guidance at its 2Q21 results to not less than 25% yoy, from not less than 42.3% yoy (Fig 12).

OneConnect maintained its FY21F net margin guidance at a double-digit percentage point improvement yoy. 2Q21 net margin improved 6.7%-pts yoy, with 1H21 net margin improving 18.5%-pts yoy

Revenue growth has been slowing, from FY18’s 143% yoy to FY20’s 42% yoy and 1Q21’s 41% yoy. While OneConnect’s revenue relies heavily on Ping An Group and its associate, Lufax, with both of these comprising 65% of total revenues in 1H21, it had been making an effort to expand revenues from other parties.

Unfortunately, the Covid-19 outbreak has made it more difficult to source new customers.

Consequently, OneConnect announced at its 2Q21 results that it has decided to shift its strategy to focus more on existing premium customers, including the ‘premium plus’ segment. OneConnect defines the ‘premium plus’ segment as customers (excluding Ping An Group and its subsidiaries) with annual revenue contribution of at least Rmb1m, which is in contrast with the ‘premium’ segment, which is defined as customers (excluding Ping An Group and its subsidiaries) with annual revenue contribution of at least Rmb100,000.

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

(Rmb m)	FY17	FY18	FY19	FY20

Ping An Group	236	528	995	1,727

Premium Customers	345	865	1,306	1,517

Basic Customers	1	21	27	68

Total	582	1,414	2,328	3,312

Growth yoy

Ping An Group		124%	89%	74%

Premium Customers		151%	51%	16%

Basic Customers		1960%	33%	150%

Total		143%	65%	42%

Mix

Ping An Group	41%	37%	43%	52%

Premium Customers	59%	61%	56%	46%

Basic Customers	0%	1%	1%	2%

Total	100%	100%	100%	100%

OneConnect has two main types of revenue: (i) implementation and (ii) transaction-based and support services.

Implementation revenue primarily consists of revenue from customer-specific software development, or customisation services provided to customers for using OneConnect’s platform either via cloud offerings or on-site.

On the other hand, transaction-based and support services relate to revenue charged to financial institution customers (mainly retail banking) based on the transaction volume generated on OneConnect’s platform. As of FY20, 74% of OneConnect’s revenue was transaction-based, and rose to 79% in 1Q21.

OneConnect has six main sources of transaction-based and support services. Business origination services were previously the most important, comprising 78% of total revenue in FY17. This segment has fallen markedly in importance, contributing only 18% of total revenue in FY20 (and only 12% in 2Q21). Business origination services involved OneConnect assisting financial institutions in acquiring customers for their loans, wealth management products and insurance policies. This is typically via the provision of customer leads, either via their own systems or third-party sources.

The most important revenue segment at the end of FY20 was operation support services, comprising 32% of revenues in FY20. FY20 growth was an impressive 82% yoy. Operation support services primarily include artificial intelligence (AI) customer services and adjuster and roadside assistance management modules.

COVID-19 has also had a negative impact on project implementation and customer usage of OneConnect’s solutions as it has caused delays in project implementation and client interaction.

# Regulatory risk is hurting revenue growth in the near-term

OneConnect operates in an industry where customers face high regulatory risk, with the regulatory environment still evolving. This is especially the case for revenues relating to co-lending or facilitation of loans, which we think a sizeable number of small banks employ to help boost loan growth.

The revenue segment most at risk from stricter regulations is OneConnect’s business origination segment (13% of revenue in 1H21), in particular those relating to Internet marketing-related services. Some element of operation support (27% of revenues in 1H21), in particular those relating to asset monitoring services, are also impacted. Risk management revenues (11% of revenues in 1H21) are also at risk.

Specifically, OneConnect has flagged four regulations in Fig 25 that impact its business in two main areas - namely the use of personal data and limits to the geographical expansion of regional banks (namely city commercial banks and rural commercial banks).

For the use of personal data, the key regulations are Measures for the Administration of Credit Investigation Services (Draft for Comments)（征信业务管理办法 (征求意见稿)）and Measures for Cybersecurity Review (Revision Draft for Comments)（国家互联网信息办公室关于《网络安全审查办法(修订草案征求意见稿)》.

These state that Internet platforms need authorisation from individuals to collect personal data. This means that Internet platforms collecting personal data are now required to obtain explicit approval from users. As a result, banks have to adjust their way of approaching risk management to ensure compliance with the new regulations.

For geographical limitations on regional banks, the regulations are Notice on Regulating Personal Deposit Business by Commercial Banks through the Internet (关于规范商业银行通过互联网开展个人存款业务有关事项的通知) and Interim Measures for the Administration of Internet Loans of Commercial Banks(商业银行互联网贷款管理暂行办法).

Under these two regulations, regional banks are not allowed to carry out any activities beyond branch presence. Also, commercial banks cannot offer deposit products through third-party Internet platforms. This new rule affects new business development through online channels for these regional banks. OneConnect has stopped offering products that are not compliant with the new rules on its platform.

OneConnect quantified the revenue impact of these four regulations, stating at its 2Q21 results that revenue exposure to these regulations was more than Rmb500m in FY20. In 1H21, the actual negative impact to revenues from these regulations was Rmb170m, and stemmed from hits to Internet marketing-related services and asset monitoring services, in particular in 2Q21. OneConnect stated at its 2Q21 analyst briefing that risk management revenues would also be impacted in 2H21F.


its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs of disposal and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at the end of each reporting period.

The Group classifies its financial assets in the following measurement categories:

• those to be measured subsequently at fair value (either through other comprehensive income, or through profit or loss), and

• those to be measured at amortized cost.

The classification depends on the entity’s business model for managing the financial assets and the contractual terms of the cash flows.

For assets measured at fair value, gains and losses will either be recorded in profit or loss or other comprehensive income. For investments in debt instruments, this will depend on the business model in which the investment is held. For investments in equity instruments that are not held for trading, this will depend on whether the Group has made an irrevocable election at the time of initial recognition to account for the equity investment at fair value through other comprehensive income.

See Note 16 for details about each type of financial asset.

The Group reclassifies debt investments when and only when its business model for managing those assets changes.

At initial recognition, the Group measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at fair value through profit or loss are expensed in profit or loss.

Subsequent measurement of debt instruments depends on the Group’s business model for managing the asset and the cash flow characteristics of the asset. There are three measurement categories into which the Group classifies its debt instruments:

• Amortized cost: Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortized cost. A gain or loss on a debt investment that is subsequently measured at amortized cost and is not part of a hedging relationship is recognized in profit or loss when the asset is derecognized or impaired. Interest income from these financial assets is included in finance income using the effective interest rate method.

• Fair value through other comprehensive income (FVOCI): Assets that are held for collection of contractual cash flows and for selling the financial assets, where the assets’ cash flows represent solely payments of principal and interest, are measured at FVOCI. Movements in the carrying amount are taken through OCI, except for the recognition of impairment gains or losses, interest revenue and foreign exchange gains and losses which are recognized in profit or loss. When the financial asset is derecognized, the cumulative gain or loss previously recognized in OCI is reclassified from equity to profit or loss and recognized in other gains/(losses). Interest income from these financial assets is included in finance income using the effective interest rate method. Foreign exchange gains and losses are presented in other gains and losses and impairment expenses in other expenses.

• Fair value through profit or loss: Assets that do not meet the criteria for amortized cost or FVOCI are measured at fair value through profit or loss. A gain or loss on a debt investment that is subsequently measured at fair value through profit or loss and is not part of a hedging relationship is recognized in profit or loss and presented net in profit or loss within other gains/(losses) in the period in which it arises.

The Group subsequently measures all equity investments at fair value. Where the Group’s management has elected to present fair value gains and losses on equity investments in other comprehensive income, there is no subsequent reclassification of fair value gains and losses to profit or loss following the derecognition of the investment. Dividends from such investments continue to be recognized in profit or loss as other income when the Group’s right to receive payments is established.

Changes in the fair value of financial assets at fair value through profit or loss are recognized in other gain/(losses) in profit or loss as applicable. Impairment losses (and reversal of impairment losses) on equity investments measured at FVOCI are not reported separately from other changes in fair value.

The Group assesses on a forward looking basis the expected credit losses associated with its debt instruments carried at amortized cost and FVOCI. The impairment methodology applied depends on whether there has been a significant increase in credit risk. Note 3.1(b) details how the Group determines whether there has been a significant increase in credit risk.

For trade receivables, the Group applies the simplified approach permitted by IFRS 9, that is to measure the loss allowance at the amount equal to lifetime expected credit loss at initial recognition and through its life of the asset. The Group uses practical expedients when estimating life time expected credit losses on trade receivables, which is calculated using a provision matrix where a fixed provision rate applies depending on the number of days that a trade receivable is outstanding.

Trade receivables are amounts due from third party distribution platforms (“Platforms”) or payment channels for proceeds earned from selling game tokens and other virtual items (Note 21). If collection of trade receivables is expected in one year or less (or in the normal operating cycle of the business if longer), they are classified as current assets. If not, they are presented as non-current assets.

Trade receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less provision for impairment. See Note 21 for further information about the Group’s accounting for trade receivables and Note 2.9 for a description of the Group’s impairment policies.

In the combined statements of cash flows, cash and cash equivalents include cash in hand and deposits at call with banks and other short-term liquid investments with original maturities of three months or less.

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.

Trade payables represent payment received from game players and to be reimbursed to the game developers. The amounts are unsecured and are usually paid within 30 to 90 days of recognition. Trade payables are presented as current liabilities unless payment is not due within 12 months after the reporting period. They are recognized initially at their fair values and subsequently measured at amortized cost using the effective interest method.

The income tax expense or credit for the period is the tax payable or recoverable on the current period’s taxable income based on the applicable income tax rate for eachj urisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses.


(a) Trade receivables mainly arise from property management services managed under lump sum basis and value-added services.

Property management services income under lump sum basis are received in accordance with the term of the relevant property service agreements. Service income from property management services is due for payment by the property owners upon rendering of services.

As at 31 December 2017, 2018 and 2019 and 30 June 2020, the ageing analysis of the trade receivables based on date of revenue recognition were as follows:

As at 31 December 2017, 2018 and 2019 and 30 June 2020, trade receivables were denominated in RMB, and the fair value of trade receivables approximated their carrying amounts due to short credit term.

The Group applies the simplified approach to provide for expected credit losses prescribed by HKFRS 9, which permits the use of the lifetime expected loss provision for all trade receivables. To measure the expected credit losses, trade receivables have been grouped based on shared credit risk characteristics and the days past due. Movements on the provision for impairment of trade receivables are shown in Note 3.1(b). For the years ended 31 December 2017, 2018 and 2019 and the six months ended 30 June 2020, a provision of RMB1,080,000, RMB910,000 and RMB2,199,000 and RMB5,248,000 was made against the gross amounts of trade receivables. For the year ended 31 December 2019, a provision of RMB3,411,000 was derived from the effect of combination of Chengdu Global Century. For the six months ended 30 June 2020, a provision of RMB452,000 was made against the originally impaired trade receivables from NCPM since the date of acquisition. The provision for impairment increased during the Track Record Period due to the increase of trade receivables.

	As at 31 December	As at 30 June

2017	2018	2019	2020

RMB’000	RMB’000	RMB’000	RMB’000

Current	Non-
current	 Current	Non-
current	 Current	Non-
current	 Current	Non-
current

Prepayments

– Utilities 	4,573	 –	7,637	 –	5,711	 –	9,300	 –

– Short-term rental
fees 	758	 –	2,692	 –	5,323	 –	11,466	 –

– Raw materials for
enigneering and
maintenance
services	–	 –	817	 –	1,992	 –	5,451	 –

– Deferred listing
expenses 	–	–	–	–	–	–	2,486	 –

– Others	1,365	 –	1,120	1,082	5,430	570	13,958	2,380

	6,696	 –	12,266	1,082	18,456	570	42,661	2,380

Other receivables

– Related parties
(Note 34 (b)) (c)  	3,222	 –	69,612	 –	282,262	 –	81,188	56,667

– Loan to a related
party (b)
(Note 34 (b)) 	713,200	614,600	614,600	–	–	–	–	–

– Payments on
behalf of property
owners (a) 	12,547	 –	18,113	 –	36,995	 –	49,606	 –

– Emlpoyees in
advance	7,311	 –	8,982	 –	11,492	 –	11,037	 –

– Deposits 	5,488	 –	6,781	 –	10,148	 –	35,069	5,863

– Others	5,263	 –	3,766	 –	2,185	 –	2,935	 –

	747,031	614,600	721,854	 –	343,082	 –	179,835	62,530

Less: allowance for
impairment of other
receivables 	(803)	 –	(1,428)	 –	(2,095)	 –	(5,756)	 –

	746,228	614,600	720,426	 –	340,987	 –	174,079	62,530

Total prepayments and
other receivables  	752,924	614,600	732,692	1,082	359,443	570	216,740	64,910


The Vascular Solutions acquisition was financed utilizing borrowings under the amended and restated credit agreement, dated January 20, 2017 (the "Credit Agreement"), which is described in Note 8.

The following table presents the purchase price allocation among the assets acquired and liabilities assumed with respect to the Vascular Solutions acquisition:

	(Dollars in thousands)

Assets

Current assets	$                   61,592

Property, plant and equipment	45,533

Intangible assets	539,250

Goodwill	524,872

Other assets	728

Total assets acquired	1,171,975

Less:

Current liabilities	15,079

Deferred tax liabilities	181,372

Liabilities assumed	196,451

Net assets acquired	$                  975,524

The goodwill resulting from the Vascular Solutions acquisition primarily reflects synergies currently expected to be realized from the integration of the acquired business and is not fully tax deductible.

The following table sets forth the components of identifiable intangible assets acquired and the ranges of the useful lives as of the date of the Vascular Solutions acquisition:

	Fair value	Useful life range

	(Dollars in thousands)	(Years)

Intellectual property	$            248,200	10 20

Inprocess research and development ("IPR&D")	15,600	Indefinite

Trade names	16,650	20

Customer relationships	258,800	25

On October 2, 2017, the Company acquired NeoTract, Inc. ("NeoTract"), a medical device company that developed and commercialized the UroLift System, a minimally invasive medical device for treating lower urinary tract symptoms due to benign prostatic hyperplasia, or BPH. The fair value of consideration transferred by the Company was \$975.2 million, which included initial payments of \$725.6 million in cash less a favorable working capital adjustment of \$1.4 million (for which the Company had not yet received payment as of December 31, 2017) and \$251.0 million in estimated fair value of contingent consideration. The contingent consideration liability represents the estimated fair value of the Company's obligations, under the acquisition agreement, to make four milestone payments of up to \$375 million in the aggregate if certain sales goals are met. The milestone payments are based on net sales (as defined in the acquisition agreement) for the periods from January 1, 2018 through April 30, 2018 and the years ended December 31, 2018, 2019 and 2020. The fair value of the contingent consideration was estimated using a Monte Carlo valuation approach. See Note 10 for additional information on the fair value measurement of the contingent consideration. The acquisition was financed using borrowings under the Company's revolving credit facility.

For the year ended December 31, 2017, the Company incurred \$10.1 million in transaction expenses associated with the NeoTract acquisition, which are included in selling, general and administrative expenses in the consolidated statement of income. For the year ended December 31, 2017, the Company recorded post acquisition revenue and operating loss of\$39.0 million and \$13.3 million, respectively, related to NeoTract. Financial information of NeoTract is primarily presented within the newly established Interventional Urology North America operating segment, which is included in the "all other" category in the Company's presentation of segment information.

The following table presents the purchase price allocation among the assets acquired and liabilities assumed with respect to the NeoTract acquisition:

	(Dollars in thousands)

Assets

Current assets	$                   32,887

Property, plant and equipment	6,980

Intangible assets	763,314

Goodwill	341,171

Other assets	184

Total assets acquired	1,144,536

Less:

Current liabilities	13,580

Deferred tax liabilities	155,806

Liabilities assumed	169,386

Net assets acquired	$                  975,150

The Company is continuing to evaluate the initial purchase price allocations in connection with its acquisition of NeoTract, and further adjustments may be necessary as a result of the Company's assessment of additional information related to the fair values of the assets acquired and liabilities assumed, primarily deferred tax liabilities, certain intangible assets and goodwill. The goodwill resulting from the NeoTract acquisition primarily reflects the benefit the Company expects to realize from the establishment of new customer relationships and the development of technology resulting from the operation of NeoTract's business. Goodwill arising from the NeoTract acquisition is not tax deductible.

The following table sets forth the components of identifiable intangible assets acquired and the ranges of the useful lives as of the date of the NeoTract acquisition:

	Fair value	Useful life

(Dollars in thousands)	(Years)

Intellectual property	$             492,118	15

Trade names	161,637	25

Customer relationships	109,559	15

On September 15, 2017, the Company acquired certain assets from one of its contract manufacturers, Tianjin Medis Medical Co. LTD ("Tianjin Medis"), consisting of substantially all of the assets used by Tianjin Medis to manufacture a line of the Company's laryngeal masks. The aggregate consideration transferred for the assets was \$21.3 million, which included payments of \$16.0 million and \$5.3 million in estimated fair value of contingent consideration. The assets acquired include goodwill and finitelived intangible assets (consisting of intellectual property, customer relationships and a noncompete agreement) of \$14.7 million and \$6.9 million, respectively. The goodwill resulting from the acquisition primarily reflects synergies currently expected to be realized from the integration of the acquired business and is not tax deductible.

On April 3, 2017, the Company completed the acquisition of Pyng Medical Corp ("Pyng"), a medical device company that developed and marketed sternal intraosseous infusion products, which complement the Company's anesthesia product portfolio. The Company acquired all of the issued and outstanding common shares of Pyng utilizing available cash. The aggregate consideration was \$17.9 million, net of cash acquired. The assets acquired include goodwill and finitelived intangible assets (primarily intellectual property and customer relationships) of \$13.0 million and \$5.5 million, respectively. The goodwill resulting from the acquisition primarily reflects synergies currently expected to be realized from the integration of the acquired business and is not tax deductible.


The Group’s revenue from continuing operations increased by 46.8% quarter-on-quarter from HK\$7,000 million in the first quarter of 2020 to HK\$10,277 million in the second quarter of 2020. The following table illustrates the revenue in the second and first quarter of 2020 based on different business:

	Three months ended

30 June 2020
(unaudited)	31 March 2020
(unaudited)

HK$’000	Proportion
in the total
revenue	HK$’000	Proportion
in the total
revenue

TCL brand TV business

– Overseas	6,053,196	58.9%	4,269,400	61.0%

– the PRC	2,504,517	24.4%	1,889,501	27.0%

Internet services

– the PRC	249,689	2.4%	146,885	2.1%

– Overseas	116,021	1.1%	8,463	0.1%

O#thers	1,353,988	13.2%	685,419	9.8%

Total revenue	10,277,411	100.0%	6,999,668	100.0%

\# Others mainly comprises revenue from smart home, smart commercial display and smart AV businesses

Revenue of TCL brand TV increased by 41.8% from HK\$4,269 million in the first quarter of 2020 to HK\$6,053 million in the second quarter. The sales volume of TCL brand TV grew by 35.1% from 3.11 million sets in the first quarter of 2020 to 4.20 million sets in the second quarter. The turnaround was attributable to the Group’s active response to the pandemic by swiftly adjusting market strategies and supply capacity which drove up the TV sales.

Revenue of TCL brand TV rose by 32.5% from HK\$1,890 million in the first quarter of 2020 to HK\$2,504 million in the second quarter. The sales volume of TCL brand TV increased by 38.2% from 1.16 million sets in the first quarter of 2020 to 1.61 million sets in the second quarter of 2020. The increase was driven by the Group’s active adjustment of distribution sales and introduction of live-streaming sales, offline channel promotion and other types of sales methods, which contributed to impressive online and offline sales performance.

The sales volume of TCL brand TV through online distribution channels in the PRC market increased by 70.6% from 510,000 sets in the first quarter of 2020 to 870,000 sets in the second quarter. The offline sales volume increased by 13.9% from 650,000 sets in the first quarter of 2020 to 740,000 sets in the second quarter of 2020. The growth was powered by the Group’s increased investment in marketing resources of online sales and maintenance of advantages of offline sales distribution channels.

Revenue of the Internet business in the PRC (mainly relevant business of Falcon Network Technology) increased by 70.0% from HK\$147 million in the first quarter of 2020 to HK\$250 million in the second quarter. Among which, revenue from membership business, value-added business and advertising business of Falcon Network Technology rose by 12.0%, 363.8% and 23.4% over the previous quarter, respectively. The progress was mainly attributable to Falcon Network Technology’s constant enrichment of platform content and improvement of user experience, which contributed to continuous enhancement of user loyalty. Meanwhile, under the positive influence of homebound life due to the pandemic, more and more consumers chose large-screen TV as the entertainment terminal.

Revenue from overseas Internet business increased by 1,270.9% from HK\$8 million in the first quarter of 2020 to HK\$116 million in the second quarter, mainly due to the overseas Internet revenue of the first half in 2020 recognised in the second quarter.

Due to the Group’s efforts in catching up business in the second quarter of 2020, the overall gross profit of the Group increased by 53.2% from HK\$1,400 million in the first quarter of 2020 to HK\$2,144 million in the second quarter. Moreover, the gross profit margin in the second quarter of 2020 increased by 0.9 percentage point to 20.9% compared with the first quarter of 2020.

The gross profit margin of the Group’s TCL brand TV in the overseas markets decreased by 0.8 percentage point from 17.8% in the first quarter of 2020 to 17.0% in the second quarter. The change was mainly attributable to adjustment of regional structure. Rapid growth was seen in the European and emerging markets with high gross profit in the first quarter of 2020, while the business in North America with low gross profit (low expenses) grew fast in the second quarter.


	Note	2020	2019

HK$’m	HK$’m

Derivative financial assets

Cross currency swaps	(a)	0.2	34.4

Interest rate swaps	(b)	1,493.0	–

Fuel price swaps		–	5.6

Foreign currency forward contracts		0.6	–

Put option	(c)	478.9	–

		1,972.7	40.0

Represented by

Non-current assets		1,972.0	34.4

Current assets		0.7	5.6

		1,972.7	40.0

Derivative financial liabilities

Cross currency swaps	(a)	(92.9)	–

Interest rate swaps		(3.6)	(15.3)

Fuel price swaps		(141.5)	(5.3)

Foreign currency forward contracts		(0.4)	(11.5)

		(238.4)	(32.1)

Represented by

Non-current liabilities		(140.7)	(8.3)

Current liabilities		(97.7)	(23.8)

		(238.4)	(32.1)

As at 30 June 2020, the Group has certain cross currency swap contracts designated as cash flow hedges against its foreign currency risk in respect of cash flows from certain bond investments and bank loan with total notional amount of US\$122.9 million (2019: Nil) and HK\$1,005.7 million (2019: Nil), respectively, and with maturities ranging from 2020 to 2029. These cross currency swap contracts are entered with several counterparties over the counter. The Group seeks to hedge the foreign currency risk by the exchange of payments denominated in targeted currency, and applies a hedge ratio of 1:1. The existence of an economic relationship between the cross currency swap contracts and the highly probable forecast transactions/actual transaction is determined based on their currency amounts and the timing of their respective cash flows. The terms of the cross currency swap contracts have been negotiated to match the terms of the underlying bond investments and bank loan. The cash flow hedges were assessed to be highly effective and the related cumulative losses in the hedge reserve amounted to HK\$72.9 million (2019: Nil).

# 28 Derivative financial instruments (continued)

As at 30 June 2020, the Group’s insurance business has certain forward starting swap contracts designated as cash flow hedges against its interest rate risk in respect of bonds to be purchased in the future. Under the contracts, the Group’s insurance business will be entitled to receive fixed rate of around 4% to 5% per annum, and required to pay floating rate of 3-month LIBOR, in USD published by the British Banker’s Association. The total notional amount was US\$450.0 million (2019: Nil).The cash flow hedge was assessed to be highly effective and the related cumulative gains in the hedge reserve amounted to HK\$477.9 million (2019: Nil).

The Group’s insurance business seeks to hedge the interest rate risk by the exchange of payments benchmarked against the targeted fixed interest rate. The Group’s insurance business applies an approximate hedge ratio of 1:1 and determines the existence of an economic relationship between the forward starting swap contracts and the debt security investments by matching their critical terms, including the reference interest rates and interest payments.

As at 30 June 2020, the Group’s insurance business received HK\$1,582.0 million (2019: Nil) cash and bank balance from counterparties (note 39) as collateral which are repayable on demand. Interest is calculated on overnight federal fund rate and payable to counterparties.

As at 30 June 2020, the Group’s insurance business holds a put option to sell or dispose of an equity investment held by the Group, which is classified as financial assets at FVOCI, at a specified price within a specified transaction period. As at 30 June 2020, the fair value of the underlying equity investment amounted to HK\$252.3 million (2019: Nil).

	Note	2020	2019

HK$’m	HK$’m

Deposits paid for acquisition of a subsidiary	50(b)	–	3,120.0

Security deposits		400.7	852.2

Deferred tax assets	40	22.8	28.0

Policy loans		478.4	–

Others		296.8	3.3

		1,198.7	4,003.5


	NOTE
附註	2018
2018年	2017
2017年

HK$
港元	HK$
港元

Total comprehensive expense      應佔全面開支總額：
attributable to:

Owners of the Company        本公司擁有人		(37,303,735)	(15,360,658)

Non-controlling interests        非控股權益		(1,067,371)	(2,007,541)

		(38,371,106)	(17,368,199)

From continuing and discontinued 自持續及終止經營業務
operations

Loss per share             每股虧損

Basic and diluted (HK Cents)      基本及攤薄（港仙）	16	(0.43)	(0.18)

From continuing operations     自持續經營業務

Loss per share             每股虧損

Basic and diluted (HK Cents)      基本及攤薄（港仙）	16	(0.43)	(0.25)

	NOTES
附註	2018
2018年	2017
2017年

HK$
港元	HK$
港元

Non-current assets           非流動資產

Plant and equipment          器械及設備	17	2,675,374	1,440,279

Investment property          投資物業	18	–	12,900,000

Goodwill               商譽	19	1,399,146	–

Intangible assets            無形資產	20	330,000	–

Equity instruments at fair value      按公平值計入其他
through other comprehensive income  全面收益的股本工具	22	1,423,467	–

Deposit paid for acquisition       收購一間聯營公司的已付按金
of an associate	26	16,600,000	–

Rental deposits             租金按金	26	570,604	–

		22,998,591	14,340,279

Current assets             流動資產

Financial assets at fair value       按公平值計入損益
through profit or loss         的金融資產	23	1,062,000	2,907,000

Amount due from a former       應收前股東款項
shareholder	24	–	2,510

Loan receivables            應收貸款	25	6,975,770	–

Trade and other receivables       貿易及其他應收款項	26	4,371,950	5,028,934

Tax recoverable            可收回稅項		–	657,372

Bank balances and cash        銀行結餘及現金	27	10,686,511	41,955,423

		23,096,231	50,551,239

Current liabilities            流動負債

Trade and other payables        貿易及其他應付款項	28	7,575,844	6,253,027

Contract liabilities           合約負債	29	550,785	–

Other borrowing            其他借款	30	10,000,000	–

Tax payable              應付稅項		117,353	68,898

Amounts due to a non-controlling    應付一間附屬公司
shareholder of a subsidiary      非控股股東的款項	31	113,953	113,953

Bank overdrafts            銀行透支	27	2,894,173	–

		21,252,108	6,435,878

Net current assets           流動資產淨值		1,844,123	44,115,361

Total assets less current liabilities    總資產減流動負債
and net assets            及資產淨值		24,842,714	58,455,640


# Meetings of the Board and Directors’ Attendance Records

The regular meeting of the Board is scheduled four times a year at approximately quarterly intervals with notice given to the Directors at least 14 days in advance. For all other Board meetings, notice will be given in a reasonable time in advance. The Directors are allowed to include any matter in the agenda that is required for discussion and resolution at the meeting. To enable the Directors to be properly briefed on issues arising at each of the Board meetings and to make informed decisions, an agenda and the accompanying Board papers will be sent to all Directors at least three days before the intended date of the Board meeting, or such other period as agreed. The company secretary of the Company (the “Company Secretary”) is responsible for keeping all Board meetings’ minutes. Draft and final versions of the minutes will be circulated to the Directors for comments and record respectively within a reasonable time after each meeting and the final version is open for the Directors’ inspection.

The attendance record of each Director in respect of the meetings of the Board, Audit Committee, Remuneration Committee, Nomination Committee as well as the annual general meeting on 31 July 2020 (the “AGM”) is set out below:

Name of directors	Attendance/Number of Meetings

Board	Audit
Committee	Remuneration
Committee	Nomination
Committee	AGM

Executive Directors:

Mr. Kwong	4/4	N/A	N/A	1/1	1/1

Ms. Kwong	4/4	N/A	N/A	N/A	1/1

Mr. Lam	4/4	N/A	N/A	N/A	1/1

Independent Non-executive
Directors:

Mr. Lai	3/4	4/5	2/2	N/A	1/1

Dr. Cheng	4/4	5/5	2/2	1/1	1/1

Mr. Kwok	4/4	5/5	2/2	1/1	1/1

The Board held a meeting on 18 June 2021 and, amongst other matters, considered and approved the audited consolidated financial statements of the Group for the Year.

Apart from the Board meetings above, consents and/or approvals of the Board were also obtained by way of written resolutions on a number of matters.

The Board adopted a policy of the Board diversity, including the measurable objectives set for implementing the same on 23 March 2018. The Nomination Committee will review these objectives regularly.

The Company recognises and embraces the benefits of a diversity of Board members. It endeavours to ensure that the Board has a balance of skills, experience and diversity of perspectives appropriate to the requirements of the Company’s business. All Board nominations, appointments and re-appointments will continue to be made on a merit basis with due regard for the benefits of diversity of the Board members and the nomination policy of the Company. Selection of candidates will be based on a range of diversity perspectives, including but not limited to gender, age, cultural and educational background, ethnicity, professional experience, skills and knowledge.

Code provision A.2.1 of the CG Code stipulates that the roles of chairman and chief executive should be separate and should not be performed by the same individual. During the Year, Mr. Kwong was the Chairman and the chief executive officer (the “CEO”) of our Group. In view of the fact that Mr. Kwong has been operating and managing the Group since 2000, the Board believes that it is in the best interest of the Group to have Mr. Kwong taking up both roles for effective management and business development. Therefore, the Board considers that the deviation from code provision A.2.1 of the CG Code is appropriate in such circumstance.

The Board has established four Board committees, namely the Audit Committee, the Nomination Committee, the Remuneration Committee and Executive Committee to oversee particular aspects of the Company’s affairs. The Board committees are provided with sufficient resources to discharge their duties.

The Audit Committee was established on the Listing Date with written terms of reference in compliance with the CG Code. The written terms of reference of the Audit Committee are published on the respective websites of the Stock Exchange and the Company. The Audit Committee comprises all the INEDs, namely Mr. Lai, Dr. Cheng and Mr. Kwok. Mr. Lai is the chairman of the Audit Committee.


# Fire Prevention and Road Traffic Safety

In accordance with the Fire Protection Law of the People’s Republic of China (《中華人民共和國消防法》) and the Regulations on Fire Prevention for Governmental Departments, Entities, Enterprises, and Institutions (《機關、團體、企業、事業單位消防安全管理規定》) issued by the Ministry of Public Security and other relevant laws and regulations, QHD Port has formulated the Supervision and Management Measures for Fire Prevention of Qinhuangdao Port Co., Ltd. (《秦皇島港股份有限公司消防安全監督管理辦法》), the Administrative Measures for Fire Prevention Archive of Qinhuangdao Port Co., Ltd. (《秦皇島港股份有限公司消防檔案管理辦法》) and other relevant systems, improved fire prevention management, prevented fire risks and improved risk response capabilities.

The Company has established a long-term mechanism on weekly fire prevention inspections, which is implemented from the Company as a whole to the grassroots teams as a whole to effectively eliminate potential fire safety hazards. It organized evaluation on fire prevention and rectified potential safety hazards in a timely manner. The Company strictly examines and approves the use of fire and strengthens the construction of emergency response capabilities on fire prevention. It built 50 new miniature fire stations in key areas such as substation and high-rise buildings and held “special emergency exercises for traffic and fire prevention”, effectively improving employees’ capabilities to respond to dangers.

The Company formulated the Supervision and Management Measures for Road Traffic Safety at the Port of Qinhuangdao Port Co., Ltd. (《秦皇島港股份有限公司港口道路交通安全監督管理辦法》) in accordance with the Road Traffic Safety Law of the People’s Republic of China (《中華人民共和國道路交通安全法》), the Regulation on the Implementation of the Road Traffic Safety Law of the People’s Republic of China (《中華人民共和國道路交通安全法實施條例》) and other relevant laws and regulations to strictly standardize the setting of traffic signs and road traffic facilities in the main business areas of the Company. For driving safety, the Company strictly reviews the qualifications of licensed drivers to ensure that they were obtained in accordance with the laws and conducts reviews regularly.

# Case: QHD Port carries out comprehensive emergency rescue exercises on fire prevention and traffic accidents

On 23 July 2021, QHD Port organized the “Comprehensive Emergency Exercise for Production Safety Accidents and Environmental Emergencies in 2021”. Qinhuangdao Emergency Management Bureau, the Municipal Bureau of Marine Development and Fisheries and the Municipal Fire and Rescue Detachment and other departments observed the exercises.

# VI. KEEPING ALERT IN BUILDING SAFE PORTS

In strict compliance with the Law of the People’s Republic of China on the Prevention and Control of Occupational Diseases (《中華人民共和國職業病防治法》), the Administrative Regulations on Employers’ Protective Equipment of Labor (《用人單位勞動防護用品管理規範》), the Provisions on the Supervision and Administration of Occupational Health at Work Sites (《工作場所職業衛生監督管理規定》) and other relevant laws and regulations, QHD Port formulated the Administrative Measures for Occupational Health Protection of Qinhuangdao Port Co., Ltd. (《秦皇島港股份有限公司職業健康監護管理辦法》), the Administrative Measures for Protective Equipment of Labor of Qinhuangdao Port Co., Ltd. (《秦皇島港股份有限公司勞動防護用品管理辦法》),  the Administrative Measures for Workplace’s Occupational Health Supervision of Labor of Qinhuangdao Port Co., Ltd. (《秦皇島港股份有限公司工作場所職業衛生監督管理辦法》) and other internal rules and systems to further perfect occupational health management, enhance the Company’s health management mechanism, improve standardized health management, prevent occupational disease risk for employees and effectively protect the health rights and interests of all employees.

The Company implements a regular health examination system for dangerous positions, adopts targeted control measures on hazards and sets up individual archives for monitoring the occupational health of employees. Meanwhile, the Company actively optimizes the working environment of key positions, strengthens the monitoring on harmful factors to employees and promotes standardized operation of the workplace to fundamentally reduce occupational hazards. In 2021, the Company had no recorded employee occupational disease cases.

# Case: QHD Port actively prevents pandemic risks

In 2021, facing the severe COVID-19 pandemic, QHD Port frequently updated pandemic-related information through its WeChat public account platform and promptly notified employees of the latest adjustments to pandemic prevention and control areas. It kept “zero reports” in monitoring the health of employees at ports on a daily basis, completed nucleic acid testing for on-the-job and retired employees and strengthened management at gates and places with crowds at all levels. The Company implemented closed-loop management for personnel involved in high-risk operations as required and strengthened the management of pandemic prevention and control in centralized offices and public places to prevent the risk of cluster infections. QHD Port actively publicized basic knowledge on health management, advocated employees to voluntarily complete full-process vaccination and reminded employees to pay attention to personal protection and personal health management.

Pandemic prevention personnel sterilize vehicles at the collection and distribution port

Qinhuangdao Port Hospital conducts nucleic acid testing for people at the port


Given that the business of Vodatel involves no production element, as a system integrator for various IT-related turnkey solutions and services, the use of resources by Vodatel, such as energy, water and other raw materials, in its day-to-day operations is minimal. This aspect is not of great relevance to our cost-structure, which mainly involves purchase of equipment from our suppliers and the associated freight and insurance, salaries and benefits to staff and third-party expenses, e.g. inland transportation and engagement of subcontractors, incurred during the installation of equipment and commissioning of surveillance and \( \Pi \) solutions. Despite that the use of natural resources is not largely relevant to Vodatel, we are aware of our consumption of electricity, water and fuel within an office environment, and will, therefore, focus our ESG improvement efforts in those areas.

√ Instil a culture of resource-usage consciousness;

√ Introduction of a framework for assessing resource utilisation, ensuring its optimised application on a systematic basis; and

√ Dissemination of any current-term measure/procedures, relating to resource usage to stakeholders.

KPI A2.1	Details of electricity consumption can be referred to KPI A1.2 above.

KPI A2.2	The Macao office consumes around 3,000 cubic metres of water each year.

KPI A2.3	Staff are reminded to turn off lihgts and computers when leaving the premises
and the level of electricity consumption is considered reasonable.

KPI A2.4	There is no issue in sourcing water that is fit for purpose. The level of water
consumption in pantries and toilets is considered reasonable.

KPI A2.5	Details of packaidgng materials use can be referred to KPI A1.4 above.

# Aspect A3: The Environment and Natural Resources

Vodatel specialises in the design and system integration of IT infrastructure, hence our operations have little impact on the environment or natural resources apart from those mentioned in the previous section. While we do encourage our employees to practise the “3Rs” and to protect the natural environment, as this aspect has no material relevance to our business, we have opted not to report on it, and KPI A3.1 (concerning the significant impacts of activities on the environment and natural resources and the actions taken to manage them) is not applicable.

Our people are our greatest asset and they are essential to continued growth at Vodatel. We staunchly believe that investing in our people and their development is inseparable from the development and ongoing success of our business.

Exchange ESG Guide Aspects	Material Areas

B1 Emlpoyment	Attraction and Retention of Talents, Working Hours and
Rest Periods

B2 Health and Safety	Occupational Health and Safety

B3 Development and Training	Learning and Training

B4 Labour Standards	Human Rihgts

B5 SulChippy an Management	Assessment of Sulippers

B6 Product Responsibility	Reliable Services and Products

B7 Anti-corruption	Anti-Corruption and Anti-Bribery

B8 Community Investment	Contribution to the Community

Vodatel is an equal opportunity employer which believes strongly in the principles of diversification and anti-discrimination. Our human resources policies are in strict compliance with those labour laws issued by the Governments in different jurisdictions in which we operate, namely Macao, Hong Kong and Mainland China taking the highest standards to be applied across all entities, and other applicable laws and regulations regarding compensation and insurance, employment, promotion and termination of employees. To this end, the employee handbook at Vodatel outlines the benefits and rights enjoyed by all employees.

Attraction and Retention of Talents – With people being our key to success, we offer market-competitive employment packages, consisting of both staff benefits and welfare for all our employees, to ensure that we attract and retain the best people for our business operations. Our comprehensive packages offer discretionary incentives, including bonus scheme, sales commission, Options, medical insurance and retirement protection. We encourage our employees to enjoy a well-balanced work and personal life. In addition to annual leaves, we help our employees to effectively manage their work and life commitments through such policies as marriage and compassionate leave allowances. Promotions are decided within a level-playing field environment and are awarded based on performance and the ability to cohere to teamwork.

Working Hours and Rest Periods – As a system integrator that provides around-the-clock, top quality support services to our customers, many of our engineers are required to be on standby duty in case of emergency and to work during non-office hours and on public holidays. In addition, we provide overtime pay, meal allowance and additional compensation for those on roster. Any compensation on working hours and rest periods are in full compliance with the relevant local employment ordinances.


As at 31 December 2018, the Group’s total liabilities were RMB21.23 trillion, an increase of RMB902,543 million or 4.44% over 2017. In this amount, deposits from customers amounted to RMB17.11 trillion, up by RMB744,924 million or 4.55% over 2017. Taking into consideration the inclusion of accrued interest, the actual increase was RMB567,675 million or 3.47%. Deposits and placements from banks and non-bank financial institutions increased by RMB127,063 million or 7.38% over 2017 to RMB1,847,697 million. Debt securities issued were RMB775,785 million, an increase of RMB179,259 million or 30.05% over 2017, mainly due to issuance of 2 batches of Tier 2 capital bonds totalling RMB83 billion. Borrowings from central banks were RMB554,392 million, an increase of 1.30% over 2017. Accordingly, in the Group’s total liabilities, deposits from customers accounted for 80.58% of total liabilities, an increase of 0.08 percentage points over 2017. Deposits and placements from banks and non-bank financial institutions accounted for 8.70% of total liabilities, an increase of 0.24 percentage points over 2017. Debt securities issued accounted for 3.66% of total liabilities, an increase of 0.73 percentage points over 2017. Borrowings from central banks accounted for 2.61% of total liabilities, a decrease of 0.08 percentage points from 2017.

The following table sets forth the Group’s deposits from customers by product type as at the dates indicated.

As at 31 December 2018, domestic corporate deposits of the Bank were RMB8,667,322 million, a decrease of 0.39% from 2017, mainly due to the decrease in corporate time deposits as a result of centralised deposits of third-party payment platforms’ settlement reserve funds with the PBC. Domestic personal deposits of the Bank were RMB7,771,165 million, an increase of RMB665,352 million or 9.36% over 2017, and accounted for 47.27% of domestic deposits from customers, up by 2.32 percentage points over 2017. Deposits from overseas operations and subsidiaries amounted to RMB492,942 million, a decrease of RMB64,127 million, and accounted for 2.88% of the total deposits from customers. The Bank’s domestic demand deposits were RMB9,125,788 million, up by RMB232,454 million or 2.61% over 2017, and accounted for 55.51% of the domestic deposits from customers. The time deposits were RMB7,312,699 million, up by RMB399,348 million or 5.78% over 2017, and accounted for 44.49% of domestic deposits from customers, up by 0.75 percentage points over 2017.

The Bank issued no corporate debt securities that were required to be disclosed in accordance with Standards for the Contents and Formats of Information Disclosure by Companies Offering Securities to the Public No. 2 – Contents and Formats of Annual Reports (2017 Revision) and Standards for the Contents and Formats of Information Disclosure by Companies Offering Securities to the Public No. 38 – Contents and Formats of Annual Reports on Corporate Debt Securities. Please refer to Note “Debt securities issued” in the financial statements for details.

The following table sets forth the Group’s total equity and its composition as at the dates indicated.

(In millions of RMB)	As at 31 December 2018	As at 31 December 2017

Share capital	250,011	250,011

Other equity instruments – preference shares	79,636	79,636

Capital reserve	134,537	135,225

Investment revaluation reserve	N/A	(26,004)

Other comprehensive income	18,451	N/A

Surplus reserve	223,231	198,613

General reserve	279,725	259,680

Retained earnings	990,872	886,921

Exchange reserve	N/A	(4,322)

Total equity attributable to equity shareholders of the Bank	1,976,463	1,779,760

Non-controlling interests	15,131	16,067

Total equity	1,991,594	1,795,827

As at 31 December 2018, the Group’s equity was RMB1,991,594 million, an increase of RMB195,767 million or 10.90% over 2017, primarily driven by the increase of RMB103,951 million in retained earnings. Taking into consideration the adjustments made at the beginning of the period in accordance with requirements of the new financial instruments standard, the actual increase was RMB215,218 million or 12.12%. As the growth rate of total equity surpassed that of assets, the ratio of total equity to total assets for the Group reached 8.58%, an increase of 0.46 percentage points over 2017.

The Group’s off-balance sheet items include derivatives, commitments and contingent liabilities. Derivatives include interest rate contracts, exchange rate contracts, precious metal contracts, etc. Please refer to Note “Derivatives and Hedge Accounting” in the financial statements of this annual report for details on the nominal amounts and fair value of derivatives. Commitments and contingent liabilities include credit commitments, operating lease commitments, capital commitments, underwriting obligations, redemption obligations, and outstanding litigation and disputes. Among these, credit commitments were the largest component, including undrawn loan facilities which are approved and contracted, unused credit card limits, financial guarantees, and letters of credit. As at 31 December 2018, credit commitments balance was RMB2,848,724 million, a decrease of RMB180,448 million or 5.96% from 2017. Please refer to Note “Commitments and Contingent Liabilities” in the financial statements in this annual report for details on commitments and contingent liabilities.

Net cash received from operating activities was RMB615,831 million, an increase of RMB536,741 million over 2017, mainly because the net growth of loans and advances to customers saw a decrease from 2017, and the deposits with central banks, banks and non-bank financial institutions decreased more over 2017 as affected by reserve ratio cuts.

Net cash used in investing activities was RMB369,779 million, an increase of RMB272,323 million over 2017, mainly because of the decrease in cash inflows from investing activities due to less proceeds from sale and redemption of investments.

Net cash from financing activities was RMB28,921 million, an increase of RMB20,129 million over 2017, mainly driven by the increase of proceeds from the issuance of bonds.


The Group adopted the code provisions set out in the Corporate Governance Code under Appendix 14 of the Listing Rules. Board of Directors members are responsible for corporate governance. The Board has delegated certain responsibilities to committees, including the Audit Committee, the Remuneration Committee and the Nomination Committee.

We have ethical commitments and advise our employees not to solicit or accept any advantage or bribes from our contractors or suppliers. We also require our employees to declare any conflict of interest and to avoid creating any possible conflict of interest whilst handling matters with our residents, commercial tenants or contractors or any other persons with whom the Company may have dealings. We also have our code of business conduct binding on all employees to avoid any impropriety. All employees must comply with the CAP 201 Prevention of Bribery Ordinance of Hong Kong when conducting all business and affairs of the Group.

For whistle-blowing procedures apply to all parties including internal as well as external informers. Any complaints or possible breach of this Code can be made either verbally or by confidentially writing to the Audit Committee; all issues will be treated promptly and fairly. In cases of suspected corruption or other criminal offences, a report may be made to the appropriate authority.

As at 30 September 2018, the Group was in compliance with all local rules and regulations relating to bribery, extortion, fraud and money laundering including CAP 201 Prevention of Bribery Ordinance. There were no concluded legal cases regarding corrupt practices brought against the Group or its employees.

As a good corporate citizen, the Group gives support to various community activities to bring positive environmental and social impacts to our tenants. We identify community events organised by different parties to provide support by various means. For example, the Group has joined the green recycling campaigns launched by the government to promote the importance of environmental protection to our tenants. By using various means of communication such as campaign posters, Facebook, email and notice boards, we trust that our community activities promotions can effectively reach our tenants.

To develop an awareness of protection and preservation regarding the environment amongst tenants, the Group has joined the “Skip lunch” campaign” supported by the Community Chest and Art jamming event collaboration with an art centre for free for tenants to join. In addition, for health promotion, we have supported the charity event “Let it beat” organised by World Heart Federation by both donation and charity walk. We have contributed in fund raising to support the Hong Kong College of Cardiology.

The board of directors (the “Board”) of Pokfulam Development Company Limited (the “Company”) is pleased to present this Corporate Governance Report for the year ended 30 September 2018 (the “Year”).

The Board considers good corporate governance practices to be essential to the promotion of the value of the Company’s shareholders (the “Shareholders”) value and investors’ confidence.

The Board has adopted all the code provisions (the “Code Provisions”) as set out in the Corporate Governance Code (the “Code”) contained in Appendix 14 to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Stock Exchange” and the “Listing Rules”, respectively) as the corporate governance code of the Company.

During the Year, the Company has complied with all the Code Provisions as set out in the Code, except for Code Provisions A.2.1 and A.4.1, details of which are explained below. The Company has committed to maintaining high corporate governance standards. The Company devotes considerable efforts to identify and formalize the best corporate governance practices suitable for the Company’s needs. In addition, the Company reviews regularly its organizational structure to ensure that operations are corresponding with good corporate governance practices as set out in the Code.

The key corporate governance principles and practices of the Company are summarized as follows:

The Board is responsible for leadership and control of the Company and oversees the businesses, strategic decisions and performance of the Company and its subsidiaries (the “Group”). The Board has also established Board committees and has delegated to these Board committees various responsibilities as set out in their respective terms of reference.

The Board reserves for its decisions all major matters of the Company, including approval and monitoring of all policy matters, overall strategies and budgets, internal control and risk management systems, material transactions (in particular those that may involve conflict of interests), financial reports, appointment of directors and other significant financial and operational matters.


# • Environmental Strategy and Management Approach (Continued)

# A1. Emissions and GHG Emission (Continued)

For detailed emission data please see the table below:

• 環境策略及管理方法（續）

A1. 排放物及溫室氣體排放（續）

有關詳細排放物數據請見下表：

	GHG Emission (tCOe2)
溫室氣體排放（公噸二氧化碳當量）

Wanchai Office
灣仔辦公室	The ICON
The ICON	Cheung Kee Garden
張記花園

Scope 1 Emission
範圍一排放	GHG Total
溫室氣體總計	0	GHG Total
溫室氣體總計	20.39	GHG Total
溫室氣體總計	14.96

Scope 2 Emission
範圍二排放	GHG Total
溫室氣體總計	13.74	GHG Total
溫室氣體總計	157.05	GHG Total
溫室氣體總計	0.60

Scope 3 Emission
範圍三排放	GHG Total
溫室氣體總計	11.20	GHG Total
溫室氣體總計	13.12	GHG Total
溫室氣體總計	8.71

Sub Total
小計	24.94	190.56	24.27

Total
總計		239.77

\* The above greenhouse gas emissions are defined and calculated according to the GHG Protocol and HKEX Guidance of ESG report Annex II

\* The above calculation EF is sourced from NDRC & HKEX Guidance of ESG report Annex II

The Group has no hazardous waste discharge in 2018. Totally 20.97 tons of non-hazardous domestic waste is sent to the domestic garbage centralized treatment station for treatment, and the harmful waste water discharge is zero.

\* 上述溫室氣體排放乃根據溫室氣體議定書及香港交易所ESG報告附件2界定及計算。

\* 上述計算EF乃取自中華人民共和國國家發展和改革委員會及香港交易所ESG報告附件2。

於二零一八年，本集團無排放有害廢物。總共20.97公噸之無害生活廢物被送往本地垃圾集中處理站進行處理，及無排放有害廢水。

The main consumption resources of the Group during the Reporting Period are electricity, gas, domestic water, gasoline and diesel.

The Group attaches great importance to the water conservation and energy efficiency in all owned and served properties. Regular maintenance and commissioning of the equipment were taken by the Group.

• 環境策略及管理方法（續）

本集團於報告期間的主要資源消耗為電力、煤氣、生活用水、汽油及柴油。

本集團重視所有自置及在管物業的節約用水及能源效率。本集團定期對設備進行維護及調試。

Resources Consumption
資源使用量	Unit
單位	Wanchai
Office
灣仔辦公室	Century
Elegant
進加	Cheung
Kee Garden
張記花園	Total
總計

Electricity
電力	kWh
千瓦時	17,398	197,594	761	215,753

Gas
煤氣	MJ
兆焦耳	0	1,584	0	1,584

Domestic Water
生活用水	3m
立方米	0	212	0	212

Gasoline
氣油	L
公升	N/A
不適用	686.64	N/A
不適用	686.64

Diesel
柴油	L
公升	N/A
不適用	N/A
不適用	5,049	5,049

In accordance with the Group’s environmental philosophy, all subsidiary companies are committed to providing high quality services while also ensuring that all business activities impact the environment positively, maintaining the balance between operational efficiency and resource consumption.

根據本集團的環保理念，所有附屬公司致力於提供優質服務，同時確保所有業務活動對環境產生正面影響以及維持營運效率與資源消耗之間的平衡。


# 31. RECONCILIATION BETWEEN U.S. GAAP AND INTERNATIONAL FINANCIAL REPORTING STANDARDS (Continued)

Under U.S. GAAP ASC 740, which was prior to the adoption of ASU 2016-16, a PRC withholding tax liability of US\$26,090, incurred on intragroup transfer of the 100% equity interest in BeiGene Shanghai to BeiGene Guangzhou in 2017, was carried in the Group’s consolidated balance sheet as a prepaid asset as of December 31, 2017.

Under IFRSs, such PRC withholding tax was charged to the Group’s consolidated statement of operations for the year ended December 31, 2017.

Upon the Company’s adoption of ASU 2016-16 on January 1, 2018, the above PRC withholding tax of US\$26,090 incurred in 2017 was charged to the opening accumulated deficit as of January 1, 2018 in the Company’s U.S. GAAP consolidated financial statements. Hence the above difference in accounting treatment between U.S. GAAP and IFRSs no longer existed for the Company’s accounting periods commencing from January 1, 2018.

Under U.S. GAAP, the government subsidies of US\$9,620 received in 2017 relating to the above PRC withholding tax was carried in the Group’s consolidated balance sheet as of December 31, 2017, as other long-term liabilities of US\$9,990 (re-translated at December 31, 2017 closing exchange rate), as a result of the recognition of the related PRC withholding tax as a prepaid asset in the balance sheet.

Under IFRSs, the above government subsidies were recognized as income in the Group’s consolidated statement of operations for the year ended December 31, 2017 as a result of the recognition of such PRC withholding tax as an expense in 2017. In addition, the income tax expense of US\$2,405 on the government subsidies deferred as a prepaid asset of US\$2,498 (re-translated at December 31, 2017 closing exchange rate) under ASC 740 was charged as an expense in the Group’s consolidated statement of operations for the year ended December 31, 2017 under IFRSs as a result of the recognition of such government subsidies as income in 2017. Finally, IFRSs adjustments were made in the Group’s consolidated statement of operations for the year ended December 31, 2017 to account for the consequential impact on the Group’s noncontrolling interests of US\$361 arising from the above adjustments of government subsidies and related income tax expense which are applicable to a non-wholly-owned PRC subsidiary.

As a result of the charge of the relevant PRC withholding tax to the opening accumulated deficit as of January 1, 2018 as mentioned above, the government subsidies of US\$9,990 and the related income tax expense of US\$2,498 carried in the balance sheet as of December 31, 2017 were also recognized in the opening accumulated deficit as of January 1, 2018 in the Company’s U.S. GAAP consolidated financial statements, and the consequential effect on noncontrolling interest of US\$375 (re-translated at December 31, 2017 closing exchange rate) and foreign currency translation difference of US\$263 were included within the Company’s opening U.S. GAAP consolidated balance sheet as of January 1, 2018 accordingly, with resulting adjustment included within the 2018 opening accumulated deficit. The overall net impact on 2018 opening accumulated deficit was US\$6,854. Thereafter the above differences in accounting treatment between U.S. GAAP and IFRSs no longer exist for the Company’s accounting periods commencing from January 1, 2018.

# 32. RECONCILIATION OF THE COMPARATIVE FINANCIAL STATEMENTS WITH THE ACCOUNTANTS’ REPORT IN THE PROSPECTUS

The comparative consolidated financial statements of the Company as of December 31, 2017 in these financial statements was prepared based on the previously published consolidated financial statements in the Company’s 2017 Annual Report on Form 10-K filed with SEC on February 27, 2018. In preparing such financial statements for the year ended December 31, 2017, those new U.S. GAAPs early adopted in preparation of the accountants’ report were not early adopted, and hence differences arose between the Company’s comparative consolidated financial statements as of December 31, 2017 disclosed in these financial statements when compared with the Company’s consolidated financial statements as of December 31, 2017 as disclosed in the accountants’ report.

The reconciliations of the comparative consolidated financial statements of the Company as of December 31, 2017 in this report with the consolidated financial statements of the Company as of December 31, 2017 disclosed in the accountants’ report in the Prospectus are as follows:

Consolidated balance sheet data	As of December 31, 2017

As reported
in these
financial
statements	Adjustments adopted in
’preparing accountants report	As reported
in the
’
accountantsreport

	US$	US$	US$	US$	US$

		(i)	(ii)	(iii)

Unbilled receivable	—	16,307	—	—	16,307

Other non-current assets	42,915	—	(26,090)	(2,498)	14,327

Total assets	1,046,479	16,307	(26,090)	(2,498)	1,034,198

Other long-term liabilities	31,959	—	—	(9,990)	21,969

Total liabilities	362,248	—	—	(9,990)	352,258

Accumulated other comprehensive loss	(480)	—	—	263	(217)

Accumulated deficit	(330,517)	16,307	(26,090)	6,854	(333,446)

Noncontrolling interest	14,422	—	—	375	14,797

Total equity	684,231	16,307	(26,090)	7,492	681,940


Cash flows from derivative financial instruments accounted for as hedges are classified in the same category as the item being hedged.

Cash paid for interest and income taxes is as follows:

(Dollars in millions)	For years ended December 31,

2017	2016	2015

Interest, net of amounts caiiptalzed	$          263	$          280	$          265

Income taxes	97	120	124

Noncash investing and financing activities:

Outstandinig trade payables related to captal exdipentures	27	34	10

(Gain) loss from equity investments	(14)	(15)	(15)

The Company's products and operations are managed and reported in four operating segments: Additives & Functional Products ("AFP"), Advanced Materials ("AM"), Chemical Intermediates ("CI"), and Fibers.

# Additives & Functional Products Segment

In the AFP segment, the Company manufactures chemicals for products in the transportation, consumables, building and construction, animal nutrition, crop protection, energy, personal and home care, and other markets.

The products the Company manufactures in the coatings and inks additives product line can be broadly classified as polymers and additives and solvents and include specialty coalescents, specialty solvents, paint additives, and specialty polymers. The adhesives resins product line consists of hydrocarbon and rosin resins. The tire additives product line includes insoluble sulfur rubber additives, antidegradant rubber additives, and performance resins. The care chemicals business consists of amine derivativebased building blocks for the production of flocculants and intermediates for surfactants. In the specialty fluids product line, the Company produces heat transfer and aviation fluids products. The animal nutrition business consists of formic acidbased solutions product lines. The crop protection business consists of metambased soil fumigants, thiram and zirambased fungicides, and plant growth regulator products.

Product Lines	Percentage of Total Segment Sales

2017	2016	2015

Coatings and Inks Additives	23%	24%	24%

Adhesives Resins	18%	21%	21%

Tire Additives	17%	17%	17%

Care Chemicals	17%	15%	15%

Specialty Fluids	13%	11%	11%

Animal Nutrition and Crop Protection	12%	12%	12%

Total	100%	100%	100%

In the AM segment, the Company produces and markets polymers, films, and plastics with differentiated performance properties for valueadded end uses in transportation, consumables, building and construction, durable goods, and health and wellness markets.

The specialty plastics product line consists of two primary products: copolyesters and cellulose esters. The advanced interlayers product line includes polyvinyl butyral sheet and specialty polyvinyl butyral intermediates. The performance films product line primarily consists of window film and protective film products for aftermarket applied films.

Product Lines	Percentage of Total Segment Sales

2017	2016	2015

Specialty Plastics	51%	50%	51%

Advanced Interlayers	33%	34%	33%

Performance Films	16%	16%	16%

Total	100%	100%	100%

The CI segment leverages large scale and vertical integration from the cellulose and acetyl, olefins, and alkylamines streams to support the Company's specialty operating segments with advantaged cost positions. The CI segment sells excess intermediates beyond the Company's internal specialty needs into markets such as industrial chemicals and processing, building and construction, health and wellness, and agrochemicals.

In the intermediates product line, the Company produces olefin derivatives, acetyl derivatives, ethylene, and commodity solvents. The plasticizers product line consists of a unique set of primary nonphthalate and phthalate plasticizers and a range of niche nonphthalate plasticizers. The functional amines product lines include methylamines and salts, and higher amines and solvents.

Product Lines	Percentage of Total Segment Sales

2017	2016	2015

Intermediates	64%	65%	65%

Plasticizers	19%	20%	20%

Functional Amines	17%	15%	15%

Total	100%	100%	100%

In the Fibers segment, Eastman manufactures and sells cellulose acetate tow for use in filtration media, primarily cigarette filters. The acetyl chemicals product line consists of triacetin, cellulose acetate flake, and acetyl raw materials for other acetate fiber producers. The acetate yarn product line consists of natural (undyed) acetate and polyester yarn and solutiondyed acetate yarn for use in apparel, home furnishings, and industrial fabrics.

Product Lines	Percentage of Total Segment Sales

2017	2016	2015

Acetate Tow	77%	80%	78%

AcetlChlPdy emica roucts	15%	13%	14%

Acetate Yarn	8%	7%	8%

Total	100%	100%	100%

The Company continues to explore and invest in R&D initiatives such as high performance materials and advanced cellulosics that are aligned with disruptive macro trends such as health and wellness, natural resource efficiency, an increasing middle class in emerging economies, and feeding a growing population. An example of such an initiative is the Eastman microfiber technology platform which leverages the Company's core competency in polyesters, spinning capability, and inhouse application expertise for use in a wide range of applications including liquid and air filtration, high strength packaging in nonwovens, and performance apparel in textiles.

Sales revenue and expense for the Eastman microfiber technology platform growth initiative are shown in the tables below as "Other" sales revenue and operating loss. R&D, pension and other postretirement benefits, and other expenses and income not identifiable to an operating segment are shown in the tables below as "Other" operating earnings (loss).


	Notes
附註	2020
二零二零年	2019
二零一九年

HK$’000
千港元	HK$’000
千港元

Non-current liabilities       非流動負債

Lease liabilities            租賃負債	35	1,246	1,677

Deferred tax liabilities         遞延稅項負債	36	2,745	2,927

		3,991	4,604

Net assets             資產淨值		206,617	245,976

Capital and reserves        股本及儲備

Share capital             股本	37	77,489	77,489

Reserves               儲備		128,902	161,059

Equity attributable to       本公司擁有人應佔權益
owners of the Company		206,391	238,548

Non-controlling interests      非控股權益		226	7,428

Total equity             權益總額		206,617	245,976

The consolidated financial statements on pages 96 to 235 were approved and authorised for issue by the board of directors on 19 March 2021 and are signed on its behalf by:

第96頁至第235頁的綜合財務報表經董事會於二零二一年三月十九日批准及授權刊發，並由以下人士代表簽署：

Wang Jiawei
王嘉偉	Lai Yuk Mui
黎玉梅

Director
董事	Director
董事

The accompanying notes form an integral part of these consolidated financial statements.

隨附的附註構成此等綜合財務報表的一部分。

	Attributable to the owners of the Company
本公司擁有人應佔	Non-
controling
interests
非控股權益	Total
equity
權益總額

Share
capital
股本	Share
premium
股份溢價	Fair value
through other
comprehensive
income reserve	Special
reserve	Statutory
reserve	Translation
reserve
匯兌儲備	Share-based
compensation
reserve
股份補償儲備	Accumulated
losses
累計虧損	Total
總額

(Note 38(i)
（附註38(i)）	(Note 38(i)
（附註38(i)）	(Note 38(ii)
（附註38(ii)）

按公平值計入
其他全面
收入儲備	特別儲備	法定儲備

HK$’000
千港元	HK$’000
千港元	HK$’000
千港元	HK$’000
千港元	HK$’000
千港元	HK$’000
千港元	HK$’000
千港元	HK$’000
千港元	HK$’000
千港元	HK$’000
千港元	HK$’000
千港元

Balance at 31 December 2018               於二零一八年十二月三十一日之結餘	77,489	1,673,299	–	4,779	3,912	(22,296)	30,554	(1,403,119)	364,618	13,557	378,175

Impact on initial application of HKFRS 16          對初次應用香港財務報告準則第16號的影響	–	–	–	–	–	–	–	(92)	(92)	(2)	(94)

Balance at 1 January 2019                 於二零一九年一月一日之結餘	77,489	1,673,299	–	4,779	3,912	(22,296)	30,554	(1,403,211)	364,526	13,555	378,081

Loss for the year                     年內虧損	–	–	–	–	–	–	–	(127,674)	(127,674)	(5,948)	(133,622)

Other comprehensive income for the year          年內其他全面收入	–	–	–	–	–	1,696	–	–	1,696	(179)	1,517

Transferred to accumulated losses             購股權失效時轉撥至累計虧損
upon lapse of share options	–	–	–	–	–	–	(8,930)	8,930	–	–	–

Balance at 31 December 2019 and             於二零一九年十二月三十一日及
1 January 2020                    二零二零年一月一日之結餘	77,489	1,673,299	–	4,779	3,912	(20,600)	21,624	(1,521,955)	238,548	7,428	245,976

Loss for the year                     年內虧損	–	–	–	–	–	–	–	(41,399)	(41,399)	(161)	(41,560)

Other comprehensive income for the year          年內其他全面收入	–	–	–	–	–	9,378	–	–	9,378	543	9,921

Transferred to accumulated losses upon lapse       購股權失效時轉撥至累計虧損
of share options	–	–	–	–	–	–	(21,624)	21,624	–	–	–

Fair value gains on financial assets at fair value through   按公平值計入其他全面收入之金融資產之
other comprehensive income                公平值收益	–	–	1,106	–	–	–	–	–	1,106	58	1,164

Transferred to accumulated losses upon           出售按公平值計入其他全面收入之
disposal of financial assets at fair value           金融資產儲備時轉撥至累計虧損
through other comprehensive income reserve	–	–	(1,106)	–	–	–	–	–	(1,106)	(58)	(1,164)

Acquisition of additional interest in subsidiaries        收購附屬公司之額外權益（附註21(1)及(2)）
(notes 21(1) and (2)	–	–	–	–	–	–	–	(136)	(136)	(7,584)	(7,720)

Balance at 31 December 2020               於二零二零年十二月三十一日之結餘	77,489	1,673,299	–	4,779	3,912	(11,222)	–	(1,541,866)	206,391	226	206,617

隨附的附註構成此等綜合財務報表的一部分。


# 10. Earnings/ (loss) per share - continued

# (b) Diluted earnings/ (loss) per share - continued

Diluted earnings/ (loss) per share attributable to equity holders of the Company are calculated as follows:

	2015	2014

Net pro t/ (loss) attributable to equity holders of the Company and used to
 determine diluted earnings per share (S$’000)	1,299	(4,968)

Weighted average number of ordinary shares outstanding for
   basic earnings/ (loss) per share (‘000)	781,909	771,595

Adjustments for (‘000)

- Share options	12,278	13,478

- Warrants	1,126,926	254,331

	1,921,113	1,039,404

Diluted earnings/ (loss) per share (cent per share)	0.07	(0.64)*

\* As loss was recorded, the dilutive potential shares from share options and warrants are anti-dilutive and no change is made to the diluted loss per share.

For the purpose of presenting the consolidated statement of cash flows, cash and cash equivalents comprise the following:

	Group

2015	2014

          S$’000	S$’000

Cash and bank balances (as above)	10,885	6,548

Less: Bank overdraft (Note 18)	(213)	(991)

Cash and cash equivalents per consolidated statement of cash flows	10,672	5,557

	Group	Company

2015	2014	2015	2014

S$’000	S$’000	S$’000	S$’000

Trade receivables

- Non-related parties	6,366	5,972	-	-

Bills receivables	9,068	7,379	-	-

Trade and bills receivables	15,434	13,351	-	-

Contract work-in-progress

- Due from customers (Note 14)	492	660	-	-

Advance payment for project costs	676	720	-	-

Unbilled contract revenue	7,492	4,992	-	-

Other receivables

- Subsidiary corporations	-	-	4,205	5,088

- Staff advances	-	4	-	-

- Non-related parties	158	298	-	-

- Value added tax recoverable	136	138	-	-

- Withholding tax receivable	16	17	-	-

Less: Allowance for impairment of receivables

 – non-related parties (Note 26(b)(ii))	-	(138)	-	-

Other receivables – net	310	319	4,205	5,088

Deposits	429	290	-	-

Prepayments	483	467	29	19

	25,316	20,799	4,234	5,107

The amount due from subsidiary corporations are non-trade in nature, unsecured, interest free and repayable on demand

	Group

2015	2014

          S$’000	S$’000

Voice, video and data communication equipment	395	432

The cost of inventories recognised as an expense and included as part of “Cost of sales – equipment and consumables used” amounts to S\$40,095,000 (2014: S\$32,592,000).

The Group has recognised a write-down of its slow-moving inventories amounting to S\$44,000 (2014: S\$42,000) (Note 5).

	Group

2015	2014

          S$’000	S$’000

Contract work-in-progress

Aggregate costs incurred and pro ts recognised (less losses recognised)
 to date on uncompleted contracts	492	660

Less: Progress billings	(45)	(77)

	447	583

Presented as:

Due from customers on contract work-in-progress (Note 12)	492	660

Due to customers on contract work-in-progress (Note 17)	(45)	(77)

	447	583


We perform a quarterly evaluation of all of our risk-sharing loans to determine whether a loss is probable. Our process for identifying which risk-sharing loans may be probable of loss consists of an assessment of several qualitative and quantitative factors including payment status, property financial performance, local real estate market conditions, loan-to-value ratio, debt-service-coverage ratio, and property condition. When we believe a loan is probable of foreclosure or in foreclosure, we record an allowance for that loan (a “specific reserve”). The specific reserve is based on the estimate of the property fair value less selling and property preservation costs and considers the loss-sharing requirements detailed below in the “Credit Quality and Allowance for Risk-Sharing Obligations” section. The estimate of property fair value at initial recognition of the allowance for risk-sharing obligations is based on appraisals, broker opinions of value, or net operating income and market capitalization rates, whichever we believe is the best estimate of the net disposition value. The allowance for risk-sharing obligations for such loans is updated as any additional information is received until the loss is settled with Fannie Mae. The settlement with Fannie Mae is based on the actual sales price of the property and selling and property preservation costs and considers the Fannie Mae loss-sharing requirements. Loss settlement with Fannie Mae has historically concluded within 18 to 36 months after foreclosure. Historically, the initial specific reserves have not varied significantly from the final settlement. We are uncertain whether such a trend will continue in the future.

In addition to the specific reserves discussed above, we also record an allowance for risk-sharing obligations related to all risk-sharing loans on our watch list (“general reserves”). Such loans are not probable of foreclosure but are probable of loss as the characteristics of these loans indicate that it is probable that these loans include some losses even though the loss cannot be attributed to a specific loan. For all other risk-sharing loans not on our watch list, we continue to carry a guaranty obligation. We calculate the general reserves based on a migration analysis of the loans on our historical watch lists, adjusted for qualitative factors. When we place a risk-sharing loan on our watch list, we cease to amortize the guaranty obligation and transfer the remaining unamortized balance of the guaranty obligation to the general reserves. If a risk-sharing loan is subsequently removed from our watch list due to improved financial performance, we transfer the unamor-tized balance of the guaranty obligation back to the guaranty obligation classification on the balance sheet and amortize the remaining unamortized balance evenly over the remaining estimated life. For each loan for which we have a risk-sharing obligation, we record one of the following liabilities associated with that loan as discussed above: guaranty obli-gation, general reserve, or specific reserve. Although the liability type may change over the life of the loan, at any particular point in time, only one such liability is associated with a loan for which we have a risk-sharing obligation.

We evaluate all of our loans held for investment for impairment quarterly. Our impairment evaluation focuses pri-marily on payment status and property financial performance. We consider a loan impaired when the current facts and circumstances suggest it is not probable that we will collect all contractually due principal and interest payments. When a loan is not considered impaired, we apply a collective allowance that is based on recent historical loss probability and historical loss rates incurred in our risk-sharing portfolio, adjusted as needed for current market conditions (“loss factors”). We use the loss experience from our risk-sharing portfolio as a proxy for losses incurred in our loans held for investment portfolio since (i) we have not experienced any actual losses related to our loans held for investment to date and (ii) the loans in the loans-held-for-investment portfolio have similar characteristics to loans held in the risk-sharing portfolio. Since the inception of the Interim Program in 2012, we have not had any delinquent or impaired loans or charged off any loans. The historical loss factors are updated quarterly. We have not experienced significant change in the loss factors during the periods presented in the financial statements. These loss factors may change in the future as economic and market conditions change and as the Interim Program matures.

# Overview of Current Business Environment

The fundamentals of the commercial and multifamily real estate market remain strong. Multifamily occupancy rates and effective rents continue to increase based upon strengthening rental market demand while delinquency rates remain at historic lows, all of which aid loan performance due to their importance to the cash flows of the underlying properties. Most other commercial real estate asset classes have experienced similar performance in underlying fundamentals. The positive performance has boosted the value of many commercial and multifamily properties towards the high end of his-torical ranges.

In addition to the improved property fundamentals, for the last several years, the U.S. commercial and multifamily mortgage market has experienced historically low interest rates, leading many borrowers to seek refinancing prior to the scheduled maturity date of their loans. As borrowers have sought to take advantage of the interest rate environment and improved property fundamentals, the number of lenders and amount of capital available to lend have increased dramati-cally. According to the Mortgage Bankers Association, commercial and multifamily loan maturities are expected to in-crease dramatically through the end of 2017, as the loans originated at the height of the CMBS market begin maturing a decade later. All of these factors have benefited our origination and investment sales volumes over the past several quarters. Competition among commercial real estate services firms, banks, life insurance companies, and the GSEs remains fierce.

During the fourth quarter of 2016, the Federal Reserve raised its targeted Fed Funds Rate by another 25 basis points and suggested that it is likely going to increase its targeted Fed Funds Rate during 2017. We have not experienced a significant decline in origination volume or profitability as a result of the increases as long-term mortgage interest rates generally remained at historically low levels during the majority of 2016. Long-term mortgage interest rates did increase significantly during the last two months of 2016, largely due to the anticipation of a rate increase by the Federal Reserve and the results of the 2016 Presidential Election. However, even the sharp increase in long-term mortgage interest rates did not appear to adversely impact our loan origination volumes. We cannot be certain that trend will continue as the number, timing, and magnitude of any future increases by the Federal Reserve, taken together with previous interest rate increases and combined with other macroeconomic factors, may have a different effect on the commercial real estate market.

Late in the second quarter of 2016, citizens of the United Kingdom (“U.K.”) voted to exit the European Union (“E.U.”), an action commonly referred to as “Brexit.” The referendum itself has not resulted in the U.K.’s immediate exodus from the E.U. since the vote was not legally binding on the British government. Rather, Parliament, having heard the voice of voters, may now enact laws to facilitate the U.K.’s departure and must notify the European Commission of its intention to leave the E.U. Legislation to effect the departure has been passed by the lower house of Parliament. Many observers anticipate that the U.K. will invoke Article 50 of the Lisbon Treaty in the first half of 2017 to leave the E.U. After such notice is provided, the U.K. and European Commission will have a two-year window in which to establish the terms of the U.K.’s departure. Even though the process of separating from the E.U. will take several years, Brexit has created a significant amount of uncertainty in both the global and domestic financial markets as participants have evaluated the impact Brexit may have on the global and domestic economies.

Brexit has had minimal impact on our operations and financial results as we have no direct exposure to the U.K. or E.U. Additionally, we believe the indirect impact of Brexit likely benefitted us during the second half of 2016 as borrowers took advantage of low mortgage interest rates and as a “flight to safety” resulted in an increase of global capital investments in U.S. markets, including commercial real estate, resulting in higher loan origination and investment sales activity. Some of these benefits may be mitigated by higher credit risk spreads demanded by investors in commercial real estate loans going forward. We believe these indirect impacts will largely continue in the near term (although potentially partially or completely mitigated by the aforementioned increase in interest rates due to the actions of the Federal Reserve and the results of the 2016 Presidential Election) but are uncertain about the long-term duration.

We are a market-leading originator with Fannie Mae and Freddie Mac, and the GSEs remain the most significant providers of capital to the multifamily market. The Federal Housing Finance Agency (“FHFA”) 2017 GSE Scorecard (“2017 Scorecard”) established Fannie Mae’s and Freddie Mac’s 2017 loan origination caps at \$36.5 billion each for market-rate apartments (“2017 Caps”), the same as the final 2016 loan origination caps (the 2016 loan origination caps began the year at \$31.0 billion each, but were adjusted by the FHFA twice during 2016 to a final amount of \$36.5 billion each). Affordable housing loans, loans to small multifamily properties, and manufactured housing rental community loans continue to be excluded from the 2017 Caps. Additionally, the definition of the affordable loan exclusion continues to encompass affordable housing in high- and very-high cost markets and to allow for an exclusion from the 2017 Caps for the pro-rata portion of any loan on a multifamily property that includes affordable units. The 2017 Scorecard provides the FHFA the flexibility to review the estimated size of the multifamily loan origination market on a quarterly basis and proactively adjust the 2017 Caps upward should the market be larger than expected in 2017 (as noted above, the FHFA adjusted the caps upward twice in 2016). The 2017 Scorecard also provides exclusions for loans to properties located in


In the event any claim, action, suit, proceeding, arbitration, complaint, charge or investigation is brought in respect of this Agreement or any of the documents referred to in this Agreement, the prevailing party will be entitled to recover reasonable attorneys' fees and other costs incurred in such Proceeding, in addition to any relief to which such party may be entitled.

Neither any failure nor any delay by any party in exercising any right, power, or privilege under this Agreement or any of the documents referred to in this Agreement will operate as a waiver of such right, power, or privilege, and no single or partial exercise of any such right, power, or privilege will preclude any other or further exercise of such right, power, or privilege or the exercise of any other right, power, or privilege. To the maximum extent permitted by applicable laws, (a) no claim or right arising out of this Agreement or any of the documents referred to in this Agreement can be waived by a Party, in whole or in part, unless made in a writing signed by such Party; (b) a waiver given by a Party will only be applicable to the specific instance for which it is given; and (c) no notice to or demand on a Party will (i) waive or otherwise affect any obligation of that Party or (ii) affect the right of the Party giving such notice or demand to take further action without notice or demand as provided in this Agreement.

All notices and other communications required or permitted by this Agreement shall be in writing and will be effective, and any applicable time period shall commence, when (a) delivered to the following address by hand or by a nationally recognized overnight courier service (costs prepaid) addressed to the following address or (b) transmitted electronically to the following facsimile numbers or e-mail addresses, in each case marked to the attention of the Person (by name or title) designated below (or to such other address, facsimile number, e-mail address, or Person as a Party may designate by notice to the other parties):

29/F., Three Pacific Place, No. 1 Queen’s Road East, Wanchai, Hong Kong

Attention: Compliance and Transactions Department

21/F, Building A, No.18 Kechuang 11th Street, Yizhuang Economic and Technological Development Zone, Daxing District, Beijing 101111, PRC

Attention: Legal Department (Mergers and Acquisitions Group)

If any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement will remain in full force and effect. Any provision of this Agreement held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable.

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Section 6.16 Counterparts and Electronic Signatures.

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\[ \begin{array} { l l } { { \overline { { { f } } } ( t _ { n } ) = \left\langle \int f ( x + \Delta x ) P _ { n - 1 } ( x ) d ^ { D } x \right\rangle _ { \mathrm { N s } } } } \\ { { \qquad = \left\langle \int \left( f ( x ) + f _ { \ast } ( x ) \Delta x ^ { i } + ( 1 / 2 ) f _ { \ast j } ( x ) \Delta x ^ { i } \Delta x ^ { j } + . . . \right) P _ { n - 1 } ( x ) d ^ { D } x \right\rangle _ { \mathrm { N s } } } } \\ { { \qquad = \displaystyle \int f ( x ) \left\langle \hat { 1 } - \frac { \partial } { \partial x ^ { i } } \Delta x ^ { i } + ( 1 / 2 ) \frac { \partial ^ { 2 } } { \partial x ^ { i } \partial x ^ { j } } \Delta x ^ { i } \Delta x ^ { j } + . . . \right\rangle _ { \mathrm { N s } } P _ { n - 1 } ( x ) d ^ { D } x . } } & { { \mathrm { ( A 8 ) } } } \end{array} \]

Here, \( f _ { / j } \, \equiv \, \partial f / \partial x ^ { i } \) and similar for \( f _ { { ' } i j } \, = \, \partial ^ { 2 } f / \partial x ^ { i } \partial x ^ { j } \), and the partial integration has been used.

The next step is to Taylor expand \( \Delta x \) up to second order in \( \Delta t \) and substitute this expansion into the above expression. Using Equation (A1), one has

\[ \Delta x ^ { i } = \mathcal { F } _ { n } ^ { i } \Delta t + \alpha ( \mathcal { F } _ { n } ^ { i } ) , \mathcal { F } _ { n } ^ { j } \Delta t ^ { 2 } + \ldots \eqno ( \mathrm { A 9 } ) \]

Substituting this expression into Equation (A8), using Equation (A2), and performing the stochastic averaging over \( \xi _ { n } \) with the help of Equation (7), one arrives at

\[ \overline { { f } } ( t _ { n } ) = \int f ( x ) ( \widehat { 1 } - \Delta t \hat { H } _ { \alpha } ^ { ( D ) } + \ldots ) P _ { n - 1 } ( x ) d ^ { D } x , \eqno ( \mathrm { A 1 0 } ) \]

\[ \hat { H } _ { \alpha } ^ { ( D ) } = - \frac { \partial } { \partial x ^ { i } } F _ { \alpha } ^ { i } ( x ) - \Theta \frac { \partial } { \partial x ^ { i } } e _ { a } ^ { i } ( x ) \frac { \partial } { \partial x ^ { j } } e _ { a } ^ { j } ( x ) \eqno ( \mathrm { A 1 1 } ) \]

and with the \( \alpha \)-dependent flow vector field from Equation (91).

In the above derivation of the FP operator, SdE (A9) was used as a formal equation defining \( \Delta x \). One can take an alternative view on stochastic dynamics in which the dynamics is continuous in time and the noise is piece-wise constant, as given in Figure 1. For a fixed noise configuration, one has a continuous trajectory x(t), defined by \( \dot { x } \, = \, \mathcal { F } _ { n } ( x ( t ) ) \) with the initial condition \( x ( t _ { n - 1 } ) = x _ { n _ { 1 } } \). Now, there is no freedom in choosing \( \alpha \) because \( \Delta x \) is uniquely defined by the evolution according to the Picard-Lindelo¨f theorem. In particular, \( \Delta x \) has a unique Taylor expansion in \( \Delta t \):

\[ \Delta x ^ { i } = \left. \frac { \partial x ^ { i } } { \partial t } \right| _ { \Delta t = 0 } \Delta t + \frac { 1 } { 2 } \left. \frac { \partial ^ { 2 } x ^ { i } } { \partial ^ { 2 } t } \right| _ { \Delta t = 0 } \Delta t ^ { 2 } + . . . \eqno ( \mathrm { A 1 2 } ) \]

The first coefficient here is determined from the SDE itself,

\[ \left. \frac { \partial x ^ { i } } { \partial t } \right| _ { \Lambda t = 0 } = \mathcal { F } _ { n } ^ { i } ( x ) , \eqno { ( \mathrm { A 1 3 } ) } \]

whereas the second coefficient is obtained via one differentiation of the SDE over time

\[ \left. \frac { \partial ^ { 2 } x ^ { i } } { \partial ^ { 2 } t } \right| _ { \Delta t = 0 } = \left. \frac { \partial \mathcal { F } _ { n } ^ { i } ( x ) } { \partial t } \right| _ { \Delta t = 0 } = \mathcal { F } _ { n ^ { \prime } j } ^ { i } ( x ) \left. \frac { \partial x ^ { i } } { \partial t } \right| _ { \Delta t = 0 } = \mathcal { F } _ { n ^ { \prime } j } ^ { i } ( x ) \mathcal { F } _ { n } ^ { j } ( x ) ; \eqno { ( \mathrm { A 1 4 } ) } \]

thus, the quantity in Equation (A12) becomes

\[ \Delta x ^ { i } = \mathcal { F } _ { n } ^ { i } ( x ) \Delta t + \frac { 1 } { 2 } \mathcal { F } _ { n ^ { \prime } j } ^ { i } ( x ) \mathcal { F } _ { n } ^ { j } ( x ) \Delta t ^ { 2 } + \ldots \eqno ( \mathrm { A 1 5 } ) \]

Comparing this equation with Equation (A9), one concludes that the Stratonovich choice of \( \alpha = 1 / \tau \) 2 must always be used for the continuous-time picture of temporal evolution.

Concerning the Ito interpretation of SDEs, it is often said that, unlike all other interpre-tations, the Ito approach respects the Markovian property in the sense that the increment \( \Delta x _ { n } \) or, equivalently, the final point \( x _ { n } \, = \, x _ { n - 1 } + \Delta x _ { n } \) is a function of only \( x _ { n - 1 } \) and not of \( x _ { n } \). This advantage of Ito SDEs, however, is a misinterpretation. Indeed, the very state-ment that \( x _ { n } \) is a function of itself for \( \alpha \) 0 does not make sense from the point of view of functional dependence. This sentence only tells us that \( x _ { n } \) as a function of \( x _ { n - 1 } \) is given only implicitly by Equation (90). For a fixed noise variable \( \xi _ { n } \), the final point \( x _ { n } \) together with the increment \( \Delta x _ { n } \) is always a function of \( x _ { n - 1 } \) only. Its explicit expression is given by Equation (A9) up to second order in \( \Delta t \), the only accuracy relevant in the continuous-time limit.

Furthermore, the Markovian property of stochastic processes is concerned not with the trajectories (the variables \( x _ { n } \) and \( x _ { n - 1 } \)) but rather with the temporal evolution of TPDs. In application to the SdEs (90), the Markovian property means that the TPD at time moment \( t _ { n } \) depends on the TPD at the previous time moment \( t _ { n - 1 } \) only and not on the TPD at earlier time moments. As clearly observed from Equation (A6), which is correct for all \( \alpha \), all the interpretations of SDEs satisfy this requirement of Markovianity. In other words, Ito SDEs are just as Markovian as SDEs in all the other interpretations.

In other words, the only advantage of the Ito interpretation is the relative ease of its numerical implementation because the increment as a function of \( x _ { n - 1 } \) is given explicitly by the Ito SdE. This convenience for numerical implementations, however, does not have any significance from the mathematical point of view.