China Environmental Energy Investment Limited CLARIFICATION ANNOUNCEMENT RELATING TO THE ANNUAL RESULTS ANNOUNCEMENT FOR THE YEAR ENDED 31 MARCH 2013

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1 Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this announcement, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this announcement. China Environmental Energy Investment Limited (Incorporated in Bermuda with limited liability) (Stock code: 986) CLARIFICATION ANNOUNCEMENT RELATING TO THE ANNUAL RESULTS ANNOUNCEMENT FOR THE YEAR ENDED 31 MARCH 2013 This announcement is made by the Company to clarify the following issues, namely, (i) the recycling business of Ideal Market Holdings Limited; (ii) the electric car battery business of Swift Profit International Limited; and (iii) the impairment loss on trade receivables and other receivables with reference to the annual results announcement of the Company for the year ended 31 March Reference is made to the annual results announcement for the year ended 31 March 2013 (the Results Announcement ) of China Environmental Energy Investment Limited (the Company ) dated 28 June The board (the Board ) of directors (the Directors ) of the Company (together with its subsidiaries, the Group ) wishes to clarify the following issues, namely, (i) the recycling business of Ideal Market Holdings Limited ( Ideal Market ); (ii) the electric car battery business of Swift Profit International Limited ( Swift Profit ); and (iii) the impairment loss on trade receivables and other receivables. Unless the context otherwise requires, capitalized terms used herein shall have the same meaning as those defined in the Results Announcement. For identification purposes only 1

2 RECYCLING BUSINESS OF IDEAL MARKET Further development of recycling business Pursuant to the sale and purchase agreement dated 9 May 2011, the Company acquired 80% of the issued share capital of Ideal Market, all indebtedness, obligations and liabilities due, owing or incurred by Ideal Market and its subsidiaries (the Acquisition ). For 2013/14 financial year, Ideal Market plans to establish five additional waste paper recycling stations in the People s Republic of China ( China ) in order to expand its business operation. The Company intends to consolidate its existing business and operation and it is expected that Ideal Market will enjoy the economies of scale to streamline the cost structure of the operation. The Company believes that establishment of additional stations will also help share the fixed operating and overhead costs. Circumstances leading to impairment loss For the year ended 31 March 2013, the Company recognized impairment loss on goodwill of HK$204 million for the recycling business (the Impairment Loss ), representing 51% of the Company s net losses. Based on market research conducted by the Company, due to a gradual upward trend in the price of imported waste paper, China s import of waste paper fell more than 4% in the first quarter of Imported waste paper as a proportion of total waste paper consumption has been declining as well. The Company forecasted that the demand for recycle papers might not be as robust as expected when compared to valuation as at 31 March Also, the financial performance for the year ended 31 March 2013 was not as good as estimated. As a consequence, the valuation assumptions and the cash flow projection have been adjusted to reflect a more conservative expectation of the Company, leading to the Impairment Loss. Based on market research conducted by the Company, paper demand in China will keep increasing due to the growth of the economy while high dependency on expensive waste paper import leads attention of the Chinese government, which introduced policies to support the development of waste paper recycling industry. With a view to the above, Directors maintained their intention to invest in the recycling business. 2

3 Impairment assessment and calculation basis of recycling business The Impairment Loss for the year ended 31 March 2013 is calculated based on the recoverable amount of the cash-generating units of the recycling business undertaken by Ideal Market. The recoverable amount has been determined based on a value in use calculation with reference to the business valuation performed by an independent valuer not connected with the Group. That calculation uses cash flow projection based on financial budgets approved by the directors covering a twenty-year period, with growth rates of 20% per annum for the first eight years and 15% per annum for the remaining twelve years, and at a discount rate of 10.75% in considering the economic conditions of the market. Based on the historical performance of Ideal Market and experience in the recycling industry, the management of the Company was of the view that the recycling business of Ideal Market would be eliminated by other market players and new entrants, as well as high operating costs. The intense competition would probably decrease the Company s margin and market share, and it is foreseeable that there would be numerous uncertainties regarding the prospect of the business after 20 years. To take a conservative basis for the annual impairment test assessment as at 31 March 2013, the Company assumed that the recycling business of Ideal Market could continue for 20 years in the financial projection, rather than continues perpetually and believed that such assumption was fair and reasonable. Moreover, due to significant decrease in actual revenue for the year ended 31 March 2012 to 31 March 2013, financial forecast for the year ended 31 December 2013, as the initial year of the projection, has been adjusted downwards. The valuation of the recycling business for the year ended 31 March 2013 was conducted by discounted cash flow ( DCF ) method, which is the same as that for the year ended 31 March The Company believes that the drop in valuation is caused by, among others, intense competition with new entrants, a decreased demand and consumption of waste paper, and actual financial performance of the Company. 3

4 ELECTRIC CAR BATTERY BUSINESS OF SWIFT PROFIT Further development of electric car battery business The Company acquired 9.9% of the issued share capital of Swift Profit on 29 December Swift Profit is developing battery production technique in a number of aspects with an aim to raise its competitive edges subsequent to the acquisition (the Acquisition ). Subsequent to the Acquisition, Swift Profit intends to improve the batteries with high safety battery set design, high insulation-resistant, protection of over recharging, good battery voltage and temperature control, higher battery efficiency and longer life. Testing on the battery s stability and quality is being conducted, and the Company endeavours to launch new products into the market in the fourth quarter of Circumstances leading to impairment loss The impairment losses on the investment in the electric car battery business of the year ended 31 March 2013 is mainly attributable to the change in industry environment and prospect related to electric cars and batteries for electric cars. Up to now, safety on electric cars and batteries for electric cars is still a concern for consumers. Recently, there was a minor exploration taking place in Hong Kong, when a rapid charger was recharging a BYD-brand taxi and overheated negative incidents. Although BYD stated that the fault was caused by loose connection between the grid and the charger, this would surely have an impact on the consumers confidence and demand on electric cars and batteries for electric cars. Moreover, in pace with the electric car subsidy policy launched by the Chinese government, the competition in electric car market in China is becoming fiercer. Increasing production then pushes the prices of both the electric cars and batteries for electric cars down. This would lead to the decline in the profit margin of the whole industry. As a result, the Company recorded an impairment loss on the investment in the electric car battery business. 4

5 Impairment assessment and calculation basis of electric car battery business The impairment loss on the available-for-sale investment (amounting to approximately HK$48 million) charged to profit or loss in respect of the year ended 31 March 2013 has been arrived at based on the present value of the estimated future cash flows of Swift Profit discounted at the rate of approximately 11% (which is determined by reference to the discount rates applicable to those enterprises engaged in businesses similar to those undertaken by Swift Profit). The Company forecasted that the demand for electric car batteries might not be as robust as expected, such that the growth of the business might be restrained. Moreover, as Swift Profit had not yet been certified as advanced and new technology enterprise, preferential tax rate in China was not adopted in the valuation. Therefore, the valuation assumptions and the cash flow projection have been adjusted to reflect and be consistent with the expectation of the Company. The valuation of the electric car battery business for the year ended 31 March 2013 was conducted by DCF method, which is the same as that for the year ended 31 March The Company believes that the drop in valuation is caused by, among others, an intense competition in the industry environment and a less robust demand related to electric cars and batteries. IMPAIRMENT LOSS ON TRADE RECEIVABLES AND OTHER RECEIVABLES Reasons for the impairment loss The Company recorded impairment loss on trade receivables of HK$6 million and other receivables of HK$36 million for the year ended 31 March Other receivables impaired during the year represent (i) the sale receivables from certain employees or intermediaries of Ideal Market which were made prior to its Acquisition, and (ii) the advances to certain purchase suppliers and other parties (not connected to the Group) made overdue more than one year. 5

6 Over 75% impairment loss represents amount being overdue more than one and a half year before the Acquisition of Ideal Market. Before its Acquisition, Ideal Market sold its products to employees or intermediaries (without executing written contracts or guarantees) who would then re-sell to customers in China. Impairment loss was incurred when the employees terminated their employment or when the intermediaries absconded. The Company would like to clarify that Ideal Market was not related to any connected persons of the Company and the impaired receivables from the employees or intermediaries were not related to connected persons of the Company. Shortly after the Acquisition of Ideal Market, the Company has improved its internal control policy by directly selling the products to its customers (which accounts for over 80% of total sales), and requested intermediaries to secure the sale orders by executing guarantees. Subsequent to 31 March 2013, as a security for the repayment of the outstanding receivables, the minority shareholders of Ideal Market (holding 20% share capital) have agreed to pledge their shares and a minority shareholder of Ideal Market has agreed to provide a personal guarantee for the intermediaries. Due diligence works performed in relation to the receivable s recoverability The Board takes the view that Directors had performed due diligence works in relation to the receivables recoverability of the recycling business to evaluate and complete the Acquisition of Ideal Market. Prior to the Acquisition of Ideal Market, the Company has obtained a PRC legal opinion from a qualified PRC legal adviser confirming, among other things, the legality of the Acquisition under the PRC laws and regulations and the due incorporation of the Ideal Market group. Ideal Market group have also obtained all relevant licences and consent or renewals thereof in relation to the business of recycling waster paper and consumable wastes and such licences remains valid and subsisting. Although no specific advice has been rendered on the recoverability of the receivables, the Board has been satisfied with the results of the due diligence review of the Ideal Market group. As disclosed in the Results Announcement, vendors of the Acquisition have undertaken and guaranteed to the Company that the actual amount of net profits after taxation of Ideal Market group for the period from 1 April 2011 to 31 March 2012, shall not be less than RMB55 million (the Profit Guarantee ). In consideration of the Profit Guarantee, Directors considered that financial risks arising out of the Acquisition would be covered. The Board therefore takes the view that it had, to the best of its knowledge and ability, conducted due diligence works for the Acquisition. 6

7 Measures taken to recover outstanding balances The Company has engaged Chinese legal advisors to issue demand letters in December 2012 and May 2013 to demand recovery of receivables. The Company will keep issuing demand letters to request repayment of the outstanding receivables, it will also consider lodging legal proceedings subject to further advice from its Chinese legal advisors. No receivables have been settled or recovered as at the date of this announcement. Subject to further advice of its Chinese legal advisors, the Directors believe that the recoverability of the receivables balances is not high. On behalf of the Board China Environmental Energy Investment Limited Chen Tong Chairman Hong Kong, 6 August 2013 As at the date of this announcement, the Board comprises four executive directors, namely Ms. Chen Tong (Chairman), Ms. Chan Ching Ho, Kitty, Ms. Li Lin and Mr. Xiang Liang; three non-executive directors, namely Ms. Yao Zhengwei, Mr. Wang Zhenghua and Mr. Liang Jianhua; and four independent non-executive directors, namely Mr. Ong King Keung, Mr. Tse Kwong Chan, Ms. Zhou Jue and Ms. Kwok Wing Kiu. All the directors of the Company jointly and severally accept full responsibility for the accuracy of the information contained in this announcement and confirm, having made all reasonable enquiries, that to the best of their knowledge, opinions expressed in this announcement have been arrived at after due and careful consideration and there are no other facts not contained in this announcement, the omission of which would make any statement in this announcement misleading. In case of any inconsistency among the Chinese and English version of this announcement, the English version shall prevail. 7