Very substantial disposal

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KONG SUN HOLDINGS LIMITED

江 山 控 股 有 限 公 司

(Incorporated in Hong Kong with limited liability)

(Stock Code: 295)

VERY SUBSTANTIAL DISPOSAL

THE DISPOSAL

On 5 December 2019 (after the trading hours of the Stock Exchange), the Vendor, a wholly-owned subsidiary of the Company, the Purchaser and the Project Company entered into the Agreement, pursuant to which the Vendor conditionally agreed to sell, and the Purchaser conditionally agreed to acquire, the entire equity interest in the Project Company and the benefit of the Shareholder's Loan for a total consideration of approximately RMB446,355,000, subject to adjustment based on the Transition Period Audit.

Upon completion of the Disposal, the Project Company will cease to be a subsidiary of the Company and its financial statement will no longer be consolidated into the Group's financial statement.

LISTING RULES IMPLICATIONS

As the relevant applicable percentage ratio set forth under Rule 14.07 of the Listing Rules in respect of the Disposal exceeds 75% or more, the Disposal constitutes a very substantial disposal of the Company under Chapter 14 of the Listing Rules and is therefore subject to the reporting, announcement and shareholders' approval requirements under Chapter 14 of the Listing Rules.

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General

The EGM will be convened and held for the Shareholders to consider and, if thought fit, to approve the Agreement and the transactions contemplated thereunder. Insofar as the Company is aware, none of the Shareholders has any material interest in the Disposal. Hence, no Shareholder is required to abstain from voting on the resolutions in relation to the Agreement and the transactions contemplated thereunder at the EGM. A circular containing, among other things, further details of the Disposal, the financial information of the Group, the financial information and the valuation report of the Project Company, the notice convening the EGM and other information as required under the Listing Rules is expected to be despatched to the Shareholders on or before 31 December 2019 as additional time is required to prepare the information to be included in the circular.

Completion of the Disposal is conditional upon satisfaction of the Conditions Precedent as set out in this announcement. Accordingly, the Disposal may or may not proceed. Shareholders and potential investors should therefore exercise caution when dealing in the Shares.

THE DISPOSAL

On 5 December 2019 (after the trading hours of the Stock Exchange), the Vendor, a wholly- owned subsidiary of the Company, the Purchaser and the Project Company entered into the Agreement, pursuant to which the Vendor conditionally agreed to sell, and the Purchaser conditionally agreed to acquire, the entire equity interest in the Project Company and the benefit of the Shareholder's Loan for a total consideration of approximately RMB446,355,000, subject to adjustment based on the Transition Period Audit.

The principal terms of the Agreement are summarized as follows:

PRINCIPAL TERMS OF THE AGREEMENT

Date

5 December 2019

Parties

1. the Purchaser;
2. the Vendor, an indirect wholly-owned subsidiary of the Company; and
3. the Project Company.

Subject Matter

Pursuant to the Agreement, the Vendor conditionally agreed to sell, and the Purchaser conditionally agreed to acquire, the entire equity interest in the Project Company.

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Consideration

The total consideration for the Disposal is approximately RMB446,355,000, consisting of the Equity Consideration and the Debt Consideration, subject to adjustment.

Equity Consideration

The Equity Consideration is RMB59,000,000, which shall be payable by the Purchaser to the Vendor in the following manner:

1. within five (5) business days after the fulfilment of conditions (1) to (4) of the Conditions Precedent, a sum of RMB53,100,000 (the ''Deposit''), representing 90% of the Equity Consideration, shall be paid into the escrow account (the ''Escrow Account'') to be jointly established and operated by the Purchaser and the Vendor;
2. within five (5) business days of the later of the Completion Date and the issue of the payment notice by the Vendor, the Deposit shall be released from the Escrow Account to a bank account designated by the Vendor; and
3. RMB5,900,000, representing 10% of the Equity Consideration, shall be paid to the Vendor within five (5) business days of the first anniversary of the Completion Date subject to the Vendor having completed certain rectification work of the Angli Project and the Vendor having complied with its representation and warranties under the Agreement.

The Equity Consideration shall be adjusted upon occurrence of the followings:

1. in the event that the Project Company distributes dividends (the ''Dividends'') to the Vendor before the Completion Date resulting in the decrease of the net assets value of the Project Company as at the Completion Date as compared with that of the Reference Date; and
2. in the event of any change of net assets value of the Project Company as a result of matters occurred in non-ordinary course of business from the Reference Date to the Completion Date, such change will be considered as an adjustment to the Equity Consideration. The Vendor and the Purchaser shall agree upon the adjusted amount within five (5) business days upon issuance of the Transition Period Audit report (the
   ''Agreed Adjustment'').

Upon the occurrence of (i) and (ii) as mentioned above, the Deposit to be released to the Vendor shall be adjusted downward by the amount of the Dividends and the Agreed Adjustment.

As at the date of this announcement, none of the situations mentioned in (i) and (ii) above has occurred.

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Debt Consideration

As at the Reference Date, the Shareholder's Loan was in the amount of approximately RMB387,355,000. The Shareholder's Loan as at the Completion Date shall be determined based on the Transition Period Audit and agreed between the Purchaser and the Vendor. The Debt Consideration shall be payable to the Vendor on or before 31 July 2021 in the following manner:

1. within ten (10) business days of the Completion Date, the amount equal to the Shareholder's Loan as at the Completion Date minus items (ii), (iii) and (iv) listed below shall be paid to the Vendor;
2. within five (5) business days upon the Vendor having replaced the defected equipment of the Angli Project to the satisfaction of the Purchaser, the amount of RMB16,875,000 shall be paid to the Vendor;
3. within five (5) business days upon the Vendor having completed certain rectification work required by the local power grid corporation, the amount of RMB13,500,000 shall be paid to the Vendor; and
4. the rectification deposit in an aggregate amount of RMB4,400,000 shall be paid to the Vendor within five (5) business days upon completion of each of the rectification work items according to the schedule set out in the Agreement.

Basis of Determining the Consideration for the Disposal

The Consideration was determined upon arm's length negotiations between the Vendor and the Purchaser with reference to the unaudited total assets of the Project Company, being the value of the underlying assets of the Project Company, in the amount of approximately RMB1,006,793,000, and adjusted by (a) applying a discount of approximately 6.2%, resulting in the amount approximately RMB944,847,000; and (b) subtracting the total liabilities due to third parties (being total liabilities of the Project Company less the Shareholder's Loan) as at 31 July 2019 in the amount of approximately RMB498,492,000, which will remain payable by the Project Company upon completion of the Disposal. The Shareholder's Loan, which represents the capital injected by the shareholder of the Project Company, was added back to the net asset value of the Project Company in determining the value of the Project Company.

In determining the discount to be applied to the value of the underlying assets of the Project Company for the determination of the consideration for the Disposal, the management of the Company took into consideration of the reasons for the Disposal as set out in the paragraph headed ''REASONS FOR AND BENEFITS OF THE DISPOSAL'' below as well as:

1. the unaudited total assets and total liabilities of the Project Company as at the Reference Date;
2. the amount of renewable energy subsidies receivable by the Project Company from the relevant PRC governmental entity;

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1. the substantial amount of the interest-free shareholder's loans to the Project Company compared with other project companies;
2. the outstanding amount of the Shareholder's Loan as at the Reference Date;
3. the financial and cash flow position of Project Company, in particular, its net cash outflow position for the years ended 31 December 2017 and 2018 if the Shareholder's Loan was not provided;
4. the expected annual finance costs saving of the Group upon completion of the Disposal;
5. the expected annual solar power plant operation and maintenance service fee income of the Group to be generated upon the completion of the Disposal; and

(viii)the comparable transactions identified by the Directors as a reference to determine discount rate of approximately 6.2% applied to the total assets of the Project Company.

Based on publicly available information, the discount/premium to the total assets of the comparable transactions ranged from a discount rate of approximately 8.3% to a premium of approximately 5.7%. The discount rate of approximately 6.2% is within the range of comparable transactions identified by the Directors in determining the consideration for the Disposal.

The aggregated amount of the financial benefit to the Group is approximately RMB36,000,000, being the sum of (a) the saving of annual finance costs of not less than approximately RMB30,000,000 and (b) the annual operation and maintenance service fee of approximately RMB6,000,000 to be receivable by the Group.

Although the Project Company is profit-making, its capital and operating expenses have been substantially funded by interest-free shareholder's loans from the Group from time to time, which in turn is funded by interest-bearing borrowings incurred by the Group at the prevailing market rate. The Disposal represents an opportunity for the Group to recoup its capital investments in the Project Company and to relieve the Group from its funding commitment to the Project Company in the form of shareholder's loans, which are costly to maintain.

Taking into consideration the factors as highlighted above, and considering that the Group will be able to realize its investment in the Project Company, the Directors are of the view that the consideration for the Disposal is fair and reasonable and in the interests of the Company and the Shareholders as a whole.

Conditions Precedent

Completion of the Disposal is subject to the following Conditions Precedent being fulfilled:

1. CITIC Finance having provided the written consent to the Disposal;
2. the Vendor, its related parties and the Project Company having entered into the debt confirmation agreement in respect of the restructuring and offset of the related party debts;

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1. the Company having obtained the Shareholders' approval at the EGM for the Agreement and the transactions contemplated thereunder in accordance with the Listing Rules;
2. the Project Company and the designated party of the Vendor having entered into the three-year service maintenance agreement regarding the maintenance of the Angli Project in the form to the satisfaction of the Purchaser;
3. the Vendor having provided to the Purchaser the termination agreements of the Project Company's existing employees or similar documents having the same legal effect;
4. the Vendor having provided to the Purchaser a lease termination agreement or a novation agreement of the Project Company's Xi'an office;
5. each party to the Agreement having completed the handover procedures including numbering the properties and collating the handover documents of the Project Company;
6. the Deposit having been paid into the Escrow Account; and
7. the Vendor and the Purchaser having agreed on the adjusted Equity Consideration (if applicable) and the outstanding amount of the Shareholder's Loan as at the Completion Date based on the Transition Period Audit.

If any of the above conditions has not be fulfilled within five (5) business days upon issuance of the Transit Period Audit report, the Vendor and the Purchaser will negotiate to extend the deadline of these conditions or if appropriate, waive these conditions. If the Vendor and the Purchaser fail to reach agreement on the extension or waiver, the Agreement will be terminated with immediate effect.

Save for items (2) and (4) of the Conditions Precedent, other Conditions Precedent has not been satisfied as at the date of this announcement.

Completion

Within five (5) business days of the satisfaction of the Conditions Precedent, each party to the Agreement shall coordinate and file the documents in respect of the transfer of the equity interest of the Project Company with the relevant industry and commerce bureau.

Upon completion of the Disposal, the Project Company will cease to be a subsidiary of the Company and its financial statements will no longer be consolidated in the Group's financial statements.

Settlement Mechanism

It is not uncommon that a portion of the consideration for transactions similar to the Disposal would be payable one year or more after the completion date and linked with the receipt of completion of rectification works, warranties deposits and/or government subsidies. As for the Disposal, (i) the payment of the Deposit representing approximately 90% of the Equity Consideration shall be paid to the Escrow Account and released to the Vendor within five (5) business days of the Completion Date; (ii) approximately

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RMB352,580,000, representing approximately 90% of the Debt Consideration shall be payable to the Vendor within 10 business days of the Completion Date. As such, the Vendor will receive approximately RMB405,680,000, representing approximately 91% of the total consideration for the Disposal within 10 business days of the Completion Date. The remaining consideration in the amount of approximately RMB40,675,000 will be paid to Vendor subject to the completion of the replacement and rectification works of the Project Company.

As at the date of this announcement, the Purchaser had complied with the payment schedule in accordance with the Huzhou Xianghui Disposal agreement.

Default Penalty

If the Purchaser fails to fulfil its obligation to pay the consideration pursuant to the terms of the Agreement, the Purchaser will be liable to pay to the Vendor a daily default payment of 0.05% of the relevant amount due, and if the default continues for more than 30 days, the Vendor will be entitled to, among other things, terminate the Agreement, require the Purchaser to return the relevant equity interest that has been transferred to the Purchaser and seek for damages from the Purchaser for all losses incurred by the Vendor.

Failure of the Purchaser to perform its obligation to pay the consideration or the default interest rate or if the Purchaser refuses to return the equity interest and assets of the Project Company pursuant to the Agreement constitutes an event of default on the part of the Purchaser and the Purchaser is liable for losses incurred thereunder. Upon which, the Vendor is entitled to commence litigation against the Purchaser in the PRC court with competent jurisdiction and claim restitution in accordance with the PRC Contract Law.

If the Purchaser refuses to perform the court decision in favour of the Vendor, the Vendor may seek enforcement by the court. Under this circumstance, the Purchaser will be added into 失信執行人名錄 (the List of Untrustworthy Executors*) (an effective enforcement machinery in the PRC), which will have a material adverse effect on the assessment of the Purchaser's credit rating and reputation.

Taking into consideration of the general market practice in the solar industry, the Huzhou Xianghui Disposal underwent by the Group and the Purchaser as well as the background of the Purchaser, the Directors are of the view that the settlement and completion mechanism is sufficient to safeguard the Company's right to receive the full consideration and the possibility of the Purchaser would not honour its contractual commitment is relatively low.

Termination of the guarantee and the CITIC Finance Lease

As at the Reference Date, the total amount (including, among others, rental payments, interests and handling fees) payable by the Project Company under the CITIC Finance Lease was approximately RMB638,703,000.

Pursuant to the Agreement, by no later than 180 days after completion of the Disposal, the Purchaser shall (i) provide necessary financing facilities to the Project Company for its repayment of the outstanding amount under the CITIC Finance Lease and terminate the CITIC Finance Lease and (ii) procure for the release of the guarantee provided by the Vendor and its affiliates to secure the borrowings of Project Company. In the event that the

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Purchaser fails to fulfil such obligation, the Vendor is entitled to terminate the Agreement and unwind the Disposal and the Purchaser is liable to pay to the Vendor a daily default payment of 0.01% on the principal guaranteed amount under the CITIC Finance Lease.

INFORMATION ON THE PARTIES

The Project Company was established in the PRC on 13 February 2012. As at the date of this announcement, the Project Company has a registered capital of RMB1,000,000. It is principally engaged in the development, construction and operation of the Angli Project. The construction of Angli Project has been completed and started power generation and the power plant has been connected to the power grid.

The unaudited financial results of the Project Company for the two years immediately preceding the date of this announcement are as follows:

The unaudited total asset value and net asset value of the Project Company as at 31 December 2018 was approximately RMB947,167,000 and RMB92,523,000, respectively.

The Vendor is a wholly-owned subsidiary of the Company which is principally engaged in investment holding. As at the date of this announcement, the Project Company is a direct wholly-owned subsidiary of the Vendor.

The Company is principally engaged in the investment in and operation of solar power plants, provision of solar power plant operation and maintenance services, provision of financial services, trading of liquefied natural gas and asset management.

The Purchaser is a company established in the PRC and whose shares are listed on Shanghai Stock Exchange with the stock code of 600886. It is principally engaged in the investment, construction, operation and management of energy projects with a focus on electricity generation. The largest ultimate beneficial owner of the Purchaser is 國務院國有資產管理監 督委員會 (State-Owned Assets Supervision and Administration Commission of the State Council*).

To the best of the Directors' knowledge, information and belief and having made all reasonable enquiries, each of the Purchaser and its ultimate beneficial owners is a third party independent of the Company and connected persons of the Company.

REASONS FOR AND BENEFITS OF THE DISPOSAL

The Company has been proactively considering innovative business opportunities, which could strengthen the Group's core business and reduce its finance costs. The Disposal represents the Group's long-termasset-light strategy. The Directors consider that it is a good

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opportunity for the Group to realise its investment in the Project Company so as to better allocate the Group's resources, optimise its operation model, enhance the efficiency of equipment in solar power plants and accelerate its pace in transforming to asset-light model.

Upon completion of the Disposal, the Group will continue to provide operation and maintenance services to the Project Company for three (3) years commencing from the Completion Date, which will generate an annual service fee income of approximately RMB6,000,000 to the Group under such asset-light model.

The Disposal will also lower the Group's gearing ratio for the following reasons: (i) the net proceeds from the Disposal will be applied to repay existing debts to reduce the finance costs of the Group; and (ii) related debts incurred by the Project Company will no longer be consolidated into the Group's financial statements upon completion of the Disposal. By utilizing the net proceeds from the Disposal for repayment of debts, the remaining Group can benefit from saving of annual finance costs of not less than approximately RMB30,000,000. Although the Project Company is profit-making, its capital and operating expenses have been substantially funded by interest-free shareholder's loans from the Group from time to time, compared with other project companies. The Disposal will eliminate the remaining Group's continuous commitment as shareholder of the Project Company including, among others, the provision of shareholder's loans to the Project Company that are funded by borrowings incurred by the remaining Group at the prevailing market rate. The Directors consider that these benefits to the Company can outweigh the impact of realizing a net loss on the Disposal in the long run.

Further, upon completion of the Disposal, together with the completion of disposal of nine

1. project companies (the ''Another Completion'') (details are set out in the Company's announcement date 26 November 2019), the Company will continue to have 34 completed solar power plants with a total installed capacity of 1,278.8 MW. The Company will continue to engage in the solar power plants business with (a) the generation of solar power and sale of electricity to power grid companies through its remaining solar power plants and two solar power plants under construction and (b) the provision of solar power plant operation and maintenance services to third parties, including the various project companies disposed by the Group, through the Group's own workforce of engineers and maintenance staff. The management team for the operation and management of the remaining Group (after completion of the Disposal) will not be downsized as a result of the Disposal.

Solar power generating business is a capital intensive industry, which highly relies on external financing in order to fund for the construction of solar power plant while the recovery of capital investment takes a long period of time. Any delay in enlisting of the solar power plants of the Group on 可再生能源電價附加資金補助目錄 (Renewable Energy Tariff Subsidy Catalogue*) (the ''Subsidy Catalogue'') or any delay in the receipt of renewable energy subsidies for its solar power plants that have been enlisted on the Subsidy Catalogue could have a material adverse effect on the Group's business, financial condition, cash flow and operating results. To cope with the gearing risk, the Group will pay close attention to the market dynamics, and to avoid any unfavorable changes to the Group. The Group has been actively seeking for opportunities to transform into the asset-light model to optimize its finance structure and lower its gearing ratio. The Disposal represents a good opportunity for the Group to implement its asset-light strategy.

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Taking into account the financial benefits from the Disposal of not less than approximately RMB36,000,000, including saving of annual finance costs of not less than RMB30,000,000 and additional annual service fee income of approximately RMB6,000,000, as well as the scale of the remaining Group's solar power plants business, the Board is of the view that the remaining Group (after completion of the Disposal) will remain viable and sustainable and will maintain a sufficient level of operations whilst in the transition to the asset-light strategy.

Based on the foregoing, the Directors are of the view that the Disposal and the terms of the Agreement, including the consideration, were entered into on normal commercial terms and are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

FINANCIAL EFFECT OF THE DISPOSAL

Upon completion of the Disposal, the Project Company will cease to be a subsidiary of the Company and its financial statements will no longer be consolidated in the Group's financial statements.

Subject to final audit, it is expected that the Group will realise a net loss on the Disposal of not more than approximately RMB65,000,000, which is calculated by reference to the differences between the Equity Consideration and (i) the net asset value of the Project Companies of approximately RMB120,946,000 based on the unaudited financial information of the Project Company as at 31 July 2019; and (ii) the related transaction costs, taxes and expenses of the Disposal. Despite the net loss on the Disposal, having taking into consideration of the reasons for the Disposal as stated under the paragraph headed ''REASONS FOR AND BENEFITS OF THE DISPOSAL'' above, the Board is of the view that the Disposal will be in the interests of the Company and its Shareholders as a whole as it will improve the Group's cash flow position in a long run.

USE OF PROCEEDS

The net proceeds from the Disposal after deducting the taxation and transaction costs are estimated to be approximately RMB445,355,000. The Group intends to apply the net proceeds from the Disposal to repay its debts to reduce the finance costs of the Group, which will lower the Group's gearing ratio.

LISTING RULES IMPLICATIONS

As the relevant applicable percentage ratio set forth under Rule 14.07 of the Listing Rules in respect of the Disposal exceeds 75% or more, the Disposal constitutes a very substantial disposal of the Company under Chapter 14 of the Listing Rules and is therefore subject to the reporting, announcement and shareholders' approval requirements under Chapter 14 of the Listing Rules.

GENERAL

The EGM will be convened and held for the Shareholders to consider and, if thought fit, to approve the Agreement and the transactions contemplated thereunder. Insofar as the Company is aware, none of the Shareholders has any material interest in the Disposal. Hence, no Shareholder is required to abstain from voting on the resolutions in relation to the

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Agreement and the transactions contemplated thereunder at the EGM. A circular containing, among other things, further details of the Disposal, the financial information of the Group, the financial information and the valuation report of the Project Company, the notice convening the EGM and other information as required under the Listing Rules is expected to be despatched to the Shareholders on or before 31 December 2019 as additional time is required to prepare the information to be included in the circular.

LATEST DEVELOPMENT OF THE GROUP

As at the date of this announcement, the Group is negotiating with independent third parties for another two (2) possible disposals of project companies, each holding one (1) solar power plant of the Group, respectively, with a total installed capacity of 80 MW (the ''Further Disposals''), and the Group has not yet entered into any legally binding agreements for the Further Disposals. If the Further Disposals materialize and assuming completion of the Disposal, the number of completed solar power plants of the Group will be further reduced to 32 and the total installed capacity will be further decreased to 1,198.8 MW. Similar to the Disposal and the previous disposals by the Group in 2019, the Board expects that the Further Disposals will be in line with the Group's asset-light strategy, with a focus on lowering the Group's finance costs and gearing ratio and increasing the Group's service fee income from provision of operation and maintenance services to the disposed project companies. The Company will only implement the Further Disposals if it is satisfied that the Further Disposals will be beneficial to the Company and the Shareholders as a whole. The Company will make further announcement(s) in respect of the Further Disposal(s) as and when appropriate under the Listing Rules. On the other hand, the management of the Company will look into opportunities to enhance the Company's capabilities in providing operation and maintenance services, and thus accelerate the shift to asset-light model. However, as at the date of this announcement, the Group has not entered into any legally binding agreement, and is not undergoing any negotiation with any party, for any such acquisition or business opportunities. Save as aforesaid, the Company currently has no intention to dispose or cease any of its remaining businesses or to start or acquire any new business within the coming 12 months.

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DEFINITIONS

In this announcement, the following expressions shall have the meanings set out below unless the context requires otherwise:

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''Huzhou Xianghui Disposal'' the details of the disposal are set out in the circular of the

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As of the date of this announcement, the Board comprises two executive Directors, Mr. Jin Yanbing and Mr. Deng Chengli, three non-executive Directors, Mr. Wu Tak Kong and Mr. Wang Ke and Mr. Jiang Hengwen and four independent non-executive Directors, Mr. Miu Hon Kit, Mr. Chen Kin Shing, Ms. Wang Fang and Ms. Wu Wennan.

* For identification purposes only

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