Chu Kong Petroleum and Natural Gas Steel Pipe : VERY SUBSTANTIAL DISPOSAL IN RELATION TO THE LAND RESUMPTION

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

If you are in any doubt as to any aspect of this circular or as to the action to be taken, you should consult your licensed securities dealer, bank manager, solicitor, professional accountant or other professional adviser.

If you have sold or transferred all your shares in Chu Kong Petroleum and Natural Gas Steel Pipe Holdings Limited, you should at once hand this circular and the accompanying form of proxy to the purchaser, the transferee or to the bank, licensed securities dealer or other agent through whom the sale or transfer was effected for transmission to the purchaser or transferee.

Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this circular, 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 circular.

CHU KONG PETROLEUM AND NATURAL GAS STEEL PIPE HOLDINGS LIMITED

珠江石油天然氣鋼管控股有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 1938)

VERY SUBSTANTIAL DISPOSAL IN RELATION TO

THE LAND RESUMPTION

Capitalised terms used in this cover page shall have the same meaning as those defined in the section headed ''Definitions'' of this circular.

A notice convening the EGM (as defined herein) of the Company to be held at Portion 2, 12/F., The Centre, 99 Queen's Road Central, Hong Kong, at 11:30 a.m. on Thursday, 28 November, 2019 is set out on pages EGM-1 to EGM-2 of this circular.

A form of proxy for use at the EGM is enclosed with this circular. Whether or not you are able to attend the meeting, you are requested to complete the enclosed form of proxy in accordance with the instructions printed thereon and return the same to the Company's Hong Kong branch share registrar and transfer office, Tricor Investor Services Limited, at Level 54, Hopewell Centre, 183 Queen's Road East, Hong Kong as soon as possible but in any event not less than 48 hours before the time appointed for holding the EGM or any adjournment thereof. Completion and return of the proxy form will not preclude you from attending and voting in person at the EGM or any adjournment thereof should you wish and in such event, the form of proxy shall be deemed to be revoked.

7 November 2019

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DEFINITIONS

In this circular, unless the context otherwise requires, the following expressions have the following meanings:

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DEFINITIONS

• The English translation of the Chinese names or words in this circular, where indicated, is included for identification purpose only, and should not be regarded as the official English translation of such Chinese names or words

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LETTER FROM THE BOARD

CHU KONG PETROLEUM AND NATURAL GAS STEEL PIPE HOLDINGS LIMITED

珠江石油天然氣鋼管控股有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 1938)

VERY SUBSTANTIAL DISPOSAL IN RELATION

TO THE LAND RESUMPTION

INTRODUCTION

Reference is made to the Company's announcement dated 20 June 2019.

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LETTER FROM THE BOARD

On 20 June 2019 (after trading hours), Guangdong Pearl Steel Investment, an indirect wholly-owned subsidiary of the Company, entered into the Land Resumption Compensation Agreement with GPDLDC, pursuant to which GPDLDC will resume, and Guangdong Pearl Steel Investment will sell, the Land of Phase III GDC. The Initial Compensation payable by GPDLDC is RMB1.16 billion (subject to upward adjustment as set out in the paragraph headed ''Compensation and Payment Terms'' below).

The Land of Phase III GDC, which has not been developed yet, was initially reserved for Phase III of the property project of the Group named GDC.

The Land Resumption will be conditional upon the approval of Shareholders at the EGM in accordance with the requirements under the Listing Rules.

As one or more of the applicable percentage ratios by reference to Rule 14.07 of the Listing Rules is more than 75%, the Land Resumption constitutes a very substantial disposal of the Company and is subject to the requirements of reporting, announcement and Shareholders' approval at the EGM under Chapter 14 of the Listing Rules.

An EGM will be convened to be held for Shareholders to consider and, if thought fit, to approve the Land Resumption. As no Shareholder has a material interest in the Land Resumption, no Shareholder is required to abstain from voting.

Completion of the Land Resumption is subject to the approval of the Shareholders at the EGM. Shareholders and potential investors of the Company are advised to exercise caution when dealing in the Shares.

THE LAND RESUMPTION COMPENSATION AGREEMENT

Details of the Land Resumption Compensation Agreement are summarised as follows:

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LETTER FROM THE BOARD

To the best of the Directors' knowledge, information and belief, and having made all reasonable enquiries, GPDLDC and its ultimate beneficial owners are Independent Third Parties.

Land of Phase III GDC to be resumed

The Land of Phase III GDC, which has not yet been developed, was initially reserved for Phase III of the property project of the Group named GDC. The Land of Phase III GDC has a site area of approximately 34,809 m2 and is located at east of the intersection of Changsha Road and Qinghe Road, Dalong Street, Panyu District, Guangzhou City, Guangdong Province, the PRC （中國廣東省廣州市番禺區大龍街清河路與長沙路交匯處以東）. The current usage of the Land of Phase III GDC is commercial. As at 31 December 2018, the book value of the Land of Phase

III GDC as recognized in the Company's accounts was RMB1.16 billion.

The Land of Phase III GDC has not yet been developed over years and has not been generating revenue for the two financial years immediately preceding the Land Resumption. The Land of Phase III GDC is not under mortgage. No buildings nor constructions is erected on the Land of Phase III GDC. Therefore, no material cost in relation to land restoration work is expected.

The Company has engaged an independent valuer, RHL Appraisal Limited, to prepare a valuation report using direct comparison approach in respect of the Land of Phase III GDC in order to support its market value when determining the consideration. According to the valuation report, the market value of the Land of Phase III GDC in commercial use was approximately RMB1.162 billion as at 31 May 2019 and RMB1.339 billion as at 30 September 2019. The valuation report as at 30 September 2019 is set out in Appendix II to this circular.

Compensation and Payment Terms

The Initial Compensation is RMB1.16 billion and was determined after arm's length negotiations between the parties to the Land Resumption Compensation Agreement with reference to, among others, the prevailing market condition of the property market, the prevailing market prices of similar plots of land in the proximity and the value of the Land of Phase III GDC in the preliminary valuation report as at 31 May 2019. The Initial Compensation shall be adjusted in circumstance (i) below but no adjustment shall be made in circumstance (ii) below:

1. If the Final Valuation exceeds the amount of RMB1.16 billion, the compensation will be adjusted to the Final Valuation;
2. If the Final Valuation equals or is less than RMB1.16 billion, no adjustment shall be made to the Initial Compensation.

GPDLDC has appointed an independent valuer in the PRC to prepare the Second Valuation Report. According to the Second Valuation Report, the Final Valuation of the Land of Phase III GDC is RMB1,52 4,628, 500. Therefo re, the C ompen sation wil l be adju sted to RMB1,524,628,500. The excess of the Compensation over the net book value of the Land of Phase III GPC as at 31 December 2018 is RMB364,628,500.

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LETTER FROM THE BOARD

The Compensation of RMB1,524,628,500 will be paid in cash as follows:

1. RMB400 million shall be payable by GPDLDC within 60 days after signing of the Land Resumption Compensation Agreement;
2. RMB400 million shall be payable by GPDLDC within 60 days after completion of the land settlement procedure;
3. RMB360 million shall be payable by GPDLDC within 60 days after signing of the land transfer confirmation; and
4. RMB364,628,500 shall be payable by GPDLDC within 60 days after completion of land consolidation and restoration.

No material transaction costs will be borne by the Vendor. As at the Latest Practicable Date, the land settlement procedure has been completed and RMB800 million was paid by GPDLDC. It is expected that RMB360 million will be received on or before end of December 2019 and the remaining RMB364,628,500 will be received by the end of March 2020. All payments already made will be refunded without interest to GPDLDC in the event that the condition precedent as set out below could not be fulfilled.

CONDITION PRECEDENT

Completion of the Land Resumption is subject to the satisfaction of the approval for the Land Resumption Compensation Agreement and the Land Resumption contemplated thereunder by the Shareholders at the EGM having been obtained. In the event that the condition precedent of the Land Resumption is not fulfilled, the Company will seek other buyer to purchase the Land of Phase III GDC.

COMPLETION

Completion of the Land Resumption shall take place after the condition precedent has been fulfilled. On completion, Guangdong Pearl Steel Investment shall transfer the Land of Phase III GDC to GPDLDC free of encumbrances by signing the land transfer confirmation with GPDLDC.

LIABILITIES ON BREACH

1. In the event that GPDLDC fails to pay the Compensation payable by it without reasons, GPDLDC will be liable to pay to the Vendor a late payment penalty calculated at a rate of 0.05% of the total amount payable on a daily basis.

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LETTER FROM THE BOARD

1. In the event that, after the Land Resumption Compensation Agreement becomes effective, the Vendor fails or causes a delay in completing the land transfer and settlement procedure in respect of the Land of Phase III GDC in accordance with the Land Resumption Compensation Agreement, the Vendor will be liable to pay to GPDLDC a penalty calculated at a rate of 0.05% of the compensation already paid by GPDLDC on a daily basis and will be liable for any loss suffered by GPDLDC.
2. In the event that, after the Land Resumption Compensation Agreement becomes effective, the Vendor breaches the terms of the Land Resumption Compensation Agreement, including mortgaging or leasing out the Land of Phase III GDC, etc, the Vendor will be liable to pay to GPDLDC a penalty calculated at a rate of 10% of the total compensation of the Land Resumption.

As at the Latest Practicable Date, the land settlement procedure in respect of the Land of Phase III GDC was completed.

INFORMATION OF THE COMPANY AND THE VENDOR

The Company is an investment holding company, the subsidiaries of which are principally engaged in the manufacture and sales of welded steel pipes, provision of related manufacturing services and property development and investment.

The Vendor is an indirect wholly-owned subsidiary of the Company. The Vendor is principally engaged in property development and investment.

INFORMATION OF GPDLDC

GPDLDC is an office of Guangzhou City Panyu District People's Government Land Acquisition Office*（廣州市番禺區人民政府徵用土地辦公室）, which is responsible for providing services for state-owned land transfer, bidding, auction, and pre-development of land, as well as for policy investigation and formulation of peasant collectively owned land in Panyu, Guangzhou, the PRC.

To the best of the Directors' knowledge, information and belief and having made all reasonable enquiries, (i) GPDLDC is a government department in the PRC; and (ii) GPDLDC and its ultimate beneficial owners are Independent Third Parties.

REASONS AND BENEFITS FOR ENTERING INTO THE LAND RESUMPTION COMPENSATION AGREEMENT

The Group is principally engaged in the manufacture and sales of welded steel pipes and property development and investment. The GDC was developed by the Group in 2013 after the conversion of part of the Group's industrial land in Panyu into commercial use. The Land of Phase III GDC was for commercial use and has not yet been developed.

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LETTER FROM THE BOARD

The Board considers that the Land Resumption can provide the Group with instant cash flow as opposed to, based on the Company's experience with Phase I of GDC, realizing return after years of development. It was stated in the Company's annual report for the year ended 31 December 2018 and the interim report for the six months ended 30 June 2019 that the Company's short-terminterest-bearing bank and other borrowings and fixed rate bonds were approximately RMB2,012.8 million and RMB1,812.2 million respectively, and finance costs were approximately RMB374.5 million and RMB233.4 million respectively, for the respective period. The realized funds can be used for repayment of existing debts which can reduce loan interests from banks, thereby reducing cost and improving the cash flow position for investing in future steel pipe projects. Moreover, the Board anticipates that upon the sale of the Land of Phase III GDC, the value of neighbouring properties may benefit from the possible uplifting market value. The Group can then enjoy appreciation in property price of the unsold properties in Phase II of GDC. Accordingly, the Directors are of the view that both the property business and the long- term development of steel pipe business will benefit from the Land Resumption and thus the Company started negotiation with GPDLDC in mid-April 2019. In order to satisfy the funding needs of the Group and further reducing the debt level and financial expenses of the Group, entering into the Land Resumption Compensation Agreement can provide immediate cash to the Group. The steel pipe business will remain as the Group's core business. The Land Resumption will not have material effect on the business and operation of the Group.

Based on the above and that the Compensation is higher than that of the valuation as assessed by the independent valuer appointed by the Company, the Directors are of the view that the terms of the Land Resumption Compensation Agreement are fair and reasonable and are in the interests of the Company and the Shareholders as a whole.

The Company currently has no plan of disposing of the Group's other assets after completion of the Land Resumption.

FINANCIAL EFFECT OF THE LAND RESUMPTION

Earnings

Based on the information available and subject to final audit, gain before tax from the Land Resumption is around RMB364.6 million as the book value of the Land of Phase III GDC as at 30 June 2019 was RMB1.16 billion. There is no tax directly associated with the Land Resumption. The calculations are only estimates provided for illustrative purposes and are subject to further review by the auditors of the Company.

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LETTER FROM THE BOARD

ASSETS AND LIABILITIES

Subject to audit, the consolidated fixed assets of the Group will be reduced by approximately RMB1,160,000,000 as a result of Land Resumption. Upon full payment of the compensation for the Land Resumption taking into consideration of the estimated cost for the demolition work, the consolidated cash in bank of the Company will be increased by approximately RMB1,524,628,500 (exclusive of related taxation). In this connection, the net assets of the Group will be increased by RMB364,628,500.

INTENDED USE OF PROCEEDS OF THE LAND RESUMPTION

After deducting expenses, the net proceeds from the Land Resumption will amount to approximately RMB1,522 million. It is intended that the net proceeds from the Land Resumption will be applied as to RMB1,324 million for repayment of debts of the Group in the following manner: (i) as to RMB641.1 million will be used to repay current portion of long term loans due by 30 June 2020 with interest rate ranging from 4.4% to 5.4%; (ii) as to RMB499.6 million will be used to repay secured and unsecured bank loans due by 30 June 2020 with interest rates ranging from 5.0% to 6.3%; (iii) as to RMB79.2 million will be used to repay secured government loan due by 30 June 2020 with interest rate of 4.9% and (iv) remaining balance will be used to repay fixed rate bonds and notes due within twelve months with interest rate ranging from 7% to 8%.

The balance of approximately RMB198 million will be used for working capital of the Company.

IMPLICATIONS UNDER THE LISTING RULES

As one or more of the applicable percentage ratios by reference to Rule 14.07 of the Listing Rules is more than 75%, the Land Resumption constitutes a very substantial disposal of the Company and is subject to the requirements of reporting, announcement and Shareholders' approval at the EGM under Chapter 14 of the Listing Rules.

EGM

An EGM will be convened and held for the Shareholders to consider and, if thought fit, to approve the Land Resumption. As no Shareholder has a material interest in the Land Resumption, no Shareholder is required to abstain from voting at the EGM.

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LETTER FROM THE BOARD

Notice of the EGM is set out on pages EGM-1 to EGM-2 of this circular and a form of proxy for use at the EGM is enclosed with this circular. Whether or not you are able to attend the meeting, please complete the accompanying form of proxy in accordance with the instructions printed thereon and return the same to the Hong Kong Branch Share Registrar office of the Company, Tricor Investor Services Limited, at Level 54, Hopewell Centre, 183 Queen's Road East, Hong Kong as soon as practicable but in any event not less than 48 hours before the time appointed for the holding of the EGM or any adjournment thereof. Completion and return of the proxy from will not preclude you from attending and voting in person at the EGM or any adjournment thereof should you wish and in such event, the form of proxy shall be deemed to be revoked.

CLOSURE OF REGISTER OF MEMBERS

The register of members of the Company for the EGM will be closed from Monday, 25 November 2019 to Thursday, 28 November 2019, both days inclusive, during which no transfer of Shares will be registered. In order to qualify for attending and voting at the EGM or any adjournment thereof, all transfers of Shares accompanied by the relevant share certificates must be lodged with the Company's Hong Kong branch share registrar and transfer office in Hong Kong, Tricor Investor Services Limited, at Level 54, Hopewell Centre, 183 Queen's Road East, Hong Kong not later than 4:30 p.m. on Friday, 22 November 2019.

RECOMMENDATION

The Directors are of the opinion that the Land Resumption is in the interests of the Company and the Shareholders as a whole, and the terms of the Land Resumption Compensation Agreement are fair and reasonable. Accordingly, the Directors recommend the Shareholders vote in favour of the ordinary resolution to be proposed at the EGM to approve the Land Resumption.

As the Land Resumption is subject to the fulfillment of conditions precedent and may or may not proceed, Shareholders and potential investors should exercise caution when dealing in the Shares.

ADDITIONAL INFORMATION

Your attention is drawn to the additional information set out in the appendices to this circular.

Your faithfully,

On behalf of the Board

Chu Kong Petroleum and Natural Gas Steel Pipe Holdings Limited

Chen Chang

Chairman

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1. FINANCIAL INFORMATION OF THE GROUP INCORPORATED BY REFERENCE

The audited consolidated financial statements of the Group for the years ended 31 December 2016, 2017 and 2018 and the unaudited consolidated financial statements of the Group for the six months ended 30 June 2019, including the notes thereto, have been disclosed in the following documents which are available on the websites of the Stock Exchange (www.hkexnews.hk) and the Company (www.pck.com.cn) or (www.pck.todayir.com).

• Interim report of the Company for the six months ended 30 June 2019 published on 11 September 2019, from pages 22 to 62;
• Annual report of the Company for the year ended 31 December 2018 published on 18 April 2019, from pages 116 to 262;
• Annual report of the Company for the year ended 31 December 2017 published on 19 April 2018, from pages 115 to 234;
• Annual report of the Company for the year ended 31 December 2016 published on 28 April 2017, from pages 111 to 226;

2. STATEMENT OF INDEBTEDNESS

Bank and other borrowings

As at the close of business on 30 September 2019, being the latest practicable date for the purpose of this indebtedness statement prior to the printing of this circular, the total borrowings of the Group comprising the following:

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As at 30 September 2019, the Group's bank and other borrowings were secured by:

1. a charge over certain property, plant and equipment of the Group with a net carrying amount of approximately RMB320,055,000;
2. a charge over certain leasehold lands of the Group with a net carrying amount of approximately RMB622,930,000;
3. certain of the Group's time deposits amounting to RMB80,000,000; and
4. a charge of certain of the properties under development, investment properties and completed properties held for sale of the Group amounting to RMB1,502,360,000.

Fixed rate bonds

As at the close of business on 30 September 2019, being the latest practicable date for the purpose of this indebtedness statement prior to the printing of this circular, the Group had outstanding fixed rate bonds with aggregated principal amount of approximately RMB165 million and interest accrued of approximately RMB5.4 million.

Contingent liabilities

As at 30 September 2019, the Group had the following outstanding contingent liabilities:

1. guarantee of RMB122.8 million to certain purchasers of the Group's properties for mortgage facilities; and
2. guarantee RMB557.2 million to joint venture for banking facilities in Saudi Arabia of which RMB468.7 million was utilized by the joint venture.

Disclaimer

Save as aforesaid and apart from intra-group liabilities, the Group did not have any debt securities, any other outstanding loan capital, any other borrowings or indebtedness in the nature of borrowings including bank overdrafts and liabilities under acceptance (other than normal trade bills and payables) or other similar indebtedness, debentures, mortgages, charges, loans, acceptance credits, hire purchase commitments, guarantees or other material contingent liabilities at the close of business on 30 September 2019.

The Directors have confirmed that there has been no material change in the borrowings and contingent liabilities of the Group since 30 September 2019.

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For the purpose of the above statement of indebtedness, foreign currency amounts have been translated into RMB at the rates of exchange prevailing at the close of business on 30 September 2019.

3. WORKING CAPITAL

As at the Latest Practicable Date, the Directors, after due and careful enquiry, are of the opinion that taking into account the Compensation, the present internal resources of the Group as well as the banking and other facilities available to the Group, the Group will have sufficient working capital for at least the next 12 months from the date of this circular in the absence of unforeseeable circumstances.

4. MATERIAL ADVERSE CHANGE

As at the Latest Practicable Date, the Directors were not aware of any material adverse change in the financial or trading position of the Group since 31 December 2018, being the date to which the latest published audited consolidated financial statements of the Group were made up.

5. MANAGEMENT DISCUSSION AND ANALYSIS OF THE REMAINING GROUP

After the completion of the Land Resumption, the Group will continue to carry out its existing businesses. The management discussion and analysis of the Group for each of the years ended 31 December 2016, 2017 and 2018 and the six months ended 30 June 2019 is set out below. The financial data in respect of the Group, for the purpose of this circular, is derived from the consolidated financial statements of the Company for the relevant financial years/period which are available on the websites of the Stock Exchange (www.hkexnews.hk) and the Company (www.pck.com.cn) or (pck.todayir.com).

1. For the six months ended 30 June 2019

1. Financial review
   Revenue

During the six months ended 30 June 2019, the Remaining Group recorded a revenue of approximately RMB491.9 million (1H2018: RMB475.7 million), representing an increase of approximately 3.4% as compared with the corresponding period in 2018. The revenue increase was due to a rebound of steel pipe demand in the PRC.

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During the six months ended 30 June 2019, the revenue from domestic sales and overseas sales represented approximately 78.8% (1H2018: 72.4%) and approximately 21.2% (1H2018: 27.6%) respectively of our total revenue. Increase in domestic sales was due to a rebound of steel pipes demand in the PRC.

Gross Profit and Gross Profit Margin

During the six months ended 30 June 2019, gross profit of the Remaining Group was approximately RMB103.4 million (1H2018: RMB43.2 million), representing an increase of approximately 139.3% as compared with the corresponding period in 2018. The overall gross profit margin was approximately 21.0%, which was higher than that for the same period in 2018 which was approximately 9.1%. The increase in gross profit and gross profit margin was partly because there was an increase in the sales of steel pipes manufacturing services, the gross profit margin of which was generally high. In addition, the average selling price increased as compared with last corresponding period.

Other income and gains

Other income and gains for the six months ended 30 June 2019 were approximately RMB58.3 million (1H2018: RMB44.9 million), representing an increase of approximately 30.1% as compared with the corresponding period in 2018. Such increase was mainly due to an increase in subsidy income and gain on resumption of land-use-rights from local authority.

Selling and distribution expenses

Selling and distribution expenses for the six months ended 30 June 2019 were approximately RMB35.4 million (1H2018: RMB32.8 million), representing a slight increase of approximately 7.8% as compared with the corresponding period in 2018. The increase in selling and distribution expenses was due to an increase in sales during the period under review.

Administrative expenses

Administrative expenses for the six months ended 30 June 2019 were approximately RMB162.7 million (1H2018: RMB231.1 million), representing a decrease of approximately 29.6% as compared with the corresponding period in 2018. The decrease in administrative expenses was mainly due to closure of manufacturing operation of Panyu Chu Kong Steel Pipe Co. Ltd (''PCKSP'') (an

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indirect subsidiary of the Company which will be disposed of) (as disclosed in the Company's announcement dated on 27 February 2019) during the six months ended 30 June 2019.

Finance costs

Finance costs for the six months ended 30 June 2019 were approximately RMB233.4 million (1H2018: RMB187.0 million), representing an increase of 24.8% as compared with the corresponding period in 2018. The increase in finance costs was mainly due to an increase in average interest rate and the average loan balance during six months ended 30 June 2019.

Other expenses

The Group recorded other expenses of approximately RMB10.6 million for the six months ended 30 June 2019 (1H2018: RMB44.3 million), representing a decrease of approximately 76.1% as compared with the corresponding period in 2018. The decrease was due to a loss on disposal of a subsidiary and property, plant and equipment in the corresponding period in 2018.

Income tax expenses

Income tax expenses of approximately RMB11.5 million was recorded for the six months ended 30 June 2019 (1H2018: tax credit: RMB109.9 million).

Loss for the period

The net loss attributable to ordinary equity holders of the Company was approximately RMB212.8 million (1H2018: loss of RMB313.2 million). Loss per share was RMB0.21 (1H2018: loss per share of RMB0.31).

1. Business review
   Steel pipe business

During the six months ended 30 June 2019, we received new orders of approximately 189,000 tonnes of steel pipes. Orders received during the period under review include orders from China Petroleum & Chemical Corporation（中 國石油化工股份有限公司）(Sinopec) for supplying approximately 35,600 tons of steel pipes for its gas and oil pipeline projects in the PRC, including projects of Rizhao Port-Jingbo Oil Pipeline, Yuexi Pipe Network and Qingning Gas Pipeline Project. We delivered approximately 142,000 tonnes of welded steel pipes during the six months ended 30 June 2019.

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Property development

Apart from the steel pipe manufacturing business, the Group also engaged in property development and investment. Following the conversion of a land in Panyu, PRC in 2013, the Group grasped the opportunity of asset appreciation to convert the land use right of the Panyu production plant from industrial use to commercial use. The property project, named GDC, is a large scale integrated commercial complex of offices, shops, apartments and villas. The land area of the converted land accounted for approximately 25% of the total land area of our factory in Panyu. The total permitted construction area of the land (including underground construction area) is approximately 550,000 m2.

The Group has recorded most of the sales of first phase of GDC in 2018. The Group has pre-sold the second phase of GDC and the total contracted sales were approximately RMB951.2 million. The third phase of GDC will be sold to

GPDLDC.

The steel pipe business will remain as the Group's core business.

(iii) Liquidity and financial resources and capital structure

As at 30 June 2019, our cash and bank balances and current ratio, as a ratio of current assets to current liabilities, were approximately RMB83.9 million (as at 31 December 2018: RMB66.9 million) and 1.05 (as at 31 December 2018: 0.99) respectively.

On 27 April 2017, the Company entered into a note purchase agreement (the ''Note Purchase Agreement'') with an investment fund, pursuant to which the Company agreed to issue, and the investment fund agreed to purchase from the Company, HK$155,000,000 8% notes due in April 2020 (the ''Notes''). Pursuant to the Note Purchase Agreement, specific performance obligations (the ''Specific Performance Obligations'') are imposed on Mr. Chen Chang, the controlling shareholder of the Company, during the term of the Note Purchase Agreement including (i) Mr. Chen Chang, directly or indirectly, holds or owns more than 50% of the voting rights of the Company; or (ii) the controlling shareholder of the Company, has management control of the Company. Any breach of the Specific Performance Obligations may constitute a breach under the Note Purchase Agreement, pursuant to which the investment fund is entitled to redeem the Notes immediately upon the occurrence of the breach in accordance with the terms and conditions of the Notes.

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On 1 June 2017, the Company entered into a facility agreement with an investment company (the ''Investment Company''), in respect of a one-year loan in an aggregate amount of HKD350 million (the ''Loan''). Under the terms of the Loan, Mr. Chen Chang and Bournam Profits Limited shall remain as shareholders of the Company interested in an aggregate of no less than 69.42% of the shareholding in the Company. On 22 June 2018, the Company entered into a loan amendment deed with the Investment Company, pursuant to which the Investment Company agreed to provide a further advance of HKD250 million (together with the Loan, the ''Loans''). In return for the further advance, the Company agreed to provide further security for the Loans and to issue unlisted warrants to the Investment Company. The unlisted warrants in the amount of HKD313,320,000 were issued pursuant to a specific mandate granted to the Board at the extraordinary general meeting held on 9 October 2018.

On 30 April 2018, the Company failed to redeem the bonds (the ''Bonds'') with a principal amount of US$72 million. On 22 June 2018, the Company entered into a rescheduling agreement with all holders of the Bonds (the ''Bondholders''), pursuant to which, the Company shall make partial payments to the Bondholders in accordance with a new repayment schedule. The Company has to pay interest on the Bonds at the rate of 7.6% per annum during the standstill period.

As at 30 June 2019, our aggregate borrowings were approximately RMB5,950.2 million (as at 31 December 2018: approximately RMB6,255.1 million), of which approximately RMB5,777.9 million (as at 31 December 2018: RMB6,097.7 million) were bank loans, other borrowings and government loans, approximately RMB163.3 million (as at 31 December 2018: RMB157.4 million) were USD and HKD bonds and approximately RMB9.0 million (as at 31 December 2018: nil) were lease liabilities.

Included in the aggregate borrowings as at 30 June 2019, there were onshore guarantees for offshore loan（內保外貸）of around RMB492 million, property development loan of around RMB1,376 million and shareholder's loan from Guangdong Yuecai of around RMB1.68 billion. Excluding the above loans, the loans for steel pipe business as at 30 June 2019 were around RMB2,402 million. We have to finance our working capital by short term borrowings as around 90% of the cost of sales is incurred on the procurement of steel plates and steel coils. Once we receive sales proceeds from our customers, we will repay the short term borrowings.

The gearing ratio, expressed as a percentage of the summation of interest- bearing borrowings and bonds over total assets was approximately 56.9% as at 30 June 2019 (as at 31 December 2018: 62.5%).

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The maturity profile of our total borrowings as at 30 June 2019 was approximately 30% (as at 31 December 2018: 32%) of the total borrowings repayable within one year, and approximately 70% (as at 31 December 2018: 68%) of the total borrowings repayable over one year.

We had net current assets of approximately RMB275.4 million as at 30 June 2019. The Group had received around RMB716 million from pre-sale of Phase II of GDC as at 30 June 2019. The Group has sufficient cashflow to meet its short term obligations.

As at 30 June 2019, approximately 43% (as at 31 December 2018: 46%) of our total borrowings were denominated in RMB which carried interest rates linked to the benchmark lending rate published by the People's Bank of China, approximately 46% (as at 31 December 2018: 41%) of our total borrowings were denominated in RMB which carried fixed interest rate and approximately 11% (as at 31 December 2018: 13%) of our total borrowings were denominated in USD and HKD which carried fixed interest rate.

1. Significant investments, material acquisitions and disposals of subsidiaries, associates and joint ventures
   Proposed change of land use in Panyu from ''industrial'' to ''residential and commercial''

On 12 February 2018, the Group entered into an agreement (''Agreement'') with Guangdong Yuecai Trust Co Limited*（廣東粵財信托有限 公司）(''Guangdong Yuecai'' together with its nominee, the ''Investors'') and Guangzhou Asset Management Company Limited*（廣東資產管理有限公 司）(''Guangzhou Asset Management'') in relation to the cooperation to facilitate the change of use of land (the ''Land'') held by PCKSP from ''industrial'' to ''residential and commercial'' and the disposal of (actual and deemed) an aggregate of 59% of the equity interest in PCKSP to the Investor. Chu Kong Steel Pipe Group Co. Ltd (''CKSPG'') and PCKSP shall complete an asset reorganisation, after which, the only asset held by the PCKSP shall be the Land. Pursuant to the Agreement, the Investor shall, by stages, (i) inject capital into PCKSP and acquire 19% of the equity interest in the PCKSP for RMB240 million; (ii) implement the asset reorganisation; (iii) apply for the change of use of the Land; and (iv) acquire 40% of the equity interest in PCKSP from CKSPG for a consideration equivalent to 40% of the fair value of the Land (after the change of use of the Land).

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The disposal of 59% equity interest of PCKSP was approved by the Shareholders at the extraordinary general meeting held on 19 April 2018.

The capital injection under the Agreement has been completed on 12 October 2018. Guangdong Yuecai has made capital injection into PCKSP in the amount of RMB240 million and acquired 19% of the registered capital of PCKSP (on enlarged basis). Following the completion of the capital injection, PCKSP was held as to 20% by Guangdong Yuecai and 80% by CKSPG.

On 27 February 2019, the Group entered into the disposal agreement (the ''Disposal Agreement'') with Guangzhou Xingchen Consultation Company Limited（廣州星宸諮詢有限公司）(''Xingchen''), Guangdong Yuecai and Guangzhou Asset Management in relation to (i) the nomination of Xingchen by the Guangzhou Asset Management under the terms of the Agreement as its nominee to acquire 40% equity interest of PCKSP; and (ii) the disposal of the remaining 40% equity interest of PCKSP to Xingchen, for a total consideration of RMB2,448 million with a possible payment of the premium of RMB272 million.

The transactions contemplated under the Disposal Agreement were approved by the Shareholders at the extraordinary general meeting held on 16 April 2019.

As at 30 June 2019, the Company has performed the following asset reorganisation as part of its obligation to fulfil the conditions precedent under the Disposal Agreement: (i) PCKSP's liabilities was reduced to below RMB159 million; (ii) most of the bank guarantees by PCKSP have been released; (iii) most of the outstanding sales contracts and engineering contracts of PCKSP were either terminated or discharged; and (iv) PCKSP has transferred the equity interest in its two subsidiaries, namely Al-Qahtani PCK Pipe Co and PCK Steel (Middle East) FZE, to the Group and an independent third party respectively.

Except for the above, the Remaining Group had no other significant investments, material acquisitions or disposals of subsidiaries, associates and joint ventures during the six months ended 30 June 2019.

1. Employees and remuneration

As at 30 June 2019, we had 991 full time employees in total (as at 31 December 2018: 1,110). To retain our employees, we provide competitive remuneration package including salaries, medical insurance, discretionary bonuses, other benefits as well as mandatory retirement benefit schemes for employees in their respective countries.

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(vi) Charge on assets

As at 30 June 2019, we pledged certain property, plant and equipment, leasehold land, time deposits, certain properties under development and completed properties held for sale with an aggregate net book value of RMB324.9 million (as at

31 December 2018: RMB833.4 million), RMB626.7 million (as at 31 December 2018:

RMB618.6 million), RMB433.0 million (as at 31 December 2018: RMB426.6 million),

RMB1,094.4 million (as at 31 December 2018: RMB1,105.9 million) and RMB354.7

million (as at 31 December 2018: RMB373.9 million) respectively, to secure bank loans granted to the Remaining Group.

(vii) Gearing ratio

The gearing ratio, expressed as a percentage of the summation of interest- bearing borrowings and bonds over total assets was approximately 56.9% as at 30 June 2019 (as at 31 December 2018: 62.5%).

(viii) Exposure to fluctuations in exchange rates and any related hedges

During the six months ended 30 June 2019, most of our operating transactions were settled in RMB except for export sales which were mostly denominated in USD. Apart from the 11% of borrowings and bonds denominated in USD/HKD, most of our assets and liabilities were denominated in RMB. We did not adopt formal hedging policies nor instruments of foreign currency for hedging purposes during the six months ended 30 June 2019.

(ix) Contingent liabilities

As at 30 June 2019, the Remaining Group guaranteed RMB122.5 million (as at 31 December 2018: RMB128.2 million) to certain purchasers of the Group's properties for mortgage facilities.

As at 30 June 2019, the Remaining Group guaranteed RMB540.2 million (as at 31 December 2018: RMB538.9 million) for banking facilities in Saudi Arabia of which RMB411.0 million (as at 31 December 2018: RMB333.5 million) was utilized by the joint venture.

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1. For the year ended 31 December 2018
2. 1. Financial review

Revenue

Revenue of the Group mainly comprises (i) steel pipe sales, and (ii) property sales.

For the year ended 31 December 2018, our revenue was approximately RMB1,620.5 million, representing an increase of approximately RMB747.2 million or 85.6% as compared with that of 2017. The increase in revenue was mainly due to the increase in domestic orders received by the Group and recognition of property sales. Major oil and gas projects in the PRC have been recovered. The Group recognised most of property sales of Phase I of GDC in 2018.

Our domestic sales accounted for approximately 75.1% of our total steel pipe revenue in 2018, as compared to approximately 53.6% in 2017. All sales of properties were domestic sales.

Gross profit and gross profit margin

Gross profit of steel pipe sales for 2018 was approximately RMB192.9 million as compared with approximately RMB58.1 million in 2017, representing an increase of approximately 231.9% or RMB134.8 million. Gross profit margin for 2018 was approximately 18.0% which was higher than that of last year as the Group has delivered some sizeable orders to Sinopec which were mainly manufacturing services with high profit margin.

Gross profit of property sales was around RMB69.5 million or 12.7% in

2018.

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Change in fair values of investment property

The Group has adopted the accounting policy of measuring investment property by using fair values. Accordingly, gains or losses arising from the changes in the fair values of investment property are reflected as profit or loss for the reporting period. The Group has transferred part of the investment property - Phase I and Phase II of GDC in prior years. The Group has engaged RHL Appraisal Limited, an independent valuer, to value the investment property. According to the valuation report as at 31 December 2018 issued by RHL Appraisal Limited, the market value of Phase III of GDC as at 31 December 2018 was RMB1.16 billion. Gain of RMB21.8 million was resulted from the fair values of the investment property in 2018 (2017: nil).

Other income and gains

Other income and gains in 2018 mainly represented bank interest income, subsidy income from government and gain on disposal of Land of Phase III GDC. Other income and gains decreased by approximately 11.7% or RMB59.0 million from approximately RMB502.6 million in 2017 to approximately RMB443.6 million in 2018. Decrease in other income and gains was mainly due to a forfeiture of customer deposit in 2017 but nil in 2018.

Selling and distribution expenses

Selling and distribution expenses decreased by approximately 40.6% or RMB43.6 million from approximately RMB107.3 million in 2017 to approximately RMB63.7 million in 2018. The decrease was mainly due to the decrease in overseas sales.

Administrative expenses

Administrative expenses decreased by approximately 8.1% or RMB38.6 million from approximately RMB475.6 million in 2017 to approximately RMB437.0 million in 2018. The decrease in administrative expenses was mainly due to decrease in research and development expenses and bank charges during the year. Included in the administrative expenses, there was one-off expenses of around RMB41 million in relation to asset reorganisation (as disclosed in the Company's announcement dated 12 February 2018). If excluded such one-off expenses, administrative expenses were further reduced.

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Finance costs

The finance costs for 2018 was approximately RMB374.5 million which were lower than that of 2017 which was approximately RMB426.3 million. The effective interest rate in 2018 was approximately 6.0% (2017: 7.3%). Decrease in finance costs was due to decrease in average interest rate.

Impairment of property, plant and equipment

The Group recorded no impairment on property, plant and equipment for the year ended 31 December 2018 (2017: RMB18.0 million).

Other expenses

Other expenses increased by approximately 625.8% or RMB80.6 million from approximately RMB12.9 million in 2017 to approximately RMB93.4 million in 2018. The increase was mainly due to loss of disposal of subsidiaries, property, plant and equipment and compensation incurred in relation to asset reorganization (as detailed in the Company's announcement dated 12 February 2018) during the year.

Exchange loss

The Group recorded exchange gain of approximately RMB16.2 million in

2018 as compared to exchange loss of approximately RMB44.1 million in 2017. The exchange gain was mainly due to depreciation of HKD against RMB which resulted in an exchange gain on RMB liability.

Income tax credit

Income tax credit increased from RMB14.6 million in 2017 to RMB113.4 million in 2018.

Deferred tax credit was recorded in 2018 as the Group expects there will be gain on disposal of land in Panyu. For more details, please refer to the announcement of the Company dated 12 February 2018 and 27 February 2019.

Loss for the year

As a result of the reasons discussed above, the Group recorded a loss of approximately RMB136.9 million in 2018 (2017: RMB511.8 million).

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1. Business review
   Steel pipe business

In 2018, the Group received new orders of approximately 360,000 tonnes and approximately 87% were received from domestic customers. The Group has received some sizeable orders like orders from China Petroleum & Chemical Corporation（中國石油化工股份有限公司）(''Sinopec''), Shenzhen-Zhongshan Bridge（深中通道）and construction projects in Hong Kong. The Group delivered approximately 348,000 tonnes of welded steel pipes during 2018.

Property development

In 2013, the Group has converted a piece of land in Panyu into commercial use. The total land area of such piece of land is 125,000 m2 which accounted for 25% of the total area of the parcels of land owned by the Group in Panyu (the ''Panyu Land''). The total construction area of the Panyu Land is 550,000 m2. The Panyu Land will be divided into three phases for development.

The Group had pre-sold the first phase and second phase of GDC and the total contracted sales were approximately RMB1,662.3 million as at 31 December 2018. Sale of properties for the Group in 2018 was around RMB549.3 million.

(iii) Liquidity and financial and capital structure

On 27 April 2017, the Company entered into a note purchase agreement (the ''Note Purchase Agreement'') with an investment fund, pursuant to which the Company agreed to issue, and the investment fund agreed to purchase from the Company, HK$155,000,000 8% notes due in April 2020 (the ''Notes''). Pursuant to the Note Purchase Agreement, specific performance obligations (the ''Specific Performance Obligations'') are imposed on Mr. Chen Chang, the controlling shareholder of the Company, during the term of the Note Purchase Agreement including (i) Mr. Chen Chang, directly or indirectly, holds or owns more than 50% of the voting rights of the Company; or (ii) the controlling shareholder of the Company has management control of the Company. Any breach of the Specific Performance Obligations may constitute a breach under the Note Purchase Agreement, pursuant to which the investment fund is entitled to redeem the Notes immediately upon the occurrence of the breach in accordance with the terms and conditions of the Notes.

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As at 31 December 2018, the Group's total borrowings amounted to approximately RMB6,255.1 million, of which approximately 68% (2017: 35%) were long term borrowings and approximately 32% (2017: 65%) were short term borrowings. Included in the total borrowings, (i) there was a bank loan of RMB490 million that was overseas loan under domestic guarantee（內保外貸）which was secured by bank deposit in PRC; (ii) there was a shareholder's loan of RMB1.68 billion which was paid by Guangdong Yue Cai Trust Co. Limited（廣東粵財信托有限 公司）(as disclosed in the announcement dated 12 February 2018). Such shareholder's loan will be set-off against the consideration under a disposal agreement (as disclosed in the announcement dated 27 February 2019); (iii) loan of RMB1.47 billion in relation to the property development business. Net borrowings under steel pipe business was around RMB2,616.9 million. The Group had to finance its working capital of steel pipe business by short term borrowings as around 90% of the cost of sales was incurred on the procurement of steel plates and steel coils. Once the Group received sales proceeds from its customers, it would then repay the short term borrowings. Taking into account the Group's cash in hand and the available banking facilities of RMB86.4 million, the Group had sufficient liquidity and was in a strong financial position to repay its short term borrowings.

As at 31 December 2018, the current liabilities of the Group exceeded its current assets by approximately RMB39.7 million. Phase II of GDC has been pre-sold in order to increase the cashflow of the Group. The Group has sufficient cashflow to meet its short term obligations.

As at 31 December 2018, approximately 46% (2017: 61%) of the total borrowings were denominated in Renminbi, which carried interest rates linked to the benchmark lending rate published by the People's Bank of China; approximately 41% (2017: 15%) of the total borrowings were denominated in Renminbi which carried fixed interest rate; approximately 0% (2017: 0%) of the total borrowings were denominated in US dollar and HK dollar with interest rates linked to the London interbank offered rates for US dollar loans and Hong Kong interbank offered rates for HK dollar loans; and approximately 13% (2017: 24%) of the total borrowings were denominated in US dollar which carried fixed interest rate.

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1. Significant investments, material acquisitions and disposals of subsidiaries, associates and joint ventures

On 12 February 2018, the Group has entered into an agreement (the

• Agreement'') with Guangdong Yuecai and Guangzhou Asset Management (collectively the ''Investor'') in relation to the cooperation to facilitate the change of use of Land held by PCKSP from ''industrial'' to ''residential and commercial'' and the disposal of (actual and deemed) an aggregate of 59% of the equity interest in PCKSP to the Investor. CKSPG and the PCKSP shall complete an asset reorganisation, after which, the only asset held by the PCKSP shall be the Land. Pursuant to the Agreement, the Investor shall, by stages, (i) inject capital into PCKSP and acquire 19% of the equity interest in the PCKSP for RMB240 million; (ii) implement the asset reorganisation; (iii) apply for the change of use of the Land; and (iv) acquire 40% of the equity interest in PCKSP from the CKSPG for a consideration equivalent to 40% of the fair value of the Land (after the change of use of the Land).

The very substantial disposal in relation to disposal of 59% equity interest of PCKSP has been approved by the Shareholders at the extraordinary general meeting held on 19 April 2018.

The capital injection under the Agreement has been completed on 12 October 2018. Guangdong Yuecai has made capital injection into PCKSP in the amount of RMB240 million and acquired 19% of the registered capital of PCKSP (on enlarged basis). Following the completion of the capital injection, PCKSP is now held as to 20% by Guangdong Yuecai and 80% by CKSPG.

Except the above, the Group had no other material acquisitions or disposals during the year ended 31 December 2018.

1. Employees and remuneration

For the year ended 31 December 2018, staff costs (including Directors' remuneration in the form of salaries and other benefits) were approximately RMB155.4 million (2017: RMB178.0 million).

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The Group remunerates its employees based on their performance, experience and prevailing industry practice. The emoluments of the Directors are recommended by the Remuneration Committee and are decided by the Board, having regard to he Group's operating results, individual performance and comparable market statistics. Competitive remuneration package is offered to retain elite employees. Our package includes salaries, medical insurance, discretionary bonuses, on-job training, other benefits as well as mandatory provident funds schemes for employees in Hong Kong and state-managed retirement benefit schemes for employees in the PRC. Pursuant to the Company's share option scheme and share award scheme, options to subscribe respectively for shares in the Company or share awards of the Company may be granted to eligible employees. No share option or share award was granted under the share option scheme or share award scheme during the year ended 31 December 2018.

As at 31 December 2018, the Group had a total of 1,110 full time employees (2017: 1,600 employees).

(vi) Charge on assets

The Group pledged certain property, plant and equipment, land use rights, time deposits, certain properties under development and completed properties held for sale with an aggregate net book value of approximately RMB833.4 million (2017: RMB1,477.5 million), RMB618.6 million (2017: RMB1,003.4 million), RMB426.6 million (2017: RMB413.7 million), RMB1,105.9 million (2017: RMB1,355.9 million) and RMB373.9 million (2017: nil) respectively as at 31 December 2018 to secure bank loans granted to the Group.

(vii) Gearing ratio

The Group's gearing ratio was calculated based on the sum of bank loans, other borrowings and short term notes divided by total assets. The gearing ratio of the Group as at 31 December 2018 and 2017 were approximately 70.6% and 64.6%, respectively.

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(viii) Exposure to fluctuations in exchange rates and any related hedges

The Group mainly operates in the PRC and most of its operating transactions are settled in Renminbi except for export sales and overseas borrowings which are mostly denominated in US dollar. Most of its assets and liabilities are denominated in Renminbi. Although the Group may be exposed to foreign currency exchange risks, the Board does not expect that future currency fluctuations would materially impact the Group's operations. The Group did not adopt formal hedging policies nor instruments of foreign currency for managing the exchange risk exposure during the year ended 31 December 2018.

(ix) Contingent liabilities

As at 31 December 2018, the Group guaranteed RMB128.2 million (2017: RMB174.1 million) to certain purchasers of the Group's properties for mortgage facilities.

As at 31 December 2018, the Group guaranteed RMB538.9 million (2017: RMB217.8 million) to joint venture for banking facilities in Saudi Arabia of which RMB333.5 million (2017: RMB200.5 million) was utilized by the joint venture.

1. For the year ended 31 December 2017
2. 1. Financial review

Revenue

For the year ended 31 December 2017, revenue of the Group was approximately RMB873.3 million, representing a decrease of approximately RMB570.2 million or 39.5% as compared with that of 2016. The decrease in revenue was mainly due to the decrease in both overseas and domestic orders received by the Group. This was due to the slowdown in the rolling out of major oil and gas projects.

Overseas sales of the Group accounted for approximately 46.4% of our total revenue in 2017, as compared to approximately 56.9% in 2016.

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Gross profit and gross profit margin

Gross profit of the Group for 2017 was approximately RMB58.1 million as compared with approximately RMB81.6 million in 2016, representing a decrease of approximately 28.8% or RMB23.5 million. Gross profit margin of the Group for 2017 was approximately 6.7% which was at similar with that of last year.

Other income and gains

Other income and gains of the Group in 2017 mainly represented bank interest income, subsidy income from government, forfeiture of customer deposit and gain on disposal of Land of Phase III GDC. Other income and gains increased by approximately 25.8% or RMB103.0 million from approximately RMB399.6 million in 2016 to approximately RMB502.6 million in 2017. Increase in other income and gains was mainly due to increase in bank interest income and forfeiture of customer deposit during 2017.

Selling and distribution expenses

Selling and distribution expenses of the Group decreased by approximately 25.7% or RMB37.1 million from approximately RMB144.4 million in 2016 to approximately RMB107.3 million in 2017. The decrease was mainly due to the decrease in sales.

Administrative expenses

Administrative expenses of the Group increased by approximately 1.0% or RMB4.7 million from approximately RMB471.0 million in 2016 to approximately RMB475.6 million in 2017. Administrative expenses in 2017 was at similar level with that of last year.

Finance costs

The finance costs of the Group for 2017 was approximately RMB426.3 million which were higher than that of 2016 which was approximately RMB237.1 million. The effective interest rate of the Group in 2017 was approximately 7.3% (2016: 3.7%). Increase in finance cost was due to increase in average interest rate.

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Impairment of property, plant and equipment

The Group recorded an impairment on property, plant and equipment of approximately RMB18.0 million for the year ended 2017 (2016: RMB516.3 million).

Other expenses

Other expenses of the Group decreased by approximately 87.8% or RMB92.4 million from approximately RMB105.3 million in 2016 to approximately RMB12.9 million in 2017. The decrease was mainly due to provision for inventories and trade and other receivables of approximately RMB99.3 million in last year.

Exchange loss

The Group recorded exchange loss of approximately RMB44.1 million in

2017 as compared to exchange loss of approximately RMB86.4 million in 2016. The decrease in exchange loss was mainly due to depreciation of RMB against USD to a lesser extent this year.

Income tax expenses

Income tax expenses of the Group decreased from RMB56.2 million in

2016 to income tax credit of RMB14.6 million in 2017. Income tax expense in last year was mainly related to the reversal of deferred tax assets in last year. Income tax credit in 2017 was related to deferred tax liability of property business sector decreased. PCKSP, and Panyu Chu Kong Steel Pipe (Zhuhai) Co., Ltd. (''PCKSP (Zhuhai)''), wholly-owned subsidiaries of the Company, were qualified as High and New Technology Enterprises and thus entitled to a reduced tax rate of 15% in 2017 (2016: 15%).

Loss for the year

The Group recorded a loss of approximately RMB511.8 million in 2017 (2016: RMB1,137.0 million).

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1. Business review
   Steel pipe business

In 2017, the Group received new orders of approximately 127,000 tonnes and approximately 33% were received from overseas customers. During the year, the Group has entered into a global frame agreement with Petroliam Nasional Berhad (''Petronas''). The Group will become a qualified supplier of Petronas to supply steel pipes of LSAW, HFW and bends up to December 2019 with two years extension option. PCKSP will be entitled to receive orders from projects of Petronas' approved contractors. The Group has received some sizeable overseas orders like offshore windfarm project in the United Kingdom. The Group delivered approximately 214,000 tonnes of welded steel pipes during 2017.

Property development

In 2013, the Group has converted a piece of land in Panyu into commercial use. The total land area of such piece of land is 125,000 m2 which accounted for 25% of the total area of the parcels of land owned by the Group in Panyu (the ''Panyu Land''). The total construction area of the Panyu Land is 550,000 m2. The Panyu Land will be divided into three phases for development.

The Group had pre-sold the first phase and second phase of GDC and the total contracted sales were approximately RMB1,079.6 million as at 31 December 2017. The Group will record the sale of properties in 2018.

(iii) Liquidity and financial and capital structure

On 27 April 2017, the Group entered into a note purchase agreement (the ''Note Purchase Agreement'') with an investment fund, pursuant to which the Company agreed to issue, and the investment fund agreed to purchase from the Company, HK$155,000,000 8% notes due in April 2020 (the ''Notes''). Pursuant to the Note Purchase Agreement, specific performance obligations (the ''Specific Performance Obligations'') are imposed on Mr. Chen Chang, the controlling shareholder of the Company, during the term of the Note Purchase Agreement including (i) Mr. Chen Chang, directly or indirectly, holds or owns more than 50% of the voting rights of the Company; or (ii) the controlling shareholder of the Company has management control of the Company. Any breach of the Specific Performance Obligations may constitute a breach under the Note Purchase Agreement, pursuant to which the investment fund is entitled to redeem the Notes immediately upon the occurrence of the breach in accordance with the terms and conditions of the Notes.

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On 28 April 2017, the Group issued a bond with a principal amount of US dollar 3,000,000 to an investor, Ms Fang, Lisa Qiu（邱運鳳）. The bond will be repayable in full by April 2020. The bond bears a fixed coupon interest rate at 7% per annum for three years payable semi-annually, commencing on 28 October 2017. The bond is unsecured.

On 24 August 2017, the Group issued a bond with a principal amount of HKD10 million to an investor, Mr. Ye Hong Xiang（葉弘翔）. The bond will be repayable in full by August 2021. The bond bears a fixed coupon interest rate at 7% per annum for four years payable semi-annually, commencing on 24 February 2018. The bond is unsecured.

On 26 September 2017, the Group issued a bond with a principal amount of HKD10 million to an investor, Mr. Hu Gan Ming（胡淦銘）. The bond will be repayable in full by September 2020. The bond bears a fixed coupon interest rate at 6% per annum for three years payable semi-annually, commencing on 26 March 2018. The bond is unsecured.

As at 31 December 2017, the Group's total borrowings amounted to approximately RMB5,821.3 million, of which approximately 35% (2016: 30%) were long term borrowings and approximately 65% (2016: 70%) were short term borrowings. Approximately 60% of total borrowings of the Group were for financing working capital of the Group, and approximately 40% of total borrowings of the Group were financing capital expenditure of the Group. The Group had to finance its working capital by short term borrowings as around 90% of the cost of sales was incurred on the procurement of steel plates and steel coils. Once the Group received sales proceeds from its customers, it would then repay the short term borrowings. Taking into account the Group's cash in hand and the available banking facilities of RMB515.5 million, the Group had sufficient liquidity and was in a strong financial position to repay its short term borrowings.

As at 31 December 2017, the current liabilities of the Group exceeded its current assets by approximately RMB2,167.0 million. Phase I and phase II of GDC has been pre-sold in order to increase the cashflow of the Group. Furthermore, subsequent to 31 December 2017, the Group has received a 3-year shareholders loan of RMB1.68 billion from Guangdong Yuecai. The Group has sufficient cashflow to meet its short term obligations.

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As at 31 December 2017, approximately 61% (2016: 43%) of the total borrowings of the Group were denominated in Renminbi, which carried interest rates linked to the benchmark lending rate published by the People's Bank of China; approximately 15% (2016: 15%) of the total borrowings were denominated in Renminbi which carried fixed interest rate; approximately 0% (2016: 9%) of the total borrowings were denominated in US dollar and HK dollar with interest rates linked to the London interbank offered rates for US dollar loans and Hong Kong interbank offered rates for HK dollar loans; and approximately 24% (2016: 33%) of the total borrowings were denominated in US dollar which carried fixed interest rate.

1. Significant investments, material acquisitions and disposals of subsidiaries, associates and joint ventures

In November 2016, the Group entered into a subscription agreement with Fang Yang Commerce Trade Company Limited（中國方洋商貿有限公司）(''Fangyang''), pursuant to which the Group would inject its existing land and equipment at a market value of RMB982 million and Fangyang would inject RMB500 million by cash to the registered capital of Lianyungang Zhujiang Metal Composite Materials Co., Ltd.*（連 雲港珠江金屬複合材料有限公司）(the ''JV Company''). Upon completion of the capital injection, Fangyang held 33.33% of the enlarged registered capital of the JV Company and the Group's equity interest in the JV Company reduced from 100% to 66.67%. The Group also entered into a non-legally binding memorandum of understanding with Fangyang, pursuant to which Fangyang would further inject RMB200 million by cash to the registered capital of the JV Company. If this further capital injection materializes, Fangyang would hold 41.2% of the further enlarged registered capital of the JV Company and the Group's equity interest in the JV Company would further reduce to 58.8%. The JV Company entered into construction agreements for the purchase of bimetal composite plate processing equipment and construction of the processing plant for an aggregate consideration of not more than RMB2.5 billion. The Company has obtained written approval of the capital injection from Mr. Chen Chang and Bournam Profits Limited. The construction agreements for the purchase of bimetal composite plate processing equipment and construction of the processing plant was duly passed by the shareholders of the Company (the ''Shareholders'') at the extraordinary general meeting on 25 January 2017. The principal business of the JV Company is the manufacturing and sales of bimetal composite plates. The construction of the processing plant will provide the Group with a stable supply of raw materials located near its production base at costs under its control. The capital injection will provide the start-up capital for the construction plant and the introduction of a reliable partner located in Lianyungang. The JV Company will be consolidated in the Company's financial statements.

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On 30 December 2016, the Group entered into a purchase agreement with Guangzhou City Pearl River Machine Tool Works Co., Ltd.*（廣州市珠江機床廠有限 公司）(''GZMT'') for the purchase of spare parts and production line (''Purchase Transaction'') from the latter for the maintenance of machines, installation of rolling line electrical drive system equipment and transformation of steel transportation system of bimetal composite plate processing plant in Lianyungang, the PRC. The consideration for the Purchase Transaction is approximately RMB173.6 million. The purchase of the spare parts and production line is mainly for the construction of the bimetal composite plate processing plant in Lianyungang, the PRC as per the Company's announcement dated 18 November 2016 and the circular dated 9 January 2017. GZMT is ultimately, wholly and beneficially, owned by Mr. Chen Chang, the controlling shareholder and chairman of the Company, and is therefore an associate of Mr. Chen Chang and a connected person of the Company. The Purchase Transaction was duly passed by the independent shareholders of the Company at the extraordinary general meeting on 19 June 2017. As at 31 December 2017, the amount due from a related party of approximately RMB84.6 million was the advance payment to GZMT for the Purchase Transaction.

On 19 April 2017, the Group and (Jiangsu Yungang Investment Development Company Limited*（江蘇雲港投資發展有限公司）(''Yungang'') entered into an Asset Transfer Agreement, pursuant to which, the Group agreed to sell, and Yungang agreed to purchase, the right of use of four land parcels and six production plants (the ''Assets'') of 連雲港艾可新型建材有限公司 (Lianyungang Aike New Construction Materials Limited*) (''Lianyungang Aike'') at a total consideration of RMB76 million. The total net book value of the Assets of Lianyungang Aike as at 31 March 2017 was approximately RMB76.2 million. The disposal of the Assets is to enhance the working capital position by disposing non-core assets of the Group. The net proceeds from the disposal of the Assets was for the general working capital of the Group for its future business development.

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R e s o u r c e s C o m p a n y L i m i t e d *（江陰市長鵬再生資源有限公司）( '' J i a n g y i n ChangPeng'') entered into an asset transfer agreement, pursuant to which the Group agreed to sell, and Jiangyin ChangPeng agreed to purchase, the right of use of land parcel and production plant of Jiangsu production plant at a total consideration of RMB43.8 million. The total net book value of the disposed assets of Jiangyin production plant as at 31 July 2017 was approximately RMB42.4 million. The Jiangyin production plant was acquired by the Group before listing of the Company's shares on the Stock Exchange. Since there is only one production line in the Jiangyin production base and the space for its expansion is limited, the Group has developed the production bases in Lianyungang and Zhuhai. Now that the production bases in Lianyungang and Zhuhai are in operation, the Group can centralize its administration in the two major production bases. The disposal is to enhance the effectiveness of the Group's management. The net proceeds from the disposal will be used as repayment of bank loan by the Group. The disposal will not have material effect on the business and operation of the Group.

On 25 October 2017, the Group and Guangzhou Ningjin Decoration Works Company Limited*（廣州寧進裝飾工程有限公司）(''Guangzhou Ningjin'') entered into a transfer agreement, pursuant to which, the Group agreed to sell, and Guangzhou Ningjin agreed to purchase, the property in Panyu at a total consideration of RMB55 million. The property is located at No. 9, 11, Dalong Street, Limin Street, Shiji Town, Panyu District, Guangzhou, the PRC*（中國廣州番禺區石基鎮大龍街利 民街9號11號）with construction area of approximately 14,000 m2. The book value of the property as at 30 September 2017 was approximately RMB42.89 million. The property is a non-core asset of the Group. The disposal has no impacts on the business operation of the Group. The disposal of property is to enhance the cashflow position of the Group.

Except the above, the Group had no other material acquisitions or disposals during the year.

1. Employees and remuneration

For the year ended 31 December 2017, staff costs of the Group (including Directors' remuneration in the form of salaries and other benefits) were approximately RMB178.0 million (2016: RMB212.2 million).

- I-25-

The Group remunerates its employees based on their performance, experience and prevailing industry practice. Competitive remuneration package is offered to retain elite employees. Package of the Group includes salaries, medical insurance, discretionary bonuses, on-job training, other benefits as well as mandatory provident funds schemes for employees in Hong Kong and state-managed retirement benefit schemes for employees in the PRC. Pursuant to the Company's share option scheme and share award scheme, options to subscribe respectively for shares in the Company or share awards of the Company may be granted to eligible employees. No share option or share award was granted under the share option scheme or share award scheme during the year ended 31 December 2017.

As at 31 December 2017, the Group had a total of 1,600 full time employees (2016: 2,100 employees).

(vi) Charge on assets

The Group pledged certain property, plant and equipment, land use rights, time deposits and certain properties under development with an aggregate net book value of approximately RMB1,477.5 million (2016: RMB1,512.5 million), RMB1,003.4 million (2016: RMB1,061.8 million), RMB413.7 million (2016: RMB410.2 million) and RMB1,355.9 million (2016: RMB442.7 million) respectively as at 31 December 2017 to secure bank loans granted to the Group.

(vii) Gearing ratio

The Group's gearing ratio was calculated based on the sum of bank loans, other borrowings and short term notes divided by total assets. The gearing ratio of the Group as at 31 December 2017 and 2016 were approximately 64.6% and 64.7%, respectively.

(viii) Exposure to fluctuations in exchange rates and any related hedges

The Group mainly operates in the PRC and most of its operating transactions are settled in Renminbi except for export sales and overseas borrowings which are mostly denominated in US dollar. Most of its assets and liabilities of the Group are denominated in Renminbi. Although the Group may be exposed to foreign currency exchange risks, the Board does not expect that future currency fluctuations would materially impact the Group's operations. The Group did not adopt formal hedging policies nor instruments of foreign currency for managing the exchange risk exposure during the year ended 31 December 2017.

- I-26-

(ix) Contingent liabilities

As at 31 December 2017, the Group guaranteed RMB174.1 million (2016: RMB136.6 million) to certain purchasers of the Group's properties for mortgage facilities.

As at 31 December 2017, the Group guaranteed RMB217.8 million (2016: RMB231.8 million) to joint venture for banking facilities in Saudi Arabia of which RMB200.5 million (2016: RMB185.4 million) was utilized by the joint venture.

1. For the year ended 31 December 2016
2. 1. Financial review

Revenue

For the year ended 31 December 2016, the revenue of the Group was approximately RMB1,443.5 million, representing a decrease of approximately RMB1,095.7 million or 43.2% as compared with that of 2015. The decrease in revenue was mainly due to the decrease in both overseas and domestic orders received by the Group. This was due to the slowdown in the rolling out of major oil and gas projects. In addition, there was a drop in average selling price in 2016 as compared with that of 2015.

Overseas sales of the Group accounted for approximately 56.9% of the Group's total revenue in 2016, as compared to approximately 53.0% in 2015.

Gross profit and gross profit margin

Gross profit of the Group for 2016 was approximately RMB81.6 million, representing a decrease of approximately 80.0% or RMB325.6 million as compared with approximately RMB407.2 million in 2015. Gross profit margin of the Group for 2016 was approximately 5.7% which was lower than that of 2015. This was due to (i) the trading of steel materials with lower gross profit margin;

1. the sale of old stock at loss to enhance our cashflow; (iii) the decreased sales cannot cover the fixed cost of the Group; and (iv) the sale of infrastructure products during the year where its gross profit margin was low.

- I-27-

Change in fair values of investment property

Gains or losses arising from the changes in the fair values of investment property were reflected as profit or loss for the period concerned. The Group has transferred part of the investment property - Phase I and Phase II of GDC under development as at 30 November 2015 and 31 December 2016 respectively. According to the valuation report as at 31 December 2016 issued by RHL Appraisal Limited, an independent valuer, the market value of the investment property as at 31 December 2016 was RMB1.14 billion. No gain was resulted from the fair values of investment property in 2016 (2015: the fair value gains on investment property of approximately RMB627.9 million).

Other income and gains

Other income and gains in 2016 mainly represented bank interest income and gain on disposal of Land of Phase III GDC. Other income and gains increased by approximately 2.1% or RMB8.3 million from approximately RMB391.2 million in 2015 to approximately RMB399.6 million in 2016. Increase in other income and gains was mainly due to increase in the subsidy income from the government during 2016.

Selling and distribution expenses

Selling and distribution expenses of the Group decreased by approximately 15.9% or RMB27.3 million from approximately RMB171.7 million in 2015 to approximately RMB144.4 million in 2016. The decrease was mainly due to the decrease in sales as discussed above.

Administrative expenses

Administrative expenses of the Group increased by approximately 7.1% or RMB31.0 million from approximately RMB440.0 million in 2015 to approximately RMB471.0 million in 2016. The increase in administrative expenses was due to the increase in bank charges and modification charges for headquarters in Panyu.

Finance costs

The finance costs of the Group for 2016 were approximately RMB237.1 million which were similar with that of 2015 of approximately RMB237.1 million. The effective interest rate in 2016 was approximately 3.7% (2015: 3.8%).

- I-28-

Impairment on property, plant and equipment and goodwill

The Group has provided the impairment on property, plant and equipment and goodwill of approximately RMB516.3 million for the year ended 2016 (2015: nil).

Other expenses

Other expenses of the Group increased by approximately 502.7% or RMB87.8 million from approximately RMB17.5 million in 2015 to approximately RMB105.3 million in 2016. The increase was mainly due to provision for inventories and trade and other receivables of approximately RMB99.3 million.

Exchange losses

The Group recorded exchange loss of approximately RMB86.4 million in

2016 as compared to exchange loss of approximately RMB53.6 million in 2015. The increase in exchange loss was mainly due to further depreciation of RMB against USD.

Income tax expenses

Income tax expenses of the Group decreased from RMB118.4 million in

2015 to RMB56.2 million in 2016. The Group recorded loss for 2016 but there were tax expenses of approximately RMB56.2 million mainly due to the reversal of deferred tax assets during the year as the Group recorded operating losses for consecutive years. PCKSP, PCKSP (Zhuhai) and Panyu Chu Kong Steel Pipe (Lianyungang) Co., Limited (''PCKSP (Lianyungang)''), wholly-owned subsidiaries of the Company, were qualified as High and New Technology Enterprises and thus entitled to a reduced tax rate of 15% in 2016 (2015: 15%).

Loss for the year

The Group recorded a loss of approximately RMB1,137.0 million in 2016 (2015: profit RMB387.5 million).

- I-29-

1. Business review
   Steel pipe business

In 2016, the Group received new orders of approximately 230,000 tonnes and approximately 67% were received from overseas customers. Some sizeable overseas orders obtained were related to offshore windfarm project in the United Kingdom, the PETRONAS Refinery and Petrochemical Integrated Development (RAPID) project in Malaysia, Sinopec's natural gas project in Tianjin, PRC and MRC's Northern Gas Pipeline (NGP) project in Queensland, Australia. The Group delivered approximately 334,000 tonnes of welded steel pipes during 2016.

Property development

In 2013, the Group has converted a piece of land in Panyu (the ''Panyu Land'') into commercial use. The total land area of the Panyu Land is 125,000 m2 which accounted for 25% of area of the parcels of Panyu Land owned by the Group in Panyu Land. The total construction area of the Panyu Land is 550,000 m2. The Panyu Land would be divided into three phases for development.

The Group had pre-sold the first phase of GDC and the total contracted sales were approximately RMB525 million as at 31 December 2016.

In October 2016, the Group also developed the second phase of GDC. The second phase is mainly composed of serviced apartments and shopping centers, and the pre-sale would be expected to commence in late-2017.

The GDC is part of the Group's strategy to widen its income sources. The Directors believed that the GDC would maximise the potential economic return of the Panyu Land to the Group. Furthermore, upon the completion of GDC, stable rental income and the proceeds from the sale of properties would support the further development of the Group's steel pipe business.

The Group would relocate the production lines in Panyu to the Lianyungang and Zhuhai production sites within three years. The Lianyungang and Zhuhai production bases would be the major production bases of the Group in the PRC, as both production bases are in proximity to the self-operated ports where the Group could minimise its transportation cost.

- I-30-

(iii) Liquidity and financial resources and capital structure

In December 2016, the Group entered into a loan agreement with the Industrial and Commercial Bank of China (''ICBC'') in respect of a 8-year loan (the ''ICBC Loan'') of RMB1.5 billion at the interest rate of 5.39% per annum, which represents a 10% premium over the prevailing RMB commercial base lending rate of 4.9% per annum published by the People's Bank of China. As security for the ICBC Loan, PCKSP, one of the Company's wholly-owned subsidiaries, has pledged its shareholding in 廣東珠鋼投資管理有限公司 (Guangdong Pearl Steel Investment Management Co. Ltd.*) (''Guangdong Pearl Steel'') and provided a corporate guarantee, and Guangdong Pearl Steel has pledged its land and properties under development in favour of ICBC.

As at 31 December 2016, the Group's total borrowings amounted to approximately RMB6,349.4 million, of which approximately 30% (2015: 55%) were long term borrowings and approximately 70% (2015: 45%) were short term borrowings. Approximately 60% of total borrowings of the Group were for financing working capital of the Group, and approximately 40% of total borrowings of the Group were financing capital expenditure of the Group. The Group had to finance its working capital by short term borrowings as around 90% of the cost of sales was incurred on the procurement of steel plates and steel coils. Once the Group received sales proceeds from its customers, it would then repay the short term borrowings. Taking into account the Group's cash in hand and the available banking facilities of RMB1,945 million, the Group had sufficient liquidity and was in strong financial position to repay its short term borrowings.

As at 31 December 2016, approximately 43% (2015: 37%) of the total borrowings of the Group were denominated in Renminbi, which carried interest rates linked to the benchmark lending rate published by the People's Bank of China; approximately 15% (2015: 16%) of the total borrowings of the Group were denominated in Renminbi which carried fixed interest rate; approximately 9% (2015: 15%) of the total borrowings of the Group were denominated in US dollar and HK dollar with interest rates linked to the London interbank offered rates for US dollar loans and Hong Kong interbank offered rates for HK dollar loans, and approximately 33% (2015: 32%) of the total borrowings of the Group were denominated in US dollar which carried fixed interest rate.

- I-31-

1. Significant investments, material acquisitions and disposals of subsidiaries, associates and joint ventures

Please refer to the paragraph headed ''5. Management discussion and analysis of the Group - (b) For the six months ended 31 December 2017 - (iv) Significant investments, material acquisitions and disposal of subsidiaries, associates and joint ventures'' above for further details about the capital injections in Lianyungang Zhujiang Metal Composite Materials Co., Ltd.*（連雲港珠江金屬複合材料有限公司）.

1. Employees and remuneration

For the year ended 31 December 2016, staff costs (including Directors' remuneration in the form of salaries and other benefits) of the Group were approximately RMB212.2 million (2015: RMB283.5 million).

The Group remunerates its employees based on their performance, experience and prevailing industry practice. Competitive remuneration package is offered to retain elite employees. Package includes salaries, medical insurance, discretionary bonuses, on-job training, other benefits as well as mandatory provident funds schemes for employees in Hong Kong and state-managed retirement benefit schemes for employees in the PRC. Pursuant to the Group's share option scheme and share award scheme, options to subscribe respectively for shares in the Company or share awards of the Company may be granted to eligible employees. No share option or share award was granted under the share option scheme or share award scheme during the year ended 31 December 2016.

As at 31 December 2016, the Group had a total of 2,100 full time employees (2015: 2,775 employees).

(vi) Charge on assets

The Group pledged certain property, plant and equipment, land use rights, time deposits and certain properties under development with an aggregate net book value of approximately RMB1,512.5 million (2015: RMB582.8 million), RMB1,061.8 million (2015: RMB650.2 million), RMB410.2 million (2015: RMB491.2 million) and RMB442.7 million (2015: nil) respectively as at 31 December 2016 to secure bank loans granted to the Group.

- I-32-

(vii) Gearing ratio

The Group's gearing ratio was calculated based on the sum of bank loans, other borrowings and short term notes divided by total assets. The gearing ratio of the Group as at 31 December 2016 and 2015 were approximately 64.7% and 57.7%, respectively.

(viii) Exposure to fluctuations in exchange rates and any related hedges

The Group mainly operates in the PRC and most of its operating transactions are settled in Renminbi except for export sales and overseas borrowings which are mostly denominated in US dollar. Most of its assets and liabilities of the Group were denominated in Renminbi. Although the Group might be exposed to foreign currency exchange risks, the Board did not expect that future currency fluctuations would materially impact the Group's operations. The Group did not adopt formal hedging policies nor instruments of foreign currency for managing the exchange risk exposure during the year ended 31 December 2016.

(ix) Contingent liabilities

As at 31 December 2016, the Group guaranteed RMB136.6 million (2015: nil) to certain purchasers of the Group's properties for mortgage facilities.

As at 31 December 2016, the Group guaranteed RMB231.8 million (2015: RMB215.9 million) to a joint venture for banking facilities in Saudi Arabia of which RMB185.4 million (2015: RMB172.7 million) was utilized by the joint venture.

6. FINANCIAL AND TRADING PROSPECTS OF THE REMAINING GROUP

Upon completion of the Land Resumption, the Group will continue to carry out its principal businesses, namely (i) manufacturing and trading of steel pipe; and (ii) property development and investment.

The steel pipe business will remain as the core business of the Group. As disclosed in the interim report of the Company for the six months ended 30 June 2019 and annual report of the Company for the year ended 31 December 2018, in light of the ''13th Five-Year Plan'' initiated by the Chinese government, it is expected that more oil and gas projects will be launched, the Group anticipates that the demand of steel pipes will rebound at a strong pace. And given that the Chinese government intends to promote clean energy as the major sources of energy in the future, the gas consumption in China is expected to increase and the demand of steel pipes will be strong. Lianyungang and Zhuhai production bases are the major production bases of the Group in China. The Directors believed that financing costs will be reduced as immediate availability of net proceeds from the Land Resumption can reduce the Group's existing debt level.

- I-33-

Apart from the steel pipe business, the Group will continue the development of the GDC. The GDC is a large scale integrated commercial complex of offices, shops, apartments and villas. The total permitted construction area of the Land is approximately 550,000 m2. The Group has pre-sold second phase of GDC and leased the shops of GDC. GDC provides a stable income source to provide solid financial support to the Group in the long run. It will also help improving the cash flow of the Group.

- I-34-

The following is the text of a valuation report, prepared for the purpose of incorporation in this circular received from RHL Appraisal Limited., an independent valuer, in connection with its valuation as at 30 September 2019 of the Property to be disposed of by the Group.

永利行評值顧問有限公司

RHL Appraisal Limited

Corporate Valuation & Advisory

7 November 2019

The Board of Directors

Chu Kong Petroleum and Natural Gas Steel Pipe Holdings Limited

Suite No.1, 2 and 19, 15th floor,

China Hong Kong City, Tower 3,

33 Canton Road, Tsim Sha Tsui,

Kowloon, Hong Kong

Dear Sir/Madam,

INSTRUCTIONS

We refer to your instruction for us to value the property interest (the ''Property'') to be disposed by Chu Kong Petroleum and Natural Gas Steel Pipe Holdings Limited (the ''Company'') located in the People's Republic of China (''PRC''). We confirm that we have carried out property inspection, made relevant enquiries and obtained such further information as we consider necessary for the purpose of providing you with our opinion of the market value of the Land of Phase III GDC as at 30 September 2019 (the ''Valuation Date'').

This letter which forms part of our valuation report explains the basis and methodologies of valuation, clarifying assumptions, valuation considerations, title investigations and limiting conditions of this valuation.

- II-1-

BASIS OF VALUATION

The valuation is our opinion of the market value (''Market Value'') which we would define as intended to mean the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm's-length transaction after proper marketing wherein the parties had each acted knowledgeably prudently and without compulsion.

Market Value is understood as the value of an asset or liability estimated without regard to costs of sale or purchase and without offset for any associated taxes or potential taxes.

The market value is the best price reasonably obtainable in the market by the seller and the most advantageous price reasonably obtainable in the market by the buyer. This estimate specifically excludes an estimated price inflated or deflated by special terms or circumstances such as atypical financing, sale and leaseback arrangements, joint ventures, management agreements, special considerations or concessions granted by anyone associated with the sale, or any element of special value.

VALUATION METHODOLOGY

We have valued the Property interest by using the Direct Comparison Approach by making reference to the comparable market transactions/asking cases as available. Comparable properties of similar size, scale, nature, character and location are analysed and carefully weighed against all the respective advantages and disadvantages of each property in order to arrive at a fair comparison of market value.

VALUATION CONSIDERATIONS

In valuing the property interest, we have complied with all the requirements contained in Chapter 5 and Practice Note 12 to the Rules Governing the Listing of Securities issued by The Stock Exchange of Hong Kong Limited and the International Valuation Standards 2017.

VALUATION ASSUMPTION

In our valuation, unless otherwise stated, we have assumed that:

1. all necessary statutory approvals for the Property of which the Property forms part of their use have been obtained; and
2. transferable land use rights in respect of the Property for specific terms at nominal annual land use fees have been granted and that any premium payable has already been fully paid.

- II-2-

TITLE INVESTIGATION

We have been shown copies of various documents relating to the Property. However, we have not examined the original documents to verify the existing titles to the Property or any amendment which does not appear on the copies handed to us. We have relied considerably on the information given by the Company's PRC legal advisers, Guangdong Zhuo Yin Law Firm, concerning the validity of the titles to the Property.

LIMITING CONDITIONS

We have conducted on-site inspections to the Property on 20 December 2018 and 24 October 2019 by our staff Mr. Charlie Chan (BSc in Geomatics).

We have not carried out detailed on-site measurement to verify the correctness of the areas in respect of the property but have assumed that the areas shown on the documents handed to us are correct. All dimensions, measurements and areas are approximate.

We have not carried out any site investigation to determine the suitability of the ground conditions or the services for any property development erected or to be erected thereon. Nor did we undertake archaeological, ecological or environmental surveys for the Property. Our valuation is prepared on the assumptions that these aspects are satisfactory and that no extraordinary expenses or delays will be incurred during the construction period. Should it be discovered that contamination, subsidence or other latent defects exists in the Property or on adjoining or neighboring land or that the Property had been or are being put to contaminated use, we reserve right to revise our opinion of value.

We have relied very considerable extent on the information provided by the Group and have accepted advices given to us on such matters, in particular, but not limited to tenure, planning approvals, statutory notices, easements, particulars of occupancy, size and floor areas and all other relevant matters in the identification of the Property. The plans including but not limited to location plan, site plan, lot index plan, outline zoning plan, building plan if any, in the report are included to assist the reader to identify the Property for reference only and we assume no responsibility for their accuracy.

We have had no reason to doubt the truth and accuracy of the information provided to us by the Group. We have also been advised by the Group that no material fact has been omitted from the information supplied. We consider that we have been provided with sufficient information to reach an informed view, and we have no reason to suspect that any material information has been withheld.

- II-3-

We do not accept a liability for any interpretation which we have placed on such information which is more properly the sphere of the legal advisers of the Group. Neither have we verified the correctness of any information supplied to us concerning the Property.

REMARKS

We have valued the property interest in Renminbi (RMB).

We enclose herewith ''Property Particulars and Opinion of Value''.

Ms. Serena S. W. Lau is a Registered Professional Surveyor (GP) with over 20 years' experience in valuation of properties in HKSAR, Macau SAR, mainland China and the Asia Pacific Region. Ms. Lau is a Professional Member of The Royal Institution of Chartered Surveyors, an Associate of Australian Property Institute, a Fellow of The Hong Kong Institute of Surveyors as well as a registered real estate appraiser in the PRC.

Ms. Jessie X. Chen is a Registered Professional Surveyor (Valuation) with over 9 years' experience in valuation of properties in HKSAR, Macau SAR, mainland China and the Asia Pacific Region. Ms. Chen is a Professional Member of The Royal Institution of Chartered Surveyors.

- II-4-

PROPERTY PARTICULARS AND OPINION OF VALUE

1. Pursuant to a Stated-owned Land Use Right Certificate, G39-000012, the land use rights of a site, with total site area of approximately 125,393 sq.m. were granted to 廣東珠鋼投資管理有限公司 (''Guangdong Pearl Steel Investment'').
2. Pursuant to the legal opinion, portion of the site with site area of approximately 34,808.87 sq.m. is attributable to the Property.
3. The property is situated at north of a composite development named as GDC which is located at the northern side of Yayun Avenue（亞運大道）in Shiji Town. The subject locality comprises mainly industrial complexes, rural villages and various newly developed residential developments.
4. We have been provided with a legal opinion by the Group's PRC legal adviser, Guangdong Zhuo Yin Law Firm, regarding the legal title of the property, which contains, inter alia, the followings:
5. 1. the property is legally held by Guangdong Pearl Steel Investment;
   2. Guangdong Pearl Steel Investment is entitled to transfer, lease, mortgage or dispose of the property freely in the market; and
   3. the property is free from any mortgage or third parties' encumbrance.

- II-5-

1. RESPONSIBILITY STATEMENT

This circular, for which the Directors collectively and individually accept full responsibility, includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Company. The Directors, having made all reasonable enquiries, confirm that to the best of their knowledge and belief the information contained in this circular is accurate and complete in all material respects and not misleading or deceptive, and there are no other matters the omission of which would make any statement herein or this circular misleading.

2. DISCLOSURE OF INTERESTS

1. Interests of Directors

As at the Latest Practicable Date, the interests or short positions of the Directors and chief executive of the Company in the shares or underlying shares or, as the case may be, the percentage in the equity interest and debentures of the Company or its associated corporations (within the meaning of the Securities and Futures Ordinance (Chapter 571) (the ''SFO'')), which were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they have taken or deemed to have under such provisions of the SFO), or which were required, pursuant to Section 352 of the SFO, to be entered in the register maintained by the Company referred to therein, or which were required, pursuant to the Model Code for Securities Transactions by Directors (the ''Model Code'') of Listed Issuers contained in the Listing Rules, to be notified to the Company and the Stock Exchange were as follows:

Note:

1. These shares are held by Bournam Profits Limited, the entire issued share capital of which is wholly and beneficially owned by Mr. Chen Chang. By virtue of the SFO, Mr. Chen Chang is deemed to be interested in the 701,911,000 shares held by Bournam Profits Limited.

- III-1-

Long positions in associated corporation

Mr. Chen Chang beneficially owns the entire issued share capital of Bournam Profits Limited, which is the beneficial owner of about 69.85% of the issued shares of the Company.

Save as disclosed above, as at the Latest Practicable Date, none of the Directors, chief executives of the Company and their associates had any interests or short positions in the Shares, underlying shares or debentures of the Company or its associated corporations (within the meaning of Part XV of the SFO) which (i) were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which he was taken or deemed to have under such provisions of the SFO); or (ii) were required, pursuant to section 352 of the SFO, to be entered in the register referred to therein; or

1. 1. were required to be notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers contained in the Listing Rules.
2. Interests of substantial Shareholders
3. 
   As at the Latest Practicable Date, so far as the Directors were aware, the following

persons or corporations (not being a Director or a chief executive of the Company) have an interest or short position in the shares and underlying shares of the Company as recorded in the register required to be kept under section 336 of the SFO or have otherwise been notified to the Company:

- III-2-

Notes:

1. The entire share capital of Bournam is solely and beneficially owned by Mr. Chen Chang. Mr. Chen is deemed under the SFO to be interested in the 701,911,000 shares held by Bournam
2. On 18 October 2018, the Company issued unlisted warrants in the aggregate amount of HK$313,320,000 to Hammer Capital, which confer the holder the right to subscribe for up to 373,000,000 Shares.
   On 22 June 2018, the Company entered into the loan amendment deed with Hammer Capital for a further advance of HK$250 million to the Company. In return for the further advance, the Company agreed to issue the unlisted warrants to Hammer Capital. Each unlisted warrant will give the holder the right to subscribe for an ordinary share of HK$0.1 each in the share capital of the Company. The warrants confer upon the holder the right to subscribe for up to HK$313,320,000 for new shares at the initial subscription price of HK$0.84. Accordingly, a maximum number of 373,000,000 warrant shares (the aggregate nominal value of such shares being HK$37,300,000) can be issued upon exercise in full of the subscription rights. The issue price of the unlisted warrants was HK$0.168 per warrant. The proceeds from the issue price of unlisted warrants was used to settle expenses incurred in connection with the loan amendment deed. As at the date of this circular, no warrant has been exercised. Each of Mr. Cheung Siu Fai and Mr. Tsang Ling Kay Rodney had 50% control of Hammer Capital and deemed to be interested in the Shares which Hammer Capital was interested in by virtue of the SFO. Please refer to the Company's announcements dated 22 June 2018 and 25 June 2018 and the Company's circular dated 17 September 2018 for further details regarding the issue of unlisted warrants.

Save as disclosed above, as at the Latest Practicable Date, the Directors were not aware of any other persons (other than the Directors or chief executives of the Company) who had interests or short positions in the Shares or underlying shares or debentures of the Company or its associated corporations (within the meaning of Part XV of the SFO) which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO.

3. DIRECTORS' SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors had entered into or was proposing to enter into a service contract with any member of the Group which does not expire or is not terminable by such member of the Group within one year without payment of compensation (other than statutory compensation).

- III-3-

4. DIRECTORS' COMPETING INTERESTS

As at the Latest Practicable Date, none of the Directors and their respective associates had any interests in a business, which competes or is likely to compete either directly or indirectly with the business of the Group which would be required to be disclosed under Rule 8.10 of the Listing Rules.

5. DIRECTORS' INTERESTS IN ASSETS

As at the Latest Practicable Date, none of the Directors had any interest, directly or indirectly, in any asset which have been, since 31 December 2018, being the date to which the latest published audited financial statements of the Group were made up, acquired or disposed of by or leased to any member of the Group or are proposed to be acquired or disposed of by or leased to any member of the Group.

6. DIRECTORS' INTERESTS IN CONTRACTS OR ARRANGEMENTS

As at the Latest Practicable Date, none of the Directors had any interest, directly or indirectly, in any contract or arrangement subsisting which is significant in relation to the business of the Group.

7. MATERIAL LITIGATION

As at the Latest Practicable Date, neither the Company nor any of its subsidiaries were engaged in any litigation, arbitration or claim of material importance and no litigation, arbitration or claim of material importance was known to the Directors to be pending or threatened by or against the Company or any of its subsidiaries.

8. MATERIAL CONTRACTS

As at the Latest Practicable Date, the following contracts (not being contracts entered into in the ordinary course of business) were entered into by members of the Group within the two years immediately preceding the date of this circular and are material:

1. The Land Resumption Compensation Agreement;

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1. the share investment agreement dated 27 February 2019 entered into among Chu Kong Steel Pipe Group Co., Limited（珠江鋼管集團有限公司）(''Chu Kong Steel Pipe''), Guangzhou Xingchen Consultation Company Limited*（廣州星宸諮詢有限公 司）(''Xingchen''), Panyu Chu Kong Steel Pipe Co., Limited（番禺珠江鋼管有限公 司）(''Panyu Chu Kong Steel Pipe''), the Company, Mr. Chen Chang, Guangzhou Asset Management Company Limited*（廣州資產管理有限公司）(''Guangzhou Asset Management''), Guangdong Yuecai Trust Co. Limited*（廣東粵財信託有限公 司）(''Guangdong Yuecai Trust'') and Guangzhou Pearl River Petroleum Steel Pipe Coating Co. Limited（廣州珍珠河石油鋼管防腐有限公司）(''Guangzhou Pearl River Coating'');
2. the loan agreement in the amount of RMB400 million entered into between Xingchen and Guangzhou Pearl River Coating dated 30 November 2018;
3. the capital injection and the cooperation agreement dated 12 February 2018 entered into among Chu Kong Steel Pipe, Guangdong Yuecai Trust, Panyu Chu Kong Steel Pipe, the Company, Mr. Chen Chang, Guangdong Pearl Steel Investment and Guangzhou Asset Management;
4. the capital injection agreement of acquiring 1% of the equity interest in Panyu Chu Kong Steel Pipe from Chu Kong Steel Pipe dated 2 February 2018;
5. the loan agreement entered into between Guangdong Yuecai Trust and Panyu Chu Kong Steel Pipe dated 2 February 2018;
6. the rescheduling agreement dated 22 June 2018 entered into between the Company and holders of the USD bonds due 2018 in respect of the new repayment schedule of the USD bonds due 2018; and
7. the loan amendment deed dated 22 June 2018 entered into among the Company, Chu Kong Steel Pipe, Mr. Chen Chang (Chairman of the Board, an executive Director and a controlling shareholder of the Company), Bournam and an investment fund as lender in respect of the further loan of HKD250 million to the Company and issue of the unlisted warrants carrying rights to subscribe for warrant shares to be issued by the Company.

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9. EXPERTS AND CONSENTS

The following is the qualifications of the experts who have given opinions, letters or advice contained in this circular:

NameQualifications

As at the Latest Practicable Date, each of the experts has given and has not withdrawn its written consent to the issue of this circular with the inclusion therein of its letter and/or reference to its name, in the form and context in which they appear.

As at the Latest Practicable Date, each of the experts did not have any shareholdings in the share capital of any member of the Group nor had any right, whether legally enforceable or not, to subscribe for or to nominate persons to subscribe for the securities in any member of the Group.

As at the Latest Practicable Date, each of the experts had not had any direct or indirect interests in any assets which have been, since 31 December 2018 (being the date to which the latest published audited accounts of the Company were made up), acquired or disposed of by or leased to any member of the Group, or which are proposed to be acquired or disposed of by or leased to any member of the Group.

10. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection at Suite Nos 1, 2 and 19, 15th Floor, Tower 3, China Hong Kong City, 33 Canton Road, Tsim Sha Tsui, Kowloon, Hong Kong during normal business hours from the date of this circular up to and including the date which is 14 days from the date of this circular:

1. the memorandum of association and the articles of association of the Company;
2. the letter from the Board, the text of which is set out on pages 4 to 11 of this circular;
3. the Company's annual reports for the years ended 31 December 2016, 2017 and 2018 and the interim report for the six months ended 30 June 2019;
4. the property valuation report on the Land of Phase III GDC prepared by RHL Appraisal Limited, the text of which is set out in Appendix II to this circular;

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1. the material contracts referred to in paragraph headed ''8. Material contracts'' in this appendix;
2. the letter of consent referred to under the paragraph headed ''9. Experts and consents'' in this appendix;
3. circular issued pursuant to the requirements set out in Chapters 14 and/or 14A which has been issued since 31 December 2018; and
4. this circular.

11. GENERAL

1. The company secretary of the Company is Ms. Wong Pui Shan. Ms. Wong is a fellow member of the Association of Chartered Certified Accountants, a member of the Hong Kong Institute of Certified Public Accountants, the Hong Kong Institute of Chartered Secretaries and the Institute of Chartered Secretaries and Administrators. Ms. Wong hold a Master's degree of Science in Finance from the Chinese University of Hong Kong and a Bachelor's degree of Arts in Accountancy from the Hong Kong Polytechnic University.
2. The registered address of the Company is Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman, KY1-1111, Cayman Islands.
3. The head office and principal place of business of the Company in PRC is at 2/F, 3-5 Golden Dragon City, Yayun Avenue, 511450 Panyu District, Guangzhou City, Guangdong Province, the PRC.
4. The head office and principal place of business of the Company in Hong Kong is at Suite Nos 1,2 and 19, 15th Floor, Tower 3, China Hong Kong City, 33 Canton Road, Tsim Sha Tsui, Kowloon, Hong Kong.
5. The branch share registrar of the Company in Hong Kong is Tricor Investor Services Limited at Level 54, Hopewell Centre, 183 Queen's Road East, Hong Kong.
6. In the event of inconsistency, the English text of this circular shall prevail over the Chinese text thereof.

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NOTICE OF EGM

CHU KONG PETROLEUM AND NATURAL GAS STEEL PIPE HOLDINGS LIMITED

珠江石油天然氣鋼管控股有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 1938)

NOTICE OF EXTRAORDINARY GENERAL MEETING

NOTICE IS HEREBY GIVEN that an extraordinary general meeting (the ''EGM'') of Chu Kong Petroleum and Natural Gas Steel Pipe Holdings Limited (the ''Company'') will be held at Portion 2, 12/F., The Centre, 99 Queen's Road Central, Hong Kong, at 11:30 a.m. on Thursday, 28 November 2019 to consider and, if thought fit, pass with or without notification, the following resolution as an ordinary resolution of the Company:

ORDINARY RESOLUTION

''THAT:

the Land Resumption Compensation Agreement dated 20 June 2019 entered into between Guangdong Pearl Steel Investment Management Co., Limited*（廣東珠鋼投資管理有限公 司）and Guangzhou City Panyu District Land Development Centre*（廣州市番禺區土地開 發中心）in connection with the land resumption of the land initially reserved for Phase III of Golden Dragon City Fortuna Plaza（金龍城財富廣場）and the transactions contemplated thereunder be and are hereby approved, confirmed and ratified, and any one director of the Company be and is hereby authorized to do all such acts and things and to sign and execute all such documents, instruments and agreements for and on behalf of the Company as they may consider necessary, appropriate, desirable or expedient to give effect to or in connection with this resolution.''

By order of the Board

Chu Kong Petroleum and Natural Gas Steel Pipe Holdings Limited

Chen Chang

Chairman

Guangdong Province, the PRC, 7 November 2019

• for identification purpose only

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NOTICE OF EGM

Notes:

1. Any member entitled to attend and vote at the EGM is entitled to appoint one or more proxies to attend and vote instead of such member in accordance with the articles of associate of the Company. A proxy need not be a member of the Company.
2. The register of members will be closed from Monday, 25 November 2019 to Thursday, 28 November 2019 (both days inclusive), during which period no share transfers will be registered. In order to qualify to attend and vote at the EGM, all transfer forms accompanied by relevant share certificates must be lodged with the Company's share registrar, Tricor Investor Services Limited at Level 54, Hopewell Centre, 183 Queen's Road East, Hong Kong not later than 4:30 p.m. on Friday, 22 November 2019.
3. This form of proxy must be signed by you or your attorney duly authorised in writing or, in the corporation, must be either under its common seal or under the hand of an officer or attorney duly authorised.
4. To be valid, a form of proxy, together with any power of attorney or other authority (if any) under which it is signed or a notarially certified copy thereof, must be completed and deposited with the Company's share registrar, Tricor Investor Services Limited at Level 54, Hopewell Centre, 183 Queen's Road East, Hong Kong not less than 48 hours before the time appointed for holding of the EGM or any adjournment thereof.
5. In the case of joint holders of a share, any one of such holders may vote at the EGM, either personally or by proxy, in respect of such share as if he were solely entitled thereto, but if more than one of such holders is present at the above meeting personally or by proxy, that one of such holders so present whose name stands first on the register of members in respect of such share shall alone be entitled to vote in respect thereof.
6. If tropical cyclone warning signal no. 8 or above, ''extreme conditions'' caused by super typhoons or a black rainstorm warning is in effect at any time after 9:00 a.m. on Thursday, 28 November 2019, the meeting will be postponed and further announcement for details of alternative meeting arrangements will be made. The meeting will be held as scheduled even when tropical cyclone warning signal no. 3 or below is hoisted, or an amber or red rainstorm warning signal is in force. You should make your own decision as to whether you would attend the meeting under bad weather conditions and if you should choose to do so, you are advised to exercise care and caution.

As at the date hereof, the Board comprises three executive Directors, namely Mr. CHEN Chang, Ms. CHEN Zhao Nian and Ms. CHEN Zhao Hua; and three independent non-executive Directors, namely Mr. CHEN Ping, Mr. TIAN Xiao Ren and Mr. AU YEUNG Kwong Wah.

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