Huadian Fuxin Energy : (1) PROPOSED PRE-CONDITIONAL PRIVATISATION OF HUADIAN FUXIN BY FUJIAN HUADIAN FURUI BY WAY OF MERGER BY ABSORPTION OF HUADIAN FUXIN (2) PROPOSED WITHDRAWAL OF LISTING (3) NOTICE OF THE EXTRAORDINARY GENERAL MEETING AND (4) NOTICE OF THE H SHAREHOLDERS' CLASS MEETING

THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

If you have sold or transferred all your shares in the Company, you should at once hand this document and the accompanying forms of proxy to the purchaser(s) or the transferee(s), or to the bank, licensed securities dealer or registered institution in securities, or other agent through whom the sale or the transfer was effected for transmission to the purchaser(s) or the transferee(s).

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

Fujian Huadian Furui Energy

Development Co., Ltd.*

(1) PROPOSED PRE-CONDITIONAL PRIVATISATION OF

HUADIAN FUXIN BY FUJIAN HUADIAN FURUI

BY WAY OF MERGER BY ABSORPTION OF HUADIAN FUXIN

1. 1. PROPOSED WITHDRAWAL OF LISTING
2. NOTICE OF THE EXTRAORDINARY GENERAL MEETING AND
3. NOTICE OF THE H SHAREHOLDERS' CLASS MEETING

Financial adviser to the Offeror

Independent Financial Adviser to the Independent Board Committee

Capitalised terms used on this cover page shall have the same meanings as those defined in the section headed "Definitions" in this document.

A letter from the Board is set out on pages 7 to 21 of this document. A letter from the Independent Board Committee to the Independent H Shareholders is set out on pages 22 to 23 of this document. A letter from Somerley Capital Limited, the Independent Financial Adviser, containing its advice to the Independent Board Committee, is set out on pages 24 to 66 of this document.

The notices convening the EGM and the H Shareholders' Class Meeting to be held at Conference Room, 5/F, Huabin International Hotel Beijing, No.4 Xuanwumennei Street, Xicheng District, Beijing, the PRC on Wednesday, 16 September 2020 (i) in relation to the EGM, 9:00 a.m., and (ii) in relation to the H Shareholders' Class Meeting, 9:00 a.m., or immediately following the conclusion of the EGM or any adjournment thereof are contained in this document. Shareholders are advised to read the notices and to complete and return the enclosed forms of proxy for use at the EGM and the H Shareholders' Class Meeting in accordance with the instructions printed thereon. If you intend to attend the EGM and H Shareholders' Class Meeting, please complete and return the appropriate reply slip in accordance with the instructions printed thereon as soon as possible and in any event by no later than Tuesday, 8 September 2020.

Whether or not you are able to attend and vote at the EGM and H Shareholders' Class Meeting or any adjournment thereof in person, you are requested to complete and return the accompanying forms of proxy in accordance with the instructions printed thereon and return them to the H Share registrar of the Company, Computershare Hong Kong Investor Services Limited (for holders of H Shares) or the Board office of the Company in the PRC (for holders of Domestic Shares), together with the power of attorney or other authority (if any) under which it is signed (or a notarially certified copy thereof), as soon as possible and in any event not later than 24 hours before the time appointed for holding the EGM and the H Shareholders' Class Meeting or any adjournment thereof (as the case may be).

Completion and return of the forms of proxy will not preclude you from attending and voting in person at the EGM, the H Shareholders' Class Meeting or any adjournment thereof should you so wish and in such event, the forms of proxy shall be deemed to be revoked.

This document is jointly issued by the Offeror and the Company.

• For identification purpose only

26 August 2020

- i -

EXPECTED TIMETABLE

The expected timetable set out below is indicative only and may be subject to change.

Further announcement(s) will be made as and when appropriate.

Unless otherwise expressly stated, references to times and dates in this document are to

Hong Kong times and dates.

Latest date for receiving reply slips for the EGM

and the H Shareholders' Class Meeting . . . . . . . . . . . . . . . . . .Tuesday, 8 September 2020

Latest time for lodging transfers of H Shares in order to be entitled to attend and vote at the EGM and

the H Shareholders' Class Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4:30 p.m. on Thursday, 10 September 2020

Closure of registers for transfers of Shares for determination of the Shareholders entitled to attend and vote at the EGM and

the H Shareholders' Class Meeting . . . . . . . . . . . . . . . . . . . .Friday, 11 September 2020 to Wednesday, 16 September 2020 (both dates inclusive)

Latest time for lodging proxy forms

in respect of the EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9:00 a.m. on Tuesday, 15 September 2020

Latest time for lodging proxy forms

in respect of the H Shareholders' Class Meeting . . . . . . . . . . . . . . . . . . . . . . .9:00 a.m. on Tuesday, 15 September 2020

Record date for Shareholders for the EGM and the H Shareholders for

the H Shareholders' Class Meeting . . . . . . . . . . . . . . . . . .Wednesday, 16 September 2020

EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9:00 a.m. on Wednesday, 16 September 2020

H Shareholders' Class Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9:00 a.m. on Wednesday, 16 September 2020, or immediately following the conclusion of the EGM or any adjournment thereof on

Wednesday, 16 September 2020

- ii -

EXPECTED TIMETABLE

Announcement of the results of the EGM

and the H Shareholders' Class Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . .by 7:00 p.m. on Wednesday, 16 September 2020

Expected date for all Conditions to

effectiveness to be satisfied . . . . . . . . . . . . . . . . . . . . . . . .Wednesday, 16 September 2020

Announcement of the satisfaction of all Conditions to effectiveness, last day for dealings in H Shares and expected date of

withdrawal of listing of H Shares . . . . . . . . . . . . . . . . . . .Wednesday, 16 September 2020

Resumption of registers for transfer of Shares . . . . . . . . . . . . .Thursday, 17 September 2020

Each of the Offeror and the Company notifies its creditors and makes a public announcement

of the Merger pursuant to the PRC Company Law . . . . . . . . . . . . . . . . . . .Within 10 days (for the notice to creditors) and 30 days (for the announcement) following the EGM and the H Shareholders' Class Meeting

Last day for dealings in H Shares . . . . . . . . . . . . . . . . . . . . . . .Monday, 21 September 2020

Latest time for lodging transfers of H Shares

in order to be entitled to receive the Cancellation Price . . . . . . . . 4:30 p.m. on Thursday, 24 September 2020

Closure of registers of members of the Company

(until the Company's deregistration occurs) . . . . . . . . . . .From Friday, 25 September 2020

Expected date and time of withdrawal of

listing of H Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9:00 a.m. on Tuesday, 29 September 2020

Announcement that all the Conditions to

implementation are satisfied (or waived, as applicable) . . . . .Tuesday, 29 September 2020

Latest date for payment of the Cancellation Price . . . . . . . . . . . . .Monday, 12 October 2020

- iii -

EXPECTED TIMETABLE

End of the period during which creditors may request the Offeror and the Company to pay off their

respective indebtedness or provide guarantees. . . . . . . . . . . . . . . . . . . . . . .Within 30 days after the receipt of notice by creditors or 45 days after the issue of announcement

to creditors (whichever is the latest)

The Offeror and the Company will jointly publish announcement(s) when or as soon as reasonably practicable after all Conditions to effectiveness of the Merger Agreement have been satisfied and the Conditions to implementation of the Merger have been satisfied or waived, as appropriate.

The Shareholders and potential investors in the securities of the Company should be aware that the Merger is subject to the conditions set out in this document being satisfied or waived, as applicable, and neither the Offeror nor the Company provides any assurance that any or all of the conditions can be satisfied, and thus the Merger Agreement may or may not become effective or, if effective, may or may not be implemented or completed. The Shareholders and potential investors in the securities of the Company should therefore exercise caution when dealing in the Shares. Persons who are in doubt as to the action they should take should consult their stockbroker, bank manager, solicitor or other professional advisers.

- iv -

IMPORTANT NOTICE

NOTICE TO U.S. HOLDERS OF SHARES

IMPORTANT: You must read the following disclaimer before continuing. The following disclaimer applies to this document following this disclaimer page and you are therefore advised to read this disclaimer page carefully before accessing, reading or making any other use of this document. In, and as a result of, accessing this document you agree, and you are deemed to agree, to be bound by the following terms and conditions.

The Merger will involve the cancellation of the securities of a company incorporated in the PRC with limited liability by means of a merger by absorption provided for under the laws of the PRC. The Merger is subject to Hong Kong disclosure requirements, which are different from those of the United States. The financial information included in this document has been prepared in accordance with International Financial Reporting Standards and thus may not be comparable to financial information of U.S. companies or companies whose financial statements are prepared in accordance with generally accepted accounting principles in the United States.

The receipt of cash pursuant to the Merger by a U.S. holder of Shares as consideration for the cancellation of its Shares pursuant to the Merger may be a taxable transaction for U.S. federal income tax purposes and under applicable state and local, as well as foreign and other tax laws. Each holder of Shares is urged to consult his/her/its independent professional advisor immediately regarding the tax consequences of the implementation of the Merger.

U.S. holders of Shares may encounter difficulty enforcing their rights and any claims arising out of the U.S. federal securities laws, as the Offeror and the Company are located in a country outside the United States and some or all of their respective officers and directors may be residents of a country other than the United States. U.S. holders of Shares may not be able to sue a non-U.S. company or its officers or directors in a non-U.S. court for violations of the U.S. securities laws. Further, U.S. holders of Shares may encounter difficulty compelling a non-U.S. company and its affiliates to subject themselves to a U.S. court's judgment.

In accordance with normal Hong Kong practice, the Offeror hereby discloses that it or its affiliates, or its nominees, or their respective brokers (acting as agents) may from time to time make certain purchases of, or arrangements to purchase, Shares outside of the United States, before or during the Offer Period. In accordance with the Takeovers Code and Rule 14e-5(b) of the U.S. Exchange Act, CICC and its affiliates may continue to act as exempt principal traders in the Shares on the Stock Exchange. These purchases may occur either in the open market at prevailing prices or in private transactions at negotiated prices, provided that any such purchase or arrangement complies with applicable law, including but not limited to the Takeovers Code, and is made outside the United States. Any information about such purchases will be reported to the SFC in accordance with the requirements of the Takeovers Code and, to the extent made public by the SFC, will be available on the website of the SFC at http://www.sfc.hk.

- v -

ACTIONS TO BE TAKEN

Whether or not they are able to attend the EGM or the H Shareholders' Class Meeting (where applicable) in person, the Shareholders are strongly urged to complete and sign the enclosed form of proxy in respect of the EGM in accordance with the instructions printed thereon and the H Shareholders are strongly urged to complete and sign the enclosed form of proxy in respect of the H Shareholders' Class Meeting in accordance with the instructions printed thereon as soon as possible, but in any case not later than the following respective times:

1. in the case of the form of proxy for use at the EGM, the Shareholders are requested to deposit such form of proxy no later than 9:00 a.m. on Tuesday, 15 September 2020 at the Company's registrar for H Shares (in respect of H Shareholders) at 17M Floor, Hopewell Centre, 183 Queen's Road East, Wan Chai, Hong Kong or at the Board office of the Company (in respect of Domestic Shareholders) at 9/F, Building B, Huadian Plaza, No. 2 Xuanwumennei Street, Xicheng District, Beijing, the PRC; and
2. in the case of the form of proxy for use at the H Shareholders' Class Meeting, the H Shareholders are requested to deposit such form of proxy no later than 9:00 a.m. on Tuesday, 15 September 2020 at the Company's registrar for H Shares at 17M Floor, Hopewell Centre, 183 Queen's Road East, Wan Chai, Hong Kong.

The completion and return of a form of proxy for any of the meetings will not preclude you from attending and voting in person at the relevant meetings or any adjournment thereof, should you so wish. In the event that you attend and vote at any of the meetings or any adjournment thereof after having deposited the relevant form of proxy, that form of proxy will be deemed to have been revoked.

If you are eligible and intend to attend the relevant meetings, please complete and return the relevant reply slips in accordance with the instructions printed thereon. Reply slips should be returned as soon as possible (but in any event not later than 8 days before the scheduled date for holding the relevant meetings or any adjournment thereof).

For the purpose of determining the entitlements of the Shareholders to attend and vote at the EGM and the H Shareholders to attend and vote at the H Shareholders' Class Meeting, the Company's registers of members will be closed from Friday, 11 September 2020 to Wednesday, 16 September 2020 (both dates inclusive). During such period, no transfer of Shares will be effected.

Only Shareholders whose names are on the Company's registers of members on Wednesday, 16 September 2020 are entitled to vote at the relevant meetings. Each Shareholder on the Company's registers of members on Wednesday, 16 September 2020 is entitled to cast one vote per Share in respect of the Merger in the EGM. Each H Shareholder on the Company's registers of members on Wednesday, 16 September 2020 is entitled to cast one vote per H Share in respect of the Merger in the H Shareholders' Class Meeting.

- vi -

ACTIONS TO BE TAKEN

An announcement will be made by the Company in relation to the result of EGM and the H Shareholders' Class Meeting. Further announcement(s) will be made before/after the satisfaction or waiver, as appropriate, of the Conditions to effectiveness of the Merger Agreement and Conditions to implementation of the Merger.

- vii -

DEFINITIONS

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

- 1 -

- 2 -

- 3 -

- 4 -

- 5 -

LETTER FROM THE BOARD

(a joint stock limited company incorporated in the People's Republic of China with limited liability)

PROPOSED PRE-CONDITIONAL PRIVATISATION OF

HUADIAN FUXIN BY THE OFFEROR

BY WAY OF MERGER OF ABSORPTION OF HUADIAN FUXIN

1. INTRODUCTION

On 1 June 2020, the Offeror and the Company published the Joint Announcement to announce that the two companies have entered into the Merger Agreement with respect to the Merger. After the Merger, the Company will be merged into and absorbed by the Offeror in accordance with the PRC Company Law and other applicable PRC Laws.

2. PROPOSED MERGER

Pursuant to the Merger Agreement, conditional upon, among others, the fulfilment (or waiver, as applicable) of the Pre-Condition and the Conditions set out in the section headed "3. PRINCIPAL TERMS OF THE MERGER AGREEMENT" below, the Offeror will pay the Cancellation Price in the amount of:

1. HK$2.50 per H Share to the H Shareholders; and

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LETTER FROM THE BOARD

1. RMB2.29995 per Domestic Share, which is equivalent of the Cancellation Price of

each H Share based on the Exchange Rate, to the Domestic Shareholders (other than Huadian and Huadian Engineering, being the parent of the Offeror and one of the parent's subsidiaries, respectively, as described in the section headed "3. PRINCIPAL TERMS OF THE MERGER AGREEMENT" below).

The amount of aggregate Cancellation Price required to be paid by the Offeror to cancel

1. the H Shares held by H Shareholders and (ii) the Domestic Shares held by the Domestic Shareholders (other than Huadian and Huadian Engineering as described in the section headed "3. PRINCIPAL TERMS OF THE MERGER AGREEMENT" below) is HK$6,425.56 million and RMB1,725.18 million respectively.

After the completion of the Merger, the Offeror will assume all assets, liabilities, interests, businesses, employees, contracts and all other rights and obligations of the Company and the Company will be eventually deregistered.

3. PRINCIPAL TERMS OF THE MERGER AGREEMENT

The principal terms and conditions of the Merger Agreement include:

Overview of the Subject to the terms and conditions of the Merger Agreement, the

MergerMerger will be implemented by the Offeror merging the Company by way of merger by absorption.

After the completion of the Merger, the Offeror will assume all assets, liabilities, interests, businesses, employees, contracts and all other rights and obligations of the Company and the Company will be eventually deregistered.

Consideration Pursuant to the Merger Agreement, conditional upon, among others, the fulfilment (or waiver, as applicable) of the Pre- Condition, the Conditions to effectiveness and the Conditions to implementation set out in the paragraphs headed "Pre-Conditionto the Merger Agreement becoming effective", "Conditions to effectiveness" and "Conditions to implementation" below, the Offeror will pay the Cancellation Price in the amount of

(a) HK$2.50 per H Share to the H Shareholders and

1. RMB2.29995 per Domestic Share, which is equivalent of the Cancellation Price of each H Share based on the Exchange Rate, to the Domestic Shareholders (other than Huadian and Huadian Engineering, being the parent of the Offeror and one of the parent's subsidiaries, as to which see below).

- 8 -

LETTER FROM THE BOARD

Pursuant to the Merger Agreement and subject to the same conditions as stated above, in consideration for the cancellation of their Domestic Shares:

(1) Huadian will be issued with RMB2.29995 registered capital

- 9 -

LETTER FROM THE BOARD

1. the passing of special resolution(s) by way of poll approving

the Merger under the Merger Agreement at the H Shareholders' Class Meeting to be convened for this purpose, provided that: (a) approval is given by at least 75% of the votes attaching to the H Shares held by the Independent H Shareholders that are cast either in person or by proxy; and (b) the number of votes cast against the resolution is not more than 10% of the votes attaching to all H Shares held by the Independent H Shareholders.

If the above Conditions to effectiveness are not satisfied by the Long-stop Date, the Merger Agreement may be terminated by either party. Please also refer to the paragraph headed 'Termination' in this section.

governmental authority or any judgment, decision or adjudication of any court on the Delisting Date which restricts, prohibits or terminates the Merger.

The Company shall be entitled to waive Condition (1) above and the Offeror shall be entitled to waive Condition (2) above. Condition (3) above is not capable of being waived. If the above Conditions to implementation are not satisfied or if applicable, waived, by the Long-stop Date, the Merger Agreement will be automatically terminated.

- 10 -

- 11 -

LETTER FROM THE BOARD

The exercise of its right by a Dissenting Shareholder is subject to the following criteria:

1. such Dissenting Shareholder having validly voted against the resolutions in respect of the Merger at the EGM and (if applicable) the H Shareholders' Class Meeting;
2. such Dissenting Shareholder having been validly registered as a shareholder on the share register of the Company since

the record date for the EGM and (if applicable) the H Shareholders' Class Meeting, and having held such Share(s) in respect of which it intends to exercise its right until the Exercise Date; and

(3) such Dissenting Shareholder having exercised its right

- 12 -

LETTER FROM THE BOARD

1. 1. the Conditions to effectiveness not having been satisfied on or before the Long-stop Date; or
   2. the Conditions to implementation not having been satisfied or if applicable waived on or before the Long-stop Date;
2. by the Offeror, if the Company commits a material breach of the representations, warranties and undertakings under the Merger Agreement or any other agreement related to the Merger Agreement which has a material impact on the Merger and such breach is not remedied by the Company within 30 days following written notice from the Offeror; or
3. by the Company, if the Offeror commits a material breach of the representations, warranties and undertakings under the Merger Agreement or any other agreement related to the Merger Agreement which has a material impact on the Merger and such breach is not remedied by the Offeror within 30 days following written notice from the Company.

4. CANCELLATION PRICE

1. Comparison of value

The Cancellation Price is HK$2.50 per H Share and RMB2.29995 per Domestic Share (equivalent to the Cancellation Price of HK$2.50 per H Share based on the Exchange Rate).

The Cancellation Price per H Share represents:

1. a premium of approximately 65.56% over the closing price of HK$1.51 per H Share on the Stock Exchange on the Last Trading Date;
2. a premium of approximately 82.22% over the average closing price of HK$1.37 per H Share based on the daily closing prices of H Shares as quoted on the Stock Exchange for the five consecutive trading days immediately prior to and including the Last Trading Date;
3. a premium of approximately 85.87% over the average closing price of HK$1.35 per H Share based on the daily closing prices of H Shares as quoted on the Stock Exchange for the ten consecutive trading days immediately prior to and including the Last Trading Date;

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LETTER FROM THE BOARD

1. a premium of approximately 87.92% over the average closing price of HK$1.33 per H Share based on the daily closing prices of H Shares as quoted on the Stock Exchange for the 30 trading days immediately prior to and including the Last Trading Date;
2. a premium of approximately 89.27% over the average closing price of HK$1.32 per H Share based on the daily closing prices of H Shares as quoted on the Stock Exchange for the 60 trading days immediately prior to and including the Last Trading Date;
3. a premium of approximately 85.34% over the average closing price of HK$1.35 per H Share based on the average closing price of H Shares on the Stock Exchange for the 90 trading days immediately prior to and including the Last Trading Date;
4. a premium of approximately 2.04% over the closing price of HK$2.45 per H Share on the Stock Exchange on the Latest Practicable Date; and
5. a discount of approximately 14.03% to the Company's net assets value (excluding the perpetual medium-term notes and renewable corporate bonds) of approximately RMB2.68 (equivalent to approximately HK$2.91) per Share as of 31 December 2019 as set out in the annual results of the Company for the year ended 31 December 2019.

For the purpose of this document, unless the context requires otherwise, amounts denominated in RMB have been translated into HK$ at an exchange rate of HK$1: RMB0.91998 which is the parity rate of RMB to Hong Kong Dollar as at the date of the Joint Announcement.

The Cancellation Price has been determined on a commercial basis after taking into account, among other things, the prices of the Shares traded on the Stock Exchange and with reference to other privatisation transactions in Hong Kong in recent years.

The Cancellation Price will not be increased and the Offeror does not reserve the right to do so.

1. Highest and lowest prices

During the Relevant Period, the highest closing price of the H Shares as quoted on the Stock Exchange was HK$2.49 on 18 June 2020, 26 June 2020 and 29 June 2020 and the lowest closing price of the H Shares as quoted on the Stock Exchange was HK$1.19 on 24 March 2020.

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LETTER FROM THE BOARD

1. Information on the Company

The Company, a state-owned enterprise, is a joint stock company incorporated in the PRC with limited liability. The Group is primarily engaged in the development, management and operation of hydropower projects and coal-fired power plants in Fujian province and wind power and other clean energy projects throughout China.

The Company is owned directly and indirectly as to approximately 62.76% by Huadian, among which, approximately 59.57% is held by Huadian directly and approximately 2.25% by Wujiang Hydropower and approximately 0.94% by Huadian Engineering, both being subsidiaries of Huadian.

Set out below is the financial information of the Group (as extracted from the published financial statements of the Company prepared in accordance with International Financial Reporting Standards) for the two financial years ended 31 December 2018 and 2019.

1. Shareholding in the Company

As at the Latest Practicable Date, the relevant securities of the Company in issue comprised 8,407,961,520 Shares, of which there were 2,570,223,120 H Shares and 5,837,738,400 Domestic Shares.

- 17 -

LETTER FROM THE BOARD

Set out below is the shareholding structure of the Company as at the Latest Practicable

1. The Shares held by Huadian, Huadian Engineering, Wujiang Hydropower and other Domestic Shareholders are Domestic Shares.
2. The percentages in the diagram above are expressed as percentages of the total issued Shares of the Company.

As at the Latest Practicable Date, the Offeror did not own any Share. Huadian, which directly and beneficially owns the entire equity interest of the Offeror, owns 5,008,785,336 Domestic Shares directly in the Company, 78,859,501 Domestic Shares through Huadian Engineering and 189,262,801 Domestic Shares through Wujiang Hydropower, representing approximately 59.57%, 0.94% and 2.25% of the voting interests in the Company respectively, and together representing approximately 62.76% of the voting interests in the Company.

As at the Latest Practicable Date, there were no outstanding options, warrants or convertible securities issued by the Company.

8. ARRANGEMENTS FOR IMPLEMENTATION OF THE MERGER AGREEMENT

The Pre-Condition has been fulfilled. Upon satisfaction of all the Conditions to effectiveness, the Company does not intend to retain its listing on the Stock Exchange and will apply to the Stock Exchange for voluntary withdrawal of the listing of the H Shares from the Stock Exchange in accordance with Rule 6.15(2) of the Listing Rules.

- 18 -

LETTER FROM THE BOARD

The Company will issue separate announcement(s) notifying H Shareholders of the proposed withdrawal of listing and the exact dates and relevant arrangements for the last day for dealing in H Shares on the Stock Exchange as well as when the formal delisting of the H Shares will become effective.

The listing of the H Shares on the Stock Exchange will not be withdrawn if the Merger is not approved or lapses or does not become unconditional for any reason.

9. INDEPENDENT BOARD COMMITTEE AND INDEPENDENT FINANCIAL ADVISER

The Board has established the Independent Board Committee, consisting of all of the non-executive Directors (except Mr. TAO Yunpeng who is nominated by Huadian), being Mr. SHI Chongguang and Mr. WANG Bangyi and all of the independent non-executive Directors, being Mr. ZHANG Bai, Mr. TAO Zhigang and Mr. WU Yiqiang. Such committee will advise the Independent H Shareholders as to: (a) whether the terms of the Merger are fair and reasonable for the purpose of the Takeovers Code; and (b) whether to vote in favour of the Merger at the EGM and the H Shareholders' Class Meeting.

The Independent Board Committee has appointed Somerley Capital Limited as its Independent Financial Adviser to provide advice to the Independent Board Committee in respect of the Merger. For the opinions and advice of the Independent Financial Adviser, please refer to section headed "Letter from the Independent Financial Adviser" in this document.

10. EGM AND H SHAREHOLDERS' CLASS MEETING

The Company will convene the EGM and the H Shareholders' Class Meeting for the Shareholders to consider and, if thought fit, approve matters including the Merger.

In compliance with Rule 2.10 of the Takeovers Code, which is applicable to the Merger, the Merger Agreement and the Merger are conditional on (i) the approval by way of poll by at least 75% of the votes attaching to the H Shares held by the Independent H Shareholders that are cast either in person or by proxy at the H Shareholders' Class Meeting; and (ii) the number of votes cast against the resolution at the H Shareholders' Class Meeting is not more than 10% of the votes attaching to all the H Shares held by the Independent H Shareholders.

The H Shareholders who have been registered as holders of H Shares on the register of members of the Company kept by the registrar of H Shares, Computershare Hong Kong Investor Services Limited, on Wednesday, 16 September 2020 and who have completed all necessary registration procedures will be entitled to attend the EGM and the H Shareholders' Class Meeting.

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LETTER FROM THE BOARD

1. Suspension of registration of Share transfers

The register of members of the Company will be closed from Friday, 11 September 2020 to Wednesday, 16 September 2020, during which no registration of transfers of Shares will be processed. If applicable, the Shareholders and the H Shareholders intending to attend the EGM and the H Shareholders' Class Meeting respectively must lodge their respective transfer documents and relevant share certificates with the Company's H Share registrar, Computershare Hong Kong Investor Services Limited, at Shops 1712-1716, 17/F, Hopewell Centre, 183 Queen's Road East, Wanchai, Hong Kong (for H Shareholders) or the Board office of the Company at 9/F, Building B, Huadian Plaza, No. 2 Xuanwumennei Street, Xicheng District, Beijing, the PRC (for Domestic Shareholders) no later than 4:30 p.m. on Thursday, 10 September 2020.

1. Proxy forms and reply slips

Whether or not you intend to attend the EGM or the H Shareholders' Class Meeting, you are strongly urged to complete and return the proxy forms in accordance with the instructions printed thereon. The proxy forms should be returned as soon as possible (but in any event not less than 24 hours before the appointed time for holding the relevant meeting or any adjournment thereof). After completion and return of the proxy forms, you may still attend and vote at the relevant meetings should you so wish.

If you are eligible and intend to attend the relevant meetings, please complete and return the relevant reply slips in accordance with the instructions printed thereon. Reply slips should be returned as soon as possible (but in any event not later than 8 days before the scheduled date for holding the relevant meetings or any adjournment thereof).

1. Voting at the EGM and the H Shareholders' Class Meeting

Pursuant to Rule 13.39(4) of the Listing Rules, all resolutions will be passed by way of poll at the EGM and the H Shareholders' Class Meeting.

11. TAXATION

1. Non-taxadvice

You should consult with your professional adviser to understand the possible tax implications of the Merger or the exercise of the Dissenting Shareholders' rights. None of the Company, the Offeror, CICC or the Independent Financial Adviser, nor their respective directors or any person participating in the Merger, assume any liability in respect of any tax incurred or other implication of any exercise of the Dissenting Shareholders' rights.

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LETTER FROM THE BOARD

1. Hong Kong stamp duty

When the Cancellation Price is paid, the corresponding H Shares will be cancelled. Therefore, the implementation of the Merger does not involve the sale and purchase of Hong Kong stock, and in this respect only, no stamp duty will be payable pursuant to the Stamp Duty Ordinance, Chapter 117 of the Laws of Hong Kong.

For the Dissenting Shareholders who exercise their right to require acquisition of their H Shares, Hong Kong stamp duty is payable at the rate of 0.1% of the consideration by each of the seller and the buyer. The stamp duty payable will be deducted from the cash received by the relevant Dissenting Shareholders who exercise such right.

12. RECOMMENDATION OF THE BOARD

The Board (other than members of the Independent Board Committee, whose views are given in the section headed "LETTER FROM THE INDEPENDENT BOARD COMMITTEE" in this document) is of the view that the terms of the Merger Agreement and the proposed Merger are fair and reasonable and in the interests of the Company and the Shareholders as a whole. Having considered the terms of the Merger Agreement and taken into account the advice from the Independent Financial Adviser, the Independent Board Committee is of the view that the terms of the Merger Agreement and the proposed Merger are fair and reasonable so far as the Independent H Shareholders are concerned. Therefore, the Board recommends that the Shareholders vote in favour of the resolutions in relation to the Merger at the EGM and (if applicable) the H Shareholders' Class Meeting.

13. OTHER INFORMATION

Your attention is drawn to other information set out in the appendices to this document.

By order of the Board

Huadian Fuxin Energy Corporation Limited

Huang Shaoxiong

Chairman of the Board

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

(a joint stock limited company incorporated in the People's Republic of China with limited liability)

(Stock code: 00816)

26 August 2020

To the Shareholders

Dear Sir or Madam,

1. PROPOSED PRE-CONDITIONAL PRIVATISATION OF HUADIAN FUXIN BY FUJIAN HUADIAN FURUI

BY WAY OF MERGER BY ABSORPTION OF HUADIAN FUXIN

1. 1. PROPOSED WITHDRAWAL OF LISTING
2. NOTICE OF THE EXTRAORDINARY GENERAL MEETING AND
3. NOTICE OF THE H SHAREHOLDERS' CLASS MEETING

INTRODUCTION

We refer to the composite document dated 26 August 2020 jointly issued by the Company and the Offeror (the "Composite Document"), of which this letter forms part. Unless the context otherwise requires, terms defined in the Composite Document shall have the same meaning when used in this letter.

We have been appointed by the Board to form the Independent Board Committee to consider and to advise the Independent H Shareholders as to whether the terms of the Merger are, or are not, fair and reasonable as to acceptance and voting.

Somerley Capital Limited has been appointed as the Independent Financial Adviser to advise us as to whether or not the terms of the Merger are fair and reasonable so far as the Shareholders are concerned. Details of its advice and the principal factors taken into consideration in arriving at its recommendation are set out in the letter from the Independent Financial Adviser on pages 24 to 66 of the Composite Document. We also wish to draw your attention to, and advise you to read, the letter from the Board on pages 7 to 21 of the Composite Document, the letter from Independent Financial Adviser on pages 24 to 66 of the Composite Document and the appendices to the Composite Document.

We, being the members of the Independent Board Committee, have declared that, as disclosed in Appendix II to the Composite Document, we are independent and do not have any conflict of interest in respect of the Merger and are therefore able to consider the terms of the Merger and to make recommendations to the Independent H Shareholders.

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

RECOMMENDATION

Having considered the principal factors and reasons considered by, and the advice of the Independent Financial Adviser as set out in its letter, we concur with the view of the Independent Financial Adviser and consider the terms of Merger to be fair and reasonable so far as the Independent H Shareholders are concerned.

Accordingly, we concur with the recommendation of the Independent Financial Adviser, and would recommend the Independent H Shareholders to accept and vote in favour of the Merger.

Notwithstanding our views and recommendation in respect of the terms of the Merger, the Shareholders are strongly advised that their decision to realise or to hold their investment in the Company depends on their own individual circumstances and investment objectives. If in doubt, the Shareholders should consult their own professional advisers for professional advice.

Yours faithfully

For and on behalf of

THE INDEPENDENT BOARD COMMITTEE

Mr. WU Yiqiang

Independent Non-Executive Director

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Set out below is the letter of advice from Somerley Capital Limited, to the Independent Board Committee, which has been prepared for the purpose of inclusion in this document.

SOMERLEY CAPITAL LIMITED

20th Floor

China Building

29 Queen's Road Central

Hong Kong

26 August 2020

To: the Independent Board Committee

Dear Sirs,

1. 1. PROPOSED PRE-CONDITIONAL PRIVATISATION OF HUADIAN FUXIN BY FUJIAN HUADIAN FURUI BY WAY OF
      MERGER BY ABSORPTION OF HUADIAN FUXIN; AND
   2. 1. PROPOSED WITHDRAWAL OF LISTING
2. INTRODUCTION
   We refer to our appointment to advise the Independent Board Committee in connection

with the Merger. Details of the Merger Agreement and the Merger are set out in the composite document jointly issued by the Offeror and the Company (the "Composite Document") dated 26 August 2020, of which this letter forms part. Capitalised terms used in this letter shall have the same meanings as those defined in the Composite Document unless the context otherwise requires.

On 1 June 2020, the Offeror and the Company entered into the Merger Agreement pursuant to which the Offeror and the Company will implement the Merger subject to the terms and conditions of the Merger Agreement, including the Pre-Condition and the Conditions. After the Merger, the Company will be merged into and absorbed by the Offeror in accordance with the PRC Company Law and other applicable PRC Laws.

The Independent Board Committee comprising all the non-executive Directors (except Mr. TAO Yunpeng who is nominated by Huadian), being Mr. SHI Chongguang and Mr. WANG Bangyi and all of the independent non-executive Directors, being Mr. ZHANG Bai, Mr. TAO Zhigang and Mr. WU Yiqiang, has been established to advise the Independent H Shareholders as to: (a) whether the terms of the Merger are fair and reasonable for the purpose of the Takeovers Code; and (b) whether to vote in favour of the Merger at the EGM and the H Shareholders' Class Meeting.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

We are not associated with the Company, the Offeror, Huadian or their respective substantial shareholders or any party acting, or presumed to be acting, in concert with any of them and, accordingly, are considered eligible to give independent advice on the Merger. Apart from normal professional fees paid or payable to us in connection with this appointment, no arrangement exists whereby we will receive any fees or benefits from the Company, the Offeror and Huadian, their respective substantial shareholders or any party acting, or presumed to be acting, in concert with any of them.

In formulating our opinion, we have reviewed, among other things, (i) the Composite Document; (ii) the Merger Agreement; (iii) the annual reports of the Company for the years ended 31 December 2017, 2018 and 2019; and (iv) the material change statement set out in Appendix I to the Composite Document, together with the future prospects of the Group, which we have discussed with the management of the Group (the "Management").

We have relied on the information and facts supplied by the Company and the opinions expressed by the Directors, and have assumed that the information and facts provided and opinions expressed to us are true, accurate and complete in all material aspects as at the Latest Practicable Date. We have further assumed that all representations contained or referred to in the Composite Document were true at the time they were made and at the date of the Composite Document and will continue to be true until the date of the EGM and the H Shareholders' Class Meeting. Shareholders will be informed as soon as reasonably practicable if we become aware of any material change to such representations during the Offer Period. We have sought and received confirmation from the Directors that no material facts have been omitted from the information supplied and opinions expressed to us. We consider that the information we have received is sufficient for us to reach our opinion and give the advice and recommendation set out in this letter. We have no reason to believe that any material information has been omitted or withheld, or to doubt the truth or accuracy of the information provided. We have, however, not conducted any independent investigation into the business and affairs of the Group, the Offeror, Huadian or any of their respective associates or any party acting, or presumed to be acting, in concert with any of them, nor have we carried out any independent verification of the information supplied.

We have not considered the tax and regulatory implications on the Independent Shareholders of acceptances of the Merger since these are particular to their individual circumstances. In particular, the Independent Shareholders who are overseas residents or subject to overseas taxation or to Hong Kong taxation on security dealings should consider their own tax position and, if in any doubt, should consult their own professional advisers.

For the purpose of illustration only and unless otherwise stated, amounts denominated in RMB in this letter have been translated into HK$ at the rate of RMB1.00 = approximately HK$1.0870 (which is equivalent to the exchange rate adopted for the Cancellation Price for the H Shares and the Domestic Shares).

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

1. PRINCIPAL TERMS OF THE MERGER AGREEMENT

The proposed Merger will be implemented by the Offeror and the Company pursuant to the terms and conditions of the Merger Agreement, the major terms of which are set out as follows:

1. Ministry of Commerce of the PRC; and

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

1. the State Administration of Foreign Exchange of the PRC, or their respective local authorities, and such other applicable governmental approvals in respect of the Merger having been obtained or completed (collectively, the "Pre-Condition")

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The exercise of its right by a Dissenting Shareholder is subject to the following criteria:

1. such Dissenting Shareholder having validly voted against the resolutions in respect of the Merger at the EGM and (if applicable) the H Shareholders' Class Meeting;
2. such Dissenting Shareholder having been validly registered as a shareholder on the share register of the Company since the record date for the EGM and (if applicable) the H Shareholders' Class Meeting, and having held such Share(s) in respect of which it intends to exercise its right until the Exercise Date; and
3. such Dissenting Shareholder having exercised its right during the Declaration Period.

A Shareholder is not entitled to exercise its right in respect of such Share(s) held by it if:-

1. such Shareholder has undertaken to the Company to waive its right;
2. such Shareholder is prohibited from exercising its right in accordance with applicable laws; or
3. any Share held by such Shareholder is subject to pledge, other third-party rights or judicial moratorium, without having legally obtained written consent or approval obtained from the relevant pledgee, third party or competent authority.

Details of the terms and conditions of the Merger Agreement are set out in the letter from the Board.

As at the Latest Practicable Date, the Pre-condition had been fulfilled. Save as disclosed above, none of the Conditions have been fulfilled or waived (as applicable) as at the Latest Practicable Date. The Conditions shall be fulfilled or waived (as applicable) on or before the Long-stop Date, being 1 June 2021, otherwise the Merger will lapse.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The Independent H Shareholders should note that there is no administrative guidance on the substantive as well as procedural rules as to how the "fair price" will be determined under the PRC Laws. Thus, no assurance can be given as to (i) the time required for the process to take; (ii) any favourable results to be granted to the Dissenting H Shareholders; and (iii) the cost may be incurred by the Dissenting H Shareholders in such process for determining the "fair price".

For the avoidance of doubt, if the Merger does not proceed as a result of the Conditions not being fulfilled in full or waived (if applicable) or the Merger Agreement being terminated, the Dissenting H Shareholders (if any) shall not be entitled to exercise their right as described above.

III. PRINCIPAL FACTORS AND REASONS CONSIDERED

In formulating our opinion and recommendation with regard to the Merger, we have taken into account the following principal factors and reasons:

1. Background information of the Group

The Company, a state-owned enterprise, is a joint stock company incorporated in the PRC with limited liability. The Group possesses a diversified portfolio of power generation business covering wind power, photovoltaic, hydropower, coal-fired power, natural gas-fired (distributed) power, nuclear power, biomass power, etc. All coal-fired power and hydropower generating assets are located in Fujian, while wind and solar power and other new energy projects are distributed across 27 provinces, cities and autonomous regions in China and Europe. Set out below is a breakdown of revenue and profit for the year ended 31 December

2019 as extracted from the Company's annual report for the year ended 31 December 2019:

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Wind power business

As of 31 December 2019, the Group had consolidated wind power installed capacity of 8,035.2 MW. During the period from 1 January 2019 to 31 December 2019, the consolidated installed capacity of the Group's new wind power projects which had commenced operation was 91.7 MW. The gross wind power generation was 16,913,424.4 Megawatt hour ("MWh") and the average on-grid tariff (tax exclusive) was RMB419.59/MWh. In 2019, the average utilisation time of the wind power generation units of the Group was 2,099 hours. The Group has focused on improving the reliability and efficiency of wind power equipment and continued to carry out comprehensive improvement of generator sets and wind power sets with poor power generating performance. As a result, the utilisation ratio of wind turbines reached 98.81% in 2019. On the other hand, the Group actively developed wind power projects such as offshore wind power projects in Fuqing Haitan Strait, Fujian and in Yuhuan Zhejiang and the wind power external transmission projects in Inner Mongolia, Xinjiang, Shaanxi, Jilin.

Solar power business

As of 31 December 2019, the Group had consolidated solar power installed capacity of 1,214.7 MW. In 2019, the Group's total solar power output was 1,724,094.8 MWh, and the average on-grid tariff (tax exclusive) was RMB807.59/MWh. The average utilisation time of the solar power generation units was 1,419 hours.

Hydropower business

As of 31 December 2019, the Group had consolidated hydropower installed capacity of 2,607.9 MW, and had capacity under construction of 1,200 MW. In 2019, the gross hydropower generation of the Group was 9,461,387.0 MWh and the average on-grid tariff (tax exclusive) was RMB287.57/MWh. The Group has strived to enhance efficiency and actively carried out the optimization of watershed reservoir management with a view to improve the power generation efficiency of watershed power stations. The average annual utilisation time of the hydropower generation units was 3,631 hours in 2019.

Coal-fired power business

As at 31 December 2019, the Group had consolidated coal-fired power installed capacity of 3,600.0 MW, with one project under construction. In 2019, the gross coal-fired power generation of the Group was 16,032,179.8 MWh. The average utilisation time of the coal-fired power generation units was 4,453 hours. The average on-grid tariff (tax exclusive) was RMB343.96/MWh. The Group has strived to increase the blending proportion of high-quality and premium priced imported coal in order to achieve cost saving.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Natural gas-fired power (distributed) business and other business

As at 31 December 2019, the consolidated installed capacity put into operation of natural gas-fired power (distributed) projects of the Group amounted to 970.0 MW, with two projects under construction. In 2019, the Group put into operation of new natural gas-fired power (distributed) projects with an increase of 67.4 MW in its consolidated installed capacity.

As of 31 December 2019, the Group invested in two nuclear power projects which were under operation and held two biomass power projects with consolidated installed capacity of 25.3 MW.

Comment

The Company, listed in June 2012, has been engaging in development, management and operation of power projects in the PRC and one of a few clean power players listed on the Stock Exchange. In 2019, the clean power contributed 87% of the Group's total operating profit, out of which wind power is the largest contributor accounting for about 62% of the clean power's total operating profit. The traditional coal-fired power accounted for 13% of the Group's operating profit. The on-grid tariffs of the clean power (except for hydropower) are higher than that of coal-fired power and their profit margins (except for natural gas-fired power (distributed)) are significantly higher than that of coal-fired power. Coal and natural gas prices, which are subject to change from time to time, while on-grid tariffs could not timely and sufficiently adjust accordingly, are the key factors affecting the profit margins of the Group's coal-fired and natural gas-fired power. Therefore, the Group's profitability is dependent on the splits of the power generation between (i) wind, solar and hydro power and (ii) coal-fired and natural gas-fired power and coal and natural gas prices. The power generation of wind, solar and hydro power have been affected by natural operating environment such as hydrological, wind and sunlight conditions, while those of coal-fired and natural gas-fired power are highly dependent on demand for the electricity in the region where the Group's power generation units are located.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

2. Industry overview and prospects of the Group's businesses

PRC economy and electricity consumption

According to the statistics published by the National Bureau of Statistics of the PRC (中國國家統計局) and the annual electricity industry statistics reports published by the China Electricity Council (中國電力企業聯合會) ("CEC"), the PRC nominal gross domestic product ("GDP") increased from RMB68,886 billion to RMB99,087 billion and the PRC electricity consumption increased from 5,693 billion kilowatt-hours ("KWh") to 7,226 billion KWh in the past five years, representing compound annual growth rates of

9.5% and 6.1% respectively, details of which are shown in the following figures:

Source: the National Bureau of Statistics of the PRC (中國國家統計局) and CEC

As shown in the above figures, the PRC electricity consumption volume is closely related to the PRC economy. Both the PRC nominal GDP and the PRC electricity consumption have seen an increasing trend from 2015 to 2019. Furthermore, both the PRC nominal GDP and the PRC electricity consumption exhibited similar trends in terms of year-on-year growth rate. From 2015 to 2017, the PRC nominal GDP growth accelerated from 7.0% in 2015 to 11.5% in 2017, then it shrank from its peak in 2017 to 7.8% in 2019. Similarly, the PRC electricity consumption growth speeded up starting from 2016, reached its peak of 8.7% in 2018 and then slowed down to 4.5% in 2019.

The recent outbreak of COVID-19 has weakened the PRC's economic performance in first half of 2020. To prevent the spread of the outbreak and its possible subsequent waves, the PRC government has taken stringent measures such as city lockdowns and restrictions on unnecessary business activities. The business resumption took place in March 2020. According to CEC, the electricity consumption rebounded to a year-on-year increases of 4.6% in May 2020, 6.1% in June 2020 and 2.3% in July 2020, and the decline in electricity consumption compared to corresponding period of the previous year narrowed from 2.8% for the first 5 months of 2020 to 1.3% for the first 6 months of 2020 and further to 0.7% for the first 7 months of 2020.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

PRC power generation

Note: The thermal power includes coal-fired power, gas-fired power, fuel oil-fired power and biomass power, among which the coal-fired power generation accounts for more than 90% of the thermal power generation in the PRC.

As shown in the Figure 5, majority of the clean power generation has generally exhibited high growth with fluctuations in 2015-2019. Solar power generation was the highest growth segment. It achieved 68.1%-77.1% positive growth in 2015-2017 before it declined to 26.5% in 2019. The growth of wind power generation had been fluctuated in a relatively narrow range of 16.1%-29.8% in 2015-2018 before it slowed down to 10.9% in 2019. The nuclear power exhibited high positive growth during 2015-2016, with 28.7% in 2015 and 24.4% in 2016, and then its growth managed to stabilise at between 16.0% and 19.0% in the following three years. Both thermal power generation and hydropower generation demonstrated slow growth over the past five years.

As shown in the Figure 6, despite thermal power's contribution to the total power generation in the PRC has been decreasing, it remains the largest contributor to the power generation in the PRC accounting for 68.9% in 2019. The total contribution from clean energy including hydropower, nuclear power, wind power and solar power has been increasing gradually from 26.3% in 2015 to 31.1% in 2019.

Relevant government policies

It is reported that the clean energy industry in the PRC is a new and capital-intensiveindustry and the PRC government's support has played an important role in its increasing contribution in recent years. We have discussed with the Management on the relevant government policies. According to the Management and "Notice on Active Promotion of the Work on Grid Parity of Wind Power and Photovoltaic Power Generation without Subsidies" (關於積極推進風電、光伏發電無補貼平價上網有關工作的通知), "Notice on Regulating the Management for Planning Prioritised Power Generation and Purchase" (關 於規範優先發電優先購電計劃管理的通知) and "Notice on Matters relating to the 2020 Wind Power and Solar Power Construction Projects" (關於2020年風電、光伏發電項目建

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

industry and made efforts to encourage the clean energy enterprises to participate in the market competition without subsidies and manage their new power construction projects in a pragmatic manner. According to the Group's annual reports, it is noted that (i) it usually takes a relatively long time to settle the government subsidies in the form of tariff premium; and (ii) the on-grid tariffs of wind power and solar power decreased in the past three years in response to the states policies. Based on the current state policies, the on-grid tariffs of wind and solar power are likely to continue to be under pressure going forward. As advised by the Management, although renewable energy projects are facing the downward pressure on the tariff, the Group will continue to improve the efficiency of the equipment, take advantage of the decreasing construction costs of the new renewable energy projects and strengthen its market competitiveness. We concur with the Management that the Group needs to take some measures including conducting control over costs in order to enhance its competitiveness in the market.

3. Reasons for and benefits of the Merger

The Company is owned directly and indirectly as to approximately 62.76% by Huadian, among which, approximately 59.57% is held by Huadian directly and approximately 2.25% by Wujiang Hydropower and approximately 0.94% by Huadian Engineering, both being subsidiaries of Huadian. As at the Latest Practicable Date, relevant securities of the Company in issue comprised 8,407,961,520 Shares, of which there were 2,570,223,120 H Shares and 5,837,738,400 Domestic Shares.

The following reasons for and benefits of the Merger have been extracted from the letter from the Board:

1. equity financing is of great significance for the Company to maintain its market competitiveness and achieve long-term strategic goals, while the Company has not been able to access capital through equity financing. Without external equity financing capability, the Company has lost the main advantage of a listing platform.
2. Huadian is of the view that the privatisation of the Company will help enhance the flexibility and efficiency of the Company's future business development, and facilitate the integration of the business of the Company and Huadian.
3. during the period from 1 December 2019 (i.e. six months preceding the commencement of the Offer Period) up to and including 27 May 2020 (i.e. the Last Trading Date), the highest closing price of the H Shares as quoted on the Stock Exchange was HK$1.63 on 7 January 2020 and the lowest closing price of the H Shares as quoted on the Stock Exchange was HK$1.19 on 24 March 2020. The average daily trading volume of the Shares for the 180 trading days up to and including the Last Trading Date represents only approximately 0.33% of the issued H Shares. Huadian is of the view that the Merger, if implemented, offers all

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Shareholders (excluding Huadian and Huadian Engineering) an excellent opportunity to realise their investments in the Company with relatively low liquidity at a cash consideration which represents an attractive premium over the market price of H Shares.

Comment

The limited usefulness of a listed platform to raise funds for financing business development has been a common reason for the recent privatisation proposals in Hong Kong, principally due to low liquidity of the shares and depressed valuations. Against this backdrop, listed companies (including the Company) are receiving proposals from their controlling shareholders at offer prices representing considerable premiums over the prevailing market prices in circumstances where the liquidity of the shares is generally low.

4. Analysis of the financial information of the Group

1. Income statement

Set out below are the summarised consolidated statements of profit or loss of the Group and segment results for each of the three years ended 31 December 2019 as extracted from the annual reports of the Company for the years ended 31 December 2017, 2018 and 2019.

Table 1: Summarised consolidated statements of profit or loss of the Group

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(i) Revenue

Set out below is a summary of the Group's segmental revenue (from external customers) for each of the three years ended 31 December 2019.

Table 2: Segmental revenue of the Group

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Table 3: Gross power generation and average on-grid tariff (tax exclusive) of business segments of the Group

As shown in Table 1, the Group recorded revenue of RMB16.8 billion, RMB18.3 billion and RMB19.8 billion for the three years ended 31 December 2019, representing a year-on-year increase of 9.0% and 7.9%, respectively. For 2018, the increase was attributable to the increase in electricity sales of the Group's coal-fired power, wind power and natural gas-fired power (distributed) segments. Amongst the three segments, coal-fired electricity sales grew by 24.9% as compared to 2017 and hydropower power sales dropped by 32.7% as a result of dried up water flow in Fujian province. For 2019, the increase was attributable to the increase in electricity sales of the Group's hydropower, natural gas-fired power (distributed) and solar power segments. Amongst the three segments, hydropower electricity sales rose by 59.7% as compared to 2018, resulting from the increase in accumulated water inflow of seven leading reservoirs in Fujian province by 132.8% to 27,386 million cubic meter in 2019.

Furthermore, we noted from Table 3 that amongst the clean energy segments, being wind power, solar power, hydropower and natural gas-fired power, solar power has the highest average on-grid tariff (tax exclusive) which is about 20% higher than that of natural gas-fired power, nearly two times higher than that of hydropower and almost one time higher than that of wind power. In addition, the average on-grid tariff of coal-fired power is higher than that of hydropower but less than those of wind power, solar power and natural gas-fired power. From 2017 to 2019, the on-grid tariff (tax exclusive) of the clean energy segments generally decreased while that of coal-fired power increased. As advised by the Management, the on-grid tariffs of different power segments are determined with reference to government's benchmark on-grid tariffs and market conditions.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

In respect of other operating expenses, the Group recorded an increase of 12.5% to RMB0.8 billion in 2018 as compared to 2017, which was principally due to the transaction fee for power generating rights of wind power segment, assets retirement of coal-fired power segment and the increase in material costs of wind power segment, despite the decrease in the expenses of hydro-resources fee and reservoir maintenance fund. The Group's other operating expenses, which include impairment loss on assets and provision on financial guarantees and loans, further increased to RMB1.8 billion in 2019, representing a year-on-year increase of 135.1%. As stated in the annual report of the Company for 2019, the other operating expenses were mainly attributable to the increase in provision of impairment losses on certain power generating assets, the increase in the purchase of substituted electricity resulting from the transfer of planned power generation rights of coal-fired power segment and the increase in the hydro-resources fee and reservoir maintenance fund resulting from the increase in the power generation of hydropower segment.

(iv) Operating profit

Set out below is the operating profit of the Group for three years ended 31 December 2019.

Table 4: Segmental operating profit and profit margins of the Group

Note: Calculated based on the segmental operating profit of the Group over the segmental revenue of the Group

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The Group's operating profit decreased by 1.1% to RMB4.8 billion in 2018 and increased by 5.2% to RMB5.1 billion in 2019, which was primarily due to the decrease in profits of hydropower segment and natural gas-fired power (distributed) segment and the increase in profits of hydropower segment and coal-fired power segment, respectively. As no fuel procurement is required for the renewable power segments, each of wind power, solar power and hydropower segment, maintains a high profit margin of above 40% for each of the three years ended 31 December 2019 (except for hydropower segment of 26.5% in 2018 due to drought in Fujian province). As shown in Table 4 above, the operating profit margin of coal-fired power segment increased from 1.8% in 2017 to 12.6% in 2019 due to the decrease in coal price whilst the natural gas-fired power (distributed) segment declined from 9.7% in 2017 to 3.2% in 2019 due to the increase in natural gas price.

1. Profit

The profit attributable to equity holders increased by 7.2% to RMB2.3 billion in 2018 and increased by 6.5% to RMB2.4 billion in 2019. Such increases were mainly due to a significant increase in profit from wind and solar power business with low income tax burden and high shareholding percentages as well as an admirable increase in the profit from associates for 2018 and an increase in profit from hydropower and coal-fired power segment for 2019.

Due to the Company's accounting policy, perpetual medium-term notes and renewable corporate bonds have been accounted for as equity of the Company and the distribution (i.e. interests) of which have been included in the profit attributable to equity holders. As shown in Table 1, after subtracting the profit attributable/distribution to the holders of perpetual medium-term notes and renewable corporate bonds, the net profit attributable to the Shareholders increased by 0.4% to RMB2.0 billion in 2018 and decreased by 5.3% to RMB1.9 billion in 2019. The increase in 2018 was offset slightly by the increase in distribution to the perpetual medium-term noteholders and renewable corporate bonders of RMB144.3 million year-on-year. The decrease in 2019 was principally due to increase in distribution to the holders of perpetual medium-term notes and renewable corporate bonds of RMB253.1 million upon the issuance of two tranches of perpetual medium-term notes with a total amount of RMB3.6 billion in 2019.

(vi) Dividends

The Group paid dividends for each of the three years ended 31 December 2019. The total dividend payouts were RMB0.47 billion, RMB0.48 billion and RMB0.45 billion, accounting for 30% of the attributable profit to the Shareholders of the Company (having deducted the reserved fund withdrawn by the business units of the Group) of the respective year. We noted that the Group's dividend payout is quite stable in the past couple of years.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Comment

We have discussed the Company's historical operational and financial performance with the Management. The net profit margin of the Group (after the distribution to the holders of perpetual medium-term notes and renewable corporate bonds) gradually declined from 11.8% in 2017 to 10.9% in 2018 and further declined to 9.5% in 2019, which is in line with the fall in the operating profit margin for wind power and hydropower, the two largest contributors to the Group's total segmental revenue and segmental profit, for 2017-2019 as shown in Table 4. The wind power segment accounted for 35.5% of the total segmental revenue and 53.7% of the total segmental operating profit in 2019 and the hydropower power segment accounted for 13.9% of the total segmental revenue and 19.4% of the total segmental operating profit of the same year. Each of the renewable energy segments, being the wind power, solar power and hydropower segment, has substantial operating profit margins of over 40% (except for hydropower segment in 2018 due to draught in Fujian province) as no procurement of fuel is required. In addition, we observed that when the hydropower segment was subject to unstable power generation due to weather conditions, the coal-fired power generation would increase so as to satisfy local electricity demand and maintain stable income or power generation for the Group. In 2018, the gross power generation of the hydropower segment decreased from 9.1 million MWh in 2017 to 5.8 million MWh in 2018, representing a year-on-year decline of 36.4% in 2018, due to the draught in Fujian province but the coal-fired power generation increased by 16.6% from 15.0 million MWh in 2017 to

1. 17.5 million MWh in 2018. We also noted that there has been improvement in operating profit margin of the coal-fired power segment due to drop in coal price in 2019. Nonetheless, given majority of the Group's operating profit derived from clean energy segments and its intention to continue to optimize its business structure to further expand its clean energy segments, combined with the PRC's recent policies and regulations regarding promoting subsidy-free clean energy projects and accelerating marketisation of clean energy industry as discussed in sub-section 2, more efforts may be required to improve the profit margin of the Group.

2. Financial position
   Set out below are the summarised consolidated statements of financial position of

the Group as at 31 December 2017, 2018 and 2019 as extracted from the annual reports of the Company for the year ended 31 December 2017, 2018 and 2019:

Table 5: Summarised consolidated statements of financial position of the Group

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Note: NAV is calculated based on the net asset attributable to equity holders of the Company less the net asset attributable to perpetual medium-term notes and renewable corporate bonds.

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1. Total assets

As at 31 December 2017, 2018 and 2019, the Group's total assets was RMB107.2 billion, RMB108.3 billion and RMB112.2 billion, respectively, representing an increase of 1.0% and 3.6%. The total assets as at 31 December 2018 is about the same as that as at 31 December 2017. The increase of total assets as at 31 December 2019 as compared to 31 December 2018 was primarily due to the increase in trade and bills receivable from RMB6.0 billion in 2018 to RMB9.5 billion in 2019 as a result of the increase in the tariff premium of renewable energy to be collected from relevant government authorities, which offsets the decline in cash position from RMB3.6 billion in 2018 to RMB2.5 billion in 2019 due to the fall in cash generated from operations. In addition, we noted that the Group's lease prepayments as at 31 December 2017 and 31 December 2018 was RMB1.4 billion and RMB1.4 billion, respectively. Following the adoption of IFRS 16 in 2019, the Group recorded right-of-use assets of RMB2.3 billion.

(ii) Total liabilities

The total liabilities of the Group decreased from RMB80.8 billion as at 31 December 2017 to RMB75.2 billion as at 31 December 2018 and further to RMB73.9 billion as at 31 December 2019, representing a year-on-year decrease of 6.9% and 1.8%, respectively, which was mainly due to the decrease in bank borrowings. As at 31 December 2017, 2018 and 2019, the Group's bank borrowings was RMB69.2 billion, RMB65.0 billion and RMB63.0 billion, respectively. Furthermore, we observed that the Group's total obligations under finance leases as at 31 December 2017 and 31 December 2018 was RMB0.3 billion and RMB0.3 billion, respectively. Following the adoption of IFRS 16 in 2019, the Group's lease liabilities amounted to RMB5.3 billion.

(iii) Net current liabilities

The Group was in net current liabilities position for 2017-2019. The net current liabilities as at 31 December 2017, 2018 and 2019 was RMB14.0 billion, RMB7.2 billion and RMB8.7 billion, respectively, representing a decrease of 48.8% in 2018 and an increase of 21.3% in 2019. The decrease in 2018 was mainly due to the repayment of borrowings and increase in cash and cash equivalents resulting from the proceeds generated from the issuance of perpetual medium-term notes and renewable corporate bonds during the year. The increase in 2019 was principally due to the increase of 25.0% in borrowings to be repaid within a year. We have discussed with the Management regarding the Group's net current liabilities and are advised that the Group had approximately RMB20.2 billion of unutilized banking facilities as at 31 December 2019 and the issuance of perpetual medium-term notes and renewable corporate bonds in 2017-2019 has lowered the net gearing ratio (i.e. total borrowings less cash and cash equivalents divided by equity of the Group) of the Group from 253.3% as at 31 December 2017 to 185.4% as at 31 December 2018 and further to 158.0% as at 31 December 2019.

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the gearing ratio from 253.3% as at 31 December 2017 to 158.0% as at 31 December 2019. Such gearing ratio, which has included the perpetual bonds in equity but excluded in total borrowings, is considered to be high. Despite the Management's effort in lowering the Group's borrowing cost through notes and bonds issuance, the Group had been in net current liabilities. We have discussed with the Management and reviewed the cash flow forecast of the Group which has taken into account the unutilised banking facilities, and noted that the Group will have the necessary liquid funds to finance its working capital and capital expenditure requirements in the next

5. Analysis of price performance and trading liquidity of the H Shares

1. Historical price performance of the H Shares
   The following figures set out the daily closing prices of the H Shares on the Stock

Exchange for the period from 1 June 2017, being three years prior to the date of the Joint Announcement up to and including the Latest Practicable Date (the "Review Period"). The Share price movement during the Review Period, which is considered to be a fair market value of the Company having taken into account the latest financial position and performance of the Group and market sentiment, is useful and relevant for conducting a comparison between the historical closing prices of the H Shares and the Cancellation Price. The H Share price performance during the Review Period is illustrated as follows:

Figure 7: Comparison between the H Share price and the Cancellation Price

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Figure 8: Comparison between the H Share price and the Hang Seng Index ("HSI")

Source: Bloomberg

As shown in the above Figure 7, the H Share price closed below the Cancellation Price of HK$2.50 per H Share all the time during the Review Period and within the range between HK$1.19 and HK$2.49 per H Share. As shown in the above Figure 8, it is observed that the H Share price seemed to be unrelated to the HSI during Period A, while it moved largely in line with HSI during Period B. We have discussed with the Management on the H Share price movement in Period A and B, and the Management are unaware of the reasons for the different patterns during the respective periods.

From 1 June 2017 to 20 November 2017 (i.e. Period A as shown in Figure 7 and 8 above), the H Shares closed between HK$1.60 and HK$2.13, with its highest recorded on 1 November 2017 and lowest recorded on 16, 21 and 22 August 2017. The H Share price fell to its lowest during Period A after announcement regarding the downward adjustment to the tariff of nuclear power was made and picked up its upward momentum after issuance of the 2017 interim results announcement. During Period A, no significant transaction announcement was made.

From 21 November 2017 to the date of the Joint Announcement (i.e. Period B as shown in Figure 7 and 8 above), the H Shares closed between HK$1.19 and HK$2.39, with its highest recorded on 13 April 2018 and lowest recorded on 24 March 2020. The H Share price rose sharply after the issue of the 2017 annual results announcement and reached its highest at HK$2.39 during Period B. The H Share price fell significantly starting from the second half of May 2018 and reached HK$1.38 on 26 October 2018. The Company has started to issue monthly business updates instead of quarterly business updates regarding the Group's power generation in May 2018. We noted that the Group's overall power generation had been fluctuated in a narrow range in April to December

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2018 but its hydropower generation experienced year-on-year decreases of 40% - 70% in April to August 2018 due to extremely less incoming water in Fujian Province. The H Share price picked up its upward momentum in November 2018 while hydropower generation was seen a sharp year-on-year increase at almost the same time. The H Shares were traded between HK$1.45 and HK$1.91 during November 2018 to March 2019 and

1. narrower range of HK$1.19 - HK$1.77 from April 2019 to the date of the Joint Announcement. A few connected transactions have been announced by the Company relating to the acquisition of power projects and disposal of non-core investments and their impacts on the H Share price are considered to be minimal.

The trading in the H Shares was suspended from 9:00 a.m. on 28 May 2020 to 1 June 2020. The Joint Announcement was published on 1 June 2020 and trading in H Shares resumed on 2 June 2020. The H Shares closed at HK$2.42 per Share on 2 June 2020 (the first trading day after the release of the Joint Announcement), representing an increase of approximately 60.3% compared to the closing H Share price of HK$1.51 per H Share on the Last Trading Date.

Following the Joint Announcement, we consider the price of the H Shares has been largely influenced by the Cancellation Price of HK$2.50 per H Share. The H Share price closed between HK$2.40 and HK$2.50 subsequent to the publication of the Joint Announcement, while the HSI fluctuated between 23,777 and 26,339 during the same period. As shown in Figure 8, the H Share price no longer followed the movement of the HSI. The H Shares closed at HK$2.45 as at the Latest Practicable Date. The Cancellation Price of HK$2.50 per H Share represents a premium of approximately 2.04% over the closing H Share price on the Latest Practicable Date.

(ii) Cancellation Price comparisons

As set out in the letter from the Board, the Cancellation Price has been determined on a commercial basis after taking into account, among other things, the prices of the H Shares traded on the Stock Exchange and with reference to other privatisation transactions in Hong Kong in recent years. The Cancellation Price of HK$2.50 per H Share represents:

1. a premium of approximately 65.56% over the closing price of HK$1.51 per H Share as quoted on the Stock Exchange on the Last Trading Date;
2. a premium of approximately 82.22% over HK$1.37 which is the average closing price per H Share as quoted on the Stock Exchange for the five consecutive trading days up to and including the Last Trading Date;

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1. a premium of approximately 85.87% over HK$1.35 which is the average closing price per H Share as quoted on the Stock Exchange for the 10 consecutive trading days up to and including the Last Trading Date;
2. a premium of approximately 87.92% over HK$1.33 which is the average closing price per H Share as quoted on the Stock Exchange for the 30 consecutive trading days up to and including the Last Trading Date;
3. a premium of approximately 89.27% over HK$1.32 which is the average closing price per H Share as quoted on the Stock Exchange for the 60 consecutive trading days up to and including the Last Trading Date;
4. a premium of approximately 75.82% over HK$1.42 which is the average closing price per H Share as quoted on the Stock Exchange for the 180 consecutive trading days up to and including the Last Trading Date; and
5. a discount of 14.03% over the audited NAV (excluding the perpetual medium-term notes and renewable corporate bonds) of approximately RMB2.68 (equivalent to approximately HK$2.91) per Share as of 31 December 2019.

In summary, although the Cancellation Price represents a discount to the audited NAV per Share, the Cancellation Price of HK$2.50 per H Share represents premia in a range of approximately 65.56% to 89.27% over the closing H Share prices for different periods before the Last Trading Date. As at the Latest Practicable Date, the H Share price closed at HK$2.45 per Share, which in our view is mostly influenced by the Merger. The Cancellation Price represents a premium of approximately 2.04% over such closing price on the Latest Practicable Date.

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(iii) Trading liquidity

As at the Latest Practicable Date, all the H Shares are held by the Independent H Shareholders. Set out in the table below are the monthly total trading volumes of the H Shares and the percentages of such monthly total trading volumes to total issued H Shares during the Review Period:

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under review. In April and May 2018 and March and May 2020, the monthly total trading volume of the H Shares (as a percentage to the total issued H Shares) was above 10%. The surge in turnover of the H Shares in April and May 2018 may be due to the significant changes in H Share price after the 2017 annual results announcement and monthly business updates were released, which has been discussed in (i) in this sub-section above. We have discussed with the surge in turnover of the H Share in March and May 2020 with the Management and they are unaware of the reasons for such fluctuation in the trading volume of the H Shares. Trading volume of the H Shares surged after publication of the Joint Announcement on 1 June 2020 with the total monthly trading volume of H Shares increasing to 1,493,747,675 H Shares in June 2020 (representing approximately 58.12% of the total issued H Shares in public float) but decreased to 197,780,505 H Shares in July 2020 (representing approximately 7.70% of the total issued H Shares in public float) and further to 49,320,100 H Shares for the period from 1 August 2020 up to the Latest Practicable Date (representing approximately 1.92% of the total issued H Shares in public float).

Although the average trading liquidity of the H Shares of 5.5% falls within the range (4.0% - 10.0%) of those of two Primary Comparable Companies (as defined in sub-section 6 below) prior to the publication of the Joint Announcement, if H Shareholders wish to sell a significant number of H Shares within a short period in the market, it is possible that a downward pressure would be exerted on the market price of the H Shares. The higher level of trading volume in June 2020 subsequent to the Joint Announcement may not, in our view, be sustained if the Merger lapses. Therefore, the Merger provides an opportunity for H Shareholders, especially those holding a large block of H Shares, to dispose of their holdings at a fixed cash price if they so wish.

(iv) Discount of the H Share price to the NAV per Share

We have reviewed, as set out in the figures below, the discounts of H Share price to the NAV per Share (based on the interim and annual results announcements and the monthly returns) from time to time, which is set out in the following figure:

Figure 9: Movements of the discounts of the H Share price to the NAV per Share

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

As set out in the Figure 9 above, the H Shares have been traded at a discount to NAV per Share (excluding the perpetual medium-term notes and renewable corporate bonds) throughout the Review Period, ranging from 4.88% to 59.08%.

As shown in Figure 9, the H Shares have been traded at discounts deeper than the discount of 14.03% as represented by the Cancellation Price in 749 trading days out of a total of 780 trading days during the period from 1 June 2017 to the Last Trading Date. The discounts have become deeper after the annual results of the Company was released on 22 March 2019 which has reported the increase in perpetual medium-term notes and renewable corporate bonds of about RMB5 billion during the second half of 2018.

Based on the Cancellation Price of HK$2.50 per H Share and the NAV per Share (excluding the perpetual medium-term notes and renewable corporate bonds) of approximately HK$2.91 as at 31 December 2019, the Cancellation Price represents a discount to the NAV per Share of approximately 14.03%, which is significantly less than the historical discounts of the H Shares for most of the time as shown in Figure 9 above.

Comment

As mentioned above, the H Shares closed lower than the Cancellation Price all the time during the Review Period. In addition, we are of the view that the H Shares have not been actively traded in the year before the release of the Joint Announcement and therefore the Merger provides an opportunity for the Independent H Shareholders to exit at a fixed cash. The recent over-performance of the H Shares is, in our opinion, due to the release of the Joint Announcement. Independent H Shareholders should therefore be aware that the current H Share price may not be sustainable if the Merger lapses and the H Share price may return to the level before the release of the Joint Announcement.

As discussed in sub-section 4, the perpetual medium-term notes and renewable corporate bonds, which have no fixed maturity dates and are callable at the Company's option in whole on the first call date or any distribution payment date falling after the first call date, have been accounted for as equity of the Company. Their interests are recorded as distribution, which are paid annually. Significant fluctuations in NAV per Share (including the perpetual medium-term notes and renewable corporate bonds) are seen. Perpetual bonds are normally adopted by capital intensive business but not all capital intensive business use them as their funding source. Only 2 out of 7 Comparable Companies (as defined hereinafter) recorded perpetual bonds as equity in their balance sheets as discussed in sub-section 6 below. On this basis and for comparison purpose, we tend to base on NAV per Share (excluding the perpetual medium-term notes and renewable corporate bonds) in our analysis. The Cancellation Price of HK$2.50 per H Share represents a discount to the NAV per Share (excluding the perpetual medium-term notes and renewable corporate bonds) of approximately 14.03%.

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6. Comparable companies analysis

The Company is a diversified energy company in the PRC with a focus on clean energy. As discussed in the sub-section 1, the Group possesses a diversified portfolio of power generation businesses covering wind power, photovoltaic, hydropower, coal-fired power, natural gas-fired (distributed) power, nuclear power, biomass power, etc. According to its annual report for the year ended 31 December 2019, we noted that (i) clean energy including wind power, solar power, hydropower and natural gas-fired power contributed approximately 68.3% of the Group's total segmental revenue for the year ended 31 December 2019; and (ii) nearly 99.7% of the Group's revenue generated from the PRC.

We employed Bloomberg and AASTOCK's equity screening tools to identify companies listed on the Stock Exchange that (i) generate majority of their revenue from the PRC; as well as (ii) derive over 50% of their revenue from clean power generation business. A total of 7 comparable companies (the "Comparable Companies") have been identified based on the above criteria, among which 2 comparable companies have a diversified portfolio of power generation business (the "Primary Comparable Companies") and 5 comparable companies have single type of clean power generation business (the "Secondary Comparable Companies"). These Comparable Companies, based on the above selection criteria, so far as we are aware of, are exhaustive, and are considered to be fair and representative samples. Details of the Comparable Companies are set out in the table below:

Table 6: Primary Comparable Companies and Secondary Comparable Companies

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Source: Bloomberg and AASTOCKS, the Stock Exchange website and 2019 annual reports of the Comparable Companies.

Notes:

1. The market capitalisation of the Comparable Companies and the Company are calculated based on their respective closing share prices as at the Last Trading Date multiplied by the number of ordinary shares as set out in their respective monthly return for May 2020.
2. The PERs of the Comparable Companies and the Company are calculated based on their respective market capitalisation as at the Last Trading Date divided by their respective profit attributable to the owners of the company as referenced from their respective annual reports for the year ended 31 December 2019.
3. The PBRs of the Comparable Companies and the Company are calculated based on their respective market capitalisation as at the Last Trading Date divided by their respective net assets attributable to the owners of the company as referenced from their respective annual reports for the year ended 31 December 2019.
4. For comparison purpose, the profit attributable to the owners of the company and net assets attributable to the owners of the company of each of China Longyuan Power Group Corporation Limited, GCL New Energy Holdings Limited and the Company have excluded the profit attributable to the perpetual capital securities holders and net assets attributable to the perpetual capital securities holders respectively.
5. The PER and PBR of the Company are calculated based on the Cancellation Price of HK$2.50.

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As shown in Table 6, we noted that the PERs of the two Primary Comparable Companies are 5.99 times and 6.22 times with an average of 5.94 times. The PER of the Company as represented by the Cancellation Price of 10.25 times is significantly higher than those of the Primary Comparable Companies. The PBRs of the Primary Comparable Companies are 0.55 times to 0.56 times with an average of 0.56 times. The PBR of the Company as represented by the Cancellation Price of 0.86 times is higher than those of the Primary Comparable Companies.

The PERs of the Secondary Comparable Companies range from 4.00 times to 10.15 times with an average of 6.68 times. The PER of the Company as represented by the Cancellation Price of 10.25 times is higher than those of the Secondary Comparable Companies and significantly higher than their average PER. The PBRs of the Secondary Comparable Companies range from 0.27 times to 0.87 times with an average of 0.53 times. The PBR of the Company as represented by the Cancellation Price of 0.86 times falls within the range of and near the high end of the range of those of the Secondary Comparable Companies.

Comment

Although the Comparable Companies have some differences in terms of market capitalisation and mix of power generation businesses, the peer comparison still serves as a useful tool to determine whether the Cancellation Price offered by the Offeror is fair and reasonable with reference to its peers' recent market valuation. The Primary Comparable Companies, with diversified power generation businesses which is similar to that of the Company, exhibited narrower ranges of PERs and PBRs which were close to those of the Company as represented by its closing price as at the Last Trading Date.

The Secondary Comparable Companies, with single type of clean power generation business, exhibited wider ranges of PERs and PBRs. Sichuan Energy Investment Development Co., Ltd., a hydropower producer, has the highest PER of 10.15 times. CGN Power Co., Ltd, a nuclear power producer, is the largest amongst all the Secondary Comparable Companies with market capitalization of over 21 times other peers and has the highest PBR of 0.87 times. The wider ranges of PERs and PBRs, in our view, may be due to different individual power segments and substantially larger in size.

The PER of the Company as represented by the Cancellation Price of HK$2.50 is higher than those of all the Comparable Companies. The PBR of the Company as represented by the Cancellation Price falls within the range of and is close to the high end of those of the Comparable Companies.

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7. Privatisation Precedents

We have compared the Merger with privatisation proposals of other companies listed on the Stock Exchange announced during the Review Period, excluding privatisation proposals which were not or are yet to be approved (or, where applicable, required acceptance level were not or yet to be achieved) or involving a share consideration (the "Privatisation Precedents"). The Privatisation Precedents, in our view, not only provide the premium or discount that an offeror is willing to pay for taking the listed companies private but also the premium or discount that most of the independent shareholders (subject to the required thresholds as stipulated under the Takeovers Code) are willing to accept for tendering their shares to the offeror. Thus, privatisation precedents excluding the failed ones are considered appropriate for comparison purpose. The Privatisation Precedents represent an exhaustive list of privatisation proposals meeting the said criteria and reflect the pricing of recent transactions of this type.

The following table is the comparison of premiums over the then market prices at which the Privatisation Precedents were priced and the level of premium or discount to NAV per share at which the Privatisation Precedents were made, although the business nature and scale of each company vary and some aspects of pricing may be industry-specific.

TABLE 7: Privatisation Precedents

Premium/(discount) of offer price/cancellation price over/to closing share

price/average share price on/over

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Premium/(discount) of offer price/cancellation price over/to closing share

price/average share price on/over