CREDIT SUISSE

EFTA02395490 Dataset 11 76 pages Download original PDF
CREDIT SUISSE China Super Power Saving Holdings Limited Information Memorandum Confidential Date: wietamm a..... May 2010 These materials may not be used or relied upon for any purpose other than as specifically contemplated by a written agreement with Credit Suisse AG or its Affiliates (hereafter 'Credit Suisse'). EFTA_R1_01426745 EFTA02395490 Ian Chang CREDIT SUISSE Important notice Memorandum ref: 1 Memorandum ref. 1 This preliminary information has been prepared from data supplied by China Super Power Saving Holdings Limited ("CSPS" or the "Company") and Lemonte Investments Limited (the "Seller") solely for information purposes to assist the recipient in deciding whether to proceed with further analysis of the transaction contemplated herein. Credit Suisse AG ('CS") has not independently verified any of the information set forth herein, including any statements with respect to projections or prospects of the Company or the assumptions on which such statements are based. Neither the Seller, the Company nor CS makes any representation or warranty, express or implied, as to the accuracy or completeness of this document or the information contained herein and none of such parties shall have any liability for the information contained in, or any omissions from, this document. CS, the Seller and the Company reserve the right to amend or replace the information at any time, and undertake no obligation to update or correct the information set forth herein or to provide the recipient with access to any additional information. This information may not be redistributed or reproduced. The information contained herein is preliminary and does not purport to contain all the information that such interested parties may desire. In all cases, each interested party should conduct its own investigation and analysis of the Company, its business, prospects, results of operations and financial condition, and should consult their own professional advisors. Neither the receipt of this information by any person, nor any information contained herein constitutes, or shall be relied upon as constituting, the giving of investment or tax advice by CS to any such person. This document may contain certain statements, estimates and projections as well as forward•looking statements, e.g., statements including terms like 'believe', 'assume', 'expect' or similar expressions, provided by the Company and the Seller with respect to the Company's anticipated future performance. Such statements were prepared based upon certain assumptions and Management's analysis of information available at the time this document was prepared, and may or may not prove to be correct. No representation, warranty or assurance of any kind, express or implied, is made regarding future performance or results. This document does not constitute an invitation or offer to sell, or a solicitation of an offer to subscribe for or purchase, any of the securities or assets, business, products or services mentioned herein. It does not constitute a prospectus within the meaning of Article 652a or Article 1156, respectively, of the Swiss Code of Obligations. This document is not being issued in the United States of America and must not be distributed in the United States or to U.S. persons or publications with a general circulation in the United States. This document does not constitute or form part of an offer or invitation to purchase any securities in the United States. The securities of the Company have not been registered under the United States securities laws and may not be offered, sold or delivered within the United States or to U.S. persons absent from registration under or an applicable exemption from the registration requirements of the United States securities laws. By accepting this document, the recipient acknowledges and agrees that (i) all of the information contained herein is subject to the Confidentiality Undertaking; (ii) the recipient will not distribute or reproduce the document in whole or in part and will use this document solely for the purpose of evaluating the recipient's interest in the Company; (iii) in the event that the recipient has no further interest in submitting a proposal to acquire the Company or if at any time CS or the Seller so requests, this document, together with all other material relating to the Company which the recipient may have received from CS, the Seller or the Company, will be returned to CS at the earliest opportunity; (iv) the recipient will not disclose to any third party that this document has been provided or that the Seller are considering a Transaction and (v) any proposed actions by the recipient which are not consistent in any manner with the foregoing agreement will require the prior written consent of the Seller, the Company or CS. The Seller, the Company and CS reserve the right to negotiate with one or more parties at any time and enter into a definitive Purchase Agreement without prior notice to you or any other recipients of this document. The Confidential Page 2 of 76 EFTA_R1_01426746 EFTA02395491 Ian Chang CREDIT SUISSE Memorandum ref: I Seller and CS also reserve the right (i) to terminate, at any time, all further participation by any party in the investigation of the Company and all participation in the proposed Transaction described herein, and (ii) to modify the rules and procedures set forth herein or any other procedures relating to the sale of the Company without prior notice to you or any other recipient of this document. In no instance will the Seller, the Company or CS be required to assign any reason for such termination or alteration of the process. The Seller, the Company intend to operate the Company in the ordinary course during the evaluation and offer period. However, the Seller, the Company and CS reserve the right to take any action, whether in or out of the ordinary course of business, which in their sole discretion is deemed reasonably necessary or prudent in the conduct of the Company or in the process contemplated by this document. CS contact person Alex von Werra Director Angela Krebs Vice President Raed EI-Dana Analyst Confidential Page 3 of 76 EFTA_R1_01426747 EFTA02395492 Ian Cheng CREDIT SUISSE Table of Contents 1. Executive summary 6 1.1. Background 6 1.2. Market overview 6 1.3. Business model 7 1.4. Products and services 9 1.5. Summary of key financials 10 2. Investment highlights 12 3. Transaction overview 13 3.1. Legal structure 13 3.2. Ownership structure 13 3.3. Listing 14 3.4. Transaction structure 15 4. Market overview 16 4.1. Industry overview 16 4.2. Competitive landscape 25 5. Company overview 27 5.1. History 27 5.2. Vision and strategy 27 5.3. Legal structure 28 5.4. Location and premises 30 6. Business model 33 6.1. Overview 33 6.2. Research and development 33 6.3. Manufacturing and assembly 38 6.4. Marketing, distribution and sales 39 6.5. Installation and after•sales services 43 7. Products and services 44 7.1. Products and services description 44 8. Management, directors and employees 48 8.1. Organisational structure 48 8.2. Management and board biographies 49 8.3. Employees 51 9. Selected case studies 63 9.1. Carrefour China 53 9.2. Qingdao street lighting 54 10. Financials 55 10.1. Administration and finance 55 10.2. Historical financials and analysis 56 10.3. Business plan 58 Memorandum ref: 1 Confidential Page 4 of 76 EFTA_R1_01426748 EFTA02395493 fan Cheng CREDIT SUISSE Memorandum ref: 1 Appendix 63 1. Key products 64 1.1. Lighting 64 1.2. Energy saving devices for motors 66 1.3. New energy saving sets 76 Confidential Page 5 of 76 EFTA_R1_0 1426749 EFTA02395494 Ian Cheng CREDIT SUISSE 1. Executive summary 1.1. Background Memomnduntnet1 Credit Suisse AG ("CS') has been retained by Lemonte Investments Limited as its exclusive financial advisor in connection with the potential disposal of all or part of its holding in China Super Power Saving Holdings Ltd. (herein referred to as "CSPS", the 'Company"). CSPS is active in the fast growing market of energy efficiency solutions and has established a strong foothold in its home market, China. The Company is listed at the Marche Libre in France, an unregulated trading facility operated by Euronext Paris SA. With a shareholding of approximately 65% owned by the Company's founder Ian Cheng Yi Feng (#1-4) (the "Founder", "Ian Cheng") through his investment vehicle, Lemonte Investments Limited, the Company ultimately remains under his control. The Founder has developed the Company to become a respected provider of energy saving solutions in China and is now looking for a strong buyer, who can foster the Company's further growth by adding an international network and knowhow. This Investment Memorandum is being furnished to selected parties who have shown an interest in the Company and have signed the relevant Confidentiality Agreement. If after reviewing this Investment Memorandum, the potential buyer wishes to further analyse the Company, such interest should be communicated to Credit Suisse AG in a formal process as outlined in the accompanying Procedure Letter. 1.2. Market overview An important driver of energy efficiency products and services is economic growth. China is expected to continue its strong growth path with 9.3% and 8.3% growth in 2010 and 2011 respectively. China - Real GDP growth 40,000 13.0% 30,000 20,770 22,504 20, 0O0 19,055 10,000 2007 2008 2009E Source: Do 24,597 26,639 28,90331,27333,837 36,400 2010E 2011E 2012E 2013E 2014E 2015E IM Real GDP (bn CNY) % Growth 15.0% 10.0% 5.0% Confidential Page 6 of 76 EFTA_R1_01426750 EFTA02395495 Ian Chang CREDIT SUISSE Memorandum ref: I Key drivers for energy efficiency in China include: ■ Strong economic growth ■ Increasing environmental concerns ■ Energy efficiency policies being implemented in China, supported by government stimulus measures ■ Steadily rising urbanisation ■ Continuous growth in energy consumption and rising electricity prices ■ Lower cost of ownership of new technologies Steadily rising urbanization ratio in China 80% 60% 40% 20% 0% 1980 1985 1990 1995 2000 2005 2010E 2015E 2020E 2025E 2030E ■ Urban population (as % of total population) Source: Cnxii &SO. Limed Naeon. A further key driver is the power shortages China faces, combined with an increasing environmental awareness. Although new regulations are supporting the use of renewable energy, over 90% of new power generation in China still comes from thermal coal plants. In addition, an estimated 80% of energy is being lost before reaching the end user, through generation, transportation etc. The government has taken note of the multiplying effect of energy savings at the end consumer and supports energy saving products and services through various regulations and subsidies. 1.3. Business model CSPS is looking to strengthen its position as one of the leading energy saving solution providers in China and introduce its services elsewhere in Asia and abroad. The Company has developed a unique business model, offering its clients a complete range of energy saving solutions and services. As such it focuses its resources on i) R&D, ii) solution based offering, and iii) a strong distribution network. The Company is offering a one-stop shop service for companies looking for energy savings. It offers its customers with a complete service including i) analysis of the current situation and energy saving potential, ii) engineering of the most suitable energy saving solution iii) assembly of the energy saving products, iv) installation of the equipment at the client's facilities, as well as v) after-sales services. While offering a complete service package to its customers, CSPS runs an asset light business model, allowing it to adapt to changing business needs of its customers. Confidential Page 7 of 76 EFTA_R1_01426751 EFTA02395496 Ian Chang CREDIT SUISSE CSPS has an internal R&D department focused on product innovation and development Basic research is mainly pederreed by external parties CSPS acquires the patents for the relevant technologies from the developer mice the product can be commorciatzed Production Producton is almost entirely outsourced to third parties in order to preserve the asset light business model CSPS only manufactures its key chip compenent in its oven production line Ouisout ced Partly performed by third parties Performed by CSPS Assembly CSPS assembles the products in as two assemby facilities Marketing & sale CSPS mainly seises products and services through agents. well a sniveler porton of sales being direct sates by the Company Efforts are led by CSPS's infernal marketing team CSPS offers as clients a ful service incluckng: onreito energy audit. consultation and playact management Installation CSPS installs the products at the Asenis CSPS offers a verge° profit sharing scheme to its clients Memorandum ref: 1 After .sales service CSPS offers alter. sales SOIVICOS, including changing of lamps etc. to its customers Such services may be oilseed within a warranty or ate chargeable additionab The Company is incorporated in Hong Kong and its operations are based in Mainland China with its office located in Shenzhen. The Company outsources the production of most product components to third parties, and assembles them in its own assembly facilities in Shenzhen and Wujiang. It employs approx. 100 permanent staff in key functions of the Company and over 200 temporary staff mainly active in its production department. The Company has focused its business on the Chinese market for energy saving solutions. It is seeing strong growth due to fast economic development, strong urbanization and increasing environmental concerns, all of which have led to a strong increase in energy consumption and new regulation relating to environmental pollution and energy usage. ar CSPS provides its solution based service to a broad client base, reaching from corporates from a wide variety of industries, to government related companies, as well as municipalities, all over Mainland China and Hong Kong. It is also exploring the overseas market potential, with first orders expected to come from the Middle East. The Company markets its products almost exclusively through agents. It has one of the largest distribution networks of its kind in this sector in China, with over 140 agents in 28 provinces. Confidential Page 8 of 76 EFTA_R1_0 1426752 EFTA02395497 Ian Chong CREDIT SUISSE Agent network fraromiana ' Phnnipol* Hobe USOMNI Xi*" Gifau Cavan &Win Mean long" Shanghai Arts Unman Wes Duping 0021/44. " Hat Yunnan Fujon GAN'S Guesnaciong Wing K000 SOUAllit Company. 1.4. Products and services Revenue split by region Memorandum ref: 1 Source: Company. The Company has developed a wide range of energy saving products including energy saving devices (used in combination with fluorescent lights, street lights, sewing machines, pumps, fans, etc.) and a low consumption lamps series. The Company analyses the customers current energy saving potential and then engineers an optimal solution, taking into consideration the customer's energy saving potential, current installation, investment budget, as well its quality considerations. CSPS' core offering currently includes solutions around its three product categories, namely: i) new generation lighting products, ii) energy saving devices for motor and lighting systems, and iii) new energy saving sets. The first two categories are currently its key revenue drivers. 2009E revenue split by product group Energy saving devices (other) 11% Energy saving device for motors 21% Source COmpany. Lamps 28% Energy saving device for lighting systems 40% Confidential Page 9 of 76 EFTA_R1_01426753 EFTA02395498 Ian Chang CREDIT SUISSE Memorandum ref: I New generation lighting products with a current focus on electrodeless magnetic discharge light ("EMDL") lamps often used in street lighting projects Lighting products •. h 9 Q ■ Energy saving devices with a focus on: - Energy saving devices for lighting systems, used to regulate electricity usage in large government buildings or production facilities - Energy saving devices for motors such as fans, air compressors, pumps, central air conditioning etc. Energy saving devices • 1.5. Summary of key financials . • € • al ... The Company experienced significant growth with revenues increasing from 2005 to 2008 by a CAGR of 75%. The management believes that the strong revenue and earnings growth experienced by the Company in recent years is poised to continue over the medium term. The Company is rolling out new energy saving devices and sets into the Chinese market and plans to enter new markets in Europe and the Middle East. Revenues are expected to grow from 2009 to 2012 by a CAGR of 37%. Over the same period EBITDA is expected to grow at a CAGR of 37.5%. Revenue and EBITDA development Revenue (R1€ million) 2,000 1.500 EMMA (RIM million) 300 250 1,198.4 200 1.000 782.3 150 515.9 100 500 3535 48.9 11 50 2005 2006 2007 2008 2009E 2010E 2011E 2012E Revenue —EBITDA Source: Conpany. Confidential Page 10 of 76 EFTA_R1_01426754 EFTA02395499 Ian Chang CREDIT SUISSE The following table presents CSPS' key historical and projected financial information. Memorandum rat 1 Consolidated P&L account OMB in reigns/ 2005 2008 2007 2008 2008E 2010E 2011E 2012E Revenue 48.9 110.7 170.8 282.4 353.5 515.9 782.3 1,198.4 % growth 126.5% 54.3% 53.6% 34.7% 45.9% 51.6% 53.2% EBITDA 13.9 33.4 49.4 80.4 130.6 190.2 288.7 441.7 % sales 28.5% 302% 26.9% 30.6% 36.9% 36.9% 36.9% 36.9% Operating profit 13.9 33.4 49.3 88.3 103.0 155.8 284.4 428.7 % safes 294% 30 1% 28.9% 26.0% 29.1% 302% 338% 358% Net Income 12.5 28.5 42.3 53.7 77.9 117.8 200.5 325.4 % sales 25.5% 25.8% 24.8% 20.5% 22.0% 22.8% 25.6% 27.2% Source: Company. Note: MIA 'nommen 2009 due to amortization of new patents over a skinned 3 years period. Confidential Page 11 of 76 EFTA_R1_0 1426755 EFTA02395500 Ian Cheng CREDITSUISSE 2. Investment highlights Memorandum ref: 1 2.1. Chinese market's continuous growth in energy consumption The Company is well positioned to profit from China's continuous economic growth. China's economy is expected to grow by a CAGR of 8.3% from 2010 to 2015. Along with the country's continuous strong GDP growth, China's energy consumption is increasing at a rate of over 5% annually. A booming real estate market further drives the hunger for energy. CSPS has established a strong footprint in China and is uniquely positioned to benefit from the growth in its energy consumption. 2.2. Favourable industry dynamics The continuously growing energy consumption puts pressure on the country's energy resources, which are still heavily dependent on traditionally polluting thermal power plants. With the government and the public keen to lessen the environmental impact of the country's fast development, energy saving measures are playing an increasingly important role. These developments are leading to a fast growing demand for CSPS' energy saving services. The use of CSPS' products and services further allows companies and local governments to achieve substantial cost savings, by reducing energy usage as well as through government awards and subsidies available. Ongoing urbanization is a further key driver for the Company, especially its lighting business. In addition to these generally strong market fundamentals, the Company benefits from offering a service which is not dependent on any specific industry sector, but can be flexibly applied to the energy needs of any company or municipality, giving CSPS the flexibility to quickly adjust to changing market demand and regulatory frameworks. 2.3. Capital efficient and highly profitable business model CSPS has an impressive record of financial performance, even showing strong growth in an adverse global macroeconomic environment. ■ The Company has shown continued strong sales growth over the last four years, reaching a CAGR of 75% ■ It has set up a lean business model, outsourcing most of the basic product manufacturing to third parties ■ With its production and assembly located in China's manufacturing centres, Pearl and Yangtze river delta, the Company benefits from a low cost environment ■ Profitability has remained high with an EBITDA and net income margins above 30% and 20% respectively 2.4. Large established distribution network CSPS has established a large distribution network, composed of over 140 agents targeting the China market opportunity. This network allows the Company to efficiently distribute products and services. It also offers a potential buyer a unique set-up to enter the Chinese market with their own products and services offering. 2.5. Unique entry point to China's market for energy saving services CSPS is positioned uniquely in its home market, China, to offer its clients a complete range of energy saving services. It has established itself a name for offering more than just the sale of a product. It reaches most of China and a wide variety of industries. CSPS provides a unique opportunity to enter the energy efficiency market in China by acquiring one of the few well established players in this fast growing segment. Confidential Page 12 of 76 EFTA_R1_01426756 EFTA02395501 Ian Cheng CREDITSUISSE 3. Transaction overview 3.1. Legal structure Memorandum ref: 1 CSPS was incorporated under the laws of Hong Kong on August 15, 2007. It is registered with the Hong Kong companies registry under the number 1158791, having its registered office at Flat 1702, 17/F, Eastern Commercial Centre, No. 393-399 Hennessy Road, Wanchai, Hong Kong. After the group's legal restructuring in 2007, CSPS became the holding company for its China onshore based operating businesses, namely Hongdegin Energy Saving and Environmental Technology Limited ("Hongdeqin") and Shenzhen Nenghua Energy Saving and Environmental Protection Limited ("Nenghua"). Legal Structure Offshore Onshore Swot Company CSPS j 100% Hongdectin 100% Nenghua Offshore holding company Investment and property holding company Operating company 3.2. Ownership structure CSPS is listed at the Marche Libre in France (0.33% floating), but remains controlled by its founder Ian Cheng. Through his investment holding company, Lemonte Investments Limited, he controls about 65% of the total issued share capital. Other shares are held among a limited number of company directors and private investors. The Company's free float is currently below 1%. Since December 28, 2007, CSPS has an authorized share capital of HKD 10m (divided into 20m shares of HKD 0.5 each). Its issued share capital is HKD 3m (divided into 6m shares of HKD 0.5 each). Confidential Page 13 of 76 EFTA_R1_01426757 EFTA02395502 Ian Chan CREDIT SUISSE The following table shows the ownership structure as of April 30, 2010. Ownership structure Memorandum rot 1 Shareholder Number of shares % of capital Lemonte Investments Limited1' 3,896.000 64.94% Finasia Limited 480,000 8.00% Eufinasia Limited 360,000 6.00% Pyrite SA 320,000 5.33% Balboa International Limited 240,000 4.00% Banque Neuflize OBC 198,000 3.30% Global Cap 186,000 3.10% China An Bang Investments Limited 180,000 3.00% China Qiao De Xin Investments Limited 60.000 1.00% Max Move International Limited 60.000 1.00% Floating shares 20.000 0.33% Total 100.00% 6,000,000 el/ Larnorda Invealniant is an invert:nom valid* wholly awned by lan Chang. Source' ,nottl:66LEtnat e Company. 3.3. Listing CSPS has been listed at the Marche Libre on February 25, 2008. The Marche Libre is an unregulated trading facility operated by Euronext Paris SA. The Company had initially sold 20,000 shares through the platform, resulting in its current free float of 0.33%. • Symbol MLCSP • ISIN code: HK0000043510 Share price performance and trading volume 11 10 • 9 8 .2 co 6 is 7 5 4 F I 11.1 11 di .••••• hirr—net 14 ILIn . . 1.000 1411 107.000 6,000 5.000 4.000 .R4 3,000 2 1-Jul-08 1-Oct-08 -Jan-09 -Apr-09 1-Jul-09 1.Oct 09 1-Jan- 0 1-Apr-10 I Volume — China Super Power Saving Holdng Ltd. Soutar Floret, as of Cet06/10. 2,000 Confidential Page 14 of 76 EFTA_R1_01426758 EFTA02395503 Ian Chen CREDIT SUISSE Memorandum ref: I Company performance Share price (April 23, 2010): 52 week high: 52 week low Shares outstanding: Market cap: Source: Pedant as ol 06105/10. EUR 4.68 EUR 9.93 EUR 4.50 6.0 milion EUR 28.08 million Average daily trading volume: 237 shares There is no market making and no broker research on the Company. In combination with the very limited float, this leads to the Company's shares being extremely illiquid with an average trading volume of only around 237 shares since its listing. As such, the management believes that the current share price does not property reflect the Company's value. The Marche Libre is an unregulated market, which does not set forth any regulations on minimum disclosure, mandatory takeover rules etc. 3.4. Transaction structure The Seller is considering selling all or part of his holding in CSPS, as a way of strengthening the Company's future growth prospects by bringing in a strong owner with an international network and knowhow. This Information Memorandum has been prepared to provide interested purchasers with a basis on which to submit an indicative proposal for the acquisition of a majority interest in CSPS. CSPS directly and indirectly owns two Chinese legal entities, which directly own the licences and patents as well as its two assembly facilities. The transaction includes all of intellectual property rights and patents linked to current business, the distribution network related to CSPS business and its assembly facilities. Interested parties should review the information provided in this Information Memorandum in conjunction with the accompanying Procedure Letter from Credit Suisse AG, which describes the basis on which any written indicative proposal should be made, the expected process beyond the indicative proposals stage and certain other important matters. Based on these and other relevant concerns, the Seller, with the advice of Credit Suisse, will determine which, if any, of the interested purchasers will be invited to continue their investigation of CSPS. The Seller reserves the right, at its sole discretion, to consider any and all factors in choosing the parties with which to proceed and whether to do so, to reject any or all proposals without giving reasons and at any time and in any respect, without giving notice, to modify or terminate the process or to negotiate with any potential purchaser. Similarly, the Seller may at any time, in its absolute discretion, enter into any special arrangement with any potential purchasers without notifying other potential purchasers. Confidential Page 15 of 76 EFTA_R1_01426759 EFTA02395504 Ian Cheng CRI DI I Stisst 4. Market overview Memorandum ref: 1 4.1. Industry overview Climate change, lack of resources and energy scarcity are leading to an increasing number of regulations and policy changes put in place by governments around the globe. Associated high energy prices, rising environmental awareness and the need for compliance with such stricter regulations and government policies are encouraging energy users to look for more efficient energy usage and saving potentials. With an increasing demand, a fast growing industry segment is developing around providing energy efficient Solutions to clients in public, corporate and retail segments. The growth in the market for electrical equipment for energy efficiency solutions is driven by a wide range of regulatory, macro economical and socio•economical factors. Key drivers - energy saving market Governmental regulations and policies Stimulus package Lower cost of ownership of now technckgies Environmental awareness Rising electricity prices and consumption Urbanisation Strong GDP growth Use of thermal energy With global fossil fuel supply getting increasingly scarce and effects from climate change associated with CO2 emissions starting to be felt, the public as well as governments are turning their focus to large users of fossil fuels and emissions of CO2. A key contributor of CO2 emissions is the electricity production, which consumes 32% of global fossil fuel and is associated with 40% of energy related CO2 emissions. By 2030, global electricity demand is expected to double and coal will continue to be the most widely used fuel, accounting for up to 90% of new power generation in China'. Although new measures and legislations are paving the way towards the use of renewables and low•carbon energy, there is a necessity to improve generation, transmission and end user efficiency. By the time the energy reaches the end user an estimated 80% of the energy has already been lost through its transport, generation, transmission and distribution, industrial processes, etc. Such economics highlight the multiplying effect of energy savings at the end user level. A further important driver of energy efficiency products is economic growth. With 70% of power supply coming from thermal power plants, and a strong growth in energy demand, China sees itself confronted with pressure to increase supply, limit demand and attend to its environmental needs. While the global economy has been slowed by the financial crises, China is showing continued high single digit growth. The world GDP is expected to grow by 3.2% and 3.4% in 2010 and 2011 respectively, while China is expecting to speed ahead with 9.3% and 8.3% growth for the two years. ' Source: EIA, 'EA. Confidential Page 16 of 76 EFTA_R1_0 1426760 EFTA02395505 Ian Chang CREDIT SUISSE Memorandum ref: 1 China - real GDP growth 40.0O0 30,0O0 20,770 22,504 19,055 20,000 10.000 2007 2008 2009E Source: ER/. 837 33, 24 597 26.639 28,903 31,273 ' 36,400 15.0% 2010E 2011E 2012E 2013E 2014E 2015E Real GDP (bn CNY) — % Growth 10.0% 5.0% Key drivers behind China's continued strong growth are ongoing urbanization, as well as stimulus measures. Steadily rising urbanization ratio in China 80% 60% 40% 20% 0% 1980 1985 1990 1995 2000 2005 2010E 2015E 2020E 2025E 2030E •Urben population (as % of total population) Source: CreSt &Sot USW Nuke. WM. Conte:10mi.) i Page 17 of 76 EFTA_R1_01426761 EFTA02395506 Ian Cheng CREDIT SUISSE Memorandum ref: 1 The strong growth in energy consumption has been highly correlated to strong growth in GDP over the last years. China - energy consumption growth ROE n moons, 3.000 7.8% 7.3% 2.000 1,853 1,000 Source ERJ. 2,096 8.1% 2,394 2,531 2,671 2.817 2007 20O8 2009E 2010E 2011E 2012E 2013E 2014E Energy consumption (mn TOE) — % Growth 9.0% 6.0% 3.0% China's current thermal power plants are showing very high utilisation rates of over 4,500 - 5,000 hours', above global average of approx. 4,4003. To ensure enough energy without putting too much additional stress on the environment, China has introduced a series of new regulations and polices. These include a wide variety of measures to shift to renewable energy sources, but like most other developing countries, China has implemented energy efficient targets, and drafted policies and legislations that will be implemented by the most consuming economic sectors. Policies in China shifted from a centrally-planned system to a more market- oriented approach. Many energy efficient policies have been implemented, providing a clear legal framework, technology development guidelines and policy tools to allow energy efficiency improvement activities in various industries and sectors. ■ By 2010 China is expected to reduce energy consumption per unit of GDP by 20 percent from its 2005 levels (11" 5 year program) ■ On November 26, 2009, China announced that by 2020, it targets to reduce carbon dioxide (CO2) emission per GDP by 40.50% from 2005 levels ■ Specific policies for commercial buildings, including building codes, office equipment standards and labelling introduced ■ China targets a 4% annual improvement on energy efficiency ■ Energy supply target: doubling energy consumption, from 1.30 billion tons of coal equivalent or 0.92 billion tons of oil equivalent (toe) in 2000 (China Statistical Yearbook, 2004) to 1.83 billion toe in 2020 (Zhang, 2005) ■ Energy efficiency will reduce the need for new power capacity to satisfy increasing demand and represents a cheaper and quicker option, as well as reduce dependency on energy imports 14 energy efficiency policies have been put in place, most notably the Energy Conservation Law, the Cleaner Production Promotion Law, the Medium and Long-Term Energy Conservation Plan. Other tools are under review intended to highlight the main content of each policy and its effectiveness. The Medium and Long-Term Energy Conservation Plan, for example, which is part of the 11' five year plan period (2006.10), outlines ten programs promoting and increasing energy efficiency: Source: Credit Suisse estimates. ' Source: Nomura International. Confidential Page 18 of 76 EFTA_R1_01426762 EFTA02395507 Ian Chang CREDIT SUISSE Memorandum ref: I • Upgrade of low-efficiency coal-fired industrial boiler (Kiln) • District heat and power cogeneration: combined heat and power system, centralised heat supply instead of small boilers • Recovery of residual heat and pressure • Oil saving and substitution • Energy conservation of motor system • Optimization of energy system • Energy conservation in buildings • Green lighting • Energy conservation in government agencies • Building the energy conservation monitoring and technological support system Apart from new regulations, government stimulus and a general increase in environmental awareness, growth of energy efficient equipment is also driven by its own technological development. New production processes and technologies lower the cost of ownership of such equipment making it economically interesting for users to incorporate these also for pure economic reasons. Lighting market overview Lighting accounts for 19% of electricity use worldwide according to the lEA, out of which 31% is used for residential lighting and 69% for commercial, industrial and outdoor lighting. Philips estimates that up to 75% of all lighting currently installed does not offer the best energy usage and dissipates most of the energy used in the form of heat. This also means that buildings and lighting are particularly large contributors to global green house gas emissions. Global greenhouse gas emissions - building contribution 100% = 40Gt CO2 Forestry Transport 14 Buildings 14 Agriculture) - power missions (indirect through power usage) 13 (process '144,Industry emissions and direct emissions from primary energy waste usage) 23 Industry (mdirect emissions through power usage) 11 Buildings (direct emissions from primary energy usage) 8 100% = 8.2Gt CO2 Building contribution Standby losses AC r 2 Water heating Commercial 8 13 Residential appiances 15 ,' Lighting , appliances 9 ill1/41/4 • Space heating and ventilation 36 Source: Vattenhil, 2007. Confidential Page 19 of 76 EFTA_R1_01426763 EFTA02395508 Ian Chang CREDIT SUISSE Market forecast for illumination by application Memorandum ref: 1 Application 2008 2009E 2010E 2011E 2012E 2018E CAGR Replacement lamps 31 45 99 270 657 1,150 106.0% Architectural 203 222 274 328 455 618 24.9% Commercial / industrial 77 89 114 149 184 232 24.7% Outdoor area 8 37 63 110 155 221 94.2% Retail display 29 36 50 86 135 180 44.1% Residential 3 9 20 36 63 99 101.2% Other 173 163 201 245 305 348 15.0% Total 524 601 821 1,224 1,974 2,848 40.3% Change -YoY 15% 37% 49% 61% 44% Source: Strateges Unlisted. The Light Emitting Diode CLED1 lighting market is expected to grow by a CAGR of 40% reaching approximately USD 3bn market potential by 2013(4). The main growth driver of LED lighting is expected to come from replacement lamps from commercial and municipal lighting. LED lamps use 60%-80% less energy than incandescent light bulbs and provide equivalent or higher light efficiency in terms of luminosity per watt. LED lamps also have a much longer life span of up to 50K hours versus 1,000-2,000 hours for traditional incandescent bulbs. However, LED lights are currently 50 times more expensive than incandescent bulbs and 5-6 times more expensive than compact florescent lights. LED lighting has several benefits compared to incandescent and fluorescent lamps: • Does not contain any hazardous substance such as mercury or hazardous gases • Digital control which allows to control the intensity of the light (dimming and elimination of flicker) ■ Better reliability and longer lifetime ■ Faster response time Global LED lighting market size and growth USD millions 3,000 2,500 2.000 1.500 1,000 500 821 40 58 85 105 126 158 2051,224 1,974 2,848 2000 2002 2004 2006 2008 2010E 2012E Global LED lighting market size - Growth YOY Source: Strators Un ' Source: Strategies Unimitiorl. 100.0% 80.0% 60.0% 40.0% 20.0% Confidential Page 20 of 76 EFTA_R1_01426764 EFTA02395509 Ian Chang CREDIT SUISSE Memorandum ref: I Average life of lighting sources, in hours Light source Range of typical rated life Incandescent 750-2,000 Halogen incandescent 3,000-4,000 Compact fluorescent (CFL) 8,000.10,000 Metal halide 7,500.20,000 Linear fluorescent 20,000.30.000 High power white LED 35,000-50,000 (*) Sourer. US 001:017110111 of Energy. Note. (1 reflects est/naked ueelut Ile. The lighting industry is composed of 5 main business segments: ■ General lighting: includes the production of light bulbs, incandescent bulbs, halogen, fluorescent and high- intensity discharge bulbs ■ Ballasts: electronic systems that regulate the current flow and therefore allow to save energy ■ Automotive lighting: composed of headlights, brake lights, indicators and instrument panels. It varies from the classical bulbs to Xenon systems or LEDs ■ LED: semiconductors diodes used principally for illuminating facades and public areas ■ Luminaries: light fixtures including spotlights, desk lamps, etc. LEDs, luminaries and electronic ballasts offer an alternative to the less efficient lighting systems currently in use and can help to cut energy cost and the inefficient loss of energy through heat. Confidential Page 21 of 76 EFTA_R1_01426765 EFTA02395510 Ian Chong CREDIT SUISSE Memorandum refit Overview of lighting technologies Lighting type 0 -J • it • d Standard Incandescent Lamp CSPS Compact Fluorescent Lamps (CFL) Halogen Lamps CSPS LED Spotlights 18 Fluorescent Tube CSPS T5 Nano Ceramic Tube Discharge Lamps CSPS EMCIL CSPS LED Streetlight Typical luminous efficiency Description • application (lm/W) Used for general indoor lighting, dimmable. 10-15 Generate a lot of heat, poor efficiency and short lifetime. Forbidden in EU New generation of indoor lighting, saving energy lamps. Can be dimmable, high efficiency and good lifetime Incandescent technology spotlight. Used for spot lighting, ceiling spots, etc. Poor efficiency, shod lifetime Cutting edge LED technology, perfect substitute to Halogen lamps. Very high efficiency and lifetime. Wide range of colour The classic indoor diffuse light source. Used in all wide indoor area such as ware house, supermarket, office etc. Average efficiency, average lifetime. Can create electrical network disturbance New generation of fluorescent tube, using nano ceramic technology. High efficiency and lifetime. the perfect retrofitting solution to T8 High power lamps used for street lighting and industrial lighting. Poor to average efficiency, short lifetime. Poor to average color rendering. High heat generation. medium to high warm-up time Innovative technology of high power lamps. 85 Good efficiency and very long lifetime. High color rendering, instant start-up Typical lifetime (hours) 1.000 Typical financial efficiency X X X 70-85 15,000 ✓ 15-33 2,000.6,000 x x 60-85 30,000. ive ✓ 50,000 60-80 5,000- 0 20,000 85-100 30,000 1/ 50-100 LED technology applied to street lighting. 90 High efficiency and long life-time. Modem design. Mow solar lighting 5,000- 20,000 60,000 /11 50,000 &toot Company. Confidential Page 22 of 76 EFTA_R1_01426766 EFTA02395511 Ian cliang CREDIT SUISSE Memorandum ref: 1 China - street lighting market Energy efficiency and saving programs have been initiated by the Chinese government as part of its 11* 5 year program, most notably the LED lighting program "10,000 lights in 10 cities in China", which targets the installation of 1 million units of street lighting equipments in 21 major cities by 2010. The equipment will be installed on main streets, subways, tunnels, and other public areas. The expected worldwide penetration of LED streetlights will only represent around 1.3% in 2009. an estimated 2.5 million units while over 90% of street lights still use high pressure mercury sodium or mercury as the light. China alone accounts for 56% of the LED street lights demand for 2009.5 Global LED street light demand (ei means) 2007 2008 2009E 2010E 2011E Global streetlight units 174 181 193 205 213 LED streetlight units 0.4 0.9 2.5 4.5 8.5 LED streetlight penetration rate 0.23% 0.50% 1.30% 2.20% 3.99% LED streetbght annual growth rate 100% 125% 178% 80% 89% Source Topology Re-march Ineetute. China LED street light demand (n mittens) 2007 2008E 2009E 2010E 2011E Global LED streetlight unit 0.4 0.9 2.5 4.5 8.5 China LED streetlight unit 0.3 0.6 1.4 2.5 5.0 China market share 75% 67% 56% 56% 59% Source. Topology Research Institute The Chinese government initiated a general lighting source replacement for its street lights: ■ Phase 1, up to 2009: designate 21 cities as test beds, using lmillion units of LED lighting equipment. Goal of achieving 60% of domestic production in LED components ■ Phase 2, 2010-2012: designate 50 cities at test beds, using 2 million units of LED lighting equipment. Goal of achieving 70% of domestic production in LED components ■ Phase 3, 2013-2015: replace over 30% of total lighting market to LED LED lamps used in street lighting environment might come at a high cost in certain regions, where humidity requires frequent replacements and purchase cost for lamp parts are increasing amid high demand. EMDL lamps may provide for a cost conscious alternative for such applications. EMDL lamps transfer the power needed to generate light from the outside of the lamp envelope by means of electromagnetic fields. This allows to eliminate electrodes leading to several advantages over a traditional lamp: ■ Extended lamp life ■ Allows usage of high efficiency light-generating substances ■ Improved collection efficiency Compared to LED lamps. EMDL lamps are capable of coping with less optimal climatic conditions, such as high humidity, providing an interesting advantage especially in outdoor applications. °Source: Morgan Stanley. Confidential Page 23 of 76 EFTA_R1_01426767 EFTA02395512 Ian Chong CREDIT SUISSE Memorandum nal: 1 Energy saving devices China's strong GDP growth is driven by fast urbanisation, a booming real estate market and fast industrialization, all driving power consumption. With China's economy increasing dependence on heavy industries with high energy usage, the need for energy saving solutions becomes even more apparent. In addition, in international comparison, China's energy consumption per capita is still at a low level. As such, China's demand for energy remains high and consumption for electricity has continued to grow, even against the backdrop of a slowdown in exports as seen during the financial crises. Energy consumption per capita (mwh per head, 2006-2009) 16.0 12.0 8.0 4.0 0.0 2.2 12.8 12.9 12.6 7.77s 7-8 7.4 7.8 7.5 7.6 7.4 5.8 5.7 5.7 5.5 2.5 2.6 2.8 12.2 2006 2007 2008 2009 •Oiina •Japan IN France UK NUS Senn Eli On a per-capita basis, China still consumes substantially less energy than developed economies. Starling from this relatively low base, China's consumption per capita is expected to grow at a CAGR of 6.2% between 2005 and 2014, making the country one of the fastest growing users of energy. China energy consumption and real GDP growth 5.000 4,000 3,000 2.000 1,000 13.0% 2006 2007 2008 2009E 2010E 2011E 2012E 2013E 2014E Energy consumption (TOE) -Real GOP Growth (%) Source: DU. Confidential Page 24 of 76 EFTA_R1_0 1426768 EFTA02395513 Ian Chang CREDIT SUISSE Memorandum ref: I 4.2. Competitive landscape CSPS is active in the lighting market, providing lighting solutions. It also provides energy saving devices used in connection with lighting systems as well as motors of different sorts. Lighting The global lighting industry is highly consolidated with the three largest players, Philips, Siemens (Osram) and GE, controlling approximately half of the world market. ■ Philips: the company manufactures and sells a complete range of products including lamps, consumer and professional luminaries, lighting electronics, automotive, and LED components. The company adopted the "Green Lightning' concept and expects it to be an important growth driver. Core elements of its growth strategy are - License LED technology to accelerate adoption of its developments - Grow in emerging markets - Perform bolt-on acquisitions to gain customer proximity - Invest in R&D (4.5% of sales) Philips' energy saving technology Energy saving technology Old technology New technology Energy savings," CO2 savings / lamp/ year Road lighting High pressure mercury CosmoPolis 57% 109 kg Road lighting High pressure sodium CosmoPolis 10% n/a Shop lighting Halo CDM 80% 115kg Office & industrial lighting 78 fluorescent 75 fluorescent 61% 77kg Home lighting Incandescent Compact fluorescent 85% 34kg Source: Mips. (I/ Competed with corwerecnal noandesoent bulbs or sings/ light output. ■ Siemens (Osram): sells lamps, LEDs, LED systems and luminaries. The company also sees green lighting as being an important growth driver. Core elements of its further development include: - Move production to low cost countries viewed as critical to remain competitive - Phase out "basic" plants and focus on "green' plants - Focus on launching "world class" products - Invest in LED (R&D is approx. EUR 100m p.a. equivalent to 15% of LED sales) - Provide an integrated LED offering (components, modules and LED•LUM) Siemens' energy saving technology CO2 savings / Energy saving technology Old technology New technology Energy savings" lamp/ year Road lighting High pressure mercury High pressure sodium 40% 130 kg Shop lighting Halostar Ceramic metal halide 80% 210kg Office & industrial lighting Fluorescent with halophosphate Fluorescent with 3- band phosphate 80% 140kg Home lighting Incandescent Compact fluorescent 80% 30kg Source: Siemens. CompantO with conventional turandoscont bulbs or simian Ight okapis'. Confidential Page 25 of 76 EFTA_R1_01426769 EFTA02395514 Ian Qwng CREDIT SUISSE Memorandum ref: I ■ GE: the lighting business unit, part of the Consumer and Industrial division, has been put into discontinued operations and management is looking to dispose of the business. Key steps of the refocusing measures include: - Continue major restructuring: lay off 2,500 employees from GE lighting division in Hungary over two years, with possibility of total shutdown of its Hungarian operations and transfer of production to low- cost countries — Focus on compact fluorescent light bulb (CFL) product enhancement to maintain innovation leadership position in the light bulb category - Deliver innovations in LED outdoor area lights to capture technology shift - Expand China presence through major strategic partnership with Sichuan Changhong Partners to rebuild Sichuan city ■ Cree: produces semiconductors used in LED lighting, light fixtures, high electron mobility transistors among other products. As an upstream producer of LED chips, it provides players in the lighting sector with highest quality material. With its entry into the down stream market, it now also offers a wide range of lighting-grade LED products ranging from buildings and street lighting to video displays, laptops, digital cameras, traffic signals ■ Epistar: located in Taiwan it is one of the key LED players worldwide. The group's principal activities are researching, developing, manufacturing and selling LED wafers and chips. Products include phosphorus aluminium gallium indium (AlGalnP) wafer and chip, arsenic aluminium gallium (AlGaAs) wafer and chip, indium gallium (InGaN) Epi wafer and chip. Si photo diode and Si photo transistor. The group exports its products to Asia and other regions. It is currently focused on the upstream business. Energy saving devices The market for energy saving devices is mainly targeted by local players. Large international companies are mostly focused on the production of new equipment with higher energy efficiency, and provide their customers with replacement equipment. The only major international player active in the provisioning of energy efficiency boxes in China is Schneider Electric. ■ Schneider Electric: It is a world leader in offering energy efficiency solutions. It offers products for electrical distribution, industrial con