THIS DOCUMENT IS IN DRAFT FORM, INCOMPLETE …...equity interest in Telma Shanghai, calculated by...

The following discussion should be read in conjunction with the financial information of

the Target Group for the Track Record Period, together with the accompanying notes, as set

out in the Accountants’ Reports in Appendix IIIA, IIIB and IIIC to this document. The

financial information of the Target Group included in the Accountants’ Reports in Appendix

IIIA, IIIB and IIIC to this document have been prepared in accordance with HKFRS. You

should read the entire Accountants’ Reports as set out in Appendix IIIA, IIIB and IIIC to this

document in conjunction with the information contained in this section.

The following discussion and analysis contains certain forward-looking statements that

reflect our current views with respect to future events and financial performance. These

statements are based on our assumptions and analysis in light of the experience and

perception of the Investor and the proposed Directors as to historical trends, current

conditions and expected future developments, as well as factors that the Investor and the

proposed Directors believe are appropriate under the circumstances. However, whether actual

outcomes and developments will meet the expectations and predictions of the Investor and the

proposed Directors depends on a number of risks and uncertainties some of which are beyond

our control. Factors that could cause or contribute to such differences include those

described in the section entitled “Risk Factors” and elsewhere in this document.

The financial year of the Target Group begins on 1 January and ends on 31 December.

All references to “FY2017”, “FY2018” and “FY2019” mean the financial years ended 31

December 2017, 2018 and 2019, respectively.

OVERVIEW

The Target Group, specializes in the manufacturing of electromagnetic braking systemsbased on the physical principle of electromagnetic induction (i.e. the Telma-branded retarders).According to the Euromonitor Report, the Target Group currently ranks first in the inductionbraking system/vehicle retarders market in Europe and China in terms of market share.

The Target Group has established relationships with many world renowned vehicles brandsand manufacturers. As at 31 December 2019, the Target Group supplied its electromagneticretarder products through the two manufacturing plants situated in France and the PRC to 143vehicle and machinery manufacturing customers.

The proposed Directors (except the proposed independent non-executive Directors) believethat the success of the Target Group is attributable to its long-standing presence in theelectromagnetic braking systems industry, its quality products and its brand recognition amongits customers.

The Target Group adopts a prudent financial approach towards its business to ensure asustainable growth and to improve the manufacturing process by continuously devotingresources to improve its technology through research and development.

THIS DOCUMENT IS IN DRAFT FORM, INCOMPLETE AND SUBJECT TO CHANGE. THE INFORMATION IN THIS DOCUMENTMUST BE READ IN CONJUNCTION WITH THE SECTION HEADED “WARNING” ON THE COVER OF THIS DOCUMENT.

FINANCIAL INFORMATION OF TARGET GROUP

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BASIS OF PREPARATION

Prior to the Acquisition Completion, 70% of Telma Shanghai was indirectly owned byTorque and 30% of Telma Shanghai was directly owned by Yutong Group, respectively. In theAcquisition, the Company will acquire 100% equity interest in Telma S.A., together with TelmaS.A.’s 70% equity interest in Telma Shanghai, from the Vendor in accordance with the ShareTransfer Agreement and 30% equity interest in Telma Shanghai from Yutong Group under thePRC Sale and Purchase Agreement and the Sale and Purchase Agreement, respectively. Suchacquisition of Telma S.A. from the Vendor and 30% of equity interest in Telma Shanghai fromZhengzhou Yutong, together with Target Company II (which was incorporated on 22 May 2017)and its wholly owned subsidiary, namely Lucky Base, (which was incorporated on 3 March 2017and will hold 30% equity interests in Telma Shanghai) (collectively, the “Nominee Group”), asstipulated under the Share Transfer Agreement, the Sale and Purchase Agreement and the PRCSale and Purchase Agreement, respectively, will form the Target Group upon the AcquisitionCompletion. For further details, please refer to the section headed “History And Background ofTarget Group – Reorganization” in this document.

The audited historical financial information of the electromagnetic braking systemsbusiness conducted by Target Group mainly reflected the business results of Telma S.A. andTelma Shanghai as operated by Torque during the Track Record Period which was extracted fromthe Accountants’ Report of the Target Group set out in Appendix IIIA to this document. Thisdocument includes three sets of financial information in respect of the Target Group includingNominee Group set forth as Appendices IIIA, IIIB and IIIC, respectively:

• the audited historical financial information of the Target Group which comprised thecombined statements of financial position of the Target Group as at 31 December2017, 2018 and 2019, the combined statements of profit or loss and othercomprehensive income, the combined statements of changes in equity and thecombined statements of cash flows, for each of the Track Record Period, and asummary of significant accounting policies and other explanatory information.Included in the Accountants’ Report of the Target Group as set forth in Appendix IIIAare results and equity attributable to Torque during the Track Record Period in respectof Target Company I, Torque’s 100% equity interest in Telma S.A. and 70% equityinterest in Telma Shanghai under the current structure of the Target Groupimmediately before the Acquisition Completion;

• the audited historical financial information of Telma Shanghai which comprised thestatements of financial position of Telma Shanghai as at 31 December 2017, 2018 and2019 and the statements of profit or loss and other comprehensive income, thestatements of changes in equity and the statements of cash flows for each of the TrackRecord Period. Included in the accountants’ report of Telma Shanghai as set forth inAppendix IIIB are results and equity attributable to the shareholders of TelmaShanghai during the Track Record Period which includes Zhengzhou Yutong’s 30%equity interest in Telma Shanghai under the current structure of the Target Groupimmediately before the Acquisition Completion; and



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• the audited historical financial information of Target Company II and its subsidiary,namely Lucky Base, which comprised the combined statements of the financialposition of the Nominee Group as at 31 December 2017, 2018 and 2019 and thecombined statements of profit or loss and other comprehensive income, the combinedstatements of changes in equity and the statements of cash flows for the period from 3March 2017 (the date of incorporation of Lucky Base) to 31 December 2017 and forthe two years ended 31 December 2019, as set forth in Appendix IIIC to thisdocument.

In accordance with Rule 14.69 of the Listing Rules, set out below is the reconciliation ofcombined net profit of the Target Group including the Nominee Group for the Track RecordPeriod immediately following the Acquisition Completion:

For the year ended 31 December2017 2018 2019

Ref. RMB’000 RMB’000 RMB’000

Combined net profit of the TargetCompany I attributable to Torquefor its 100% direct equity interestin Telma S.A. and 70% indirectequity interest in Telma Shanghai(Note 1) a 17,609 21,360 24,179

Net profit of Telma Shanghaiattributable to Yutong Group forits 30% direct equity interest inTelma Shanghai (Note 2) b 5,670 7,143 9,958

Combined net profit of the TargetGroup, excluding the NomineeGroup (Note 3) c=a+b 23,279 28,503 34,137

Combined net loss of the NomineeGroup (Note 4) d (9) (25) (13)

Total combined net profit of theTarget Group including theNominee Groups e=c+d 23,270 28,478 34,124



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Notes:

1. as extracted from “the Accountants’ Report of the Target Group” as set forth in Appendix IIIA to thisdocument and representing the combined net profit of Target Company I attributable to Torque for its100% direct equity interest in Telma S.A. and 70% indirect equity interest in Telma Shanghai.

2. as derived from “the Accountants’ Report of Telma Shanghai” as set forth in Appendix IIIB to thisdocument, and representing the net profit of Telma Shanghai attributable to Yutong Group for its 30%equity interest in Telma Shanghai, calculated by multiplying the net profit of Telma Shanghai by 30%.

3. representing the sum of (i) the combined net profit of the Target Company I attributable to Torque for its100% direct equity interest in Telma S.A. and 70% indirect equity interest in Telma Shanghai and (ii) thenet profit of Telma Shanghai attributable to Yutong Group for its 30% equity interest in Telma Shanghai.

4. as extracted from “the Accountants’ Report of Target Company II” as set forth in Appendix IIIC to thisdocument.

JH CPA Alliance Limited, the reporting accountants engaged by the Company, hasperformed procedures in respect of the compilation of the “Total combined net profit of theTarget Group including the Nominee Groups” (the “Statement”) for the Track Record Period inaccordance with Hong Kong Standard on Related Services 4400 “Engagements to PerformAgreed-Upon Procedures Regarding Financial Information” issued by the Hong Kong Institute ofCertified Public Accountants (“HKICPA”). JH CPA has agreed the amounts in the “Totalcombined net profit of the Target Group including the Nominee Groups” set out above bychecking and matching to the corresponding amounts appearing in the respective Accountants’Reports prepared by KPMG, the reporting accountants of the Target Group and Telma Shanghai,and itself, being the reporting accountants of Target Company II as disclosed in Appendix IIIA,Appendix IIIB and Appendix IIIC respectively; checked the arithmetical accuracy of thecalculations in the schedules; and agreed the amounts in the schedules based on JH CPA’sreview. JH CPA has concluded that, based on the information available and the results ofprocedures performed, no exception was found and no additional adjustment was required inrespect of the calculation of the statement.

The management discussion and analysis contained in this section is based on the financialinformation of the Target Group, excluding the Nominee Group, which has operated theelectromagnetic braking systems business throughout the Track Record Period prior to theAcquisition Completion. Unless the context indicates otherwise, it means the financial data andstatistics of the Target Group, excluding the Nominee Group.



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KEY FACTORS AFFECTING THE TARGET GROUP’S RESULTS OF OPERATIONS

The Target Group’s results of operations and financial condition have been and willcontinue to be affected by a number of factors, including those set forth below.

Customer demand and average selling price of the products of the Target Group

The Target Group’s financial condition and results of operations are dependent on thecustomer demand of the Target Group’s products. The Target Group’s customers are mainlyglobal and regional vehicle and machinery manufacturing customers and the Target Group’sproducts form part of their vehicles or machinery and their demand is dependent on its continuedgrowth, viability and financial stability. If the demand for products of the Target Group does notgrow at the pace as anticipated by the Target Group, its business, results of operations andfinancial condition could be adversely affected.

The average selling price of the Target Group’s products is affected by the marketcompetition and customer demand for the retarders in its target markets. The Target Group’scustomers are generally price sensitive and the market competition may drive down the sellingprice of its products and affect its financial condition and results of operation.

Change in products mix

The Target Group’s financial condition and results of operations are affected by changes inits product mix. The Target Group’s main products are broadly categorized into Axial series andFocal® series. During the Track Record Period, revenue derived from the sales of Focal® seriesproducts accounted for the largest portion of the Target Group’s total revenue. During the TrackRecord Period, revenue generated from the sales of the Focal® series products accounted forapproximately 51.4%, 48.0% and 49.3%, respectively, of the Target Group’s total revenue.Whilst revenue from Axial series products accounted for approximately 33.7%, 36.6% and 35.7%of the Target Group’s total revenue respectively, for the same period. As different products havedifferent average selling prices and different margin, changes in the Target Group’s product mixwould have a direct impact on the Target Group’s results of operations and financial condition.

Cost of direct materials

The direct materials of the Target Group mainly consist of wires and rotors, the price ofwhich are largely influenced by the commodity price of copper, steel alloy and aluminum.During the Track Record Period, direct materials accounted for approximately 70.2%, 70.6% and72.8% of the total Target Group’ cost of sales. Continuing volatility in the prices for the directmaterials, parts and components may have adverse effects on the Target Group’s business, resultsof operations and financial condition. The Target Group will continue its efforts to pass materialand components cost increases on to its customers. However, competitive and market pressureshave limited ability of the Target Group to do so, and may prevent the Target



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Group from doing so in the future, because its customers are generally not obligated to acceptits proposed price increases.

The following sensitivity analysis illustrates the impact of hypothetical fluctuations indirect material costs on the profit before tax of the Target Group during the Track RecordPeriod. Fluctuations in the direct materials cost are assumed to be 5%, 7.5% and 10%.

Hypothetical fluctuations ofdirect materials cost +/- 5% +/- 7.5% +/-10%

RMB’000 RMB’000 RMB’000

Decrease/increase in profit before taxYear ended 31 December 2017 8,255 12,382 16,510Year ended 31 December 2018 8,040 12,060 16,080Year ended 31 December 2019 9,060 13,589 18,119

Prospective investors should note that the above analysis on the historical financials isbased on assumptions and is for reference only and should not be viewed as actual effect.

Research and development

The proposed Directors (except the proposed independent non-executive Directors) are ofthe view that technological leadership is one of the key factors attributable to the success of theTarget Group. The Target Group’s research and development expenses charged to the combinedstatement of profit and loss and other comprehensive income were approximately RMB19.4million, RMB16.4 million and RMB21.3 million, representing approximately 5.8%, 5.2% and6.1% of the total revenue for the year ended 31 December 2017, 2018 and 2019, respectively.The Target Group plans to prioritize the research and development efforts in technologies thatoffer attractive long-term growth opportunities by improving the performance and reducing theproduction costs of the existing retarder series. Any change in the Target Group’s research anddevelopment capability may adversely affect the result of operations of the Target Group.

Tax treatment and rates

Pursuant to the EIT Law, with respect to a high and new technology enterprise, the taxlevied on its income will be at a rate of 15% after obtaining the High-tech Enterprise Certificateand completing the filing with the competent tax authorities. Telma Shanghai obtained theHigh-tech Enterprise Certificate dated 23 November 2017, which granted Telma Shanghai theright to use the preferential income tax rate for years 2017 to 2019. Pursuant to the relevantPRC tax laws, Telma Shanghai was entitled to a preferential tax rate of 15% for the years 2017to 2019. If Telma Shanghai fails to maintain its status as a high technology enterprise, pursuantto the relevant PRC tax laws, it will be subject to a tax rate of 25%.



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In 2016, Telma S.A. was subject to a tax inspection by the French Tax Authority (“FTA”)in respect of its tax affairs for years 2013 to 2015. Subsequent to this inspection, the FTAchallenged that the withholding tax rate for dividends distributed by Telma S.A. to Torqueshould have applied 30% instead of 10% adopted by Telma S.A. As a result, the FTA issued anotice to Telma S.A., being the withholding agent for the tax, to levy additional withholding taxand related late interest. For more details, please refer to the paragraph headed “French dividendwithholding tax indemnity arrangements” in this section and the section headed “Accountants’Report of the Target Group” in Appendix IIIA to this document. For the relevant risk factor,please refer to the section headed “Risk Factors – Dividends distributed by Telma S.A. to Torquemay be subject to dividend withholding tax under France tax laws” in this document.

SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES

The Target Group has identified certain accounting policies that are significant to thepreparation of the Target Group’s financial information. Some of the accounting policies involvesubjective assumptions and estimates and judgments relating to accounting items. In each case,the determination of these items requires management judgments based on information andfinancial data that may change in future periods. Please see below those accounting policies thatare significant in the preparation of the Target Group’s financial information. Details of otheraccounting policies and accounting judgements and estimates are set out in Note 2 and Note 28to the Accountants’ Report in Appendix IIIA to this document, respectively.

Revenue Recognition and other income

HKFRS 15, “Revenue from Contracts with Customers” replaces the previous revenuestandards HKAS 18 “Revenue” and IAS 11 “Construction Contracts” and related interpretations.The Target Group has adopted HKFRS 15 throughout the Track Record Period. The adoption ofHKFRS 15 has no material impact on the financial information for the years ended 31 December2017, 2018 and 2019.

Income is classified by the Target Group as revenue when it arises from the sale of goodsor the provision of services in the ordinary course of the Target Group’s business.

Revenue is recognised when control over a product or service is transferred to the customerat the amount of promised consideration to which the Target Group is expected to be entitled,excluding those amounts collected on behalf of third parties. Revenue excludes value added taxor other sales taxes and is after deduction of any trade discounts.

Where the contract contains a financing component which provides a significant financingbenefit to the customer for more than 12 months, revenue is measured at the present value of theamount receivable, discounted using the discount rate that would be reflected in a separatefinancing transaction with the customer, and interest income is accrued separately under theeffective interest method. Where the contract contains a financing component which provides asignificant financing benefit to the Target Group, revenue recognised under that contractincludes the interest expense accreted on the contract liability under the effective interestmethod. The Target Group takes advantage of the practical expedient in paragraph 63 of HKFRS



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15 and does not adjust the consideration for any effects of a significant financing component ifthe period of financing is 12 months or less.

Intangible Assets (other than goodwill)

Expenditure on research activities is recognised as an expense in the period in which it isincurred. Expenditure on development activities is capitalized if the product or process istechnically and commercially feasible and the Target Group has sufficient resources and theintention to complete development. The expenditure capitalized includes the costs of materials,direct labour, and an appropriate proportion of manufacturing overheads and borrowing costs,where applicable. Capitalized development costs are stated at cost less accumulated amortisationand impairment losses. Other development expenditure is recognised as an expense in the periodin which it is incurred.

Other intangible assets that are acquired by the Target Group are stated at cost lessaccumulated amortisation (where the estimated useful life is finite) and impairment losses.

Amortisation of intangible assets with finite useful lives is charged to profit or loss on astraight-line basis over the assets’ estimated useful lives. The following intangible assets withfinite useful lives are amortised from the date they are available for use and their estimateduseful lives are as follows:

• Computer software 10 years• Technical know-how 10 years• Customer relationships 10 years• In-process R&D 5–10 years

Both the period and method of amortisation are reviewed annually.

Intangible assets are not amortised while their useful lives are assessed to be indefinite.Any conclusion that the useful life of an intangible asset is indefinite is reviewed annually todetermine whether events and circumstances continue to support the indefinite useful lifeassessment for that asset. If they do not, the change in useful life assessment from indefinite tofinite is accounted for prospectively from the date of change and in accordance with the policyfor amortisation of intangible assets with finite lives as set out above.

Inventories

Inventories are carried at the lower of cost and net realisable value.

Cost is calculated using the weighted average cost formula and comprises all costs ofpurchase, costs of conversion and other costs incurred in bringing the inventories to their presentlocation and condition.



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Net realisable value is the estimated selling price in the ordinary course of business less theestimated costs of completion and the estimated costs necessary to make the sale.

When inventories are sold, the carrying amount of those inventories is recognised as anexpense in the period in which the related revenue is recognised. The amount of any write-downof inventories to net realisable value and all losses of inventories are recognised as an expensein the period the write-down or loss occurs. The amount of any reversal of any write-down ofinventories is recognised as a reduction in the amount of inventories recognised as an expense inthe period in which the reversal occurs.

Trade and other receivables

A receivable is recognised when the Target Group has an unconditional right to receiveconsideration. A right to receive consideration is unconditional if only the passage of time isrequired before payment of that consideration is due. If revenue has been recognised before theTarget Group has an unconditional right to receive consideration, the amount is presented as acontract asset.

Trade and other receivables are initially recognised at fair value and thereafter stated atamortised cost using the effective interest method, less allowance for impairment of doubtfuldebts, except where the receivables are interest-free loans made to related parties without anyfixed repayment terms or the effect of discounting would be immaterial. In such cases, thereceivables are stated at cost less allowance for impairment of doubtful debts.

Financial instruments

HKFRS 9 replaces HKAS 39, Financial instruments: recognition and measurement. It setsout the requirements for recognising and measuring financial assets, financial liabilities andsome contracts to buy or sell non-financial items.

The Target Group has applied HKFRS 9, Financial instruments, to items that existed at 1January 2018 in accordance with the transition requirements. The Target Group has concludedthat there is no material impact for the initial application of the new impairment requirements,therefore, no adjustment is made to the opening equity at 1 January 2018.

HKFRS 16, Leases

HKFRS 16 replaces HKAS 17, Leases, and the related interpretations, HK(IFRIC) 4,Determining whether an arrangement contains a lease, HK(SIC) 15, Operating leases –

incentives, and HK(SIC) 27, Evaluating the substance of transactions involving the legal form of

a lease. It introduces a single accounting model for lessees, which requires a lessee to recognisea right-of-use asset and a lease liability for all leases, except for leases that have a lease term of12 months or less (“short-term leases”) and leases of low-value assets. The lessor accountingrequirements are brought forward from HKAS 17 substantially unchanged.



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HKFRS 16 also introduces additional qualitative and quantitative disclosure requirementswhich aim to enable users of the financial statements to assess the effect that leases have on thefinancial position, financial performance and cash flows of an entity.

The Target Group has initially applied HKFRS 16 as from 1 January 2019. The TargetGroup has elected to use the modified retrospective approach and has therefore recognised thecumulative effect of initial application as an adjustment to the opening balance of equity at 1January 2019. Accordingly, the Historical Financial Information presented for the years ended 31December 2017 and 2018 has not been restated and continues to be reported under HKAS 17.



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SUMMARY OF RESULTS OF OPERATIONS

Combined statements of profit or loss and other comprehensive income

Years ended 31 December2017 2018 2019

RMB’000 RMB’000 RMB’000

Revenue 333,618 314,710 347,210

Cost of sales (235,226) (227,644) (248,967)

Gross profit 98,392 87,066 98,243

Other net income 2,472 9,839 12,377Selling and distribution expenses (30,854) (24,200) (24,816)General and administrative expenses (22,290) (23,237) (24,036)Research and development expenses (19,437) (16,377) (21,307)

Profit from operations 28,283 33,091 40,461

Finance costs (111) (387) (397)

Profit before taxation 28,172 32,704 40,064

Income tax (4,893) (4,201) (5,927)

Profit for the year 23,279 28,503 34,137



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RMB’000 RMB’000 RMB’000

Profit for the year 23,279 28,503 34,137Other comprehensive income for the year

(after tax)Item that will not be reclassified to

profit or loss:Changes in actuarial gains and losses of

defined benefit retirement plan 2,076 – (278)Item that may be reclassified subsequently to

profit or loss:Exchange differences on translation of

financial statements of French entity(Note) 5,780 562 (358)

Total comprehensive income forthe year 31,135 29,065 33,501

Note: The results of the Target Group’s entity in France are translated into RMB at the exchange rates approximatingthe foreign exchange rates ruling at the dates of the transactions. Statement of financial position items aretranslated into RMB at the closing foreign exchange rates at the end of the reporting period. The resultingexchange differences are recognised in other comprehensive income and accumulated separately in equity in theexchange reserve.



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DESCRIPTION OF SELECTED ITEMS OF COMBINED STATEMENTS OF PROFIT ORLOSS AND OTHER COMPREHENSIVE INCOME

Revenue

The principal activities of the Target Group are manufacturing of electromagnetic brakingsystems based on the physical principle of electromagnetic induction. The following table setsout the breakdown of the revenue by product categories for the periods specified below:


Revenue

% oftotal

revenueQuantity

sold

Averageselling

price Revenue

% oftotal

revenueQuantity

sold

Averageselling

price Revenue

% oftotal

revenueQuantity

sold

Averageselling

priceRMB’000 Unit RMB

per unitRMB’000 Unit RMB

per unitRMB’000 Units RMB

per unit

Axial series(Note 1) 112,497 33.7% 7,064 15,925 115,248 36.6% 6,980 16,511 124,015 35.7% 7,576 16,370

Focal® series(Note 2) 171,463 51.4% 24,483 7,003 151,175 48.0% 21,668 6,977 171,223 49.3% 25,223 6,788

Parts 49,658 14.9% NA NA 48,287 15.4% NA NA 51,972 15.0% N/A N/A

Total 333,618 100.0% 31,547 NA 314,710 100.0% 28,648 NA 347,210 100.0% 32,799 N/A

Notes:

1. Axial series are the main targets for the sales in the Non-PRC markets.

2. Among the Focal® series, the DX series are designed for PRC market.



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Cost of Sales

Cost of sales represents costs directly attributed to the Target Group’s revenue generatingactivities and consists principally of cost of direct materials, direct labour costs andmanufacturing overheads.

Cost of direct materials mainly represent purchase costs of wire and rotors, which are madeup of copper, steel alloy and aluminium. Direct labour costs consist primarily of labour cost andbenefits. Cost of manufacturing overheads mainly comprised costs and expenses related to themanagement and planning for manufacturing and support functions, utilities, ancillary materials,equipment maintenance expenses. The following table sets forth the components of cost of salesof the Target Group for the periods specified below:


RMB’000 % RMB’000 % RMB’000 %

Direct materials 165,097 70.2 160,798 70.6 181,192 72.8Direct labour costs 40,431 17.2 40,302 17.7 42,297 17.0Manufacturing overheads 23,524 10.0 21,073 9.3 15,335 6.2Depreciation and

amortisation 6,174 2.6 5,471 2.4 10,143 4.0

Total 235,226 100.0 227,644 100.0 248,967 100.0

The Target Group has implemented a Performance Improvement Management System(“PIMS”) since 2012 for monitoring purchasing production, overhead expenses and saving byreviewing the production process. The PIMS analyses the earnings and operating margin fordifferent project types (including the components for retarders) on a monthly basis and identifiesareas for improvement. As such, the management of the Target Group, in general, has been ableto identify areas for improvement in budget control and keep track on the progress of the PIMSfor measures implemented. During the Track Record Period, the Target Group has alsoimplemented a number of cost reduction initiatives relating to cost of sales, includingnegotiating with existing suppliers or seeking alternative suppliers for better terms for directmaterials and implementing production efficiency improvements.

Gross profit and gross profit margin

Gross profit represents the total revenue minus the cost of sales and gross profit marginrepresents the percentage of dividing the gross profit by the total revenue.



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The following table sets out the breakdown of the gross profit and gross profit margin ofthe Target Group’s products categories for the periods specified below:


GrossProfit

GrossProfit

MarginGrossProfit

GrossProfit

MarginGrossProfit

GrossProfit

MarginRMB’000 % RMB’000 % RMB’000 %

Axial series 24,858 22.1 25,718 22.3 26,807 21.6Focal® series 46,492 27.1 37,644 24.9 48,192 28.1Parts 27,042 54.5 23,704 49.1 23,244 44.7

Total 98,392 29.5 87,066 27.7 98,243 28.3

Other net income

Other net income consists of interest income from bank deposits, government grants,foreign exchange gain/(loss) and net service income. Government grants mainly representunconditional subsidies to support training of research and development personnel and researchand development of vehicle braking system applications and individual income tax refundreceived from the Chinese local government by Telma Shanghai. For FY2018, there was netservice income of RMB7.0 million arising from providing technical research and developmentservice to an independent third party and service income of approximately RMB1.5 millionarising from technical services to a related party, Telma Retarder Inc. For FY2019, there was netservice income of RMB9.8 million arising from providing technical research and developmentservice to Independent Third Parties. For details of the service income, please refer to the“Research and Development” in the section headed “Business of the Target Group” in thisdocument.

Selling and distribution expenses

Selling and distribution expenses principally include marketing and entertainment expenses,salary paid to the sales and marketing and after sales service employees of the Target Group.The following table sets out the breakdown of the Target Group’s selling and distributionexpenses during the Track Record Period:


RMB’000 RMB’000 RMB’000

Marketing and entertainment 12,059 5,503 5,146Staff costs 13,532 14,398 13,265After sales service & warranty 2,201 1,346 1,644Technical service fee payable to Yutong

Group (Note 1) 446 – –Others (Note 2) 2,616 2,953 4,761

Total 30,854 24,200 24,816



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Notes:

1. This represented technical fees paid to Yutong Group on annual basis in accordance with the joint venturecontract signed on July 2005. In March 2018, Yutong Group confirmed that Yutong Group has no longerenjoyed any shareholder and other rights in Telma Shanghai in accordance with the joint venture contractdated July 2005 since its signing of the equity transfer agreement to transfer 30% equity interest in TelmaShanghai to Well Goal Limited on 2 May 2017, Therefore, no technical service fee was charged by YutongGroup since May 2017.

2. Other selling and distribution expenses mainly included depreciation costs and rental expenses.

General and administrative expenses

Administrative expenses principally include salary paid to management and administration,human resources and finance employees, depreciation and amortisation costs for officeequipment and intangible assets and office and insurance related expenses. The following tablesets out the breakdown of the Target Group’s general and administrative expenses for the periodsspecified below:


RMB’000 RMB’000 RMB’000

Staff costs 12,787 14,143 13,841Depreciation and amortisation 4,010 4,106 4,189Legal and professional expenses 1,653 1,706 1,971Travelling expenses 395 421 611Rental 455 495 426Maintenance 462 185 163Training 243 237 567Others (Note) 2,285 1,944 2,268

Total 22,290 23,237 24,036

Note: Other general and administrative expenses mainly included insurance costs and office-related costs.

Research and development expenses

Research and development expenses principally include staff costs paid to research anddevelopment employees, consultants fees paid to third parties, costs for prototypes and othercosts and expenses incurred for product research and development.



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Finance costs

Finance costs primarily consist of interests on bank loans and other borrowings and financecharges on obligations under finance leases. During the Track Record Period, the Target Group’sfinance costs were approximately RMB0.1 million, RMB0.4 million and RMB0.4 million,respectively.

PERIOD-TO-PERIOD COMPARISON OF RESULTS OF OPERATIONS



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– 285 –



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Comparison of FY2017 and FY2018

Revenue

The Target Group’s revenue decreased by approximately RMB18.9 million or 5.7% fromapproximately RMB333.6 million for FY2017 to approximately RMB314.7 million for FY2018mainly due to the decrease in revenue generated from the China Segment resulted from thedecrease in sales to Yutong Group and Customer C. The management of the Target Groupconsidered that the decrease in sales to Yutong Group and Customer C was affected by thedecline in the vehicle market in the PRC in 2018.

Cost of sales

The Target Group’s cost of sales decreased by approximately RMB7.6 million or 3.2% fromapproximately RMB235.2 million for FY2017 to approximately RMB227.6 million for FY2018mainly due to the decrease in direct materials cost of approximately RMB4.3 million as a resultof the decrease in quantity sold of Focal® series and Axial series products by approximately11.5% and 1.2% respectively and partly offset by the increase in average purchase cost of wiresand rotors. The decrease in quantity sold of Focal® series products was mainly due to thedecrease in sales to Yutong Group and the decrease in quantity sold of Axial series products wasmainly due to the decrease in sales to Customer B.


As a result of the above, the Target Group’s gross profit decreased by approximatelyRMB11.3 million or 11.5% from approximately RMB98.4 million for FY2017 to approximatelyRMB87.1 million for FY2018 and the gross profit margin decreased from approximately 29.5%for FY2017 to approximately 27.7% for FY2018. The decrease in the gross profit margin forFY2018 was mainly attributable to the increase in the average purchase cost of wires byapproximately 0.1% and the average purchase cost of rotors by approximately 6.6%.

Other net income

The Target Group’s other net income increased by approximately RMB7.4 million or298.0% from approximately RMB2.5 million for FY2017 to approximately RMB9.8 million forFY2018 mainly due to the service income of RMB7.0 million arising from providing technicalresearch and development service to an independent third party. For details of the serviceincome, please refer to the “Research and Development” in the section headed “Business of theTarget Group” in this document.


The Target Group’s selling and distribution expenses decreased by approximately RMB6.7million or 21.6% from approximately RMB30.9 million for FY2017 to approximately RMB24.2million for FY2018 mainly due to the decrease in marketing and entertainment expenses of



– 287 –

approximately RMB6.6 million resulted from the effect of continuing cost control such as thereduction of the entertainment expenses.

General and administration expenses

The Target Group’s general and administration expenses increased by approximatelyRMB0.9 million or 4.2% from approximately RMB22.3 million for FY2017 to approximatelyRMB23.2 million for FY2018 mainly due to the increase in the basic salary of the general andadministrative staff.


The Target Group’s research and development expenses decreased by approximatelyRMB3.1 million or 15.7% from approximately RMB19.4 million for FY2017 to approximatelyRMB16.4 million for FY2018 mainly due to the development costs of approximately RMB5.3million were capitalised for FY2018 partially offset by the increase in the basic salary of theresearch and development staff.

Finance costs

The Target Group’s finance costs increased by approximately RMB0.3 million or 248.6%from approximately RMB0.1 million for FY2017 to approximately RMB0.4 million for FY2018mainly due to interest on bank loans and other borrowings of approximately RMB0.3 million forFY2018.

Income tax

The Target Group’s income tax expenses decreased by approximately RMB0.7 million or14.1% from approximately RMB4.9 million for FY2017 to approximately RMB4.2 million forFY2018. Such decrease was mainly due to the decrease in the corporate income tax rate inFrance from 33.33% for the year ended 31 December 2017 to 28.0% on the first Euro500,000 ofprofits and the remaining profits subject to the 33.33% standard rate after 1 January 2018 andthe over-provision of income tax in Telma Shanghai in respect of prior year. The effective taxrate, which is calculated based on income tax expenses dividend by profit before taxation, wasapproximately 17.4% and 12.8% for FY2017 and FY2018, respectively.

Profit for the year

As a result of the above, the Target Group’s net profit for FY2018 was approximatelyRMB28.5 million, representing an increase of approximately RMB5.2 million, or 22.4%,compared to that for FY2017 of approximately RMB23.3 million. The Target Group’s net profitmargin for FY2017 and the FY2018 were approximately 7.0% and 9.1%, respectively.



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Comparison of FY2018 and FY2019

Revenue

The Target Group’s revenue increased by approximately RMB32.5 million or 10.3% fromapproximately RMB314.7 million for FY2018 to approximately RMB347.2 million for FY2019mainly due to (i) the increase in revenue generated from the China Segment resulted from theincrease in the sales quantity of the Focal® series products and Axial series products and partlyoffset by the decrease in average selling price of Focal® series products and Axial seriesproducts and (ii) the increase in revenue generated from the Non-PRC Segment resulted from theeffect of the increase in the average selling prices and the quantity sold of the Axial seriesproducts.

Cost of sales

The Target Group’s cost of sales increased by approximately RMB21.3 million or 9.4%from approximately RMB227.6 million for FY2018 to approximately RMB249.0 million forFY2019 mainly due to the increase in direct materials cost of approximately RMB20.4 million asa result of the increase in quantity sold of Focal® series products.


As a result of the above, the Target Group’s gross profit increased by approximatelyRMB11.2 million or 12.8% from approximately RMB87.1 million for FY2018 to approximatelyRMB98.2 million for FY2019 and the gross profit margin increased slightly from approximately27.7% for FY2018 as compared to approximately 28.3% for FY2019.

Other net income

The Target Group’s other net income increased by approximately RMB2.5 million or 25.8%from approximately RMB9.8 million for FY2018 to approximately RMB12.4 million for FY2019mainly due to the increase in net service income arising from providing technical research anddevelopment service to independent third parties. For details of the service income, please referto the “Research and Development” in the section headed “Business of the Target Group” in thisdocument.


The Target Group’s selling and distribution expenses increased by approximately RMB0.6million or 2.5% from approximately RMB24.2 million for FY2018 to approximately RMB24.8million for FY2019 mainly due to the increase in other expenses of approximately RMB1.8million and partly offset by the decrease in staff costs of approximately RMB1.1 million.



– 288-a –

General and administration expenses

The Target Group’s general and administration expenses increased by approximatelyRMB0.8 million or 3.4% from approximately RMB23.2 million for FY2018 to approximatelyRMB24.0 million for FY2019 mainly due to the increase in the training and others expenses.


The Target Group’s research and development expenses increased by approximatelyRMB4.9 million or 30.1% from approximately RMB16.4 million for FY2018 to approximatelyRMB21.3 million for FY2019 mainly due to the continuous investment in research anddevelopment of the Group.

Finance costs

The Target Group’s finance costs remained stable at approximately RMB0.4 million forFY2018 and FY2019.

Income tax

The Target Group’s income tax expenses increased by approximately RMB1.7 million or41.1% from approximately RMB4.2 million for FY2018 to approximately RMB5.9 million forFY2019 mainly due to the increase in revenue for FY2019. The effective tax rate, which iscalculated based on income tax expenses dividend by profit before taxation, was approximately12.8% and 14.8% for FY2018 and FY2019, respectively.

Profit for the year

As a result of the above, the Target Group’s net profit for FY2019 was approximatelyRMB34.1 million, representing an increase of approximately RMB5.6 million, or 19.8%,compared to that for FY2018 of approximately RMB28.5 million. The Target Group’s net profitmargin for FY2018 and FY2019 were approximately 9.1% and 9.8%, respectively.



– 288-b –

DISCUSSION OF THE TARGET GROUP’S RESULTING SEGMENT

The Non-PRC Segment mainly covers sales of the Axial series and Focal® series, primarilyin Europe, North and South America and Australia under the Target Group’s management basedin France whereas the China Segment mainly covers sales of the Focal® series across the entirePRC market under the Target Group’s management based in Shanghai, the PRC. The followingtable sets forth the segment results of the Target Group for the periods specified below:

For the year ended 31 December2017 2018 2019

RMB’000 RMB’000 RMB’000

Segment revenue– Non-PRC Segment 174,103 175,542 182,681– China Segment 159,515 139,168 164,529

333,618 314,710 347,210

Segment gross profit– Non-PRC Segment 47,797 45,675 46,401– China Segment 50,595 41,391 51,842

98,392 87,066 98,243

Gross profit margin– Non-PRC Segment 27.5% 26.0% 25.4%– China Segment 31.7% 29.7% 31.5%

29.5% 27.7% 28.3%

Reportable segment profit beforetaxation

– Non-PRC Segment 8,391 9,281 4,352– China Segment 23,558 27,484 39,546

31,949 36,765 43,898

Reportable segment profit margin beforetaxation

– Non-PRC Segment 4.8% 5.3% 2.4%– China Segment 14.8% 19.7% 24.0%

9.6% 11.7% 12.6%



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Segment revenue

(i) Non-PRC Segment

The Target Group’s revenue for the Non-PRC Segment increased by approximately RMB1.4million, or approximately 0.8%, from approximately RMB174.1 million for FY2017 toapproximately RMB175.5 million for FY2018 mainly due to the effect of the increase in theaverage selling price of the Axial series products and Focal® series products outweighed theeffect of the decrease in sales quantity of the Axial series products and Focal® series products.

The Target Group’s revenue for the Non-PRC Segment increased by approximately RMB7.1million, or approximately 4.1%, from approximately RMB175.5 million for FY2018 toapproximately RMB182.7 million for FY2019 mainly due to the effect of the increase in theaverage selling prices and the quantity sold of the Axial series products.

(ii) China Segment

The Target Group’s revenue for the China Segment decreased by approximately RMB20.3million, or approximately 12.8%, from approximately RMB159.5 million for FY2017 toapproximately RMB139.2 million for FY2018 mainly due to decrease in the sales quantity andthe average selling price of the Focal® series products.

The Target Group’s revenue for the China Segment increased by approximately RMB25.4million, or approximately 18.2%, from approximately RMB139.2 million for FY2018 toapproximately RMB164.5 million for FY2019 mainly due to the increase in the sales quantity ofthe Focal® series products and Axial series products and partly offset by the decrease in averageselling price of the Focal® series products and Axial series products.



– 290 –

Segment gross profit and gross profit margin

(i) Non-PRC Segment

The Target Group’s segment gross profit for the Non-PRC Segment decreased byapproximately RMB2.1 million, or approximately 4.4%, from approximately RMB47.8 millionfor FY2017 to approximately RMB45.7 million for FY2018 mainly due to the decrease in thesales quantity of Focal® series products. The Target Group’s segment gross profit margin for theNon-PRC Segment decreased from approximately 27.5% for FY2017 to 26.0% for FY2018mainly due to the decrease in gross profit margin in Focal® series products resulted from theincrease in average purchase cost of wires and rotors and the decrease in average selling price.

The Target Group’s segment gross profit for the Non-PRC Segment increased byapproximately RMB0.7 million, or approximately 1.6%, from approximately RMB45.7 millionfor FY2018 to approximately RMB46.4 million for FY2019 mainly due to the effect of theincrease in the average selling prices and the quantity sold of the Axial series products. TheTarget Group’s segment gross profit margin for the Non-PRC Segment decreased fromapproximately 26.0% for FY2018 to 25.4% for FY2019 mainly due to the decrease in grossprofit margin in the Focal® series products and the Axial series products resulted from theincrease in average purchase cost of wires and rotors.

(ii) China Segment



– 291 –

The Target Group’s segment gross profit for the China Segment decreased by approximatelyRMB9.2 million, or approximately 18.2%, from approximately RMB50.6 million for FY2017 toapproximately RMB41.4 million for FY2018 mainly due to the decrease in the sales quantity ofthe Focal® series products and the decrease in average selling price of Axial series products andFocal® series products. As such, the Target Group’s segment gross profit margin for the ChinaSegment decreased from approximately 31.7% for FY2017 to 29.7% for FY2018.

The Target Group’s segment gross profit for the China Segment increased by approximatelyRMB10.5 million, or approximately 25.2%, from approximately RMB41.4 million for FY2018 toapproximately RMB51.8 million for FY2019 mainly due to the increase in the sales quantity ofthe Focal® series products and Axial series products and partly offset by the decrease in averageselling price of the Focal® series products and Axial series products. As such, the Target Group’ssegment gross profit margin for the China Segment increased from approximately 29.7% forFY2018 to 31.5% for FY2019.

Segment profit and profit margin

(i) Non-PRC Segment

The Target Group’s reportable segment profit for the Non-PRC Segment increased byapproximately RMB0.9 million, or approximately 10.6%, from approximately RMB8.4 millionfor FY2017 to approximately RMB9.3 million for FY2018 mainly due to the decrease inresearch and development expenses due to part of the development costs were capitalised forFY2018. The Target Group’s reportable segment profit margin for the Non-PRC Segmentincreased from approximately 4.8% for FY2017 to approximately 5.3% for FY2018 due to thesame reasons described above.

The Target Group’s reportable segment profit for the Non-PRC Segment decreased byapproximately RMB4.9 million, or approximately 53.1%, from approximately RMB9.3 millionfor FY2018 to approximately RMB4.4 million for FY2019 mainly due to the increase in researchand development expenses for FY2019. The Target Group’s reportable segment profit margin forthe Non-PRC Segment decreased from approximately 5.3% for FY2018 to approximately 2.4%for FY2019 due to the same reasons described above.



– 292 –

(ii) China Segment

The Target Group’s reportable segment profit for the China Segment increased byapproximately RMB3.9 million, or approximately 16.7%, from approximately RMB23.6 millionfor FY2017 to approximately RMB27.5 million for FY2018 mainly due to the service income ofapproximately RMB7.0 million. The Target Group’s reportable segment profit margin for theChina Segment increased from approximately 14.8% for FY2017 to approximately 19.7% forFY2018 due to the same reasons described above.

The Target Group’s reportable segment profit for the China Segment increased byapproximately RMB12.1 million, or approximately 43.9%, from approximately RMB27.5 millionfor FY2018 to approximately RMB39.5 million for FY2019 mainly due to the increase inrevenue and the increase in net service income for FY2019. The Target Group’s reportablesegment profit margin for the China Segment increased from approximately 19.7% for FY2018to approximately 24.0% for FY2019 due to the same reasons described above.

During the Track Record Period, the Target Group’s Non-PRC Segment had a relativelylower segment profit margin as compared to that of its China segment mainly because (i) theNon-PRC Segment had a lower gross profit margin than the China Segment due to their differentmix of products. The key products of the Target Group’s Non-PRC Segment were Axial seriesproducts which have a lower gross profit margin than the key products of the Target Group’sChina segment which were the Focal® series products; and (ii) the staff costs for the key costcenters such as quality control and research and development in the Target Group’s Non-PRCSegment were higher than that of the China segment as such personnel are primarily situated inFrance.



– 293 –

ANALYSIS OF COMBINED STATEMENTS OF FINANCIAL POSITION

The following table sets out the Target Group’s combined statements of financial positionas of the dates indicated:

As at 31 December2017 2018 2019

RMB’000 RMB’000 RMB’000

Non-current assetsProperty, plant and equipment 17,569 16,924 32,524Intangible assets 14,176 15,211 14,648Goodwill 16,237 16,330 16,264Deferred tax assets 5,383 3,881 4,684

Total non-current assets 53,365 52,346 68,120

Current assetsInventories 29,032 33,212 36,404Trade and other receivables 121,878 167,089 167,545Pledge bank deposits 14,847 1,625 –Cash and cash equivalents 50,636 45,056 65,432

Total current assets 216,393 246,982 269,381

Current liabilitiesBank loans 1,545 989 1,133Trade and other payables 92,277 92,726 82,269Lease liabilities – – 5,811Current taxation 1,898 1,955 4,183Provisions 4,625 2,493 2,840Net defined benefit retirement obligations

due within one year 296 549 90

Total current liabilities 100,641 98,712 96,326

Net current assets 115,752 148,270 173,055

Total assets less current liabilities 169,117 200,616 241,175

Non-current liabilitiesBank loans – 2,911 2,384Lease liabilities – – 8,146Net defined benefit retirement obligations 6,648 7,502 8,491Deferred tax liabilities 4,749 3,418 2,059

Total non-current liabilities 11,397 13,831 21,080

NET ASSETS 157,720 186,785 220,095



– 294 –

DESCRIPTION OF SELECTED ITEMS OF COMBINED STATEMENTS OF FINANCIALPOSITION

Inventories

The Target Group’s inventories include direct materials, work in progress and finishedgoods. Direct materials primarily include wire and rotors. The following table sets out asummary of the balance of inventories as at the dates indicated:

As at 31 December2017 2018 2019

RMB’000 RMB’000 RMB’000

Raw materials 20,311 23,919 23,634Work in progress 5,254 6,026 6,818Finished goods 3,467 3,267 5,952

29,032 33,212 36,404

The increase in inventories from approximately RMB29.0 million as at 31 December 2017to approximately RMB33.2 million as at 31 December 2018 was primarily due to theconsignment stock maintained at Yutong Group as at 31 December 2018. For details of suchconsignment stock arrangement, please refer to “Customer” in the section headed “Business ofthe Target Group” in this document. As at 31 December 2019, the inventories increased toapproximately RMB36.4 million as compared to approximately RMB33.2 million as at 31December 2018 mainly due to the increase in finished goods as at 31 December 2019.

The Target Group regularly reviews the inventories on hand and evaluates future demandbased on two weeks confirmed orders and six months sales forecast. Impairment provisions arerecognized when there is objective evidence that inventory is obsolete based on the past twelvemonths orders and inventory movements.

The following table sets out the Target Group’s average inventory turnover days for theyears indicated:


Average inventory turnover days (Note) 41.0 49.9 51.0



– 295 –

Note: Inventory turnover days is calculated using the average balance of inventory divided by the cost of salesfor the relevant year and multiplied by the number of days in the relevant year. Average balance ofinventory is calculated as the sum of the beginning and the ending balance for the relevant year divided bytwo.

The Target Group’s inventory turnover days increased to 49.9 days for FY2018 due to theincrease in inventory level as explained above. The Target Group’s inventory turnover daysremained stable at approximately 51.0 days for FY2019.

As of the Latest Practicable Date, the Target Group had used or sold approximately 78.9%or approximately RMB28.7 million of the total balance of the inventories as at 31 December2019.

Trade and other receivables

The Target Group’s trade receivables primarily consist of amounts payable by third-partycustomers. The following table sets out the trade and other receivables of the Target Group as atthe dates indicated:

As at 31 December2017 2018 2019

RMB’000 RMB’000 RMB’000

Trade and bills receivable 98,031 141,499 149,794

VAT recoverable 913 2,503 2,188Other receivables due from Torque

(Note 1) 4,965 4,969 5,086French dividend withholding

tax receivable from Torque (Note 2) 9,979 10,296 3,774Other receivables due from third parties 6,279 7,076 6,486Deposits and prepayments 1,711 746 217

121,878 167,089 167,545

Notes:

1. In June 2017, Telma S.A. purchased the intellectual property rights and tooling from Torque. Theconsideration of approximately RMB5.6 million was offset by the receivables due from Torque. Theremaining amount is expected to be settled upon the Acquisition Completion.

2. Please refer to Note 26 of the Accountant’s Report in Appendix IIIA of this document for details.



– 296 –

The Target Group regularly reviews its aging analysis and evaluate the collectability of itscustomers on an individual basis. The following table sets out the aging analysis based on theinvoice date of the trade and bills receivables of the Target Group (net of loss allowance) as atthe dates indicated:

As at 31 December2017 2018 2019

RMB’000 RMB’000 RMB’000

Within 1 month 23,934 41,947 55,9281 to 3 months 45,165 59,844 69,6123 to 12 months 28,932 39,708 24,246More than 12 months – – 8

98,031 141,499 149,794

With the adoption of HKFRS 9 on 1 January 2018, HKFRS 9 replaces the “incurred loss”model in HKAS 39 with the “expected credit loss” model. The “expected credit loss” modelrequires an ongoing measurement of credit risk associated with a financial asset and thereforerecognises the expected credit losses earlier than under the “incurred loss” accounting model inHKAS 39. Prior to 1 January 2018, an impairment loss was recognised only when there wasobjective evidence of impairment. The following table sets out the aging analysis of the tradeand bill receivables of the Target Group based on the due date as at 31 December 2017respectively:

As at31 December

2017RMB’000

Neither past due nor impaired 81,636

Less than 6 months past due 16,3346 to 12 months past due 6112 to 24 months past due –

Total past due but not impaired 16,395

98,031



– 297 –

The following table provides information about the Target Group’s exposure to credit riskas at 31 December 2018 and average expected loss rate for the trade receivables for the yearended 31 December 2018.

Telma S.A.

Foreign customers (Note 1)

Expected lossrate

Grosscarryingamount

Lossallowance

% RMB’000 RMB’000

Current (not past due) 0.0116% 14,486 2Less than 3 months past due 0.0116% 4,899 –3 to 6 months past due 0.0116% 10 –6 to 12 months past due 0.0116% 1,093 –12 to 24 months past due 0.0116% – –Bankruptcy 100% 60 60

20,548 62

French vehicle and other machinery manufacturing customers

Expected lossrate

Grosscarryingamount

Lossallowance

% RMB’000 RMB’000

Current (not past due) 0.2320% 24,902 58Less than 3 months past due 1.4500% 1,458 213 to 6 months past due 5.8000% 93 56 to 12 months past due 17.4000% – –12 to 24 months past due 17.4000% – –

26,453 84



– 297-a –

French distributors

Expected lossrate

Grosscarryingamount

Lossallowance

% RMB’000 RMB’000

Current (not past due) 0.2320% 2,182 5Less than 3 months past due 1.4500% 413 63 to 6 months past due 5.8000% – –6 to 12 months past due 17.4000% – –12 to 24 months past due 17.4000% – –Bankruptcy 100% 390 390

2,985 401

Telma Shanghai

Strategic customers (Note 2)

Expected lossrate

Grosscarryingamount

Lossallowance

% RMB’000 RMB’000

Current (not past due) 0.00% 79,691 –Less than 6 months past due 0.00% 12,632 –6 to 12 months past due 0.00% 979 –12 to 24 months past due 0.00% – –24 to 36 months past due 0.00% – –

93,302 –



– 297-b –

Other customers (Note 3)

Expected Lossrate

Grosscarryingamount loss allowance

% RMB’000 RMB’000

Current (not past due) 0.00% – –Less than 6 months past due 0.00% – –6 to 12 months past due 0.01% – –12 to 24 months past due 100.00% 596 59624 to 36 months past due 100.00% – –More than 36 months past due 100.00% 457 457

1,053 1,053

The following table provides information about the Target Group’s exposure to creditrisk as at 31 December 2019 and average expected loss rate for the trade receivables for theyear ended 31 December 2019.

Telma S.A.

Foreign customers (Note 1)

Expected lossrate

Grosscarryingamount

Lossallowance

% RMB’000 RMB’000

Current (not past due) 0.0116% 15,238 2Less than 3 months past due 0.0116% 1,119 –3 to 6 months past due 0.0116% – –6 to 12 months past due 0.0116% 103 –12 to 24 months past due 0.0116% – –Bankruptcy 100% 102 102

16,562 104



– 297-c –

French vehicle and other machinery manufacturing customers

Expected lossrate

Grosscarryingamount

Lossallowance

% RMB’000 RMB’000

Current (not past due) 0.2320% 24,722 57Less than 3 months past due 1.4500% 3,731 543 to 6 months past due 5.8000% 29 26 to 12 months past due 17.4000% – –12 to 24 months past due 17.4000% – –

28,482 113

French distributors

Expected lossrate

Grosscarryingamount

Lossallowance

% RMB’000 RMB’000

Current (not past due) 0.2320% 2,372 6Less than 3 months past due 1.4500% 559 83 to 6 months past due 5.8000% – –6 to 12 months past due 17.4000% – –12 to 24 months past due 17.4000% – –Bankruptcy 100% 388 388

3,319 402



– 297-d –

Telma Shanghai

Strategic customers (Note 2)

Expected lossrate

Grosscarryingamount

Lossallowance

% RMB’000 RMB’000

Current (not past due) 0.00% 95,746 –Less than 6 months past due 0.00% 6,873 –6 to 12 months past due 0.00% – –12 to 24 months past due 0.00% – –24 to 36 months past due 0.00% – –

102,619 –

Other customers (Note 3)

Expected lossrate

Grosscarryingamount

Lossallowance

% RMB’000 RMB’000

Current (not past due) 0.00% – –Less than 6 months past due 0.00% 93 –6 to 12 months past due 0.34% 210 112 to 24 months past due 98.74% 712 70324 to 36 months past due 100.00% 264 264More than 36 months past due 100.00% 169 169

1,448 1,137

Note 1: Telma S.A. has credit insurance to cover 99.9884% of its trade receivables for foreign customers.Therefore, the ECL rate of 0.0116% for trade receivables of Telma S.A. represents uncoveredratio apart from insurance. For foreign customers which are in bankruptcy, the ECL rate of 100%represents the remaining receivable balance which is not covered by the credit insurance.

Note 2: For strategic customers of Telma Shanghai, based on assessment of past history of tradereceivables, there was no actual bad debt incurred. Therefore, the ECL rates estimated by themanagement are 0.0000%.



– 297-e –

Note 3: Telma Shanghai has significantly reduced its business with one customer since late 2018 due toits delay in payment of trade receivables because of its poor cash flow. Therefore, TelmaShanghai has re-categorised this customer from strategic customer to other customer in June 2019and provided loss allowance based on expected loss rate presented above for its outstandingbalance which has been over 6 months past due as at 31 December 2019.

Expected loss rates are estimated by management based on actual loss experience overthe past 3 years. These rates are adjusted to reflect differences between economicconditions during the period over which the historic data has been collected, currentconditions and the Target Group’s view of economic conditions over the expected lives ofthe receivables.

As at 31 December 2018, the increase in trade and bills receivables of the TargetGroup was mainly due to the increase in bills receivable as at 31 December 2018 whichwas due to Yutong Group having changed its payment method from bank transfer to bankacceptance bills since 2018 that had a maturity date of six months. Credit terms range from25 to 120 days from the date of billing depending on the creditworthiness of the customerwhich is assessed based on their payment history and ability to make repayments. Thefollowing table sets out the Target Group’s average trade and bill receivables turnover daysfor the year indicated:


Average trade and bill receivablesturnover days (Note) 100.9 138.9 153.1

Note: Trade and bill receivables turnover days is calculated using the average balance of trade and billreceivables divided by the revenue for the relevant year and multiplied by the number days in therelevant year (i.e 365 days for the three years ended 31 December 2019). Average balance of tradeand bill receivables is calculated as the sum of the beginning and the ending balance for the relevantyear, divided by two.

The Target Group’s average trade and bill receivables turnover days increased toapproximately 138.9 days for FY2018 mainly due to the increase in bills receivable as at 31December 2018 which was due to Yutong Group having changed its payment method from banktransfer to bank acceptance bills since 2018 that had a maturity date of six months. In the eventthat the Target Group experiences significant financial difficulty arising from the operating cashoutflow position in the future, the Target Group will consider to discount part of the billreceivables to its banks prior to their maturity for improving the operating cash outflow position.The Target Group’s average trade and bill receivables turnover days increased to approximately153.1 days for FY2019, which was mainly due to the change in the credit term to Yutong Groupfrom 30 days upon receipt of invoice to 60 days upon receipt of invoice since 1 May 2019.



– 297-f –

As at the Latest Practicable Date, approximately 85.7% or approximately RMB128.3million of the Target Group’s trade receivables outstanding as at 31 December 2019 was settled.

Pledged bank deposits

The pledged bank deposits with fixed interest rate of 1.55% per annum represent cashmaintained at banks as security for guarantees of payment relating to the issuance of billspayable to vendors. Upon maturity of the bills payable, the restriction on the bank deposits isreleased.

Trade and other payables

The Target Group’s trade and other payables primarily consist of amounts payable to thirdparties for the purchase costs of direct materials and other production costs, staff costs andmanufacturing overheads. The following table sets out the balance of the trade and otherpayables as of the dates indicated:

As at 31 December2017 2018 2019

RMB’000 RMB’000 RMB’000

Trade creditors and bills payable 58,387 46,442 57,042Contract liabilities 1,511 62 242Staff cost payable 17,561 16,765 18,845Other payables 4,472 19,098 2,366Accrued charges 367 63 –French dividend withholding tax provision 9,979 10,296 3,774

92,277 92,726 82,269

As at 31 December 2017, 2018 and 2019, the trade and other payables remained relativelystable at approximately RMB92.3 million, RMB92.7 million and RMB82.3 million, respectively.



– 298 –

The following table sets out the aging analysis of the trade creditors and bills payablesbased on the invoice date is as follows:

As at 31 December2017 2018 2019

RMB’000 RMB’000 RMB’000

Within 1 month 43,644 27,940 41,152After 1 month but within 3 months 13,978 15,349 14,871After 3 months but within 1 year 671 3,060 692Over 1 year 94 93 327

Total 58,387 46,442 57,042

Payment terms to suppliers typically range from 30 to 90 days. The following table sets outthe Target Group’s average trade and bill payables turnover days for the years indicated:


Average trade and bill payables turnoverdays 82.4 84.0 75.9

Note: Trade and bill payables turnover days is calculated using the average balance of trade and bill payablesdivided by the cost of sales for the relevant year and multiplied by the number of days in the relevant year(i.e. 365 days for the three years ended 31 December 2019). Average balance of trade and bill payables iscalculated as the sum of the beginning and the ending balance for the relevant year, divided by two.

The Target Group’s average trade and bill payables turnover days remained relatively stableat approximately 82.4 days, 84.0 days and 75.9 days during FY2017, FY2018 and FY2019,respectively. The Target Group’s average trade and bill payables turnover days decreased toapproximately 75.9 days for FY2019, which was mainly due to the shorter credit term offered byseveral suppliers.

As at the Latest Practicable Date, approximately 86.5% or approximately RMB49.3 millionof the Target Group’s trade creditors and bills payables outstanding as at 31 December 2019 wassettled.



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Goodwill

Goodwill represents the amount recognised by Torque when it acquired Telma S.A. fromValeo S.A. in August 2010 were measured and recorded at the date of acquisition at their fairvalues. In accordance with the Target Group’s accounting policies, management has assessed therecoverable amount of goodwill and determined that the goodwill was not impaired. Therecoverable amount of the cash-generating unit was determined by a value-in-use calculation,which used cash flow projections based on financial budgets approved by management. The cashflow projections covered a period of five years and adopted pre-tax discount rate ofapproximately 21.8%, 19.8% and 18.8% for the years ended 31 December 2017, 2018 and 2019respectively. The discount rate considered the applicable weighted average cost of capital of theTarget Group and the specific risks relating to the respective Target Group’s businesses. Thecash flow projections have taken into account the historical financial performance, expectedsales growth rate and profit margin of the Target Group, market conditions and other availableinformation. The assumptions used are based on management’s past experience of the specificmarket, having made reference to external sources of information. Cash flows beyond thefive-year period are extrapolated using estimated growth rate of 3%, 2.5% and 2.5% for theyears ended 31 December 2017, 2018 and 2019, respectively, which does not exceed thelong-term average growth rate for the business in which the Target Group operates.

The estimated recoverable amount of the cash-generating unit based on a value-in-usecalculation exceeded its carrying amount by approximately Euro8.7 million (equivalent toapproximately RMB67.8 million), Euro18.4 million (equivalent to approximately RMB144.8million) and Euro17.1 million (equivalent to approximately RMB133.7 million) as at 31December 2017, 2018 and 2019, respectively. The management of the Target Group hasconsidered a reasonably possible change in the discount rate that could cause the recoverableamount of the cash-generating unit to be less than the carrying amount at end of each reportingperiod. With other assumptions remain unchanged, the pre-tax discount rate would need toincrease to higher than 35.2%, 40.5% and 32.5% in respect of the impairment test in FY2017,FY2018 and FY2019, respectively, for the estimated recoverable amount to be less than thecarrying amount.

For more details, please refer to “Appendix IIIA – Accountants’ Report of the TargetGroup” to this document.

Net defined benefit retirement obligation

Telma S.A. in France maintains a defined benefit retirement plan which covers theindemnity to be paid to its employees when they retire. A defined amount is granted to theemployees according to the French Collective Labor Agreement for metalworking industrydepending on the number of years worked and the final salary at retirement.

The calculation of the obligations is based on a valuation performed by Societe General asat 31 December 2017 and 2018, independent actuaries using the projected unit credit method andfinal salaries. The payment obligations are gradually settled when the employees retire which is



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expected to be over a maximum period of 40 years. The plan is funded by Telma S.A.,employees are not required to contribute to the plan. The weighted-average duration of thedefined benefit obligation is 13.2 years, 13.2 years and 13.5 years as at 31 December 2017, 2018and 2019, respectively. In FY2017, Telma S.A. contributed approximately Euro0.5 million(equivalent to approximately RMB3.4 million) to a fund managed by an insurance company tomeet its future obligations of the defined benefit plan and to coincidentally enjoy an additionaltax deduction. Telma S.A. does not have commitment to make further contribution to this fundbut will decide to make in future after considering certain factors, such as availability offinancial resources, return on plan assets etc.

The Target Group’s net defined benefit retirement obligation remained stable atapproximately RMB6.9 million, RMB8.1 million and RMB8.6 million as at 31 December 2017,2018 and 2019, respectively.

For more details, please refer to “Appendix IIIA – Accountants’ Report of the TargetGroup” to this document.

French dividend withholding tax indemnity arrangements

In 2016, Telma S.A. was subject to a tax inspection by the FTA in respect of its tax affairsfor year 2013 to 2015. Subsequent to this inspection, the FTA challenged that the withholdingtax rate for dividends distributed by Telma S.A. to Torque should have applied 30% instead of10% adopted by Telma S.A. As a result, the FTA issued a notice to Telma S.A., being thewithholding agent for the tax, to levy additional withholding tax and related late interestamounting to approximately Euro0.6 million (approximately RMB4.0 million as at 31 December2016) in relation to the dividends distribution during years 2013 to 2015 to Torque based on ahigher withholding tax rate. Consequently, Telma S.A. has been challenged by the FTA regardingthe dividend distribution to Torque during FY2016. As Torque or Telma S.A failed to defend itstax position for FY2016, additional withholding tax and late interest of approximately Euro1.3million (equivalent to approximately RMB9.3 million as at 31 December 2016) has been leviedby the FTA. In response to the tax risk, Torque and Telma S.A. have engaged externalconsultants to defend their tax position for FY2016.

In the opinion of the external tax lawyer of Telma S.A., Torque is the primary obligor ofthe dividend withholding tax and Telma S.A. is levied by the FTA in its capacity as thewithholding agent. On 5 June 2017, Torque and Telma S.A. signed an indemnity agreement,pursuant to which Torque covenants to assume all French withholding tax in respect of anydividend paid or declared by Telma S.A. to Torque, and Torque will fully indemnify Telma S.A.against the liability of any additional withholding tax, losses, damages, costs, expenses, fines,interest or penalties incurred in this regard. In connection with this indemnity agreement, the



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Investor, an independent third party, has agreed to deposit cash in the amount of approximatelyobligations. Euro1.8 million as a guarantee for Torque’s payment obligations.

As a result, the Target Group has recognised a provision for French withholding tax ofapproximately Euro1.8 million (approximately RMB13.3 million as at 31 December 2016) and acorresponding amount recoverable from Torque in the combined statements of financial positionas at 31 December 2016.

After further discussions with the FTA, the FTA agreed to revise the calculation base of thewithholding tax and issued a tax demand notice on 27 November 2017 (“Tax Demand Notice”)for a total amount of approximately Euro1.3 million in respect of the withholding tax for years2013 to 2016 and related late interest, subject to the condition that the withholding tax burden isultimately borne by Torque. As a result, the Target Group has reduced the provision for Frenchwithholding tax from approximately Euro1.8 million as at 31 December 2016 (equivalent toapproximately RMB13.3 million as at 31 December 2016) to approximately Euro1.3 million asat 31 December 2017 (equivalent to approximately RMB10.0 million as at 31 December 2017)and approximately Euro1.3 million as at 31 December 2018 (equivalent to approximatelyRMB10.3 million as at 31 December 2018) and a corresponding amount recoverable from Torquein the combined statement of financial position with no impact to profit and loss. However,Torque and Telma S.A. submitted the Contest Letter to the FTA regarding the revised taxassessment in December 2017 and asked for the deferred payment. Thereafter, the FTA issuedthe FTA Guarantee Request in April 2018 by which the FTA demanded Telma S.A. to promptlyoffer guarantees to cover the amount of approximately Euro1.2 million (which is equivalent tothe reduced withholding tax excluding the related late penalties). Subsequently, in order toadhere to the FTA Guarantee Request, Telma S.A. and Torque opted for creating an escrowaccount which is ultimately set up and funded by Torque. The Contest Letter was rejected by aletter from the FTA in June 2018 (“Rejection Letter”), as Telma S.A. was not able to provideany Torque’s residency certificate issued by the Hong Kong tax authorities for the years 2013 to2016 to the FTA. The Rejection Letter was challenged before the Administrative Court ofCergy-Pontoise in July 2018. As a consequence, the FTA cannot ask for immediate payment ofthe withholding tax before a judgment of this Court is made, which will take at least a year.However, due to the long delay in compliance with the FTA Guarantee Request in setting up anescrow account, the FTA has taken preventive seizure since December 2018 pursuant to whichcertain VAT and research and development tax benefits to which Telma S.A. is entitled havebeen withheld. In December 2018, four preventive seizures were taken on Telma S.A.’s taxreceivables against the French Treasury which amounted to approximately Euro0.3 million.According to the external tax lawyer of Telma S.A., such preventive seizures have no taximplication for both the year ended 31 December 2018 and the year ending 31 December 2019.In April 2019, Torque and Telma S.A. entered into an agreement with FTA in respect of thepayment schedule of withholding tax amounting to approximately Euro1.3 million. According tothe agreed payment schedule, the withholding tax will be settled in five instalments as toapproximately Euro0.4 million before end of April 2019 (the “First Instalment”), and theremaining approximately Euro0.9 million in four instalments before end of July 2019, October2019, January 2020 and April 2020, respectively. In accordance with the agreed paymentschedule, Torque paid the First Installment, and the second and the third instalment of



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approximately EUR0.2 million each into FTA’s designated bank account which was received bythe FTA on 16 April 2019, 9 September and 12 November 2019, respectively. After receiving theFirst Instalment, FTA has released the preventive seizures and stopped taking any newpreventive seizures. Although the fourth instalment of EUR225,000 and the fifth instalment ofEUR225,024 were originally due for payment in January 2020 and April 2020 respectively,because of the COVID-19 Pandemic, the FTA has allowed the payment of these two instalmentsto be postponed to the end of June 2020. Based on the tax lawyer’s opinion, given all thesuccessive and exceptional postpones granted, any failure regarding the payment on the expiryof the new deadline would be considered as a breach of the payment schedule and the FTA couldtake measures to obtain immediately the forced recovery of any outstanding tax from TelmaS.A.. It is expected that the FTA will calculate the late payment interest (at the rate of 0.2% permonth) due on the principal amount (EUR1,183,276), but taking into account, for eachinstallment, the period between the due date indicated on the Tax Demand Notice and the date ofeach payment. The expected late interest is EUR50,878 (equivalent to RMB398,000). For furtherdetails, please refer to “Appendix IIIA – Accountants’ Report of the Target Group” to thisdocument.



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For further details, please refer to the paragraph headed “Dividends distributed by TelmaS.A. to Torque may be subject to dividend withholding tax under France tax laws” in the “RiskFactors” section and the sub-section headed “J. Indemnities” under the “Statutory and GeneralInformation” section in Appendix VII to this document. In addition, the Restructured Group maybe subject to different dividend withholding tax treatment under French tax laws for anydividends distributed by Telma S.A. under the proposed group structure upon the completion ofthe Restructuring Group. In the worst case scenario, the Restructured Group may be subject to awithholding tax rate of 30% rather than 10%. This may adversely affect the profitability of theRestructured Group. For further details, please refer to “Appendix V – Unaudited Pro-FormaFinancial Information of the Restructured Group” to this document.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

The Target Group’s primary uses of cash are to satisfy the working capital needs foroperating activities and to purchase direct materials and equipment. The Target Group hashistorically met its working capital and other capital requirements principally from cash flowsgenerated from its operating activities and loans from banks.

Going forward, the Target Group believes that its liquidity and capital expenditurerequirements will continue to be satisfied by a combination of cash generated from its operatingactivities and continued banking facilities.



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The following table sets out selected cash flows data of the Target Group for the datesindicated:


RMB’000 RMB’000 RMB’000

Cash generated from operations before changes inworking capital 36,656 42,546 56,159

Increase in inventories (3,626) (4,024) (3,252)Increase in trade and other receivables (8,028) (44,819) (740)Increase/(decrease) in trade and other payables 4,368 2,984 (9,676)(Decrease)/increase in provisions (2,535) (2,114) 432(Decrease)/increase in net defined benefit retirement

obligations (1,490) 1,062 166

Cash generated from/(used in) operations 25,345 (4,365) 43,089Profits tax paid (5,777) (4,335) (5,669)

Net cash generated from/(used in) operating activities 19,568 (8,700) 37,420

Net cash (used in)/generated from investing activities (20,825) 1,575 (10,184)Net cash generated from/(used in) financing activities 1,465 2,089 (6,692)

Net increase/(decrease) in cash and cash equivalents 208 (5,036) 20,544Cash and cash equivalents at

1 January 48,976 50,636 45,056Effect of foreign exchange rate changing 1,452 (544) (168)

Cash and cash equivalents at31 December 50,636 45,056 65,432

Cash flows generated from/(used in) operations

Net cash generated from/(used in) operation activities comprises profit before taxationadjusted for non-cash items, such as depreciation and amortization, and finance costs andinterest income, and adjusted for the change in working capital.



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For FY2017, the net cash generated from operating activities of approximately RMB19.6million was a result of operating cash inflow before changes in working capital of approximatelyRMB36.7 million, change in working capital of approximately RMB11.3 million and the profittax paid of approximately RMB5.8 million. Change in working capital primarily reflectedincrease in trade and other receivables and increase in inventories, while partially offset by theincrease in trade and other payables.

For FY2018, the net cash used in operating activities of approximately RMB8.7 millionwas a result of operating cash inflow before changes in working capital of approximatelyRMB42.5 million, change in working capital of approximately RMB46.9 million and the profittax paid of approximately RMB4.3 million. The net cash used in operating activities for FY2018was mainly due to increase in trade and other receivables resulted from the increase in billsreceivable as at 31 December 2018 since Yutong Group had changed its payment method frombank transfer to bank acceptance bills, which made the increase of the balance of the billsreceivables by approximately RMB53.4 million from approximately RMB2.0 million as at 31December 2017 to approximately RMB55.4 million as at 31 December 2018. In the event thatthe Target Group experiences significant financial difficulty arising from the operating cashoutflow position in the future, the Target Group will consider to discount part of the billreceivables to its banks prior to their maturity for improving the operating cash outflow position.

For FY2019, the net cash generated from operating activities of approximately RMB37.4million was a result of operating cash inflow before changes in working capital of approximatelyRMB56.2 million, change in working capital of approximately RMB13.1 million and the profittax paid of approximately RMB5.7 million. Change in working capital primarily reflectedincrease in inventories and decrease in trade and other payables.

Cash flows (used in)/generated from investing activities

For FY2017, the net cash used in investing activities of approximately RMB20.8 millionprimarily reflected the increase in pledged bank deposits by approximately RMB14.8 million andthe payment for purchase of property, plant and equipment of approximately RMB7.3 million.

For FY2018, the net cash generated from investing activities of approximately RMB1.6million primarily reflected the decrease in pledged bank deposits of approximately RMB13.2million and interest received of approximately RMB1.4 million and partially offset by thepayment for purchase of intangible assets of approximately RMB6.6 million and the payment forpurchase of property, plant and equipment of approximately RMB6.4 million.

For FY2019, the net cash used in investing activities of approximately RMB10.2 millionprimarily reflected the payment for purchase of property, plant and equipment of approximatelyRMB7.7 million and payment for intangible assets and capitalised development costs ofapproximately RMB4.9 million.



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Cash flow generated from/(used in) financing activities

For FY2017, the net cash generated from financing activities of approximately RMB1.5million was mainly due to proceeds from bank loan of approximately RMB1.5 million.

For FY2018, the net cash generated from financing activities of approximately RMB2.1million was mainly due to proceeds from bank loan of approximately RMB4.0 million andpartially offset by the repayment of bank loans of approximately RMB1.5 million and interestpaid of approximately RMB0.3 million.

For FY2019, the net cash used in financing activities of approximately RMB6.7 millionwas mainly due to capital element of lease rentals paid of approximately RMB6.0 million.

Net current assets and liabilities

The following table sets out the breakdown of the current assets and current liabilities ofthe Target Group as of the dates indicated:

As at 31 DecemberAs at 31

March20202017 2018 2019

RMB’000 RMB’000 RMB’000 RMB’000(unaudited)

Current assetsInventories 29,032 33,212 36,404 36,704Trade and other receivables 121,878 167,089 167,545 146,984Pledged bank deposits 14,847 1,625 – –Cash and cash equivalents 50,636 45,056 65,432 64,649

Total current assets 216,393 246,982 269,381 248,337

Current liabilitiesBank loans 1,545 989 1,133 1,144Trade and other payables 92,277 92,726 82,269 65,161Lease liabilities – – 5,811 5,485Current taxation 1,898 1,955 4,183 248Provisions 4,625 2,493 2,840 2,712Net defined benefit retirement obligations

due within one year 296 549 90 90

Total current liabilities 100,641 98,712 96,326 74,840

Net current assets 115,752 148,270 173,055 173,497



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The Target Group has principally financed its working capital from cash provided byoperations and loans from banks. It had net current assets of approximately RMB115.8 million,RMB148.3 million, RMB173.1 million and RMB173.5 million as of December 2017, 2018, 2019and 31 March 2020, respectively.

The Target Group’s net current assets increased to approximately RMB148.3 million as at31 December 2018 mainly due to the increase in trade and other receivables of approximatelyRMB45.2 million and the increase in inventories of approximately RMB4.2 million; whilepartially offset by the decrease in cash and cash equivalents of approximately RMB5.6 million.

The Target Group’s net current assets increased to approximately RMB173.1 million as at31 December 2019 mainly due to the increase in cash and cash equivalents of approximatelyRMB20.4 million and the decrease in trade and other payables of approximately RMB10.5million; while partially offset by the increase in lease liabilities of approximately RMB5.8million.

Based on the Target Group’s unaudited management accounts as at 31 March 2020, theTarget Group’s net current assets remained stable at approximately RMB173.5 million as at 31March 2020 compared to that as at 31 December 2019 of approximately RMB173.1 million.

WORKING CAPITAL

Taking into account the financial resources presently available to us, including the cashflows from operating activities, existing cash and cash equivalents and the estimated[REDACTED] from the Subscription and the [REDACTED], the proposed Directors (except theproposed independent non-executive Directors) are of the opinion that the Target Group hassufficient available working capital for its present requirements for the next 12 months from thedate of this document.



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CAPITAL EXPENDITURES

The Target Group’s capital expenditures include cash expenditures for the purchases ofmachinery, plant and equipment and construction in progress.

The following table sets out the Target Group’s capital expenditures for the dates indicated:


RMB’000 RMB’000 RMB’000

Capital expenditures in connection with:– Purchase of property, plant and equipment 7,277 6,420 7,746– Intangible assets and capitalised

development cost 928 6,579 4,923

Total 8,205 12,999 12,669

The capital expenditures of the Target Group during the Track Record Period wereprimarily financed by its cash flow generated from operating activities and bank borrowings.The Target Group expects to incur approximately RMB[REDACTED] million andRMB[REDACTED] million of capital expenditures for the years 2020 and 2021 respectivelymainly for (i) funding the expansion plan in India; (ii) research and development of improvingand upgrading existing retarders and developing next generation retarders and exploringadditional EMR applications for different types of vehicles; and (iii) enhancing the productioninfrastructure of Telma Shanghai. For further details, see the section headed “Summary –[REDACTED]” in this document. The Target Group plans to fund such capital expenditures bythe [REDACTED] from the Subscription and the [REDACTED] and its cash generated from itsoperations and/or bank borrowings.



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COMMITMENTS

Capital commitments

The following table sets out the Target Group’s capital commitments outstanding for thedates indicated:

The Target Group

As at 31 December2017 2018 2019

RMB’000 RMB’000 RMB’000

Contracted for 480 – –Authorised but not

contracted for 13,992 8,620 24,428

14,472 8,620 24,428

Operating lease commitments

The following table sets out the Target Group’s non-cancellable operating leases for thedates indicated:

As at 31 December2017 2018

RMB’000 RMB’000

Within 1 year 5,588 5,599After 1 year but within 5 years 6,046 12,404

11,634 18,003

Operating lease commitments represent rentals payable by the Target Group for its branchoffice in Germany and production plants in France and Shanghai.

The Target Group is the lessee in respect of business premises and equipment and vehiclesunder leases which were previously classified as operating leases under HKAS 17. The TargetGroup has initially applied HKFRS 16 using the modified retrospective approach. Under thisapproach, the Target Group adjusted the opening balances at 1 January 2019 to recognise leaseliabilities relating to these leases. From 1 January 2019 onwards, future lease payments arerecognised as lease liabilities in the combined statement of financial position in accordance withthe new policies.



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INDEBTEDNESS

Bank loans

As at 31 December 2017, the Target Group had outstanding bank loan of approximatelyRMB1.5 million. As at 31 December 2018 and 2019, the Target Group had outstanding bank loanof approximately RMB3.9 million and RMB3.5 million, respectively.

As at 31 March 2020, being the latest practicable date for the purpose of the indebtednessstatement, the Target Group drawn down the loan of approximately Euro0.4 million (equivalentto approximately RMB3.2 million) and the total unutilised banking facilities amounted toapproximately Euro2.0 million (equivalent to approximately RMB15.6 million). As at 31 March2020, the Target Group has current lease liabilities amounted to approximately RMB5.5 millionand non-current lease liabilities amounted to approximately RMB6.9 million.

Contingent liabilities

The Target Group had no contingent liabilities as at 31 December 2017, 2018, 2019 and asat the Latest Practicable Date.

OFF-BALANCE SHEET COMMITMENTS AND ARRANGEMENTS

As at the Latest Practicable Date, except as set out above under the paragraph heading“Commitments – Operating lease commitments” in this section, the Target Group had not enteredinto any off-balance sheet transactions.



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KEY FINANCIAL RATIOS

The following table sets out selected financial ratios of the Target Group as of the datesindicated:

As at and for the years ended 31 December2017 2018 2019

Gross profit margin (1) 29.5% 27.7% 28.3%Net profit margin (2) 7.0% 9.1% 9.8%Return on equity (3) 14.8% 15.3% 15.5%Return on total assets (4) 8.6% 9.5% 10.1%Current ratio (5) 2.2 2.5 2.8Quick ratio (6) 1.9 2.2 2.4Gearing ratio (7) 1.0% 2.1% 1.6%Net debt to equity ratio (8) N/A N/A N/AInterest coverage (9) 614.8 96.5 183.1

Notes:

1. Gross profit margin for each of the years is calculated based on gross profit divided by revenue for therespective year. Please refer to the section headed “Financial Information of the Target Group – Summaryof Results of Operation” in this document for more details on the Target Group’s gross profit margin.

2. Net profit margin for each of the years is calculated based on profit for the year divided by revenue for therespective year. Please refer to the section headed “Financial Information of the Target Group – Summaryof Results of Operation” in this document for more details on the Target Group’s net profit margin.

3. Return on equity is calculated by dividing profit for the year by total equity of the respective year-end dateand multiplying the resulting value by 100%.

4. Return on total assets is calculated by dividing profit for the year by total assets of the respective year-enddate and multiplying the resulting value by 100%.

5. Current ratio is calculated as the total current assets divided by the total current liabilities.

6. Quick ratio is calculated as total current assets less inventories and divided by total current liabilities.

7. Gearing ratio is calculated as the total interest-bearing loans, divided by total equity and multiplied by100%.

8. Net debt to equity ratios is calculated as net debt divided by total equity and multiplied by 100%. Net debtincludes all interest-bearing loans (if any), net of cash and cash equivalents.

9. Interest coverage is calculated as profit before interest and tax divided by interest expenses on bank loansand other borrowings for the year.



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Return on equity

The Target Group’s return on equity increased from approximately 14.8% for the yearended 31 December 2017 to approximately 15.3% for the year ended 31 December 2018,primarily due to the higher level of the increase in profit for the year than the increase in totalequity for the same period.

The Target Group’s return on equity increased from approximately 15.3% for the yearended 31 December 2018 to approximately 15.5% for the year ended 31 December 2019,primarily due to the higher level of the increase in profit for the year than the increase in totalequity for the same period.

Return on total assets

The Target Group’s return on assets increased from approximately 8.6% for the year ended31 December 2017 to approximately 9.5% for the year ended 31 December 2018 and furtherincreased to approximately 10.1% for the year ended 31 December 2019, primarily due to theincrease in net profit for the year.

Current ratio

The Target Group’s current ratio remained stable at approximately 2.2, 2.5 and 2.8 as at 31December 2017, 2018 and 2019, respectively.

Quick ratio

The Target Group’s quick ratio remained stable at approximately 1.9, 2.2 and 2.4 as at 31December 2017, 2018 and 2019, respectively.

Gearing ratio

The gearing ratio increased to approximately 1.0% and 2.1% as at 31 December 2017 and2018 respectively, which was mainly attributable to the increase in the outstanding bank loans asat 31 December 2017 and 2018, respectively. The gearing ratio remained stable at 1.6% as at 31December 2019.

Interest coverage

The Target Group’s interest coverage decreased to approximately 96.5 times for the yearended 31 December 2018, which was mainly due to the increase in interest expense as a resultof increase in bank loans for the year ended 31 December 2018. The Target Group’s interest



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coverage increased to approximately 183.1 times for the year ended 31 December 2019 due tothe decrease in interest expense for the year ended 31 December 2019.

QUANTITATIVE AND QUALITATIVE MARKET RISKS

The Target Group is exposed to various type of market risks, including credit risk, liquidityrisk, interest rate risk and currency risk.

Details of the risk to which the Target Group is exposed are set out in note 23 to theAccountants’ Report, the text of which is set out in Appendix IIIA to this document.

DIVIDEND

During the Track Record Period, dividends declared to Torque by Telma S.A. was nil, niland nil, respectively. The declaration of dividends is subject to the discretion of the Board andthe approval of the Shareholders upon completion of the Resumption Proposal.

The Company has not formulated any dividend policy and does not have any predetermineddividend payout ratio. After completion of the Resumption Proposal, the Target Group willbecome a wholly-owned subsidiary of the Company. Any dividend distribution which may bemade by the Target Group thereafter will belong to the Company. Any declaration anddistribution of dividend (and the amount) of the Company shall depend on the results ofoperations, cash flows, financial position, statutory and regulatory restrictions on the payment ofdividends, future prospects and other factors of the Restructures Group that the proposedDirectors may consider relevant. Shareholders of the Restructured Group will be entitled toreceive such dividends pro rata according to the amount paid up or credited as paid up on theShares. Any declaration and payment of the dividend (and the amount) will be subject to ourconstitutional documents and the Bermuda Company Law, including the approval of theShareholders.

In addition, the Restructured Group may be subject to different dividend withholding taxtreatment under French tax laws for any dividends distributed by Telma S.A. under the proposedgroup structure upon the completion of the Restructuring Group. In the worst case scenario, theRestructured Group may be subject to a withholding tax rate of 30% rather than 10%. This mayadversely affect the profitability of the Restructured Group. For further details, please refer toparagraph headed “Dividends distributed by Telma S.A. to Torque may be subject to dividendwithholding tax under France tax laws” in the “Risk Factors” section and “Appendix V –Unaudited Pro-Forma Financial Information of the Restructured Group” in this document.



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DISTRIBUTABLE RESERVES

The amount of reserves available for distribution of the Target Group as at 31 December2017, 2018 and 2019 amounted to approximately RMB76.5 million, RMB105.6 million andRMB138.9 million respectively.



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RELATED PARTY TRANSACTIONS

The Target Group entered into certain related party transactions with its related partiesduring the Track Record Period, details of which are set out in note 25 to the Accountants’Report in Appendix IIIA to this document. The proposed Directors (except the proposedindependent non-executive Directors) confirm that the principal terms of these related partytransactions (including pricing, credit and other principal terms) during the Track Record Periodwere conducted in the ordinary and usual course of business and on normal commercial terms.The proposed Directors (except the proposed independent non-executive Directors) are of theview that the related party transactions during the Track Record Period did not cause anymaterial distortion in the Target Group’s results of operations or render its historical results tobe significantly non-reflective in the Track Record Period.

DISCLOSURE REQUIRED UNDER THE LISTING RULES

The proposed Directors (except the proposed independent non-executive Directors) haveconfirmed that, as of the Latest Practicable Date, there were no circumstances which would havegiven rise to any disclosure requirement under Rules 13.13 to 13.19 of the Listing Rules.

NO MATERIAL ADVERSE CHANGE

Since the outbreak of the COVID-19 from the beginning of January 2020, Telma Shanghaihas actively responded to and strictly implemented the various regulations and requirements ofthe PRC national governments at all levels for virus epidemic prevention and controls. TelmaShanghai suspended production since late January 2020 and partly resumed production inmid-February 2020. By 1 March 2020, Telma Shanghai’s production plant has resumed to normaloperation. On 11 March 2020, COVID-19 has been declared a pandemic by the World HealthOrganization, and most governments are taking restrictive measures to contain its further spreadaffecting free movement of people and goods. Telma S.A. suspended its manufacturingtemporarily on 20 March 2020 and has resumed operations on 29 April 2020 with first deliveriesmade on 29 April 2020. Based on latest information, the Target Group expects that COVID-19situation and prevention and control measures will have a certain short-term impact on theTarget Group’s production and operations, and the degree of such impact depends on theprogress and duration of pandemic prevention and control and the implementation of localprevention and control policies. The Target Group will continue to monitor the development ofCOVID-19, and evaluate and actively respond to its impact on the financial position andoperating results of the Target Group.

Save as disclosed above, the proposed Directors (except the proposed independentnon-executive Directors) have confirmed that from 31 December 2019 (being the date to whichthe latest audited combined financial statements of the Target Group were prepared) up to thedate of this document, there had been no material adverse change in the financial or tradingposition or prospects and no event had occurred that would materially and adversely affect theinformation shown in the Target Group’s financial information to the Accountants’ Reports inAppendices IIIA, IIIB and IIIC to this document.



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