Anhui Chao Lake Environmental Rehabilitation Project (Phase 2) (PRC RRP 55048-001)

Financial Due Diligence Report

Project Number: 55048-001

October 2023

People’s Republic of China: Anhui Chao Lake

Environmental Rehabilitation Project (Phase 2)
This financial due diligence report is a document of the consultant. The views expressed
herein do not necessarily represent those of Asian Development Bank’s (ADB) Board of
Directors, Management, or staff, and may be preliminary in nature. This report was
prepared at the request and with the financial support of the ADB. The views expressed
are those of the consultants and do not necessarily reflect those of the Government of
the People’s Republic of China or ADB
.
 Contents

Executive Summary......................................................................................................1
I. Introduction.........................................................................................................2
II. Macro Overview.................................................................................................2
III. Institutional Overview.........................................................................................6
IV. Governance Structure........................................................................................7
V. Financial Management Assessment................................................................14
VI. Risk Management.............................................................................................16
VII. Compliance Framework...................................................................................17
VIII. Financial Performance Assessment.................................................................19
IX. Financial Sustainability of JEDZI and the FIL..................................................21
X. Recommended Risk Mitigation Measures........................................................26
XI. Proposed Action Plan.......................................................................................29
XII. Conclusion........................................................................................................30
 Executive Summary

1. The FDD concludes that Juchao Economic Development Zone Investment Co. is
operating in compliance with regulations and its financial management system and
procedures are robust to perform proper financial management and reporting necessary
for smooth implementation of the FIL component. JEDZI will operate with a designated
state-owned enterprise (SOE) partner through an investment partnership agreement 1 to
establish the Climate Resilient Investment Fund (CRIF). JEDZI will help set up the fund’s
management team consisting of an investment unit, a risk management unit and a
financial unit for search, screening, assessing, risk management, and accounting of
investment opportunities. An investment committee will be established jointly by JEDZI
and the SOE partner with full authorization by the two partners to independently make
investment decision for CRIF. In addition, CRIF will adopt disclosure policy in line with
AMAC’s disclosure requirements for PE funds. The designated accounting and financial
staff of JEDZI for CRIF are recognized as sufficient but training on ADB’s procedures
and policies in aspects of disbursement, financial management, procurement, and
safeguards is assessed necessary. In addition, the current fund management team
designated for CRIF is found lacking sectoral expertise required by the FIL and thus the
capacity of investment committee of CRIF needs to be strengthened to finally ensure the
fund’s decision quality: (i) adding an investment expert with investment experience in
green agriculture, green rural development and environmental protection; (ii) adding a
risk management professional with private equity fund experience; (iii) development of
FIL specific financial management manual to provide constant and comprehensive
guidance to JEDZI staff for a long run, and (i) outsourcing external environmental/social
experts for detailed safeguards due diligence because its designated ESMS specialist
lacks environmental and social education background.

2. Sustainability of JEDZI is assessed robust under conservative assumptions with

notice of the impact of FIL, which is small in comparison to its asset/revenue scales.
Under normal assumptions, the FIL operation for JEDZI, particularly, is also assessed
sustainable on the condition that the investment team of CRIF is experienced and
capable of achieving the targeted investment returns. How to retain capable fund
management professionals is a critical issue JEDZI must tackle well to ensure the good
performance of CRIF and thus the sustainability of the FIL. A performance-linked service
fee incentive mechanism compensable to services provided by the fund management
team, endorsed by ADB, is recommended to be adopted by JEDZI as a condition for
loan disbursement.

1
Such agreement should be signed before loan effectiveness.
 2

I. Introduction

3. The proposed ADB loan project PRC: Anhui Chao Lake Environmental
Rehabilitation Project (Phase 2) (the project) will allocate USD 15 million equivalent in
form of financial intermediation loan (FIL) modality to set up an innovative private equity
2
fund, named as Climate-Resilient Investment Fund (CRIF), to invest in eligible
environmental protection and climate-positive projects that improve the water
environment and promote rural development around the Chao Lake Basin3 area. Total
size of CRIF is estimated to be USD 30 million equivalent. The FIL proceeds will be
onlent in sequence on the same terms and conditions from Ministry of Finance (MOF) to
Anhui Provincial Government, and then from Anhui Provincial Department of Finance,
which acts on behalf of the provincial government, to Chaohu City Government, and then
from Chaohu Finance Bureau, which acts on behalf of Chaohu City government, to
Anhui Juchao Economic- Development Zone Investment Co. (JEDZI). JEDZI, acting as
implementing agency and financial intermediary of the FIL component, will use the
received FIL proceeds to invest, together with equivalent amount of social capital from
another State-Owned Enterprise partner (SOE partner), on eligible subprojects. JEDZI
has set up an initial fund management team to operate CRIF. This financial due
diligence is carried out to assess the institutional and financial performance of JEDZI and
the designed management structure of the SPC for the purpose of determining their
suitability of the assigned roles and sustainability of the FIL component.

II. Macro Overview

A. Overview of PRC Equity Investment Sector

4. The proposed CRIF is in the private equity (PE) investment sector. In the
People’s Republic of China (PRC), the local PE investment sector was born in 1985
when the State Science and Technology Commission and the MOF have jointly
established the China New Technology Venture Capital Co. to support the development
of high-tech enterprises across the country. In 1992, the first foreign investment
institution, IDG Capital, entered the PRC. The successful listing of Sohu, NetEase,
AsiaInfo and others in the United States brought many foreign investment firms rich
returns, stimulating more foreign capitals to enter the PRC. The passage of the
Partnership Law in 2006 greatly promoted the development of the sector.

5. Along with the regulatory development, the PE investment sector of PRC

experienced strong growth. In 2015, the rise of emerging technologies such as mobile
Internet, biotech and artificial intelligence, and abundant liquidity in the capital market led
to the explosive growth of the private equity market. The scale and number of PE funds
increased significantly. In 2017, the scale of PE funds raised in the year was about CNY

2
The private equity fund refers to a company or partnership whose capitals are raised from private placement
but not from open market and who is mainly engaged in equity investment in unlisted companies.
3
Chao Lake Basin area refers to a total of 17 counties/districts in 5 municipalities encircling the Chao Lake,
including Feidong County, Feixi County, Lujiang County, Changfeng County, Chaohu City, Baohe District,
Luyang District, Shushan District, and Yaohai District of Hefei Municipal City, Shucheng County, Huoshan
County and Jin'an District of Lu'an Municipal City, Wuwei City, Jiujiang District of Wuhu Municipal City,
Hanshan County and HeXian County of Ma'anshan Municipal City, and Yuexi County of Anqing Municipal
City.
 3

1.8 trillion, and the overall PE fund scale exceeded CNY 8 trillion, an increase of 7 times
and 1 time respectively over 2013. However, the rapid progress of this period is mainly
based on the overextended shadow banking system. The long-term stable funds are still
in shortage. With the implementation of the new asset management regulation in 2018,
under the background of financial deleveraging, the credit of shadow banks has
contracted, the bank's capital channels have been greatly cut off, and the private equity
industry has ended irrational prosperity and made a comprehensive correction. In 2018,
the amount of funds raised fell back to CNY 1.3 trillion, and continued to decline to CNY
1.2 trillion in 2019. In 2020, the sector restored to some extent. By end of 2020, totally
39,800 of existing PE investment funds were registered with Asset Management
Association of PRC with total capital size of CNY 11.56 trillion, 98,386 projects were
accumulatively invested by the PE funds in total amount of CNY 7.18 trillion,
accumulatively 26,708 investment projects realized exit in total amount of CNY 2.21
trillion.4

6. Along the Chao Lake Basin, there are lots of investment opportunities for eligible
environmental protection and climate-resilient projects that improve the water
environment and promote rural development within the area. In fact, JEDZI has collected
six potential subprojects with total investment demand of CNY 235 million, which is
almost the total amount of the proposed fund size of CRIF. Although their eligibility is
subject to further due diligence as per the subproject selection criteria accepted by ADB
and the PMO, the preliminary assessment is that most of them could be eligible, and the
investment will depend on the commercial negotiation with the related owners.
Readiness of the equity fund is good and, compared to the fund size, the future market
potential is large enough for the FIL proceeds to revolve.

B. Regulatory Assessment
7. Under the PRC’s regulatory framework, China Securities Regulatory Commission
(CSRC) is the administrative authority for PE investments and Asset Management
Association of China (AMAC) is an industrial self-discipline organization that is
responsible for daily management of the PE investment sector, including accreditation of
fund investment professionals, registration of PE funds, and registration of PE fund
managers etc. In 1995, the Administrative Measures for the Establishment of Overseas
Chinese Industrial Investment Funds was enacted to encourage more foreign-funded
investment institutions to enter PRC to carry out PE investments including venture
capital investments. The Partnership Law was enacted in 2006, which greatly promoted
the sector’s development because the law allows PE funds to adopt limited liability
partnership, which is commonly used by international PE funds, and very suitable for
attracting social capitals to invest on PE funds while employing the specialized skills and
knowledge of investment professionals. The fundamental law that may govern the PE
investment sector is the Fund Law enacted in 2012, but main supervision object of this
law is public funds, it only stipulates principles for private securities funds, and it has no
legal provisions on supervision of PE investment funds. After then, a series of
regulations such as the Division of Responsibilities for Private Equity Fund Management
issued by the Central Committee Compilation and Clarification in 2013, the Interim
Measures for the Supervision and Administration of PE Investment Funds enacted by
CSRC in 2014, and the Measures for the Registration of Private Equity Investment Fund
Managers and the

4
Numbers are incited from the PRC PE Investment Fund Sector Development Report 2021, published by
Asset Management Association of China in September 2021.
4

Fund Filing (Trial Implementation) promulgated by AMAC in 2014, further clarified and
improved the regulatory system for private equity investment and gradually standardized
the sector’s development. Although these regulations and sectoral rules actually govern
PE investment fund sector, their legal position is not high and their contents are still in
process of improvement. The Interim Regulations on the Administration of Private Equity
Investment Funds to be enacted by the State Council can perfectly solve the problem of
legal blank for the sector. The draft of the Regulation was released for comment on 30
August 2017, but the official draft has not yet been issued so far. Once it officially takes
effect in the future, its status and effect are second only to the Fund Law, which will end
the legislative gap of private equity funds at the legislative level. In 2018, at the guidance
of the State Council, PBOC, CBIRC, CSRC and State Administration of Foreign
Exchange jointly issued Guiding Opinions on Standardizing Asset Management
Business of FIs, whose requirements on prohibiting fund channeling business,
eliminating multi-layer fund of funds structure, limiting leverage ratio of funds, prohibiting
income guarantee for senior investors, breaking rigid payment, and regulating capital
pooling are also applicable to PE investment funds. This legal document serves as a
brake for rapid but disorderly growth of the sector. In December 2020, in absence of the
State Council’s regulation, CSRC further issued Several Provisions on Strengthening the
Supervision of Private Equity Investment Funds, which specifies 14 detailed measures
for supervision of the sector, and particularly requires all funds and fund management
companies to register properly before conducting PE fund investment activities.

8. Particularly, the Interim Measures for the Supervision and Administration of PE

Investment Funds enacted by CSRC in 2014 provides three ways to establish PE funds:
company, limited liability partnership and contract, and expands the investment objects
of private equity fund assets to "buy and sell stocks, equities, bonds, futures, options,
fund shares and other investment targets stipulated in investment contracts." So far, the
three ways of establishing PE funds, namely in form of company, partnership and
contract, all are legitimate, but each form of PE fund have different bros and cons. Table
1 provides the comparison of the three organizational forms from three angles: cost,
incorporation and management system, and performance. The overall assessment
indicates that contract form fund may be the best choice for CRIF considering the
regulatory context, registry difficulty and government restraints on employee incentive
policy etc.
 5

Table 1: Comparison of Three Organizational Forms of a PE Fund

Items Sub-items Company LLP Contract Assessment
Almost have the same effect under the
1-50 shareholders for limited less than 200 qualified investors
Number of FIL context, although contract form
companies, and 2-200 shareholders 2-50 partners under thorough shareholding
investors generally prevails with broader scope of
for shareholding companies structure survey
potentail investors and easy setup
Doubt taxiation: the company fund will
pay income fax for investment return;
Tax No double taxiation No double taxiation LLP and Contract forms prevail
Cost its investors will be double taxed for
distributed investment income.
The company fund shall register with LLP fund shall register with AMAC
No need to register. Fund is
industrial and commercial and shall be managed by registered
established through customized
Registry & exit administration authority. Exit of its fund managers. Exit of its investment Contact form prevails
contractual arrangement. Exit is
investors shall go through complex partner is simple compared to that of
flexible.
procedure a company.
LLP prevails. Contract form can be
Usually the fund follows up
Professionalism Usually the fund follows up company The fund is managed by improved if the qualification of
contractual arrangement to operate.
& disclosing law to operate. Disclosure to external professionals accredited by AMAC management team is set high, the
Disclosure to external authority is
policy authority is limited with transparant disclosing policy investment process is standardized, and
limited
high-level disclosure is adopted
investors will not directly participate in
Fund manager is greatly affected by LPs will not directly participate in
investment decision. Investment
investor's board of directors, leading investment decisions, such form can LLP prevails. Contract form can be
Incoporation & Decision decision is efficient, but effectiveness
to low decision efficiency. In the ADB effectively employee investment improved if the fund management team
Management procedure of investment decision is conditional
project, the governments who control professionals' expertise and improve has high quality
system on the fund management team
the SOEs may be bureaucratic the investment decision efficiency
capacity.
Easy. Under the project context, Easy. Under the project context,
investors of CRIF will be two SOEs investors of CRIF will be two SOEs
registry with AMAC will take a long
Easy for (JEDZI and another) under Chaohu (JEDZI and another) under Chaohu
term with uncertainty of successful Company and Contract forms prevail
establishment municipal government. Consent on municipal government. Consent on
result
incorporating as a company is easy to contractual arrangement is easy to
reach. reach.
Equity capitals shall be injected as
Capital injection shall be made in line Capital injection shall be made in line
Usage efficiency per the registered schdule, which may
with the investment plan. Fund usage with the investment plan. Fund usage LLP and Contract forms prevail
of funds not match with the actual investment
efficiency is improved efficiency is improved
plan.
Unless specially provided in its
LLP natually embeds incentive
Performance corporate charter, company form fund
mechanism for fund manager. For Incentive mechanism under contract
shall distribute profits among
Incentive example, GP as fund manager form of fund is flexible and can be LLP and Contract forms prevail. Contract
investors in proportion to their
mechanism contributing 1% of fund capitals may customized as per the project need form is more suitable for the FIL
shareholding, thus provide less
typically obtain 20% of investment with consideration of policy restraints
incentive to its fund manager because
of their small share in the equity. returns

Source: ADB

9. With regards to Anti-Money Laundering and Counter Financing of Terrorism, as

required by law, JEDZI, as an investor and the fund manager of CRIF, has limited
responsibilities mainly in customer due diligence covering verification of customer’s true
identity, address, business and ultimate beneficiary ownership, which is able to be
satisfied by JEDZI through its existing institutional arrangement. Since CRIF’s
investments shall comply with the subproject selection criteria in the PAM, which strictly
require the fund to invest on real projects/businesses around Chao Lake Basin, and thus
rule out the possibility of investment on shell companies.

10. To conclude, the PE investment has experienced fast growth over the past 27
years and reached a very large scale so far. A lot of professionals are engaged in the
investment industry. Meanwhile, PRC has gradually improved the regulatory framework
over the industry. The money laundering risk and terrorism finance risk of the FIL
component is very small due to its business nature. There is no legal barrier for JEDZI to
set up the CRIF through reaching investment cooperation agreement (ICA) with SOE
partner. But qualification requirement for the fund management team, investment
committee composition, and investment decision process shall be properly specified to
ensure the smooth implementation of the FIL component, and transparent disclosure of
CRIF investments shall be provided to the PMO and ADB in a way similar to AMAC’s
requirements for registered funds.
6

III. Institutional Overview

A. Institutional Setup

11. JEDZI will be one of the major capital contributors of CRIF and lead the
institutional setup for the fund management. Since the FIL will be onlent from the
government to it and it bears the FIL repayment responsibility, its financial management
and financial strength will be assessed by the report. Established in July 2002 with
unfixed operation period, JEDZI is a State-Owned Enterprise (SOE) wholly owned by
Anhui Juchao Economic Development Zone Administration Commission (JEDZA). It has
CNY 700 million of registered capital with registered address in the cross of Qishan
Road and Qilu Road, Chaohu city, Anhui Province. It holds a unified social credit code of
9134018174087343XK. Its major business domain covers construction of city-supporting
infrastructure, land development and clearance, construction of government investment
projects, investment on high-tech and strategic emerging industries, investment and
operation of revenue-generating public facilities, and state-owned asset construction and
management within industrial parks etc. So far, it has been engaged in two kinds of
businesses: quasi-finance business and construction agency business.

12. For implementation of the FIL component, JEDZI has locked in a potential
partner, which is also a SOE controlled by Chaohu City Government. JEDZI intends to
establish CRIF in cooperation the SOE partner through signing of an investment
partnership agreement (IPA), template of which is subject to ADB endorsement. Main
provisions of the IPA will include, but not limited to, the followings:
(i) CRIF investment fields and eligible investment criteria;
(ii) fund structure and cooperation contents;
(iii) due diligence (incorporating ADB’s ESMS check) and investment decision
process;
(iv) roles and responsibilities of the two parties, articulating JEDZI will be
responsible for organizing the fund management team;
(v) the composition of investment committee;
(vi) Co-investment ratio of 1:1 on eligible subprojects;
(vii) fund flows of CRIF, requiring the co-investment of the SOE partner will be
transferred to JEDZI’s special project account first, and then channeled to
the target investees who operate eligible subprojects together with the FIL
proceeds;
(viii) fund management service fee charged by the fund management team;
(ix) practicable exit strategy of CRIF in a match with the FIL repayment schedule,
which shall incorporate a Put Protected Equity Investment Option (PPEI,
which requires the controlling shareholder of target investee to buy back the
fund’s equity investment as the last remedy);
(x) profit distribution; and
(xi) monitoring and reporting requirement etc.

B. Ownership Structure

13. The ownership structure of JEDZI is very simple. JEDZI is a SOE 100% owned
by JEDZA, which is a government agency administering the zone.
 7

IV. Governance Structure

14. JEDZI’s governance structure is very simple. It has a board of directors

consisting of 5 directors and functioning as the highest decision-making body. Under the
board of directors, there is no special committees. All major business decisions are to be
submitted to the board for final decision. It does not have a board of supervisors either.
Instead, it just has a supervisor to supervise the board of directors and senior managers
on behalf of the local government. Because its business operation is very simple, the
local government thinks one supervisor is sufficient to execute the ordinary supervision.
It has a senior management team in charge of the company’s daily operation. The board
chairman is also the general manager of the company. Such structure is good for
implementation. The necessary controls and checks are realized through inspections
and audits. The management is subject to regular inspections arranged by the board and
the entire company is subject to external inspections and audits. Such streamlined
structure has functioned well in the past and is reasonable due to the limited business
scope of JEDZI. JEDZI’s businesses are very simple, including constructing and
operating infrastructure facilities for JEDZ, and providing necessary financing support to
enterprises within JEDZ etc., all of which are conducted with the aim to support the
development of the national Juchao Economic Development Zone. The local
government thinks there is no need for it to adopt a full-fledged governance structure
because the external supervision is stringent. The proposed FIL component is a new
operation to JEDZI and will require the fund, CRIF, to build up competitive professional
team and effective managerial structure, but not necessarily require JEDZI to change the
governance structure.

A. Organization Structure

15. The organization structure of JEDZI is illustrated in Figure 1 below. JEDZI is

mainly engaged in two kinds of businesses: 1) construction agency business, where it
implements, on behalf of JEDZA, infrastructure construction projects in relation to the
Juchao EDZ development. Its main roles in this business include: call for tendering
for the design, construction and supervision of infrastructure construction projects,
review the engineering design, supervise the construction progress, arrange acceptance
inspection of completed civil works, and make payments accordingly. It has four
subsidiaries in this business domain. JEDZI usually charges the local government,
JEDZA, 10% additional to the infrastructure construction cost, which constitutes its gross
revenue for such business.
2) quasi-financing business, where it provides financing support to enterprises operating
within the Juchao EDZ. The forms of financing support include: credit guarantee, equity
investment, and low-rent plants which were operated and maintained by JEDZI on behalf
of JEDZA. For each form of financing support, JEDZI established one wholly owned
subsidiary to provide such support. It has a subsidiary named as Chaohu Qishan
Zhongzhi Venture Investment Management Co. (CQZ) responsible for early stage equity
investment with investment scope gradually expanded to outside of JEDZ. Guarantee
fee, rent (above the facility O&M cost) and investment return are main revenues of
JEDZI in this domain.
8

Figure 1: Organization Structure of JEDZI

Board of Directors One Supervisor

Senior Management Fund Mgt Team CRIF, Phase I, II, ...

Quasi-finance business Construction agency business

Engineering Management

Chaohu Zhutian Auto-parts

Chaohu Qixin Construction

Financial Guarantee Co.

Construction & Inv't Co.

Inv't & Construction Co.

Construction & Inv't Co.

Financial & Financing
Operation & Mgt Co.
Anhui Qicheng Tech.

Anhui Qiyu Asset

General Office

Engineering Co.
Chaohu Yuyang

Chaohu Zhixing
Department

Department
CQZ

Source: JEDZI

B. Fund Flow Arrangement

16. The fund, CRIF, will adopt a contractual structure for implementation. JEDZI will
partner with another SOE to contribute equally all capitals for the fund, and take the lead
to set up a fund management team for CRIF. For investment opportunities having
passed the due diligence and approval procedure, the SOE partner will transfer its
portion of investment to a specially established bank account of JEDZI, which will be
maintained by the designated fund management team, JEDZI will contribute the same
amount of FIL proceeds to the project account as well, and then total investment funds
for an eligible project will be invested to the target investee. Under the fund, an
investment committee will be established after negotiation between JEDZI and the SOE
partner. Usually, each partner will appoint one committee member, and the specific fund
management team will appoint another. The final composition of investment committee
will be determined with aim to deploy sufficient expertise and knowledge in a match with
the fund operation and risk management. All investment proposals together with the
supporting due diligence report (including ESMS check) prepared by the designated fund
management team with no objection on ESMS result from the PMO will be submitted to
the investment committee to vote. The fund management team then will execute the
investment if it is approved by the committee. The fund flow and the related information
flow of the FIL component are illustrated in Figure 2 below.
 9

Figure 2: Fund Flow Chart

ADB FIL repayments in EX

MOF

FIL disbursements in EX Converted

into EX

Anhui Provincial Government (EA)

CLMA Provincial Finance Dept.

(PMO) (advance account)

onl ending after

FIL
conversion into CNY
repayments
in CNY

JEDZI (IA, FI) inv't return

SOE partner
CNY

contribute $ 15m contribute $ 15m

PMO equivalent CNY equivalent CNY
(ESMS
Investment
check) Committee
CRIF (special project account),
in amt. of $30 m equivalent
Fund Mgt CNY, Phase I, II, ...
team Equity inv't Realized inv't
CNY return CNY

Eligible enterprises engaged in environment

protection, eco-tourism or green rural
development businesses
Information flow
ADB loan disbursements/co-investment
ADB loan repayments /Investment returns
ADB=Asian Development Bank, CLMA=Chao Lake Management Authority, CRIF=Climate Resilient
Investment Fund, EA=Executing Agency, ESMS=Environment and Social Management System,
IA=Implementing Agency, JEDZI=Juchao Economic Development Zone Investment Co., MOF=Ministry of
Finance, PMO=Project Management Office, SOE=State-Owned Enterprise
Source: ADB

C. Market Position

17. JEDZI is an investment platform of the local government, JEDZA, and is

dedicated in the development of the national Juchao Economic Development Zone. It
has a mandate to provide construction business on behalf of the local government to
improve the zone’s infrastructure system so as to attract more enterprises to build
production base in the zone, and provide financing support to those enterprises within
JEDZ in form of low-rent plant facility leasing, low fee rate of guarantee services, and
low-cost of capital equity investment, if necessary, with the aim to keep them operating
in the zone. The management is obliged to preserve and increase the value of state-
owned assets under its management, although not fully oriented for maximizing profit,
which means they shall always keep sufficient profit cushion to counter economic ups
and downs, so as to ensure the company’s sustainable operation. Except for the
investment business which may involve clients outside of the zone, its customers in
other businesses are easily available and JEDZI owns a monopoly position to serve
them.
10

D. Fund Management Team for CRIF

18. The proposed fund management team for CRIF consists of three units with staff
deployed within the group of JEDZI: investment unit, risk management unit, and financial
unit. Their experience is illustrated in Table 2. The core investment team that is available
for management of CRIF consists of four persons, three out of whom have obtained the
qualification as investment professionals, which is accredited by AMAC. They are (i) Mr.
XIANG Yunsheng, qualified investment professional, chairman and general manager of
JEDZI, whom also has acted as PMO director for ADB’s Chaohu loan project and will be
appointed by JEDZI as a member of investment committee of CRIF, (ii) Mr. XIAO
Guoqing, qualified investment professional, vice general manager of JEDZI, whom will
lead the investment unit, (iii) Mr. LIU Jixiang, qualified investment professional, vice
general manager of JEDZI with fund investment qualification, who will lead the risk
management unit, and (iv) Mr. WANG Feng, CFO of JEDZI with over 10 years of
financial management and investment experience, who will manage the financial unit for
the fund.
 11

Table 2: Fund Management Team

Professional
Name Birth Sex Post Degree Related experience
title
2019-until now, GM and board chairman of JEDZI and
Anhui Qicheng Financial Guarantee Co.
Medium Level 2012-2019, staff, vice director general, and vice
GM of JEDZI, Environmental general manager of Chaohu Urban Construction &
proposed to be a Protection Investment Co., during which also acted as director of
XIANG
08/1983 M member of the Master Specialist, and the PMO for ADB's Anhui Chaohu Basin Water
Yunsheng
inv't committee of Qualified Environment Comprehensive Treatment Project
CRIF Investment 2010-2012, Operation chief in China
Professional Comservice Zhejiang Nantian Post
Communication Tech. Co. 2007-2010, project
manager in CASIC Nanjing
Chenguang Group Co.
CPA, Medium
Vice GM of 2019-until now, Vice GMr of JEDZI and GM of CQZ
Level
JEDZI and GM 2010-2019, Manager of Integrated Financial
Accountant and
XIAO Guoqing 10/1988 M of CQZ, MBA Department of Chaohu Guoyuan Small-loan Co., Ltd.
Qualified
proposed to be 2009-2010, Accountant in Planning and Financial
Investment
the inv't unit Department of Lianyungang Xiangyi Landing Co.
Professional
manager of CRIF
2019-until now, Vice General Manager of JEDZI
and Chief Risk Officer of CQZ
2016-2019, vice GM and CFO of Anhui Zhixiangzhai
Vice GM of Foods Co.
JEDZI and Chief 2014-2016, Financial Manager of EasyHome Anhui
Bachelor in Qualified
Risk Officer of branch
LIU Jixiang 09/1982 M financial Investment
CQZ, proposed 2012-2014, Director of general office, and secretary to
mgt Professional
to lead the risk the board chairman of Anhui Dongwei Group Co.
mgt of CRIF 2009-2012, Accounting chief of An-bang Property and
Casualty Insurance Anhui Branch
2005-2009, Accountant in Wuhu Conch Profiles and
Science Co.
Bachelor in 2018-until now, JEDZI office staff
JEDZI staff, English, 2012-2018, Translator of the PMO for ADB's
FANG
08/1988 F proposed to be and Anhui Chaohu Basin Water Environment
Chenchen
ESMS specialist Industrial Comprehensive Treatment Project
Mgt 2011-2012, Translator in AECOM
2022 until now,Investment associate of CQZ and
Investment CRIF.
Bachelor in Medium Level
TANG Jiajia 03/1994 F associate of CQZ 2018-2021, Risk control specialist of Anhui
accounting Accountant
and CRIF Qicheng Technology Financing Guarantee Co.Ltd.
2016-2018, Finance of Shanghai Disney Resort.
2021-until now, Investment associate of CQZ
2017-2021, JEDZI
Investment Qualified
2015-2017, Chaohu City Bureau of Commerce
XU Min 11/1990 M associate of CQZ Master Investment
accountant
and CRIF Professional
2012-2014， Accountant in Gangling Neighborhood
Committee of Yafu Street Chaohu
Risk associate of Master of Passed Judicial
ZHAO Bao 05/1987 M Over 10 years of law professional experience,
CQZ and CRIF Laws Examination
CFO of JEDZI, Over 10 years of financial management and
proposed to be Bachelor in Junior investment related professional experience, worked in
WANG Feng 11/1985 M
financial manager accounting accountant financial institutions in charge of administrative affair
for CRIF and logistics.
Accountant of
JEDZI, proposed Bachelor in Medium Level Over 6 years of financial management and
ZHOU Juan 11/1989 F
to be accountant accounting Accountant cashier work experience in finance and other
of CRIF sectors.
Cashier of the Bachelor in 2016-until now, accountant in Anhui Qicheng
guarantee sub., accounting Junior Technology Financial Guaranty Co., one of
LI Lu 03/1992 F
proposed to be & finanical accountant JEDZI's subsidiary
cashier for CRIF mgt 2013-2016, HR specialist in Hefei Jingu Hospital
CFO=Chief Financial Officer, CPA=Certified Public Accountant, CQZ= Chaohu Qishan Zhongzhi Venture
Investment Management Co., CRIF=Climate Resilient Investment Fund, GM=General Manager,
JEDZI=Juchao Economic Development Zone Investment Co.
Source: JEDZI

19. The investment unit of CRIF led by Mr. Xiao will be supported by two associates
with industry management/accounting background, who may carry out investment due
diligence on candidate projects. The risk management unit led by Mr. Liu Jixiang will be
 12

supported by one associate with master degree in law who has passed the BAR juridical
examination. The same team composition has assisted JEDZI and its venture capital
investment subsidiary CQZ to directly invest on 8 companies since 2017, mainly in
medical mechanics, manufacturing and semiconductors. The detailed investment
records of JEDZI are illustrated in Table 3. The team has built up necessary investment
skills and information network from the previous investment experience. But their
experienced investment sectors are not similar to the target sectors of CRIF. CRIF will
focus on sectors of water environment, rural tourism and rural development etc., which
both JEDZI and CQZ have no investment experience. Consequently, there is a need for
the investment unit to be strengthened through recruiting an investment professional with
rich experience in environment and social management in rural areas. The risk unit lacks
a professional with working experience in PE funds and such gap needs to be made up.
In addition, CQZ has not registered with AMAC as a fund manager so far. Overall, the
team needs to be strengthened for management of CRIF and the fund manager registry
shall be completed at least within one year after the ADB loan signature.

Table 3: Direct Investment Record

Invested Time of Inv't Amt Equity
No. Name of Investee Sector Remarks
by Inv't (CNY million) proportion
1 Anhui Huiruan Science & Tech. Co. JEDZI Apr-17 10.00 17.78% Medical mechanics
Youfang (Hefei) Medical Science &
2 JEDZI Jul-17 5.00 3.90% Medical mechanics Exit in June 2022
Tech. Co.
Anhui Xinzhisheng Medical Science &
3 CQZ Jul-17 2.20 3.65% Medical mechanics
Tech. Co.
Anhui Zhiyun Medical Science & Tech.
4 CQZ May-20 1.30 6.50% Medical mechanics
Co.
Anhui Kunhe Intelligent Science & Tech.
5 CQZ Apr-21 3.00 30% Manufacturing
Co.
In the process of
6 Ningbo Lian Science & Tech. Co. CQZ Nov-21 15.00 0.99% Manufacturing inquiry for
second-
board listing
Pilot project
for central
7 Baomake (Hefei) Science & Tech. Co. JEDZI Mar-22 100.00 16.76% Automobile parts SOE's mingled
shareholding
reform
8 Zhongdao Semiconductor (Hefei) Co. CQZ May-22 3.00 13.04% Semiconductor
Total amount: 139.50
CQZ= Chaohu Qishan Zhongzhi Venture Investment Management Co., JEDZI=Juchao Economic
Development Zone Investment Co.
Source: JEDZI

20. So far, some of the investments have performed well. One investment realized
successful exit. One invested enterprise is in the process of going public listing in the
second-board. Once the listing is completed, the investment value consolidated to JEDZI
will greatly appreciated. Other projects are still in the exiting period waiting for
appropriate exit opportunity or trigger of equity buyback by major shareholders of
investees. The historical investment experience of JEDZI and its investment subsidiaries
built up a basic foundation enabling JEDZI to be engaged in the FIL as FI.

21. An office staff of JEDZI who has education background in English language and
industrial management and worked in the PMO of ADB’s Chaohu loan project during
2012- 2018 as translator thus familiar with ADB’s ESMS standards and procedures, is
designated as ESMS specialist. She may be capable of arranging necessary
environmental and social assessments as per the related ADB’s checklists and editing
the
 13

related ESMS reports in English, but the detailed ESMS due diligence still needs
specialized environmental/social experts or institutes to implement.

E. Investment Decision Process of CRIF

22. The following investment decision process is proposed for CRIF and, if accepted
by ADB, PMO and JEDZI, will be included in the Project Administration Manual (PAM)
and ICA in a consistent way.

23. First of all, JEDZI will help establish a capable investment committee for CRIF
and set up qualification requirements for two independent committee members, subject
to endorsement by ADB and PMO. The committee is recommended to have five
members, three of which will be appointed by JEDZI, the other SOE partner, and the
fund management team, one for each respectively. The fourth and fifth committee
members will be outsourced independent experts: one is a sector expert who have rich
investment experience in green agriculture, green rural development and environmental
protection and the other is a risk management professional with rich working experience
in PE funds and academic background in laws and/or finance. The two independent
committee members are expected to complement the knowledge and skills of internal
fund investment and management personnel useful for the CRIF performance.

24. The second step is to build up a capable fund management team consisting of
investment unit, risk management unit and financial unit for daily management of CRIF.
So far, JEDZI has preliminarily designated such fund management team with key
positions appointed. Once the ADB loan agreement is signed, during each round of FIL
revolving, the investment unit of the fund management team will collect candidate
investment opportunities as per the subproject selection criteria from its existing
information network and the local government channel through the PMO. After these
projects having passed preliminary assessment, the two investment associates will carry
out investment due diligence and the ESMS specialist will organize ESMS check, which
will be done by outsourced environmental/social professionals as per ADB’s standards
and procedures, which may be supported by Output 1 of the project. The investment due
diligence covers verification of the investee’s address, real business, ultimate beneficiary
owners, and credit records, financial analysis, market potential and competitive
advantages assessment etc. The related due diligence reports drafted by the investment
associates and the ESMS reports drafted by environmental/social professionals will be
reviewed by the investment unit head.

25. After the investment unit’s approval, the ESMS assessment reports together with
project information will be submitted to the PMO for endorsement. The PMO will review
the reports, with assistance from environmental/social experts to be hired under the
Output 1 of the project, as per the subproject selection criteria and provide feedback to
the fund management team.

26. After obtaining no-objection from the PMO for ESMS, the investment unit will
negotiate with the investee companies on specific investment terms and conditions with
the aim to reach a deal, which must include a practicable exit strategy such as using
PPEI as the bottom-line condition for the fund’s investment. After reaching consent, the
investment unit will wrap up an investment proposal.
14

27. The investment proposal, together with supporting documents including the due
diligence reports and ESMS assessments, will be submitted to the risk unit for risk
appraisal, which may concentrate on assessing the investee’s compliance operation,
sector policy, market competition, surviving and growth capability, feasibility of the exit
strategy, and contractual setup. The risk appraisal will be reviewed by the risk
management unit head, and if necessary, he can request an enhanced due diligence
done by external accounting/law/consulting firm to seek their opinion on legal
compliance, financial performance, technical competition capacity and contractual setup
of the deal.

28. After the investment proposals have passed risk appraisal, they will be submitted
to the investment committee of CRIF. The investment committee will organize review
meeting and vote on the investment proposals as per the committee’s meeting rules.
After approval by the investment committee, the investment proposals will be executed
accordingly.

V. Financial Management Assessment

A. Accounting Policies and Procedures

29. JEDZI apply accrual accounting in compliance with the PRC’s Accounting
Standards for Business Enterprises (ASBE). The accounting standards are consistent
with International Accounting Standards in most aspects applicable to banks as well.
JEDZI has adopted a computerized software provided by Kingdee for the financial and
accounting management of the parent company and its subsidiaries, which is deemed in
compliance with all related legal requirements. On the other hand, the designated three
financial staff for CRIF have not implemented ADB loan project before. Necessary
trainings shall be provided to them.

B. Internal Controls and Internal Audit Function

30. JEDZI does not have an audit department. Only one supervisor is in place to
supervise the board of directors and senior management. The main internal control is in
the financial aspects. Their new bank accounts are subject to approval by its owner,
JEDZA. Most costs of the infrastructure construction projects implemented by JEDZI
adopt the direct payment method so as to secure that funds are used for designated
purpose and JEDZI only receives much down scaled cash inflows from construction cost
add-up for construction agency business, and guarantee fee, rent and investment return
for its quasi-finance business. Major financial risk exposure of the parent company is
thus mitigated. Nevertheless, such internal control and audit arrangement is deemed
inadequate from the corporate level. From the project level, if the proposed investment
decision process is adopted, there are embedded internal controls for normal operation
of CRIF. First, the ESMS check conducted by the investment unit will be reviewed by the
PMO with technical support from the environmental and social experts outsourced from
the Output 1. Secondly, the decision of the investment unit is subject to the review by the
risk management unit which may be strengthened by outsourced financial/legal/technical
assessment opinions. Thirdly, the investment proposals endorsed by the investment unit,
the PMO, and the risk management unit will be further subject to approval by the
investment committee, which will be strengthened through addition of an investment
 15

professional with rich investment experience in green agriculture and green rural
development and a risk management professional with rich work experience in PE funds.
Such setup of controls with enhanced human power setting, if adopted, are expected to
function well to systematically avoid misconducts of JEDZI staff and irresponsible
investment activities, thus constituting an effective internal control for the project.

C. External Audit

31. Financial statements of JEDZI are annually audited by an external accounting

firm, on a rotating basis acceptable to its sole owner JEDZA, in accordance with the
PRC’s Auditing Standards. The external auditor was Chaohu Xinghua CPAs (a local
accounting firm) between 2017-2018, and Rongcheng Accounting Firm (LLP) (a national
accounting firm) between 2019-2021. All of them gave a standard unqualified opinion for
the 2017- 2021 financial statements, indicating that the financial management system of
JEDZI is generally sound, Generally Accepted Accounting Principles (GAAPs) are
properly adopted, and financial statements accurately reflect its financial standing.
Moreover, as a local SOE, JEDZI is subject to inspections and economic audits arranged
by JEDZA. Intention of these inspections is to ensure that the financial management
rules governing SOEs are abided, and the required performance indicators are satisfied.
Lastly, since the related project is a sovereign loan project, as required by law, the
project account of JEDZI will be audited by Anhui Provincial Audit Office at the time of
acceptance inspection. It is further recommended that local audit authority in Chaohu city
shall include the CRIF into its annual audit scope. These external audits can increase
transparency in the company’s as well as the project’s financial management system.
The external audit arrangement is assessed satisfactory.

D. Reporting and Monitoring Systems

32. As required by law, JEDZI normally report its consolidated performance

indicators to its sole owner JEDZA on a regular basis. It is obligated to provide the
audited financial statements including balance sheet, income statement, cashflow
statement, comprehensive equity statement etc. and other management summary
information indicating achievement of the performance goals to the local government.
For the proposed project, JEDZI and CRIF need to further provide their audited financial
statements, summary information on project accounts of CRIF and FIL implementation
progress to ADB through PMO on a quarterly basis during the implementation period. It
has a computerized financial management and accounting software to record the related
fund flows and provide all necessary project-based accounting and reports under the
FIL.

E. Financial Management Staffing and Capacity

33. JEDZI has been prepared to designate three financial staff within the group,
including one manager, one accountant and one cashier, to constitute the financial
management unit to take care of financial and accounting matters of CRIF. The
proposed staffing and capacity are assessed as sufficient. But the financial staff lack the
experience of implementing ADB loan projects. Trainings on ADB’s procedures and
policies in aspects of disbursement, procurement, and financial management applicable
to the project are deemed necessary and shall be provided to the fund management
team in the start-up stage of FIL implementation.
16

34. In addition, a financial management manual providing the following guidelines is

assessed necessary and helpful to support the staff of the fund management team, which
may be changed from time to time, for proper management of CRIF for a long run so as
to ensure the sustainability of the fund: (i) ADB loan disbursement procedure; (ii) fund
flow arrangement of FIL component; (iii) establishment of project accounts necessary for
implementing the FIL; (iv) accounting and financial management for CRIF, including
accounting treatment of currency conversion of FIL proceeds, SOE partner’s investment
fund transfer, investment to investees combining JEDZI and the SOE partner's funds,
investment returns collected from subprojects, investment return distributed to the SOE
partner and investment return enjoyed by JEDZI, fund management fee revenues, fund
management cost and expense standards and reimbursement procedure, asset
safeguards, storage of original accounting documents, regular reevaluation of
investments, recognition and write-off of non-performing assets, etc.; (v) investment due
diligence and decision making process with consideration of subproject eligibility criteria
and ESMS check requirement of the FIL component; (vi) risk management framework
and policy including practicable exit strategy; (vii) investment planning: cashflow match
with consideration of FIL service payment schedule and necessary cash cushion
prepared for foreign exchange rate risk and foreign interest rate risk; and (viii) monitoring
and reporting project accounts and development of project financial statements for CRIF,
etc.

VI. Risk Management

35. To control risks, it is proposed that JEDZI shall effectively take the following risk
management measures, which, if accepted by the PMO and ADB, will be included in the
PAM and ICA consistently.
(i) Strict client entry standards and approval process. Only those
companies meeting the entry standards and passing through the
designated approval procedure can get CRIF’s investment. For example,
a qualified investee must meet the subproject selection criteria as set out
in the PAM, be free of crime, have no default events and have sufficient
financial strength to undertake the pre-set buy-back condition for equity
investment.
(ii) Utilization of PPEI as risk control measure, PPEI is used to control the
invested subproject company so as to avoid unnecessary credit risk and
make sure the capitals are used for designated purpose. This risk-
mitigation technique is proved to be effective under the PRC’s credit
environment and will be used for the ADB FIL project.
(iii) Applying technical support from Output 1: Institutional
Strengthening in green agriculture, green rural development and
environmental protection. Technical risk consists of the major part of
risks associated with project investments. It is recommended that the
consulting firm hired under Output 1 shall provide technical support to the
fund management team in evaluating the related sectoral, technical and
market risks of potential subprojects and recommending appropriate risk
mitigation measures.
(iv) Formulating near market-based fund management service fee
mechanism with an aim to retain capable professionals in the fund
management team. JEDZI has recognized the importance of hiring and
retaining key capable persons with rich experience in private equity
investment management in the designated sectors of green agriculture,
 17

green rural development and environmental protection. But it lacks

sufficient performance-based compensation incentive program, which is
subject to approval by Chaohu Finance Bureau, a situation out of JEDZI’s
control. For the ADB project, it is recommended that JEDZI will be
allowed to charge a performance-linked fee scheme on CRIF for
management services rendered by its fund management team. For
example, it may charge basic management fee at 1% on the outstanding
fund investment each year during fund operation period. At the end of
fund tenor, a comprehensive accounting will be made. If the realized
investment return (say 15%) is larger than the targeted return (say 10%),
20% the extra return (equivale to 5%*20%=1% in our case) will be
charged by JEDZI as extra revenues earned by the fund management
team, and a corresponding performance-linked bonus as per JEDZI’s
current compensation policy shall be awarded to the fund management
team in three years (50%, 25% and 25% respectively in each year). This
measure is reinforced in the sustainability analysis of the FIL. Adoption of
such fund management fee charging scheme will be set as a condition for
loan disbursement.

36. Particular to the ADB loan project, since JEDZI will bear fundamentally all risks of
the FIL, it is quite motivated to supervise the fund management team and evaluate the
team’s performance on a regular basis. If underperformance is observed consecutively
for certain years, JEDZI will consider changing the fund management team to control the
related risks.

VII. Compliance Framework

37. JEDZI is a local SOE 100% owned by JEDZA. Its board of directors, the
supervisor, and senior managers are all appointed by the government with prior integrity
check on their professional records. They shall report to the government the personal
matters and shareholding situations of their families so as to avoid conflict of interests.
The central, and provincial governments’ anti-corruption policies applicable to SOEs
shall be abided by the company. The local government will organize integrity inspection
on the company in every three years. In addition, the company’s operation including the
investment activities shall meet regulatory requirements. Particularly, it shall follow up
the financial management systems applicable to SOEs enacted by Chaohu Finance
Bureau. Staff compensation, and major reimbursable expenses shall meet the standards
approved by the local government. The compliance risk is low.

38. To facilitate the smooth operation of CRIF, it is planned that CRIF will adopt a
contract form to establish. All investment funds will be aggregated at a special bank
account of JEDZI first and then injected into investees. Such arrangement is legally
permitted for a PE fund.

A. Summary of Institutional Assessment

39. From the above assessments in section III through VII on institutional setup,
governance structure, financial management system, risk management system, and
compliance framework of JEDZI, it is found that (i) the governance structure of JEDZI is
18

relatively simple, but due to its nature of 100% SOE, external inspection and supervision
are frequently carried out by different government agencies, effectively making up the
deficiency of its governance; (ii) it adopts government accepted financial management
system to manage its financial resources, which is accrual based accounting and can
safeguard the related assets; (iii) it has established a risk management system that is
effective to control risks associated with its existing businesses (mainly construction
agency business), but for management of risks associated with CRIF, JEDZI may need
strengthened capacity; (iv) for financial management of the FIL component, JEDZI has
designated sufficient financial and accounting staff, who are capable for their respective
accounting and financial posts but are assessed in need of trainings on ADB procedures
and standards in aspects of disbursement, financial management, procurement, and
safeguards; (v) JEDZI is operated in compliance with external regulations. Its
responsibility with regards to AML/CFT as required by the law is limited in customer due
diligence, which can be satisfied by JEDZI’s current practice. The establishment of
subproject eligibility criteria in the PAM will further ensure low risk of money laundering
under the FIL. The usage of contract form to set up CRIF is also legally permitted; (vi)
The internal control of JEDZI is weak, but the external control applicable to it is strong as
evidenced by the fact that a discipline inspection group is deployed by the Chaohu City
Government to work within the company; (vii) the unique market position of JEDZI in
obtaining government support to develop JEDZ determines that its business
development will be quite stable and its current streamlined management structure and
human resources are adequate for its existing businesses; and (viii) JEDZI and its
subsidiary made several direct investments in past few years and accumulated basic
skills and knowledge for management of private equity investments. But their experience
does not cover the fields the FIL intends to finance. JEDZI still needs capacity
strengthening for successful operation of CRIF.

40. To conclude, JEDZI is assessed having sufficient institutional capacity to sustain

its existing infrastructure investment and zone development financing support
businesses, on the condition that the external supervision, discipline control and audit
implemented by the local government are effective. Its financial management system
and the fund flow arrangement under the FIL are able to ensure the ADB loan proceeds
will be used for the purpose intended. The arrangement of setting up CRIF in form of
contract is legitimate and beneficial to the smoothy implementation of the FIL. On the
other hand, it is also noted that the investment team currently designated by JEDZI to
manage CRIF lacks expertise critical for successful operation of the fund. Institutional
capacity enhancement advices on the composition of the investment committee of the
fund, development of project specific financial management manual, and a customized
risk management mechanism have been recommended. In addition, the report found
that JEDZI staff may need training support on ADB’s requirements and procedures with
regards to disbursement, procurement, financial management, and safeguards. The
related capacity strengthening and training will be provided by the consulting firm hired
under Output 1 during loan implementation after approval by the PMO. If these advices
are adopted by JEDZI and PMO, institutional capacity for management of CRIF will be
deemed satisfactorily enhanced.
 19

VIII. Financial Performance Assessment

41. All subsidiaries are 100% owned by JEDZI, the subsidiaries’ financial statements
are fully consolidated into JEDZI. JEDZI implements a centralized management over its
subsidiaries through integrating the financial management and human resource
management in the parent company. Therefore, the report only analyzed JEDZI’s
financial performance on a consolidated basis. The business mandates given to the
management and the unique market position determine that JEDZI can earn profitability
at reasonably low level but sufficient to ensure its sustainable operation.

42. The revenues of JEDZI come from four sources: construction agency, rent from
leasing plant facilities, guarantee fee charged for provision of loan guarantees, and
investment returns. Table 4 summarizes the business composition of JEDZI as of 2021.
Construction agency business contributes over 97% of its revenues and over 90% of its
gross profit. The 10% price add-up arrangement for construction agency and the very
small portion of other businesses makes JEDZI very unlikely to suffer loss. Because of
its concentrated business nature, its growth is also limited, basically in line with the
development of JEDZI.

Table 4: Business Unit Composition of JEDZI as of 2021

In amount Proportion
Business Units Revenues Costs Gross profit Revenues Gross profit
Construction agency 446,256,822 387,944,813 58,312,009 97.0% 90.4%
Rent from leasing 8,825,001 7,586,655 1,238,346 1.9% 1.9%
Guarantee fee 3,236,669 3,236,669 0.7% 5.0%
Investment 1,769,332 19,832 1,749,500 0.4% 2.7%
Total 460,087,823 395,551,301 64,536,523 100.0% 100.0%

43. Except the extra year of 2019, when JEDZI experienced a business restructuring
as arranged by its owner, JEDZI’s assets and sales were steadily growing with sales
growing a little faster. In five years from 2017-2021, its assets increased to 1.77 times
and sales to 1.83 times. Net profit margin was relatively volatile, ranging from 4.4% to
81.4% from 2017-2021, which was caused by extraordinary revenues obtained in 2019
(CNY 177m) and 2021 (CNY 85m) as a result of government subsidy program, leading
to extra high operating profit margin of 81.7% and 32.9% in the two years respectively.
Excluding the abnormal years, JEDZI’s profitability is kept in moderate and acceptable
level. Since the rent of plant facilities and the guarantee fee are charged in the lower
range with the aim to attract enterprises to remain operation in the zone and the largest
portion of construction agency business is limited at 10% of price add-up, the overall
returns on assets and equity are relatively low. But this is determined by the market
positioning of JEDZI. The current ratio of JEDZI during 2017-2021 is maintained always
higher than 3.0, outstanding in comparison to the benchmark of 1.5 times. The total
liabilities to total assets ratio increased from 58% in 2017 to 74 in 2020, and then
brought down to 60% in 2021, making its financial leverage structure more reliable. Its
interest coverage ratio is also good, higher than the benchmark of 2.0 times in last three
years. Its debt service coverage ratio (DSCR) is low, even staying negative in three out
of the last five years. This is mainly caused by the nature of construction agency
business. JEDZI needs to borrow from banks to have contractors to start construction in
the beginning, and then gradually get reimbursed from the government. With the
development of its business scale, the financing demand becomes larger. In sometimes,
if the government payment is late for
20

some reasons, the operating cashflows of JEDZI can become negative, thus leading to
negative DSCR. Such low or even negative ratio is assessed not a real risk to JEDZI
since the underlying payment obligator is the local governments including Juchao
Economic Development Zone Commission and Chaohu City Government. The zone is a
national development zone, Chaohu City Government will always put high priority to
support JEDZI without doubt.

44. Key financial indicators of JEDZI are summed up in Table 5 below. Its average
annual net profit (CNY 76.4 million) is about 72% of the total FIL amount (CNY 106.2
million). As of the end of 2021, its net assets (CNY2,089.2 million) and its cash holding
(CNY 580.7 million) are about 20 times and 5 times of the total FIL amount respectively.
Such financial strength builds up a solid basis for JEDZI to sustainably implement the
FIL even if the related equity investments encounter unexpected adverse shocks from
the market.

Table 5: Key Financial Indicators of JEDZI

45. Historical analysis of JEDZI’s financial performance concludes that the company
has been well operated with robust growth and reasonable profitability, its unique market
position provides solid foundation for it to keep the growth momentum, and its current
financial strength is strong enough to support the sustainable implementation of the FIL
against adverse market shocks.
 21

IX. Financial Sustainability of JEDZI and the FIL

A. Sustainability of JEDZI

46. Projection of JEDZI’s financial performance for 2022-2031, as illustrated in Table

6, is made with consideration of the incremental impact of the FIL. The resulted financial
ratios are summarized in Table 7. The projection supports the judgement that JEDZI’s
operation will be sustainable after considering the impact of FIL. Key assumptions are
made conservatively, including: (i) 85% of net income will be retained; (ii) inventory will
grow at 6% annually (last 5 year average is 28%); (iii) weighted average tenor of long-
term debt is 6 years; (iv) gross margin will increase in proportion to sales growth with
consideration of scale impact, (v) short-term borrowing growth will remain at 5% during
2022-2023 and drop to 3% in and after 2024, and long-term borrowing growth will be
maintained at 3% in and after 2022; (vi) business as usual (BAU) investment will grow at
3%, total investments will be BAU investment plus FIL disbursements, which is assumed
to be completed evenly from 2023-2025; (vii) target investment return is 13% 5; (viii)
management expense has included the incremental cost resulted by the FIL for ESMS
and human source strengthening, which is assumed CNY 1 million/year, and (ix) other
items such as cash, receivables, other current assets, and other non-current assets will
change at a moderate rate.

47. All key financial indicators 6 will get improved or remain at acceptable range.
Particularly, sales revenues, profits, asset scales will steadily increase. Financial
leverage will be maintained in good shape. Current ratio will be high, always over 4.5
times, total liabilities to total assets ratio drops from 60% in 2021 to 55.5% in 2031, and
interest coverage ratio will be kept over 2.5 times, higher than the benchmark of 1.5
times. DSCR will be improved but still be very small, around 0.1-0.2 only, much lower
than the benchmark rate of 1.2 times. DSCR is meaningful to measure the debt service
capacity of industrial and commercial companies, but not suitable to measure that of
financial institutions including investment companies. JEDZI, as an investment company,
has continuous financing demand to construct new infrastructures or production facilities.
Each year it borrows a lot, and has to repay a lot of loan principle, which is much higher
than its revenues scale (as decided by the 10% price add-up policy). The projected
borrowing scale in the next 10 years ranges from CNY 924 million to CNY 1,267 million,
much lower than its 2021 borrowing level of CNY 1,420 million, which further illustrate
that the projection is conservative and affordable. In case JEDZI has a temporary
funding debt service problem, it can apply loans from its unused credit lines to promptly
meet such funding need. Furthermore, since the repayment obligation will be ultimately
passed through to the local government JEDZA, such low DSCR will not likely to affect
JEDZI’s solvency capability from a long-term perspective. As DSCR loses its ground to
measure JEDZI’s repayment capacity, it is recommended to use another three financial
ratios as a proxy of debt assurance: (i) interest rate coverage ratio shall be covenanted
to be higher than 1.5 times; (ii) current ratio shall be covenanted higher than 2.0 times;
and (iii) total

5
The average investment return of PE funds in PRC during 2010-2019 is over 13%.
6
JEDZI regularly reevaluates the value of its equity investments in a principle of marking to the market and
the value of its debt investments as per 3rd party appraisal. Its audited financial statements indicated that in
2020 and 2021 respectively, it recorded CNY 302,087 of loss and CNY 4,722,253 of gain from its financial
assets, and CNY 17,926,426 of loss and CNY 9,255,899 of gain for its debt type investments. Such
accounting practice is recognized by the audit firm as acceptable.
22

liabilities to total assets ratio shall be covenanted to be less than 70%. If JEDZI is
capable of meeting requirements on these financial indicator’s, it is expected that JEDZI
can maintain sustainable operation in the future.

Table 6: Projected Financial Statements of JEDZI

Source: ADB estimates

 23

Table 7: Key Projected Financial Ratios

Source: ADB estimates

48. Projected financial performance of JEDZI reinforces the conclusion that the
company can sustainably carry out its existing businesses and operate CRIF under the
FIL component in the future.

B. Financial Sustainability of the FIL

49. Furthermore, it is found that CRIF itself is sustainable under normal assumptions.
CRIF will adopt a typical 7-9 years of tenor consisting 3 years of investment period and 4
to 4 years of exit period. 7 It is assumed that the FIL term will be 25 years with 6 years of
grace period. The CRIF can revolve three phases during the FIL term, projected with 7-
year, 8-year, and 10-year tenors, respectively. 8 Such setting will result in 0.30% of
maturity premium. 15-year fixed swap rate of 3.16% is used, and thus the FIL interest
rate of 6% is used in the sustainability analysis. As JEDZI is a SOE not fully market-
oriented, its required cost of equity is assumed 6%, which can satisfy the requirements
of asset value preservation and addition by government. Total investment for the FIL
operation is estimated to be CNY 408.5 million, of which CNY 125.7 million will come
from the FIL (at an exchange rate CNY7.7454 = €1 as of 5 September 2023). The rest of
CNY 125.7 million will cover the financial charges (FIL interest and commitment fee) and
FIL principal repayments JEDZI must pay before collecting back the investment return in
each phase. The weighted average cost of capital (WACC) for this operation is thus
estimated at 6% in nominal terms without considering PRC’s inflation, which is a
common practice in PE investment sector. Such approach will help increase the FIL
sustainability (see Table 8).

7
If agreed by both partners, the CRIF may be extended for 2 more years in exit.
8
FIL principal repayments will be made during years 7–25, dependent on potential extension of CRIF tenors
in the first two phases.
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Table 8: WACC Calculation for the FIL operation

50. FIL proceeds are assumed to be withdrawn from 2023 to 2025. The fund
management fee will be 2.0%. Negative income tax payments calculated from the FIL
operation for a year (if any) will be counted as positive cashflow because JEDZI’s
business as usual is expected to make much larger before-tax income. Based on these
assumptions, the overall financial internal rate of return that JEDZI can earn from its
investment on the CRIF is 8.20%, which is above the weighted average cost of capital of
6%. Sensitivity analysis indicates returns are sensitive to changes in gross return,
indicating that selection of viable subprojects that meet the FIL investment criteria
will be critical. With consideration of the robust earnings capacity of JEDZI and the
high priority attached to this project, it can be concluded that the CRIF is sustainable,
based on the above assumptions.
 25

Table 9: Financial Sustainability of FIL

Source: ADB estimates

51. Nevertheless, it is noted that the above project financial sustainability is built up
on the condition that CRIF can closely achieve the target investment return of 8.20% in
base case scenario. Only if JEDZI can retain a capable investment team familiar with the
sector risk/return features, PE fund risk management and ADB’s special safeguards
requirements, such target return can be realized on a persisting basis, and the
sustainability of the FIL can be ensured. This condition consequently requires JEDZI to
adopt the performance-linked management fee charging scheme as mentioned before.

52. If the recommended risk management strategies are adopted by CRIF, its equity
investments will be protected by the put option, which in effect will require the controlling
shareholders of investees to buy back the fund’s investments if other exit strategies are
not realized in certain period of years, thus formulating a bottom line of risk defense for
the fund itself and enabling JEDZI to use the distributed investment return to meet the
FIL service demand. Adoption of such measure will also enhance the FIL’s sustainability
from the implementation aspect.
26

53. On the other hand, even if some of the investments of CRIF encounter full
defaults, for example, the investment loss up to 30% of FIL amount (about CNY 30
million), which is rare case for JEDZI to suffer such a big loss, is still assessed affordable
by JEDZI and can be covered by its BAU annual net income, which is averaged at CNY
76.41 million during 2017-2021 and CNY 55.29 million from 2022-2037 as projected
under conservative assumptions.

54. To sum up, the FIL component is assessed sustainable with consideration of
FIL’s positive cashflow effect, JEDZI’s financial strength and the conditions set out in
implementation of CRIF.

X. Recommended Risk Mitigation Measures

55. Risks in association with the FIL component have been identified. The overall
finding about risk level of the project is moderate. A summary of risk analysis is shown in
Table 10.

Table 10: Risk Analysis

Risk
Risks Impact Likelihood Assessment Proposed Mitigation
Inherent Risks
Country Specific Risks– Low less likely low
National accounting standards
as issued by the Ministry of
Finance are equivalent to
International Accounting
Standards and acceptable to
ADB. ADB experiences in
project implementation shows
generally high financial
management capacity. Audit
reports of Anhui provincial audit
office are submitted timely in
accordance with ADB
requirements.
Entity Financial Strength Low less likely low Audited financial statements
JEDZI holds a robust financial of JEDZI will be provided to
standing with steady growth. Its ADB each year for
low debt service coverage ratio monitoring purpose.
will not cause solvency problem It will be covenanted that (i)
since it has high current ratio, the interest coverage ratio
moderate financial leverage, shall be maintained higher
large net assets, which are than 1.5 times; (ii) the
about 20 times of the FIL size, current ratio shall be
and business nature of passing maintained higher than 2.0
most of debts to local times; and (iii) total liabilities
government. to total assets ratio shall be
less than 70%, all of which
will be monitored each year
before the loan closure.
Project Risks
Financial sustainability of Low less likely low FIL proceeds should be
JEDZI: JEDZI has been kept in separate project
modeled with positive cash account from the other
flows with consideration of the Funds of JEDZI.
FIL impact in the next 10 years.
Financial sustainability of the High likely moderate A reasonable performance-
 27

Risk
Risks Impact Likelihood Assessment Proposed Mitigation
FIL: The FIL is assessed linked management fee
financially sustainable on the charging scheme with
condition that JEDZI can retain endorsement from ADB
capable investment team to should be adopted by
achieve the target return while JEDZI with an aim to trigger
controlling the associated better compensation bonus
investment risks for CRIF. to the fund management
team from the existing
compensation policy of
JEDZI.
Appropriate investment due
diligence and decision-
making process applicable
to CRIF will be included in
the PAM.
Technical/sector
assessment support
provided by consulting firm
hired under Output 1 will be
made available to CRIF
Accounting policies and Low less likely low Trainings on ADB
financial management procedures and policies in
system–JEDZI and its aspects of disbursement,
subsidiaries practice accrual procurement, financial
accounting in accordance with management and
the PRC’s GAAP, which is safeguards will be provided
consistent with IAS on a project to the designated financial
accounting level. But the staff before loan
designated financial staff lack effectiveness.
ADB project experience.
Staffing high likely moderate The investment committee
The designated financial staff of of CRIF shall include one
JEDZI is sufficient. capable investment
The current investment team professional experienced in
proposed for CRIF lacks green agriculture, green
investment experience in green rural development and one
agriculture, green rural risk management exert with
development and rich work experience in PE
environmental protection, risk funds and law/finance
management experience in PE academic background. The
funds, and ESMS expertise fund management team for
CRIF will get capacity
strengthening support from
the consulting firm of Output
1 in detailed ESMS due
diligence for first 2-3
investments, and then it
shall outsource experienced
environmental /social
experts using the templates
provided by the consulting
firm to support its ESMS
check.
Internal audit– JEDZI does not low likely moderate Local audit authority will
have an internal audit include the CRIF operation
department, which is hard to in its ordinary audit scope.
change. This is a shortage but
its negative impact is limited
due to strict external
inspections and
audits.
28

Risk
Risks Impact Likelihood Assessment Proposed Mitigation
In addition, a specific
investment decision process
with appropriate controls has
been proposed for management
of CRIF
External Audit–JEDZI and its Low less likely low
subsidiaries are subject to
annual external audits on a
rotating basis by CPAs auditing
firms designated by the local
government. All these auditing
firms can provide proficient
auditing services. The project
will also receive provincial
government-organized audits
after project completion.
Reporting and Monitoring– low less likely low The PAM includes guidance
The reporting and monitoring of on preparing progress
the project will be carried out reports and annual reports
mainly by JEDZI’s fund acceptable to ADB.
management team with Financial statements of
guidance from the PAM. The project accounts of JEDZI
chairman of JEDZI worked as established for
PMO director for an ADB implementing the FIL
project. He may be able to component shall also be
transfer the necessary provided to ADB at least
knowledge to the fund annually
management team on reporting
and monitoring
Project implementation delay Low likely moderate Direct payment from Anhui
risks–numerous onlending Provincial Department Of
arrangements must be Finance to JEDZI is
formulated and agreed among recommended.
the entities. PAM will include the agreed
Appropriate subproject selection subproject selection criteria.
criteria have been developed
with consultation with JEDZI to
ensure its practicability.
Information Systems–JEDZI Low less likely low JEDZI’s fund management
uses computerized accounting team shall monitor the
software, which is in PAM’s requirement on
compliance with the Chinese reporting.
Accounting Standards and can
provide detailed project account
transaction recording, loan fund
flow tracking, financial book
summary and archive index
management.
Overall Project Risk Moderate likely Implementing the mitigation
Overall Risk Moderate Likely Moderate actions mentioned above
will reduce the risk to low.
ADB = Asian Development Bank, AMAC = Asset Management Association of China, CRIF = Climate Resilient
Investment Fund, CPAs = Certified Public Accountants, FIL = financial intermediation loan, GAAP = generally
accepted accounting principles, IAS = international accounting standard, JEDZI = Anhui Juchao Economic
Development Zone Investment Co., LLP = limited liability partnership, MOF = Ministry of Finance, PAM = project
administration manual, PPEI=Put Protection Equity Investment
Source: Asian Development Bank.
 29

XI. Proposed Action Plan

56. The following actions (Table 11) are proposed to be taken by the relevant parties
to address the identified gaps between the current capacities, legal environments and
practices of JEDZI and ADB requirements for an FIL program in relation to financial
management, procurement and anti-corruption. ADB and JEDZI have agreed that the
proposed action plan is subject to regular review for progress and may be updated when
necessary.

Table 11: Proposed Action Plan for Financial Management & Staffing
Action Responsibility Timing
1. Sign the investment partnership agreement JEDZI Before loan
with another SOE partner, template of which is effectiveness
subject to the endorsement of ADB. The IPA will
authorize JEDZI to adopt appropriate
performance-linked management fee charging
scheme on CRIF
2. Training on ADB procedures and requirements ADB, PMO, JEDZI Before loan
in aspects of disbursement, procurement, effectiveness
financial management and safeguards
3. Appoint two independent CRIF investment JEDZI Within three
committee members: one investment professional months after IPA
with rich experience of investment in green signature
agriculture, green rural development and
environmental protection, and one risk
management professional with rich working
experience in PE funds, and cause its fund
management team to outsource experienced
environmental/social experts to support ESMS
due diligence when necessary
4. Simplify the fund flows by adopting direct PDOF Before loan
payment method to transfer FIL proceeds directly effectiveness
to JEDZI
5. Develop appropriate financial management JEDZI Within 6 months
manual for the FIL component, summarizing the after loan
related provisions included in the PAM such as effectiveness
FIL disbursement procedure, fund flow, project
account establishment, subproject eligibility
criteria, investment due diligence and decision
making process, risk management strategies
including PPEI, plus additional guidelines in
relation to proper accounting and financial
management of transactions under the FIL
component, covering: investment planning in line
with FIL disbursement/repayment schedule,
recognition and accounting of project revenues,
scope of eligible costs/expenses for the FIL
component and reimbursement procedure, project
financial statement development, asset
safeguards, investment reevaluation, non-
performing asset recognition and write-off, etc.
30

Action Responsibility Timing

6. Cause the consulting firm hired under Output 1 PMO During FIL
to provide necessary institutional strengthening implementation
support to JEDZI as approved by the PMO in
three aspects: (i) technical and/or sector
assessment for investments with
complex/advanced technologies in agriculture and
water environment protection; (ii) ESMS due
diligence for first 2-3 investment projects; and (iii)
guidance on development of financial
management manual applicable to CRIF.
7. Include the audit on CRIF in its regular audit Audit Office of Chaohu Decision shall be
scope of the local audit authority during the fund City made before loan
term. effectiveness and
regular CRIF audit
shall be
implemented
during the term of
CRIF
ADB = Asian Development Bank, CQZ = Chaohu Qishan Zhongzhi Venture Investment Management Co.,
CRIF = Climate Resilient Investment Fund, ICA=Investment Cooperation Agreement, JEDZI = Anhui Juchao
Economic Development Zone Investment Co., PAM = project administration manual, PDOF = Provincial
Department Of Finance, PMO = Project Management Office, PPEI=Put Protection Equity Investment
Source: Asian Development Bank.

XII. Conclusion

57. The financial due diligence on JEDZI finds that both JEDZI and the proposed
CRIF are financially sustainable.

58. JEDZI is able to satisfactorily perform proper financial management, monitoring

and reporting necessary for smooth implementation of the FIL component, and is
financially robust and can be expected to sustainably run the business for a long-time.
There are no legal barriers for JEDZI to establish the fund, CRIF, by reach investment
cooperation agreement with the SOE partner, which is a preferred organization form for
CRIF under the project context. JEDZI can practice accrual-based accounting on a
project basis and its accounting procedures are aligned with the regulations. The
designated accounting and financial staff are recognized as sufficient for the project.
Meanwhile, the institutional capacity of JEDZI is found with moderate shortcomings that
should be reinforced. The existing investment team has some basic investment
experience but is hardly assessed as sufficient for operation of CRIF. Appropriate
financial management manual shall be developed by JEDZI for smoothly implementing
the FIL component.

59. Projected financial performance of JEDZI with consideration of the incremental

impact of the proposed FIL illustrates that the financial sustainability of JEDZI will be
maintained or even further improved. The FIL component itself is assessed as
sustainable under adverse scenarios. With consideration of the positive cashflows
generated by the FIL, JEDZI financial strength, and adoption of the recommended
institutional capacity strengthening measures, it is assessed that the FIL sustainability
can be reliably ensured.

60. The overall financial management risk of the FIL component is assessed to be
moderate. A time-bound action plan is proposed. After adopting the recommended
mitigation measures, it is expected to be reduced to low.