Clarification Statement of Beijing Enterprises Water Group Limited Regarding an Article “Chinese Water Accounting Is Slippery” Published by The Wall Street Journal

HONG KONG, CHINA - Media OutReach - 16 December 2015 - Regarding the article "Chinese Water Accounting Is Slippery" published by The Wall Street Journal, Beijing Enterprises Water Group (hereinafter referred to as "BEWG") issues a clarification statement to explain the accounting treatment of our build-operation-transfer projects (the "BOT Projects") under the Hong Kong financial reporting standards (the "HKFRSs") to enable investors a better understanding of our financial reports.

In accordance with Hong Kong Accounting Standard 11 Construction Contracts and HK (IFRIC) Interpretation 12 Service Concession Arrangements ("HK (IFRIC)-Int 12"), "If the operator provides construction or upgrade services the consideration received or receivable by the operator shall be recognised at its fair value"; and "If the operator performs more than one service (ie construction or upgrade services and operation services) under a single contract or arrangement, consideration received or receivable shall be allocated by reference to the relative fair values of the services delivered". In other words, construction revenue shall be recognised during the construction phase of the BOT Projects and the construction revenue shall be measured at its fair value. In determining the fair value of construction gross margin of the BOT Projects, we adopt a more prudent approach by annually engaging independent professionally qualified valuers to perform the fair value gross margin valuation. The fair value of the gross margin represents a profit margin prevailing in the market of similar business at the time of construction and is reviewed by independent auditors annually to ascertain the fair value of construction gross margin is up to date. We are unable to control the valuation result.

HK (IFRIC)-Int 12 stipulates guaranteed receipts-related and non-guaranteed receipts-related initial investments (i.e. construction receivables of the BOT Projects) alongside the construction gross margin shall be bifurcated as financial assets and intangible assets respectively. After initial measurement, financial assets are subsequently measured at amortised cost using the effective interest rate method. Yearly guaranteed receipts are then allocated as the settlements of the interest income, initial value of the financial assets and operating revenue. Interest income and operating revenue are recognised accordingly. On the other hand, initial costs of intangible assets, after initial measurement, are amortised over the service concession period.

As a result, total amount of the guaranteed receipts and non-guaranteed receipts are the same as the total amount of total investment cost, construction margin, interest income and operating revenue recognised throughout the service concession period.

To conclude, we believe that the article "Chinese Water Accounting Is Slippery" published by the The Wall Street Journal has many loopholes in the analysis of the accounting treatment adopted by our company, which may result in misunderstanding by the readers. Therefore, we believe a clarification statement is necessary to clarify:

1. Our financial statements are prepared strictly in accordance with the HKFRSs. The accounting policies adopted are in line with the HKFRSs, which are agreed and recognised by Ernst and Young, one of the Big Four auditing firms. In particular, the accounting treatment on service concession arrangements is strictly in line with the requirement of HK (IFRIC)-Int-12, which was effective for annual periods beginning on or after 1 January 2008 and was applicable to all entities adopting the HKFRSs engage in relevant service concession arrangements.

2. Prudent approach is consistently adopted in determining our construction gross margin for the BOT Projects, and our construction gross margin is maintained at an average to low level among the peers. Fair value of the construction gross margin is assessed annually by independent professionally qualified valuers and finalised upon agreement with the Big Four auditing firm, and we are unable to revise the construction gross margin without the unanimous consents of these independent experts.

In relation to the increase in fair value of the construction gross margin in 2014 as compared to that of prior years: At the time of the first adoption of HK(IFRIC)-Int-12 in 2008 when the standard first becomes effective, the independent professionally qualified valuers included entities in various construction industries as valuation comparables in assessing the fair value of the construction gross margin taking into account the number of entities engaged in the water-related construction businesses at that time. The valuation was performed annually to ensure the fair value of construction margin is update to date. In 2014, the independent professionally qualified valuers and the external auditors reassessed the construction gross margin by taking into account solely on entities engage in water-related construction businesses with a view of a fairer reflection of our financial performance.

3. We recognised interest income and operating income strictly in accordance with HK(IFRIC)-Int-12 and the recognition of interest income during the operation phase of the BOT Projects will not lead to any profit increment of BEWG based on the accounting principles explained in the above paragraphs.

4. In accordance with Hong Kong Accounting Standard 7 Statement of Cash Flows, the capital investments of the BOT Projects are classified as operating cashflows. In the past few years, water industry has maintained at a high-growth momentum. We seize the expansion opportunities and maintain a high level of investment in the construction of water treatment plants. This is also the main reason that BEWG has a net negative cashflow from operating activities on consolidation level. On the other hand, all of our water plants under operation generates positive operating cash flows and the cash flows keep growing on an annual basis.

5. BEWG always pays significant attention to monitor the quality and quantity investment of the BOT Projects and such business management strategy leads to attractive returns in recent years. We believe that under the close guidance and supervisions of our professional and management teams, our water projects could fuel up the future growth of BEWG, not only at the construction stage but more at the operating stage of the service concession projects. In addition, our other businesses will also contribute strong growth to BEWG.

As a listed company in The Stock Exchange of Hong Kong Limited, we will uphold our vision and mission, be practical at work, make every effort on timely communication with investors, be transparent in information disclosures in a timely manner, in order to create greater value and return for the shareholders.

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About Beijing Enterprises Water Group Limited (0371 HK)

The Company was incorporated in Bermuda as an exempted company with limited liability and the shares of which are listed on The Stock Exchange of Hong Kong Limited. The ultimate holding company of the Company is Beijing Enterprises Holdings Limited, (stock code: 0392). The Group strategically positions itself as a "leading integrated water system solution provider", and specializes in water service and environmental protection businesses, with waste water treatment as its core business segment.

For more information, please visit the Group's website at: http://www.bewg.com.hk

The English translation is for reference only and the Chinese version shall prevail in case of any inconsistency between the Chinese version and English translation thereof.