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个股公告正文

晨 鸣B:2016年年度报告(英文版)

日期:2017-02-18附件下载

                                          MITED
SHANNGDONG CHEENMINNG PAPPER HOOLDINGGS LIM



           THE 2016 A AL REPPORT




                  Febbruary 2017




                                              1
I    Important Notice, Table of Contents and Definitions



The board of directors (the “Board”), the supervisory committee (the “Supervisory Committee”) and the directors (the “Directors”),
supervisors (the “Supervisors”) and senior management (the “Senior Management”) of the Company hereby warrant the
truthfulness, accuracy and completeness of the contents of the annual report, guarantee that there are no false representations,
misleading statements or material omissions contained in this Report, and are jointly and severally responsible for the liabilities of
the Company.

Chen Hongguo, head of the Company, Hu Jinbao, head in charge of accounting and Dong Lianming, head of the accounting
department (Accounting Officer), declare that they warrant the truthfulness, accuracy and completeness of the financial
statements in the annual report.

All Directors were present in person at the Board meeting to consider and approve this Report.

The Company is exposed to various risk factors such as macro-economic fluctuation, adjustment of state policy and competition
in the industry. Investor should be aware of investment risks. For further details, please refer to the risk factors likely to be faced
and the measures to be taken to address them as set out in the outlook on the future development of the Company in Discussion
and Analysis of Operations.

The proposed profit distribution plan of the Company was considered and passed by the Board:

The audited consolidated net profit attributable to shareholders of the Company for 2016 prepared in accordance with Accounting
Standards for Business Enterprises by the Company amounted to RMB2,063,986,822.25. When deducting the interest for
perpetual bonds of RMB153,140,000 for 2016, the distributable profit realised for 2016 amounted to RMB1,910,846,822.25.

In accordance with the Prospectus of Non-public Issuance of Preference Shares, shareholders of preference shares may jointly
participate in the distribution of the 50% retained earnings realised for the year of issuance with ordinary shareholders. The basis
for the distribution is calculated as follows: (the number of months for the period from the next month after the month of issuance
to the end of the reporting period/12)       the retained earnings realised for the year   50%, and the basis for the distribution is
9/12 19.11 50%=RMB717 million.

Based on the total ordinary share capital of 1,936,405,467 shares as at the end of 2016 and the 387,263,339 simulated shares
converted from the preference shares as at the end of 2016 on a conversion ratio of 1 share valued at RMB5.81, a cash dividend
of RMB6 (tax inclusive) per ten shares or RMB1,161,843,280.20 will be distributed to ordinary shareholders, and a cash dividend
of RMB3.08 (tax inclusive) per ten shares or a variable cash dividend of RMB119,277,108.41 will be distributed to holders of
preference shares. No bonus shares (tax inclusive) will be issued and the share capital will not increase with the funds transferred
from the reserves.




                                                                                                              2016 ANNUAL REPORT           1

     3700278-t01fnar (Shandong Chenming) p.1 (CHIPC07) 17-02-2017 16:38
     OUTPUT: 17-02-2017 16:46:50
    I      Important Notice, Table of Contents and Definitions



    Table of contents
    I          Important Notice, Table of Contents and Definitions ...............................................................................................                               1

    II         Company Profile and Key Financial Indicators ........................................................................................................                             4

    III        Chairman’s Report ...................................................................................................................................................           10

    IV         Business Overview ...................................................................................................................................................            12

    V          Discussion and Analysis of Operations ....................................................................................................................                       17

    VI         Directors’ Report ......................................................................................................................................................        46

    VII        Material Matters .......................................................................................................................................................         53

    VIII       Changes in Share Capital and Shareholders ...........................................................................................................                            83

    IX         Preference Shares ....................................................................................................................................................           89

    X.         Directors, Supervisors and Senior Management and Staff......................................................................................                                     92

    XI         Corporate Governance.............................................................................................................................................               103

    XII        Corporate Bonds......................................................................................................................................................           125

    XIII       Financial Report .......................................................................................................................................................        129

    XIV        Documents Available for Inspection ........................................................................................................................                     276




2   SHANDONG CHENMING PAPER HOLDINGS LIMITED

                                                                                               3700278-t01fnar (Shandong Chenming) p.2 (CHIPC07) 17-02-2017 16:38
                                                                                                                                                                 OUTPUT: 17-02-2017 16:46:50
I      Important Notice, Table of Contents and Definitions



Definitions
Item                                                  Definition

Company, Group, Chenming              means           Shandong Chenming Paper Holdings Limited and its subsidiaries
 Group or Chenming Paper

Parent Company or                     means           Shandong Chenming Paper Holdings Limited
  Shouguang Headquarters

Chenming Holdings                     means           Shouguang Chenming Holdings Company Limited

Shenzhen Stock Exchange               means           Shenzhen Stock Exchange

Stock Exchange                        means           The Stock Exchange of Hong Kong

CSRC                                  means           China Securities Regulatory Commission

Shandong CSRC                         means           Shandong branch of China Securities Regulatory Commission

Zhanjiang Chenming                    means           Zhanjiang Chenming Pulp & Paper Co., Ltd.

Jiangxi Chenming                      means           Jiangxi Chenming Paper Co., Ltd.

Wuhan Chenming                        means           Wuhan Chenming Hanyang Paper Holdings Co., Ltd.

Chenming (HK)                         means           Chenming (HK) Limited

Haiming Mining                        means           Haicheng Haiming Mining Company Limited

Jilin Chenming                        means           Jilin Chenming Paper Co., Ltd.

Shouguang Meilun                      means           Shouguang Meilun Paper Co., Ltd.

Chenming Sales Company                means           Shandong Chenming Paper Sales Company Limited

Finance Company                       means           Shandong Chenming Group Finance Co., Ltd.

Financial Leasing Company             means           Shandong Chenming Financial Leasing Co., Ltd.

reporting period or the year          means           The period from 1 January 2016 to 31 December 2016

the beginning of the year or          means           1 January 2016
  the period

the end of the year or                means           31 December 2016
  the period

the prior year                        means           The period from 1 January 2015 to 31 December 2015




                                                                                                           2016 ANNUAL REPORT   3

       3700278-t01fnar (Shandong Chenming) p.3 (CHIPC07) 17-02-2017 16:38
       OUTPUT: 17-02-2017 16:46:50
    II Company Profile and Key Financial Indicators



    I.    Company profile
          Stock abbreviation                                                 ,    B         Stock code                 000488, 200488
          Stock exchanges on which the shares are listed             Shenzhen Stock Exchange
          Stock abbreviation                                         Chenming Paper         Stock code                 01812
          Stock exchanges on which the shares are listed             The Stock Exchange of Hong Kong Limited
          Legal name in Chinese of the Company
          Legal short name in Chinese of the Company
          Legal name in English of the Company (if any)              SHANDONG CHENMING PAPER HOLDINGS LIMITED
          Legal short name in English of the Company (if any)        SCPH
          Legal representative of the Company                        Chen Hongguo
          Registered address                                         No. 595 Shengcheng Road, Shouguang City, Shandong Province
          Postal code of registered address                          262700
          Office address                                             No. 2199 Nongsheng East Road, Shouguang City, Shandong Province
          Postal code of office address                              262705
          Website of the Company                                     http://www.chenmingpaper.com
          Email address                                              chenmmingpaper@163.com

    II.   Contact persons and contact methods
                                  Secretary to the Board                 Securities Affairs Representative   Hong Kong Company Secretary

          Name                   Xiao Peng                               Yuan Xikun                          Poon Shiu Cheong
          Correspondence Address No. 2199 Nongsheng East Road,           No. 2199 Nongsheng East Road,       22nd Floor, World Wide House, Central,
                                 Shouguang City, Shandong Province       Shouguang City, Shandong Province   Hong Kong
          Telephone              (86)-0536-2158008                       (86)-0536-2158008                   (852)-2501 0088
          Facsimile              (86)-0536-2158977                       (86)-0536-2158977                   (852)-2501 0028
          Email address          chenmmingpaper@163.com                  chenmmingpaper@163.com              kentpoon_1009@yahoo.com.hk

    III. Information disclosure and places for inspection
          Designated media for information disclosure           China Securities Journal, Shanghai Securities News, Securities Times,
                                                                  Securities Daily and Hong Kong Commercial Daily
          Designated websites for the publication of            Domestic: http://www.cninfo.com.cn; Overseas: http://www.hkex.com.hk
            the Annual Report as approved by CSRC
          Places for inspection of the Company’s               Securities investment department of the Company
            Annual Report

    IV. Change in registration
          Uniform social credit code                            913700006135889860
          Change of principal activities since its listing
            (if any)                                            No
          Change of the controlling shareholder (if any)        No




4   SHANDONG CHENMING PAPER HOLDINGS LIMITED

                                                                          3700278-t01fnar (Shandong Chenming) p.4 (CHIPC07) 17-02-2017 16:38
                                                                                                                         OUTPUT: 17-02-2017 16:46:53
II Company Profile and Key Financial Indicators



V.   Other relevant information
     CPAs engaged by the Company
     Name of CPAs                                                    Ruihua Certified Public Accountants (Special General Partnership)
     CPAs’ Office Address                                           4/F, Tower 2, No. 16 Xisihuanzhong Road, Haidian District, Beijing
     Name of the Signing Certified                                   Zhao Yanmei and Wang Zongpei
       Public Accountants

     Sponsors engaged by the Company to continuously perform its supervisory function during the reporting period

     √ Applicable                 Not applicable

                                                                                 Name of the
     Name of sponsor                     Sponsor’ office address                representatives of sponsor    Period under ongoing supervision

     Zhongtai Securities                 Securities Tower, No. 86 Jingqi Road,   Qian Wei and Zeng Liping      16 March 2016 – 22 November 2016
       Company Limited                   Jinan, Shandong Province
     CSC Financial                       9/F, Block B and E, Kaiheng             Song Shuangxi and             23 November 2016 –
       Co., Ltd.                         Center, No. 2 Chaonei Avenue,           Shen Xiqiang                  31 December 2017
                                         Dongcheng District, Beijing

     Financial Advisors engaged by the Company to continuously perform its supervisory function during the reporting period

          Applicable √ Not applicable




                                                                                                                       2016 ANNUAL REPORT          5

     3700278-t01fnar (Shandong Chenming) p.5 (CHIPC07) 17-02-2017 16:38
     OUTPUT: 17-02-2017 16:46:53
    II Company Profile and Key Financial Indicators



    VI. Major accounting data and financial indicators
        Retrospective adjustment to or restatement of the accounting data for prior years by the Company due to change of
        accounting policies and correction of accounting errors

           Yes √ No

                                                                                              Increase/decrease
                                                                                                  for the year as
                                                                                                    compared to
                                                               2016                  2015       the prior year (%)                         2014

        Revenue (RMB)                             22,907,118,241.84    20,241,906,131.81                 13.17%         19,101,677,077.69
        Net profit attributable to shareholders
          of the Company (RMB)                      2,063,986,822.25     1,021,224,678.04               102.11%             505,204,384.73
        Net profit after extraordinary gains or
          losses attributable to shareholders
          of the Company (RMB)                      1,611,533,699.22      719,891,359.63                123.86%             130,445,644.83
        Net cash flows from operating
          activities (RMB)                          2,153,049,269.84    -9,721,363,524.30               122.15%             985,399,735.85
        Basic earnings per share
          (RMB per share)                                      0.99                   0.50               98.00%                             0.26
        Diluted earnings per share
          (RMB per share)                                      0.99                   0.50               98.00%                             0.26
        Rate of return on net assets on
          weighted average basis                             9.59%                 6.73%                  2.86%                          3.62%


                                                                                              Increase/decrease
                                                                                                    as at the end
                                                                                                      of the year
                                                                                                       compared
                                                          As at the             As at the           to the end of                  As at the
                                                        end of 2016           end of 2015       the prior year (%)               end of 2014

        Total assets (RMB)                        82,285,354,532.14    77,961,699,547.59                  5.55%         56,822,026,545.21
        Net assets attributable to shareholders
          of the Company (RMB)                    22,218,808,367.43    16,871,494,584.82                 31.69%         13,917,343,301.15


        Explanation: Net profit attributable to shareholders of the Company does not exclude the effect of interest payment deferred
        and accumulated to subsequent periods for perpetual bonds under other equity instruments. When calculating financial
        indicators such as earnings per share and rate of return on net assets on weighted average basis, the interest for perpetual
        bonds from 1 January 2016 to 31 December 2016 of RMB153,140,000.00 is deducted. For details, please refer to Note XVII.
        2 of section XIII of this report.




6   SHANDONG CHENMING PAPER HOLDINGS LIMITED

                                                                  3700278-t01fnar (Shandong Chenming) p.6 (CHIPC07) 17-02-2017 16:38
                                                                                                                  OUTPUT: 17-02-2017 16:46:53
II Company Profile and Key Financial Indicators



VII. Differences in accounting data under domestic and overseas accounting standards
    1.        Differences between the net profit and net assets disclosed in accordance with international
              accounting standards and China accounting standards in the financial report
                  Applicable √ Not applicable

              There was no difference between the net profit and net assets disclosed in accordance with international accounting
              standards and China accounting standards in the financial report during the reporting period.

    2.        Differences between the net profit and net assets disclosed in accordance with overseas accounting
              standards and China accounting standards in the financial report
                  Applicable √ Not applicable

              There was no difference between the net profit and net assets disclosed in accordance with overseas accounting
              standards and China accounting standards in the financial report during the reporting period.


VIII. Key Financial Indicators by Quarter
                                                                                                                       Unit: RMB

                                                                   1Q                 2Q                 3Q                   4Q

    Revenue                                          4,951,931,256.74    5,654,427,476.28   5,965,699,811.33     6,335,059,697.49
    Net profit attributable to shareholders
      of the Company                                   402,131,344.77     537,033,525.83      614,998,648.94      509,823,302.71
    Net profit after extraordinary gains or losses
      attributable to shareholders of the Company       292,898,560.63     448,912,523.19     522,725,460.32       346,997,155.08
    Net cash flows from operating activities         -3,936,890,898.29   1,239,381,045.25    -422,581,643.26     5,273,140,766.14


    Whether the above indicators or their aggregated amounts have any material difference with the respective amounts as
    disclosed in the quarterly report or interim report

         Yes √ No




                                                                                                         2016 ANNUAL REPORT         7

    3700278-t01fnar (Shandong Chenming) p.7 (CHIPC07) 17-02-2017 16:38
    OUTPUT: 17-02-2017 16:46:53
    II Company Profile and Key Financial Indicators



    IX. Five-year financial summary under paragraph 19 of appendix 16 of the Hong Kong Listing
        Rules
                                                                                                                             Unit: RMB’0,000

                                                                             For the year ended 31 December
                                                             2016              2015           2014          2013                             2012

        Revenue                                         2,290,711         2,024,191         1,910,168         2,038,889              1,976,168
        Profit before tax                                 258,317           141,017            56,101            86,629                 -1,614
        Tax                                                56,056            43,224            10,770            17,594                 -6,283
        Profit for the current period attributable to
          shareholders of the listed company              206,399           102,122            50,520            71,066                  22,103
        Minority interests                                 -4,138            -4,329            -5,190            -2,030                 -17,435
        Basic earnings per share (RMB/share)                 0.99              0.50              0.26              0.35                    0.11
        Rate of return on net assets on weighted
          average basis (%)                                9.59%             6.73%             3.62%             5.11%                    1.63%


                                                                                                                             Unit: RMB’0,000

                                                                             For the year ended 31 December
                                                             2016              2015           2014          2013                             2012

        Total assets                                    8,228,535         7,796,170         5,682,203         4,752,188              4,772,542
        Total liabilities                               5,972,050         6,070,277         4,247,396         3,288,353              3,338,000
        Minority interests                                 34,605            38,743            43,073            59,847                 58,592
        Equity attributable to shareholders of the
        listed company                                   2,221,881        1,687,149         1,391,734         1,403,989              1,375,950
        Net current assets/(liabilities)                -1,094,182       -1,347,029          -452,549          -106,347                 24,638
        Total assets less current liabilities            3,557,671        2,932,756         2,872,637         2,823,321              2,775,419




8   SHANDONG CHENMING PAPER HOLDINGS LIMITED

                                                                     3700278-t01fnar (Shandong Chenming) p.8 (CHIPC07) 17-02-2017 16:38
                                                                                                                    OUTPUT: 17-02-2017 16:46:53
II Company Profile and Key Financial Indicators



X.   Items and amounts of extraordinary gains or losses
     √ Applicable                 Not applicable

                                                                                                                            Unit: RMB

     Item                                           Amount for 2016       Amount for 2015   Amount for 2014   Explanation

     Profit or loss from disposal of non-current
       assets (including write-off of provision
       for assets impairment)                         -1,536,454.18         18,317,909.85     65,276,190.37
     Government grants (except for the
       government grants closely related to
       the normal operation of the company
       and granted constantly at a fixed
       amount or quantity in accordance with
       a certain standard based on state
       policies) accounted for in profit or loss
       for the current period                        472,476,962.83        244,716,579.78    260,000,612.10
     Profit or loss from debt restructuring              -90,997.90         32,089,863.80      1,725,797.17
     Gain or loss on external entrusted loans         87,608,490.56         94,777,777.77     82,833,581.81
     Non-operating gains and losses other
       than the above items                           10,022,635.89         10,274,311.04     49,781,358.66
     Gain or loss from changes in fair value of
       consumable biological assets
       subsequently measured at fair value           -20,084,425.90        -19,078,538.02      6,856,815.32
     Less: Effect of income tax                       92,004,074.27         76,729,624.38     81,221,136.75
     Effect of minority interests (after tax)          3,939,014.00          3,034,961.43     10,494,478.78

     Total                                           452,453,123.03        301,333,318.41    374,758,739.90   —


     Notes for the Company’s extraordinary gain or loss items as defined in the Explanatory Announcement on Information
     Disclosure for Companies Offering Their Securities to the Public No.1 - Extraordinary Gains or Losses and the extraordinary
     gain or loss items as illustrated in the Explanatory Announcement on Information Disclosure for Companies Offering Their
     Securities to the Public No.1 - Extraordinary Gains or Losses defined as its recurring gain or loss items

          Applicable √ Not applicable

     No extraordinary gain or loss items as defined or illustrated in the Explanatory Announcement on Information Disclosure for
     Companies Offering Their Securities to the Public No.1 - Extraordinary Gains or Losses were defined by the Company as its
     recurring gain or loss items during the reporting period.




                                                                                                              2016 ANNUAL REPORT        9

     3700278-t01fnar (Shandong Chenming) p.9 (CHIPC07) 17-02-2017 16:38
     OUTPUT: 17-02-2017 16:46:53
     III Chairman’s Report



     Dear Shareholders,

     I am pleased to present to all shareholders the report of the Company for the financial year ended 31 December 2016. On behalf
     of the Board, I express my sincere gratitude to all shareholders for their concern and support rendered to Chenming Paper.

     In 2016, China’s economy grew at a slow yet stable pace with favourable momentum. The supply-side reform achieved
     initial results. Against the backdrop of the stable macroeconomic operation, the paper making industry where the Company
     operated was affected by factors including the supply-side structural reform, national environmental governance, elimination of
     overcapacity and increase in market demand, favouring the accelerated price increases in the paper making industry. In particular,
     in the second half year, there was a general increase in prices in the paper making industry in China due to the increased cost
     of, among other things, wood pulp, waste paper, logistics and coal, showing signs of recovery in the industry with a boom to be
     prolonged. On the other hand, with support from the documents in relation to the promotion of the leasing business issued by the
     State Council, the leasing industry continued to grow in defiance of an overall swoon with increasing downward pressure on the
     economic development.

     In 2016, the Company aimed for “developing into an enterprise with hundreds of billions in value” by adhering to the main theme
     of “achieving growth amid stability” and committed itself to “team building, management enhancement, outstanding business
     performance and good results”. The Company stuck to its diversification strategy, accelerated transformation and upgrading, and
     developed an industrial system that centred on pulp production, paper making and finance to achieve synergy among forestry
     and mining so as to boost the management quality, core competitiveness and profitability. The past year was the best year for
     the Company’s development so far. The overall strength of the Company significantly increased while the Company enhanced its
     position in the industry, delivering excellent performance.


     I.    Results of Operations
           In 2016, the Company completed the production of machine-made paper of 4.36 million tonnes with sales of 4.52 million
           tonnes and achieved revenue of RMB22.907 billion, a year-on-year increase of 13.17%. The Company recorded operating
           costs of RMB15.787 billion, a year-on-year increase of 6.93%. Total profit and net profit attributable to equity holders of the
           Company were RMB2,583 million and RMB2,064 million respectively, up by 83.18% and 102.11% from the prior year. The
           Company’s total assets amounted to RMB82.285 billion. The financial segment experienced stable development across
           businesses with ever improving management systems and effective risk preventions.


     II.   Corporate Governance
           During the reporting period, the Company regulated its operation under the requirements of Companies Law, Securities
           Law, Code of Corporate Governance for Listed Companies, Rules Governing Listing of Stocks on Shenzhen Stock
           Exchange, Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and the related
           provisions of the China Securities Regulatory Commission. The Company kept on improving and optimising its legal person
           governance structure and regulating its operation in practice. The Board considered the state of the Company’s corporate
           governance was substantially in compliance with the requirements and requests of the regulatory documents such as Code
           of Corporate Governance for Listed Companies.

           During the reporting period, the Board strived to regulate the operation of the Company by improving its corporate
           governance. It improved corporate governance system in a timely manner and formulated and optimised management
           systems including the Administrative Measures of Proceeds, the amended the Implementing Rules for Audit Committee
           under the Board and amended Articles of Association in accordance with the regulatory requirements.

           Strict enforcement of relevant internal control systems had promoted a regulated operation and healthy development of the
           Company, protecting the legitimate rights and interests of our investors. The overall state of corporate governance was in
           compliance with the requirements of the China Securities Regulatory Commission. As the Company’s development strives
           forward, its state of regulated operation and internal control will continue to improve.




10   SHANDONG CHENMING PAPER HOLDINGS LIMITED

                                                                     3700278-t01fnar (Shandong Chenming) p.10 (CHIPC07) 17-02-2017 16:38
                                                                                                                     OUTPUT: 17-02-2017 16:46:55
III Chairman’s Report



III. Dividend Distribution
     Consistent with our long-term goal of pursuing the maximisation of corporate values, the Company has always placed much
     emphasis on the benefits of and returns to our shareholders. The audited consolidated net profit attributable to shareholders
     of the Company for 2016 prepared in accordance with Accounting Standards for Business Enterprises by the Company
     amounted to RMB2,063,986,822.25. When deducting the interest for perpetual bonds of RMB153,140,000 for 2016, the
     distributable profit realised for 2016 amounted to RMB1,910,846,822.25. In accordance with the requirements of the Articles
     of Association and the Prospectus of Non-public Issuance of Preference Shares, the proposed profit distribution plan of the
     Company for 2016 is as follows:

     In accordance with the Prospectus of Non-public Issuance of Preference Shares, shareholders of preference shares
     may jointly participate in the distribution of the 50% retained earnings realised for the year of issuance with ordinary
     shareholders. The basis for the distribution is calculated as follows: (the number of months for the period from the next
     month after the month of issuance to the end of the reporting period/12)      the retained earnings realised for the year
     50%, and the basis for the distribution is 9/12 19.11 50%=RMB717 million.

     Based on the total ordinary share capital of 1,936,405,467 shares as at the end of 2016 and the 387,263,339 simulated
     shares converted from the preference shares as at the end of 2016 on a conversion ratio of 1 share valued at RMB5.81, a
     cash dividend of RMB6 (tax inclusive) per ten shares or RMB1,161,843,280.20 will be distributed to ordinary shareholders,
     and a cash dividend of RMB3.08 (tax inclusive) per ten shares or a variable cash dividend of RMB119,277,108.41 will be
     distributed to holders of preference shares. The retained earnings after the profit distribution will be carried forward for
     distribution in subsequent years.

     As always, the Company will continue to stay focused on its long-term development and maximise returns for our
     shareholders by delivering better results.

IV. Future Development
     In the light of the easing downward pressure on the national economy, improving income levels for residents and the
     stabilising economy as a whole, the disparity between China and developed countries will become smaller. According to
     the per capita consumption of paper products in developed countries, it is expected the per capita consumption of paper
     and paper board will continue to increase in China. Besides, under the current market conditions, elimination of obsolete
     production capacity in the paper making industry and increasingly stringent environmental protection policies are forcing
     some small and medium-sized enterprises out of the market, thus favouring industry concentration and standardised
     industry competition to establish a sound industry cycle. There are obvious signs for industry recovery with a boom to be
     prolonged.

     Since the implementation of the “Thirteenth Five Year Plan”, the accelerated urbanisation and industrialisation in China, the
     change in driver of economic growth, upgrade of traditional industries, development of emerging industries, and continuous
     infrastructure construction require substantial investment in fixed assets. China will become the largest leasing market in the
     world. According to the Research Report on Business Prospects Survey of and Investment Strategies in the China Financial
     Leasing Industry 2016-2021 issued by ASKCI Consulting Co. Ltd., the financial leasing industry will grow at a compound
     annual growth rate of over 20% in the future and it is expected that the outstanding leasing contracts of the financial leasing
     industry in China will amount to RMB20.79 trillion by 2021. The business prospects of the financial leasing industry in China
     are promising.

     Looking forward, the Company will adhere to the main theme of emphasising on environmental protection, low carbon,
     recycling and sustainable development. Following the “Made in China 2025 Plan” and the principles of scientific
     development and quality and efficiency enhancement, it will comprehensively improve its quality and efficiency,
     management level, technology application, sense of happiness and brand image through the integration between its
     production and manufacture segment and financial services segment, incorporation of smart technology into its industrial
     activities, further reorganised methodology and restructuring so as to achieve taxable profit over RMB10 billion and develop
     into an integrated diversified enterprise with hundreds of billions in value during the “Thirteenth Five Year Plan” period.




Chen Hongguo
Chairman
17 February 2017
                                                                                                          2016 ANNUAL REPORT           11

     3700278-t01fnar (Shandong Chenming) p.11 (CHIPC07) 17-02-2017 16:38
     OUTPUT: 17-02-2017 16:46:55
     IV Business Overview



     I.   Principal operations of the Company during the Reporting Period
          Whether the Company needs to comply with the disclosure requirements of specific industries

          No

          (I)   Principal operations of the Company during the Reporting Period
                The Company is a large and integrated modern conglomerate principally engaged in pulp production, paper making,
                finance and forestry businesses while also involved in mining, energy, logistics, construction materials, hotel operation
                and others. It is also the only listed company with A shares, B shares, H shares and preference shares in issue and
                the first company in the paper making industry having a finance company and a financial leasing company integrated
                with its industrial activities in China. The machine-made paper business and the financial leasing business are main
                sources of revenue and profit of the Company. In 2016, the Company completed the production of machine-made
                paper of 4.36 million tonnes with sales of 4.52 million tonnes. During the reporting period, there was no significant
                change in the principal operations of the Company.

                1.    Machine-made paper business

                      The Company is a leading player in the paper making industry in China. It has established production bases
                      in Shandong, Guangdong, Hubei, Jiangxi and Jilin with annual pulp and paper production capacity of
                      over 8,500,000 tonnes. It has the largest pulp paper production base in the world and dozens of pulp and
                      paper production lines of international advanced standards. The product mix of the Company has gradually
                      diversified into five major paper types, namely printing paper, packaging paper, office paper, industrial paper
                      and household paper, as well as the nine major product series which focus on high and middle end products,
                      including high-end cultural paper, coated paper, white paper board, newsprint paper, light weight coated paper,
                      copy paper, industrial paper, special paper and household paper.

                      The Company has scientific research institutions including the national enterprise technology centre, the post-
                      doctoral working station as well as state certified CNAS pulp and paper testing centre and has obtained over
                      150 national patents including 9 patents for invention, with 7 products selected as national new products and
                      29 products filling the gap in China. The Company has obtained 21 Science and Technology Progress Awards
                      above the provincial level and undertaken five national science and technology projects and 26 provincial
                      technological innovation projects. The brand “Chenming” is recognised as a well-known brand name in China.

                2.    Financial leasing business

                      Since the establishment of the Financial Leasing Company, it, relying on strong capital strength and talent
                      advantages of the Company while giving full play to the advantages of internationalisation and market-
                      oriented operation mechanisms, has been actively seeking the organic combination between industrial capital
                      and financial capital. Externally, it provides financing and value-added service solutions to large state-owned
                      enterprises, listed companies, government financing platforms, quality private enterprises, new and high-tech
                      enterprises, schools and hospitals. Internally, it adapts to the trend of diversification of demands in the financial
                      market and the development of integrated financial services within the Company to provide services for the
                      upstream and downstream sectors of the industry chain of the paper making industry. The leasing business
                      of the Financial Leasing Company is mainly conducted on a leaseback basis. Recently, the Financial Leasing
                      Company has become a new source of profit growth of the Company with sound momentum for future growth.




12   SHANDONG CHENMING PAPER HOLDINGS LIMITED

                                                                    3700278-t01fnar (Shandong Chenming) p.12 (CHIPC07) 17-02-2017 16:38
                                                                                                                    OUTPUT: 17-02-2017 16:46:58
IV Business Overview



I.   Principal operations of the Company during the Reporting Period (Cont’d)
     (II)      General information of the industries where the Company operated in during the reporting period
               1.       Paper making industry

                        The growth of the paper making industry tends to be closely correlated to the macroeconomic growth. While
                        there are adjustments of economic growth in China, the growth of the paper making industry is also subject
                        to pressure for adjustments. However, in the light of the easing downward pressure on the national economy,
                        improving income levels of residents and the stabilising economy as a whole, it is expected the per capita
                        consumption of paper and paper board will continue to increase. Besides, under the current market conditions,
                        as the enterprises step up efforts to eliminate obsolete production capacity and restructure their businesses, it
                        is expected the competition in the paper making industry will be further standardised.

                        In 2016, China’s economy grew at a slow yet stable pace with favourable momentum. The supply-side reform
                        achieved initial results. There were more drivers for economic growth. Against the backdrop of the stable
                        macroeconomic operation, the paper making industry where the Company operated was affected by factors
                        including the supply-side structural reform, national environmental protection governance, elimination of
                        overcapacity and increase in market demand, favouring the accelerated price increases in the paper making
                        industry. In particular, in the second half year, there was a general increase in prices in the paper making
                        industry in China due to the increased cost of, among other things, wood pulp, waste paper, logistics and coal.
                        In the medium to long run, as the supply-side reform in China further advances, the elimination of much more
                        obsolete production capacity in the paper making industry will accelerate, and the elimination of the production
                        capacity of small and medium-sized enterprises will also accelerate due to the strengthened environmental
                        governance, thus favouring industry concentration. There are obvious signs for industry recovery with a boom
                        to be prolonged.

                        The Company enjoyed obvious economies of scale in the paper making industry. The output and sales revenue
                        of the Company had been ranking high in the industry for many years, and its comprehensive economic benefits
                        had ranked first among the peers in the industry in China for many years in a row. Its comprehensive strength
                        had ranked among the top ten paper manufacturers in the world. Therefore, the Company enjoyed significant
                        economies of scale in the industry and was relatively favourably positioned for its future development. In
                        addition, as the first listed company with A shares, B shares, H shares and preference shares in issue in China,
                        the Company had gained access to the capital market, thus providing effective support for the future project
                        investments of the Company. The overall listing of the machine-made paper business of the Company also
                        made the management of the Company more regulated and the operations more transparent, thus laying a solid
                        foundation for the sustainable development of the Company.

               2.       Financial leasing industry

                        The Guiding Opinions on Accelerating the Development of Financial Leasing Industry and the Guiding Opinions
                        on Promoting the Sound Development of Financial Leasing Industry were issued by the State Council in 2015.
                        As the first national policy on promoting the financial leasing industry in China, the above opinions had paved
                        the way for the development of the financial leasing industry in the future.

                        Under the new normal of the economic development, the financial leasing industry in China entered its golden
                        years. According to the estimate of the China Leasing Alliance, there were over 7,000 headquarters enterprises
                        engaging in financial leasing in China, representing a year-on-year increase of approximately 2,500, as at the
                        end of the year. The outstanding financial leasing contracts amounted to RMB5.33 trillion, representing a year-
                        on-year increase of 20%. According to the Research Report on Business Prospects Survey of and Investment
                        Strategies in the China Financial Leasing Industry 2016-2021 issued by ASKCI Consulting Co., Ltd., the financial
                        leasing industry will grow at a compound annual growth rate of over 20% in the future and it is expected that
                        the output of the industry will amount to RMB20.79 trillion by 2021. The business prospects of the financial
                        leasing industry in China are promising.


                                                                                                                2016 ANNUAL REPORT          13

     3700278-t01fnar (Shandong Chenming) p.13 (CHIPC07) 17-02-2017 16:38
     OUTPUT: 17-02-2017 16:46:58
     IV Business Overview



     II.   Material Changes of Major Assets
           1.    Material Changes of Major Assets
                 Major assets                         Description

                 Equity                               The Company made equity investments in Guangdong Dejun Investment Co.,
                                                      Ltd. during the reporting period.
                 Fixed Assets                         The Company reclassified the high-end packaging paper project of Jiangxi
                                                      Chenming and 600,000-tonne liquid packaging paper project of Zhanjiang
                                                      Chenming during the reporting period.
                 Construction in progress             The Company reclassified the high-end packaging paper project of Jiangxi
                                                      Chenming and 600,000-tonne liquid packaging paper project of Zhanjiang
                                                      Chenming during the reporting period.

           2.    Major Assets Overseas
                   Applicable √ Not applicable


     III. Analysis of Core Competitiveness
           Whether the Company needs to comply with the disclosure requirements of specific industries

           No

           The Company is a leading player in the paper making industry of China. After entrepreneurship and innovation for more than
           half a century, it has developed into a large and integrated modern conglomerate principally engaged in pulp production,
           paper making, finance and forestry businesses while also involved in mining, energy, logistics, construction materials, hotel
           operation and others. It is also the only listed company with A shares, B shares, H shares and preference shares in issue
           in China and the first company in the paper making industry having a finance company and a financial leasing company
           integrated with its industrial activities in China. Compared with other enterprises in the industry, the Company has the
           following advantages:

           1.    Scale advantages
                 After years of development, the Company, being a leading player in the paper making industry in China, has achieved
                 annual pulp and paper production capacity of over 8.50 million tonnes and is capable to compete with international
                 paper making enterprises in scale. The large-scale centralised production and operation model has provided
                 the Company with obvious economic benefits. The Company also has strong market influence over raw material
                 procurement, product pricing and industry policymaking.

           2.    Product advantages
                 While the production scale of the Company is expanding rapidly, its product mix also continues to optimise. In recent
                 years, the Company has built production lines for cultural paper such as high-end coated paper, high-end food
                 packaging paper and high-end white paper board. The product mix of the Company has gradually diversified into five
                 major paper types, namely printing paper, packaging paper, office paper, industrial paper and household paper, as
                 well as the nine major product series which focus on high and middle end products, including high-end cultural paper,
                 coated paper, white paper board, newsprint paper, light weight coated paper, copy paper, industrial paper, specialty
                 paper and household paper. Thus, the Company has become the enterprise that offers the widest product range in
                 China’s paper making industry. Diversification and gentrification of the product mix has not only greatly enhanced the
                 Company’s ability to withstand market risks, but also enabled the Company to maintain a relatively high profitability




14   SHANDONG CHENMING PAPER HOLDINGS LIMITED

                                                                    3700278-t01fnar (Shandong Chenming) p.14 (CHIPC07) 17-02-2017 16:38
                                                                                                                    OUTPUT: 17-02-2017 16:46:58
IV Business Overview



III. Analysis of Core Competitiveness (Cont’d)
    3.        Advantages in technical equipment
              The Company’s overall technical equipment has reached the advanced international level. The major production
              equipment has been imported from internationally renowned manufacturers, including Valmet, Ahlstrom and Metso
              of Finland, Voith of Germany and TBC of the United States. The equipment such as advanced dilution headboxes,
              top wire formers, unirun dryers, on-machine film coaters, non-contact hot air drying and two-sided soft and dense
              calender machines in the world is equipped with advanced technologies including online paper disease monitoring
              system, caliper control system and intelligent quality control system.

              The technical equipment used by the Company generally reflects the characteristics of being technology-intensive
              and the integration of mechanical and electrical in the paper making industry nowadays. The degassing technology,
              wet end chemical technology, intelligent sheet lateral control technology, coating preparation technology, free-jet
              coating technology, multi-nip pressure balanced calender technology and the technical processes independently
              developed by the Company of the pulp systems have all reached the international advanced level.

    4.        Advantages in research and innovation and new product development
              The Company is a high and new-technology enterprise and gives full play to its strong research capability. Supported
              by the national enterprise technology centre and the post-doctoral working station, the Company has established
              a comprehensive intellectual property system and put more and more efforts in technical innovation and scientific
              research and development to develop new products with high technology contents and high added value as well
              as proprietary technologies. Meanwhile, the technology centre of the Company has actively engaged in technical
              cooperation with schools, research institutions and international advanced enterprises. The Company has obtained
              over 150 national patents including 9 patents for invention, with 7 products selected as national new products and
              29 products filling the gap in China. The Company has obtained 21 Science and Technology Progress Awards above
              the provincial level and undertaken five national science and technology projects and 26 provincial technological
              innovation projects. The brand “Chenming” is recognised as a well-known brand name in China.

    5.        Funding advantages
              The paper making industry is a capital-intensive industry, and funding is one of the most important factors in the
              development of the industry. The Company has high profitability and credit status, and has maintained long-term
              stable cooperative relations with its bankers, which provide the Company with an unobstructed indirect financing
              capacity. Since its listing, the Company has maintained good operating results and a sound corporate governance
              structure. It has conducted several financing activities in domestic and foreign capital markets. As the funds obtained
              have been applied effectively with good market image, the Company has stronger abilities in direct financing in the
              capital market.




                                                                                                            2016 ANNUAL REPORT          15

    3700278-t01fnar (Shandong Chenming) p.15 (CHIPC07) 17-02-2017 16:38
    OUTPUT: 17-02-2017 16:46:58
     IV Business Overview



     III. Analysis of Core Competitiveness (Cont’d)
         6.   Team advantages
              The key management members and the core personnel of the Company remain stable. In the business development
              of Chenming Paper, an internal corporate culture developed by the stable core staff team favourable to the growth of
              the Company consolidates the management experience specific to the industry, thus resulting in a team advantage
              blended with management and culture. Meanwhile, the Company has attracted experienced professionals with
              financial, legal, financial management backgrounds through its advanced management philosophy and ample room
              for development. The high quality and professional team secures the sustainable development of the Company with a
              solid supply of talents.

         7.   Advantages in environmental governance capacity
              In recent years, the Company and its subsidiaries have constructed the pollution treatment facilities including the
              alkali recovery system, middle water treatment system, white water recovery system and black liquor comprehensive
              utilisation system. The environmental emission indicators of the Company rank high among industry peers. Besides,
              the national policy of eliminating obsolete production capacity will facilitate the development of the paper making
              industry while the replenishment and replacement of advanced production capacity will bring new blood and
              momentum into the paper making industry, favouring industry concentration to establish a sound industry cycle.




16   SHANDONG CHENMING PAPER HOLDINGS LIMITED

                                                               3700278-t01fnar (Shandong Chenming) p.16 (CHIPC07) 17-02-2017 16:38
                                                                                                               OUTPUT: 17-02-2017 16:46:58
V Discussion and Analysis of Operations



I.   Overview
     In 2016, the Company aimed for “developing into an enterprise with hundreds of billions in value” by adhering to the main
     theme of “achieving growth amid stability” and committed itself to “team building, management enhancement, outstanding
     business performance and good results”. The Company stuck to its diversification strategy, accelerated transformation
     and upgrading, and developed an industrial system that centred on pulp production, paper making and finance to achieve
     synergy among forestry and mining so as to boost the management quality, core competitiveness and profitability.

     The past year was the best year for the Company’s development so far. The overall strength of Company significantly
     increased while the Company enhanced its position in the industry, delivering excellent performance. In 2016, the Company
     completed the production of machine-made paper of 4.36 million tonnes with sales of 4.52 million tonnes and achieved
     revenue of RMB22.907 billion, a year-on-year increase of 13.17%. The Company recorded operating costs of RMB15.787
     billion, a year-on-year increase of 6.93%. Total profit and net profit attributable to equity holders of the Company were
     RMB2,583 million and RMB2,064 million respectively, up by 83.18% and 102.11% from the prior year. The Company’s total
     assets amounted to RMB82.285 billion. The financial segment experienced stable development across businesses with ever
     improving management systems and effective risk preventions.

     (I)       New era in corporate management
               The Company introduced a professional management consulting company to make changes focusing on the three
               aspects, namely, organisation management and structural optimisation, remuneration system and performance
               appraisal. The Company placed emphasis on “strengthening the headquarters and consolidating secondary
               companies” and adjusted the organisation structure of the Group. The Company also achieved synergy among three
               segments, namely manufacturing, finance and supply chain trading, to expand and develop into a diversified group
               integrating production, financing and trading.

     (II)      New performance in marketing
               The Company attached great importance to its employees. Human resources were actively introduced at all levels.
               The appraisal methodology was optimised to reward the diligent. The market-based sales work assignment toolkit
               was established and the product lines were segmented. A company was set up for electrostatic paper products and
               the development of major customers was strengthened. Management of receivables was strengthened and default in
               delivery was controlled strictly. Delivery and reduction in inventories were implemented.




                                                                                                       2016 ANNUAL REPORT          17

     3700278-t01fnar (Shandong Chenming) p.17 (CHIPC07) 17-02-2017 16:38
     OUTPUT: 17-02-2017 16:47:01
     V Discussion and Analysis of Operations



     I.   Overview (Cont’d)
          (III) New progress in production and operation
                Primary management was steadily enhanced and production and operation continued to be highly effective in
                strict compliance with the standard parameters and subject to the sheet break and review of operation efficiency.
                The Company watched the markets closely to adjust its product mix by developing high value added products
                such as glassine paper, wine label paper, super high-bulk white paper board and high weight duplex press paper.
                The Company gained efficiency through optimisation of the pulp structure, substitution of domestically produced
                chemicals for overseas ones, and promotion of the application of new technologies such as filler enhancers and novel
                retention agents.

          (IV) New development in the financial segment
                The Company successfully issued preference shares of RMB4.5 billion as the first Shandong-based listed company
                and the first company in the industry to issue preference shares. The Company secured the special funds of RMB700
                million from the National Development and Reform Commission and China Development Bank at a return rate of 1.2%
                per annum to reduce its finance expenses, which was a precedent in the paper making industry. The invoicing system
                of the Finance Company was approved to be online to increase the business of the rediscounting channel of People’s
                Bank of China. The Finance Company developed all lines of business.

          (V)   New momentum gained from corporate development
                Progress of new projects accelerated: Zhanjiang Chenming’s liquid packaging paper project commenced operation
                smoothly in October 2016. Haiming Mining’s magnesite mining project entered the peak time of shaft construction
                and equipment installation. Huanggang Chenming’s forestry pulp integration project commenced the construction of
                pulp manufacturing facilities, piers and staff quarters. Shouguang Chenming’s chemical pulp project made progress
                on schedule. The above projects played a very important role in reinforcing the subsequent corporate development
                and facilitating the fulfilment of corporate strategic objectives.

          (VI) New benefits from procurement
                Procurement to reduce costs with benefits at source paid off. The Company cooperated with quality and major
                suppliers to reduce overall procurement costs. The measures such as overseas financing, adjusted and centralised
                payment procedures and boosted sales volume of trading increased benefits by reducing the capital appropriated
                for inventories. The electronic commodity exchange for pulp and paper was approved as a trading platform for the
                integrated pulp and paper supply chain system, which became a new source of profit growth.




18   SHANDONG CHENMING PAPER HOLDINGS LIMITED

                                                                 3700278-t01fnar (Shandong Chenming) p.18 (CHIPC07) 17-02-2017 16:38
                                                                                                                 OUTPUT: 17-02-2017 16:47:01
V Discussion and Analysis of Operations



II.   Analysis of principal operations
      1.        Overview
                Please see “I. Overview” under “Discussion and Analysis of Operations” for relevant information.

      2.        Revenue and cost
                (1)      Components of revenue

                                                                                                                                       Unit: RMB

                                                                       2016                                 2015                  Increase/decrease
                                                                 Amount       % of revenue            Amount       % of revenue                  (%)

                         Total revenue                  22,907,118,241.84           100%     20,241,906,131.81           100%               13.17%
                         By industry
                         Machine-made paper             19,536,639,601.47          85.29%    18,072,997,652.53          89.29%               8.10%
                         Financial leasing               2,339,925,682.07          10.21%     1,084,860,187.11           5.36%             115.69%
                         Electricity and steam             338,702,429.21           1.48%       437,772,691.42           2.16%             -22.63%
                         Construction materials            227,629,265.80           0.99%       223,266,272.44           1.10%               1.95%
                         Chemicals                         129,003,963.48           0.56%       124,008,406.45           0.61%               4.03%
                         Hotel                              26,677,286.19           0.12%        27,136,077.49           0.13%              -1.69%
                         Others                            308,540,013.62           1.35%       271,864,844.37           1.34%              13.49%
                         By product
                         Duplex press paper              4,966,155,905.70          21.68%     4,460,441,279.15          22.04%              11.34%
                         Coated paper                    4,428,162,301.09          19.33%     4,365,890,220.92          21.57%               1.43%
                         White paper board               2,815,701,912.71          12.29%     1,915,153,293.25           9.46%              47.02%
                         Electrostatic paper             2,107,489,078.57           9.20%     1,580,897,670.32           7.81%              33.31%
                         Anti-sticking raw paper         1,009,523,792.88           4.41%       897,236,148.18           4.43%              12.51%
                         Newsprint paper                   996,218,028.98           4.35%       970,297,912.12           4.79%               2.67%
                         Household paper                   659,518,362.24           2.88%       670,406,337.06           3.31%              -1.62%
                         Light weight paper                463,577,121.66           2.02%       612,237,436.63           3.02%             -24.28%
                         Writing paper                     274,469,632.58           1.20%       289,489,121.26           1.43%              -5.19%
                         Other machine-made paper        1,815,823,465.06           7.93%     2,310,948,233.64          11.42%             -21.43%
                         Financial leasing               2,339,925,682.07          10.21%     1,084,860,187.11           5.36%             115.69%
                         Electricity and steam             338,702,429.21           1.48%       437,772,691.42           2.16%             -22.63%
                         Construction materials            227,629,265.80           0.99%       223,266,272.44           1.10%               1.95%
                         Chemicals                         129,003,963.48           0.56%       124,008,406.45           0.61%               4.03%
                         Hotel                              26,677,286.19           0.12%        27,136,077.49           0.13%              -1.69%
                         Others                            308,540,013.62           1.35%       271,864,844.37           1.34%              13.49%
                         By geographical segment
                         Mainland China                 19,628,612,055.93          85.69%    16,431,182,080.91          81.17%              19.46%
                         Other countries and regions     3,278,506,185.91          14.31%     3,810,724,050.90          18.83%             -13.97%




                                                                                                                      2016 ANNUAL REPORT               19

      3700278-t01fnar (Shandong Chenming) p.19 (CHIPC07) 17-02-2017 16:38
      OUTPUT: 17-02-2017 16:47:01
     V Discussion and Analysis of Operations



     II.   Analysis of principal operations (Cont’d)
           2.   Revenue and cost (Cont’d)
                (2)   Industries, products or regions accounting for over 10% of revenue or operating profit of the Company

                      √ Applicable               Not applicable

                      Whether the Company needs to comply with the disclosure requirements of specific industries

                      No

                                                                                                                                                                          Unit: RMB

                                                                                                                                           Increase/decrease       Increase/decrease of
                                                                                                               Increase/decrease of         of operating costs       gross profit margin
                                                                                                              revenue as compared         as compared to the         as compared to the
                                                                                                               to the corresponding     corresponding period       corresponding period
                                                        Revenue      Operating costs     Gross profit margin period of the prior year          of the prior year         of the prior year

                      By industry
                      Machine-made paper        19,536,639,601.47   14,893,061,575.87               23.77%                    8.10%                     6.87%                      0.87%
                      Financial leasing          2,339,925,682.07      219,444,595.95               90.62%                  115.69%                    71.75%                      2.40%
                      By product
                      Duplex press paper         4,966,155,905.70    3,719,642,641.60               25.10%                   11.34%                    10.71%                      0.43%
                      Coated paper               4,428,162,301.09    3,287,988,564.78               25.75%                    1.43%                     0.91%                      0.38%
                      White paper board          2,815,701,912.71    2,127,180,790.00               24.45%                   47.02%                    45.33%                      0.88%
                      Financial leasing          2,339,925,682.07      219,444,595.95               90.62%                  115.69%                    71.75%                      2.40%
                      By geographical segment
                      Mainland China            16,258,133,415.56   12,009,467,873.60               26.13%                   13.99%                     7.21%                      4.68%
                      Other countries
                        and regions              3,278,506,185.91    2,883,593,702.27               12.05%                  -13.97%                     5.50%                    -16.23%


                      Under the circumstances that the statistics specification for the Company’s principal operations data
                      experienced adjustment in the reporting period, the principal operations data upon adjustment of the statistics
                      specification at the end of the reporting period in the latest year

                      √ Applicable              Not applicable

                (3)   Whether revenue from sales in kind is higher than revenue from services

                      √ Yes           No

                                                                                                                                                                         Increase/
                                                                                                                                                                         decrease
                      By industry                           Item                        Unit                                 2016                      2015                    (%)

                      Machine-made paper                    Sales                       ’0,000 tonnes                         452                       415                 8.92%
                                                            Production output           ’0,000 tonnes                         436                       418                 4.31%
                                                            Inventories                 ’0,000 tonnes                          33                        49               -32.65%


                      Explanation on why the related data varied by more than 30%

                      √ Applicable               Not applicable

                      The inventories of machine-made paper decreased by 32.65% as compared to the corresponding period of the
                      prior year mainly due to the increase in sales as a result of market recovery and increase in price.

20   SHANDONG CHENMING PAPER HOLDINGS LIMITED

                                                                                    3700278-t01fnar (Shandong Chenming) p.20 (CHIPC07) 17-02-2017 16:38
                                                                                                                                                        OUTPUT: 17-02-2017 16:47:01
V Discussion and Analysis of Operations



II.   Analysis of principal operations (Cont’d)
      2.        Revenue and cost (Cont’d)
                (4)      Performance of material sales contracts of the Company during the reporting period

                              Applicable           √ Not applicable

                (5)      Composition of operating costs

                         By industry

                                                                                                                                                                   Unit: RMB

                                                                                        2016                                       2015                        Increase/decrease
                         By industry            Item                              Amount     % of operating costs            Amount     % of operating costs                  (%)

                         Machine-made paper Raw materials                 8,974,526,123.35                60.26%     8,201,192,813.92                58.85%               9.43%
                                            Depreciation                    768,639,922.25                 5.16%       717,089,611.94                 5.15%               7.19%
                                            Labour costs                    186,978,418.54                 1.26%       155,963,303.02                 1.12%              19.89%
                                            Energy and power              1,526,753,692.29                10.25%     1,431,585,168.47                10.27%               6.65%
                                            Chemicals                     2,014,239,925.46                13.52%     2,239,539,323.75                16.07%             -10.06%
                                            Other production costs        1,421,923,493.98                 9.55%     1,189,915,009.44                 8.54%              19.50%
                                            Subtotal                     14,893,061,575.87               100.00%    13,935,285,230.54               100.00%               6.87%

                         Power and steam        Raw materials              161,521,323.47                 75.37%      212,564,419.12                 76.48%             -24.01%
                                                Depreciation                19,858,908.35                  9.27%       26,248,475.37                  9.44%             -24.34%
                                                Labour costs                 7,643,082.12                  3.57%        9,007,758.17                  3.24%             -15.15%
                                                Energy and power             2,769,566.68                  1.29%        6,764,518.93                  2.43%             -59.06%
                                                Chemicals                      697,230.84                  0.33%        3,670,407.74                  1.32%             -81.00%
                                                Other production costs      21,811,402.07                 10.18%       19,675,742.40                  7.08%              10.85%
                                                Subtotal                   214,301,513.53                100.00%      277,931,321.73                100.00%             -22.89%

                         Construction materials Raw materials              116,872,767.63                 67.09%      130,797,042.19                 74.04%             -10.65%
                                                Depreciation                 4,589,639.45                  2.63%        4,696,431.30                  2.66%              -2.27%
                                                Labour costs                11,218,728.30                  6.44%        7,362,629.26                  4.17%              52.37%
                                                Energy and power            22,500,486.99                 12.92%       21,178,593.05                 11.99%               6.24%
                                                Other production costs      19,011,859.48                 10.91%       12,628,034.78                  7.15%              50.55%
                                                Subtotal                   174,193,481.85                100.00%      176,662,730.59                100.00%              -1.40%




                                                                                                                                                  2016 ANNUAL REPORT                21

      3700278-t01fnar (Shandong Chenming) p.21 (CHIPC07) 17-02-2017 16:38
      OUTPUT: 17-02-2017 16:47:01
     V Discussion and Analysis of Operations



     II.   Analysis of principal operations (Cont’d)
           2.   Revenue and cost (Cont’d)
                (6)   Change of scope of consolidation during the reporting period

                      √ Yes          No

                      1.       Newly established subsidiaries

                                                                                                                        Registered
                                                             Time of                                                        capita
                               Name                          incorporation   Scope of business                         (RMB’0,000)       Shareholding

                               Qingdao Chenming Nonghai 2016.07              Financial leasing, operating leasing,     500,000.00                    100%
                                  Financial Leasing Co., Ltd.                purchase of assets for leasing, etc.
                               Jilin Chenming Logistics       2016.08        Road transportation of general                 500.00                   100%
                                  Co., Ltd.                                  cargo; transportation for
                                                                             containers; road transportation
                                                                             agency; consultation on cargo
                                                                             transportation; warehousing,
                                                                             loading and unloading
                                                                             services, etc.
                               Jiangxi Chenming Logistics    2016.09         Road transportation of general                 500.00                   100%
                                 Co., Ltd.                                   cargo; transportation for
                                                                             containers; road transportation
                                                                             agency; consultation on cargo
                                                                             transportation; warehousing,
                                                                             loading and unloading
                                                                             services, etc.


                      2.       Disposal of subsidiaries

                                                                                                                                            Difference
                                                                                                                                              between
                                                                                                                                         consideration
                                                                                                                                          and share of
                                                                                                                                            net assets
                                                                                                                                            of relevant
                                                                                                                                            subsidiary
                                                        Consideration                                                                            as per
                                                          of disposal Shareholding    Nature of                                           consolidated
                                                             of equity of disposal    disposal                                                financial
                                                              interest    of equity   of equity    Time of loss                            statements
                               Name                      (RMB’0,000) interest (%)    interest       of control      Basis for time               (RMB)

                               Shouguang Chenming             100.00         100.00   Transfer         2016.12       Equity transfer              1203.18
                                 Jiatai Property                                                                     agreement and
                                 Management Co., Ltd.                                                                consideration
                                                                                                                     received




22   SHANDONG CHENMING PAPER HOLDINGS LIMITED

                                                                        3700278-t01fnar (Shandong Chenming) p.22 (CHIPC07) 17-02-2017 16:38
                                                                                                                             OUTPUT: 17-02-2017 16:47:01
V Discussion and Analysis of Operations



II.   Analysis of principal operations (Cont’d)
      2.        Revenue and cost (Cont’d)
                (7)      Significant change in or adjustment of the businesses, products or services of the Company during the
                         reporting period

                              Applicable    √ Not applicable

                (8)      Sales to major customers and major suppliers

                         Sales to major customers of the Company

                         Total sales to top 5 customers (RMB)                                                        1,366,256,966.82
                         Total sales to top 5 customers as a percentage of the total sales for the year                        5.96%
                         Sales to top 5 customers who are related parties as a percentage of the total
                           sales for the year                                                                                  1.06%

                         Information on top 5 customers of the Company

                                                                                                                     As a percentage
                                                                                                                     of the total sales
                         No.        Name of customer                                                  Sales (RMB)      for the year (%)

                         1          XIAMEN ITG GROUP CORP., LTD                                   334,802,947.45               1.46%
                         2          SHANGHAI YAOJI PLAYING CARD CO., LTD.                         309,184,951.64               1.35%
                         3          DELI GROUP CO., LTD.                                          263,198,484.86               1.15%
                         4          ANHUI TIME SOURCE CORPORATION                                 242,616,643.35               1.06%
                         5          VITAL SOLUTIONS PTE LTD                                       216,453,939.52               0.94%
                         Total                                                                  1,366,256,966.82               5.96%


                         Major suppliers of the Company

                         Total purchases from top 5 suppliers (RMB)                                                  3,174,029,707.71
                         Total purchases from top 5 suppliers as a percentage of the total purchases for the year             20.11%
                         Total purchases from top 5 suppliers who are related parties as a percentage
                           of the total purchases for the year                                                                 0.00%

                         Information on top 5 suppliers of the Company

                                                                                                                 As a percentage of
                                                                                                                 the total purchases
                         No.        Name of supplier                                             Purchases (RMB)      for the year (%)

                         1          GUANGDONG LEPENG TRADING CO., LTD                             789,805,758.56               5.00%
                         2          ITOCHU HONGKONG LTD                                           787,631,291.55               4.99%
                         3          ZHANJIANG MINGLI TRADING CO., LTD                             768,404,800.30               4.87%
                         4          JIANGXI COAL SALES CO., LTD.                                  416,884,759.82               2.64%
                         5          SHANDONG HEXIN CHEMICAL GROUP CO., LTD.                       411,303,097.47               2.61%
                         Total                                                                  3,174,029,707.70              20.11%




                                                                                                                2016 ANNUAL REPORT        23

      3700278-t01fnar (Shandong Chenming) p.23 (CHIPC07) 17-02-2017 16:38
      OUTPUT: 17-02-2017 16:47:01
     V Discussion and Analysis of Operations



     II.   Analysis of principal operations (Cont’d)
           3.   Expenses
                                                                                                                                   Unit: RMB

                                                                                  Increase/
                                                      2016                2015 decrease (%)       Reasons for material changes

                Selling and distribution   1,166,484,567.20   1,190,961,739.99         -2.06%     Mainly due to strengthened
                  expenses                                                                        management and strict expense
                                                                                                  control.
                General and                1,441,458,586.06   1,384,652,496.82          4.10%     Mainly due to increase in research
                  administrative                                                                  and development expenditure.
                  expenses
                Finance expenses           1,818,564,890.78   1,669,400,051.76          8.94%     Mainly due to increase in interest
                                                                                                  expenses.
                Taxes and surcharges        251,439,236.50     133,046,735.23          88.99%     Mainly due to the reclassification
                                                                                                  of taxes originally included in
                                                                                                  administrative expenses.
                Loss on impairment of       413,711,106.31      60,968,344.72        578.57%      Mainly due to the provision of
                  assets                                                                          impairment for the idle fixed assets
                                                                                                  of Fuyu Chenming and Jiangxi
                                                                                                  Chenming.




24   SHANDONG CHENMING PAPER HOLDINGS LIMITED

                                                                 3700278-t01fnar (Shandong Chenming) p.24 (CHIPC07) 17-02-2017 16:38
                                                                                                                 OUTPUT: 17-02-2017 16:47:01
V Discussion and Analysis of Operations



II.   Analysis of principal operations (Cont’d)
      4.        Research and development expenditure
                √ Applicable        Not applicable

                The Company had been watching closely the changes in economic situation and market development in China since
                2016. Driven by customers’ demand and targeting at enhancing economic benefits, the Company strived to conduct
                R&D on product differentiation and refining. The Company also promoted structural adjustments in products and
                eliminated obsolete production capacity while developing new products with high technology contents and high
                economic benefits. For example, six projects such as “technical development of special cardboard for pharmaceutical
                packaging”, “technical development of special raw paper for babies”, “technical development of high-bulk matte
                coated paper” and “technical development of high-end wet curtain raw paper, were listed into the technological
                innovative project plans of Shandong Province for 2016. Meanwhile, the Company completed the development of high
                value-added products such as high-end glassine paper, wine label paper, super high-bulk white paper board, high
                weight duplex press paper or their upgrades, thereby making significant improvement in product quality, enhancing
                market competitiveness and raising economic benefits.

                Research and development expenditure

                                                                                     2016              2015   Percentage change

                R&D headcount                                                        1,161            1,108                4.78%
                Ratio of R&D personnel                                              8.94%            9.32%                -0.38%
                R&D expenditure (RMB)                                       735,689,011.01   649,368,119.76               13.29%
                R&D expenditure to revenue                                          3.21%            3.21%                     0
                Capitalised R&D expenditure (RMB)                                     0.00             0.00                    0
                Capitalised R&D expenditure to R&D expenditure                      0.00%            0.00%                     0


                Reasons for significant change in total R&D expenditure to revenue

                    Applicable      √ Not applicable

                Reasons and basis for significant change in R&D capitalisation ratio

                    Applicable      √ Not applicable




                                                                                                           2016 ANNUAL REPORT          25

      3700278-t01fnar (Shandong Chenming) p.25 (CHIPC07) 17-02-2017 16:38
      OUTPUT: 17-02-2017 16:47:01
     V Discussion and Analysis of Operations



     II.   Analysis of principal operations (Cont’d)
           5.     Cash flows
                                                                                                                                          Unit: RMB

                                                                                                                                         Increase/
                                                                                                                                         decrease
                  Item                                                                   2016                    2015                          (%)

                  Subtotal of cash inflows from operating activities      23,640,327,789.01       20,059,101,045.18                        17.85%
                  Subtotal of cash outflows from operating activities     21,487,278,519.17       29,780,464,569.48                       -27.85%
                  Net cash flows from operating activities                 2,153,049,269.84       -9,721,363,524.30                       122.15%
                  Subtotal of cash inflows from investing activities         660,100,177.22          641,826,148.96                         2.85%
                  Subtotal of cash outflows from investing activities      4,327,554,352.96        4,102,411,633.83                         5.49%
                  Net cash flows from investing activities                -3,667,454,175.74       -3,460,585,484.87                        -5.98%
                  Subtotal of cash inflows from financing activities      59,667,079,610.56       42,750,073,812.63                        39.57%
                  Subtotal of cash outflows from financing activities     58,037,514,000.21       28,686,399,578.97                       102.32%
                  Net cash flows from financing activities                 1,629,565,610.35       14,063,674,233.66                       -88.41%
                  Net increase in cash and cash equivalents                   91,753,551.86          912,010,632.46                       -89.94%


                  Explanation on main effects of material changes

                  √ Applicable        Not applicable

                  (1)     Net cash flows from operating activities increased by 122.15% as compared to the corresponding period of the
                          prior year mainly due to the increased sales of machine-made paper with higher revenue, and the decreased
                          external investment of the financial leasing business.

                  (2)     Net cash flows from financing activities decreased by 88.41% as compared to the corresponding period of the
                          prior year mainly due to the increase in repayment for the corporate bonds, privately placed bonds and short-
                          term commercial paper due.

                  Explanation on main reasons leading to the material difference between net cash flows from operating activities during
                  the reporting period and net profit for the year

                        Applicable   √ Not applicable


     III. Analysis of non-principal operations
                Applicable     √ Not applicable




26   SHANDONG CHENMING PAPER HOLDINGS LIMITED

                                                                        3700278-t01fnar (Shandong Chenming) p.26 (CHIPC07) 17-02-2017 16:38
                                                                                                                        OUTPUT: 17-02-2017 16:47:01
V Discussion and Analysis of Operations



IV. Assets and liabilities
    1.        Material changes of asset items
                                                                                                                                                                                                     Unit: RMB

                                                    As at the end of 2016                        As at the end of 2015
                                                                    As a percentage of                           As a percentage of
                                                      Amount               total assets            Amount               total assets   Percentage change   Description of major changes

              Monetary funds                 10,109,930,319.49                 12.29%      8,984,326,016.01                 11.52%                0.77%    Mainly due to the increase of the sales revenue.
              Accounts receivable             3,974,065,104.15                  4.83%      3,951,287,979.32                  5.07%               -0.24%    –
              Inventories                     4,862,668,746.90                  5.91%      5,210,917,891.42                  6.68%               -0.77%    –
              Investment property                14,258,675.83                  0.02%         15,996,931.87                  0.02%                0.00%    –
              Long-term equity investments       67,251,992.88                  0.08%         70,492,256.38                  0.09%               -0.01%    –
              Fixed assets                   28,811,555,365.39                 35.01%     24,169,725,529.18                 31.00%                4.01%    Mainly due to the reclassification of the high-end packaging
                                                                                                                                                           paper project of Jiangxi Chenming and 600,000-tonne liquid
                                                                                                                                                           packaging paper project in Zhanjiang.
              Construction in progress        4,115,194,870.23                  5.00%      5,829,619,258.48                  7.48%               -2.48%    Mainly due to the reclassification of the high-end packaging
                                                                                                                                                           paper project of Jiangxi Chenming and 600,000-tonne liquid
                                                                                                                                                           packaging paper project in Zhanjiang.
              Short-term borrowings          27,875,506,988.53                 33.88%     24,755,535,672.86                 31.75%                2.13%    Mainly due to the greater demand for short-term working
                                                                                                                                                           capital as a result of the increase of the production scale of
                                                                                                                                                           the Company.
              Long-term borrowings            6,935,598,781.23                  8.43%      5,169,381,063.83                  6.63%                1.80%    Mainly due to the increase of long-term borrowings as a result
                                                                                                                                                           of the increased investment in the projects of the Company.
              Available-for-sale              1,945,000,000.00                  2.36%       109,000,000.00                   0.14%                2.22%    Mainly due to the additional investment of RMB1.85 billion in
                financial assets                                                                                                                           Guangdong Dejun Investment Co., Ltd.
              Accounts payable                3,724,266,382.06                  4.53%      2,942,337,386.57                  3.77%                0.76%    Mainly due to the increase in the amounts payable for projects.




                                                                                                                                                                        2016 ANNUAL REPORT                                   27

    3700278-t01fnar (Shandong Chenming) p.27 (CHIPC07) 17-02-2017 16:38
    OUTPUT: 17-02-2017 16:47:01
     V Discussion and Analysis of Operations



     IV. Assets and liabilities (Cont’d)
          2.   Assets and liabilities measured at fair value
               √ Applicable             Not applicable

                                                                                                                                                                 Unit: RMB

                                                                     Profit or loss
                                                                  from change in          Cumulative       Impairment
                                                                 fair value during fair value change   provided during       Purchases     Disposal during
               Item                           Opening balance           the period charged to equity        the period during the period        the period    Closing balance

               Financial assets
               Consumable biological assets   1,509,964,711.87    -20,084,425.90     120,474,840.64                       229,064,141.88    85,430,433.57 1,633,513,994.28
               Total                          1,509,964,711.87    -20,084,425.90     120,474,840.64                       229,064,141.88    85,430,433.57 1,633,513,994.28
               Financial liabilities                      0.00                                                                                                        0.00


               Whether there were any material changes on the measurement attributes of major assets of the Company during the
               reporting period

                   Yes       √ No

          3.   Restriction on asset rights as at the end of the reporting period
                                                Carrying amount as
               Item                           at the end of the year            Reasons for such restriction

               Monetary funds                       8,130,069,273.87            As deposits for bank acceptance bills, letters of credit and bank
                                                                                borrowings, and deposit reserves
               Bills receivable                       637,871,869.25            As collateral for short-term borrowings, bills payable, letters of
                                                                                guarantee and letters of credit
               Fixed assets                        4,597,554,400.35             As collateral for bank borrowings and long-term payables
               Intangible assets                     432,328,638.94             As collateral for bank borrowings and long-term payables
               Total                              13,797,824,182.41



     V.   Analysis of Investments
          1.   Overview
               √ Applicable             Not applicable

                 Investments during the reporting                 Investments during the corresponding
                                    period (RMB)                          period of prior year (RMB)                                                            Change

                                         4,603,144,781.24                                    4,664,143,400.00                                                    -1.31%




28   SHANDONG CHENMING PAPER HOLDINGS LIMITED

                                                                                   3700278-t01fnar (Shandong Chenming) p.28 (CHIPC07) 17-02-2017 16:38
                                                                                                                                               OUTPUT: 17-02-2017 16:47:01
V Discussion and Analysis of Operations



V.   Analysis of Investments (Cont’d)
     2.        Material equity investments during the reporting period
               √ Applicable                                         Not applicable

                                                                                                                                                                                                                                                                                        Unit: RMB

                                                                                                                                                                                                        Progress as                 Profit or l ss from Lawsuit i
                                                                            Form of                                                                                  Period of                          at the date of Estimated    i vestment for the i volved Date of
               Name of i vestees              Principal activ t es          i vestment Investment amount Sharehold ng Source of fund      Partner(s)                 i vestment       Product type      balance sheet return          reporting period or not     disclosure (if any)    Disclosure i dex (if any)

               Qingdao Chenming Nonghai       Financia l asing              Newly         1,392,144,781.24    100.00% Self-owned funds Not appl cable                22 July 2016 - 21 Financial leasing Completed Not appl cable      11,405,095.03 No              31 March 2016       http://www.cninfo.com.cn/
                 Financia Leasing Co., Ltd.   business (excluding           establ shed                                                                              July 2046         business
                                              financia l asing) and
                                              operating l asing
                                              business, etc.
               Shandong Chenming Group        Business as                   Capital       1,000,000,000.00    100.00% Self-owned funds Not appl cable                Long term        Corporate         Completed Not appl cable      104,001,738.03 No              14 September 2016 http://www.cninfo.com.cn/
                 Finance Co., Ltd.            permitted by the              i crease                                                                                                  financia business
                                              China Banking
                                              Regulatory Commission
                                              pursuant to relevant
                                              l ws, admin strative
                                              regulations and
                                              other regulations.
               Guangdong Dejun Investment     House l asing; sales          Capital       1,850,000,000.00     50.00% Self-owned funds Shanghai Zhongneng            Long term        Project           Completed Not appl cable                0.00 No              28 December 2016    http://www.cninfo.com.cn/
                Co., Ltd.                     of: chemical materia s        i crease                                                   Enterprise Development                         i vestment
                                              (excluding dangerous                                                                     (Group) Co., Ltd.
                                              chemicals), metal i
                                              materia s, bui d ng
                                              materia s, paper-making
                                              materia s and paper,
                                              cement, steel and mineral
                                              products (excluding
                                              tungsten, tin and stib um),
                                              electronic appl ances and
                                              components, mechanical
                                              equipment, electronic
                                              products, hardware
                                              products, l bour i surance
                                              products, agricultural by-
                                              products; and export
                                              and i port of goods and
                                              technology.
               Shanghai Hengzheng Venture     Investment management,        Newly             6,000,000.00     11.43% Self-owned          Shanghai Hengying          24 February      Investment        Completed Not appl cable                0.00 No              19 December 2016    http://www.cninfo.com.cn/
                 Capital Investment Center    venture capital i vestment,   establ shed                               funds               Cisheng Asset              2016             management
                 (Lim ted Partnership)        i dustria i vestment, asset                                                                 Management Co., Ltd.; Li   – 23 February
                                              management, i vestment                                                                      Yuan, Wu Sis , etc.        2036
                                              consultation and
                                              commercia i formation
                                              consultation.
               Shandong Chenming Paper        Sale of machine-made          Capital        350,000,000.00     100.00% Self-owned          Not appl cable             17 March 2010    Paper product     Completed Not appl cable        5,703,360.87 No              Not appl cable      Not appl cable
                 Sales Company Lim ted        paper, paperboard, paper-     i crease                                  funds                                          to 10 March      trading
                                              making materia s and                                                                                                   2040
                                              accessories and paper
                                              machinery.




                                                                                                                                                                                                                                                    2016 ANNUAL REPORT                                               29

     3700278-t01fnar (Shandong Chenming) p.29 (CHIPC07) 17-02-2017 16:38
     OUTPUT: 17-02-2017 16:47:01
     V Discussion and Analysis of Operations



     V.   Analysis of Investments (Cont’d)
          2.   Material equity investments during the reporting period (Cont’d)
                                                                                                                                                                               Progress as                      Profit or l ss from Lawsuit i
                                                                       Form of            Investment                                               Period of                   at the date of Estimated         i vestment for the i volved Date of
               Name of i vestees            Principal activ t es       i vestment            amount Sharehold ng Source of fund   Partner(s)       i vestment   Product type   balance sheet return               reporting period or not     disclosure (if any)   Disclosure i dex (if any)

               Jiangxi Chenming Logistics   Road transportation        Newly                             100.00% Self-owned       Not appl cable   Long term    Logistics      Capital         Not appl cable         -41,544.31 No              Not appl cable     Not appl cable
                 Co., Ltd.                  of general cargo;          establ shed                               funds                                                         contribution to
                                            transportation for                                                                                                                 be made
                                            containers; road
                                            transportation agency;
                                            consultation on
                                            cargo transportation;
                                            warehousing, l ading and
                                            unloading services, etc.
               Ji i Chenming Logistics      Road transportation        Newly             5,000,000.00    100.00% Self-owned       Not appl cable   Long term    Logistics      Completed Not appl cable                60,579.45 No              Not appl cable     Not appl cable
                  Co., Ltd.                 of general cargo;          establ shed                               funds
                                            transportation for
                                            containers; road
                                            transportation agency;
                                            consultation on
                                            cargo transportation;
                                            warehousing, l ading and
                                            unloading services, etc.
               Total                                                                 4,603,144,781.24                                                                                         Not appl cable      121,129,229.07




30   SHANDONG CHENMING PAPER HOLDINGS LIMITED

                                                                                                                                      3700278-t01fnar (Shandong Chenming) p.30 (CHIPC07) 17-02-2017 16:38
                                                                                                                                                                                                                                      OUTPUT: 17-02-2017 16:47:01
V Discussion and Analysis of Operations



V.   Analysis of Investments (Cont’d)
     3.        Material non-equity investments during the reporting period
               √ Applicable                         Not applicable

                                                                                                                                                                                                                           Unit: RMB

                                                                                                                                                                 Accumulated
                                                                                                                                                                      realised   Reasons
                                                           Industry in                      Accumulated                                                                 return   for failure
                                                           which the      Investment       actual amount                                                             as of the   in meeting
                                              Fixed assets investment  amount during       invested as of                                                          end of the    scheduled             Date of
                                   Form of    investment project        the reporting          the end of                              Estimated                    reporting    progress and          disclosure
               Project name        investment or not       operates            period    reporting period   Source of fund    Progress return                           period   estimated return      (if any)       Disclosure index (if any)

               Forestry paper        Self-       Yes      Pulp         1,486,551,177.12 2,147,036,838.90    Self-raised and    41.57% The expected net profit               0    Not yet completed     2 August 2013 http://www.cninfo.com.cn/
                 integration project constructed          production                                        borrowings                of the forest base will
                 of Huanggang                                                                                                         amount to RMB102
                 Chenming                                                                                                             million and the expected
                                                                                                                                      average total profit per
                                                                                                                                      annum of the industrial
                                                                                                                                      project will amount to
                                                                                                                                      RMB350 million.
               600,000 tonne liquid Self-    Yes          Paper making 1,959,980,125.78 4,549,537,022.09    Self-raised and   100.00% The expected profit                   0    Asset                 19 December    http://www.cninfo.com.cn/
                 packaging paper constructed                                                                borrowings                realised for the year                      reclassification      2015
                                                                                                                                      will amount to RMB340                      during the
                                                                                                                                      million.                                   reporting
                                                                                                                                                                                 period without
                                                                                                                                                                                 profit contribution
               Magnesite mining    Self-       Yes        Mining        216,089,605.96    758,224,355.23    Self-raised and    99.00% The expected average                  0    Not yet completed     25 October     http://www.cninfo.com.cn/
                                   constructed                                                              borrowings                total profit per annum                                           2012
                                                                                                                                      RMB184 million
               Integrated terminal Self-        Yes       Terminal       62,908,602.53     62,908,602.53    Self-raised and    17.92% To ensure the normal                  0    Not yet completed     19 December    http://www.cninfo.com.cn/
                  project of H      constructed                                                             borrowings                production and                                                   2015
                  uanggang Chenming                                                                                                   operation of Huanggang
                                                                                                                                      Chenming and reduce
                                                                                                                                      the transportation costs
                                                                                                                                      of the Company.

               Total               —           —        —           3,725,529,511.39 7,517,706,818.75    —                     — —                                   —    —                    —             —



     4.        Financial asset investment
               (1)        Security investments

                                  Applicable            √ Not applicable

                          The Company did not have any security investments during the reporting period.

               (2)        Derivatives investments

                                  Applicable            √ Not applicable

                          The Company did not have any derivative investments during the reporting period.




                                                                                                                                                                                                2016 ANNUAL REPORT                                31

     3700278-t01fnar (Shandong Chenming) p.31 (CHIPC07) 17-02-2017 16:38
     OUTPUT: 17-02-2017 16:47:01
     V Discussion and Analysis of Operations



     V.   Analysis of Investments (Cont’d)
          5.   Use of proceeds
               √ Applicable         Not applicable

               (1)   General use of proceeds

                     √ Applicable         Not applicable

                                                                                                                                                Unit: RMB’0,000

                                                                                                 Total
                                                                        Total               amount of       Total   Proportion
                                                                      amount                 proceeds amount of     of total                                  Total
                                                                   of utilised      Total with change accumulated   amount of                                 amount
                                                                    proceeds amount of          in use  proceeds    accumulated   Total         Use and       of idle
                                        Fund-              Total   during the accumulated during the         with   proceeds      amount of     status of     proceeds
                                        raising       amount of       current     utilised   reporting    change    with change   unutilised    unutilised    for over 2
                     Year               method         proceeds        period   proceeds        period     in use   in use        proceeds      proceeds      years

                     2016               Non-public      450,000     447,750      447,750           0           0    0.00%         0             Not           0
                                        issuance of                                                                                             applicable
                                        preference
                                        shares
                     Total              —              450,000     447,750      447,750           0           0    0.00%         0             —            0


                     Description of the general use of proceeds

                     On 17 September 2015, the Company received the Approval of the Non-Public Issuance of Preference Shares
                     of Shandong Chenming Paper Holdings Limited (Zheng Jian Xu Ke [2015] No. 2130) from the China Securities
                     Regulatory Commission.

                     (1)     On 17 March 2016, the gross proceeds from the non-public issuance of preference shares amounted to
                             RMB2,250 million and the proceeds from the same net of paid issuance expenses of RMB11.25 million
                             amounted to RMB2,238.75 million, which was deposited to the designated account for the proceeds of
                             such issuance. At the tenth extraordinary meeting of the seventh session of the Board held on 24 March
                             2016, the Resolution on Replacement of Self-raised Funds Invested in Advance to Projects Financed by
                             Proceeds with Proceeds from Issue of Preference Shares approving the replacement of self-raised funds
                             invested in advance to projects financed by proceeds with RMB2,238.75 million from the proceeds of
                             initial non-public issue of preference shares was passed.

                     (2)     On 17 August 2016, the gross proceeds from the non-public issuance of preference shares amounted
                             to RMB1,000 million and the proceeds from the same net of paid issuance expenses of RMB5 million
                             amounted to RMB995 million, which was deposited to the designated account for the proceeds of such
                             issuance.

                     (3)     On 22 September 2016, the gross proceeds from the non-public issuance of preference shares amounted
                             to RMB1,250 million and the proceeds from the same net of paid issuance expenses of RMB6.25 million
                             amounted to RMB1,243.75 million, which was deposited to the designated account for the proceeds of
                             such issuance. At the third extraordinary meeting of the eighth session of the Board held on 23 September
                             2016, the Resolution on Replacement of Self-raised Funds Invested in Advance to Projects Financed by
                             Proceeds with Proceeds from Issue of the Third Tranche of Preference Shares approving the replacement
                             of self-raised funds invested in advance to projects financed by proceeds with RMB761.25 million from
                             the proceeds of initial non-public issue of the third tranche of preference shares was passed.


32   SHANDONG CHENMING PAPER HOLDINGS LIMITED

                                                                              3700278-t01fnar (Shandong Chenming) p.32 (CHIPC07) 17-02-2017 16:38
                                                                                                                                       OUTPUT: 17-02-2017 16:47:01
V Discussion and Analysis of Operations



V.   Analysis of Investments (Cont’d)
     5.        Use of proceeds (Cont’d)
               (2)      Commitment of proceeds

                        √ Applicable                  Not applicable

                                                                                                                                                            Unit: RMB’0,000

                                                                                                                  Investment
                                                  Change                       Total      Invested Accumulated progress as                     Return       Expected
                        Committed                 in project       Total investment        amount      invested at the end      Expect         realised     return
                        investment project        (including committed         after    during the amount as           of the   date of        during the   being      Significant
                        and excess                partial    investment adjustment       reporting at the end of      Period    operation of   reporting    achieved   change
                        proceeds                  change) of proceeds             (1)       period the period (2) (3)=(2)/(1)   the project    period       or not     in project

                        Committed
                          investment project
                        Repayment of bank         No            300,000      300,000      300,000      300,000      100.00%     23 September   Not          Yes        No
                          borrowings                                                                                            2016           applicable
                        Replenishment             No            150,000      147,750      147,750      147,750      100.00%     23 September   Not          Yes        No
                          of liquidity                                                                                          2016           applicable
                        Total of committed        —            450,000      447,750      447,750      447,750            —    —             Not          —         —
                          investment project                                                                                                   applicable
                        Condition and reason      Not
                          for not achieving       applicable
                          planned progress
                          or expected return
                          (by special item)
                        Description               Not
                          of significant change   applicable
                          in feasibility
                          of project
                        Amount, use and           Not
                          utilisation of excess   applicable
                          proceeds
                        Change in place of        Not
                          implementation of       applicable
                          investment project
                          of proceeds
                        Adjustment on             Not
                          implementation          applicable
                          method of
                           investment project
                          of proceeds




                                                                                                                                                 2016 ANNUAL REPORT                  33

     3700278-t01fnar (Shandong Chenming) p.33 (CHIPC07) 17-02-2017 16:38
     OUTPUT: 17-02-2017 16:47:01
     V Discussion and Analysis of Operations



     V.   Analysis of Investments (Cont’d)
          5.   Use of proceeds (Cont’d)
               (2)   Commitment of proceeds (Cont’d)

                                                                                                                  Investment
                                              Change                       Total          Invested Accumulated progress as                           Return         Expected
                     Committed                in project       Total investment            amount      invested at the end          Expect           realised       return
                     investment project       (including committed         after        during the amount as           of the       date of          during the     being         Significant
                     and excess               partial    investment adjustment           reporting at the end of      Period        operation of     reporting      achieved      change
                     proceeds                 change) of proceeds             (1)           period the period (2) (3)=(2)/(1)       the project      period         or not        in project

                     Pre-investment           Applicable
                       and swap of
                       investment project
                       of proceeds
                                              (1)     At the tenth extraordinary meeting of the seventh session of the Board held on 24 March 2016, the Resolution on Replacement of Self-
                                                      raised Funds Invested in Advance to Projects Financed by Proceeds with Proceeds from Issue of Preference Shares approving the
                                                      replacement of self-raised funds invested in advance to projects financed by proceeds with RMB2,238.75 million from the proceeds of
                                                      initial non-public issue of preference shares was passed. Please refer to the relevant announcement dated 25 March 2016 published on
                                                      www.cninfo.com.cn.
                                              (2)     At the third extraordinary meeting of the eighth session of the Board held on 23 September 2016, the Resolution on Replacement of Self-
                                                      raised Funds Invested in Advance to Projects Financed by Proceeds with Proceeds from Issue of the Third Tranche of Preference Shares
                                                      approving the replacement of self-raised funds invested in advance to projects financed by proceeds with RMB761.25 million from the
                                                      proceeds of initial non-public issue of the third tranche of preference shares was passed. Please refer to the relevant announcement
                                                      dated 24 September 2016 published on www.cninfo.com.cn.
                     Temporary                Not
                       replenishment          applicable
                       of liquidity by idle
                       proceeds
                     Balance and reason       Not
                       for proceeds           applicable
                       arising from project
                       implementation
                     Use and direction        Not
                       of unused proceeds     applicable
                     Use of proceeds          Not
                       and problems           applicable
                       disclosed or other
                       issues


               (3)   Change in use of proceeds

                         Applicable           √ Not applicable

                     The Company did not have any change in use of proceeds during the reporting period.




34   SHANDONG CHENMING PAPER HOLDINGS LIMITED

                                                                                       3700278-t01fnar (Shandong Chenming) p.34 (CHIPC07) 17-02-2017 16:38
                                                                                                                                                           OUTPUT: 17-02-2017 16:47:01
V Discussion and Analysis of Operations



VI. Disposal of material assets and equity interest
    1.        Disposal of material assets
                  Applicable √ Not applicable

              The Company did not have any disposal of material assets during the reporting period.

    2.        Disposal of material equity interest
              √ Applicable                   Not applicable

                                                                            Net profit              Ratio of the
                                                                        contribution to                net profit
                                                                        the Company               contribution to                                                              Carried out
                                                                             from the             the Company                                                    Relevant      on schedule
                                                                         beginning of                of disposal     Pricing                                     equity        or not, if not,
                                                                           the period                   of equity    basis of      Related                       interest      the reasons
                                Equity                    Transaction       up to the Effect of    interest over     disposal of   party       Relationship      fully         and measures
                                interest       Disposal   consideration disposal date disposal on       total net    equity        transaction with              transferred   taken by the Disclosure Disclosure
              Counterparty(ies) disposed of    date        (RMB’0,000) (RMB’0,000) the Company        profit (%)   interest      or not      counterparty(ies) or not        Company         date    index

              Shouguang         100% equity 30 December          100           -0.04 No effect                 0 Transfer     No               Not applicable    Yes           Not applicable Not        Not
                Yucheng Trading interest in     2016                                                             based on net                                                                 applicable applicable
                Co.,Ltd.        Shouguang                                                                        assets
                                Chenming
                                Jiatai Property
                                Management
                                Co., Ltd.




                                                                                                                                                                         2016 ANNUAL REPORT                           35

    3700278-t01fnar (Shandong Chenming) p.35 (CHIPC07) 17-02-2017 16:38
    OUTPUT: 17-02-2017 16:47:01
     V Discussion and Analysis of Operations



     VII. Analysis of major subsidiaries and investees
         √ Applicable               Not applicable

         Major subsidiary and investees accounting for over 10% of the net profit of the Company

                                                                                                                                                                           Unit: RMB

                                                                                                                                                              Operating
         Name of company                  Type of company Principal activities    Registered capital     Total assets       Net assets         Revenue            profit        Net profit

         Zhanjiang Chenming Pulp &        Subsidiary        Production and sale 3,550,000,000.00 19,547,470,205.55 4,059,577,379.49 4,962,723,381.93 555,568,627.61 567,190,267.33
           Paper Co., Ltd.                                  of pulp, duplex press
                                                            paper, Electrostatic
                                                            paper
         Shandong Chenming Financial      Subsidiary        Paper product trading 5,872,000,000.00 26,077,801,815.27 7,493,294,936.26 2,558,763,185.27 998,037,881.50 918,516,201.38
           Leasing Co., Ltd.                                and financial leasing
         Shouguang Meilun Paper Co., Ltd. Subsidiary        Production and sale 3,000,000,000.00 10,061,260,332.41 4,591,070,219.26 5,194,516,832.03 465,089,491.56 353,189,186.48
                                                            of coated paper and
                                                            household paper
         Fuyu Chenming Paper Co., Ltd.    Subsidiary        Production and sale of  208,000,000.00 178,742,720.05 -217,437,397.40        26,917,408.94 -217,554,999.67 -216,371,879.34
                                                            flat sheet


         Acquisition and disposal of subsidiaries during the reporting period

         √ Applicable               Not applicable

                                                                      Methods to acquire and
                                                                      dispose of subsidiaries during                      Impact on overall production and
         Name of companies                                            the reporting period                                operation and results

         Shouguang Chenming Jiatai                                    Equity transfer                                     No effect on overall production
            Property Management Co., Ltd.                                                                                 and operation and results.
         Jilin Chenming Logistics Co., Ltd.                           New establishment                                   Net profit for 2016 was RMB60,600.
         Jiangxi Chenming Logistics Co., Ltd.                         New establishment                                   Net profit for 2016 was -RMB41,500.
         Qingdao Chenming Nonghai                                     New establishment                                   Net profit for 2016 was RMB11.4051 million.
            Financial Leasing Co., Ltd.


         Particulars of major subsidiaries and investees
         (1)      Zhanjiang Chenming’s major products, including high-end duplex press paper and electrostatic paper, had lower
                  costs, high gross profit margin and better returns.
         (2)      Financial Leasing Company made steady progress and delivered better profit.
         (3)      With the higher gross profit margin from its major product, coated paper, and the gains from sale of electricity,
                  Shouguang Meilun recorded better profit.
         (4)      Fuyu Chenming suspended its production and made impairment provision for its fixed assets and construction in
                  progress.




36   SHANDONG CHENMING PAPER HOLDINGS LIMITED

                                                                                           3700278-t01fnar (Shandong Chenming) p.36 (CHIPC07) 17-02-2017 16:38
                                                                                                                                                         OUTPUT: 17-02-2017 16:47:01
V Discussion and Analysis of Operations



VIII. Structured entities controlled by the Company
           Applicable         √ Not applicable


IX. Outlook on the future development of the Company
    (I)       Competition overview and development trend of the industry
              Paper making industry

              The growth of the paper making industry tends to be closely correlated to the macroeconomic growth. While there
              are adjustments of economic growth in China, the growth of paper making industry is also subject to pressure for
              adjustments. However, in the light of the easing downward pressure on the national economy, improving income
              levels of residents and the stabilising economy as a whole, it is expected the per capita consumption of paper
              and paper board will continue to increase. Besides, under the current market conditions, elimination of obsolete
              production capacity in the paper making industry and increasingly stringent environmental protection policies are
              forcing some small and medium-sized enterprises out of the market, thus favouring industry concentration and
              standardised industry competition to establish a sound industry cycle. There are obvious signs for industry recovery
              with a boom to be prolonged.


              Financial leasing industry

              As the financial reforms advance further, the integration of industrial capital and financial capital gradually accelerate
              in China. The financial leasing industry as a favoured supplementary corporate financing channel and an effective tool
              to use assets at hand embraces continuously mounting market demand. Since the implementation of the “Thirteenth
              Five Year Plan”, the accelerated urbanisation and industrialisation in China, the change in driver of economic growth,
              upgrade of traditional industries, development of emerging industries, and continuous infrastructure construction
              require substantial investment in fixed assets. China will become the largest leasing market in the world. According
              to the Research Report on Business Prospects Survey of and Investment Strategies in the China Financial Leasing
              Industry 2016-2021 issued by ASKCI Consulting Co. LTD, the financial leasing industry will grow at a compound
              annual growth rate of over 20% in the future and it is expected that the outstanding leasing contracts of the financial
              leasing industry in China will amount to RMB20.79 trillion by 2021.

              In view of the establishment and optimisation of trading rules, accounting standards, industry regulation and tax
              policies for the financial leasing industry, the financial leasing in China has been evolving into modern leasing at high
              speed. In the future, the size of the financial leasin24g business in China will expand significantly. Financial leasing
              will become an important alternative of financing for enterprises, especially small and medium-sized enterprises. The
              business prospects of the financial leasing industry in China are promising.

    (II)      Development strategy
              Looking forward, Chenming Group will adhere to the principal of emphasising on environmental protection, low
              carbon, recycling and sustainable development. Following the “Made in China 2025 Plan” and the principles of
              scientific development and quality and efficiency enhancement, it will comprehensively improve its quality and
              efficiency, management level, technology application, sense of happiness and brand image through the integration
              between its production and manufacture segment and financial services segment, incorporation of smart technology
              into its industrial activities, reorganised methodology and restructuring so as to expand and improve itself and strive
              to achieve taxable profit over RMB10 billion and develop into an integrated diversified enterprise with hundreds of
              billions in value during the “Thirteenth Five Year Plan” period.




                                                                                                              2016 ANNUAL REPORT           37

    3700278-t01fnar (Shandong Chenming) p.37 (CHIPC07) 17-02-2017 16:38
    OUTPUT: 17-02-2017 16:47:01
     V Discussion and Analysis of Operations



     IX. Outlook on the future development of the Company (Cont’d)
         (III) Operation plans for 2017
              In the year 2017, the main goal of the Company is adherence to the main theme of achieving growth amid stability
              and the guiding principal of work of “team building, management enhancement, outstanding business performance
              and good results”. A new management philosophy will be firmly established and consistently practised. The Company
              will commit itself to, among other things, operating steadily, boosting growth, adjusting the structure, preventing risks
              and benefiting the employees. The major measures are as follows:

              1.    Determined to upgrade corporate management

                    The Company will enhance its corporate management level with the help of external experts. The Company
                    commits itself to performing its tasks up to standard and on schedule in strict compliance with the plans
                    as formulated by the management consulting companies and the information technology companies. The
                    Company will work together with external experts to learn their advanced philosophies and methods.

                    The Company will focus on team building to enhance its comprehensive management capability. The
                    hierarchical management will improve to make the management at each hierarchy level function and to
                    establish cadres with designated duties and full of energy. Staff teams will excel themselves during skill training.
                    Hierarchical training will be given in terms of, among other things, ideology, morals, business skills, theory and
                    knowledge.

              2.    Determined to strengthen market-oriented operations in terms of operations management

                    The Company will strengthen its market-oriented operations. It will increase the selling prices in a timely manner
                    based on the actual market conditions, and increase its revenue through the measures such adjustment to
                    the product structure, investment in products of higher returns, investment in markets of close proximity and
                    turning inefficient entities around. The Company will control the appropriation of funds through the measures
                    such as increase in prepayments, sales on contract with customers, and bartering, thus enhancing the quality of
                    operations.

                    The Company will commit itself to working together with the management consulting companies and the
                    information technology companies. The Company will enhance its sales management level by well defining
                    job duties based on the sales structure, formulating standard procedures, and paying attention to key points
                    through full mechanical operation.

                    The Company will make every effort to recover the amount past due with a view to the collection of all past due
                    accounts. The Company will improve the quality of collateral security to prevent risks.




38   SHANDONG CHENMING PAPER HOLDINGS LIMITED

                                                                  3700278-t01fnar (Shandong Chenming) p.38 (CHIPC07) 17-02-2017 16:38
                                                                                                                  OUTPUT: 17-02-2017 16:47:01
V Discussion and Analysis of Operations



IX. Outlook on the future development of the Company (Cont’d)
    (III) Operation plans for 2017 (Cont’d)
              3.       Determined to promote innovation with higher efficiency in terms of production management

                       The Company will focus on the improvement of management level for production and operation while ensuring
                       stable operation and put more efforts into efficiency utilisation, research and development innovation as well
                       as environmental protection and safety. The Company will motivate the employees through appraisals at levels
                       and attach great importance to training programmes for staff at entry level. The Company will cooperate with
                       information technology companies to facilitate early warning and examination through mechanical operation
                       during production. The Company will introduce high-end technicians to improve the research and development
                       capabilities of the teams. The Company will encourage technology innovation and apply for 20 national patents.
                       The Company will adjust the product mix and focus on the research and development as well as marketing
                       of unbleached household paper, anti-counterfeiting white paper board, cigarette card board and other high
                       value-added products. The Company will introduce new types of raw materials and promote the application of
                       technologies including paper surface enhancement. The Company will be strict with product quality and work
                       on increases in prices and benefits in sales. The Company will implement safety standardisation management
                       and pay attention to environmental protection in accordance with national standards and requirements. The
                       Company will set up and closely monitor the safety factors for internal control indicators so as to ensure
                       standardised emission.

              4.       Determined to maintain quality and be on track in terms of project management

                       The Company will make sure the phase I of Haiming mining project to commence production on schedule. The
                       Company will also pay close attention to Huanggang Chenming’s integrated forestry, pulp and paper project,
                       Shouguang Chenming’s chemical pulp project and other projects under construction to ensure such projects
                       will proceed on schedule.

              5.       Determined to achieve stable growth in terms of financial capital management

                       The Company will regard risk management as the most important task for financial capital management.
                       Leveraging professional teams, the Company will optimise its business risk management system and set
                       up a customer classification evaluation system. Financing and project investment will be under centralised
                       management of the Group so as to prevent business risk.

                       The Company will proceed with capital financing to reduce its gearing ratio and optimise the structure of assets
                       and liabilities. The Company will also proceed with direct financing for the medium to long term so as to prevent
                       liquidity risk.

                       The Company will enhance the incentive and appraisal mechanism for middle and senior management for the
                       financial segment. The Company will strengthen the ideological education and comprehensive capabilities
                       training for cadres to enhance team cohesion. By virtue of additional investment through the leasing company
                       and expansion in the scale of cooperation with the industry peers through the Finance Company, the Company
                       will engage in new businesses including industry chain finance to increase benefits.




                                                                                                               2016 ANNUAL REPORT          39

    3700278-t01fnar (Shandong Chenming) p.39 (CHIPC07) 17-02-2017 16:38
    OUTPUT: 17-02-2017 16:47:01
     V Discussion and Analysis of Operations



     IX. Outlook on the future development of the Company (Cont’d)
         (III) Operation plans for 2017 (Cont’d)
              6.    Determined to grow revenue from trading in terms of supply chain management

                    Cooperating with management consulting companies and professional information technology companies,
                    the Company will strive to the establishment of information platform and international tender network so as
                    to enhance the level of information management for procurement. The Company will place great emphasis
                    on bulk procurement of raw materials and establish strategic cooperation relationship with quality customers
                    while putting more efforts into market analysis and improving analysis and judgement capabilities for market
                    conditions so as to reduce procurement costs. The Company will give full play to the electronic merchandise
                    exchange centre for pulp and paper products and establish a supply chain system integrating warehousing
                    and logistics for pulp and paper products in China. The Company will expand sales channels in the market to
                    improve trading volume. The Company will closely follow the coordination and payment process and further
                    utilise acceptance payment to facilitate the cooperation with electronic commercial draft business.

              7.    Determined to consolidate resources in terms of logistics management

                    The Company will rationalise its organisation structure and introduce logistics professionals to facilitate the
                    greater reforms of the logistics of the Group. The Company will ensure the timely completion of phase I of the
                    Shouguang Chenming international logistics centre project and the main building of the Qingdao innovative
                    industry park project. The Company will facilitate the establishment of logistics information platform so as to
                    accomplish the integration between business flow, material flow and information flow. The information platform
                    will integrate logistics resources to build an intelligent logistics system. The Company will utilise the function
                    of supervision stations, bonded warehouses and other existing facilities to customise comprehensive logistics
                    service programs for different corporate customers.

              8.    Caring for employees with more and more employee benefits

                    The Company will rationalise the salary increment mechanism to improve staff’s income in real terms so as to
                    make sure the salary level of its staff is relatively higher than those of its local counterparts and industry peers.
                    Making reference to renowned enterprises, the Company will improve the living standards of staff quarters
                    through further improvement in basic facilities and amenities. The Company will commence physical training
                    and testing for staff to improve their physical quality. Focusing on green landscaping, the Company will build
                    more garden-like factory areas so as to create a more pleasant working environment for employees.

         (IV) Future capital requirements, source of funds and plan for use
              The Company has established business segments for its core business, namely, pulp production, paper making,
              finance and forestry. With the further development of the existing principal businesses of the Company, the future
              capital requirements of the Company will be: (1) investment in the existing projects under construction and proposed
              new projects; (2) consistent investment in the existing production facilities because of technological transformation
              or production expansion; and (3) business expansion and general working capital requirements. As the demand for
              capital has been growing for the Company’s production and operation, there is a strong need to replenish the working
              capital to enhance the Company’s capability for sustainable operations.

              In order to meet the business development requirements of the Company and further extend and expand the industry
              chain, the Company will establish diversified financing channels and increase the proportion of direct financing
              through diversified financing channels such as private placement, preference shares, corporate bonds and cross-
              border financing so as to improve the debt structure of the Company and provide stable financial support for the
              operation and development of the Company.




40   SHANDONG CHENMING PAPER HOLDINGS LIMITED

                                                                  3700278-t01fnar (Shandong Chenming) p.40 (CHIPC07) 17-02-2017 16:38
                                                                                                                  OUTPUT: 17-02-2017 16:47:01
V Discussion and Analysis of Operations



IX. Outlook on the future development of the Company (Cont’d)
    (IV) Future capital requirements, source of funds and plan for use (Cont’d)
              The Company will use RMB3.7 billion from private placement to reduce the cost of paper making. The investment
              in the 400,000-tonne chemical pulp project through private placement will improve the self-sufficiency of pulp of the
              Company and the raw materials structure of the paper making segment, in the expectation of reducing the production
              costs of paper making and enhancing profitability of paper making business. At the same time, non-public issuance of
              shares will optimise the debt structure and reduce financial costs as well as the gearing ratio.

              Diversified financing channels to meet the Company’s capital requirements: (1) The Company will reduce the financing
              costs and optimise the capital structure by issuing corporate bonds, medium-term notes, short-term financing,
              super short-term financing, perpetual bonds and other means for financing so as to provide financial support for the
              Company’s long-term healthy development. (2) The Company will facilitate cross-border financing by making full use
              of the financing platform in Hong Kong market to increase its credit line. Besides, the Company will also mitigate
              exchange rate risk through multi-currency financing and improve the efficiency of use of capital to reduce financial
              costs. As at the end of 2016, the credit lines utilised by the Company amounted to RMB36.7 billion and the credit
              lines obtained by the Company amounted to RMB68.4 billion with a utilisation rate of 53.65%. (3) The Company will
              make use of the advantages of the Finance Company and the Financial Leasing Company in the financial industry to
              expand the financing channels for the Group, bring new momentum for business development.

    (V)       Risk factors likely to be faced and the measures to be taken
              1.       Risk on paper making industry

                       Policy risk

                       Paper making industry is a basic raw materials industry and its growth has been faster than the average
                       growth of the national economy in recent years. However, the paper making industry’s profitability is closely
                       correlated to the economic cycle, and the industry is therefore a cyclical industry fluctuating with the national
                       macroeconomic performance, which will further affect the profitability of the Company.

                       Hence, following the principles of scientific development and quality and efficiency enhancement, the Company
                       will comprehensively improve its industrial structure and regional layout through the integration between its
                       production and manufacture segment and financial services segment, and incorporation of smart technology
                       into its industrial activities. The Company will emphasise on the development of leading businesses including
                       paper making, finance and forestry so as to construct an efficient industrial system with synergies.

                       Market fluctuation risk

                       With the rapid growth of the national economy, economic globalisation and China’s accession to the WTO,
                       China’s paper making industry has been facing increasingly fierce competition. Leveraging the strength and
                       capital accumulated over the years, domestic enterprises have further expanded their sizes and improved their
                       technological levels and product quality. Well-known paper making enterprises overseas have also directly set
                       up production bases in China through sole proprietorship or joint ventures so as to participate in the domestic
                       market competition by virtue of their advantages in size and technology. Besides, tariff reduction on China after
                       accession to the WTO has also further intensified the impact on the international market.




                                                                                                               2016 ANNUAL REPORT          41

    3700278-t01fnar (Shandong Chenming) p.41 (CHIPC07) 17-02-2017 16:38
    OUTPUT: 17-02-2017 16:47:01
     V Discussion and Analysis of Operations



     IX. Outlook on the future development of the Company (Cont’d)
         (V)   Risk factors likely to be faced and the measures to be taken (Cont’d)
               1.   Risk on paper making industry (Cont’d)

                    Hence, the Company will strive to enhance the quality of paper products and achieve the target of establishing
                    a layout for high-end paper industry so as to increase the proportion of high-end paper. In recent years, the
                    Company has been expanding its business size and optimising its product mix and has set up a few production
                    lines for high-end paper. A diversified and high-end product mix enables the Company to spread market risk
                    and strengthen the resistance towards market volatility. Besides, as high-end products have better profit
                    margins, the Company can increase the proportion of high-end products through consistent improvement in
                    product mix, thereby enhancing its profitability and comprehensive competitiveness.

                    Risk of overcapacity and slowdown in demand

                    Overcapacity is a prominent problem in the paper making and paper product industry in China such that
                    there has been fierce competition among enterprises. Since 2013, affected by slowdown in macroeconomic
                    growth, the demand in paper making industry has been weak. At the same time, China has been encouraging
                    energy conservation and emission reduction. The obsolete production capacity will be phased out, and thus
                    the new projects will be on a large scale. By virtue of the economies of scale in the paper making industry,
                    the production capacity of individual paper making projects which are under construction or planning for
                    construction in China is large, which affects the demand and supply relationship in the whole paper making
                    industry.

                    Hence, the Company will make advancements in equipment and technological level, expand its product mix,
                    improve the grading of products and focus on the research and development of high-end products so as to
                    improve competitiveness.

                    Risk of price fluctuation of raw materials

                    The major raw materials used by the Company are wood pulp and waste paper. The market prices of wood pulp
                    and waste paper fluctuate significantly. The market price fluctuation of raw material has significantly affected the
                    production costs of the Company. In addition to intensified market competition resulting from surging capacity
                    in the industry in recent years, the increases in prices of a number of paper products were not in line with the
                    increases in prices of raw materials. The market price fluctuation of raw materials will have an impact on the
                    performance of the Company.

                    Hence, the Company will remain steadfast in the “forestry-pulp-paper integration” development path and focus
                    on the construction of the Zhanjiang Chenming pulp project, the Huanggang Chenming pulp project and the
                    Shouguang chemical pulp project, thereby eliminating the limitations of upstream resources on the Company’s
                    development and enhancing the Company’s sustainable development.




42   SHANDONG CHENMING PAPER HOLDINGS LIMITED

                                                                  3700278-t01fnar (Shandong Chenming) p.42 (CHIPC07) 17-02-2017 16:38
                                                                                                                  OUTPUT: 17-02-2017 16:47:01
V Discussion and Analysis of Operations



IX. Outlook on the future development of the Company (Cont’d)
    (V)       Risk factors likely to be faced and the measures to be taken (Cont’d)
              1.       Risk on paper making industry (Cont’d)

                       Risk of change in environmental protection policies

                       China has been raising the standards for environmental protection in recent years. The new Environmental
                       Protection Law took effect on 1 January 2015. More stringent environmental protection policies have been
                       implemented in the paper making industry. A multi-pronged approach has been adopted to promote industrial
                       restructuring, and the paper making industry has entered into an important transitional period of development. A
                       higher emission standard is bound to increase the Company’s environmental protection costs and a high entry
                       standard may result in the slowdown of scale expansion.

                       The Company always strives to achieve harmonious development with energy conservation and emission
                       reduction. The Company will endeavour to develop the recycling economy through waste exchange and
                       recycling and strive to maximise its resource utilisation. Meanwhile, the Company will make greater efforts to
                       construct environment friendly projects and strive to achieve its waste emission target.

              2.       Risk on financial leasing business

                       Policy risk

                       Recently, the financial leasing business is regulated by the commerce departments at different levels instead of
                       being directly regulated by the People ‘s Bank of China or China Banking Regulatory Commission. The financial
                       leasing industry in China is still at the exploration stage with incomplete laws and regulations. If there is any
                       material adjustment or change in national or local policies for the financial leasing industry, the Company’s
                       financial leasing business may be adversely affected, in turn harming the Company’s profitability.

                       In September 2015, the General Office of the State Council promulgated the Guiding Opinions on Accelerating
                       the Development of Financial Leasing Industry, which formulated comprehensive systematic planning on
                       accelerating the development of the financial leasing industry. The financial leasing industry embraced a rare
                       opportunity for leap-forward development. In February 2016, the General Office of People’s Government of
                       Shandong Province promulgated the Opinions of the General Office of People’s Government of Shandong
                       Province on Accelerating the Development of Financial Leasing Industry by Implementing Document Guo Ban
                       Fa [2015] No. 68, formulating specific measures to refine policy measures and ensure the measures being
                       carries out properly, which provided actual policy support for the development of the financial leasing industry
                       in Shandong Province.




                                                                                                               2016 ANNUAL REPORT          43

    3700278-t01fnar (Shandong Chenming) p.43 (CHIPC07) 17-02-2017 16:38
    OUTPUT: 17-02-2017 16:47:01
     V Discussion and Analysis of Operations



     IX. Outlook on the future development of the Company (Cont’d)
         (V)   Risk factors likely to be faced and the measures to be taken (Cont’d)
               2.   Risk on financial leasing business (Cont’d)

                    Liquidity risk

                    In a market economy, the macroeconomic operation tends to be in cycles and the Company is inevitably
                    affected by those cycles. At the same time, there is fierce competition in the financial industry and the interest
                    margin is a main source of income for the financial leasing business. The market interest rate is affected by
                    the benchmark interest rate of the People’s Bank of China, the macroeconomic environment, market demand
                    and supply and other factors, bringing uncertainties to the fluctuation of the market interest rate, which in turn
                    causes uncertainties in revenue from the financial leasing business.

                    Hence, following the principles of scientific development and quality and efficiency enhancement, the Company
                    will comprehensively improve its industrial structure and regional layout through the integration between its
                    production and manufacture segment and financial services segment, and incorporation of smart technology
                    into its industrial activities. The Company will emphasise on the development of leading businesses including
                    paper making, finance and forestry so as to construct an efficient industrial system with synergies.

                    Credit risk

                    The Company may suffer from loss if the lessees of its financial leasing business cannot make full rental
                    payment on time due to any reason and there are abuses on equipment or any other short-term behaviour.
                    Although the risk of such rental being unrecoverable is minimal, the Company will also make bad debt provision
                    as required under its accounting policy. If such amounts cannot be recovered on time, the Company may be
                    exposed to risk of bad debts.

                    The stringent risk management measures of Chenming Leasing provide comprehensive risk prevention
                    and management for the Company’s projects. Besides, the Company usually cooperates with state-owned
                    enterprises and local governments, so it has strong risk resistance and low risk of default. The Company does
                    not have any non-performing or overdue loans so far. Chenming Leasing will develop quality customers and
                    strengthen risk management so as to enhance risk resistance and maintain high quality services.

                    Operation risk

                    Recently, there is still a gap between the practitioners working in the financial leasing industry and those working
                    in traditional financial institutions such as banks in terms of their expertise and experience in financial profession
                    in China. There is also a large gap in terms of investment in infrastructure. If internal control procedures are
                    not implemented properly and involve operation risk as a result of operation errors, violations or non-standard
                    execution, the Company may suffer from loss.

                    Learning from the risk management experience of outstanding financial leasing companies at home and abroad,
                    the leasing company has formulated and optimised the internal management system of the leasing business
                    and established an effective system for risk assessment, risk control and risk tracking. The Company has
                    also exercised proper control on business risk by regulating the key business procedures including quotation,
                    guarantee review, contract signing, leased assets management and archives management.




44   SHANDONG CHENMING PAPER HOLDINGS LIMITED

                                                                   3700278-t01fnar (Shandong Chenming) p.44 (CHIPC07) 17-02-2017 16:38
                                                                                                                   OUTPUT: 17-02-2017 16:47:01
V Discussion and Analysis of Operations



X.   Reception of research investigations, communications and interviews
     1.        Registration report on reception of research investigations, communications and interviews during the
               reporting period
               √ Applicable       Not applicable

                                                            Class of parties
               Date of reception        Manner of reception accommodated       Index of particulars of research investigations

               5 May 2016               On-site research      Institution      Details are disclosed in the investor relationship
                                        investigation                          event record on CNINFO on 8 May 2016
               19 May 2016              On-site research      Institution      Details are disclosed in the investor relationship
                                        investigation                          event record on CNINFO on 22 May 2016
               27 June 2016             On-site research      Institution      Details are disclosed in the investor relationship
                                        investigation                          event record on CNINFO on 28 June 2016

               Number of receptions                                                                                           3
               Number of institutions received                                                                              106
               Number of individuals received                                                                                 0
               Number of other entities received                                                                              0
               Disclosure, leakage or divulgence of
                 undisclosedsignificant information                                                                          No




                                                                                                        2016 ANNUAL REPORT          45

     3700278-t01fnar (Shandong Chenming) p.45 (CHIPC07) 17-02-2017 16:38
     OUTPUT: 17-02-2017 16:47:01
     VI Directors’ Report



     The Directors (the “Directors”) of the Company hereby present the annual report and the audited consolidated financial statements
     of the Company and the Group for the year ended 31 December 2016.


     I.    Principal activities
           Please refer to section IV “Business Overview”, and “I. Principal operations of the Company during the Reporting Period”
           and “II. Analysis of principal operations” under section V “Discussion and Analysis of Operations” for details of principal
           activities of the Company.


     II.   Results and profit distribution
           Please refer to section XIII “Financial Report” for the results of the Group for the year ended 31 December 2016.


     III. Dividends
           After the end of the reporting period, the Board proposed to pay a final dividend for the year ended 31 December 2016 (“final
           dividend”) of RMB6.00 in cash for every 10 Shares (tax inclusive) (2015: dividend of RMB3.00 in cash for every 10 Shares
           (tax inclusive)) to the ordinary shareholders of the Company, subject to approval of shareholders at the forthcoming Annual
           General Meeting (“AGM”) of the Company held on 21 April 2017. Upon approval of shareholders of the Company at the
           AGM, the Company is expected to pay the final dividend on or by 20 June 2017 to shareholders whose names appear on
           the register of members of the Company on 28 April 2017.

           In accordance with the Corporate Income Tax Law of the PRC and its implementation rules effective on 1 January 2008,
           where a PRC domestic enterprise distributes dividends for financial periods beginning from 1 January 2008 to non-resident
           enterprise shareholders, it is required to withhold 10% corporate income tax for such non-resident enterprise shareholders.
           Therefore, as a PRC domestic enterprise, the Company will, after withholding 10% of final dividends as corporate income
           tax, distribute the final dividends to non-resident enterprise shareholders, i.e. any shareholders who hold the Company’s
           Shares in the name of non-individual shareholders, including but not limited to HKSCC Nominees Limited, or other
           nominees, trustees, or holders of H Shares registered in the name of other organisations and groups.

           Due to changes in the PRC tax laws and regulations, according to the Announcement on the List of Fully and Partially
           Invalid and Repealed Tax Regulatory Documents issued by the State Administration of Taxation (
                                                               ) on 4 January 2011, individual Shareholders who hold the Company’s H
           Shares and whose names appeared on the H Share Register of the Company can no longer be exempted from individual
           income tax pursuant to the Notice of the State Administration of Taxation Concerning the Taxation of Gains on Transfer
           and Dividends from Shares (Equities) Received by Foreign Investment Enterprises, Foreign Enterprises and Foreign
           Individuals (Guo Shui Fa [1993] No. 045) (                                                          (    )
                               (      [1993]045 )) issued by the State Administration of Taxation, whilst pursuant to the letter titled
           Tax Arrangements on Dividends Paid to Hong Kong Residents by Mainland Companies issued by the Stock Exchange to
           the issuers on 4 July 2011 and the Notice on Matters Concerning the Levy and Administration of Individual Income Tax
           after the Repeal of Guo Shui Fa [1993] No. 045 of State Administration of Taxation (Guo Shui Han [2011] No. 348) (
                                   [1993]045                                                   (      [2011]348 )), it is confirmed that
           the overseas resident individual shareholders holding shares of domestic non-foreign invested enterprises issued in Hong
           Kong are entitled to the relevant preferential tax treatments pursuant to the provisions in the tax arrangements between the
           countries where they reside and the PRC or the tax arrangements between the PRC and Hong Kong or the Macau Special
           Administrative Region of the PRC. Therefore, the Company will withhold 10% of the dividend as individual income tax,
           unless it is otherwise specified in the relevant tax regulations and tax agreements, in which case the Company will withhold
           individual income tax of such dividends in accordance with the tax rates and according to the relevant procedures as
           specified by the relevant regulations.




46   SHANDONG CHENMING PAPER HOLDINGS LIMITED

                                                                     3700278-t01fnar (Shandong Chenming) p.46 (CHIPC07) 17-02-2017 16:38
                                                                                                                     OUTPUT: 17-02-2017 16:47:09
VI Directors’ Report



IV. Closure of register of members
     The register of members of the Company will be closed from 20 March 2017 (Monday) to 21 April 2017 (Friday), (both
     days inclusive), during which no transfer of shares of the Company will be registered. In order to be eligible to attend and
     vote at the annual general meeting to be held on 21 April 2017 (Friday), all share transfer documents accompanied by
     the corresponding share certificates must be lodged with the Company’s Hong Kong share registrar and transfer office,
     Computershare Hong Kong Investor Services Limited at shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen’s Road
     East, Wan Chai, Hong Kong for registration not later than 4:30 p.m. on 17 March 2017 (Friday).


V.   Five-year financial summary
     Please refer to “IX. Five-year financial summary under paragraph 19 of appendix 16 of the Hong Kong Listing Rules”
     under section II “Company Profile and Key Financial Indicators” for the financial summary of the Company for the past five
     financial years.


VI. Donations
     During the year, the Company donated RMB1,000,000 (2015: RMB600,000) to non-profit making organisations.


VII. Subsidiaries
     Please refer to “VII. Analysis of major subsidiaries and investees” under section V “Discussion and Analysis of Operations”
     and “XX. Matters of significant of subsidiaries of the Company” under section VII “Material Matters” for the details of
     acquisition and disposal of subsidiaries by the Company during the year.


VIII. Property, plant and equipment
     Please refer to “1. Consolidated Balance Sheet” under section XIII “Financial Report” for the details of changes in property,
     plant and equipment of the Group for the year ended 31 December 2016.


IX. Share capital
     Please refer to “I. Changes in shares” under section VIII “Changes in Share Capital and Shareholders” for details of changes
     in share capital of the Company for the year ended 31 December 2016.


X.   Pre-emptive rights
     In accordance with the Articles of Association and the PRC laws, there are no rules requiring the Company to grant existing
     shareholders pre-emptive rights on newly issued shares of the Company in proportion to their shareholdings.


XI. Transfer into reserves
     The Company’s contributed surplus is distributable to shareholders in accordance with the Companies Law. As at 31
     December 2016, the Company’s reserves available for cash distribution and/or distribution in specie, including contributed
     surplus of the Company, amounted to RMB7,393,989,520.67 (2015: RMB6,002,557,599.09) as set out in “1. Consolidated
     Balance Sheet” under section XII “Financial Report”.




                                                                                                            2016 ANNUAL REPORT           47

     3700278-t01fnar (Shandong Chenming) p.47 (CHIPC07) 17-02-2017 16:38
     OUTPUT: 17-02-2017 16:47:09
     VI Directors’ Report



     XII. Directors
         As at 31 December 2016, the Directors of the Company were:

         1.    Executive Directors
               Mr. Chen Hongguo
               Mr. Yin Tongyuan
               Mr. Li Feng
               Mr. Geng Guanglin

         2.    Non-executive Directors
               Ms. Zhang Hong
               Ms. Yang Guihua

         3.    Independent Non-executive Directors
               Ms. Liang Fu
               Ms. Wang Fengrong
               Mr. Huang Lei
               Ms. Pan Ailing

         According to the Articles of Association of the Company, all Directors, including non-executive Directors, have been elected
         at the general meetings with a term of three years from May 2016 to May 2019. They may be re-elected for another term
         upon expiry of tenure.


     XIII. Directors’ service contracts
         All Directors have entered into service contracts with the Company for a term from 18 May 2016 to 17 May 2019.

         None of the Directors who have offered themselves for re-election at the forthcoming AGM have entered into any service
         contract with the Company or any of its subsidiaries which cannot be terminated by the Group within one year without
         payment of compensation other than statutory compensation.


     XIV. Directors and senior management’s remuneration and the five highest paid individuals
         Details of Directors and senior management’s remuneration and those of the five highest paid individuals in the Company
         and its subsidiaries are set out in part V of section X and part XII of section XII.

         In 2016, the Company has 33 senior management in total, which include directors, supervisors and senior management.
         The remuneration of senior management falls within the following ranges:

         Range of remuneration (RMB)                                                                                                Number

         4.8 million to 5.2 million                                                                                                            1
         3.6 million to 4.0 million
         3.2 million to 3.6 million
         2.8 million to 3.2 million                                                                                                            1
         2.4 million to 2.8 million
         2.0 million to 2.4 million                                                                                                             1
         1.2 million to 1.6 million                                                                                                             3
         0.8 million to 1.2 million                                                                                                             2
         Below 0.8 million                                                                                                                     25



48   SHANDONG CHENMING PAPER HOLDINGS LIMITED

                                                                 3700278-t01fnar (Shandong Chenming) p.48 (CHIPC07) 17-02-2017 16:38
                                                                                                                 OUTPUT: 17-02-2017 16:47:09
VI Directors’ Report



XV. Independent Non-executive Directors
    The Company has received from each of the independent non-executive Directors a confirmation of independence for the
    year pursuant to Rule 3.13 of the Hong Kong Listing Rules and considered all of the independent non-executive Directors to
    be independent during the year.


XVI. Securities interests held by Directors, Supervisors and Chief Executives
    As at 31 December 2016, interests of the Company or its associated corporations (within the meaning of Part XV of SFO)
    held by each of the Directors, Supervisors and Chief Executives of the Company under section 352 of the SFO are set out
    as follows:

                                                                                                           Number of shares
                                                                                                               (A shares) held
                                                                                                              as at the end of
                                                                                                         the reporting period
    Name                                                         Position                                             (shares)

    Directors
    Chen Hongguo (Note 1)                                        Chairman and General Manager                      6,434,527
    Yin Tongyuan                                                 Executive Director and Vice Chairman              2,423,640
    Li Feng                                                      Executive Director                                  471,818
    Geng Guanglin                                                Executive Director                                  437,433
    Yang Guihua                                                  Non-executive Director                                   —
    Zhang Hong                                                   Non-executive Director                                   —
    Huang Lei                                                    Independent non-executive Director                       —
    Liang Fu                                                     Independent non-executive Director                       —
    Wang Fengrong                                                Independent non-executive Director                       —
    Pan Ailing                                                   Independent non-executive Director                       —
    Supervisors
    Li Dong                                                      Supervisor                                                —
    Sun Yinghua                                                  Supervisor                                                —
    Yang Hongqin                                                 Supervisor                                                —
    Liu Jilu                                                     Supervisor                                                —
    Zhang Xiaofeng                                               Supervisor                                                —




                                                                                                        2016 ANNUAL REPORT       49

    3700278-t01fnar (Shandong Chenming) p.49 (CHIPC07) 17-02-2017 16:38
    OUTPUT: 17-02-2017 16:47:09
     VI Directors’ Report



         Associated corporations

                                                                                         Number of                                             Number of
                                                                                     shares held at                                        shares held at
                                                                                   the beginning of                                            the end of
                                             Name of                                  the reporting           Change during                 the reporting
         Name                 Position       associated corporations                 period (shares)           the period +/-              period (shares)

         Chen Hongguo         Chairman       Shouguang Henglian                         231,000,000                          —                231,000,000
                                             Enterprise Investment
                                             Co. Ltd. (Note 2)


         Note 1:   Save for the 6,434,527 A shares held personally, Chen Hongguo is deemed to be interested in the 429,348 A shares held by his spouse, Li
                   Xueqin.

         Note 2:   Chen Hongguo and his spouse, Li Xueqin, collectively hold 43% equity interests in Shouguang Henglian Enterprise Investment Co. Ltd.,
                   (hereinafter referred to as “Shouguang Henglian”), as a result, Shouguang Henglian is deemed to be controlled by Chen Hongguo. As a
                   result, the 231,000,000 shares in Chenming Holdings (approximately 18.65% of the total share capital of Chenming Holdings) held by
                   Shouguang Henglian is also deemed to be held by Chen Hongguo.


         Save as disclosed above, as at 31 December 2016, none of the Directors, Supervisors or chief executives of the Company
         had any interests or short positions in the shares, underlying shares or debentures of the Company or any of its associated
         corporations which were required to be filed in the register of the Company required to be maintained pursuant to section
         352 of the SFO or which were required to be notified to the Company and the Hong Kong Stock Exchange pursuant to the
         Model Code for Securities Transactions by Directors of Listed Issuers as contained in Appendix 10 to the Rules Governing
         the Listing of Securities on the Hong Kong Stock Exchange (hereinafter referred to as the “Hong Kong Listing Rules”).

         As at 31 December 2016, none of the Directors, Supervisors or chief executives or their respective spouses or children
         under the age of 18 held or exercised any rights to subscribe for the share capital or debentures of the Company or its
         associated corporations.


     XVII. Interests and short position of substantial shareholders in shares and underlying shares
         As at 31 December 2016, the following shareholders (other than the Directors, Supervisors or chief executives of the
         Company) had interests or short positions in the Company’s shares and underlying shares as shown in the share register
         maintained by the Company in accordance with Section 336 of the SFO (Chapter 571 of the Laws of Hong Kong):

                                                                                                               Approximate shareholding
                                                                                                                  as a percentage of
                                                                  Number of shares held                        Total share             Class of
         Name                                                     (shares)                                      capital (%)          shares (%)

         Shouguang Chenming Holdings Co., Ltd.                    293,003,657 A shares (L)                             15.13                              26.32
         Shouguang Chenming Holdings Co., Ltd.                    73,207,900 B shares (L)                               3.78                              15.55
         Chenming Holdings (Hong Kong) Limited                    73,207,900 B shares (L)                               3.78                              15.55
         Shouguang Chenming Holdings Co., Ltd.                    99,885,500 H shares (L)                               5.16                              28.36
         Chenming Holdings (Hong Kong) Limited                    99,885,500 H shares (L)                               5.16                              28.36
         The National Social Security Fund Council                35,570,000 H shares (L)                               1.84                              10.10


         (L) - Long position                          (S) - Short position     (P) - Lending pool

         Save as disclosed above, as at 31 December 2016, no other person had interests or short positions in the Company’s
         shares or underlying shares as recorded in the register maintained under section 336 of the SFO.




50   SHANDONG CHENMING PAPER HOLDINGS LIMITED

                                                                           3700278-t01fnar (Shandong Chenming) p.50 (CHIPC07) 17-02-2017 16:38
                                                                                                                                  OUTPUT: 17-02-2017 16:47:09
VI Directors’ Report



XVIII. Relationship with employees, customers and suppliers
    Please refer to “VI. Personnel of the Company” under section X “Directors, Supervisors and Senior Management and Staff”,
    “2. (8) Sales to major customers and major suppliers” of “II. Analysis of principal operations” under section V “Discussion
    and Analysis of Operations” for details of the relationship between the Company and its employees, customers and
    suppliers.


XIX. Directors’ interests in material contracts and indemnity provision
    None of the Company or any of its subsidiaries entered into any material contracts, in which Directors had significant
    interests (either directly or indirectly), that subsisted at the end of the financial year or at any time during the reporting
    period. The Company did not have any indemnity provision in favour of any Director.


XX. Interests in competing business
    None of the Directors or controlling shareholders of the Company was interested in any business which competes or is
    likely to compete with the businesses of the Company and any of its subsidiaries.


XXI. Directors’ rights to purchase shares or debentures
    At no time during the year was the Company or any of its subsidiaries a party to any arrangements to enable the Directors
    to acquire benefits by means of the acquisition of shares in, or debentures of, the Company or any other body corporate.


XXII. Preference shares
    Please refer to section IX “Preference Shares” for details of the issue of preference shares of the Company.


XXIII. Management contracts
    No contracts concerning the management and administration of the whole or any substantial part of the business of the
    Company were entered into or existed in 2016.


XXIV. Major risk factors
    Please refer to “(V) Risk factors likely to be faced and the measures to be taken” of “IX. Outlook on the future development
    of the Company” under section V “Discussion and Analysis of Operations” for details of major risk factors of the Company.


XXV. Material matters
    Please refer to section VII “Material Matters” for details of material matters of the Company.


XXVI. Future development
    Please refer to “(I) Competition overview and development trend of the industry”, “(II) Development strategy”, “(III) Operating
    plan for 2017” and “(IV) Future capital requirements, source of funds and plan for use” of “IX. Outlook on the future
    development of the Company” under section V “Discussion and Analysis of Operations” for details of future development of
    the Company.


XXVII. Environment, social and governance report and social responsibility
    Please refer to XVIII. Fulfilment of Social Responsibility under section VII “Material Matters” for details of fulfilment of social
    responsibility. Please refer to the environment, social and governance report as required by the Hong Kong Listing Rules,
    which will be issued separately by the Company before 17 May 2017.




                                                                                                              2016 ANNUAL REPORT            51

    3700278-t01fnar (Shandong Chenming) p.51 (CHIPC07) 17-02-2017 16:38
    OUTPUT: 17-02-2017 16:47:09
     VI Directors’ Report



     XXVIII. Purchase, sale and redemption of shares
         The Company and its subsidiaries did not purchase, sell or redeem any listed securities of the Company during the reporting
         period.


     XXIX. Sufficiency of public float
         During the reporting period, based on the information that is publicly available to the Company and within the knowledge of
         the Directors, the Company has maintained a sufficient prescribed amount of public float as required under the Hong Kong
         Listing Rules.


     XXX. Review of the Audit Committee
         The audited consolidated financial statements of the Company for the year ended 31 December 2016 has been reviewed by
         the Audit Committee of the Company.


     XXXI. Gearing ratio
         As at 31 December 2016, the Company’s gearing ratio (including minority interest) was 62.41%, representing a decrease
         of 2.65 percentage points from 65.06% for 2015, mainly due to the issuance of preference shares of RMB4.5 billion as the
         Company sought to improve its capital and debt structure.

         The ratio was calculated as: total borrowings/total assets (whereas total borrowings represent borrowings due within one
         year, borrowings due after one year, short-term commercial paper and medium and long-term notes and others).


     XXXII. Going Concern Basis
         The Company is a leading player in the paper making industry in China. After entrepreneurship and innovation for more than
         half a century, it has developed into a large and integrated modern conglomerate principally engaged in pulp production,
         paper making, finance and forestry businesses while also involved in mining, energy, logistics, construction materials, hotel
         operation and others. It is the only Chinese company with A shares, B shares, H shares and preference shares in issue, and
         the first company in the paper making industry to integrate finance and industry and own a finance company and a financial
         leasing company. The Group has production bases in Shandong, Guangdong, Hubei, Jiangxi and Jilin, which deliver annual
         pulp and paper production capacity of over 8,500,000 tonnes.

         The Company has good sustainable profitability. In 2016, the Company achieved revenue of RMB22.907 billion, net profit
         attributable to shareholders of the Company of RMB2,064 million and net cash flows from operating activities of RMB2,153
         million. Meanwhile, the Company always places emphasis on the interests of and return to shareholders, and has paid
         generous cash dividends for several years. With the improvement of the economic situation, the future performance of the
         Company is worth looking forward to.

         In addition, as of the end of December 2016, the Company obtained a comprehensive credit line of RMB68.4 billion from
         major financial institutions, of which unused credit line amounted to RMB31.7 billion, which provided important support to
         the Company’s business development. As an A-share, B-share and H-share listed company, the Company has convenient
         financing channels. The Company established Shandong Chenming Financial Leasing Co., Ltd., Shandong Chenming
         Investment Limited and Shandong Chenming Group Finance Co., Ltd. as the core of the financial segment. The rapid
         business development, improving management system and effective risk control provide new sources of profit growth for
         the Company, further increase the Group’s fund settlement, management, investment and financing ability, and reduce its
         financing cost while improving its debt structure.

         The auditors of the Company have prepared the 2016 annual financial report on a going concern basis, and have issued a
         standard unqualified audit opinion (see Financial Report section).

         Therefore, the Board believes the Company has the ability to continue as a going concern.



52   SHANDONG CHENMING PAPER HOLDINGS LIMITED

                                                                  3700278-t01fnar (Shandong Chenming) p.52 (CHIPC07) 17-02-2017 16:38
                                                                                                                  OUTPUT: 17-02-2017 16:47:09
VII Material Matters



I.   Profit distribution for ordinary shares of the Company and conversion of capital reserves into
     share capital
     Formulation, implementation or adjustment of profit distribution policy for ordinary shares, especially the
     cash dividend during the reporting period
     √ Applicable            Not applicable

     On 2 June 2016, the Resolution on Amendments to the Articles of Association of Shandong Chenming Paper Holdings
     Limited was considered and passed at the 2016 second extraordinary general meeting of the company, which amended
     the practice of profit distribution in the Articles of Association based on the actual operating conditions and the non-public
     issuance of shares of the Company.

     The Company implemented its profit distribution policy in strict compliance with the Articles of Association. Its cash
     dividend policy was formulated and implemented in compliance with the requirements of the Articles of Association and the
     resolution of the general meeting with well-defined and clear dividend distribution criteria and proportion. The legal interests
     of the small shareholders were fully protected as the related decision making process and mechanism were in place,
     the duties of independent Directors were well-defined so that they played a role, and the small shareholders were given
     opportunities to sufficiently voice their opinion and make requests.

     Implementation of the 2015 profit distribution plan: Based on the number of the shares as at the dividend distribution
     registration date of 1,936,405,467 shares, a cash dividend of RMB3 (tax inclusive) was to be paid to all shareholders
     for every 10 shares held. The total cash dividend to be distributed amounted to RMB580,921,640.10 (tax inclusive). The
     dividend distribution was implemented and completed on 15 July 2016. For details, please refer to the announcement on
     payment of final dividend and withholding and payment of enterprise income tax for non-resident enterprise shareholders
     published on the Hong Kong Stock Exchange on 4 July 2016, and the announcement on the implementation of the 2015
     profit distribution plan for A share and B share published on CNINFO on 7 July 2016.

                                                     Particulars of Cash Dividend Policy

     Was it in compliance with the requirements of the Articles of Association
       and the resolutions of the general meeting?                                                                             Yes
     Were the dividend distribution criteria and proportion well-defined and clear?                                            Yes
     Were the related decision making process and mechanism in place?                                                          Yes
     Did independent Directors fulfil their duties and play their role?                                                        Yes
     Were the minority shareholders given opportunities to sufficiently voice their opinion
       and make requests and were the legal interests of the minority shareholders fully protected?                            Yes
     Were conditions and procedures legal and transparent in respect of
       cash dividend policy with adjustments and changes?                                                                      Yes

     The dividend distribution plans for ordinary shares (proposed) and the proposals on conversion of capital
     reserves into share capital (proposed) over the past three years (the reporting period inclusive)
     (1)       The 2016 profit distribution plan

               Based on the total ordinary share capital of 1,936,405,467 shares as at the end of 2016, a cash dividend of RMB6 (tax
               inclusive) per ten shares or RMB1,161,843,280.20, representing 56.29% of the consolidated net profit attributable to
               ordinary shareholders of the Company, will be distributed to ordinary shareholders.




                                                                                                           2016 ANNUAL REPORT           53

     3700278-t01fnar (Shandong Chenming) p.53 (CHIPC07) 17-02-2017 16:38
     OUTPUT: 17-02-2017 16:47:12
     VII Material Matters



     I.   Profit distribution for ordinary shares of the Company and conversion of capital reserves into
          share capital (Cont’d)
          The dividend distribution plans for ordinary shares (proposed) and the proposals on conversion of capital
          reserves into share capital (proposed) over the past three years (the reporting period inclusive) (Cont’d)
          (2)   The 2015 profit distribution plan

                The 2015 profit distribution plan was considered and approved in the 2015 annual general meeting convened by
                the Company on 18 May 2016. Based on the number of the shares as at the dividend distribution registration date
                of 1,936,405,467 shares, a cash dividend of RMB3.00 (tax inclusive) was to be paid to all shareholders for every 10
                shares held. The total cash dividend distributed during 2015 amounted to RMB580,921,640.10 (tax inclusive).

          (3)   The 2014 profit distribution plan

                The 2014 profit distribution plan was considered and approved in the 2014 annual general meeting convened by
                the Company on 15 May 2015. Based on the number of the shares as at the dividend distribution registration date
                of 1,936,405,467 shares, a cash dividend of RMB1.40 (tax inclusive) was to be paid to all shareholders for every 10
                shares held. The total cash dividend distributed amounted to RMB271,096,765.38 (tax inclusive).

                Cash dividends for ordinary shares of the Company over the past three years (the reporting period inclusive)

                                                                                                                                          Unit: RMB

                                                                                                           As a
                                                                                                  percentage
                                                                                    Net profit    of net profit
                                                                              attributable to     attributable
                                                                                   owners of        to owners
                                                                            the Company in               of the   Amount       Ratio of
                                                                           the consolidated         Company        of cash        cash
                                                                                     financial           in the dividends    dividends
                                                         Amount of               statements      consolidated distribution distribution
                                                    cash dividends           during the year          financial   through      through
                Year of distribution                  (tax inclusive)         of distribution     statements other means other means

                2016                             1,161,843,280.20          2,063,986,822.25           56.29%              0.00                0.00%
                2015                               580,921,640.10            959,717,938.31           60.53%              0.00                0.00%
                2014                               271,096,765.38            505,204,384.73           53.66%              0.00                0.00%

                The Company made a profit and had positive retained profit available for ordinary shareholders of parent company
                during the reporting period without cash dividend for ordinary shares being proposed

                  Applicable √ Not applicable




54   SHANDONG CHENMING PAPER HOLDINGS LIMITED

                                                                        3700278-t01fnar (Shandong Chenming) p.54 (CHIPC07) 17-02-2017 16:38
                                                                                                                        OUTPUT: 17-02-2017 16:47:12
VII Material Matters



II.   Proposals on profit distribution and conversion of capital reserves into share capital during
      this reporting period (Including preference shares)
      √ Applicable            Not applicable

      Numbers of bonus share per 10 shares (share(s))                                                                                       0
      Dividend distribution per 10 shares (RMB) (tax inclusive)                                          Dividend of RMB6.00 (tax inclusive)
                                                                                                         per 10 ordinary shares and RMB3.08
                                                                                                         (tax inclusive) for per 10 preference
                                                                                                         shares
      Conversion per 10 shares (share(s))                                                                                                   0
      Share base of the distribution proposal (shares)                                                   1,936,405,467 ordinary shares
                                                                                                         and 387,263,339 simulated shares
                                                                                                         converted from preference shares on
                                                                                                         a conversion ratio of 1 share valued
                                                                                                         at RMB5.81
      Total cash dividend (RMB) (tax inclusive)                                                                              1,281,120,388.61
      Distributable profits (RMB)                                                                                            6,684,468,041.59
      Percentage of cash dividend to total profits distribution                                                                     100. 00%

                                                                     Cash dividend policy

      For profit distribution of companies which are fully developed with significant capital expenditure arrangement, the
      percentage for cash dividend shall represent at least 40% of the profits distribution for the current year

                                    Particulars of profit distribution and conversion of capital reserves into share capital

      The audited consolidated net profit attributable to shareholders of the Company for 2016 prepared in accordance with
      Accounting Standards for Business Enterprises by the Company amounted to RMB2,063,986,822.25. When deducting
      the interest for perpetual bonds of RMB153,140,000 for 2016, the distributable profit realised for 2016 amounted to
      RMB1,910,846,822.25. In accordance with the requirements of the Articles of Association and the Prospectus of Non-public
      Issuance of Preference Shares, the proposed profit distribution plan of the Company for 2016 is as follows:

      In accordance with the Prospectus of Non-public Issuance of Preference Shares, shareholders of preference shares
      may jointly participate in the distribution of the 50% retained earnings realised for the year of issuance with ordinary
      shareholders. The basis for the distribution is calculated as follows: (the number of months for the period from the next
      month after the month of issuance to the end of the reporting period/12)      the retained earnings realised for the year
      50%, and the basis for the distribution is 9/12 19.11 50%=RMB717 million.

      Based on the total ordinary share capital of 1,936,405,467 shares as at the end of 2016 and the 387,263,339 simulated
      shares converted from the preference shares as at the end of 2016 on a conversion ratio of 1 share valued at RMB5.81, a
      cash dividend of RMB6 (tax inclusive) per ten shares or RMB1,161,843,280.20 will be distributed to ordinary shareholders,
      and a cash dividend of RMB3.08 (tax inclusive) per ten shares or a variable cash dividend of RMB119,277,108.41 will be
      distributed to holders of preference shares.




                                                                                                                     2016 ANNUAL REPORT          55

      3700278-t01fnar (Shandong Chenming) p.55 (CHIPC07) 17-02-2017 16:38
      OUTPUT: 17-02-2017 16:47:12
     VII Material Matters



     III. Performance of undertakings
         1.   Undertakings made by parties involved in undertakings including the Company’s beneficial controllers,
              shareholders, related parties, bidders and the Company during the reporting period or prior periods
              but subsisting to the end of the reporting period
              √ Applicable               Not applicable

              Undertaking                 Party involved      Type of undertaking Details of undertaking                                           Undertaking date   Term                   Particulars on
                                          in undertaking                                                                                                                                     the performance

              Undertaking on
                shareholding structure
                reformation

              Undertaking made in
                offering documents
                or shareholding
                alternation documents

              Undertaking made during
                asset reconstruction

              Undertaking made on         Shouguang           Non-competitive      (1) Shouguang Chenming Holdings Co., Ltd.                       22 May 2008        During the period Implementing as
                initial public offering   Chenming Holdings   undertaking          (“Shouguang Chenming Holdings”) shall not engage,                                w h e n C h e n m i n g normal
                or refinancing            Co., Ltd.                                whether solely, jointly, or by representing itself or any                          Holdings was the
                                                                                   other persons or companies, and shall not procure its                              major shareholder of
                                                                                   associates (as defined in The Listing Rules of Hong                                the Company
                                                                                   Kong Stock Exchange) to engage, in any business
                                                                                   which competes with the business of the Company and
                                                                                   its subsidiaries (“Chenming Group” or “we”) directly
                                                                                   or indirectly, in any country and region which our
                                                                                   business exists (or any part of the world if in any form of
                                                                                   electronics business), or in any business that directly or
                                                                                   indirectly competes with Chenming Group’s business
                                                                                   which we operate from time to time (including but not
                                                                                   limited to any business in the form of sole proprietorship,
                                                                                   joint ventures or acquisitions, or holding interests directly
                                                                                   or indirectly in such enterprises, or by any other means);
                                                                                   (2) in the event that Shouguang Chenming Holdings is
                                                                                   required by its business to, whether solely, jointly, or by
                                                                                   representing itself or any other persons or companies,
                                                                                   engage in business which directly or indirectly competes
                                                                                   against the business of Chenming Group, or obtain
                                                                                   any business opportunity which directly or indirectly
                                                                                   competes against the business of Chenming Group, it
                                                                                   shall endeavour to procure that Chenming Group shall
                                                                                   have priority to obtain the right to operate such business
                                                                                   or to obtain such business opportunity; (3) if Shouguang
                                                                                   Chenming Holdings is in breach of the abovementioned
                                                                                   undertakings, it shall indemnify the Company for any
                                                                                   loss caused by such breach and the Company shall
                                                                                   have the right to acquire all businesses of Shouguang
                                                                                   Chenming Holdings, which directly or indirectly compete
                                                                                   with the businesses of our Group, at market price or
                                                                                   cost price (whichever price is lower); (4) Shouguang
                                                                                   Chenming Holdings shall not make use of its position
                                                                                   as the controlling shareholder (as defined in The Listing
                                                                                   Rules of Hong Kong Stock Exchange) of our Group to
                                                                                   jeopardise the legal interests of Chenming Group and
                                                                                   its shareholders with other persons or companies or on
                                                                                   their behalf.



56   SHANDONG CHENMING PAPER HOLDINGS LIMITED

                                                                                                3700278-t01fnar (Shandong Chenming) p.56 (CHIPC07) 17-02-2017 16:38
                                                                                                                                                                             OUTPUT: 17-02-2017 16:47:12
VII Material Matters



III. Performance of undertakings (Cont’d)
    1.        Undertakings made by parties involved in undertakings including the Company’s beneficial controllers,
              shareholders, related parties, bidders and the Company during the reporting period or prior periods
              but subsisting to the end of the reporting period (Cont’d)
              Undertaking         Party involved      Type of undertaking Details of undertaking                                          Undertaking date   Term             Particulars on
                                  in undertaking                                                                                                                              the performance

                                  Shouguang           Defective properties (1) According to the plan on defective properties of the       16 January 2008    During the period Implementing as
                                  Chenming Holdings                        Company, Shouguang Chenming Holdings Co., Ltd.                                    w h e n C h e n m i n g normal
                                  Co., Ltd.                                (“Shouguang Chenming Holdings”) has guaranteed                                  Holdings was the
                                                                           and undertaken that: according to the application of                              major shareholder of
                                                                           the Company, for defective property(ies) owned by the                             the Company
                                                                           Company and its holding subsidiary company which
                                                                           situated in the administrative area of Shouguang city,
                                                                           Shouguang Chenming Holdings will purchase it (them)
                                                                           and have it(them) being transferred to itself pursuant
                                                                           to the law in accordance with the result of the related
                                                                           asset valuation if the Company decides to transfer and
                                                                           dispose of it(them) and there is no other transferee;
                                                                           (2) before the Company transfers and disposes of the
                                                                           defective properties pursuant to the law, if the Company
                                                                           suffers any economic losses due to the defects of the
                                                                           title (including but not limited to damages, penalties and
                                                                           relocation costs), Shouguang Chenming Holdings will
                                                                           bear such economic losses; (3) during the regulatory
                                                                           process taken to the defective properties of buildings
                                                                           and land of subsidiaries of the Company situated
                                                                           outside the local areas (outside the administrative area of
                                                                           Shouguang city), the economic losses such as penalties
                                                                           or relocation costs imposed by competent administrative
                                                                           authorities to be borne by the subsidiaries arising from
                                                                           defects of insufficient title documents shall be paid
                                                                           pursuant to the law by Shouguang Chenming Holdings
                                                                           after verification.

                                  Shandong            Specific remedial      In view of the impacts on dilution of current returns        25 March 2016      9999-12-31       Implementing as
                                  Chenming Paper      measures for           for ordinary shareholders under the preference shares                                            normal
                                  Holdings Limited    non-public issuance    issuance, and in order to implement the Notice of
                                                      of preference shares   the General Office of the State Council on Further
                                                                             Strengthening Protection of the Lawful Rights of Small
                                                                             Investors in Capital Markets, protect the interests
                                                                             of ordinary shareholders and provide remedies for
                                                                             the possible dilution on current returns as a result
                                                                             of preference shares issuance, the Company has
                                                                             undertaken that it will implement various measures
                                                                             to ensure the effective utilisation of proceeds raised,
                                                                             which can prevent dilution on current returns effectively,
                                                                             thereby enhancing future returns.




                                                                                                                                                              2016 ANNUAL REPORT                 57

    3700278-t01fnar (Shandong Chenming) p.57 (CHIPC07) 17-02-2017 16:38
    OUTPUT: 17-02-2017 16:47:12
     VII Material Matters



     III. Performance of undertakings (Cont’d)
          2.      Description on the Company’s assets and items in meeting original profit forecast and its explanation
                  as there is profit forecast for assets and items of the Company and the reporting period is still within
                  the profit forecast period
                     Applicable √ Not applicable


     IV. Appropriation of funds of the Company by the controlling shareholder and its related parties
         for non-operating purposes
               Applicable √ Not applicable

          There was no appropriation of funds of the Company by the controlling shareholder and its related parties for non-operating
          purposes during the reporting period.


     V.   Opinions of the Board, the Supervisory Committee and independent Directors (if any)
          regarding the “modified auditor’s report” for the reporting period issued by the accountants
               Applicable √ Not applicable




58   SHANDONG CHENMING PAPER HOLDINGS LIMITED

                                                                  3700278-t01fnar (Shandong Chenming) p.58 (CHIPC07) 17-02-2017 16:38
                                                                                                                  OUTPUT: 17-02-2017 16:47:12
VII Material Matters



VI. Reason for changes in accounting policies, accounting estimates and accounting methods
    as compared to the financial report for the prior year
    √ Applicable            Not applicable

    1.        There was no change in accounting policies and accounting methods of the Company during the reporting period.

    2.        There was a change in accounting estimates of the Financial Leasing Company under the Company during the
              reporting period. The debts arising from the financial leasing business of the Financial Leasing Company were
              provided for bad debts at 5% to 10% since 1 November 2016.


VII. Reason for retrospective restatement to correct major accounting errors during the reporting
     period
         Applicable √ Not applicable

    No retrospective restatement was made to correct major accounting errors during the reporting period.


VIII. Reason for changes in scope of the consolidated financial statements as compared to the
      financial report for the prior year
    √ Applicable            Not applicable

    1.        Establishment of new subsidiaries
                                                                                                                                           Registered
                                                   Date of                                                                                    capital        Percentage
              Name of the company                  establishment      Operating scope                                                     (RMB’0,000)   of shareholding

              Qingdao Chenming Nonghai             July 2016      Finance leasing, operational leasing, purchase of assets for leasing,   500,000.00              100%
                 Finance Leasing Co., Ltd.                        etc.
              Jilin Chenming Logistics Co., Ltd.   August 2016    Road transportation of general cargo; transportation for containers;        500.00              100%
                                                                  road transportation agency; consultation on cargo transportation;
                                                                  warehousing, loading and unloading services, etc.
              Jiangxi Chenming Logistics Co., Ltd. September 2016 Road transportation of general cargo; transportation for containers;        500.00              100%
                                                                  road transportation agency; consultation on cargo transportation;
                                                                  warehousing, loading and unloading services, etc.




                                                                                                                                          2016 ANNUAL REPORT               59

    3700278-t01fnar (Shandong Chenming) p.59 (CHIPC07) 17-02-2017 16:38
    OUTPUT: 17-02-2017 16:47:12
     VII Material Matters



     VIII. Reason for changes in scope of the consolidated financial statements as compared to the
           financial report for the prior year (Cont’d)
         2.     Disposal of subsidiary
                                                                                                                                                               Difference
                                                                                                                                                                 between
                                                                                                                                                                 disposal
                                                                                                                                                           consideration
                                                                                                                                                         and net assets
                                                                                                                                                           of the subject
                                                                                                                                                               subsidiary
                                                                                                                                                             attributable
                                                                                                                                                        to the Company
                                                                                                                                                                    under
                                                  Consideration                                                                                             consolidated
                                                      for equity    Percentage                     Date on which        Basis of determination of                financial
                                                       disposal        of equity                   control over         date on which control                 statements
                Name of subsidiary                  (RMB’0,000)   disposed (%)    Way of disposal subsidiary is lost   over subsidiary is lost                     (RMB)

                Shouguang Chenming Jiatai                100.00         100.00     Transfer         December 2016       Equity transfer agreement and            1,203.18
                  Property Management Co., Ltd.                                                                           transfer consideration
                                                                                                                          received

     IX. Engagement or dismissal of accounting firms
         Current accounting firm engaged

         Name of the domestic accounting firm                                                               Ruihua Certified Public Accountants
                                                                                                            (Special General Partnership)
         Remuneration of the domestic accounting firm (RMB ‘0,000)                                         260
         Continued term of service of the domestic accounting firm                                          4
         Name of certified public accountants of the domestic accounting firm                               Zhao Yanmei and Wang Zongpei

         Whether to appoint another accounting firm during the period

              Yes √ No

         Particulars on recruitment of accounting firms, financial consultants or sponsors for internal control and auditing purposes

         √ Applicable      Not applicable

         1.     In 2016, the Company engaged Ruihua Certified Public Accountants as the internal control and auditing firm of the
                Company. The Company paid RMB600,000 as internal control and auditing fees during the period;

         2.     In 2016, the Company engaged King & Wood Mallesons (Qingdao) Law Firm as its regular legal advisor and paid
                RMB100,000 as legal advisory fees during the period;

         3.     During the year, due to non-public issuance of preference shares, the Company engaged Zhongtai Securities Co., Ltd.
                as the sponsor of the Company. The Company paid RMB2.00 million as sponsorship fees during the period. During
                the reporting period, due to the working requirements for the non-public issuance of A shares, the Company engaged
                CSC Financial Co., Ltd. as the sponsor for the non-public issuance. Hence, the unfinished ongoing supervisory of
                Zhongtai Securities on the non-public issuance of the Company will be succeeded by CSC Financial. The term for
                ongoing supervisory will be expired on 31 December 2017.




60   SHANDONG CHENMING PAPER HOLDINGS LIMITED

                                                                               3700278-t01fnar (Shandong Chenming) p.60 (CHIPC07) 17-02-2017 16:38
                                                                                                                                          OUTPUT: 17-02-2017 16:47:12
VII Material Matters



X.   Suspension in trading or delisting upon publication of annual report
          Applicable √ Not applicable


XI. Matters related to bankruptcy and reorganisation
          Applicable √ Not applicable

     There was no matter related to bankruptcy and reorganisation during the reporting period.


XII. Material litigation and arbitration
     √ Applicable               Not applicable

                                                                                                                                                               Judgment
                                                                                                                                                               execution of
     Basic information about    Amount               Will liability                                             Judgment result of the litigation              the litigation
     litigation (arbitration)   (RMB’0,000)         be incurred      Progress of litigation (arbitration)      (arbitration) and its effect                   (arbitration)    Disclosure date       Disclosure index

     Statutory demand           RMB167,860,000 and No                 1.    On 18 October 2016, a “statutory 1.            The injunction order issued Not applicable 26 October 2016,               http://www.cninfo.com.cn,
                                the interest thereon,                       demand” from a claimed creditor                on 7 November 2016 will                    9 November2016 and             announcement number:
                                USD3,548,900 and                            was delivered to the Hong Kong                  continue to be effective until             22 November 2016               2016-140, 2016-144 and 2016-151.
                                the interest thereon and                    registered address of the Company;              further order made by the
                                HKD3,303,900 and                                                                            court.
                                the interest thereon                  2.    On 7 November 2016, the Company
                                                                            engaged solicitor to apply to 2.                The inter-parties hearing
                                                                            the Court of First Instance in the              regarding the injunction
                                                                            High Court of Hong Kong Special                 order will be continued at the
                                                                            Administrative Region and has                   Court of First Instance in the
                                                                            obtained an injunction order                    High Court of Hong Kong
                                                                            “against applicant to petition for             Special Administrative Region
                                                                            winding-up against the Company;                 on 21 February 2017 and
                                                                                                                            22 February 2017, with 23
                                                                      3.    On 11 November 2016, the Court of               February 2017 reserved.
                                                                            First Instance in the High Court of
                                                                            Hong Kong Special Administrative 3.             The production and operation
                                                                            Region has made the following                   of the Company remain
                                                                            orders: (1) The injunction order                normal, with increase in
                                                                            issued on 7 November 2016 will                  production and sale volume.
                                                                            continue to be effective until further          In view of the amount involved
                                                                            order made by the court; (2) the                in this incident and the current
                                                                            inter-parties hearing regarding the             financial condition of the
                                                                            injunction order will be continued              Company, the Board of the
                                                                            at the Court of First Instance in               Company is not expecting any
                                                                            the High Court of Hong Kong                     significant adverse effect on
                                                                            Special Administrative Region on                the ordinary production and
                                                                            21 February 2017 and 22 February                operation of the Company.
                                                                            2017, with 23 February 2017
                                                                            reserved.




                                                                                                                                                                                                  2016 ANNUAL REPORT                     61

     3700278-t01fnar (Shandong Chenming) p.61 (CHIPC07) 17-02-2017 16:38
     OUTPUT: 17-02-2017 16:47:12
     VII Material Matters



     XIII. Punishment and rectification
         √ Applicable            Not applicable

         Name                         Type       Reason                            Type of punishment                  Conclusion (if any)                Disclosure date       Disclosure index

         Jiangxi Chenming Paper       Enterprise Administrative penalty imposed by Ordinary administrative penalty     From April to September 2016, the Not applicable         Not applicable
           Co., Ltd.                             environment authority due to over- imposed by environment authority   unstable operation of environmental
                                                 discharge of waste gas and waste                                      protection facilities of Jiangxi
                                                 water                                                                 Chenming resulted in fluctuation
                                                                                                                       in waste water and waste gas
                                                                                                                       indicators. The Environmental
                                                                                                                       Protection Bureau imposed six
                                                                                                                       administrative penalties on Jiangxi
                                                                                                                       Chenming. The penalties were
                                                                                                                       paid on-time, and the aforesaid
                                                                                                                       punishment was concluded. Jiangxi
                                                                                                                       Chenming conducted rectification in
                                                                                                                       accordance with the requirements
                                                                                                                       under the Notice on Rectification
                                                                                                                       within a Prescribed Timeframe,
                                                                                                                       and the rectification achieved good
                                                                                                                       results. The six administrative
                                                                                                                       penalties above were ordinary
                                                                                                                       administrative penalty and did not
                                                                                                                       constitute any material breach of
                                                                                                                       laws and regulations.


         Explanation on rectification
         √ Applicable            Not applicable

         After the aforesaid environmental protection punishment had been imposed, Jiangxi Chenming has proactively implemented
         rectification. As of 31 December 2016, Jiangxi Chenming had fully paid the penalties. Specific rectify measures imposed by
         Jiangxi Chenming are as follow:

         1.       In respect of over-discharge of waste water, specific rectify measures imposed by Jiangxi Chenming are as follows:

                  (1)      Establish an environment management team under the supervision of senior management, which will be
                           responsible for discovering and solving issues about process effluent produced during ordinary production, and
                           supervising the ordinary production and operation.

                  (2)      Adjust the water discharge indicator for workshops. Filtration equipment will be installed at gutters of workshops
                           in order to reduce impurity in waste water.

                  (3)      Cooling water and condensate in workshops will be fully reused; For paper-making workshops, 90% of the
                           white water will be reused; Invest RMB3.50 million for the installation of new sand filtration system, which
                           can reuse approximately 6,000 m3 process effluent per day; Improve the fibre retention rate to over 95% in
                           systems as to reduce loss in fibres. Through reducing loss at source, the volume of waste water discharged will
                           be reduced, thus mitigating the load for process effluent treatment. By implementing aforesaid measures, the
                           waste water discharge of Jiangxi Chenming can meet with the discharge limitation.

         2.       In respect of over-discharge of smelly gas, Jiangxi Chenming will invest RMB3.80 million for the installation of new
                  odour elimination system for process effluent. Such system has put into operation. The process effluent workshops
                  of Jiangxi Chenming have been operating steadily. Functional departments have enhanced their supervision over the
                  operation of process effluent workshop, and focused on supervision over various technical indicators, thus meeting
                  with the discharge indicators.




62   SHANDONG CHENMING PAPER HOLDINGS LIMITED

                                                                                            3700278-t01fnar (Shandong Chenming) p.62 (CHIPC07) 17-02-2017 16:38
                                                                                                                                                                 OUTPUT: 17-02-2017 16:47:12
VII Material Matters



XIV. Credibility of the Company, its controlling shareholders and beneficial controllers
         Applicable √ Not applicable


XV. Implementation of the equity incentive plan, employee shareholding plan or other employee
    incentive measure of the Company
         Applicable √ Not applicable

    There was no implementation of the equity incentive plan, employee shareholding plan or other employee incentive measure
    of the Company during the reporting period.


XVI. Significant related party transactions and connected transactions
    1.        Related party transactions associated with day-to-day operation
              √ Applicable                                   Not applicable

                                                                                                                                                 Percentage
                                                                  Types of           Subject matter                                  Amount of as the amount Amount of                                                                 Market price                                             A connected transaction   Disclosed under the
                                                                  the related        of the         Pric ng basis    Price of related party        of sim l r transactions                             Whether                         of avai able                                             under Chapter 14A of      requirements of the
                                       Related party              party              related party of the related    related party transactions transactions approved                                  exceeding Settlement of related sim l r                                                  the Hong Kong Listing     Hong Kong Listing Rules
              Related party            relationship               transactions       transactions party transactions transactions (RMB’0,000)            (%) (RMB’0,000)                             approved cap party transactions transaction Disclosure date   Disclosure i dex           Rules or not              or not

              Jiangxi Chenming Senior management Procurement Natural gas and Market price                                   Market price 16,943.69                    1.07%             36,000 No                   Bank acceptance and Not appl cable 31 March      http://www.cninfo.com.cn   Yes                       Yes. Please see the related
                Natural Gas             of the Company                              heavy oi etc.                                                                                                                   telegraphic transfer               2016                                                               announcement dated
                Co., Ltd.               served as i s director                                                                                                                                                                                                                                                            30 March 2016
              Particulars on refund of bulk sale                                                                                                                                                                    Ni
              Estimated total amount for day-to-day related party transactions to be conducted during the period (by types of transactions) and their actual i plementing during the reporting period (if any)      Not appl cable
              Reason for the difference between transaction price and market reference price (if appl cable)                                                                                                        Not appl cable


    2.        Related party transaction in connection with purchase or sale of assets or equity interest
                      Applicable √ Not applicable

              There was no related party transaction of the Company in connection with purchase or sale of assets or equity interest
              during the reporting period.

    3.        Related party transaction in connection with joint external investment
                      Applicable √ Not applicable

              There was no related party transaction of the Company connected to joint external investment during the reporting
              period.




                                                                                                                                                                                                                                                                                 2016 ANNUAL REPORT                                                     63

    3700278-t01fnar (Shandong Chenming) p.63 (CHIPC07) 17-02-2017 16:38
    OUTPUT: 17-02-2017 16:47:12
     VII Material Matters



     XVI. Significant related party transactions (Cont’d)
         4.   Related creditors’ rights and debts transactions
              √ Applicable   Not applicable

              Whether non-operating related creditors’ rights and debts transactions existed

                 Yes √ No

              There was no non-operating related creditors’ rights and debts transaction of the Company during the reporting
              period.

         5.   Other significant related party transactions
                 Applicable √ Not applicable

              There was no other related party transaction of the Company during the reporting period.

         6.   Connected transactions
              During the year, the connected transaction entered into by the Company was in strict compliance with the related
              requirements of Chapter 14A of the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong
              Limited (the “Listing Rules”). The details of the related connected transaction are as follows:

              Entering into a conditional new share subscription agreement with the controlling shareholder

              On 17 May 2016, the Company entered into a conditional new share subscription agreement with Chenming Holdings,
              pursuant to which Chenming Holdings subscribed shares in the non-public issue based on its 20.35% (including
              20.35%) equity interest in the Company as at 31 March 2016. The specific number of the subscribed shares was
              determined by the final number of the shares issued in the non-public issue multiplied by 20.35%. As at the date of
              this report, Chenming Holdings is the controlling shareholder of the Company which holds 24.07% equity interest in
              the Company. Under Chapter 14A of the Listing Rules, Chenming Holdings is a connected person of the Company.
              For the details of entering into the new share subscription agreement, please refer to 1. Non-public issue of A shares
              under XIX. Other matters of significance of this section, and the announcement of the Company dated 17 May 2016.

         7.   Continuing connected transactions
              During the year, the continuing connected transactions entered into by the Company were in strict compliance
              with the related requirements of Chapter 14A of the Listing Rules and approved by the independent shareholders if
              necessary. The details of the related continuing connected transactions are as follows:

              Entering into a purchase and sale agreement with Jiangxi Chenming Natural Gas Co., Ltd. (the “Purchase and Sale
              Agreement”)

              On 30 March 2016, the Company and Jiangxi Chenming Natural Gas Co., Ltd. (“Jiangxi Chenming Natural Gas”)
              entered into the Purchase and Sale Agreement in relation to the procurement. The term of the Purchase and Sale
              Agreement is one year commencing on 30 March 2016 and expiring on 29 March 2017. As at the effective date of
              the Purchase and Sale Agreement, Mr. Chen Hongguo, being an executive Director, held 60.36% equity interest in
              Shouguang Hengtai Enterprise Investment Company Limited (“Hengtai Enterprise”), and Mr. Yin Tongyuan, Mr. Li
              Feng, Mr. Geng Guanglin, Mr. Hou Huancai and Mr. Zhou Shaohua, all being executive Directors, and Mr. Gao Junjie,
              being a Supervisor, held in aggregate 37.28% equity interest in Hengtai Enterprise, which in turn held 51% equity
              interest in Jiangxi Chenming Natural Gas. Accordingly, Jiangxi Chenming Natural Gas was deemed to be an associate
              of the above connected persons. Pursuant to Chapter 14A of the Listing Rules, the procurement under the Purchase
              and Sale Agreement constituted continuing connected transactions of the Company. For the details of the Purchase
              and Sale Agreement, please refer to XVI. Significant related party transactions under this section, (1) Related party
              transactions in connection with purchase and sales of goods and rendering and receiving services under 5. Related
              party transactions of XII. Related parties and related party transactions under section XIII Financial Report, and the
              announcement of the Company dated 30 March 2016.

64   SHANDONG CHENMING PAPER HOLDINGS LIMITED

                                                                 3700278-t01fnar (Shandong Chenming) p.64 (CHIPC07) 17-02-2017 16:38
                                                                                                                 OUTPUT: 17-02-2017 16:47:12
VII Material Matters



XVI. Significant related party transactions (Cont’d)
              The independent non-executive Directors of the Company had reviewed the above continuing connected transactions
              and confirmed that the transactions had been entered into:

              (1)      in the ordinary and usual course of business of the Group;

              (2)      on normal commercial terms or better (as defined in the Listing Rules); and

              (3)      according to the agreement governing them on terms that were fair and reasonable and in the interests of the
                       shareholders of the Company as a whole.

              The Company had engaged Ruihua Certified Public Accountants (Special General Partnership), the auditors of the
              Company, to conduct an annual review of the above continuing connected transactions in accordance with Rule
              14A.56 of the Listing Rules. Ruihua Certified Public Accountants (Special General Partnership) had undertaken a
              limited assurance engagement in accordance with Hong Kong Standard on Assurance Engagements 3000 (Revised),
              Assurance Engagements Other Than Audits or Reviews of Historical Financial Information and with reference to
              Practice Note 740, Auditor’s Letter on Continuing Connected Transactions under the Hong Kong Listing Rules issued
              by Hong Kong Institute of Certified Public Accountants, and provided a letter separately to the Board, confirming that
              the above continuing connected transactions:

              (1)      were approved by the Board;

              (2)      were, in all material respects, executed in accordance with the pricing policies of the relevant agreement
                       governing the transactions;

              (3)      were, in all material respects, conducted in accordance with the terms of the relevant agreement governing the
                       transactions; and

              (4)      had not exceeded the annual cap as disclosed in the related announcement.


XVII. Material contracts and implementation
    1.        Custody, contracting and leasing
              (1)      Custody

                            Applicable √ Not applicable

                       There was no custody of the Company during the reporting period.

              (2)      Contracting

                            Applicable √ Not applicable

                       There was no contracting of the Company during the reporting period.

              (3)      Leasing

                            Applicable √ Not applicable

                       There was no leasing of the Company during the reporting period.




                                                                                                            2016 ANNUAL REPORT          65

    3700278-t01fnar (Shandong Chenming) p.65 (CHIPC07) 17-02-2017 16:38
    OUTPUT: 17-02-2017 16:47:12
     VII Material Matters



     XVII. Material contracts and implementation (Cont’d)
         2.   Significant guarantees
              √ Applicable             Not applicable

              (1)   Guarantees

                    During the reporting period, the Company did not provide any guarantee to external parties (excluding those
                    provided to its subsidiaries) and did not provide any guarantees against the rules and regulations.

                    During the reporting period, the Company provided guarantee to their subsidiaries with respect to application of
                    bank loans. The guarantee amount incurred was RMB12,007.0451 million. As at 31 December 2016, the balance
                    of the guarantee provided by the Company amounted to RMB13,170.7253 million, representing 59.28% of the
                    equity attributable to shareholders of the Company as at the end of 2016.

                                                                                                                                                                                                                      Unit: RMB’0,000

                                                                                    External guarantees of the Company and its subsidiaries (excluding guarantees to subsidiaries)
                                             Date of the related
                                             announcement                                                                                                                                                                    Guarantee to
                                             disclosing the            Amount of                 Guarantee date                                                                                                              related parties
                    Name of obligee          guarantee amount          guarantee                 (agreement date)        Guarantee provided      Type of guarantee         Term                    Fulfilled or not          or not

                    Total external guarantees approved during the reporting period (A1)                             0 Total actual external guarantees during the reporting period (A2)                                                         0
                    Total external guarantees approved at the end of the reporting period (A3)                      0 Balance of total actual guarantees at the end of the reporting period (A4)                                                0

                                                                                                         Guarantees between the Company and its subsidiaries
                                                                                      Date of the related
                                                                                      announcement                                                                                                                                    Guarantee to
                                                                                      disclosing the             Amount of Guarantee date                  Guarantee           Type of                                 Fulfilled      related parties
                    Name of obligee                                                   guarantee amount            guarantee (agreement date)                 provided          guarantee              Term             or not         or not

                    Zhanjiang Chenming Pulp & Paper Co., Ltd.                        27 October 2014                 650,000     29 June 2015                 253,602.82     General guarantee       3 years           No             No
                    Zhanjiang Chenming Pulp & Paper Co., Ltd.                        30 March 2016                   150,000                                                 General guarantee       3 years           No             No
                    Shandong Chenming Financial Leasing Co., Ltd.                    26 March 2015                   500,000     28 November 2014          258,586.54        General guarantee       7 years           No             No
                    Shandong Chenming Financial Leasing Co., Ltd.                    30 March 2016                   300,000                                                 General guarantee       7 years           No             No
                    Huanggang Chenming Arboriculture Co., Ltd.                       27 October 2014                  10,000                                                 General guarantee       3 years           No             No
                    Huanggang Chenming Pulp & Paper Co., Ltd.                        26 March 2015                   400,000     17 August 2015              83,607.05       General guarantee       7 years           No             No
                    Huanggang Chenming Pulp & Paper Co., Ltd.                        30 March 2016                   550,000                                                 General guarantee       7 years           No             No
                    Jiangxi Chenming Paper Co., Ltd.                                 27 October 2014                 200,000     29 January 2014             82,423.66       General guarantee       3 years           No             No
                    Jiangxi Chenming Paper Co., Ltd.                                 30 March 2016                   150,000                                                 General guarantee       3 years           No             No
                    Shouguang Meilun Paper Co., Ltd.                                 16 December 2010                600,000     14 November 2016            34,383.49       General guarantee       10 years          No             No
                    Shandong Chenming Paper Sales Company Limited                    27 October 2014                 400,000     7 July 2016               227,671.05        General guarantee       3 years           No             No
                    Shandong Chenming Paper Sales Company Limited                    30 March 2016                   200,000                                                 General guarantee       3 years           No             No
                    Chenming (HK) Limited                                            27 October 2014                 500,000     22 January 2016           372,797.91        General guarantee       3 years           No             No
                    Chenming (HK) Limited                                            30 March 2016                   100,000                                                 General guarantee       3 years           No             No
                    Shouguang Chenming Import and Export Trade Co., Ltd.             27 October 2014                 200,000                                                 General guarantee       3 years           No             No
                    Jilin Chenming Paper Co., Ltd.                                   27 October 2014                 150,000     20 July 2016                    4,000       General guarantee       3 years           No             No
                    Shandong Chenming Group Finance Co., Ltd.                        29 December 2014                400,000                                                 General guarantee       3 years           No             No
                    Total amount of guarantee provided for subsidiaries approved during the reporting period (B1)                     2,050,000 Total amount of guarantee provided for subsidiaries during                           1,200,704.51
                                                                                                                                                  the reporting period (B2)
                    Total amount of guarantee provided for subsidiaries approved as at the end of the reporting period (B3)           5,460,000 Total balance of guarantee provided for subsidiaries as at                           1,317,072.53
                                                                                                                                                  the end of the reporting period (B4)




66   SHANDONG CHENMING PAPER HOLDINGS LIMITED

                                                                                                              3700278-t01fnar (Shandong Chenming) p.66 (CHIPC07) 17-02-2017 16:38
                                                                                                                                                                                                      OUTPUT: 17-02-2017 16:47:12
VII Material Matters



XVII. Material contracts and implementation (Cont’d)
    2.        Significant guarantees (Cont’d)
              (1)      Guarantees (Cont’d)
                                                                                                                       Guarantees between subsidiaries
                                                                                         Date of the related
                                                                                         announcement                                                                                                                            Guarantee to
                                                                                         disclosing the                Amount of   Guarantee date              Guarantee                                             Fulfilled   related parties
                       Name of obligee                                                   guarantee amount              guarantee   (agreement date)             provided         Type of guarantee       Term        or not      or not

                       Total amount of guarantee provided for subsidiaries approved during the reporting period (C1)                            0 Total amount of guarantee provided for subsidiaries                                      0
                                                                                                                                                    during the reporting period (C2)
                       Total amount of guarantee provided for subsidiaries approved as at the end of the reporting period (C3)                  0 Total balance of guarantee provided for subsidiaries                                     0
                                                                                                                                                    s at the end of the reporting period (C4)

                                                                                             Total amount of guarantee provided (i.e. sum of the above three guarantee amount)

                       Total amount of guarantee approved during the reporting period (A1+B1+C1)                                        2,050,000 Total amount of guarantee during the reporting period (A2+B2+C2)               1,200,704.51
                       Total amount of guarantee approved as at the end of the reporting period (A3+B3+C3)                              5,460,000 Total balance of guarantee as at the end of the reporting period (A4+B4+C4)    1,317,072.53
                       The percentage of total amount of guarantee provided (i.e. A4+B4+C4) to the net assets of the Company                                                                                                          59.28%
                       Of which:
                       Balance of guarantee provided for shareholders, beneficial controllers and its related parties (D)                                                                                                                   0
                       Balance of guarantee directly or indirectly provided for obligors with gearing ratio over 70% (E)                                                                                                         1,232,228.49
                       Total amount of guarantee provided in excess of 50% of net assets (F)                                                                                                                                       188,829.57
                       Sum of the above three amount of guarantee (D+E+F)                                                                                                                                                        1,317,072.53


              (2)      External guarantees against the rules and regulations

                            Applicable √ Not applicable

                       There was no external guarantee provided by the Company which was against the rules and regulations during
                       the reporting period.




                                                                                                                                                                                                     2016 ANNUAL REPORT                            67

    3700278-t01fnar (Shandong Chenming) p.67 (CHIPC07) 17-02-2017 16:38
    OUTPUT: 17-02-2017 16:47:12
     VII Material Matters



     XVII. Material contracts and implementation (Cont’d)
         3.   Entrusted cash and asset management
              (1)      Entrusted wealth management

                            Applicable √ Not applicable

                       The Company did not have any entrusted wealth management during the reporting period.

              (2)      Entrusted loans

                       √ Applicable                 Not applicable

                                                                                                                                                                                                 Unit: RMB’0,000

                                                                                                                                               Actual                                      Actual gains
                                                                                                                                             principal                                        or losses   Gains or losses
                                                   Related party                                                                           recovered        Impairment                       during the   recovered during
                                                   transaction Interest rate                                                                   during         provision     Expected          reporting   the reporting
                       Borrower                    or not          of loans Loan amount               Commencement date Expiry date        the period            (if any)      return            period   period

                       Shouguang Jin
                         Choi Public Assets
                         Management Co., Ltd. No                        10.00%            50,000      18 January 2014    17 January 2017            0                  0      15,000          4,867.14    Recovered on time
                       Shouguang Jin
                         Choi Public Assets
                         Management Co., Ltd. No                        10.00%            40,000      18 April 2014      18 April 2017              0                  0      12,000          3,893.71    Recovered on time

                       Source of entrusted loans                                                                                           Self-owned funds
                       Accumulated principal and return overdue but not yet recover                                                        0
                       Dispute (if applicable)                                                                                             None
                       Disclosure date of approval of entrusted loans in board meeting (if any)                                            18 January 2014
                       Disclosure date of approval of entrusted loans at a general meeting (if any)
                       Any entrusted loan plan in the future?                                                                              Not applicable


         4.   Other material contracts
                    Applicable √ Not applicable

              The Company did not have any other material contract during the reporting period.




68   SHANDONG CHENMING PAPER HOLDINGS LIMITED

                                                                                                           3700278-t01fnar (Shandong Chenming) p.68 (CHIPC07) 17-02-2017 16:38
                                                                                                                                                                                        OUTPUT: 17-02-2017 16:47:12
VII Material Matters



XVIII. Fulfilment of Social Responsibility
    1.        Fulfilment of social responsibility regarding specialised poverty relief
                  Applicable √ Not applicable

    2.        Fulfilment of other social responsibility
              The state is the strongest support for the development of Chenming, while the society is the greatest origin for
              Chenming’s development and growth. During its development for more than half a century, Chenming has always
              adhered to its philosophy of “building the country through industry development and paying back to society”. It has
              voluntary performed its social responsibility, and cultivated the “tree of responsibility”, which has already achieved
              fruitful results.

              The Company has established its corporate governance structure in accordance with the requirements of the
              Companies Law, Securities Law, Articles of Association and other relevant laws and regulations and the actual
              situation of the Company. There is a clear separation of powers and responsibilities between the general meeting,
              the Board, the Supervisory Committee and the management which is accountable to the general manager. The
              management system under the structure is characterised by a mechanism of checks and balances of a legal person
              with separation of ownership and operation, separation of the decision-making, execution and supervisory powers,
              as well as the co-existence of the general meeting, the Board and the Supervisory Committee. Strict provisions on
              the rights, duties and responsibilities of the general meeting, the Board, the Supervisory Committee and general
              managers have been stipulated. The Company has placed great emphasis on fulfilment of social responsibility and
              goes beyond the concept of “profit as the only goal”. While creating value for shareholders during the process of
              production, operation and business development, the Company, in line with the development of the State and the
              society, has strived to reach a compromise between economic benefits and social benefits, short-term benefits and
              long-term benefits, as well as corporate development and social development, with the aim to achieve a healthy and
              harmonious development between the Company and its employees, the Company and the society, and the Company
              and the environment.

              Centring the corporate mission of “Creating Sharing Culture within Chenming and Achieving Win-Win Situation”, the
              core value of “Good Faith, Win-Win and Sharing”, the corporate spirit of “Learning, Surpass and Leading” as well
              as the human resources philosophy of “Providing Staff Trainings, Recruiting Talents, Allocating Human Resources
              Properly and Retaining Talents”, the Company has established its own corporate culture, which has become the spirit
              and driver for the sustainable and health development of the Company.

              The Company strives to the development path of new type industrialisation with high technology contents, low
              energy consumption and less pollution. It puts great efforts in the implementation of green low-carbon strategy. In
              addition, the Company endeavours to facilitate business development in line with ecological development, enhance
              its competitiveness in economic development and environmental protection, and establish its economic and
              ecological culture. It also seeks for development while protecting the environment and maintains higher environmental
              protection while seeking for scientific development, thus achieving “win-win” situation in economic development
              and environmental protection. The Company has strictly in compliance with relevant environmental protection
              policies, laws and regulations in China. It has mitigated the impact on environment through industrial optimisation
              and upgrade, reduced resources utilisation through innovative operation, and implemented strict management with
              the concept of environmental protection and safety operation being penetrated into every procedure in production
              and operation, thereby promoting the harmonious development between the people and the Company, as well as
              that of the Company and the environment. The Company is the first in the industry in China which passes ISO14001
              environmental management system certification. The Company has been named the environmental friendly enterprise,
              the recycling economy exemplary enterprise, the outstanding water efficiency unit and the outstanding unit in
              comprehensive utilisation of resources of Shandong province.




                                                                                                            2016 ANNUAL REPORT           69

    3700278-t01fnar (Shandong Chenming) p.69 (CHIPC07) 17-02-2017 16:38
    OUTPUT: 17-02-2017 16:47:12
     VII Material Matters



     XVIII. Fulfilment of Social Responsibility (Cont’d)
         2.   Fulfilment of other social responsibility (Cont’d)
              Leveraging its advanced production technology and manufacture equipment, extensive experience in waste treatment
              and various comprehensive treatment systems, the Company strives to implement horizontal and vertical control
              throughout its production processes, thus achieving low carbon emission through low energy consumption, as well
              as reduction of use of resources through recycling. The Company has passed the clean production assessment
              organised by United Nations Development Programme in May 1999. The Company focuses on its works in various
              aspects, including the establishment of eco-friendly energy consumption system, implementation of on-site 6S
              management, launch of environmental protection and hazard inspection works, wide application of new energy
              conservation and emission reduction technology, promotion of key energy conservation and emission reduction
              projects, enhancement of innovative technology, promotion of the industrialisation of comprehensive resources
              utilisation, implementation of scientific proposal on “multi-usage of water” based on the quality, quantity and working
              procedure, as well as strengthening of the awareness on energy saving and environmental protection of all staff and
              habit building. Hence, the Company has achieved whole process control and management over clean and efficient
              production.

              The Company has strictly implemented in-depth corporate governance. It has put great efforts and huge investments
              in promoting the management of “the three wastes” so as to facilitate energy conservation and emission reduction,
              aiming to become a low energy consumption and environment friendly enterprise. In respect of waste water
              treatment, the Company has established world-class waste water treatment system. It has over 10 waste water
              treatment facilities for various purposes, with the most advanced treatment technology in domestic and overseas
              market being adopted. Hence, the Company has realised the comprehensive integration and upgrade of waste water
              treatment facilities in plants, with different emission indicators better than relevant regulatory benchmark. In respect
              of solid waste treatment, the Company has discontinued the traditional landfilling treatment. It has enhanced its
              technology innovation, strengthened comprehensive resources utilisation, as well as expanded its industrial chain,
              thereby achieving recycling and harmless utilisation of solid wastes. In respect of waste gas treatment, the Company
              has introduced advanced international environmental protection equipment and technology for desulphurisation,
              denitrification and de-dusting, smelly gas treatment and closure of coal plants. It has adopted scientific waste gas
              treatment as to ensure our waste gas emission is in compliance with all relevant environmental protection standards
              and requirements in China.

              The Company strives to create a wealthy society. It has offered more job vacancies, thereby contributing more
              taxes to the government, and sharing the achievements of the Company with our staff and society. While caring our
              staff sincerely and building up a harmonious relationship with the staff, the Company also greatly supports different
              charity programmes. Over the past few years, the Company has donated tens of millions to Shouguang Education
              Fund, Shouguang Charity Federation, Weifang Venture Association, Shandong Red Cross and districts suffered from
              earthquake, which reflects the outstanding contribution of the Company to building a harmonious society in China.
              The Company has been honoured with the title of “Most Caring Donating Enterprise” by Weifang and Shouguang
              Municipal Committee and Municipal Government for serval times, while our chairman Mr. Chen Hongguo has been
              honoured with the title of “Most Caring Person”.




70   SHANDONG CHENMING PAPER HOLDINGS LIMITED

                                                                 3700278-t01fnar (Shandong Chenming) p.70 (CHIPC07) 17-02-2017 16:38
                                                                                                                 OUTPUT: 17-02-2017 16:47:12
VII Material Matters



XVIII. Fulfilment of Social Responsibility (Cont’d)
    2.        Fulfilment of other social responsibility (Cont’d)
              Are the Company and its subsidiaries classified as key pollutant discharging unit as specified by environmental
              protection authority?

              √ Yes        No    Not applicable

              (1)      The Company and its subsidiaries strictly comply with laws, regulations and relevant rules regarding
                       environmental protection of the central and local government. The construction of projects strictly executed
                       the evaluation system on impacts of project construction on environment. In order to ensure pollutants are
                       discharged strictly in accordance to requirements under laws and regulation and disposed properly, production
                       and operation strictly comply with the national Law on the Prevention and Control of Environmental Pollution,
                       Law on the Prevention and Control of Air Pollution, Ten Rules Regarding Water Pollution and Law on the
                       Prevention and Control of Environmental Pollution by Solid Waste.

              (2)      Both the Company and its subsidiaries are equipped with comprehensive environmental protection treatment
                       facilities. The aerobic-anaerobic-in-depth treatment technology is the major technology for water treatment,
                       which can achieve standardised discharge of waste water. Moreover, subsidiaries are equipped with recycling
                       system for process effluent, and reuse treated waste water to the greatest extent in order to minimise pollution.
                       Chenming Paper has constructed a total of 8 water treatment plants, with daily treatment capacity of 350,000
                       m3. Major national monitor indicators included indicators on COD, SS, ammonia nitrogen and PH value etc. The
                       emission standards are: <90mg/l for COD, <30mg/l for SS, <8mg/l for ammonia nitrogen and PH value ranges
                       from 6-9. In 2016, the average emission standards are: 68mg/l for COD, 19mg/l for SS, 2mg/l for ammonia
                       nitrogen and PH value of 7.1. Total pollutant emission in 2016 was 2,674 tonnes for COD and 128.97 tonnes
                       for ammonia nitrogen. A total of seven online water monitor facilities were installed in subsidiaries (one of
                       which was shared by two water treatment plants in Zhanjiang). Four online water monitor facilities are directly
                       managed by the environmental protection bureau, while the remaining three online water monitor facilities are
                       operated by entrusted enterprises qualified for running such facilities. In addition, governmental authority will
                       regularly visit the Company to conduct comparison of online monitor data every quarter. All data meets the
                       standards.

              (3)      Subsidiaries of Chenming Paper have its own power plants. Each self-owned plant has its own environmental
                       protection facilities for de-dusting, desulphurisation and denitrification. Denitrification is conducted
                       through SNCR, while desulphurisation is primarily conducted through gypsum desulphurisation (ammonia
                       desulphurisation is adopted in self-owned plant of Jiangxi Chenming).

                       Shouguang Chenming power plant II: 12mg/l for smoke (standard: 20mg/l), 8mg/l for sulphur dioxide (standard:
                       100mg/l) and 50mg/l for nitrogen oxide (standard: 200mg/l);

                       Shouguang Chenming power plant III: 11mg/l for smoke (standard: 20mg/l), 9mg/l for sulphur dioxide (standard:
                       35mg/l) and 53mg/l for nitrogen oxide (standard: 100mg/l);

                       Jilin Chenming, Zhanjiang Chenming 1#2#: 13mg/l for smoke (standard: 30mg/l), 12mg/l for sulphur dioxide
                       (standard: 100mg/l) and 35mg/l for nitrogen oxide (standard: 100mg/l);

                       Jiangxi Chenming: 12mg/l for smoke (standard: 30mg/l), 50mg/l for sulphur dioxide (standard: 200mg/l) and
                       110mg/l for nitrogen oxide (standard: 200mg/l);

                       Total pollutant emission in 2016: 900.25 tonnes per year for smoke, 1,583.11 tonnes per year for sulphur dioxide
                       and 3,776.02 tonnes per year for nitrogen oxide. A total of ten online water monitor facilities were installed in
                       subsidiaries. Five online water monitor facilities are directly managed by the environmental protection bureau,
                       while the remaining five online water monitor facilities are operated by entrusted enterprises qualified for running
                       such facilities. In addition, governmental authority will regularly visit the Company to conduct comparison of
                       online monitor data every quarter. All data meet the standards.

                                                                                                                 2016 ANNUAL REPORT           71

    3700278-t01fnar (Shandong Chenming) p.71 (CHIPC07) 17-02-2017 16:38
    OUTPUT: 17-02-2017 16:47:12
     VII Material Matters



     XVIII. Fulfilment of Social Responsibility (Cont’d)
         2.    Fulfilment of other social responsibility (Cont’d)
               Will social responsibility report be published?

                  Yes √ No


     XIX. Other matters of significance
         √ Applicable   Not applicable

         1.    Non-public issue of A shares
               At the 4th extraordinary meeting of the eighth session of the Board, relevant resolutions, including the Resolution
               on the Adjustments to the Use of Proceeds, Proceeds Amount, Issue Price and Issue Volume for the Non-Public
               Issue of A Shares, were considered and approved. In view of the recent fluctuation in the security market and the
               actual conditions of the Company, based on the authorisation granted to the Board at the general meeting, the
               Company intended to cancel the utilisation of proceeds of RMB1,500 million for the repayment of bank loans. The
               proceeds to be raised from the issue will be adjusted from not more than RMB5,200 million (inclusive) to not more
               than RMB3,700 million (inclusive). It is proposed that the proceeds, net of issue expenses, will be fully utilised for the
               annual production capacity of 400,000-tonne bleached sulphate pine chemical pulp project. The Announcement on
               Supplemental Reply to the Notice of Feedback on Administrative Approval Application for the Non-public Issuance
               and the Supplemental Reply to the Notice of Feedback on Administrative Approval Application for the Non-public
               Issuance were published on 27 September 2016.

               As of the disclosure date of the Report, the Company has not received the related approval of the CSRC. The
               Company will perform its obligations to disclose the related information on a timely basis based on the approval of the
               CSRC.

         2.    Completion of non-public issuance of 45.00 million preference shares with proceeds raised of RMB4.5
               billion
               On 17 September 2015, as approved by the Approval from the China Securities Regulatory Commission (Zheng Jian
               Xu Ke [2015] No. 2130), not more than 45,000,000 preference shares shall be issued. Among which: the Company
               issued 22,500,000 preference shares on 17 March 2016. The actual proceeds raised from the non-public issuance,
               net of issue expenses, amounted to RMB2,238.75 million; The Company issued 10,000,000 preference shares on 17
               August 2016. The actual proceeds raised from the non-public issuance, net of issue expenses, amounted to RMB995
               million; The Company issued 12,500,000 preference shares on 22 September 2016. The actual proceeds raised from
               the non-public issuance, net of issue expenses, amounted to RMB1,243.75 million.

         3.    Obtaining high and new tech enterprise qualifications by the Company and its subsidiaries
               The Company received a high and new technology enterprise certificate jointly issued by the Shandong Provincial
               Office of SAT, Shandong Local Taxation Bureau, the Shandong Province Finance Bureau and the Department of
               Science & Technology of Shandong Province certifying the Company as a high and new technology enterprise with a
               certification number of GR201537000611 valid for three years.

               Shouguang Meilun, a wholly-owned subsidiary, received a high and new technology enterprise certificate jointly
               issued by the Shandong Provincial Office of SAT, Shandong Local Taxation Bureau, the Shandong Province Finance
               Bureau and the Department of Science & Technology of Shandong Province certifying Shouguang Meilun as a high
  &ens