Shandong Molong Petroleum Machinery : INTERNAL CONTROL REVIEW REPORT

Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this announcement, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this announcement.

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(A Sino-foreign joint stock limited company incorporated in the People's Republic of China with

limited liability)

(Stock Code: 568)

ANNOUNCEMENT

INTERNAL CONTROL REVIEW REPORT

Reference are made to the announcements of Shandong Molong Petroleum Machinery Company Limited (the "Company" or "Shandong Molong") dated 27 September 2019, 11 February 2018, 16 January 2018, 25 September 2017, 25 August 2017, 26 July 2017, 26 June 2017, 26 May 2017, 15 May 2017, 27 April 2017, 21 March 2017 and 8 February 2017, and the new release published by The Stock Exchange of Hong Kong Limited (the "Stock Exchange") on 6 September 2019 in relation to the material misstatement of the financial information disclosed by the Company for 2015 and 2016.

As disclosed in the announcements of the Company dated 21 November 2019 and 16 January 2020, The Company has, in accordance with the directions of the Stock Exchange, appointed Crowe (HK) Risk Advisory Limited to conduct a review of the effectiveness of the Group's internal control system, so as to improve the internal control system designed and implemented by the Company's management according to the Group's Practical Regulations on Corporate Governance and as required under the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the "Listing Rules"), and to assess the adequacy of the systems, structures and monitoring measures formulated by the Group and whether they are sufficient for the directors of the Company (the "Directors") to make an appropriate assessment of the financial position and prospects of the Company (the "Relevant Listing Rules Compliance Review"); and has disclosed the results of the Relevant Listing Rules Compliance Review and of its follow-up review.

Internal Control Review Report

In compliance with the judgment (the "Judgment") of and Court order made by the High Court of the Hong Kong Special Administrative Region of the People's Republic of China in respect of the petition (the "Petition") filed by the Securities and Futures Commission (the "SFC") under section 214 of the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong), the Company has appointed Crowe (HK) Risk Advisory Limited, an independent external auditor acceptable to the SFC ("Crowe" or the "Independent External Auditor") to review and prepare a report on the internal control and financial reporting procedures of the Company (the "Internal Control Review Report") so as to ensure that the Company complies with all relevant rules and regulations in Hong Kong and minimise the risk of recurrence of the misconduct complained of in the Petition. The Company has also been ordered to publish and implement the suggested measures as many be advised in the Internal Control Review Report by the Independent External

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Auditor.

Findings #1

Adjustment on the management responsibilities of certain existing management and administrative personnel are needed to enhance the integrity of the management and to comply with the relevant provisions in the Securities and Futures Ordinance

Entity

Shandong Molong

Process Involved

Corporate Integrity Governance

Findings in the Review

During the course of the review, the management of the Company confirmed that, among the seven former senior management and administrative personnel of Shandong Molong who were involved in the misconduct as set out in the Petition of the SFC and the order of the Court of First Instance (the "Involved Persons"), some are still in management positions within the Group.

It is understood from the management of the Company that the Involved Persons, who are still in employment, are only employees of the Group.

As stated in the Petition of the SFC, given that the Involved Persons who are still under employment were then serving as key management and executive personnel, it is inevitable for the SFC to believe those personnel, in the unlikely event that they were not aware of the fact that they are performing the Group's functions. It is a suspicion of misconduct involved in the financial exaggeration plan.

For the purposes of complying with the requirements of the Court order, Shandong Molong may consider that, due to the current employment of the Involved Persons, certain existing management and executive personnel (i.e. the Involved Persons) do not have the appropriate integrity to adequately and effectively implement proper internal control and financial reporting procedures to ensure the Company's financial information is properly prepared and disclosed. The management of the Company has indicated that, the current management duties of those personnel will be handed over to suitable personnel to be sourced and identified in the future. They have also undertaken that, those personnel will not be involved in management duties relating to internal control activities and/or financial information reporting, etc., if they are still under employment in the future.

Impact

With reference to the provision in section 214(2) of the Securities and Future Ordnance, the prohibition on any direct or indirect involvement or participation in the management of the Group's affairs by the relevant personnel in any way may further ensure the credibility of the preparation and disclosure of financial information.

Risk rating

High

Recommendations

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The Group is recommended to make reference to the provision in section 214(2) of the Securities and Future Ordinance and comply with the disqualification order of the Court of First Instance, and complete the identification of suitable personnel to replace the management duties of the Involved Persons as soon as possible.

Findings #2

Control over the management of inside information is required to be strengthened to comply with the inside information provisions of the Securities and Futures Ordinance

Entity

Shandong Molong

Processes Involved

Corporate Integrity Governance

Findings in the Review

Shandong Molong has established certain written management systems to regulate the mechanism of inside information confidentiality and its disclosure to the public. Among others, according to the "Management System for Changes in Shareholdings of Directors, Supervisors and Senior Management", directors, supervisors, senior management and shareholders holding more than 5% of the Company's shares shall inform the secretary to the board of directors in writing of relevant trading plans before trading in the Company's shares and its derivatives, so as to allow the secretary to the board of directors to make timely disclosure in accordance with the relevant regulations, including the requirements relating to the disclosure of inside information in Chapter 13 of the Listing Rules and Part XIVA of the Securities and Futures Ordinance. However, with reference to the announcement of Shandong Molong on 7 December 2020 and the discussion with the management of the Company, the following incidents concerning undisclosed inside information were confirmed:

• A shareholder of the Company intended to sell the Company's shares in January 2020 and signed an agreement of intent in equity transfer, but did not inform the board of directors in time so as to make a timely disclosure;
• The then chairman of the board of directors knowingly failed to perform his/her duty as a director by reporting such inside information to Shandong Molong in order to allow Shandong Molong's disclosure to the public the relevant intended transfer of shares in the Company; and
• The then secretary to the board of directors (currently an executive director) failed to perform his/her duty as the secretary to the board of directors by identifying and disclosing such inside information in a timely manner.

Management explained that, the reason for the improper disclosure of the incident was the shareholders of the Company and the then chairman of the board of directors were not fully aware of the duty of confidentiality and disclosure of inside information; therefore the board of directors did not have timely information of the potential share sale and failed to make disclosure to the public.

Impact

By signing a written undertaking and conducting targeted training, it can be ensured that the shareholders of the Company and the member of the board of directors have a proper

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understanding of the confidentiality and disclosure of inside information, which may mitigate the risk of disciplinary action being taken against the Company and relevant personnel by regulatory authorities for breaches of relevant laws or regulations, including requirements on disclosure of inside information in Chapter 13 of the Listing Rules and Part XIVA of the Securities and Futures Ordinance.

Risk Ratings

High

Recommendations

It is recommended that the Group take the following measures to enhance or maintain awareness of the relevant personnel on the duty of confidentiality and disclosure of inside information of the Company:

• To require shareholders holding more than 5% of the Company's shares to sign an undertaking to ensure compliance with relevant regulations and to report their potential or actual share transactions to the board of directors of the Company in a timely manner; and
• To arrange training for directors and secretary to the board of directors on the handling of inside information to ensure that they are fully aware of their responsibilities to identify and disclose inside information and to disclose any inside information required to be disclosed in a timely manner.

In addition, the secretary to the board of directors should monitor the price movements of the Company's shares on an on-going basis and report any abnormalities to the board of directors in a timely manner for further follow-up and confirmation.

Findings #3

Improvement on monitoring of the employment, promotion and termination investigation of management personnel is required to strengthen the integrity and conduct of management personnel

Entity

Shandong Molong

Processes Involved

Corporate Integrity Governance

Findings in the Review

During the review, the following areas were identified for improvement in the Group's current investigation procedures for the employment, promotion and termination of management personnel:

(a) Investigation and control of employment and promotion of management personnel

Shandong Molong has established its Anti-Corruption Regulations, which require background investigation (on areas including educational background, working experience and criminal records) for the personnel to be employed and promoted (including board members and senior management), and during the review, room for improvement was found in the execution of the following processes:

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1. • In the background investigation of the employment of the Company's board members, Shandong Molong only keeps written records of the minutes and resolutions of the board of directors and its nomination committee to set out the results of the background investigation of the appointees. However, there were no sufficient written records of the manner and procedures of the investigation, the investigators and the information used for the investigation; and
   • The Company confirms that the above background investigation procedures also cover management personnel other than members of the board of directors (e.g. deputy general managers and financial officers), but in addition to the above deficiencies, there is no documentation to support that criminal record investigation on such personnel have been properly conducted.
2. Control of termination investigation
   In accordance with the "Measures for Management of Accountability ", Shandong Molong is required to conduct outgoing audit and keep written records of the resignation of its management personnel and employees in key positions, but the Company confirms that:
3. • At present, there is no specific definition of personnel in key positions, such as whether they include non-board members, financial officers, personnel of subsidiaries, etc.; and
   • No relevant written records in respect of the outgoing audit process have been kept to support the results of the outgoing audit (including the impact to the Group of departing personnel and remaining responsibilities, etc.).

Impact

Complete written records of the employment, promotion and termination investigations provide sufficient traces of review to support the results of investigation. Clearly defining the target can ensure that investigations are conducted in a comprehensive manner and that risks related to talents, ethics and integrity are properly controlled.

Risk Rating

Moderate

Recommendations

Shandong Molong should improve its investigation procedures for the employment, promotion and termination of management personnel with respect to the above findings in the review, and keep complete documentation, including criminal investigation records. Shandong Molong should also improve the contents of its "Measures for Management of Accountability " to clearly define the ranks or positions that must be subject to an outgoing audit.

Findings #4

Arrangement for effective directors' and officers' liability insurance in accordance with Listing Rules is required

Entity

Shandong Molong

Processes Involved

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