Shanghai Electric : REVISION OF ANNUAL CAPS FOR CONTINUING CONNECTED TRANSACTIONS

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SHANGHAI ELECTRIC GROUP COMPANY LIMITED

上海電氣集團股份有限公司

(A joint stock limited company incorporated in the People's Republic of China with limited liability)

(Stock Code: 02727)

REVISION OF ANNUAL CAPS FOR CONTINUING CONNECTED

TRANSACTIONS

Reference is made to the announcement of the Company dated 29 October 2019 and the circular of the Company dated 6 December 2019 in relation to, among others, the Continuing Connected Transactions between SE Finance, a subsidiary of the Company, and SEC and the Existing Annual Caps for three years ending 31 December 2022. On 11 May 2021, the Board considered and approved the resolution in respect of the revision of annual caps for the Continuing Connected Transactions with SEC. As SEC is the controlling shareholder holding approximately 54.55% equity interest in the total issued share capital of the Company as at the date of this announcement, SEC is a connected person of the Company as defined under Chapter 14A of the Listing Rules. Therefore, the transactions between SE Finance and SEC constitute continuing connected transactions of the Company under the Listing Rules.

Based on reasons mentioned in this announcement, the Directors believe that the Existing Annual Caps will not be sufficient for the Group's current business needs and therefore propose to revise the Existing Annual Caps for the maximum daily balance of deposit services and loan and bill discounting services to RMB11,500 million and RMB11,500 million for the years ending 31 December 2021 and 2022, respectively, with the terms of the Framework Financial Service Agreements remaining unchanged.

As the highest applicable percentage ratio (as defined in the Listing Rules) of the Proposed Revised Annual Caps under the Continuing Connected Transactions is expected to be more than 5%, the Proposed Revised Annual Caps are subject to reporting, announcement, annual review and Independent Shareholders' approval requirements under Chapter 14A of the Listing Rules. The respective highest applicable percentage ratio of the Proposed Revised Annual Caps under the Continuing Connected Transactions is expected to be more than 5% and less than 25%, and therefore, such transactions fall under the discloseable transactions as defined in Chapter 14 of the Listing Rules, which are subject to reporting and announcement requirements.

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INTRODUCTION

Reference is made to the announcement of the Company dated 29 October 2019 in relation to, among others, the Continuing Connected Transactions between SE Finance and SEC and the Existing Annual Caps for three years ending 31 December 2022. On 11 May 2021, the Board considered and approved the resolution in respect of the revision of annual caps for the Continuing Connected Transactions with SEC. As SEC is the controlling shareholder holding approximately 54.55% equity interest in the total issued share capital of the Company as at the date of this announcement, SEC is a connected person of the Company as defined under Chapter 14A of the Listing Rules. Therefore, the transactions between SE Finance and SEC constitute continuing connected transactions of the Company under the Listing Rules.

Based on reasons mentioned in this announcement, the Directors believe that the Existing Annual Caps will not be sufficient for the Group's current business needs and therefore propose to revise the Existing Annual Caps for the maximum daily balance of deposit services and loan and bill discounting services to RMB11,500 million and RMB11,500 million for the years ending 31 December 2021 and 2022, respectively, with the terms of the Framework Financial Service Agreements remaining unchanged.

1. SEC FRAMEWORK DEPOSIT AGREEMENT

Historical Amounts, Existing Annual Caps and Proposed Revised Annual Caps

The table below sets out the historical actual maximum daily balance of deposits (including interests) made by SEC Group with SE Finance for the years ended 31 December 2018, 2019 and 2020:

	For the year ended 31 December
	2018	2019	2020
		(RMB million)
Actual maximum daily balance of	4,089	6,969	6,969
deposits by SEC Group

After consideration, the proposed increase in the maximum daily balance of SEC's deposits with SE Finance to RMB11,500 million for both years 2021 and 2022 is, on one hand, to meet the peak demand for SE Finance's deposit services that may result from the fund centralization management requirements as well as large cash inflows that may come from land disposal and equity transfer of SEC. On the other hand, it is also conducive to the increase in the daily fund centralization of SEC and its subordinate enterprises through SE Finance and the increase in the average daily deposit scale of SE Finance. The Directors believe that the Existing Annual Caps will not be sufficient for the Group's current business needs. Therefore, on 11 May 2021, the Board proposed to revise the Existing Annual Caps of the transactions under the SEC Framework Deposit Agreement to RMB11,500 million for the years ending 31 December 2021

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and 2022. The table below sets out the Existing Annual Caps and the Proposed Revised Annual Caps of the transactions under the SEC Framework Deposit Agreement for the years ending

31 December 2021 and 2022:

For the year ending 31 December

20212022

(RMB million)

Existing Annual Caps for

maximum daily balance of deposit7,5007,500 services

Proposed Revised Annual Caps for

maximum daily balance of deposit11,50011,500 services

In arriving at the above Proposed Revised Annual Caps, the Directors of the Company have considered that SE Finance may increase the fund centralization scale of SEC and its subsidiaries and allocate the funds to interbank loans and deposits business which provides higher yields, providing the Company with additional spread income through increasing the amount of deposit connected transaction. These interest rates offered by SE Finance to SEC and its subsidiaries are in line with the interest rate policies promulgated by the PBOC from time to time, and are beneficial to all Shareholders of the Company as a whole.

Pricing Basis

The pricing basis for deposit interest rates provided by SE Finance has no substantive change to the same as set out in the circular of the Company dated 6 December 2019.

Interest rates set by SE Finance for deposits by SEC Group will be subject to the relevant guidelines and regulations of the PBOC set out on the website of the PBOC. SE Finance will set its interest rates with reference to the relevant savings rates set by the PBOC from time to time as well as the rates set by the major commercial banks in the PRC. The current interest rates offered by SE Finance in respect of RMB deposits, which range from 0.35% to 2.73% per annum depending on amount and terms of deposits (0.35% for demand deposits, 1.54% to 1.65% for three-month term deposits, 1.75% to 1.95% for six-month term deposits, 2.1% to 2.25% for one-year term deposits, 2.31% to 2.73% for two-year term deposits and 1.38% to 1.5985% for agreement deposits) (the "Current Deposit Interest Rates"), are with reference to the prevailing interest rates set and updated by the PBOC as at the date of 24 October 2015 and are in line with the market rates and are subject to adjustment as per regulations and requirements of the PBOC on the interest rates. The annual interest rates set by SE Finance for deposit is the same with the PBOC benchmark rates, the annual interest rates set by SE Finance for agreement deposits represent 120% to 139% of the PBOC benchmark rates, the annual interest rates set by SE Finance for deposits with a term of one year or shorter represent 135%

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to 150% of the PBOC benchmark rates and the annual interest rates set by SE Finance for two- year term deposits represent 110%-130% of the PBOC benchmark rates, respectively. SE Finance will consider the size, term and time of deposits and funding needs of SE Finance at the time of taking deposits for each individual case, and offer interest rates higher than the benchmark rates set by the PBOC if the factors mentioned above are favourable to SE Finance. The Directors considered the higher interest rates than the benchmark rates set by the PBOC is still fair and reasonable based on (i) the interest rates offered by SE Finance is within the range of deposit interest rates offered by the major commercial banks in the PRC; and (ii) SE Finance applies the same factors above to all kinds of its clients and offers no preferential treatment to members of SEC Group.

The Current Deposit Interest Rates are not fixed and are subject to adjustment. The finance department of SE Finance will check the deposit interest rates published by the major commercial banks in the PRC monthly and review the rates offered by SE Finance accordingly. SE Finance will apply the above interest rates to all the customers equally. The audit committee of the Company will review the relevant deposit service agreements or provisions entered into between SE Finance and SEC Group quarterly to ensure the pricing basis disclosed above is complied with. Interest for deposits (other than term deposits) is usually payable by SE Finance to SEC Group on a quarterly basis. Interest for term deposits is usually payable by SE Finance to SEC Group on the maturity date.

Reasons and Benefits for Revising the Existing Annual Caps for Deposit Service

In order to provide sufficient funds to the Company and its subsidiaries, SE Finance must ensure sufficient liquidity to meet the needs of granting loans and bill discounting, conducting interbank deposit business, etc. By increasing the maximum daily balance for deposits, SE Finance will be able to increase the fund centralization scale for SEC Group and allocate the funds to loans and the interbank deposit business of higher yields, which will provide additional income from interest spread to the Company. In determining the revision of the Existing Annual Caps for deposit service, the Company takes into account two factors in relation to the fund centralization: the scale of the deposits of SEC Group at the end of 2020 and the significant cash inflows as a result of the recent projects carried out by SEC.

The interest rates offered by SE Finance to SEC Group are in compliance with the interest rate policy promulgated by the PBOC from time to time, which are beneficial to the Company and all its Shareholders. Given that the additional deposits taken by SE Finance can be allocated to the loans and bill discounting as well as the interbank deposit business, it is estimated that the gain from those businesses will be in proportion to the scale of the additional deposits. Since the revenue contribution is related to the asset allocation, allocating funds to loans and bill discounting which provide higher yields will bring higher revenue to the Company.

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2. SEC FRAMEWORK LOAN AGREEMENT

Historical Amounts, Existing Annual Caps and Proposed Revised Annual Caps

The table below sets out the historical maximum daily balance of outstanding loans (including interests) maintained by SEC Group with SE Finance for the years ended 31 December 2018,

2019 and 2020:

For the year ended 31 December

Actual maximum daily balance of loan and bill discounting services provided to SEC Group by SE Finance

2018	2019	2020
	(RMB million)
7,453	7,492	7,389

After consideration, the increase in the maximum daily balance of SEC's loans and bill discounting with SE Finance to RMB11,500 million for 2021 and 2022 is, on one hand, to meet the needs of peak management for loans and bill discounting services of SEC and its subsidiaries. On the other hand, it is expected that the average daily loan and scale of bill discounting business of approximately RMB10 billion will be provided to SEC and its subsidiaries, which is higher than the current level of connected transactions. The Directors believe that the Existing Annual Caps will not be sufficient for the Group's current business needs. Therefore, on 11 May 2021, the Board proposed to revise the Existing Annual Caps of the transactions under the SEC Framework Loan Agreement to RMB11,500 million for the years ending 31 December 2021 and 2022. The table below sets out the Existing Annual Caps and the Proposed Revised Annual Caps of the transactions under the SEC Framework Loan Agreement for the years ending 31 December 2021 and 2022:

Existing Annual Caps for maximum daily balance of loan and bill discounting services

Proposed Revised Annual Caps for maximum daily balance of loan and bill discounting services

For the year ending December 31

20212022

(RMB million)

7,5007,500

11,50011,500

In arriving at the above Proposed Revised Annual Caps, the Directors have considered that as a centralized fund management platform of the Group, in order to effectively utilize the

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