Hong Kong and China Gas : Preliminary Announcement of 2016 Annual Results

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香 港 中 華 煤 氣 有 限 公 司‌‌‌ THE HONG KONG AND CHINA GAS COMPANY LIMITED

(Incorporated in Hong Kong under the Companies Ordinance with limited liability)‌

(Stock Code: 3)

PRELIMINARY ANNOUNCEMENT OF 2016 ANNUAL RESULTS CHAIRMAN'S STATEMENT THE YEAR'S RESULTS

The Group's town gas business in Hong Kong maintained stable growth in 2016. Global economic fluctuations, slowdown in economic growth in mainland China, further devaluation of the renminbi and low international oil prices during the year, however, impacted the Group's utility and emerging environmentally-friendly energy businesses on the mainland. Nevertheless, the Group endeavoured to maintain stability in its overall recurrent business results for 2016.‌‌‌‌‌

Profit after taxation attributable to shareholders of the Group for the year increased by‌

0.53 per cent to HK$7,341 million, an increase of HK$39 million compared to 2015. Earnings per share for the year amounted to HK57.7 cents.

During the year under review, the Group invested HK$6,257 million in production facilities, pipelines, plants and other fixed assets for the sustainable development of its various existing and new businesses in Hong Kong and mainland China.‌

TOWN GAS BUSINESS IN HONG KONG‌

The local economy grew slower in 2016 compared to 2015 amid a challenging global economy. During the year, tourism was hit by a strong Hong Kong dollar causing a decrease in the total number of inbound visitors for the second consecutive year and thus negatively impacting the food and beverage gas sales market. Conversely, as the average temperature in Hong Kong in 2016 was lower than in 2015, residential gas sales increased. Compared to 2015, total volume of gas sales in Hong Kong for 2016 increased by 1.4 per cent to 28,814 million MJ while appliance sales revenue increased by 24.9 per cent to HK$1,634 million with a total of 275,361 sets sold, mainly benefiting from newly completed residential projects.‌‌‌‌

As at the end of 2016, the number of customers was 1,859,414, an increase of 20,153 compared to 2015, slightly up by 1.1 per cent.‌

BUSINESS DEVELOPMENT IN MAINLAND CHINA

The Group's mainland businesses continued to progress steadily during 2016. Overall, inclusive of projects of the Group's subsidiary, Towngas China Company Limited ("Towngas China"; stock code: 1083.HK), the Group had 241 projects on the mainland, as at the end of 2016,

19 more than at the end of 2015, spread across 26 provinces, autonomous regions and municipalities. These projects encompass upstream, midstream and downstream natural gas sectors, water sectors, efficient energy applications and exploration and utilisation of emerging environmentally-friendly energy, as well as telecommunications.

The Group's development of emerging environmentally-friendly energy businesses in mainland China, including coalbed methane liquefaction, coal chemicals, conversion and utilisation of biomass, natural gas refilling stations, etc., through its wholly-owned subsidiary

ECO Environmental Investments Limited and the latter's subsidiaries (collectively known as "ECO"), is progressing steadily. During 2016, international oil prices continued to fluctuate, falling at one time early in the year, to a 2003 low, leading to a drastic drop in prices of energy products which significantly affected ECO's profits. Nevertheless, ECO's self-developed innovative technologies progressed well in 2016. Gradual commercial application of ECO's new technologies is expected to contribute to long-term business growth of the Group. Additionally, international oil prices have become more stable since the end of 2016, and this will also help the Group's income growth.

Diversification and an increase in the number of projects have gradually transformed the Group from a locally-based company in Hong Kong centred on a single town gas business into a sizable, nation-wide, multi-business corporation focused on environmentally-friendly energy ventures and utility sectors.

UTILITY BUSINESSES IN MAINLAND CHINA

The Group's city-gas businesses are progressing well. As at the end of 2016, inclusive of Towngas China, the Group had a total of 131 city-gas projects in mainland cities spread across 23 provinces, autonomous regions and municipalities. The total volume of gas sales for these projects in 2016 was approximately 17,140 million cubic metres, an increase of 10.3 per cent over 2015. As at the end of 2016, the Group's mainland gas customers stood at approximately

23.1 million, an increase of 11 per cent over 2015. The Group continues to have a good reputation as a large-scale city-gas enterprise with outstanding performance on the mainland.

Due to uncertainties over the policy direction of a number of major global economies resulting in poor growth momentum, demand for commodities worldwide remained weak during 2016, and, as a result, growth in the mainland economy slowed compared to 2015. Exports from mainland China have now declined for two consecutive years. Cutting excessive capacity, destocking and deleveraging have also reduced industrial production. Thus, demand for energy across the country, including electricity, petroleum and natural gas, recorded only slight growth in 2016. Furthermore, given low international oil prices, prices for other petroleum fuels also declined. Nevertheless, in the medium to long term, as natural gas is still projected to be the clean energy of choice to best reduce air pollution and improve smoggy atmospheric conditions on the mainland, long-term and steady growth in demand is still anticipated. The Chinese government has also formulated a natural gas utilisation policy to strengthen preventative measures to combat air pollution and to minimise the formation of smog, indicating an energy development trend inclining towards natural gas and environmentally-friendly energy. The competitiveness of natural gas relative to other energy sources was also enhanced following reductions in the mainland's non-residential natural gas city-gate prices at the end of 2015. This favourable momentum will continue to benefit the Group's city-gas and natural gas businesses.

In addition, with gradual commissioning of large-scale national natural gas projects, including transmission pipelines from Sichuan province to eastern and southern China and the West-to-East pipeline, and projects for importing piped natural gas from Central Asia and Myanmar, together with a scheduled supply of piped natural gas from Russia, as well as a rise in the sources of imported liquefied natural gas ("LNG"), supply of natural gas on the mainland is becoming ample, which is beneficial to market development. With a number of mainland cities gradually advocating the use of natural gas to replace coal, natural gas as a fuel for household heating in winter is steadily growing. Thus, with increasing sources of gas supply, expanding pipeline networks, rising living standards and society's aspiration for greater environmental protection, the Group anticipates its mainland city-gas businesses will continue to thrive in future.

Anhui Province Natural Gas Development Co. Ltd., an associated company of the Group, was listed on the Shanghai Stock Exchange on 10th January 2017. As a large-scale integrated operator, its core business is the construction and operation of long-haul natural gas pipelines in Anhui province, alongside a downstream distribution business. Listing will help speed up the company's construction of natural gas pipelines and its development of markets in the province.

Construction of the Group's natural gas storage facility in underground salt caverns in Jintan district, Changzhou city, Jiangsu province, is in progress. Upon completion, this facility will be the first of its kind developed by a city-gas enterprise on the mainland. Total storage capacity will be approximately 460 million standard cubic metres. Completion of phase one of this project, with a storage capacity of 150 million standard cubic metres, is expected during the second quarter of 2017. This facility, which will help the Group supplement and regulate gas supplies during the peak winter period for several of its city-gas projects in eastern China, is in line with the Chinese government's policy of advocating faster development of gas storage capacity, and will support the Group's business development in downstream city-gas markets.

The Group's development of natural gas vehicular refilling stations in mainland China, under the brand name "Towngas", is progressing well with 109 stations now spread across different provinces to date. Apart from this, the Group is also proactively developing refilling projects for marine vessels and is currently investing in a joint venture project, with six refilling sites, for barges along the Yangtze River in Jiangsu province. This is the country's first, and largest project in terms of number of refilling sites, along this river. In September 2013, the joint venture constructed and put into service the country's first floating LNG refilling station barge. Classified by the government as a pilot project, this venture represents the start of a new era for the mainland's marine industry in LNG applications. Given that LNG is a form of clean energy that is being actively promoted by the Chinese government, vehicular and marine refilling station businesses have good prospects for the Group.

The Group has entered into the mainland water market under the brand name "Hua Yan Water" for over 11 years and currently invests in, and operates, six water projects. These include water supply joint venture projects in Wujiang district, Suzhou city, Jiangsu province and in Wuhu city, Anhui province; wholly-owned water supply projects in Zhengpugang Xin Qu, Maanshan city and in Jiangbei Xin Qu, Wuhu city, both in Anhui province; and an integrated water supply and wastewater treatment joint venture project, together with an integrated wastewater treatment joint venture project for a special industry, both in Suzhou Industrial Park, Suzhou city, Jiangsu province. In addition, given food waste processing and utilisation is also a sizable environmentally-friendly industry, the Group is constructing a plant in Suzhou Industrial Park to handle 500 tonnes of food waste, green waste and landfill leachate daily for conversion into natural gas, oil products, solid fuel and fertilizers, under the "Hua Yan Water" brand; commissioning is expected in the third quarter of 2018 and will be the Group's first project converting waste into high-value products.

Operation and management of businesses encompassing city-gas, midstream natural gas, city-water and waste processing and utilisation projects create greater synergy and mutual advantages. Furthermore, these businesses generate a stable income and provide good environmental benefits, with room for expansion. The Group will therefore keep on looking for opportunities to invest in high-quality utility projects on the mainland.

EMERGING ENVIRONMENTALLY-FRIENDLY ENERGY BUSINESSES

ECO's major businesses in Hong Kong - an aviation fuel facility, dedicated liquefied petroleum gas ("LPG") vehicular refilling stations and landfill gas utilisation projects - all operated smoothly in 2016. With a total turnover of approximately 6.2 million tonnes in 2016, ECO's aviation fuel facility provided a safe and reliable fuel supply to Hong Kong International Airport and contributed to ECO's steady profit growth. ECO's LPG vehicular refilling station business had a steady operation and satisfactory profit in 2016, providing a quality and reliable fuel supply to the territory's taxi and minibus sectors. ECO's landfill gas project in the North East New Territories, after operating for several years, has been generating noticeable environmental benefits. ECO's development of a South East New Territories landfill gas utilisation project is also progressing smoothly, with commissioning expected to start in the first half of 2017. This will then further increase the proportion of landfill gas used by the Group and make an additional contribution to energy conservation and emission reduction in Hong Kong.

With international oil prices creeping low during most of 2016, annual output of ECO's oilfield project in Thailand fell to 1.37 million barrels, causing a significant impact on profit. However, a rebound in international oil prices to a range of approximately USD55 per barrel in late 2016 helps to stabilise the business conditions faced by the project.

As smog and air pollution on the mainland are now a growing concern, the Chinese government is stepping up its efforts to promote the use of LNG to gradually replace diesel as fuel for heavy-duty trucks. ECO's networks of natural gas refilling stations are gradually taking shape in provinces and autonomous regions including Shaanxi, Inner Mongolia, Ningxia, Shandong, Shanxi, Jiangsu, Henan and Liaoning. All in all, ECO currently has 62 refilling stations in operation, under construction or at the planning stage. As expansion of its networks progresses, the ECO brand name will gradually become more well-known in the market.

Conversion of biomass into clean energy and chemical products is an important part of ECO's business strategy which is in line with the policy direction of mainland China. To this end, the plant now under construction and located in Zhangjiagang city, Jiangsu province can upgrade approximately 220,000 tonnes of palm acid oil, a low-quality inedible bio-oil, into high-value oleic acids and other chemical products each year. Construction is expected to be completed and ready for trial production by the third quarter of 2017. In addition, construction of a project in Xuzhou city, Jiangsu province to produce LNG by methanation of coke oven gas has been largely completed; trial production is expected to commence in the first half of 2017.

Mainland China, a sizeable agricultural country, generates a large quantity of agricultural waste every year. Apart from using a small portion of this in fields or for power generation, there are currently no effective measures to make good use of the rest of this waste. However, ECO's research and development team has successfully developed a world leading approach on pyrolysis and hydrolysis technologies, which can convert agricultural and forestry waste into high-value syngas and green block chemicals, such as furfural and levulinic acid. To this end, ECO has launched a pilot project in Hebei province with trial production expected to start in the second half of 2017, the success of which would pave the foundation for subsequent commercial implementation.