Sino Construction’s 64% surge in expenses being probed by SGX

1. We note that administrative expenses increased by 64.3%, from RMB6.96 million for 3Q2010 to RMB11.44 million for 3Q2011. Please provide a breakdown of the material items contributing to the significant increase in 3Q2011.

The increase in administrative expenses is mainly due to depreciation charges, repair and fuel expenses of unutilized construction equipment being classified under administrative expenses. As the Group has lesser contracts in 9M2011 as compared to prior year, this has resulted to certain construction equipment and machinery being unutilized and expenses were charged to administrative expenses instead of costs of construction.

2. It is stated on page 12 of the results announcement that intangible assets consist of license and plant and equipment. We note that intangible assets as at 30 September 2011 amounted to RMB337 million. In this respect, please provide the following information:

(a) Details of the license and the factors taken into account which resulted in the significant value.
License refers to the right to supply heat to pre-assigned area given by the local government in Daqing. This licence is the asset belonging to Daqing Sunshine Reli Thermal Co., Ltd. (“Sunshine”) which is now a subsidiary of the Group. The License is valued at Rmb51.3 million with indefinite useful life. There is no stipulated period on the license. License is valued by PWC based on the indefinite useful life using Multi-Period Excess Earnings Method, a form of the income approach.

(b) How was the value of RMB51.3 million for license determined?
The management has performed preliminary purchase price allocation and recognize the provisional fair values of the assets and liabilities of Sunshine at date of acquisition. Arising thereon, the fair values of plant and equipment and license were provisionally determined to be RMB285.7 million and RMB51.3 million respectively. Please also refer to explanation for question 2(a).

(c) Why would plant and equipment be classified as intangible assets?
Based on preliminary assessment, the arrangement entered into by our subsidiary with the local government relating to the provision of heating services may be a public-to-private concession under Financial Accounting Standard INT FRS 112 Service Concession Arrangements. Sunshine is deemed to have been given the right to charge users for the public service involving the provision of heating services. As such, the plant and equipment i.e. the infrastructure used in the provision of heating services is classified as Intangible assets instead of property, plant and equipment and this is also the stance taken by the auditors.

(d) What is the nature of this plant and equipment and for how long will the item be amortised?
The plant and equipment relating to the infrastructure used to provide the heating services include piping networks, boiler equipment and heat exchangers and they will be amortised over the period of 20 years.