Extended Annual Review Report

Project Number: 46928-014 Investment Number: 7380 Loan Number: 2986 September 2016

Senior Loan Clean Bus Leasing (China, People’s Republic of) This is an abbreviated version of the document which excludes commercially sensitive and confidential business information that is subject to exceptions to disclosure set forth in ADB's Public Communications Policy 2011

CURRENCY EQUIVALENTS Currency unit – yuan (CNY)

At Appraisal

At Project

Review 3 January 2016

$0.1540 CNY6.4931

14 December 2012 CNY1.00 = $.16009

$1.00 = CNY6.2464

ABBREVIATIONS ADB – Asian Development Bank CBRC – China Regulatory Banking Commission FEH – Far East Horizon Limited FLC – financial leasing company IBFL – Industrial Bank Financial Leasing Company Limited IFEL – International Far Eastern Leasing Company Limited PRC – Peoples Republic of China TA – technical assistance

ADB recognizes "China" as the People's Republic of China.

NOTES In this report, “$” refers to US dollars.

Vice-President D. Gupta, Private Sector and Cofinancing Operations Director General M. Barrow, Private Sector Operations Department (PSOD) Director C. Roberts, Private Sector Portfolio Management Division, PSOD Team leader Team members

M. Gunawardhena, Investment Specialist, PSOD M. Angeles-Barellano, Project Analyst, PSOD M. Del Rosario, Associate Investment Officer, PSOD B. Huang, Investment Specialist, PSOD A. Porras, Safeguards Officer, PSOD M. Principe, Safeguards Officer, PSOD

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgment as to the legal or other status of any territory or area.

CONTENTS

Page BASIC DATA i EXECUTIVE SUMMARY ii

I. THE PROJECT 1

A. Project Background 1

B. Key Project Features 2

C. Progress Highlights 3

II. EVALUATION 3

A. Project Rationale and Objectives 3

B. Development Results 4

C. ADB’s Additionality 8

D. ADB Investment Profitability 8

E. ADB Work Quality 8

F. Overall Evaluation 9

III. ISSUES, LESSONS, AND RECOMMENDED FOLLOW-UP ACTIONS 9

A. Issues and Lessons 9

B. Recommended Follow-Up Actions 10

APPENDIXES 1. Business Performance 11 2. Financial Statements 17 3. Results and Ratings for Project Contributions to Private Sector Development

and ADB Strategic Development Objectives—Financial Intermediaries 18 4. Forecast of the Number of Clean Buses Funded under the Loan Program 22

BASIC DATA

Senior Loan: Far East Horizon Limited Clean Bus Leasing Program

(Loan No. 2986 – China, People’s Republic of )

Key Project Data

As per ADB Loan Documents ($ million)

Actual ($ million)

Loan 2986 Total project cost:

ADB Loan 100.0 100.0 Total investment:

Committed 100.0 100.0 Disbursed 100.0 100.0 Outstanding 0.0 0.0

Supplementary cofinancing (The entire clean bus leasing program is $275 million)

Key Dates

Concept clearance approval Board approval Loan agreement Loan effectiveness First disbursement Loan maturity

2012 2013 2013 2013 2014

25 September 2021

19 July 2011 15 January 2013

25 September 2013 25 September 2013 18 February 2014

25 September 2021

Project Administration and Monitoring Number of Missionsa

No. of Person-Days

Concept clearance … … Due diligence mission 4 7 Private sector credit committee meeting … … Board approval … … Project administration 1 6 XARR 1 6 … = data not available, ADB = Asian Development Bank, XARR = extended annual review report. a

Missions undertaken for the three financial institutions participating in the program.

EXECUTIVE SUMMARY In January 2013, the Board of Directors of the Asian Development Bank approved a loan program for clean bus leasing of $275 million permitting accreditation of up to five financial leasing companies for financing of clean buses in the People’s Republic of China (the loan program). The loans have a maximum exposure of $100 million per financial leasing company and a tenor of up to 8 years per loan. The accredited financial leasing companies under the loan program are Far East Horizon Limited, Industrial Bank Financial Leasing Company Limited and Everbright Financial Leasing Company Limited. Under the loan program Far East Horizon Limited received $100 million in September 2013, and Industrial Bank Financial Leasing Company Limited received $100 million in November 2014. A third loan ($75 million), to Everbright Financial Leasing Company, was approved and is awaiting disbursement. This report covers the loan of $100 million to Far East Horizon Limited with a maturity period of 8 years (the project).

The loan program was the first non-sovereign program-based lending in the People’s Republic of China designed to strengthen the Sustainable Transport Initiative of the Asian Development Bank. It also achieved the goals of supporting environmental sustainability and financial sector development under Strategy 2020 of the Asian Development Bank. The program complemented the country partnership strategy in strengthening the linkage between public sector and non-sovereign operations by increasing the Asian Development Bank’s private sector operations in the People’s Republic of China. The loan program was timely given the ongoing initiative in the People’s Republic of China to expand clean transport. In addition, the Asian Development Bank contributed further to sustainable transport through a technical assistance program (approved separately in June 2014), which intends to improve efficiency through better fleet management and maintenance by bus operators.

The leasing industry in the Peoples Republic of China is regulated by the China Banking and Regulatory Commission governing bank owned leasing companies and the Ministry of Commerce governing non-bank owned leasing companies. The loan program targeted top-tier financial leasing companies which, apart from being experienced in leasing public transport vehicles, had large portfolios diversified across industries and geographical areas. Far East Horizon Limited, 23% owned by Sinochem Group (a key state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the State Council of the People’s Republic of China) and regulated by the Ministry of Commerce, is a financial leasing company with sound financial performance and ownership. Far East Horizon Limited uses its 100%-owned subsidiary, International Far Eastern Leasing Company Limited, to lend funds to bus operators.

The project’s development results are rated satisfactory overall. The project’s contribution to private sector development and Asian Development Bank’s strategic objectives is rated satisfactory. It helped increase clean bus transport services in the Peoples Republic of China by (i) increasing the number of clean buses (the project has added 1860 clean buses as of the date of this report), (ii) increasing access to longer term finance for bus operators located in less developed inland areas or the western provinces of the Peoples Republic of China, (iii) increasing vehicle-kilometers of service per year by clean buses, and (iv) reduction in greenhouse gas emissions. The project helped to expand the leasing operations of financial leasing companies by disbursing a loan of $100 million to Far East Horizon Limited.

The project’s impact will be even greater once the remaining $175 million of the program are fully utilized, which should ensure that the program targets are met. The number of public bus operators receiving financing, and operators located in less developed inland areas or the

western provinces who were identified as requiring access to longer term financing, already exceed the outcome targets.

The project’s business and economic performance is rated satisfactory. As at 2015, Far East Horizon ranked first in terms of net profit and fourth in terms of total assets in the leasing market of the People’s Republic of China. Its profitability was acceptable at 0.71% net interest margin and 2% return on average assets. It has maintained a strong capital position and earnings. Its asset quality is maintained at less than 1% of non-performing leases to the gross lease portfolio despite the economic rebalancing that is ongoing in the People’s Republic of China. A salient feature in its business is fund diversification and its ability to mobilize funds from a multitude of sources both onshore and offshore.

The project’s environmental and social performance is rated satisfactory. The loan to Far East Horizon Limited is in the financial intermediary category of Asian Development Bank’s Environment Policy (2009). Far East Horizon Limited adopted an environmental and social policy consistent with the standards of the Asian Development Bank. The loan is category C for its impact on indigenous peoples. No involuntary resettlement of indigenous peoples resulted from Far East Horizon Limited’s activities.

The Asian Development Bank’s additionality from the project is rated satisfactory. The outcome targeted in the report and recommendation of the President—contribution to the People’s Republic of China’s efforts to improve the environment through its clean bus program in every city of the country—is on track to be achieved once the full program is implemented. The loan strengthened Far East Horizon Limited’s ability to diversify its funding base.

The investment profitability of the project is rated satisfactory. The margin that the Asian Development Bank charged Far East Horizon Limited was in line with various US dollar-denominated loans extended by other lenders to Far East Horizon Limited in the same period.

The Asian Development Bank’s work quality on the project is rated satisfactory for (i) screening, appraisal, and structuring; (ii) monitoring and supervision; and (iii) role and contribution. Its loan to Far East Horizon Limited is part of the loan program for clean buses. The funds under the project were drawn down within a short period thanks to being suitably structured to meet the funding needs of Far East Horizon Limited and International Far Eastern Leasing Company Limited.

The extended annual review report rates the Asian Development Bank’s investment in Far East Horizon Limited successful overall. Lessons learned from the project include that loan programs that cover more than one financial leasing company made it possible to reach a more diverse number of bus operators, and that yuan loans are preferred to US dollar loans by Far East Horizon Limited. Recommended follow-up actions include the recruitment of Chinese-speaking staff members to the Asian Development Bank’s resident mission in the People’s Republic of China and the provision of loans in yuan.

I. THE PROJECT

A. Project Background

1. In January 2013, the Board of Directors of the Asian Development Bank (ADB) approved a loan program for clean bus leasing of up to $275 million (the loan program) to finance clean buses in the People’s Republic of China (PRC). The loans would be to a maximum of five accredited companies with a maturity of up to 8 years.1 Far East Horizon Limited (FEH) was the first of the companies accredited under the program to receive a loan of $100 million. The agreement was signed in September 2013 and funds were disbursed in February 2014. FEH is the holding company of a group of companies. Its 100%-owned subsidiary International Far Eastern Leasing Company Limited (IFE) was the conduit used to channel funds to the bus operators. The other two accredited companies are (i) Industrial Bank Financial Leasing Company Limited (IBFL), to which a loan of $100 million was disbursed in November 2014; and (ii) Everbright Finance Leasing Company Limited (EFL), to which a loan of $75 million was approved and is pending disbursement. This extended review report (XARR) is on the loan of $100 million disbursed to FEH with a maturity period of 8 years (the project). 2. The Energy Efficient and New Energy Vehicle Industry Development Plan, 2012–2020 of the State Council of the PRC intends to increase clean buses to reduce emissions annually.2 Based on this plan, the ministries of Finance, Science, Technology, Industry, and Information joined the National Development and Reform Commission to launch a pilot program that offered subsidies to bus operators for the purchase of expensive fuel-cell electric, battery-only electric, and hybrid buses with effect from July 2010.3 Demand for clean buses is strong, driven by the relatively low price of natural gas, the minimal cost difference between a natural gas bus and a diesel bus, and the increasing number of liquefied natural gas and compressed natural gas fueling stations. Based on the required incremental number of clean buses every year so far, bus operators’ demand is set to continue until 2020, both for first-time purchases and replacements. 3. The incentive for bus operators (mostly state-owned) to convert to clean buses is significant thanks to the availability of government subsidies. For the balance of their funding requirements, bus operators need suitable lease financing. They find it immensely difficult to raise funds when the government subsidies are delayed, and in sourcing incremental funds in general. The banks provide leasing to clean bus operators for a maximum of 3 years, which is inadequate to cover the funding requirements. Financial leasing companies (FLCs) in the PRC offer an effective financing model to supplement traditional bank loans and subsidies, and support the operators in times of subsidy delays without putting pressure on their cash flows.

1 ADB. 2012. Report and Recommendation of the President to the Board of Directors (RRP) on a Proposed Loan

Program for Clean Bus Leasing in the People’s Republic of China. Manila. 2 A clean bus is defined as a bus that meets the equivalent of Euro III emission standards and falls within at least

one of the following categories: (i) buses running on cleaner fuel such as compressed or liquefied natural gas and biomethane; (ii) “energy-efficient and new-energy buses” as defined by the national government of the PRC (currently including hybrid buses with fuel-saving rates of more than 10%, battery-only electric buses, and fuel-cell electric buses); and (iii) buses that meet the most advanced emission standards equivalent to Euro IV or above. Euro III and Euro IV are European emission standards that define acceptable limits for exhaust emissions of vehicles.

3 State Council of the People’s Republic of China. 2012. Energy Efficient and New Energy Vehicle Industry

Development Plan, 2012–2020. Beijing. The plan has a sales target of 500,000 hybrid and electric vehicles for 2012–2015 and 5 million for 2012–2020. The number of electric and hybrid buses stood at 14,491 in 2011.

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4. In the PRC, the availability of customized longer-term lease financing falls short of demand. Although the leasing industry in the PRC has shown exponential growth, it still is at an early stage of development. Market penetration was only 3.8% in 2010, compared with an average 13.8% in the 10 other largest financial leasing markets in the world (footnote 1). The China Regulatory Banking Commission (CBRC) and the Ministry of Commerce implement the rules governing the leasing industry in the PRC. Although banks offer leasing products, the FLCs have a higher market share in the industry because they focus exclusively on leasing products. FLCs offer customized, amortizing long-term leases compared with short-term bank loans that often require bullet repayment of capital. The strong government support for public transport development attracts FLCs to the bus industry. Another positive is their ownership rights over the vehicles under the lease terms. In the PRC FLCs are not permitted to take public deposits and have significant reliance on short-term bank financing. Many FLCs are constrained by their limited access to long-term bank loans, which creates asset and liability mismatches in their books. 5. The participating FLCs were accredited under the program for clean bus leasing based on multiple criteria.4 6. ADB accredited FEH thanks to its presence in the public utilities segment, which includes clean buses. FEH uses International Far Eastern Leasing Company Limited (IFE) an offshore company in the PRC, to provide lease facilities to bus operators for the purchase of clean buses. The loan to FEH was associated with technical assistance (TA) in information-technology-related logistics and fleet management by bus operators.5 The Transport Division of ADB’s East Asia Department is implementing and monitoring the TA. B. Key Project Features 7. Under the project, the loan to FEH was given with a grace period of 2.5 years . IFE is the direct financial intermediary to the clean bus operators within the FEH group. However, it is unable to borrow offshore funds directly under the present rules set by CBRC on offshore borrowings for local entities. FEH, as a listed offshore company, is eligible to borrow in foreign currency from overseas. The project gave IFE access to long-term funding via FEH. IFE received a shareholder loan from FEH (CNY 630,000,000) with a similar maturity and repayment structure as the ADB loan to FEH. Up to 10% of a lease amount granted to a clean bus operator could be used for purchasing software that would assist fleet and route management with an emphasis on the urban focus of ADB’s Sustainable Transport Initiative (STI).6 The loan program is ADB’s first non-sovereign loan program to support sustainable transport in the PRC.

4 (i) FLCs subject to regulation and supervision by CBRC or the Ministry of Commerce; (ii) minimum equity of

$100 million based on latest audited financial statements; (iii) minimum credit rating of NSO 7 (BB) under ADB’s internal rating system; (iv) strong corporate governance, sound management structure, and adequate risk management systems; (v) satisfactory financial performance particularly with respect to capital adequacy, asset quality, funding, liquidity and profitability; and (vi) experience in leasing public transport vehicles and a commitment by public transport operators to supporting adoption of clean buses.

5 The TA project was introduced in the report and recommendation to the President, but approved separately in

2014. ADB 2014. Capacity Development Technical Assistance. Peoples’ Republic of China: Improving Clean Bus Operations and Management.

6 ADB.2010.http://www.adb.org/publications/sustainable-transport-initiative-overview.Manila. The Sustainable

Transport Initiative Operational Plan provides details of how ADB will update its operations in the transport sector in line with Strategy 2020. ADB will focus on creating transport systems that are accessible, safe, affordable, and environment-friendly.

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8. The TA, which is not subject to this review, has not yet been implemented and has not yet contributed to the clean bus leasing program because the East Asia Department is revisiting the TA implementation arrangements. However, the TA could still have a substantial impact on the bus operators. C. Progress Highlights

9. The ADB Board of Directors approved the loan program in December 2012. The loan agreement for $100 million to FEH was signed on 25 September 2013. The first disbursement was on 16 December 2013 and the final disbursement was on 18 February 2014. The loan matures on 25 September 2021. The grace period ended in March 2016.The first capital repayment was due on 25 March 2016. FEH services the loan to ADB regularly with capital and interest. 10. A monitoring mission in 2015 was followed by a second mission in May 2016 to complete the extended annual review report on ADB’s loan to FEH. This mission included physical interviews with three clean bus operators who had borrowed funds from IFE, and with FEH officials.

II. EVALUATION

A. Project Rationale and Objectives

11. The pilot program launched by the National Development and Reform Commission in the PRC offers subsidies to bus operators to purchase fuel–cell electric buses. The pilot program is expected to expand. It is complemented by the Energy Efficient and New Energy Vehicle Industry Development Plan of the State Council of the PRC. This plan is in line with ADB’s Strategy 2020, which stresses support for environmentally sustainable growth in developing member countries, the expansion of ADB’s promotion of sound environmental management, and the development of the finance sector with an emphasis on private sector development through the development of capital markets.7 12. The plan is aligned with the ADB’s STI, which focuses on developing sustainable transport in the urban sector. It is consistent with the STI because it focuses on creating transport systems that are accessible, safe, affordable and environment-friendly. 13. Further it is in line with ADB’s and the PRC’s country partnership strategy.8 It responds to the civil society and private sector perceptions of the strategy in that the plan promotes clean energy. It also increases private sector operations, which is a recommendation of the country assistance program evaluation. 14. The objectives of the loan program under the areas mentioned above are mitigation of climate change, meeting the region’s growing energy demand, supporting the nascent leasing industry in the PRC, and achieving sustainable urban transport. Climate change mitigation is a crucial imperative in meeting the strategic objectives of environmental management. It is achieved through directing the lending of selected entities under the program to low-carbon growth paths such as improving energy efficiency, expanding the use of clean energy sources,

7 ADB. 2008. Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank, 2008–2020.

Manila. 8 ADB. 2012. Country Partnership Strategy: People’s Republic of China, 2011–2015. Manila.

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reducing fugitive greenhouse gas emissions, and modernizing public transport systems. The demand for energy was to be met by helping the PRC develop environment-friendly technologies. The leasing industry was assisted by the provision of critical long-term financing and the promotion of innovative financing mechanisms for sustainable growth and development of capital markets. 15. The loan program supports the emphasis on mainstreaming climate change considerations, support for green finance, and finance sector development, which the country partnership strategy identifies as operational foci of the private sector.9 16. Local bus operators in the PRC rely significantly on government subsidies, without which they would operate at a loss.10 Banks are usually unwilling or unable to approve the large amounts of credit on a long-term basis needed to meet the operators’ ambitious plans to expand and replace their fleets. Although banks are an important funding source for bus operators, their financing is insufficient. Financial leasing as opposed to traditional bank loans provides an ideal funding mechanism for clean bus operators in the PRC. It gives the bus operator flexibility of repayment and use of the asset. The longer tenor assists good cash-flow management. This eases the financial burden for the operators, freeing up cash for operations and growth. 17. The loan program aimed to help the FLCs in the PRC access medium-term financing on suitable terms and onlend such funds to end-lessees that require longer-term, flexible financing to overcome their cash-flow mismatches. From a developmental point of view, ADB provided a loan tenor of 8 years, which is the longest-term borrowing available to FEH. Other objectives were to assist the PRC’s initiative to replace existing buses with clean buses running on liquefied natural gas or compressed natural gas, and with electric buses that comply with globally accepted emission standards. In addition, ADB’s clean bus leasing program promoted better fleet management by clean bus operators, which led to an overall improved efficiency in public transport, e.g., by installing information technology funded via the leases. Since ADB selected three FLCs, it also achieved greater coverage of clean bus operators under a single program. B. Development Results

18. The project’s development results are rated satisfactory overall.

1. Contribution to Private Sector Development and ADB Strategic Objectives

19. The effect of the ADB’s project on private sector development and ADB strategic objectives is rated satisfactory. The project contributed to (i) better access to finance for FLCs, (ii) an increase in the number of clean buses, (iii) broader access to finance for bus operators in less-developed inland or western provinces of the PRC, and (iv) environmental sustainability. The project helped both FEH and IFE to meet key output and outcome targets specified in the project design and monitoring framework.11

9 Pillar 2 of the country partnership strategy (environmentally sustainable growth) states: “All ADB assistance will be

viewed through an environmental lens to further green the portfolio and mainstream climate change considerations into future operations.”

10 Bus fares in the PRC are regulated and typically set at very low levels (e.g., a cash fare of CNY1.00 per trip, with up to 50% discount if an integrated circuit card is used.)

11 Footnote 1. Design and monitoring framework of the report and recommendation of the President.

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20. Better access to finance for leasing companies. The loan program targeted to provide $275 million to a maximum of five accredited FLCs (footnote 1); in the end, three were selected (para. 1). Being a listed FLC, FEH had a diversified funding base, including public bond issuances at the time of the ADB loan in 2013. ADB’s $100 million loan to FEH was channeled to clean bus operators via FEH’s 100%-owned subsidiary IFE. In 2013, IFE was unable to borrow long-term funds from offshore sources. ADB’s loan to FEH enabled IFE to access long-term funds vital for the creation of leases to clean bus operators. It thus met the objective of assisting the growth of the leasing industry in the PRC and had a favorable impact.—FEH’s leasing portfolio (net of repayments) through IFE increased from $75 million in 2013 to $88 million in 2015. 21. Increase in the number of clean buses. The loan program extended to three FLCs (para. 1) set the target to lease and put into operation at least 5,000 clean buses in the PRC by 2018 (footnote 1). The project provided financing to 1,860 buses as of December 2015, and the loan to Industrial Bank Financial Leasing (IBFL) financed 1,598 buses as of December 2015, for a total of 3,458 buses. Even without accounting for the (so far undisbursed) loan to EFL (para.1), and based on a simple model with conservative assumptions (Appendix 5), FEH and IBFL could extend funding to a further 1,455 buses between 2016 and 2018, putting the target of 5,000 buses well within reach. The model assumes that an ADB loan tenor of 8 years allows FEHL and IBFL to redeploy the funds more than once within the lifetime of the loan, since the average tenor of a lease to a bus operator is 5 years. 22. Broader access to finance for bus operators. Out of the 1,860 clean bus operators that had received financing from FEH (through IFE) by December 2015, 37% were from less developed areas. This is above the targeted 30%. FEH’s financing to clean bus operators from 2013 to 2015 also created 315 jobs for drivers and associated roles in the bus companies.12 23. Environmental sustainability. ADB also contributed to establishing an environmental and social management system at FEH. The reporting practices at FEH improved thanks to the requirements of the reporting covenant. During 2013–2015, the clean buses funded by the project provided 156 million vehicle-kilometers of annual service, while the loan to IBFL resulted in 134 million vehicle-kilometers of annual service. This compares well with the program target of 420 million vehicle-kilometers of annual service by 2019. FEH and IBFL, along with EFL, will further expand the overall annual service between 2016 and 2019 to reach the program target. The savings in greenhouse gas emissions by FEH-funded clean buses stood at 488,250 tons per annum from 2013 to 2015, and those achieved by IBFL-funded clean buses stood at 419,475 tons per annum.13 The program target of overall savings in greenhouse gas emissions of 1.31 million tons by 2019 is on track, i.e., the incremental savings in emissions from 2016 to 2019 by the clean buses funded through ADB loans to FEH, IBFL and EFL will achieve the targeted level.14

12

Information provided by clean bus operators to the ADB monitoring mission in May 2016. 13

Footnote 1. Design and monitoring framework of the report and recommendation of the President. Note c. Assuming each clean bus performs at an average speed of 20 kilometers per hour, 12 operating hours per day, and 350 operating days per year.

14 Footnote 1. Design and monitoring framework of the report and recommendation of the President. The use of each clean bus is estimated to avoid an emission of 0.75 tons of greenhouse gases (carbon dioxide equivalent) per day on average. Assuming 350 operating days per year per bus, 5,000 buses avoid 1.31 million tons of greenhouse gas emissions (carbon dioxide equivalent) per annum.

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2. Economic Performance

24. The economic performance of the project is rated satisfactory. Since the project became effective in September 2013, a significant increase in the globalization of its funding strategy propelled FEH to the forefront of the FLC space. FEH increased its foreign currency borrowings from 12% in 2012 to 33% in 2015, its direct borrowings from 9% to 26%, and its overseas borrowings from 20% to 38%. FEH lending to clean bus operators in the public utilities segment increased by a compound annual growth rate of 14% between 2012 and 2015. 25. FEH has increased its lease portfolio at a compound annual growth rate of 18% from 2012 to 2015. Its asset quality remained below 1% of nonperforming leases to the gross lease portfolio despite the increase in the portfolio, a decline in gross domestic product, and a foray into newer industries. The provision coverage ratio is at an internally set target of greater than 200%. No independent published data exists for the leasing industry in the PRC. Based on client feedback, FEH is ranked fourth in terms of total assets. The number of bus operators funded by IFE through the ADB loan had risen to 27 by 2015. The competition for leasing arises from non-financial and financial companies regulated by the Ministry of Commerce and CBRC-regulated banks, In the second category of companies regulated by MOFCOM, FEH and IEF are leading their competitors even though the competition has been increasing. Banks also compete directly with FLCs.

3. Environmental and Social Performance

26. The loan program was classified as category FI (treated as C) for environment, involuntary resettlement, and indigenous peoples impacts under ADB’s Safeguard Policy Statement (2009). The program was approved to help up to five FLCs deploy clean buses and information technology systems that will improve fleet operating efficiency for urban, suburban, or intercity bus services in the PRC. This section focuses on IFE, which provided assistance to twenty-four state-owned bus operators and helped procure a total of 1860 units of general and clean buses. 27. The nature of IFE’s operations does not generate any adverse environmental impacts. Buses are cleaned with water, and no chemicals are used. After the useful life of a bus expires, the operator gives it back to the government to reuse or recycle it according to applicable national laws and guidelines. Savings in greenhouse gas emissions computed for the existing fleet of IFE-funded clean buses totaled 488,250 million tons in 2015. The bus leasing activities of IFE-L did not entail acquisition of land or restrictions on land use. IFE stated that the bus operators’ existing depots were adequate to house the newly procured buses and there was no need to acquire additional land for new facilities. No indigenous peoples were affected. The expansion of the bus fleets also translated into 315 new jobs. IFE noted that all bus operators are regulated by the National Transport Commission, which also regulates and monitors their compliance with national laws and regulations, including labor laws. No labor noncompliance by the four bus operators was reported to date.

4. Business Success

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28. The business success of FEH and IEF is rated satisfactory, applying an analysis of the borrowers’ business performance and prospects. 15 Appendix 1 contains a more detailed analysis of the companies’ performance from 2012 to 2015 based on its capital adequacy, asset quality, management, earnings, and liquidity. Each of these elements is performing satisfactorily and the transaction has maintained its ADB credit rating since initial disbursement. 29. As at 30 June 2016, the market capitalization of FEH stood at CNY20.34 billion.16 On 23 September 2015, Standard & Poor's (S&P) affirmed FEH’s issuer ratings of 'BBB-' (long-term) and 'A-3' (short-term), but revised the outlook from stable to negative. The negative outlook was to reflect the diminishing net interest margins and stress on the lease portfolio from exposure to the economic decline in the PRC. FEH's main goal is steady and safe growth in the long term. The company focuses on both stable and adjusting industries in building a diversified lease portfolio. It integrates finance and industry by using its expertise of the industries in the portfolio. The two companies enjoy a valuable franchise in the FLC category of the leasing industry. Their staff is well trained and sought after by rival companies. 30. The lease portfolio of FEH showed strong growth from 2013 to 2015. The largest portfolio is in the health-care segment followed by education, construction, machinery, and packaging. The company has 12,000 clients, of which the highest number is in the packaging category followed by health care, machinery, and construction. The portfolio concentration was adjusted to increase interest-earning assets in the stable industries (e.g., health care, construction, education, electronics, and public utilities) while reducing exposure to packaging, machinery, and construction. The public utility segment, which includes public bus transport, is becoming a stable sector for the company. 31. FEH maintains a sound liquidity profile evidenced by strong liquidity indicators. This is manifest in the ratio of liquid assets to short-term liabilities, which exceeded 100% (the covenant demands 100%) from 2012 to 2015. The company’s diversified fund base, with reputed names among the holders of its bonds, is an indication of FEH’s ability to raise funds and of its market standing in that regard. FEH is the Chinese leasing company with the highest stand-alone S&P credit rating (at BBB-). Its capital adequacy, measured by assets at risk to equity, was well within the regulatory requirement of 10 times set by the Ministry of Commerce during 2012–2015. FEH complied with the capital covenant from 2013 to 2015. 32. FEH’s asset quality, measured by net nonperforming leases to net leases, is well within ADB’s covenant of 2% despite the economic downturn in the PRC (gross domestic product decelerating to 6.7% in 2015).17 The main drivers that keep the asset quality satisfactory are an excellent recovery rate and success in timely entry and timely reduction of exposure in stressed sectors. The industry exposures are diversified and geographic concentration in high-risk areas is identified for special surveillance. Stronger evaluation applies to non-state-owned clients. Credit risk is minimized by the 10%–30% of the lease value that all lessees have to deposit at the start of a lease. Loss recovery procedures are efficient and result in quick recovery of funds from asset sales. The single-party and related-party exposure ratios are well within the covenant levels.

15

Specifically, Alternative 4: Business Performance and Prospects of Institutions Supported under Other Financial Market Projects in para. 38ff (Appendix 1) of ADB. 2014. Guidelines for the Preparation of Project Performance Evaluation Reports on Non-sovereign Operations. Manila.

16 Assuming that the number of shares remained at the full-year 2015 level of 3,950,400,000. Converted to yuan using ADB’s foreign exchange rate of US$1 = HK$0.1288759440 = CNY0.1507090863.

17 ADB. 2015. Asian Development Outlook 2015. Manila.

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C. ADB’s Additionality

33. ADB’s additionality of the project is rated satisfactory. The project contributed to the policy initiative of the PRC in promoting clean buses and adding clean buses to the overall clean bus program of the PRC (footnote 3). The 1,860 FEH-funded clean buses and the 1,598 IBFL-funded clean buses leased and in operation by December 2015 are an addition to the 14,491 electric and hybrid buses that were operating in the PRC in 2011. 34. At the time of ADB’s approval of the loan program in 2013, the FLCs in the PRC faced a strong need for long-term financing. ADB’s loan tenor of 8 years constitutes the longest-term borrowing by FEH. Subsequently, from 2013 to 2015, the company continued to raise funds through foreign currency, direct, and offshore borrowings as part of its resource mobilization strategy. While ADB’s loan is small compared with FEH’s total borrowings (accounting for just 4%), its tenor brought a significant advantage—from 2013 to date, FEH was able to increase the average tenor of borrowings to above 2.5 years and maintain it. D. ADB Investment Profitability

35. ADB’s investment profitability is rated satisfactory. The loan was approved by the Office of Risk Management and was within the recommended pricing for a similarly rated and structured transaction based on ADB's pricing model.18 The loan is current and has not had any payment delays. It is expected to be repaid on time based on the repayment record so far. ADB’s $100 million loan was priced at the 6-month US dollar London interbank offered rate plus a credit spread , for a period of 8 years. E. ADB Work Quality

36. ADB’s work quality is rated satisfactory based on its (i) screening, appraisal, and structuring of the project; and (ii) monitoring and supervision.

1. Screening, Appraisal, and Structuring of the Project

37. ADB’s work in screening, appraisal, and structuring is rated satisfactory. The project was structured using a single program covering up to five FLCs in the PRC. It was ADB’s first non-sovereign lending to the sustainable transport industry in the PRC, and the program-based approach enabled ADB to spread its exposure and broaden the development impact of the project. The project’s relevance to ADB’s corporate, country, and sector strategies is very high since borrower selection was based on sound financial appraisal, Strategy 2020, country partnership strategy, and STI.

38. ADB selected the participating financial institutions to launch the program based on stringent criteria that ensured high quality. FEH is a listed company whose parent is Sinochem. The selection of FEH and IFE for ADB’s first loan under the loan program was a sound decision based on their financial, operational, and management profiles. FEH was selected after comprehensive due diligence of the leasing industry in the PRC. The fact that FEH has successfully adapted the business model to deal with the challenging economic environment in the PRC is sufficient evidence of the resilience of its business philosophy.

18

ADB, Office of Risk Management. 2013. Credit Note for Far East Horizon Limited: Loan Program for Clean Bus Leasing. Manila.

9

39. The project was also expected to provide funds to a minimum of 30% of bus operators from less developed provinces and FEH was selected based on its ability to do so. This ensured access to long-term finance from ADB to bus operators from less developed areas.

2. Monitoring and Supervision

40. ADB’s monitoring and supervision of FEH and IFE is rated satisfactory. The FLCs are monitored (i) for their compliance with reporting and financial covenants in the facility agreement, (ii) through review missions (in 2015 and 2016), and (iii) through periodic monitoring reports. Regular review missions provided the project team with a realistic perspective of the FLCs’ operations in the leasing industry. These missions helped open and maintain necessary communication lines to help clients meet their service quality requirements. The annual monitoring reports were completed and submitted on time, and approved by the Office of Risk Management. The monitoring of compliance with investment covenants was strong. Delays in submitting reports occurred occasionally. However, vigilant monitoring by the portfolio administration unit of the Private Sector Operations Department always ensured compliance. 41. The monitoring of clients’ environmental, social, health, and safety performance was satisfactory. Reports were duly submitted. F. Overall Evaluation 42. Overall, the project is rated successful.

Evaluation of ADB’s Senior Loan to Far East Horizon Limited

Item Unsatisfactory Less than

Satisfactory Satisfactory Excellent

Development Results √ (i) Contribution to private sector

Development and ADB strategic development objectives

√

(ii) Economic performance √ (iii) Environmental, social, health, and safety

performance √

(iv) Business success √ ADB Additionality √ ADB Investment Profitability √ ADB Work Quality √ (i) Screening, appraisal, and structuring √ (ii) Monitoring and supervision √

Overall Rating Successful

ADB = Asian Development Bank. Source: Asian Development Bank.

III. ISSUES, LESSONS, AND RECOMMENDED FOLLOW-UP ACTIONS A. Issues and Lessons

43. Lessons. The loan program with multi-FLC accreditation is effective in terms of implementing a unified set of covenants and monitoring conditions which is more suitable than a

10

single-FLC loan for implementation of ADB’s developmental strategies in the areas identified by the design and monitoring framework. Further, it saved time in preparing the documentation for approval by ADB (only one report and recommendation of the President) while minimizing credit and nonperformance risk for ADB. It also increased the ability to reach out to a number of FLCs, which a single-FLC loan approach would not have offered. This also enables competition in the FLC sector and increases access to finance for a larger number of bus operators. 44. The FLCs prefer to borrow in yuan instead of in US dollars. This is due to the foreign exchange risk faced by FEH in converting US dollars to yuan. This indicates there is a demand for yuan-denominated long-term loans in the leasing sector of the PRC which could be catered to by ADB in future transactions. B. Recommended Follow-Up Actions 45. ADB should continue to provide yuan-denominated loans to FLCs in the PRC, which would assist FLCs in providing leases without currency risk to bus operators. 46. ADB should recruit an officer with local language skills to strengthen the Resident Mission in the PRC, so it can better support program-related missions. It would also speed up the analysis of information submitted.

Appendix 1 11

BUSINESS PERFORMANCE

A. Financial Highlights

Table A1.1: Far East Horizon Limited – Financial Highlights, 2012–2015 Indicator Amount (CNY billion) CAGR (%)

2012–2015 2012 2013 2014 2015 Balance Sheet Gross leases 56.89 78.64 97.14 110.38 18.02 Total assets 60.57 86.51 110.73 139.31 23.15 Total borrowings 38.22 58.09 74.41 90.52 24.05 Total liabilities 47.71 72.35 93.28 116.35 24.97 Shareholders’ equity 12.86 14.16 17.45 22.96 15.59 Income Statement Net interest income 2.17 2.69 3.03 2.58 4.42 Net non-interest income 2.14 3.14 4.01 5.46 26.38 Net income 1.52 1.91 2.30 2.50 13.25

CNY = yuan, CAGR = compound annual growth rate Note: Numbers may not sum precisely because of rounding. Source: Audited financial statements of Far East Horizon Limited, 2012 to 2015.

Table A1.2: International Far Eastern Leasing Limited– Financial Highlights, 2012–2015

Indicator Amount (CNY billion) CAGR (%) 2012–

1H2015 2012 2013 2014 1H2015

Net income 1.56 1.82 2.17 1.56 0 Net loans 53.69 74.94 88.63 88.09 13.18

CNY = yuan, CAGR = compound annual growth rate, 1H = first half. Source: Audited financial statements of International Far Eastern Leasing Company Limited, 2012 to 2015.

B. Portfolio Growth

Table A1.3: Far East Horizon Limited – Loan Portfolio by Segment, 2012–2015 Segment Amount (CNY billion) CAGR (%)

2012–2015 2012 2013 2014 2015

Health care 11.73 17.23 22.81 27.21 23.41 Packaging/Printing 8.09 11.48 11.56 11.00 7.98 Transportation/Shipping 6.54 9.04 9.40 8.99 8.28 Infrastructure construction 8.72 11.45 15.03 17.28 18.65 Machinery 4.35 6.81 9.99 10.76 25.41 Education 10.05 12.82 15.07 19.32 17.75 Textile 1.23 2.24 3.18 3.70 31.70 Electronic information 3.02 4.43 5.73 6.72 22.14 Others

a 3.08 3.61 4.28 5.35 14.80

CNY = yuan, CAGR = compound annual growth rate. a Includes public utilities.

Source: Audited financial statements of Far East Horizon Limited, 2012 to 2015.

12 Appendix 1

020406080

100120140160180200

Figure A1.1: 2015 Top 10 Leasing

Companies by Asset Size

(CNY billion)

0%

1%

2%

Figure A1.3: Comparative ROAA for

Top 10 Leasing Companies in 2015

Source: Far East Horizon Limited

Table A1.4: Geographical Location of Bus Operators as at December 2015 Location of Lessees

(Province) Number of Lessees No. of vehicles

Fujian 2 129 Fuzhou 1 34 Guandong 5 303 Hebei 1 50 Hubei 2 42 Hunan 3 398 Jiangsu 2 65 Shaanxi 1 49 Shandong 3 380 Zhejiang e 1 60 Total 1,510

CAGR = compound annual growth rate. Source: Semiannual Report on Clean Bus Program by Far East Horizon Limited.

CNY = yuan, ROAA = Return on Average Assets, ROAE = Return on Average Equity, ICBCFL = CBC Financial Leasing Company Limited, CDBL = China Development Bank Leasing, BoCFL = Bank of communications Financial Leasing Company Limited, MFL = Mingsheng Financial Leasing Company Limited, IBFL = Industrial Bank Financial Leasing Company Limited, CMBFL = CMB Financial Leasing Company Limited, BFIH = Bohai Financial Investment Holding Company Limited, CCBFL = CCB Financial Leasing Company Limited, CHFL = China Huarong Financial Leasing Company Limited

00.5

11.5

22.5

3

Figure A1.2: 2015 Top 10 Leasing

Companies by Net Income

(CNY billion)

Source: Far East Horizon Limited

0%

10%

20%

Figure A1.4: Comparative ROAE for

Top 10 Leasing Companies in 2015

Source: Far East Horizon Limited

Source: Far East Horizon Limited

Appendix 1 13

C. Business Analysis

1. Capital Adequacy

1. The capital adequacy of Far East Horizon Limited (FEH) is rated satisfactory (Figure A1.5). The company’s capital adequacy indicators remained well within regulatory and covenant limits, albeit in a declining trend since 2012. The company’s lease portfolio grew by a strong 18% on a compounded basis from 2012 to 2015. Net income growth and capital growth were at 13% and 16% on a compounded basis. This resulted in a slight decline in capital adequacy. FEH infused additional equity in 2015, which, together with its healthy generation of internal capital, increased loan loss absorption capacity. The ratio of assets at risk to equity declined slightly reflecting the growth in capital.

MOFCOM = Ministry of Finance and Commerce

2. Asset Quality

2. FEH’s asset quality is rated satisfactory (Table A1.5). Nonperforming leases remained low at less than 1% of net lease receivables, but showing an upward trend. The ratio is within the covenant threshold of 2%. The asset quality is maintained despite stress in the lease portfolio because of sectors that are directly sensitive to the economic stress of the People’s Republic of China (PRC). The ratio of loan loss reserves over nonperforming leases has remained above the 200% level since 2012, which is an internal standard for the company. This indicates it prudent provisioning approach. The company maintained asset quality through intense risk asset disposals, continuously optimizing risk allocation and improving credit operating processes. FEHL uses an internal five-category approach—pass, special mention (overdue by 30 days), substandard (overdue by 90 days), doubtful, and loss. The five categories are approached with differentiated strategies, using lease allocation to better-performing sectors and reducing non-state-sector leases while intensifying risk asset disposal of the last three categories. The company proactively classifies performing assets under special mention when the sector is under economic stress.

0

5

10

15

20

25

2012 2013 2014 2015

Figure A1.5: Far East Horizon Limited – Capital Adequacy Indicators

MOFCOM limit for Assets at

Risk to Equity Ratio (<10%)

ADB Covenant on Tangible

Common Equity to Tangible

Managed Assets(>12%)

Assets at Risk to Equity Ratio

Tangible Common Equity to

Tangible Managed Assets (%)

Source: FEH, ADB

14 Appendix 1

Table A1.5: Far East Horizon Limited– Asset Quality Indicators, 2012–2015 (%)

2012 2013 2014 2015

Gross NPLs as a percentage of gross loans 0.73 0.82 0.94 0.99 Gross NPLs as a percentage of equity and total LLR 3.02 4.13 4.68 4.35 Total LLR as a percentage of NPLs 213.32 216.53 215.96 200.63 Related-party loans as a percentage of gross loans 14.68 26.11 29.88 0.16

NPL = nonperforming lease, LLR = loan loss reserves. Note: Gross NPLs were computed based on audited financial statements. Source: Audited financial statements of Far East Horizon Limited, 2012 to 2015.

3. FEHL’s lease portfolio is well diversified across various industries (Figure A1.3). The portfolio has higher concentration in health care and education, balancing the stress in the infrastructure, construction, and machinery segments. The company is also proactive in increasing concentration in growth sectors and moving away from sluggish sectors to improve risk, profitability, and diversification. 4. The highest decline in asset quality occurred in the transport sector, which suffered from a prolonged downturn in the shipping market. The company follows an aggressive asset classification policy to reflect the stress in the portfolio and enable rapid disposal of assets.

3. Management

5. The management of FEH is rated satisfactory. The company is 23% owned by Sinochem Group via a 100%-owned subsidiary of Sinochem. Its majority shareholders are Kohlberg Kravis & Roberts Company Limited, one of the oldest and largest private equity investment institutions, Cathay Life Insurance Company Limited, a publicly listed insurance company in Taipei, China, and China Mingsheng Investment Corporation, a leading private investment group who invested in FEH in a rights issue (private placement) in June 2015.

6. The senior management has strong industry experience. The board has a diversified composition. It has two executive directors, six nonexecutive directors, and four independent nonexecutive directors. Ning Gaoning was appointed as nonexecutive director and chairman of the board in March 2016. The positions of chairman and chief executive officer are held by different persons to preserve independence. The listing rules of the Hong Kong stock exchange mandate that at least one-third of the board (or a minimum of three board members) should be independent nonexecutive directors to strengthen corporate governance.

4. Earnings

7. FEH’s profitability is rated satisfactory (Table A1.6; Figures A1.4 and A1.5). The company is the fourth-largest leasing firm in the PRC in terms of total assets as of 2015, and was the most profitable, with net income of CNY2.6 billion and return on average assets (ROAA) of 2.1% (Figures A1.1–A1.4). The decline in ROAA despite its ranking is the result of an increase in the asset base and a decline in net interest margins. The drop in the return on average equity (ROAE) in 2015 was due to the capital infusion of CNY3.5 billion from the issuance of 658 million new shares in June 2015 (Figures A1.5 and A1.6). However, FEHL’s ROAE was still the fifth-highest in the industry in 2015.

8. FEH’s profitability remains sound despite a declining net interest margin owing to the tight interest rate conditions in the market. The volume of leases increased between 2012 and 2015, which helped improve net interest income despite shrinking margins. Impairment

Appendix 1 15

0%

1%

1%

2%

2%

3%

3%

2012 2013 2014 2015

Figure A1.6: FEH Historical ROAA

provisions, on the other hand, continued to account for a somewhat significant share of the company’s cost base. The proactive provisioning is part of FEH’s continued efforts to maintain a strong loss absorption capacity. The cost–income ratio is reasonable and maintained at a stable level. Every expansion into new sectors has increased income despite the initial costs of entry. The non-interest income shows a healthy increase between 2012 and 2015, achieved gained mainly through service fee income, which is sustainable.

Table A1.6: Far East Horizon – Profitability and Efficiency Indicators, 2011–2014

(%) 2012 2013 2014 2015

Net interest margin 4.08 2.10 1.51 0.71 Non-interest income as a percentage of operating income 49.58 51.94 57.11 67.68 Provision as a percentage of pre-provision income 14.83 17.52 20.68 19.09 Pre-provision income as a percentage of average total assets 4.39 4.15 3.68 3.44 Cost–income ratio 44.43 44.81 44.26 45.37

Source: Audited financial statements of Far East Horizon Limited, 2012–2015.

Source: Audited financial statements of Far East Horizon Limited.

5. Liquidity

9. FEH’s liquidity is rated satisfactory (Table A1.7). The liquidity position remained above the Asian Development Bank covenant requirement from 2013 to 2015. The liquid assets excluding lease assets maturing within 90 days over short-term liabilities declined, which indicates the asset allocation change from cash to leases. Consequently, the liquidity indicator including lease assets has increased to over 100%. 10. Funding sources remained well diversified with more than 40 lenders (Tables A1.8 and Appendix 3, Table A3.1). Foreign currency borrowings continued to increase to 32.5% of total borrowings, mostly from foreign entities comprising 38.0% of total borrowings in 2015. Likewise, FEHL’s borrowings from the market increased from CNY3.4 billion in 2012 to CNY22.1 billion in 2015, equivalent to 26.4% of total borrowings. Direct borrowings increased from 6% in 2013 to 26% in 2015, showing greater reliance on borrowing through instruments on its own strength. Similarly, the offshore borrowing composition increased from 7% to 38%, reflecting FEHL’s ability to borrow from offshore sources. FEHL borrowings have tenors ranging from 6 months to 5 years, although most of its borrowings continue to have a 3-year tenor.

11%

12%

12%

13%

13%

14%

14%

15%

15%

2012 2013 2014 2015

Figure A1.7: FEH Historical ROAE

16 Appendix 1

Table A1.7: Far East Horizon Limited– Liquidity Indicators, 2012–2015 (%)

2012 2013 2014 2015

Gross loans to money market funding 148.76 135.37 130.55 121.94 Gross loans to total assets 93.92 90.90 87.73 79.23 Liquid assets to money market funding 3.93 4.60 4.27 2.00 Liquid assets / short-term liabilities

a 7.36 9.28 9.66 3.71

Liquid assets / short-term liabilitiesb 105.00 118.00

a Liquid assets include interest-bearing deposits and placements with other banks, cash and non-interest-

bearing deposits, and 85% of trading-and-available-for-sale securities. b Liquid assets include cash at hand and deposits with banks with residual maturity of 90 days or less;

marketable precious metals; liquid securities including marketable investment grade securities; 50% of equities that are publicly listed and actively traded, and other marketable securities subject to approval by the Asian Development Bank; 90% of loan and accounts receivable due within 90 days; and 90% of deposit and other receivables due within 90 days. Covenant threshold at >100%. Sources: Audited financial statements of Far East Horizon Limited, 2012–2015; Reporting covenants submission, 2013–2015, Office of Risk Management, Asian Development Bank.

Table A1.8: Far East Horizon Limited– Borrowing Analysis, 2012–2015 (CNY billion, %)

2012 2013 2014 2015 Amount % Amount % Amount % Amount %

CNY 32.27 87.80 41.48 73.35 47.57 66.27 56.31 67.51 FX 4.48 12.20 15.07 26.65 24.21 33.73 27.11 32.49 On-shore 29.57 80.46 35.47 62.71 41.75 58.17 51.77 62.05 Off-shore 7.18 19.54 21.09 37.29 30.02 41.83 31.66 37.95 Direct 3.44 9.36 5.86 10.37 12.75 17.76 22.05 26.43 Indirect 33.31 90.64 50.69 89.63 59.03 82.24 61.38 73.57

CNY = yuan, FX = foreign exchange. Sources: Audited financial statements of Far East Horizon Limited, 2012–2015.

Source: Audited financial statements of Far East Horizon Limited, 2012–2015

0%

1%

2%

3%

4%

5%

2012 2013 2014 2015

Figure A1.8: Liquid assets to money

market funding

-

20

40

60

80

100

2012 2013 2014 2015

Figure A1.9: Funding Growth

(CNY billion)

Appendix 2 17

FINANCIAL STATEMENTS

Table A2.1: Far East Horizon Limited– Statement of Financial Position, 2012–2015 (CNY billion)

2012 2013 2014 2015

Net customer loans 56.00 77.25 95.18 108.18 Other earning assets 3.70 5.91 11.07 22.00 Fixed assets, net 0.36 0.96 1.73 3.36 Other non-earning assets 0.51 2.39 2.74 5.77 Total Assets 60.57 86.51 110.73 139.31 Other liabilities 29.89 43.08 51.77 74.62 Long-term borrowings 17.83 29.27 41.50 41.73 Total Liabilities 47.71 72.35 93.28 116.35 Common stock (including capital surplus)

a 7.11 7.13 8.02 11.78

Retained earnings 3.30 4.60 6.28 8.19 Reserves 2.45 2.43 3.15 2.99 Total Equity 12.86 14.16 17.45 22.96 Total Liabilities and Equity 60.57 86.51 110.73 139.31

a Includes perpetual noncumulative preferred stock and minority share.

Note: Numbers may not sum precisely because of rounding. CNY = yuan Sources: Audited financial statements of Far East Horizon Limited, 2013 to 2015.

Table A2.2: Far East Horizon Limited– Income Statement, 2012–2015 (CNY billion)

Item 2012 2013 2014 2015

Interest income 4.38 5.15 6.34 6.66 Interest expense 2.21 2.46 3.44 4.08 Net interest Income 2.17 2.69 2.90 2.58 Net fee and commission income 1.62 2.38 2.97 3.90 Other operating income 0.51 0.52 0.89 1.50 Total Operating Income 4.30 5.59 6.76 7.97 Less: operating expense 1.93 2.54 3.13 3.70 Pre-provision income 2.37 3.05 3.63 4.30 Loss provisions 0.35 0.53 0.75 0.82 Income after Loss Provisions 2.02 2.52 2.88 3.48 Net nonoperating income 0.06 0.08 0.33 0.10 Pre-tax income 2.08 2.60 3.21 3.58 Taxes 0.56 0.68 0.87 1.00 Net income

a 1.52 1.91 2.30 2.50

a Includes minority interest.

Note: Numbers may not sum precisely because of rounding. CNY = yuan Sources: Audited financial statements of Far East Horizon Limited, 2012 to 2015; Asian Development Bank.

Appendix 3 18

RESULTS AND RATINGS FOR PROJECT CONTRIBUTIONS TO PRIVATE SECTOR DEVELOPMENT AND ADB STRATEGIC DEVELOPMENT OBJECTIVES—FINANCIAL INTERMEDIARIES

(for Small and Medium-Sized Enterprise Financing)

Results Area Actual achievements

Rating Justification Potential

future achievements

Risk

1. Financial institution and sub-borrower PSD effects

1.1 Improved skills: (i) Improved SME credit skills in the participant financial institution(s). (ii) Contribution via the participating financial institution(s) to improved sub-borrower skills in operation of their businesses, e.g., via appropriate loan conditions, advisory services by the bank(s).

Since 2013, IFE has been providing leases to clean bus operators with longer-term maturities. The average lease period is 5 years

Satisfactory Since IFE was able to grant a longer period for the leases, the bus operators have been able to replace a significant component of their fleet with clean buses

With the experience of lending to clean bus operators IFE would be able to increase its presence in this segment of business.

Low

1.2 Improved standards: Improved standards and practices with regard to corporate governance and transparency, stakeholder relations, or Environmental, Social, and Health Systems in participating financial institutions or sub-borrowers.

1.3 Innovation: Innovative ways of offering effective banking services to SMEs (including new products, services, and technologies)

N/A

1.4 Catalytic element: Mobilizing or inducing more local or foreign market financing or foreign direct investment for the supported financial institution or sub-borrowers.

Since 2012, FEH has increased offshore and foreign currency borrowings.

Satisfactory FEH has raised 33% in foreign currency borrowings and 38% in offshore borrowings over its total borrowings in 2015, compared with 12% and 20% in 2012.

The presence of ADB in the liability portfolio of the company has assisted in increasing FEH’s credibility.

Low

1.5. Improved business performance. Expanded SME lending with good portfolio and sub-borrower performance. Expansion of market share.

2. PSD effects beyond financial intermediaries and sub-borrowers

2.1 Private sector expansion and institutional impact: 2.1.1 Contribution to an increased private sector

19 Appendix 3

Results Area Actual achievements

Rating Justification Potential

future achievements

Risk

share and role in the economy. 2.1.2 Contribution to expanded SME lending in the financial system. 2.1.3 Improved SME access to formal credit and banking services in the economy. 2.2 Competition: Enhanced competition in SME market segment among local banks or other types of financial institutions (including new product and service offerings, local-currency products) and/or contribution to increased competition in key sub-borrower markets.

N/A

2.3 Demonstration effects: Replication of new ways of offering effective banking services to SMEs by other banks or institutions.

N/A

2.4 Linkages: Contribution to local savings and deposit mobilization via networks of participant bank(s); contribution to notable upstream or downstream link effects to sub-borrowers’ businesses in their industries or the economy.

N/A

2.5 Catalytic element: Contribution to mobilization of other local or international financing for financial institutions with SME business, and by positive demonstration to market providers of debt and risk capital to SMEs.

N/A

2.6 Affected laws, frameworks, regulation: Contribution to (i) improved laws, regulation, and inspection affecting SME financing; or (ii) a more enabling environment for SMEs via lobby activity, policy dialogue, or otherwise.

N/A

3. Contributions to other ADB strategic objectives

3.1 Inclusion: Increased availability or reduced cost of financial services for the

Public transport operators receiving

Satisfactory 37% of the public transport operators are from less

There will be a higher percentage

Low

20 Appendix 3

Results Area Actual achievements

Rating Justification Potential

future achievements

Risk

poor and other disadvantaged groups. Indirect inclusion benefits generated by subprojects/borrowers through forward/backward links to poor, female, or rural entrepreneurs; the provision of services or products for the poor, women, and rural populations; and employment of such groups.

financing from the program are located in less developed or inland or western provinces.

developed or inland or western provinces.

achieved in this category through the other loans in the program.

3.2 Job creation: Creation of additional sustainable jobs or self-employment. Distinguish between jobs created within supported financial institutions, sub-borrowers and beyond.

There was an increase in employment at the bus operator level due to fleet expansion.

Satisfactory New recruitments by bus operators from 2013 to 2015 total 315.

None Low

3.3. Environmental sustainability: Contribution to reductions in GHG emissions and other environmental improvements through relevant lending policies and practices, and targeting of / allocations for borrowers with environmentally beneficial investments.

The number of clean buses leased to bus operators and in operation by them has increased. The service per annum provided by the funded buses from 2013 to 2015. GHG emissions savings of 1.31 million tons per annum achieved by 2019 as a result of clean buses funded.

Excellent The number of clean buses run by bus operators stood at 1,860 at the end of the period 2013–2015. The service per annum provided by the funded buses was 156,240,000 vehicle-kilometres during 2013–2015. GHG emission savings of 488,250 tons per annum were achieved during 2013 to 2015.

The number of clean buses leased and in operation has increased. The reflows of leases that are of 5 years duration would assist to achieve the target of 5,000 buses by 2018. The service per annum by the funded buses would reach 420,000,000 in 2019 if 5,000 clean buses were in operation by 2019 as targeted. GHG emission reduced by use of clean buses funded. The savings would reach the targeted 1.31 million tons per annum by 2019.

Excellent

3.4. Regional integration: Project contributions to

N/A

21 Appendix 3

Results Area Actual achievements

Rating Justification Potential

future achievements

Risk

regional cooperation and integration by facilitating trade or cross-border financial transactions. 3.5 Any other project development outputs and outcomes

4. Overall Rating Satisfactory ADB = Asian Development Bank, FEH = Far East Horizon Limited, GHG = greenhouse gas, IFE = International Far Eastern Leasing Company Limited, N/A = not applicable, PSD = private sector development, SMEs = small and medium-sized enterprises.

Appendix 4 22

FORECAST OF THE NUMBER OF CLEAN BUSES FUNDED UNDER THE LOAN PROGRAM

Number of clean buses funded by FEHL as at 2015

1,860

Number of clean buses expected to be funded by FEHL from 2016 to 2021

337

Number of clean buses funded by IBFL as at 2015

1,598

Number of clean buses expected to be funded by IBFL from 2016 to 2022

1,118

Total number of clean buses forecast to be funded by FEHL and IBFL

4,913

FEH = Far East Horizon Limited, IBFL = Industrial Bank Financial Leasing Company Limited. Assumptions:

I. The net funds available for lending subsequent to loan repayments to the Asian Development Bank were lent for a period of 5 years.

II. The full amount of $100 million was outstanding in leases as at December 2015 from both FEHL and IBFL. III. The average cost of a bus is assumed at $75 million based on the total number of buses funded and the total

value of lease contracts outstanding as at December 2015. IV. Only the capital flows were considered.