Investment Report on Ri Zhao International Ocean City

New Industry New Life

New Ecology

Rizhao International Ocean City — the Blue New City Investment Report on Rizhao International Ocean City

1

Ocean City (Rizhao IOC) is supported by China’s national government strategy

International and national stakeholders have assembled to actively drive Rizhao IOC’s development

• In 2011, China’s State Council approved Rizhao IOC as a key Sinoforeign cooperation project in its “Development Plan for Shandong Peninsula Blue Economic Zone” • The government’s vision for Rizhao IOC is to become a cluster for modern marine industry encouraging Sino-foreign cooperation, as outlined in the national12th Five-Year Plan on Marine Economy

• Singapore-Shandong Business Council is supporting Rizhao IOC as a key project • Urban planning jointly driven by Rizhao IOC and Singapore Surbana Group will adopt the development concepts of “New industry, new life, and new ecology” • Academic and professional institutions working with Rizhao IOC include the Ocean University of China, Shanghai Ocean University, Institute of Oceangraphy of Chinese Academy of Sciences and the research institutes of State Oceanic Administration of China

日照国际海洋城投资环境报告2013 Rizhao International

Key geographical location

Beijing Seoul Jin-Zhong-Nan Railway

Tokyo

• East Asia access within a three-hours’ flight • Rizhao City governance enables Rizhao IOC to enjoy national support as part of Shandong Peninsular Blue Economic Zone • Important estuary from central China to the Yellow Sea

Shandong Province Shanghai

Rizhao IOC

• Linking two deep-water port areas, Rizhao Port area and Lanshan Port area, who are forecasted to achieve a total annual port throughput of 600 million tons • Embodies a rare long coastline of 16.5 kilometres • Habitat Scroll of Honor Award from the United Nations for favourable living environment

Hong Kong South China Sea

National Strategy

Advantageous natural environment

Infrastructure for sustainable growth

Growth

Rizhao International Ocean City Water sports Marine Industry Marine Economic Zone Investment Deep-water ports Sino-foreign Ecology cooperation

• Construction of an international airport, multiple inter-city high speed railways and the Jin-ZhongNan Railway (linking Shanxi to Rizhao) will soon be finished • Abundant human resources and R&D support from Rizhao University and Scientific Park

© 2013毕马威企业咨询 (中国) 有限公司 — 中国外商独资企业，是与瑞士实体 — 毕马威国际合作组织 (“毕马威国际”) 相关联的独立成员 所网络中的成员。版权所有，不得转载。

2

日照国际海洋城投资环境报告2013

“

Rizhao IOC’s marine industry cluster will provide abundant opportunities for investors to participate in this fast growing industry sector with a relatively low cost

”

Focus industries Marine services Marine engineering and machinery Marine biology Comprehensive utilisation of sea water Marine ecology Coastal advanced manufacturing

Investment opportunities Value chain Leverage existing marine industry value chain and support from Rizhao City and Shandong Province

Market Access regional markets covering Shandong, central China, East Asia and beyond

Growth Benefit from the region’s developing ocean economy

fast

Cost Gain profitable return from lower costs comparing with other coastal cities

© 2013毕马威企业咨询 (中国) 有限公司 — 中国外商独资企业，是与瑞士实体 — 毕马威国际合作组织 (“毕马威国际”) 相关联的独立成员 所网络中的成员。版权所有，不得转载。

Contents 04

Geographic location and economic foundations for marine industry

05

Concept and vision

06

Investment considerations

07

Comparative advantages of Rizhao IOC

08

Investment opportunities

09

Business and living environment

10

Incentive policies

11

Blueprint of Rizhao IOC

13

Key industries

20

Appendix

Prof. Ting writing an inscription for Rizhao IOC Prof.

Samuel C.C. Ting (Ding Zhaozhong), the 1976 winner of the Nobel Prize for Physics and currently investigating dark matter, originated from Taoluo Township of Rizhao IOC. He often visits to consult on Rizhao’s development

“We have been honored to visit Rizhao today to learn more about the Ting family heritage and the exciting future of Rizhao” -- Nobel Prize Winner Samuel C.C. Ting, 2012

日照国际海洋城投资环境报告2013

4

Geographic location and economic foundations for marine industry

Economy

Basic information

Overview of Rizhao 2012 City level

Prefecture-level city in Shandong province

Population

2.89 million

Disposable income of urban population per capita

CNY 22,877

Major industries

Logistics, equipment manufacturing, high-end steel manufacturing, etc.

Number of universities / university student number

8 universities / 70,000 students

GDP, CAGR for the last five years

CNY 135.26 billion, 15% growth

Total value of import and export, CAGR for the last five years

USD 25.25 billion, 28.5% growth

Port throughput, CAGR for the last five years

284 million tons, 17.2% growth

Proportion of marine industry added value of local GDP

44.1% (2012), 42.5% (2011)

Number of tourists, CAGR for the last five years

28.24 million, 17.8% growth

Within one hour flight Within two hour flight Within three hour flight Beijing

Chengdu

Seoul

Shanghai

Tokyo Rizhao International Airport (commence in 2015)

10 km to Rizhao Port

Rizhao downtown

Hong Kong

Rizhao IOC

10 km to Lanshan Port

Sources: Rizhao IOC Administration Committee; Rizhao 2012 Statistics Report

04

05

Concept and vision

1

6

Six design concepts leveraging Singapore’s planning experience

Mutual growth for the marine industry and the city

2

Build up marine industry cycle and take a holistic approach in industrial planning and urban design

3

Keep the long-term vision in current development

Formulate phased development strategy and reserve space for further city expansion and sustainable development

Develop the city from a multistructure perspective

4

Build a structured “communityblock-district” city framework and create a convenient, efficient and comfortable living and working environment Develop convenient transportation

Integrate natural environment into urban corridors

Integrate the natural environment with the five-colour corridors, using natural, sustainable development concepts

5

6

Preserve the city’s unique feature

Design the downtown districts along the central axis of “ancient, modern, future" by integrating the culture of nature, sun and ocean

Match rail transport stations with urban planning and build out the city’s public transport system

Overall concept : extend from inland to the ocean, by leveraging the resources along the central axis (two centres, one island and the ten clusters) • “Two centres and one island” refers to the historical spot of the Yaowangcheng (King of Yao), the modern lifestyle centre of One Ocean World and the Future Island

Central axis

• The central axis represents the development ideology of Rizhao IOC connecting inland to ocean and past to future

Yaowangcheng One Ocean World Future Island

• “Ten clusters” (dashed line areas shown in the graph on the right) stand for the ten industrial areas along the central axis

Pacific Ocean

Rizhao IOC development timeline Design phase and construction start

2012

Startup area ready

Build up scale of industry clusters

Form a city with a balanced living and industrial environment

2013

2015

2020

Sources: Rizhao IOC Administration Committee

Investment considerations

Key considerations before investment

Support from Rizhao IOC

• Cooperation agreements with multiple universities and research institutions focusing on marine industry

Value chain

Logistics infrastructure

Human resources

Land supply and land cost

Utilities

• Infrastructure support covering the entire value chain of the marine industry. Examples include the installation of sea water pumping system for real estate climate control and the adoption of sea water toilet flushing system

• Heavy investment to improve transportation infrastructure. Rizhao International Airport and Jin-Zhong-Nan Railway currently under construction. Inter-city high speed railway lines to Jinan and QingdaoRizhao-Lianyungang Railway to start construction in the near future • A tax-free area is under planning, designed to benefit import/exportoriented companies in the zone

• Rizhao University and Scientific Park currently has 70,000 university students, with 40,000 pursuing 26 distinct marine industry related majors • Rizhao has 58 innovation centres at provincial level or above, among which 14 are marine focused. They provide the marine industry with 152,000 professionals

• Land in startup area is ready for construction • Rizhao IOC will reduce the investment cost by taking charge of basic facility construction(a)

• Nine kilometres’ underground utility tunnel is ready for a new public pipe system, which will avoid the problems of traditional pipe systems • Startup area’s pipe system for water, electricity and gas is currently under construction and is to commence in 2013

Labour cost

• Cooperation agreement with vocational training schools is expected to provide consistent labour supply and reduce training cost

Tax and other incentives

• A package of Tax incentives will be provided to investors in order to achieve a lower cost of investing in Rizhao IOC (for more information, please refer to page 10)

Notes: (a) Basic facility refers to: Land flatness; road building; construction of underground pipes for rain, sewage water; pipes for tap water, gas; access for gas, telecommunication, heat and cable Sources: Rizhao IOC Administration Committee; Rizhao City People’s Congress website

06

07

Comparative advantages of Rizhao IOC

Location

Port capability

Land supply

Linking central China with East Asia and beyond

Top-ranked in logistics; Potential to grow

Abundant land available

Natural Favourable environment climate and highquality sea water

Labour cost

Lower labour cost

• Rizhao IOC is located in the southern part of Shandong Peninsula and the midpoint of China’s coastline. As a Yellow Sea estuary, Rizhao IOC is the key for central China’s import and export • Lying just to the west of Japan and South Korea provides Rizhao an easy commute to major east Asia cities such as Tokyo, Yokohama, Seoul and Pusan, which only requires a three-hour flight or three-days by ship

• Rizhao Port is China’s ninth largest coastal port by throughput and has direct transportation to more than 100 countries and regions globally. 2012 throughput reached 284 million tons • Rizhao Port owns advanced logistics infrastructure including a 300,000-ton mineral berth and a 150,000-ton coal mine berth. A projected port coastline of 29.7 kilometres underscores the port’s growth potential

• The planned area reached 169.7 square kilometres. As much as 28 percent of the area is for industrial and warehouse use, providing a large area for construction

• Suitable climate for cultivation of both northern and southern plants and aquatic products • The quality of sea water meets national first-class standard, which provides a positive environment for marine biology and industries using sea water

• Rizhao’s 2012 average wage for urban employee per capita was CNY 40,361, six percent below Shandong’s average and at least five percent lower than other major coastal provinces or cities

Sources: Rizhao IOC Administration Committee; Phoenix

Investment opportunities

Participate in Rizhao’s fast growing marine economy

Enter into regional markets enabled by convenient transportation

• Shandong has a developed marine economy covering sectors along the value chain. The province’s 2012 marine industry GDP reached CNY 946 billion, a 14 percent increase from 2011, representing nearly 20 percent of the nation’s marine industry GDP

• Highways and inter-city speed trains connect areas in Shandong Peninsula and south of Shandong

• Rizhao’s marine industry is the city’s key economic driver. Over 44 percent of the city’s total GDP in 2012 came from the marine industry and this share grew by two percent over 2011

• Convenient links to the East Asian markets will be provided by Rizhao’s two port areas and the upcoming international airport

Benefit from the region’s fast development • Rizhao’s GDP has been growing at a 15 percent CAGR over the past five years and is forecasted to be 12 percent through 2015 • Total value of import and export in Rizhao increased at a CAGR of 28.5 percent in the past five years and it aims to grow at a CAGR of 12 percent within the period to 2015 • Rizhao IOC’s CAGR for its GDP in 20122020 aims to be 42 percent

08

• The Jin-Zhong-Nan Railway will be ready in the near future and lower the cost of transportation to central and northwest China

Gain profitable return from low cost • Lower labour costs comparing with other coastal cities in China • Logistics and procurement reduced by leveraging the location being close to Rizhao steel and automobile manufacturing bases

cost can be advantageous Port, high-end and parts

• Investment preferential policies such as tax incentives are provided to the companies, as well as cost saving solutions for land usage

Rizhao IOC computer designed image

Sources: Rizhao IOC Administration Committee; People.com; Xinhua.net

09

Business and living environment

Quality residency options from rated hotels and apartments are available • Rizhao has more than 30 hotels with a rating of three-star or above and many economy hotels • The monthly rent for a two-bedroom apartment is about CNY 800-1200 (USD 128-192)

Rizhao’s international schools and hospitals offer convenience for expats’ education and medication • Rizhao EtonHouse International School was established in 2012 with a curriculum covering primary and secondary education • There are 25 hospitals in Rizhao. All are qualified to provide foreign-language medication service

Rizhao Wanpingkou Scenic Area

Rizhao’s pleasant living and tourism environment has been awarded with the UN’s Habitat Scroll of Honor Award • Rizhao’s average annual temperature is 12.6 ℃, with a summer average of 23.9 ℃ and winter average of 0.5 ℃ • Throughout a year, there are a total of 2,540 hours of sunny weather, giving Rizhao the nickname as China’s “Sun City of the East”

• As the “City of Water Sport”, Rizhao has built the Olympic Water Sports Park and held many sport events such as the International Sailing Championship • Golden beaches of 64 kilometres have attracted tourists from all over the world. In 2012, 28.24 million tourists visited Rizhao, a 15.2 percent increase from 2011

Incentive policies

Rizhao IOC provides investors with the following incentive policies(a) Policies

Contents

Land

For industrial projects, investors can purchase land use rights through the bidding process . After commencing operation, the company can enjoy 100% waiver in land use tax and construction maintenance tax in the first two years on condition that the reported tax per mu(b) exceeds CNY 10,000

Tax incentives

After commencing operation, companies enjoy a 50 percent tax return on the local residual of their value-added tax, business tax and company income tax. In the third year, the tax return rate is 30 percent

Fee incentives

In the process of new company registration and construction, companies enjoy a certain amount of managerial fee to be waived. A business process fee is charged based on the lowest standard

Case by case discussion

Rizhao IOC typically offers incentives on an individual case basis for investors with larger investment, higher technology or with other high-impact capabilities

Notes: (a) For more information, please contact Rizhao IOC Administration Committee (b) 1 mu = 667 square metre

Sources: Rizhao IOC Administration Committee

10

11

Blueprint of Rizhao IOC

Startup Area

Sources: Rizhao IOC Administration Committee

Marine Equipment Manufacturing Area

Key industry Overview - the marine industry cycle

Marine Service Logistics, IT and financial services

Products application

Marine biology

Tourism, technology application

Application of equipment/ technology Purified water

Purified water

Comprehensive utilisation of Sea water

Cooling water

Onshore heavy equipment manufacturing Rizhao has manufacturing capacity of 750,000 automobiles, 6.2 million tons of oil and grain processing, 5 million tons of oil and grain processing, and 12 million tons of steel and iron processing

Sources: Rizhao IOC Administration Committee

An eco-friendly marine industry cycle can be built by cross-sector mutual support

Marine ecology

Equipment application

Rizhao’s sea water quality and natural environment is suitable for aquatic products cultivation and processing

Processing

13

Cooling water

Raw material / machinery parts

Raw material / machinery parts

Marine machinery

Rizhao has ship manufacturing capability of 250,000 tons and is expected to reach 2 million tons in 2015

Key industry Marine service

14

Rizhao IOC is closely linked to Rizhao’s two port areas which have rich marine culture such as ocean festival. These areas can be leveraged to develop marine service industries such as logistics and coastal tourism • Develop tourism projects such as cruise, yacht, marine science tour, ocean culture tour and water town tour

Coastal tourism

• Build up marine logistics, e-commerce, third party and fourth party logistics

Focus Areas

Logistics Research service

• Organize marine science and technology incubation center, R&D labs, intellectual property exchange service companies will be encouraged

Regional headquarters

• Attract corporate headquarters such as regional sales, financial settlement and service centres

Financial service Exhibition service

100 km coastline International airport

Sources: Rizhao IOC Administration Committee

• Plans to build exhibition venues and cultivate professional exhibition brands

4000-years’ history

200-million ton port

Central China Estuary

• Encourage venture capital, trust companies, companies in banking, security, financial leasing and wealth management to join IOC

Beaches

City of Water Sports

Sun Festival· Sun Worship Ceremony

Longshan Culture Relics

Ocean Voyage Festival

UN Habitat Scroll of Honor Award

15

Key industry Marine engineering and machinery Rizhao IOC is close to Rizhao’s high-end steel manufacturing base, heavy marine machinery manufacturing base and ship building factories. This offers value chain and talent resources for the development of marine machinery sector China’s marine machinery sector has potential for demand growth and localisation

Rizhao is prepared to provide support for IOC’s development in this sector

• At present, 70 percent of China’s marine machineries are imported, and less than five percent of key instruments are built domestically

• Rizhao’s high-end steel manufacturing base has a production capacity of 12 million tons

• China’s current average proven rate for ocean oil and gas resources are 12.3 percent and 10.9 percent respectively which is below the global average level of about 50 percent. This underscores the large potential demand for marine machinery

• Rizhao’s marine machinery manufacturing base and Huahai Shipping Company have developed deep sea drilling platform and distribution equipment as well as a 250,000-ton shipbuilding capability and a 20,000-ton ship repairing capacity

Manufacturing for marine projects equipments

Marine new energy equipment manufacturing Build a research centre focusing on Rizhao’s marine new energy and the manufacturing of related equipment for harnessing tidal energy and wave energy

Manufacturing for marine projects equipments

Focus on the R&D and manufacturing of large marine equipment instruments and metres, auto-control system and telecommunication and navigation system

Marine new energy equipment manufacturing

Focus Areas

Onshore machinery manufacturing

Onshore machinery manufacturing

Special ship and cruise ship building Enhance ship building capability of special ships such as offshore operation ship, work craft, as well as cruise, yacht, race and sailing boat etc.

Special ship and cruise ship building

Develop manufacturing of onshore machinery including cranes, loaders and unloaders, and other transportation equipment

Sources: Rizhao IOC Administration Committee; “Accelerate in marine equipment manufacturing and avoid energy shortage”, Hexun; Xinhua; “China’s oil and gas has entered the Ocean Era”, People’s Daily

Key industry Marine biology Rizhao IOC’s mild climate, 16.5-kilometre coastline and marine science organisations provide advantageous foundations for marine biology industry, including aquatic product cultivation, food processing and aquatic materials

15.7 sq km2 for marine life cultivation South-north climate transition area Four aquatic species reserve area National first-class quality sea water

Eight National green cultivation demonstration area

Marine science research partner organisations Examples of marine science research partner organisations Organisation name Ocean University of China

Shanghai Ocean University The First Institute of Oceanography, State Oceanic Administration The Second Institute of Oceanography, State Oceanic Administration The Third Institute of Oceanography, State Oceanic Administration Institute of Oceanology, Chinese Academy of Sciences Chinese Academy of Fishery Sciences, Yellow Sea Fisheries Research Institute

Sources: Rizhao IOC Administration Committee

Focus Areas Marine functional food and cosmetics products • Develop marine functional food industry including processed food such as fish oil, marine algae and cosmetics industry including marine collagen and active peptides

Marine bio-material and marine enzyme • Develop bio-material industry in producing products such as carrageen and agar, as well as enzyme sector

Aquatic biological breeding • Build up an innovation platform for aquatic biological breeding.

Develop advanced sea water breeding and cultivation technology and technologies for prevention and control of fish diseases

Marine biomedicine • Encourage investment from sectors such as medical preparation and genetic engineering. Develop modern marine medicine for anti-virus or cancer-prevention purposes

Marine drugs and marine contract research outsourcing (MCRO) • Establish public research platform for marine R&D and attract corporate and institutional research centres to develop R&D outsourcing sector

16

17

Key industry Comprehensive utilisation of sea water

The national first-class quality sea water of Rizhao provides Rizhao IOC with quality resources to further develop sea water utilisation industry, including desalination, direct usage and chemical resources

Focus Areas Desalination

Research and develop key technology for production of high quality desalination films and devices, energy recycling devices and high-pressure pump

Direct use

Focus on technologies in developing sea water cooling system, eco-friendly water treatment, seawater desulfurisation and seawater treatment for daily usage

Chemical resource usage

Develop technology and equipment for magnesium, bromine, potassium, and uranium extraction to help complete the sea water treatment value chain

Objective: To be a national model for sea water treatment

Sources: Rizhao IOC Administration Committee

Key industry Marine ecology

In marine ecology, Rizhao IOC plans to focus on four sectors listed below.

Rizhao IOC has signed research and technology support agreements with institutions such as Shanghai Ocean University to further drive this industry

Research and production of ocean environment repair equipment, pollution prevention devices and online environment detection devices

1

Ocean anticorrosion sector

2

Ocean environment devices manufacturing

3 Environmental

Research and industrialisation focus in areas such as tidal area steel corrosion

Sources: Rizhao IOC Administration Committee

Cooperate with national marine research institutions in developing marine new energy

devices for ship and offshore projects use

4

Marine new energy such as tidal and wave energy

Key areas include ship incinerators, sewage treatment equipment, oily water separators and crude oil wash equipment

18

19

Key industry Coastal advanced manufacturing Rizhao’s two port areas and onshore manufacturing industry provide Rizhao IOC the value chain support to develop coastal advanced manufacturing, such as onshore equipment manufacturing and steel processing

Onshore equipment manufacturing

Development foundation Advanced steel manufacturing will further develop into the Southern Shandong Coastal Industry Cluster as mentioned in “Development Plan for Shandong Peninsula Blue Economic Zone” Rizhao Port area is an important estuary for Southern Shandong Economic Belt, which means the port is eligible to radiate the area as well as central China market

Focus Areas

Manufacturing of precision machinery, heavy machinery, new energy equipment, and new material industry: electronics, construction and packaging

Steel processing

Rizhao IOC is close to the two port areas of Rizhao port, advanced steel manufacturing base, automobile parts manufacturing base and oil and gas logistics and processing base

Steel plates and tube processing for use on automobiles, household equipment, ships, containers and oil pipes

Southern Shandong area and the coastal industry cluster Hebei Province

Bohai Sea

Shandong Peninsula Blue Economic Zone

Shandong Province

Southern Shandong Economic Belt

Rizhao City

Huanghai Sea

Southern Shandong coastal industry cluster

Sources: Rizhao IOC Administration Committee

Appendix Operating cost Land, office building cost Floor Standard factory building cost (single-deck lightweight steel Standard factory building cost (concrete Standard factory annual rent Office building monthly rent

CNY/m2

USD/m2

800

127.8

1200 70-100 15-18

191.7 11.2-16.0 2.4-2.9

Cargo delivery fee by highway, railway and by sea Destination Beijing Shanghai

CNY 6,200 6,000

Guangzhou

15,000

Highway USD 990.3 958.3

Destination (by sea) Singapore Tokyo, Yokohama, Osaka, Kobe Sydney, Melbourne, Brisbane North-western ports Los Angeles, Auckland New York

2,395.8

Days 1 1 4

CNY 3,086 2,576

Railway USD 492.9 411.4

6,529

1,042.8

USD 230 50 1,200 1,450 2,200 2,850

Days 1 1 6

Days 9 3 21 30 13 33

Notes: The cargo delivery fee above refers to delivering a TEU from Rizhao to the destination; The price is solely for reference purpose and it may fluctuate in relation to prices of raw material and fuel

Public facility cost Water (per ton)

Public facility For living use

CNY 2.81

USD

For industrial use

3.11

0.50

For living use Electricity (per kwh)

For commercial use

For industrial use Gas 3 (per m )

For living use For commercial and industrial use

0.45

0.4929-0.5469 0.0787-0.0874 0-1 kilovolt: 0.7753 0-1 kilovolt: 0.1238 1-10 kilovolt: 0.7603 1-10 kilovolt: 0.1214 35 kilovolt and above: 0.7453 35 kilovolt and above: 0.1190 1-10 kilovolt: 0.6411 1-10 kilovolt: 0.1024 35-110 kilovolt: 0.6261 35-110 kilovolt:0.1000 110 kilovolt and above: 0.6111 110 kilovolt and above: 0.0976 2.913 0.47 3.253

0.52

Notes: Above cost and fee are based on renminbi, except for sea shipping cost; Exchange rate: USD 1 = CNY 6.2609

Sources: Rizhao IOC Administration Committee; Rizhao Sanyun Logistics Company; boc.cn

20

21

Appendix Management structure and company registration flow chart

Rizhao IOC organisational structure Rizhao IOC Administration Committee

General Office

Construction Bureau

Economic Development Bureau

Financial Bureau

Social Affairs Bureau

Investment Promotion Centre

Public Utility Management Centre

Companies registration flow chart Project feasibility report

Project discussion, evaluation and agreement

Enterprise name registration

Project establishment registration

Company registration procedures

Land use right procedures

Construction permit

Topo. map

Construction blueprint approval

Blueprint

Environment / Location / Land pre-approval

Environment report

Project establishment procedures

Domestic investment

Foreign investment

Pre-approval for special projects

Approval for foreign investment

Capital verification

Business license

Construction plan approval / Project bidding / Construction permit

Construction plan

Land certificate

Construction commencement

Sources: Rizhao IOC Administration Committee

Certificates (Quality inspection, tax, bank)

Business license

Certificates (Quality Inspection, foreign currency, bank)

Capital verification Certificates (tax, bank, customs)

Project commencement