EXHIBIT 3: CONSOLIDATED FINANCIAL STATEMENTS a. Balance Sheet millions of 2012 2013 2014 ASSETS Non-current assets 8,095 8,671 10,261 Property, plant, and equipment 7, 142 7,416 8,823 Leasehold land and land use rights 523 780 875 Intangible assets 121 1 11 157 Investments in joint ventures 104 130 161 Long-term receivables 25 19 Long-term prepaid rental expenses 67 62 56 Deferred income tax assets 113 153 189 Current assets 5,065 6,012 6,630 Inventories 1,907 1,877 2, 169 Trade and other receivables 2,647 3,215 3,549 Derivative financial instruments 0 2 Restricted cash 24 11 8 Cash and cash equivalents 487 490 499 Assets of disposal group classified as held-for-sale 417 402 Total assets 13, 160 14,683 16,891 EQUITY Equity attributable to equity holders of the company 6,988 7,858 8,814 Share capital* 2,003 2,003 2,003 Share premium 184 184 184 Other reserves 854 944 874 Retained earnings 3,947 4,727 5,753 Non-controlling interests 3 Total equity 6,992 7,862 8,818 LIABILITIES Non-current liabilities 1,009 1,241 1,622 Borrowings 380 18 1,213 Deferred income tax liabilities 8 63 74 Deferred income on government grants 121 260 336 Current liabilities 5, 160 5,581 6,451 Trade and other payables 1,825 2.374 2,795 Current income tax liabilities 206 259 282 Borrowings 3, 126 2,899 3,336 Derivative financial instruments 8 2 Current portion of deferred income on government grants 3 7 14 Liabilities of disposal group classified as held-for-sale 32 22 Total liabilities 6, 169 6,822 8,073 Total equity and liabilities 13, 160 14,683 16,891 *As of December 2014, 2,002,986,332 A-shares had been issued and were outstanding.EXHIBIT 3 (CONTINUED) b. Income Statement millions of 2012 2013 2014 Revenue 10,247 1 1,501 12,928 Cost of sales (6,420) (6,831) (7,566) Gross prot 3,828 4,671 5,363 Distribution costs and selling expenses (779) (877) (982) Administrative expenses (763) (908) (1.031) Research and development expenses (236) (389) (518) Other income 63 54 46 Other losses ains net 48 0 43 Operating prot 2,065 2,552 2,834 Finance income 2 3 14 Finance costs (226) (202) (241) Finance costs net (224) (199) (227) Share of results of joint ventures 22 26 31 Prot before income tax 1,862 2,379 2.638 Income tax expense (338) (462) (422) Prot for the year 1,524 1,917 2217 Earnings per share for prot attributable to equity holders of the company during the year Eraasrlgpnd diluted earnings per share (expressed In if per 0.76 0.96 1.11 Dividends proposed 1,001 1,001 n.a. EXHIBIT 3 (CONTINUED) c. Cash Flow Statement millions of 2012 2013 2014 Cash flow from operating activities Cash generated from operations 2,772 3, 199 3.565 Income tax paid (346) (382) (435) Net cash generated from operating activities 2,426 2,817 3, 131 Cash flow from investing activities Proceeds from disposal of PP&E (including leases) 40 311 75 Purchases of PP&E (including leases and intellectual property (1,507) (1,881) (2,793) Interest received 2 3 14 Government grants received relating to PP&E 83 151 93 Net cash used in investing activities (1,383) (1,417) (2,612) Cash flows from financing activities Borrowings and repayments 380 (186 741 Dividends paid to the company's shareholders (801) (1,001) (1,001) Interest paid (197) 209) 254) Capital Injections 14 0 4 Net cash used in financing activities (1,364) (1,396) (511) Net (decrease)/increase in cash and cash equivalents (320) 5 7 Cash and cash equivalents at beginning of the period 808 487 492 Cash and cash equivalents at end of the period 487 492 499 Note: "PP&E" is property, plant, and equipment; figures may not add up exactly due to rounding errors. Source: Simplified from "Fuyao Glass Industry Group Limited Global Offering," HKEX News, March 19, 2015, accessed April 13, 2015, www.hkexnews.hk/listedco/listconews/SEHK/2015/0319/LTN20150319019.pdf.EXHIBIT 4: FINANCIAL PERFORMANCE MEASURES a. Fuyao Glass Historical 2014 2013 2012 2011 2010 2009 200 2007 2006 2005 Performance Revenue (millions of *) 12,928 11,501 10,247 9,689 8,508 6,079 5,71 5,166 3,935 2,911 Net Income (millions of ) 2,217 1,917 1,525 1,513 1,78 1, 118 246 917 614 392 Total Assets (millions of *) 16,891 14,683 13, 160 12,212 10,567 9,051 9,33 9,462 7,594 6,551 Gross Margin Percentage (%) 41.48 40.61 37.35 36.56 40.42 42.05 31.32 36.18 34.76 30.51 Net Income Margin 17.15 16.66 14.88 15.61 21.01 18.39 4.30 17.76 15.60 13.46 Percentage (%) Dividend Payout Ratio n.a. 0.52 0.66 0.53 ).64 0.30 0.54 0.51 Dividend Yield Ratio n.a. .06 0.06 0.05 ).04 0.01 .0 0.02 0.01 0.00 Return on Assets (%) 13.12 13.05 11.5 12.39 16.92 12.35 2.64 9.69 8.08 5.98 Return on Equity (%) 25.14 24.38 21.86 24.27 30.60 25.49 7.53 26.01 21.07 17.73 Sustainable Growth Rate n.a. 11.70 7.43 11.41 11.01 17.84 7.5 11.96 10.32 17.73 (%) Current Ratio 1.03 1.08 0.98 1.04 1.00 ).99 0.78 0.88 0.94 0.92 Debt Ratio 0.48 0.46 0.47 0.49 ).45 ).5 0.65 0.63 0.62 0.66 Capitalization Ratio 0.34 0.33 0.36 n.a. n.a. n.a n.a. n.a. n.a. n.a. For Year Ended December 31, 2014 b. Competitive Performance Fuyao AGC NSG Saint- Gobain Xinyi Revenue (millions of *) 2,928 67,415 30,305 279, 167 8,689 Net Income (millions of *) 2,217 1,024 (824) 6,480 1,092 Total Assets (millions of *) 16.891 103,867 46,259 304,667 16,827 Gross Margin (%) 41.48 24.61 24.13 6.81 25.17 Net Income Margin (%) 17.15 1.52 (0.03) 2.32 12.57 Dividend Payout Ratio n.a. 1.31 0.00 0.73 0.43 Dividend Yield Ratio n.a. 0.037 0.00 0.03 0.01 Return on Assets (%) 13.12 0.99 (1.78) 2.13 6.49 Return on Equity (%) 25.14 1.73 (9.45) 5.17 8.85 Sustainable Growth Rate (%) n.a. (0.53) (9.45) 1.40 5.04 Current Ratio 1.03 1.76 1.03 1.35 1.00 Debt Ratio 0.48 0.43 0.81 0.59 0.41 Capitalization Ratio 0.34 0.33 0.72 0.40 0.33 n.a. = not available Notes: Sustainable growth rate = return on equity x (1 - dividend payout ratio); Debt ratio = total liabilities + total assets; Capitalization ratio = total debt + the sum of total debt + total equity; Ratios for AGC and NSG are for the whole group rather than for their glass divisions. AGC and NSG statements originally in JPY have been translated to * at the rate of 1 JPY = * 0.05; Saint-Gobain statements originally in EUR have been translated to * at the rate of 1 EUR = 6.8; Xinyi statements originally in HKD have been translated to * at the rate of 1 HKD = 10.8. AGC announced dividends twice in 2014; we used the closing price on December 31, 2014 to calculate dividend yield; As of December 31, 2014, 10-year, risk-free government treasury bond rates were 3.62 per cent, 0.33 per cent, and 1.30 per cent in *, euros, and Japanese yen, respectively. Source: Created by authors using the subject companies' audited financial statements.EXHIBIT 5: PLANNED CAPITAL EXPENDITURES, 2015 AND 2016 Location and Type of Year ended Expenditure December 31, 2015 2016 (millions of *) United States Auto glass 760 255 Float glass 250 455 U.S. subtotal 1,010 710 Russia Auto glass 32 470 Float glass 0 525 Russia subtotal 32 995 Others Auto glass in Shenyang 190 Auto-glass technology upgrades 1,400 1,000 Float-glass technology upgrades 200 20 Other 158 100 Others subtotal 1,948 1,300 Total 2,990 3,005 Source: "Fuyao Glass Industry Group Limited Global Offering," HKEX News, March 19, 2015, accessed April 13, 2015, www.hkexnews.hk/listedco/listconews/SEHK/2015/0319/LTN20150319019.pdf. EXHIBIT 6: BORROWINGS (MILLIONS OF *) As of Debt Type As of December 31 January 31 2012 2013 2014 2015 Non-Current Long-term bank borrowings 617.0 924.0 1, 198.0 1, 198.6 Medium-term notes 399.5 399.5 399.6 399.7 Less: current portion of non- current borrowings (136.3) (406.0) (385.0) (385.0) Subtotal 880.2 917.5 1,212.6 1,213.3 Current Short-term bank borrowings 1,146.4 1,260.6 2,640.9 2,687.3 Short-term commercial papers 1,843.1 1,232.7 309.7 311.3 Current portion of non-current borrowings 136.3 406.0 385.0 385.0 Subtotal 3, 125.8 2,899.3 3,335.6 3,383.6 Total 4,006.0 3,816.8 4,548.2 4,596.9 Note: Fuyao's principal banking relationships were with Agricultural Bank of China, Industrial and Commercial Bank of China, China Construction Bank, Bank of China, China Construction Bank, The Export-Import Bank of China, Citibank, and Deutsche Bank. Source: "Fuyao Glass Industry Group Limited Global Offering," HKEX News, March 19, 2015 accessed April 13, 2015, www.hkexnews.hk/listedco/listconews/SEHK/2015/0319/LTN20150319019.pdfEXHIBIT 7: STOCK PRICES AND DIVIDEND PAYOUTS a. Stock Price Change around Dividend Payment Fuyao Year Dividen 3-Day Event Date Ending Fuyao 3-Day SSE Fuyao d RMB Share minus SSE Price () Return (%) Return (%) 1%) Payout May 19, 2014 8.08 1.25 -0.84 2.08 2014 0.50 Ex-Dividend May 13, 2014 8.59 -5.93 1.81 -7.74 Announcement February 25, 2014 8.00 0.00 -3.49 3.49 Payout June 7, 2013 8.10 -4.86 -5.55 0.69 2013 0.50 Ex-Dividend June 3, 2013 9.00 -8.94 -1.98 -6.97 Announcement March 19, 2013 8.42 1.66 1.70 -0.03 Payout July 6, 2012 7.60 -0.66 -2.57 1.91 2012 0.40 Ex-Dividend June 27, 2012 8.40 -6.92 0.15 -7.07 Announcement April 25, 2012 8.28 2.64 0.67 1.97 Payou April 8, 2011 12.16 2.13 0.71 1.42 2011 0.57 Ex-Dividend March 30, 2011 12.95 -8.48 -1.89 -6.59 Announcement March 2, 2011 12.59 1.50 -0.07 1.58 Payout April 29, 2010 11.11 -2.03 -1.29 -0.74 2010 0.17 Ex-Dividend April 20, 2010 11.82 -7.30 -3.15 -4.15 Announcement March 10, 2010 12.45 0.08 -0.06 0.14 Note: "Announcement" refers to the date on which Fuyao announced the amount and payment date of the dividend; "Ex- Dividend" refers to the first date on which holders of record of the stock were not entitled to receive the declared dividend; "Payout" refers to the date on which holders of record received the dividends; "Payout SSE" refers to the Shanghai Stock Exchange 180 Index. b. Historic Prices and Trading Volumes for Fuyao on the Shanghai Stock Exchange 16 14 12 10 8 A 2 January 4, 2010 - March 4, 2010 May 4, 2010 July 4, 2010 September 4, 2010 November 4, 2010 January 4, 2011 March 4, 2011 May 4, 2011 - July 4, 2011 September 4, 2011 November 4, 2011 January 4, 2012 March 4, 2012 May 4, 2012 - July 4, 2012 September 4, 2012 November 4, 2012 -January 4, 2013 March 4, 2013 May 4, 2013 July 4, 2013 -September 4, 2013 November 4, 2013 -January 4, 2014 March 4, 2014 May 4, 2014 July 4, 2014 September 4, 2014 November 4, 2014 January 4, 2015 -Price in Chinese Yuan - Volume in tens of millions of shares Source: Created by the authors from "Fuyao Glass Industry Group Co Lid," Bloomberg, accessed March 17, 2016.EXHIBIT 8: TAX AND REGULATORY ISSUES CONCERNING DIVIDENDS Date Regulation Name Key Content 2013-12-27 Opinions on Further Listed companies should disclose dividend policies, particularly Enhancing the Protection commitments and detailed plans for cash dividend payments. of Small lnvestors' Rights Failure to implement such commitments should be and Interests to Promote documented . . . . Independent directors and relevant the Construction of a intermediaries should explicitly express their opinions on whether a Comprehensive Capital company's prot distribution policy might harm small investors' Market System rights and interests. 2013-11-30 No. 3 Guideline for the Article 2: Listed companies shall rmly establish an awareness to Supervision of Listed reward shareholders, improve cash dividend distribution strictly in CompaniesCash accordance with the Company Law, the Securities Law, and their Dividend Distribution of articles of association; maintain consistency, rationalityI and Listed Companies stability of dividend distribution policies; and ensure truthfulness of disclosure of dividend distribution. Artists 4: Listed companies shall prioritize cash dividend over stock dividends. Where conditions for cash dividend distribution are met, prot shall be distributed in cash. Where prot distribution is carried out in stock dividends, consideration shall be given to factors such as company growth performance and dilution of net assets per share. Artists 5: The boards of directors of a listed company shall, taking into consideration industry characteristics. the company's development stage, business operation model, protability, and signicant capital expe nditures, and in accordance with the procedures specied in their articles of association, develop differentiated cash dividend policies applicable to the following situations: (i) Where a company is mature and has no signicant capital expendituresI the cash dividend payout ratio shall be no less than 80 per cent of prots: (ii) Where a company is mature but has signicant capital expenditures. the cash dividend payout ratio shall be no less than 40 per cent of prots; and (iii) Where a company is in a growth stage and has signicant capital expenditures, the cash dividend payout ratio shall be no less than 20 per cent of prots. 2012-11-16 Notice of the Ministry of Where an individual acquires the stock of a listed company from a Finance, the State public offering of the company or from the stock market, if the stock Administration of Taxation, holding period is one month or less. the income from dividends and and China Securities bonuses shall be included in the individual's taxable incomes in full Regulatory Commission on amount; if the stock holding period is more than one month up to Issues Concerning the one year, the income from dividends and bonuses shall be Implementation of included in the taxable incomes at the reduced rate of 50 per cent Differential Individual for the time being: and if the stock holding period is more than one Income Tax Policies on year, the income from dividends and bonuses shall be included in Dividends and Bonuses of the taxable incomes at the reduced rate of 25 per cent. Individual Listed Companies income taxes on the aforesaid incomes shall be collected at the uniform rate of 20 per cent. Source: Created by the authors from data obtained from the regulations cited in columns one and two of the above table. issued by the China Securities Regulatory Commission. increase to 528 million square metres in 2018. This increase would driven primarily by the economic recovery in the United States and Europe and the growing demand for automobiles in the emerging economies of Asia and South America. The global auto-glass market was highly concentrated. In 2013, four top players-Asahi Glass Co., Ltd. (AGC), Fuyao, Nippon Sheet Glass Co., Lid. (NSG), and Saint-Gobain-accounted for approximately 77 per cent of the global market in terms of sales revenue. Fuyao's sales represented 20 per cent of the total global auto-glass sales, right after AGC, which was number one with 22 per cent of the total global glass market. Among Fuyao's three international competitors, Saint-Gobain was the largest in terms of revenue, but glass (including auto glass) made up only half of Saint-Gobain's Innovative Materials Division's revenues and just a quarter of Saint-Gobain's total revenues. About three-quarters of Saint-Gobain's revenues came from the manufacture and distribution of other building materials. About half of AGC's sales were glass-related (including flat glass, auto glass, and display glass), with the rest of its sales made up of electronics, chemicals, and ceramics. In contrast, almost all of NSG's revenues were glass-related, with about half from auto glass, 40 per cent from construction glass, and 10 per cent from technical glass.' Unlike its competitors, Fuyao specialized exclusively in auto-glass production. The Chinese domestic auto-glass market was also highly concentrated, with approximately 89 per cent of China's auto-glass sales made by the top five domestic manufacturers (three of which were Chinese subsidiaries of Fuyao's international competitors) and 10 per cent by imports. The domestic market was expected to grow from 96.5 million square metres in 2013 to 150.6 million square metres in 2018.* Fuyao was the largest domestic player (63 per cent market share), followed by AGC (12 per cent), Saint-Gobain (9 per cent), Xinyi (7 per cent), and NSG (4 per cent). High entry barriers into the auto-glass industry explained industry concentration in both the global and domestic markets. First, it was very difficult to quickly establish manufacturing and sales networks covering major automobile producers. These networks were crucial as a cost-effective way to meet OEM and ARG markets. Second, the advanced technology requirements for the production of safe, multifunctional auto glass presented barriers to potential entrants that had poor research and development (R & D) capabilities. Third, any new entrant would have to make large capital investments to establish an auto-glass manufacturing facility and ensure supplies of float glass. Fuyao had already invested in its own high-quality float glass production lines located near each of its auto-glass manufacturing facilities. Last but not least, automobile manufacturers required that the auto glass they installed should possess the safety and quality certifications prescribed by each of the countries and regions where their cars would be sold. Fuyao's auto glass already had such certification. The auto-glass industry was experiencing several new trends. Sunroofs were becoming increasingly popular, and enhancements were being made in both the size and tilt angle of the front windshield. Each of these trends increased glass area per vehicle. Customers expected more value-added features and functions to improve driving comfort, safety, and energy efficiency, and many of these traits were being built into auto glass. In order to better control costs, optimize supply chains, and enhance quality control, "Fuyao Glass Industry Group Limited Global Offering," Fuyao Glass, March 19, 2015, 119, accessed April 13, 2015, www.hkexnews.hk/listedco/listconews/SEHK/2015/0319/LTN20150319019.pdf, hereinafter Prospectus. In the Prospectus, filed with Hong Kong Exchanges and Clearing, Fuyao reported that it obtained the forecasts from a privately commissioned study issued by Roland Berger Enterprise Management (Shanghai) Co. in preparation for the offering. Saint-Gobain, 2015 Registration Document, accessed October 14, 2016, www.saint- gobain.com/sites/sgcom.master/files/sg_drf2015_gb.pdf; AGC Group, AGC Report 2015, accessed October 14, 2016, www.agc.com/english/csr/book/pdf/agc_report_2015e.pdf; NSG Group, Annual Report 2015: Fiscal Year Ended 31 March 2015, accessed October 14, 2016, www.nsg.com/~/media/NSG/Site%20Content/Temporary%20Downloads/English/AR2015.ashx. * Prospectus, 88.auto-glass manufacturers, in close cooperation with the OEMs, modularized their products so the auto glass could be installed quickly on autobodies as they travelled along the OEMs' assembly lines.' COMPANY BACKGROUND On June 20, 1987, Fuyao was established as a Sino-foreign equity joint venture under the name of Fujian Yaohua Industrial Glass Co., Lid., with a registered capital of V6.27 million. At that time, a township enterprise' called the Fuqing County Gaoshan Special Shaped Glass Factory held a 25 per cent equity interest in Fuyao, and Fuyao was managed by Cho under a contract from the county. Since that time, Fuyao's ownership structure and management had changed several times, but effective control had remained in Cho's hands (see Exhibit 1). Fuyao's products were sold in the domestic Chinese and overseas markets. Its major customers included the world's top 20 automobile manufacturers and China's top 10 passenger vehicle manufacturers. The average age of its business relationship with its top 10 customers was 10 years, and those customers' engineers cooperated closely with Fuyao, from the early planning stages through to the manufacturing of each new model's auto-glass needs. Fuyao's 12 auto-glass production bases in China enabled the company to offer cost-effective, just-in-time domestic delivery. Vertical integration into float glass provided a stable, high-quality glass supply. High operational efficiency further contributed to Fuyao's significant cost competitiveness. In addition, by using a flexible manufacturing system, the company could respond quickly to market changes and could manufacture auto glass in small batches. Fuyao expanded internationally by establishing subsidiaries in Hong Kong, the United States, South Korea, Germany, Japan, and Russia, thereby raising international sales in 2012, 2013, and 2014 to 32.6 per cent, 32.0 per cent, and 33.5 per cent of total revenue, respectively. By late 2014, after the completion of an auto-glass production facility in Shenyang, Liaoning Province, China, management at Fuyao considered that further domestic production expansion would be pointless. Instead, any future production expansion would be largely international. As of early 2015, Fuyao had an auto-glass production facility in Kaluga City, Russia, which it was expanding; completion of that expansion was scheduled for the fourth quarter of 2016. Although Russia was the second-largest automobile market in Europe, Fuyao's management considered that Russia's uncertain economy and currency could increase the volatility of Fuyao's profit. Besides its Russian facility, Fuyao was also establishing an auto-glass manufacturing plant in the U.S. state of Ohio, which was expected to be completed by December 2015. The company's expansion into the United States was driven by customers' (e.g., Honda and BMW) demand for just-in-time delivery and by the cost advantages that could be achieved as a result of considerably lower energy costs, transportation costs, and import tariffs. To ensure timely supplies of float glass, Fuyao planned to construct two float glass production lines near its Russian facility and to retrofit and upgrade its two float glass production lines in the U.S. state of Illinois, which it had purchased in August 2014. U.S. banking and financial services company J. P. Morgan estimated that Fuyao could reduce its selling costs for auto glass by about 3 to 4 per cent by 5 "Industry Overview," Prospectus, 86-7. A Sino-foreign equity joint venture is a limited liability company formed by a Chinese company and a foreign company in Chinese territory. Foreign companies typically put up at least a quarter of the total investment, while there is no minimum investment requirement for Chinese companies. Township enterprises, owned initially by communes and later by townships, were set up in the 1980s as part of the initial reforms associated with the opening up and reforming of the Chinese economy after the Cultural Revolution.producing in the United States. At the same time, Fuyao could achieve a significant increase in sales revenues from the U.S. market. The company intended to continue its long-term policy of constructing overseas manufacturing bases to meet global demand (see Exhibit 2), subject to understanding the local environments and regulations. Fuyao had two R & D centres in China and one each in Germany and the United States. These facilities allowed Fuyao to co-design and develop auto glass that could fit with customers' product development cycles, thus enabling Fuyao to produce customized auto glass for each new model produced by its customers. As a result, the company was able to help its customers address potential manufacturing or design problems, and customer relationships were strengthened in the process. As a way to differentiate itself from its competitors, Fuyao prioritized R & D on high value-added products, introducing auto glass for environmental friendliness, low energy consumption, smart digital capabilities, and modularized features. Fuyao's main competitors in the global market, headquartered in Japan (AGC and NSG) and France (Saint-Gobain), had limited presence in Eastern Europe. In 2010, in Russia, AGC built the world's largest float glass furnace and, in 2015, it acquired an ARG auto-glass plant in Poland. Saint-Gobain produced flat glass and construction materials and had an R & D centre in Russia, but the company performed no auto-glass production there. In 2006, NSG acquired the major British glass company, Pilkington Glass, and had a float glass production facility in Russia, but no auto-glass production. In North America, however, both AGC and NSG had substantial auto-glass manufacturing presences dating back to the 1990s, while Saint-Gobain had an ARG presence." COMPANY STRATEGY Fuyao's goal was to solidify its dominant position in China and become the most competitive auto-glass manufacturer in the world. The company planned to strengthen its relationships with OEMs through offering more high-quality products and services and building more satellite facilities near its OEM customers so that products and services could be provided in a cost-effective and timely manner. Management planned to set up more sales offices and representative offices, and recruit global talent whenever strategic opportunities arose. Fuyao was committed to increasing R & D spending, offering better just-in-time delivery, implementing cost-control measures, streamlining production processes, and increasingly using automation to further reduce costs and increase profitability. FINANCIAL PERFORMANCE10 Fuyao's revenue was #10.25 billion in 2012, V11.50 billion in 2013, and V12.93 billion in 2014. Net profits earned were V1.52 billion in 2012, V1.92 billion in 2013, and Y2.22 billion in 2014. As of December 31, 2014, Fuyao had cash and cash equivalents of 1499.1 million (see Exhibits 3 and 4). The Nick Lai, Leon Chik, Rebecca Y. Wen, and Liwen Yin, "J. P. Morgan: Fuyao Glass Industry Group-H, Crystal Clear Future-Initiate with OW," Asia Pacific Equity Research, May 5, 2015, accessed May 15, 2015, www.niuniuwang.cn/wp- content/uploads/2016/03/H3_AP201603220014021313_01.pdf. "Russia, Ukraine, CIS Countries," Saint-Gobain, accessed August 1, 2016, www.saint-gobain.com/en/russia-ukraine-cis- countries; "AGC Our Story," AGC Asahi Glass, accessed August 1 , 2016, www.agc.com/english/company/history/history.html. For a report on the NSG acquisition of Pilikington, see L. Saigol, K. Suzuki, and D. Turner, "NSG and Pilkington in E2.2bn Deal," Financial Times, February 28, 2006, accessed August 1, 2016; www.ft.com/content/439a720c-a563-11da-bf34-0000779e2340. For information on NSG see "NSG Group Worldwide," NSG Group, accessed August 1, 2016, www.nsg.com/en/about-nsgsggroupworldwide. 10 "Financial Information," Prospectus, 184-230.company planned capital expenditures of 2.99 billion and 3.01 billion in 2015 and 2016, respectively, mainly to construct new auto glass and oat glass manufacturing facilities in overseas markets and to upgrade any existing facilities (see Exhibit 5). Fuyao would take advantage of additional global auto-glass investment opportunities when they arose. Other than capital expenditure, Fuyao expected to use 523.S million to increase its working capital in 2015. CaSh ow that would be made available for new investments and to pay out dividends would come from the combined effects of operations, selling of assets, and raising and retiring of debt and equity. The proportion of debt in the desired capital structure of Fuyao therefore affected the dividend policy. Cho had frequently told Zuo his opinion of capital structure: I think that if you are running a company and don't use debt, you are an idiot. You should use debt. So how much is reasonable? Less than 50 per cent is reasonable. Some are more conservative. They say less than 30 per cent is a little better. I think that less than 50 per cent is no problem. Our products are special. Our cash flow is adequate. There is no problem. Fuyao's debt ratio as of the end of 2014 was similar to AGC's and Xinyi's, but lower than NSG's and Saint-Gobain's (see Exhibit 4). Fuyao's debt consisted primarily of bank loans, medium-term notes, and commercial paper (see Exhibit 6). Since its inception, Fuyao had never experienced obstacles in raising new debt. As of January 31, 2015, the company had the right to draw on pre-approved bank-loan funding in the amount of 13.17 billion without fulfilling any additional conditions. Cho expressed pride in his relationships with the banks and his condence that reasonable payouts of dividends could be easily financed: If we had to come up suddenly with one or two billion renminbi [for dividend payments], we could retain revenues and not pay expenses for two months . . . but of course we don't do it that way. When we don't have the money to pay out dividends, we borrow it from the bank. When we have the money, we return it. Fuyao uSually received payments from customers within three months after delivery of products. Its OEM customers generally contracted without minimum-purchase obligations, and some of them even contracted with alternative suppliers at the same time. As a result, unexpected delays in payment or termination of contracts could adversely affect Fuyao's operational and nancial conditions. In order to avoid any cash shortages caused by these risks, Fuyao targeted a cash balance of 4 per cent of annual sales. Although Fuyao had strong debt-nancing abilities, one of the reasons for planning to issue its shares on the Hong Kong Exchange in March 2015 was to fund the company's global expansion in a way that would not be entirely debt-fmanced. Fuyao management considered that a reasonable equity cushion would reduce liquidity risk. Management had decided on an offshore listing in Hong Kong rather than a subsequent primary offering (SPO) of A-shares in Shanghai because an international listing would reduce the inconveniences caused by foreign exchange controls in China and would also increase international investors' access to Fuyao shares. Hong Kong was the preferred choice of mainland issuers seeking offshore listings; in fact, mainland shares accounted for over half the value of shares traded on the Hong Kong Exchange. Another reason that Fuyao's nancial advisors chose a global IPO on the Hong Kong Stock Exchange rather than a Shanghai SPO involved the investors' tastes: Chinese domestic investors were keener on growth stocks than were international investors. The international investors placed greater value on companies like Fuyao that had a steady performance and a stable and rising dividend payout. DIVIDEND POLICY Since its domestic A-share IPO in 1992, Fuyao had implemented stock dividends on seven occasions, issued primary shares in an SPO, conducted two rights issues, and increased share capital on three occasions through conversions of capital reserves.11 Concerning cash dividends, Fuyao's articles of association endeavoured to pay dividends out of our after-tax prot only after we have made the following allocations: recovery of accumulated losses from previous years, if any; allocations to statutory reserve nd of 10 per cent of our aer-tax prot until the amount in the statutory reserve fund reaches 50 per cent of our registered capital; and allocations to a discretionary reserve fund. Fuyao's articles of association also stated its intention \"to distribute cash dividends of at least 20 per cent of its distributable prots each year unleSs it expected to make signicant investrnent or incur signicant capital expenditures in the following year.\"12 The company declared cash dividends of 1 .01 billion for 2012 and 2013, representing 0.5 per A-Share (see Exhibit 7). Fuyao management considered that shareholders appreciated dividends and observed that Fuyao's stock price typically went up around the time when management announced that it would pay such dividends. Cho commented: Fuyao's projected cash ow is extremely stable. That's why I could boastfully distribute 50 per cent of prots without a care. If I didn't distribute it, it would have to go to pay back the bank, but that is not a good deal. The company belongs to the shareholders. Why not use debt? Debt has several advantages: (1) the interest cost of debt is a pre-tax expense, so it is tax deductible; (2) all countries have adopted [a] loose monetary policy, printing money like there's no limit; (3) from an investor's point of view, we should enjoy the returns of our investment, distribute back a little prot, take it easy for a bit. That's the way it is. Since the turn of the century, Chinese securities mgulators, concerned about the low dividend payout rate of many listed rms, promulgated various guidelines to encourage companies to pay cash dividends or justify non-cash dividends (see Exhibit 8). Zou was aware that Cho was in favour of paying dividends, having once heard the chairman say: I also like money. I work myself half to death, but [if I] don't declare dividends, where can I get money from? I work here as the chairman, but my salary is very little. Every year, I only make a few tens of thousands of U.S. dollars. It's only enough for my own expenses. But what about my wife and kids? 1" A stock dividend gives holders of existing shares additional shares in proportion to their existing holdings. A rights issue gives existing shareholders the right but not the obligation to purchase additional shares. The strike price of the rights issue is typically set at a discount to the current share price. '2 \"Dividend Policy," Prospectus. 227. Besides Cho, Fuyao had one other major shareholder: the Heren Charitable Foundation. Cho, a conscientious Buddhist, had set up the Heren Foundation in 2011, donating to it 14.48 per cent of the shares of Fuyao. The foundation served as a vehicle through which Cho could direct his considerable charitable activities. With that donation, Cho became the foremost philanthropist in China. " Did the cash flow needs of such a large shareholder enter into the dividend decision-making of Fuyao? Cho commented: In my heart, the most important thing is the Fuyao Group. This is my lifeblood, my work. I set up the Heren Foundation with a donation. The Chinese people said that I contributed V3.5 billion. My stock at the time I donated it was worth V3.5 billion. If the foundation needs money, it can sell stock. I have no undertaking to assure that it receives dividends. As Zuo turned his thoughts to the board briefing paper that he needed to write for recommending a dividend policy, his mind shifted back to Fuyao's upcoming global IPO. Clearly, whatever policy he chose to advocate should also accord with the tastes of the new international investors. Hugh Thomas is an associate professor at CUHK Business School, The Chinese University of Hong Kong; Joyce L. Wang is a lecturer at CUHK Business School, The Chinese University of Hong Kong; and Yuhui Wu is an associate professor at the School of Management, Xiamen University. The authors wish to express their gratitude for financing provided by the Victor and William Fung Foundation to the Fung Service Leadership Initiative, the China National Natural Science Funds [Project No. 71372072], and the Program for New Century Excellent Talents in University [Project No. NCET-13-05071. Lydia Chen, "Charity Receives Massive Donation," Shanghai Daily, April 14, 2011, accessed March 16, 2016, www.fuyaogroup.com.hk/download/Charity%20receives%20massive%20donation.pdf.EXHIBIT 1: FUYAO'S OWNERSHIP STRUCTURE AS OF JANUARY 31, 2015 Heren Charitable Foundation 14.48% 0.02% 100% Sanyi 19.50% Cho Tak 100% Home Wong 0.60% The Bridge Company 0.01% Chan Fung Chopline 100% Ying 99.99% Limited Yaohua 1.71% Other Holders of A-Shares 63.69% Note: Heren Charitable Foundation's highest decision-making body was its council, which, in 2015, comprised nine members, including Mr. Cho Tak Wong's brother, Mr. Cao Degan, and two non-executive directors of Fuyao. Sanyi, Home Bridge, and Yaohua were 100 per cent directly and indirectly owned by Mr. Cho Tak Wong and his wife, Ms. Chan Fung Ying. Source: "Fuyao Glass Industry Group Limited Global Offering," HKEX News, March 19, 2015, accessed April 13, 2015, www.hkexnews.hk/listedco/listconews/SEHK/2015/0319/LTN20150319019.pdf.EXHIBIT 2: PRODUCTION CAPACITY, UTILIZATION, AND EXPANSION PLANS Float Glass Auto Glass capacity (thousands of tonnes) capacity (thousands of tonnes) utilization (% utilization (%) Existing Facilities 2012 2013 2014 2012 2013 2014 China Northern China Capacity 395.0 199.0 230.0 24.7 23.1 27.1 Utilization 93.7 94.0 73.0 77.5 91.3 77.9 Central and Eastern China Capacity 23.5 28.6 33.1 Utilization 86.4 87.1 85.5 Southern China Capacity 474.0 474.0 500.0 29.6 30.7 35.0 Utilization 94.3 92.8 87.8 82.1 90.6 88.3 Southwestern China Capacity 281.0 341.0 328.0 14.2 14.2 15.1 Utilization 96.8 95.9 84.8 80.3 85.9 93.4 Russia Capacity 4.0 Utilization n.a Float Glass Auto Glass Planned Facilities 2015 2016 2017 2015 2016 2017 China (all regions) 0.0 0.0 0.0 6.0 0.0 n.a. Russia 0.0 0.0 450.0 0.0 8.1 n.a. United States 150.0 150.0 0.0 12.1 0.0 n.a. n.a. = not available Note: Northern China included Beijing, Jilin, Shenyang, and Inner Mongolia; Central and Eastern China included Henan, Hubei, and Shanghai; Southern China included Fujian and Guangdong; and Southwestern China included Chongqing. Total commitment to the auto-class production facilities in Kaluga City, Russia, was approximately US$200 million. As of December 31, 2014, Fuyao had invested approximately US$116 million. Fuyao expected to use the funds raised from its global offering (approximately *785.2 million) for the second phase of construction of the auto-glass production facility. Fuyao planned to construct an auto-glass grade float-glass production facility with annual capacity of approximately 450,000 onnes near its Russian auto-glass production facility. The construction was expected to start in 2016, to be completed by the end of 2017. An amount of *1.57 billion, raised from Fuyao's global offering, was expected to be used for the float-glass facility. Fuyao expected to use the approximately *1.83 billion raised from its global offering for investment in the auto-glass production facility in the U.S. state of Ohio; this facility was expected to be completed by December 2015. Fuyao planned to retrofit and upgrade its two U.S. production lines (purchased at US$56 million in 2014) to manufacture float glass that was of an auto-glass grade. The U.S. production lines were expected to provide production capacity of 300,000 tonnes and additional commerce production for Fuyao in the fourth quarter of 2015 and the third quarter of 2016, respectively. Source: "Fuyao Glass Industry Group Limited Global Offering," HKEX News, March 19, 2015, accessed April 13, 2015, www.hkexnews.hk/listedco/listconews/SEHK/2015/0319/LTN20150319019.pdf.Prepare a pro forma cash ow forecast with 0.50 per year dividend by completing the following table. Fuyao Glass Pro Forma Cash Flow Forecast 2015 2016 2017 2018 (millions of ) Cash flows from operating activities Cash generated from operations Income tax paid Net cash generated irom or (used in) operating activities Cash ow from investing activities Capital expenditures - United States Capital expenditures -Russia Capital expenditures -Others including China Working capital investment Net cash generated irom or (used in) investing activities Net cash available before nancing Cash flow from nancing activities Borrowings or (Repayments) ' (4,335.50) " (1,121.52) ' (949.42) ' (1,242.42) Dividends paid to the company's shareholders Other interest received 227.00 5.00 61.00 13.00 Capital injections - issuance of new shares Net cash generated from or (used in) nancing activities Net (decrease) or increase in cash and cash equivalents Cash and cash equivalents at beginning of the period Cash and cash equivalents at end of the period Notes: 1. Cash generated from operations and revenue increase at a constant rate of 10 per cent per year from 2014 to 20 18. Income tax paid is 12 per cent of cash generated from operations from 2015 to 2018. In Exhibit 5, \"Others\" means Others including China. Planned capital expenditures for Others including China remains the same amount from 2016 to 2018. Working capital investment increases at a rate of 163 per cent of the change in cash generated from operating activities until 2018. 9P9.\