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Business Summary:
The Group is principally engaged in alternative energy business and software development business.

Business Review:
During 2009, HKE made several important moves to transform the Group into HKC Group’s alternative energy flagship. Fully aware of the strong support given by the People’s Republic of China (“PRC”, or “China”) government on alternative energy, in particular wind and solar power, HKE refined the business strategy and disposed of the cellulosic ethanol pilot project in May 2009. Resources and focus were redirected to wind energy project development.

The equity for the Lunaobao wind farm project was fully injected and construction was well underway. The 100.5 megawatt (“MW”) wind farm is located in Lunaobao, Hebei Province, adjacent to Danjinghe, where another promising wind farm of the Group was being developed. HKE owns 30% of the joint venture with the rest of the stake held by the wind division subsidiary of China Energy Conservation Investment Corporation (collectively “CECIC”). The project comprises 67 sets of 1,500 kilowatt (“KW”) PRC domestic manufactured wind turbines and the total investment cost is around RMB950.78 million. At as 31st December 2009, all 67 foundations had been completed and a total of 24 sets wind turbine and towers had been installed. Other peripheral and logistical infrastructure, such as the central control room, staff quarter and substation were completed. Work on power transmission and connection to the grid was in progress. Remaining wind turbines installation and peripheral construction are expected to be completed for trial run in mid 2010, well ahead of schedule and under budget.

A new Executive Director and Managing Director, Dr. Bruce Yung, who has worked in the energy industry for more than 20 years, joined HKE in August 2009. His joining has strengthened the Group’s ability to source new, high return wind farms and improved HKE’s awareness to the investor community. The Group’s technical wind resources evaluation and micro-site setting capabilities were further enhanced through the signing of a framework agreement with Garrad Hassan Limited (“Garrad Hassan”), a highly reputable wind power engineering consulting firm from the United Kingdom. The firm has considerable experience in the PRC.

During the second half of 2009, the Group signed memorandum of understanding (“MOU”) with and received letter of support from several provincial governments, such as Kulun in Inner Mongolia and Kangping in Liaoning Province, to commence wind resource and feasibility studies for developing wind farms. This will help increase the size of the Group’s wind farm projects pipeline.

HKE entered into an agreement in November 2009 to acquire from its parent company, HKC, 25% of HKE (Danjinghe) Wind Power Limited, which holds 40% equity interest in the project company developing the Danjinghe wind farm, for a consideration of approximately HK$83.06 million. The consideration represented a 25% discount to the fair value of the wind farm given by an independent business appraiser and a 36% premium to the net asset value of this asset accounted for under HKC. The transaction was completed by unanimous shareholders’ approval in the extraordinary general meeting held on 30th December 2009. After the transaction, HKE holds 10% effective equity interest in the project company holding the Danjinghe wind farm project while the remaining 30% and 60% rights are held by HKC and CECIC respectively.

The Danjinghe project is located approximately 300 kilometres (“km”) north of Beijing adjacent to Lunaobao in the Hebei Province with total 200 MW wind power generating capacity. The project is part of the 1,000MW national-scale wind power project designated by National Development & Reform Commission (“NDRC”) as a showcase for China. The wind farm was developed in three phases where phase 1 consisted 54 units of 750 KW wind turbine, phase 2 consisted 100 units of 800 KW wind turbine, and phase 3 consisted 53 units of 1,500 KW wind turbines all manufactured by PRC domestic supplier.

Phase 1 construction of the Danghinghe project was completed for trial run in January 2009 and commenced commissioning in June 2009. Phase 2 and 3 construction was also completed in December 2009, ahead of schedule by 12 months. Both phases are currently waiting for trial run. The project was completed under budget, with the Phase 1 operating performance in 2009 exceeded the original forecast of 75 million kilowatt-hour (“Kwh”) by 10 million Kwh. The injection of this promising wind asset from the parent company represents a significant move for the Group to become HKC’s alternative energy flagship.

Prospects:
China’s rapid economic development following the stabilization of the world’s economy creates a strong demand for energy. Alternative energy has been seen by the Chinese government as the most promising source of energy in addition to fossil fuels. Considerable attention has been given to the alternative energy sector and favourable policies have been rolled out in the past. This situation is expected to remain the same in the foreseeable future as alternative energy was highly promoted in the PRC Twelfth Five Years Plan for 2011 to 2015. Reflecting the government’s commitment to alternative energy, a number of amendments to China’s Renewable Energy Law were proposed in the eleventh National People’s Congress (“NPC”) in PRC held on 26th December 2009. These amendments were designed to resolve the problems with grid connection for wind power projects.

On the supply side, there is an indication of abundant wind equipment suppliers. Although consolidation is expected to come shortly, prices for wind equipment have come down, and are expected to continue to decline. As a result, development costs to HKE will also decline and should result in higher return on equity.

Internally, HKE will take advantage of the current favourable business environment and proceed with developing our wind farm projects in a cautious and careful manner. Further to signing the MOU and strategic development agreement with the provincial government, the Group will engage Garrad Hassan to conduct wind resources analysis, feasibility and micro-site study for Kulun of Inner Mongolia and Kangping of Liaoning. Kulun is southeast of Inner Mongolia approximately 77 km northwest of Fuxin city in Liaoning Province. The location is capable of accommodating three 49.5 MW wind farms. Kangping is approximately 120 km north of Shenyang city in Liaoning Province with an area over 300 square km. This location can develop into a 250 MW wind farm. Both locations are close to the transmission infrastructure and areas of power demand, which will be ideal for establishing wind farm. Apart from Kulun and Kangping, the Group is also exploring other potential wind farm locations in the south-western part of PRC.

The Group will also actively seek strategic partnerships with the aim to strengthen HKE’s capital base and to enhance the Group’s competitive advantages for future growth. In addition, HKE will explore plans and their feasibilities to further inject other alternative energy assets from the HKC Group. This will complete the transformation of HKE into HKC’s alternative energy flagship. Several alternative energy assets currently belong to HKC Group that can be considered are listed below:

(a) Phase I Siziwang Qi of Inner Mongolia – a 49.5 MW wind farm. This first phase of a potential 1,000 MW project is 100% wholly owned by HKC Group. The wind farm is currently under construction. Construction work for the foundations, control room and substation was completed. All 33 wind turbine units were hoisted in 2009 ready for the final connection to the grid and trial run in early 2010.

(b) Mudanjiang and Muling of Heilongjiang – a 2 x 30 MW wind farm. HKC Group owns majority stakes of 86% and 86.68% in the two wind farms. The wind farms commenced full operations in September 2007, and are making steady revenue contributions to the HKC Group.

(c) Danjinghe of Hebei – a 200 MW wind farm. This wind farm is a joint venture with CECIC. HKC Group owns a 40% effective equity interest in which 10% held indirectly via HKE and 30% held directly by HKC Group. The first phase, consisting of 40.5 MW, commenced commissioning in June 2009. Cost saving was achieved. First commission data indicated that the performance in 2009 was better than originally forecasted. Construction for the remaining 2 phases was completed end of 2009 ahead of original schedule by 12 months. Trial run and commissioning was targeted mid 2010.

(d) Changma of Gansu – a 201 MW wind farm. This wind farm is a joint venture with CECIC. HKC Group owns a 40% interest. Construction was completed end of 2009. Trial run and commissioning was targeted mid 2010.

(e) Linyi of Shandong – a 25 MW waste-to-energy power plant. The plant is a joint venture with CECIC. HKC Group owns 40% interest. The plant commenced full operations in September 2007, and is making steady revenue contributions to the HKC Group.