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Management Q&A

8th April 2005

Dear Investors,

Thank you very much for the questions and the opportunities to clarify them. We hope you have a better understanding of our business through this online exchange.

Your questions will be reposted in blue followed by our replies in black.

Rgds,
The Management Team 
Asia Water Technology Limited

Dear Gillian, you wrote:

As a shareholder, applaud the management efforts in securing the new mega deals and generous dividend given.
The company has done very well within a short span of listing compared to others.

1) With the generous proposed dividend, will the cash flow and growth be significantly affected?

While we recognize that continous growths require funding, we endeavour to provide shareholders with the best possible return and believe in providing a balance between these extremes. The 2.5 Singapore cents dividends were proposed by our directors after careful cashflow planning and deliberation, which involves, among others, future project funding requirement.

However, our Group has not expressed any statement to indicate that the present dividend policy is of any strict indication of dividend to be proposed for FY2005 or beyond.

2) The govt is placing greater emphasis on power and water shortages, how well is the company geared towards these growing business?

In FY2003 and FY2004, water purification projects accounted for 94% and 84% respectively. These projects pertained mainly to the water treatment systems in powerplants. In October 2004, we secured the largest powerplant project in China and has continued our reputation as being a preferred supplier in this sector. Hence, we will ride on the power shortages situation in China to garner more powerstation projects.

The Group has also ventured into municipal tap water and wastewater projects and believes that the current water pollution problem and the resulting Government's initiatives will continue to bring about business opportunities for us.

3) There has been talk regarding the low margins associated with BOT projects, appreciate if the management can shed more light on this and their projects?

We witnessed a decrease in gross margin for our wastewater treatment segment (from 16.5% in FY2003 to 15% in FY2004). This is due to the municipal wastewater treatment project worked on in FY2004.

By and large, large scale municipal projects tend to yield a lower gross profit margin, as compared to power station projects. However, the former is usually much larger in terms of project quantum. Hence, despite having a lower gross profit margin, its revenue contribution in absolute dollars is larger.

Thanks!
Dear Fiona Bong, you wrote:

A quick check on your financial statements prompted my curiousness:

(1) Other payables and accurals jumped from 33mil to 109mil. why is there such a huge increase in payables? is it loan related?

No, these are not loan-related. As at 31 December 2004, we do not have neither long-term borrowings nor short-term loans. The accounting caption is used to record business expense accrual and advances provided by our customers. At inception of all projects, we require a 'downpayment' equivalent to 10% of the contract sum from customers.

Hence, with our increase in business scope, we observe an increase in this accounting caption. Such increase is in line with business expansion and is equally 'cushioned' by increases in assets, in the likes of work-in-progress, accounts receivables and cash at bank.

(2) There was a 66.9% jump in personnel expenses. Why so?

This was due to an increase in headcount in from 78 at the beginning of FY2003 to 193 at the end of FY2004. The increase in headcount was due to our increase in business, as we take on larger projects.

(3) The income from waste water treatment was very impressive. are the investors expecting to see this trend to maintain in the coming FY?

We will continue to explore opportunities for growth within the wastewater business segment, in particular, municipal wastewater projects. China is facing acute water shortages and serious environmental issues (as a result of rapid industrialization). Amidst the worsening wastewater condition in China, and an increase in Government's initiatives, we are confident of this business segment and will strive to boost our revenue contribution from this segment.

(4) Care to shed some light on the profitability of "BOT" projects? is it a win win situation?

BOT project, or 'Build-Operate-Transfer' in full refers to a scheme where the project company has been approved by the Government to Build the plant, operate it for a licensed period of years (usually 20 to 25 years) and transfer to the Government at the end of the licensed period.

We specialize in providing the wastewater treatment systems for such plant and can undertake such projects. We have also invested in 1 BOT project which will provide us with a constant stream of income from water tariff collection.

In addition, we have the licence to manage industrial and municipal wastewater treatment facilities which, if realized, will provide us with another constant stream of income.
Dear Andre Chong, you wrote:

1) Can the management shed more light on the recent multi million deal awarded?

Thank you for the question. We reckon that the project you are referring to is the Tap Water Treatment Project in Tianmen ("Tianmen Project") in Hubei Province, PRC with a total contract value of RMB111.7 million.

This project involves the management of the construction of a tap water treatment facility as well as the procurement , installation and commissioning of the tap water treatment system ("first contract"). It also encompasses the expansion of the existing underground piping network responsible for the transportation of treated tap water throughout a surface area of 25 square kilometers, serving a population of 304,000 ("second contract").

We expect the first contract to be completed by 31 December 2005 and the second contract a year later.

Importantly, this contract marks our foray into the tap water arena and have added significantly to our order book.

2) Can we expect the same level of profit growth?

From FY2003 to FY2004, we experienced an increase in revenue of 41%. Upon segmental analysis, we present to you the following:-
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Clearly, we have achieved an increase in revenue from all 3 business segments, in particular, the "wastewater treatment" and "others" segments. Increase in wastewater treatment is due to our entry into the area of municipal wastewater treatment. We will continue to expand our presence in this business segment as we see a huge potential for growth.

The surge in revenue from 'others', which are mainly automation projects for powerplants is a result of an increase in desulpurisation control system projects.

In the area of water purification, we expect to continue our foothold in this business segment as evidenced from our success in garnering the Huaneng Yuhuan 4 X 1,000 MW water treatment project. At present, this powerplant has the largest electricity generating capacity in the entire PRC and it marks our leadership in the water treatment segment for powerplants.

With the contribution of revenue from the Tianmen Tapwater project, we expect revenue for our water purification segment to increase in line with the growth in market demand for such segment.
Dear James Lim, you wrote:

Appreciate the management initative to maintain communications with investors thru this online Q&A.

1) From the latest presentation slides, the company focus now is on water treatment. But with China surging demand in power, how is the company geared towards benefiting from this business aspect as well?

Dear James, thank you for your questions. It is our pleasure to be able to address investors' concern in our business.

In the area of water treatment segment, bulk of our revenue was derived from water treatment projects for powerplants. While continuing our presence in this business segment, we have also added 2 tapwater contracts worth a total of RMB111.7 million, which was announced on 16 March 2005.

We will also continue to capitalize on the surging demand for municipal wastewater solutions in China to grow our wastewater treatment segment.

Our Company is well-positioned to leverage on the power shortage and water pollution problems in China. In the area of powerplant business, we have continued to maintain our foothold in this business segment as evidenced from our success in garnering the Huaneng Yuhuan 4 X 1,000 MW water treatment project. At present, this powerplant has the largest electricity generating capacity in the entire PRC and it marks our leadership in the water treatment segment for powerplants.

Hence, while continuing to grow our wastewater treatment segment, we will also continue to strive and maintain our reputation as a quality provider of water treatment solutions in the area of powerplant business.

2) How competitive is the water treatment market in China as I understand that many Singapore listed water treatment companies have operations there?

The water treatment business is indeed competitive here. We will explain our strength in your next question.

Amidst the competitions, there are huge opportunities for water treatment companies in PRC. Over 300 cities in China are facing acute water shortages. As such, it is important to tap treated wastewater as a source of water. There is always large inadequacy of water treatment facilities. Hence, we believe this presents huge opportunities for growth for the water industry.

3) What steps is the management undertaking to differentiate itself?

We have an experienced management team with strong technical expertise. Our senior management possess degrees/senior technical qualifications and have experience in managing large projects. We have also established ourselves as a reputable water treatment company. In China, we have been leading the pack in our successful tender of water treatment projects for large powerplant business.

Also, in line with powerplant project owners, we are able to provide the complimenting automated control systems for water treatment systems. This ability to provide an integrated solution provides us an edge over our competitors, who often can only one but not the entire automated + water treatment system.

We also have business coverage in almost the entire PRC and have experience in large scale projects within.

Led by a strong management team, we are confident of leveraging on our competitive advantage to continue our quest for more projects.

4) Can the management shed more light on the timeline its operations: from tender to completion of treatment plant?

For water treatment projects within powerplants, depending on capacity, we take about 12 to 18 months to bring a project from cradle to death. However, it is harder to apply a rule of thumb for wastewater projects, as it varies according to contracted date.

To aid investors in your analysis of our income stream, we have been striving to disclose the completion dates of sizeable projects and will continue to do so.
Dear Yellowcard, you wrote:

I feel very happy to see companies like yours with high earnings visibility. You have a high order book with clear indication of which FY period which it will be recognised. That removes a lot of uncertainties that is generally seen in listedcos.

Just some questions.

1) Dividends of 2.5cts is amazing! What is your dividend policy?

We try to strike a balance between amassing funds for reinvestment and rewarding shareholders with return. The 2.5 cents dividend was carefully deliberated by our Directors, and in consideration of having a good FY2004 results and the strong cash position we are in, they are proposing a dividend of 2.5 Singapore Cents, subjected to approval at AGM.

2) A friend of mine commented something which I feel requires your clarification. Issuing div straight after IPO is rare.

Is it fair to say that the company used the proceeds of the IPO which is from PUBLIC to re-distribute part of the proceeds as cash to all shareholders as dividends.

As you are the largest shlders, is it right to say that the company used public money to pay yourselves as dividend? Pls advise on this observation my friend made above.

As stated in prospectus, bulk of our use of proceeds from IPO will be invested in Hanxi Wastewater "BOT' Project Company. In accordance with our announcement in 17 March 2005, we have fulfilled the investment of these monies.

To clarify, we are unable to decipher your comments that we are the largest shareholders of the Company. Our Shareholders are fragmented and consist of the general public, investors from an Austrian Listed Company and companies owned by people with different nationalities. For disclosure sake, the Executive Directors collectively own 3.76% of our Company.

Even without dividend, we would have dividend out FY2004 profit, which was generated from FY2004 operations. (We returned the year with a profit after tax of RMB27 million). Hence, we have proposed a dividend of 2.5 Singapore Cents mainly out of profit of FY2004.

Thanks.
Dear Roger Tay, you wrote:

1) Forgive my ignorance but why should investors put their money in the company?

Each person has his own appetite for risk and investment perspective. By and large, investments have 2 important elements, capital appreciation and dividend returns. At Asia Water Technology, we are mindful of these 2 elements and seek to grow our business and along with its profitability. We will endeavour to strike a balance between amassing funds for future expansion and rewarding shareholders with dividends, as exhibited by our maiden dividend of S$0.025 per share.

At present, we have a strong order book and have concluded FY2004 with growth in revenue and profitability of 41% and 28% respectively. Our Directors see excellent business opportunities in PRC and Asia Water Technology is well-positioned to leverage on our good track record to venture into other related-business, eg. Management of industrial wastewater and sewage discharge facilities to boost our income stream.

2) What differeniates Asia Water with the rest of its competitors?

We have an experienced management team with strong technical expertise. Our senior management possiss degrees/senior technical qualifications and have experience in managing large projects.

We have also established ourselves as a reputable water treatment company. In China, we have been leading the pack in our successful tender of water treatment projects for large powerplant business.

Also, in line with powerplant project owners, we are able to provide the complimenting automated control systems for water treatment systems. This ability to provide an integrated solution provides us an edge over our competitors, who often can only one but not the entire automated + water treatment system.

We also have business coverage in almost the entire PRC and have experience in large scale projects within.

Led by a strong management team, we are confident of leveraging on our competitive advantage to continue our quest for more projects.

3) What are the new projects the company is actively engaging in?

We have just secured a Tap Water Treatment Project in Tianmen ("Tianmen Project") in Hubei Province, PRC with a total contract value of RMB111.7 million.

This project involes the management of the construction of a tap water treatment facility as well as the procurement , installation and commissioning of the tap water treatment system ("first contract"). It also encompasses the expansion of the existing underground piping network responsible for the transportation of treated tap water throughout a surface area 25 square kilometers, serving a population of 304,000 ("second contract").

Also, we are working on another municipal wastewater project in Wuhan New Economic Development Wastewater project, which will be completed in FY2005. There are also power plant water treatment projects which we are working on.

4) Most of the BOT projects are very capital intensive, will the group require more capital in the future?

We are currently involved in the building of BOT plants. We have also invested in a BOT project (43% shareholdings), which was mainly financed by our IPO proceeds. These projects are capital intensive, but there is an avenue of loan for such project companies. The invested capital usually comprise only 20% to 25% of the entire project cost.

Our core business lies in the provision of water treatment systems. Though we have embarked on our first investment into a BOT project, we will continue to monitor and look out for worthy BOT projects to put a stake in.

Dear Investors,

Thank you for all your questions and the interest in Asia Water Technology Limited. We have come to the end of this Q&A session.

We have enjoyed and learnt much from your questions and we hope that you have a better insight of our Company and know more about our operations.

Rgds,
The Management Team 
Asia Water Technology Limited