The Water Equity Division will participate in BOO arrangements in partnership with government agencies. Specifically, the Company will acquire majority stakes of existing, preferably state-owned, water companies in China through a BVI registered investment holding company. Such companies are typically generating revenues but had been operated by local governmental affiliates with low efficiency and poor management skills. Given the lack of timely inspections and due maintenance, the volume of "non-revenue water" (i.e. the supplied water, which cannot generate revenues due to pipeline leakages, meter malfunctions, water theft and uncollectible receivables) has averaged at 30-40% of the total supplied volume in China, according to the estimates of China Water Networks. With the more professional management and efficient operations, the Company's team of consultants can significantly reduce "non-revenue" volumes, which can be an additional source of income generation, even assuming there is no improvement in utilization. With reduced non-revenue water, operators are expected to enhance profitability handsomely.
Investments in Chinese water works utilities infrastructure - USA Public Company
Company management also believes mergers and acquisitions will bring economies of scale for water operators. Acquisitions within similar or nearby regions will lead to synergies in the following areas:
Investments in Chinese water works utilities infrastructure - USA Public Company

Less maintenance and management costs, as technicians and management team can be shared among different plants.

Cheaper machinery costs and lower capital expenditure, as the equipment and machines in various plants can share common/similar configuration and be procured together under bulky contracts;

The Administration Rules for Urban Water Supply Tariffs ("Administration Rules"), which the Ministry of Construction and the State Development and Planning Commission jointly issued in September 1998, states that urban water supply tariffs (i.e. tap water tariffs) should be set according to the principles of "cost compensation, reasonable return, water conservation and fair cost-bearing". Furthermore, the reasonable return for water supply companies should be 8% - 10% Return on Equity. Companies that source funds from commercial loans, foreign investments, as well as bonds or stock offerings, can obtain ROE of no higher than 12%.

As the project ROE in the water sector is set at 12%, the Company can finance their project investments (which are booked as equities in the project companies) with debts (including bank loans, convertible bonds and short-term financing notes) to earn a return spread. Assuming a pre-tax interest rate of 5.58% per annum. (i.e. People's Bank of China one-year benchmark lending rate) and a conservative project ROE of 8%, the Company can reasonably earn a post-tax return spread of 4.3% with bank borrowings. In addition, the Company will derive additional profits from value added services related to the water business, which are not subject to any limits on profits. As such, NCVL can in fact achieve a ROE of higher than 12% on a consolidated basis, while project ROE on that portion for the water tariff business will still be within the range of governmental guidance (i.e. 8%-12%).

Company management has identified three potential acquisitions in China. The Company is currently in confidential negotiation stages with various government officials and therefore is not able to provide detailed information on each project. Below is a brief outline of each of the projects:

1) Business: water production and supply, sale of warm water equipment, water supply engineering, installation of water pipes and water supply facilities.
Investments in Chinese water works utilities infrastructure - USA Public Company
2) Company: original water plant was established in 1992; legally became a private shareholding company from a state-owned enterprise by open tender in 2004 at RMB 24 million for assets and RMB 5 million for concession rights; the new company invested RMB 20 million to refurbish the old pipework and lay down new pipelines; the company is currently operating normally, all equipment are operating properly, all licenses for water supply are readily available, actual total assets value is estimated at more than RMB 50 million.
Investments in Chinese water works utilities infrastructure - USA Public Company
3) Market: the county town area has a population of 220,000 people plus industrial and commercial users; the company has obtained the exclusive water supply and sale rights to the town area for 30 years (December 30, 2004 - December 29, 2034)
Investments in Chinese water works utilities infrastructure - USA Public Company
4) Sales: 2006 water supply sale amount was approximately RMB 9 million, sum of initial installation fee, connection fee, and engineering fee was approximately RMB 2 million; 2006 average daily sale volume was more than 30,000 tons; 2007 water supply sale amount will reach RMB 10.5 million, sum of initial installation fee, connection fee and engineering fee will reach RMB 2.5 million.
Investments in Chinese water works utilities infrastructure - USA Public Company
5) Business prospect:
    a) Since many factories moved north from the Pearl River Delta, economy in the Yanshan area is developing rapidly; demand for water supply increases by 15% annually.
    b) A water supply pipeline was laid to Shenlong Wood Company at Longtang Town with auspices from the government in the end of 2006; pipelines will be connected to several large Taiwanese shoes factories in the end of 2007, water supply area will increase to 23 sq Km for a population of 230,000.
    c) The water plant has reserved a piece of land for 30,000 ton phase II development; total average daily water supply will reach 60,000 ton, completely satisfying the developing need of Yanshan and vicinity areas.
Investments in Chinese water works utilities infrastructure - USA Public Company
6) Financial: water tariff and others fees are received through a company account at a credit union in cash or notes; accounting system is in place, and all kinds of financial reports and tax returns are available; able to collect more than 90% of water tariff.
Investments in Chinese water works utilities infrastructure - USA Public Company
7) Debt: The company has a RMB 18 million loan inherited from the original Yanshan Water Plant, and a low interest RMB 3 million government loan, total debt RMB 21 million; sale of project will transact at zero debt on the vendor.
Investments in Chinese water works utilities infrastructure - USA Public Company
Background Information on Yanshan County Nanyang Water Plant

Project 2 is operated and managed by a district water supply company. It owns two water supply plants, one of which was built and completed in May 2001, with a water supply capacity of 150,000 tons/day, the other was completed in 1994 with water supply capacity of 50,000 tons/day, which is currently used as a standby water supply plant.
Investments in Chinese water works utilities infrastructure - USA Public Company
The district water supply company is currently planning the construction of two additional facilities to increase daily consumption by 150,000 tons per day.

Project 3 is located in a city within the Hunan province which is a strong industrial base in the southern part of China. The said water supply company owns 5 water production plants with a water supply capacity of 800,000 tons/day.
Investments in Chinese water works utilities infrastructure - USA Public Company
Based on the average annual increase of 14% in the past three years, coupled with the consideration of the population, economy, information on water usage increase and the city development in the next few years, there will be a conservative average annual growth of 10% in five years.

In addition to water supply, Company management also intends to introduce the water meter installation service that will be a steady recurring income stream for each water project. This includes new meter installation and the renewal of old meters. Previously, it was not necessary that each household have its own meter, and many households were sharing meters. However, given the current water crisis, and the government mandate for the conservation of water, the Chinese government is making it a national policy for every household to have their own meter. On average, the percentage of homes that have individual water meters is less than 50%. As such, local governments have been given a mandate to install water meters in their cities and regions and NCVL is well poised as a local water supply company to perform and installation and maintenance. NCVL management expects to be charging RMB 500 to 1,500 per meter installation, with a gross margin that can be as high as 70%.

On the research and development side, CGW has been developing a leading edge water metering and tariff collection system which management believes will be key in achieving above average return. Existing mechanical metering systems currently installed across China are often inaccurate, create a unsustainable amount of work load for water suppler in data collection and could create substantial cash flow issues when collection of tariffs and enforcement of sanctions can be labour-intensive.
Investments in Chinese water works utilities infrastructure - USA Public Company
NCVL's metering solution features pre-paid value cards and digital meters that are connected to a central database. Such systems are used extensively in Europe, especially in the U.K. Water users will purchase water credits from managing centres, which could be any government agencies or retail outlets, in the form of pre-paid cards and insert the cards to their water meters. This dramatically increases the water supplier's cash flow as all water tariffs will now be prepaid, and the user will lose water access if he or she runs out of credits.

In addition, the meters will be connected over a wireless network to a centralized database such that the water company and government agencies can effectively monitor water usage and identify any wastage issues within the system.

CGW will be pilot-testing the electronic metering system in several test sites over the next 24 months. If the pilot testing yields positive results, the electronic metering system will be offered by the water project company as a value added service that could dramatically enhance the profitability of any one water project.
Investments in Chinese water works utilities infrastructure - USA Public Company
In addition, the local water company usually has a construction team for building and maintaining the last mile network, reservoirs and other related facilities. NCVL can derive revenue by engaging this construction team in third party construction projects as well. As emphasized previously, the government's ROE guidance is applicable on a project basis. Even if a project's ROE is within the 8-12% guidance range, the water company's ROE (on a consolidated basis) can still exceed 12%, as those services fees will ultimately be booked in the consolidated Profit & Loss account.

Given the 8% -12% ROE limitation set out in the government's industrial guidance, the Company decided to acquire an industry leading consultancy firm (i.e., CGW) which can directly participate in the growing water industry without any limits on return. With the acquired expertise, NCVL can begin launching value-added services, such as system design, project engineering, management consulting, equipment procurement, pipeline inspection and maintenance, as well as meter reading and tariff collection, in markets in which it has set up a water project company and has monopoly rights to the region to enhance profitability. The charges for these services will be booked as operating costs for specific plants or projects.

The management of the Company believes that the competitive advantages of the Company are attributable to the following factors:

A top management team, which consists of former high ranking officials in the Chinese Ministry of Water, with vast experience in water projects in China

An experienced expert consultancy team with an optimized organizational and management structure

Comprehensive market development capacity, especially with the niche strategy of targeting emerging cities and regions within China

A logical business model of evaluating and modernizing undervalued, inefficiently operated assets and applying a western, private enterprise management to dramatically increase the value of the assets

Investment in multiple assets to diversify operational risks

A end-to-end water solution that allows the local government to address the water crisis in China

Company management understands the importance of a brand image, especially when dealing with government officials who are seeking the most reliable and affordable solution for their respective regions. For this reason, the Company will launch the following initiatives to enhance and manage its brand:

All of the Company's operations will be carried out under a single brand. Company management intends to leverage CGW's current brand recognition in the water industry in China as the basic foundation for its brand image, and ensures the CGW brand is employed in all facets of operations

Consistently provide reliable, efficient, and affordable solutions to government agencies and water users alike and

Partner with established players in the water industry, especially foreign water companies who have substantial technical expertise.