The company is listed on the Main Board of the Hong Kong Stock Exchange (HKSE). It is currently owned 62.6% by First Fortune; 12.4% by the Company’s management; 9.9% by Pilkington; and about 15% by the general public through HKSE listed ‘H’ shares. Its market capitalization as of February 15, 2007 was $116 million. Pilkington has an option to increase its stake from 9.9% to 29.9%.

Hony is a mid-market private equity fund headquartered in Beijing and with a buyout focus in China. It specializes in acquiring medium-sized state-owned enterprises and restructuring them into private companies that are among the leaders in their sectors. Hony got its start under the sponsorship of Legend Holdings, the parent company to Lenovo, one of the largest personal computer makers in the world. Hony closed its first fund in December 2003 with a fund size of $38 million. In addition to China Glass, the main investments of this fund include Bank of China and Denong Seeds, a top-five rice seed producer. Hony’s second fund was closed in September 2004, with a fund size of $87 million mostly provided by Legend Holdings and Goldman Sachs. Investments from this fund include Zoomlion, the third largest manufacturer of construction machinery; Solarfun, a manufacturer of photovoltaic cells; and Simcere Pharmaceuticals, a leading drug producer and distributor. Hony’s third fund is expected to total $500 million, with contributions from Legend Holdings, Goldman Sachs, the Gates Foundation, the Getty Foundation, Mitsubishi Capital and Temasek.

Established in 1826, Pilkington became a member of Nippon Sheet Glass (NSG) group in June 2006. Employing approximately 36,000 people globally, the group is a leading worldwide producer of glass and glazing products. With ownership and interests in 50 float lines on five continents, the group has an annual output of float glass of 6.4 million tonnes. For the nine months ended December 2006, NSG/Pilkington posted net sales of JPY 486 billion ($4.1 billion equivalent) and net income of JPY 28.2 billion ($237 million equivalent). Total net assets stood at JPY 420 billion ($3.5 billion), representing 29% of total assets. NSG is planning to further strengthen the group’s market position with increased competitiveness in costs, quality and service, taking full advantage of enhanced economies of scale and combined technologies. China is a leading actor in the world’s flat glass market and represented a competitive landscape for Pilkington and NSG prior to their merger. The unified group represents a major force in a market which continues to be highly fragmented and dominated by smaller domestic manufacturers.

The project consists of a proposed investment by IFC to support the company’s operations and for general corporate purpose.

75.0 million (USD)

Product Line	IFC Investment (million USD)
Risk Management
Guarantee	60.0
Loan
Equity	15.0

* These investment figures are indicative

The company’s operations date back to 1958, when its first glass production facility went into operation in Suqian, Jiangsu province. At that time, the company was called Jiangsu Glass Factory. In 1994, with an aim to produce high quality float glass, the company upgraded its facility to achieve a melting capacity of 400 tons per day (tpd). In 1997, the company was converted to a wholly state-owned enterprise and renamed the Jiangsu Glass Group. During the period 1997 to 2003, the company went through various corporate and ownership restructurings. In 2002, it added a second float glass line with a melting capacity of 500 tpd.

However, the modern incarnation of China Glass occurred in December 2003, when Hony became a controlling shareholder by purchasing approximately 83% of Jiangsu Glass’ shareholding. The balance of ownership was with the management team of China Glass. At that point, China Glass’s operations consisted of 2 flat glass production lines with a melting capacity of 900 tpd located in Suqian. In 2005, the Company built a third float glass line with a capacity of 600 tpd, bringing China Glass’s total melting capacity to 1,500 tpd. In 2006, the Company embarked on an acquisition strategy, identifying 8 smaller companies in China as targets. Once all the acquisitions have been completed, China Glass will be one of the largest flat glass manufacturers in China, with 14 production lines and a melting capacity of 4,780 tpd. A table showing China Glass’s operations once the acquisitions are complete (excluding the JV solar glass project) can be found in the accompanying attachment.

The project is part of the consolidation of the fragmented float glass industry in China. Loss making float glass SOEs are being closed and the government is selling others. This process will put the industry on a commercial basis. In addition, as a consequence of the scale economies of a large enterprise, CGH will implement cost reductions, gain efficiency improvements and operating synergies particularly in energy utilization. The company will also lower its unit SG&A costs by centralizing all marketing and logistic activities. The Project, with Pilkington’s shareholding will help bring more world-class technology to the glass industry in China and not only help meet the growing demand for high quality glass, but improve the efficiency/productivity in the industry.

IFC’s main contribution will be to:

- facilitate efficient provision of long-term financing to China Glass and support the company’s efforts to rationalize its capital structure and reduce its overall financing risk, which will allow China Glass to better weather any cyclical downturns in the future;

- mobilize incremental cross border long-term financing, leveraging IFC’s name and creditworthiness so that China Glass will be able to raise more than twice the IFC-guaranteed amount (in total debt and equity fundraising), and introduce the company name to international financial institutions, which should give China Glass greater depth of financing options in the future; and

- work with the company to introduce international standards and practices in areas such as corporate governance, energy efficiency and environmental management.

This is an Environmental Category B project according to IFC’s Environmental and Social Review Procedure. IFC’s due diligence identified issues related to the following Performance Standards:

- PS1: Social and Environmental Assessment and Management Systems with respect to the company’s management of its environmental, health and safety performance; compliance with national and local permitting requirements, as well as World Bank Group guidelines; and its engagement with local communities, and corporate social responsibility efforts.

- PS2: Labor and Working Conditions with regard to fair, safe (specifically handling of glass panels) and healthy working conditions.

- PS3: Pollution Prevention and Abatement with specific focus on sulfur oxides, NOx and particulate emissions to air arising from the glass manufacturing facilities, water/wastewater management, solid waste recycling and efforts to optimize energy efficiency.

- PS4: Community Health, Safety and Security in respect of the impact on local ambient air, and infrastructure for raw material and product transportation.

- PS5: Land Acquisition and Involuntary Resettlement in respect of land acquisition for the Solar Glass project.

Appraisal included field visits to all company plants. IFC has identified areas for improvement and in coordination with the company, designed and agreed adequate mitigating measures formulated in an Action Plan.