Special Explanation on the Non-Standard Audit Opinion for Qingdao Zhongzi Zhongcheng Group Co., Ltd.'s 2024 Financial Statements
To all shareholders of Qingdao Zhongzi Zhongcheng Group Co., Ltd.:
We have been entrusted to audit the financial statements of Qingdao Zhongzi Zhongcheng Group Co., Ltd. (hereinafter referred to as "Qingdao Zhongcheng" or "the Company") for the year 2024, and on April 29, 2025, we issued an audit report with a qualified opinion containing a significant uncertainty related to going concern and an emphasis of matter paragraph (Report No.: Hexin Audit [2025] No. 000770).
According to the relevant requirements of the China Securities Regulatory Commission's "Rules for the Disclosure of Information by Companies Issuing Securities to the Public No. 14 - Requirements for Non-Standard Audit Opinions" (revised in 2020) and the "Guidelines for the Application of Regulatory Rules - Audit Class No. 1," we provide the following explanations regarding the relevant matters:
1. Main Content of the Non-Standard Audit Opinion
(1) Matters Involved in the Qualified Opinion
As stated in Note 6, Contract Assets, of the financial statements, as of December 31, 2024, the book balance of the contract assets for the Philippine photovoltaic project is RMB 1.176 billion, with an impairment provision of RMB 730 million, resulting in a book value of RMB 446 million. We understand the management's method for impairment testing of the Philippine photovoltaic project and have examined the supplementary agreements signed after the project period. However, since the Philippine photovoltaic project has not yet reached commercial operation conditions, and the repayment cycle from the project owner spans 25 years, there is considerable uncertainty in future cash flow forecasts. We were unable to obtain sufficient and appropriate audit evidence regarding the future collectability of the contract consideration of RMB 446 million for the photovoltaic project, nor could we determine whether adjustments to the relevant financial statement items and disclosures are necessary.
(2) Significant Uncertainties Related to Going Concern
We remind users of the financial statements to pay attention to the following: as stated in Note 3, 2, the Company's operating revenue for 2024 decreased by approximately RMB 322 million compared to 2023, with a consolidated net loss of RMB 320 million and total equity attributable to the parent company at RMB 173 million at year-end. As of December 31, 2024, the Company's current liabilities exceeded current assets by RMB 755 million; among the current liabilities, the total balance of short-term loans, accounts payable, and borrowings from non-financial institutions is RMB 2.274 billion. The cash and cash equivalents balance as of December 31, 2024, is only RMB 69 million. These matters, along with other items described in Note 3, 2 of the financial statements, indicate significant uncertainties that may lead to substantial doubts about Qingdao Zhongcheng's ability to continue as a going concern.
(3) Emphasis of Matter
We remind users of the financial statements to pay attention to the following: as stated in Note 14, on January 17, 2025, Qingdao Zhongcheng received a "Notice of Case Filing" (No. 03720251001) from the China Securities Regulatory Commission (CSRC) due to suspected violations of information disclosure laws and regulations. The CSRC decided to file a case against the Company on January 16, 2025. As of the audit report date, we have not received a conclusive opinion or decision from the CSRC regarding the aforementioned case filing. This paragraph does not affect the audit opinion already issued.
2. Basis and Reasons for Issuing the Non-Standard Audit Opinion
(1) Overall Materiality Level of the Consolidated Financial Statements
In conducting the audit of Qingdao Zhongcheng's 2024 financial statements, we determined the overall materiality level of the consolidated financial statements to be RMB 19.34 million. Qingdao Zhongcheng is a profit-oriented entity, and we used the absolute value of its average recurring business pre-tax profit over the past four years, which is RMB 386.8921 million, as the basis, multiplying this by 5% to arrive at the overall materiality level of RMB 19.34 million. This period's materiality level is consistent with the calculation method used in the previous period.