Independent Auditor’s Report

To the Members of CITIC Limited
(incorporated in Hong Kong with limited liability)

Opinion

What we have audited

The consolidated financial statements of CITIC Limited (the “Company”) and its subsidiaries (the “Group”) set out on pages, which comprise:

• the consolidated balance sheet as at 31 December 2017;
• the consolidated income statement for the year then ended;
• the consolidated statement of comprehensive income for the year then ended;
• the consolidated statement of changes in equity for the year then ended;
• the consolidated cash flow statement for the year then ended; and
• the notes to the consolidated financial statements, which include a summary of significant accounting policies.

Our opinion

In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial position of the Group as at 31 December 2017, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) and have been properly prepared in compliance with the Hong Kong Companies Ordinance.

Basis for Opinion

We conducted our audit in accordance with Hong Kong Standards on Auditing (“HKSAs”) issued by the HKICPA. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independence

We are independent of the Group in accordance with the HKICPA’s Code of Ethics for Professional Accountants (“the Code”), and we have fulfilled our other ethical responsibilities in accordance with the Code.

Key Audit Matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Key audit matters identified in our audit are summarised as follows:

• Impairment of loans and advances to customers and other parties and investments classified as receivables of China CITIC Bank Corporation Limited (“CITIC Bank”)
• Consolidation of structured entities – non-principal guaranteed wealth management products of CITIC Bank
• De-recognition of financial assets of CITIC Bank
• Disclosure of the possible impact of HKFRS 9 implementation of CITIC Bank
• Impairment of the Sino Iron Project

Key Audit Matter

Impairment of loans and advances to customers and other parties and investments classified as receivables of CITIC Bank

Loans and advances to customers and other parties

Refer to Note 2(i), Note 3 and Note 25 to the consolidated financial statements.

As at 31 December 2017, loans and advances to customers and other parties of CITIC Bank amounted to RMB3,196.9 billion (approximately HK$3,824.5 billion), and the corresponding allowance for impairment losses was RMB90.9 billion (approximately HK$108.7 billion).

Allowance for impairment losses represented management’s best estimates of losses incurred within loans and advances to customers and other parties as at the balance sheet date. The allowance was computed individually or on a collective basis, where appropriate.

Corporate loans were initially assessed for impairment individually by management. If objective evidence of impairment was identified, management regularly assesses the amount and timing of the expected future cash flows from the loans to calculate the allowance for impairment losses, which was the difference between the carrying amount of the loans and the present value of their expected future cash flows.

Non-impaired corporate loans and all personal loans were included in homogeneous groups with similar credit risk characteristics for performance of impairment assessments on a collective basis. Models were used for this purpose, considering the similarity of credit risks and applying key assumptions such as, historical loss experience, loss identification period for incurred but unidentified impairment losses, macro-economic factors, and special considerations for high risk products and geographical locations in the calculation methodology. Management assessed these key assumptions on a periodic basis, and made adjustments where deemed appropriate.

Investments classified as receivables

Refer to Note 2(i), Note 3 and Note 28 to the consolidated financial statements.

As at 31 December 2017, investments classified as receivables (“Investments”) of CITIC Bank amounted to RMB534.1 billion (approximately HK$638.9 billion), and the corresponding allowance for impairment losses was RMB2.9 billion (approximately HK$3.5 billion).

Management focused on and assessed the Investments with credit-type underlying assets individually for impairment. Underlying assets not identified as impaired from the individual assessments were included in homogenous groups with similar credit risk characteristics, considering risk factors relating to different industries and different types of underlying assets, and were assessed for impairment on a collective basis.

Identification and assessment of impairment of loans and advances to customers and other parties and Investments involved complex and significant judgements by management, and, as such, we focused on this area as a key audit matter.

Consolidation of structured entities – non-principal guaranteed wealth management products of CITIC Bank

Refer to Note 2(e), Note 3 and Note 49 to the consolidated financial statements.

As at 31 December 2017, unconsolidated structured entities included non-principal guaranteed wealth management products (“WMPs”) issued and managed by CITIC Bank.

Management’s decision on whether or not to consolidate structured entities was based on an assessment of the power of CITIC Bank, its variable returns and the ability to exercise its power to influence the variable returns from these structured entities.

We focused on the consolidation assessment and judgement made by management involving the structures entities for non-principal guaranteed WMPs during our audit as whether or not to consolidate these entities involved significant judgement.

De-recognition of financial assets of CITIC Bank

Refer to Note 2(i), Note 3 and Note 49 to the consolidated financial statements.

During the year ended 31 December 2017, CITIC Bank entered into transactions which involved transfers of financial assets including those through securitisation and loan transfers.

Management analysed the contractual rights and obligations of CITIC Bank in connection with such transfers, and assessed the extent to which the associated risks and rewards of ownership were transferred by using models to determine whether the de-recognition criteria were met. Where necessary, CITIC Bank assessed whether it had relinquished its control over the transferred financial assets to determine whether the de-recognition criteria were met.

The de-recognition assessment relating to the transfer of financial assets involved significant judgement from management, and as such, we focused our audit on the de-recognition of these financial assets.

Disclosure of the possible impact of HKFRS 9 implementation of CITIC Bank

Refer to Note 57 to the consolidated financial statements.

The Group adopted HKFRS 9 – Financial Instruments (“HKFRS 9”) on 1 January 2018. HKFRS 9 involves three major changes: classification and measurement, impairment and hedge accounting.

In addition, according to HKAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors, for those HKFRSs which are issued but not yet effective, entities should disclose the possible impact where it is known or can be reasonably estimated. Therefore, the Group disclosed the possible impact, whether it is known or can be reasonably estimated, of HKFRS 9 implementation in the notes to the financial statements for the year 2017.

Adopting HKFRS 9 poses significant impact on the Group’s subsidiary, CITIC Bank. Estimation of the impact on equity attributable to ordinary equity holders for HKFRS 9 implementation is a highly complex process, which involves significant management’s judgement. Hence, we focused on this area as a key audit matter.

Impairment of the Sino Iron Project

Refer to Note 3 and Note 8 to the consolidated financial statements.

In light of the changes in the key assumptions, an impairment assessment has been undertaken on the Sino Iron Project (“the Project”) as at 31 December 2017.

Management has assessed the recoverable amount of the Project using the Fair Value Less Cost of Disposal (“FVLCD”) method as consistent with the approach taken previously. As a result, a total impairment charge of US$921 million (approximately HK$7,184 million) has been recognised in the consolidated income statement.

In the impairment assessment, the most significant areas of judgement applied by management relate to:

• The production profile of the Project (including production rates as the Project ramps up, ore grades and operating and capital expenditures);
• Iron ore prices (inclusive of base price and premium on product grade);
• The discount rate adopted in the valuation;
• The discount rate adopted in the valuation;
• Foreign exchange rates, particularly between Australian and United States dollars.

As the impairment assessment involves significant assumptions and judgements, we regard this as a key audit matter.

How our audit addressed the Key Audit Matter

Impairment of loans and advances to customers and other parties and investments classified as receivables of CITIC Bank

Loans and advances to customers and other parties

We evaluated and tested the design and operating effectiveness of the relevant controls over the impairment assessments and impairment allowance computations for loans and advances to customers and other parties, including review and approval of results of credit reviews on impaired loans, the periodic revaluations of collateral, the estimation of future cash flows for impaired loans, and the collective impairment computations (including the selection and changes of models, data inputs and key assumptions and changes thereof used in the computations).

We performed independent credit reviews of selected samples, considering the credit profiles of the related borrowers, guarantors and the collateral, as well as external evidence and factors, to ascertain whether management’s identification of impaired loans was appropriate.

For impaired loans identified individually, we examined, on a sample basis, data inputs to the discounted cash flow models, including the cash flow status of the borrowers and guarantors, latest collateral valuations, applicable haircut rates and disposal plans, in supporting the estimation of future cash flows and present value.

For those loans and advances to customers and other parties which were assessed by management on a collective basis for impairment losses, we conducted independent testing on the appropriateness of the design and logic of the models employed by management. We tested the migration model for corporate loans and the roll rate models for personal loans, respectively, including completeness of the source data, appropriateness of the key assumptions, and mathematical accuracy of the calculations.

We discussed with management and scrutinised the appropriateness of those key assumptions applied in management’s impairment assessment, and compared them with available external evidence where necessary. We also applied sensitivities to underlying key assumptions.

Investments classified as receivables

Loans and advances to customers and other parties and Investments relating to the same borrower were included in the integrated credit approval and management system of CITIC Bank so that management manages its credit risk exposure in a holistic manner.

For Investments with credit-type underlying assets, the testing of relevant controls over impairment identification and assessments of these Investments was covered through our testing of internal controls over loans and advances to customers and other parties mentioned above.

For Investments with credit-type underlying assets where the underlying assets related to borrowers who also had outstanding balances of loans and advances with CITIC Bank, we applied a consistent approach, to selection of samples and conducting credit reviews. For borrowers with no outstanding balances of loans and advances to customers and other parties with CITIC Bank, we separately selected samples and performed procedures on them to ascertain whether there was objective evidence of impairment for the underlying assets.

For Investments with credit-type underlying assets, that were not identified as impaired from individual assessments, we evaluated the appropriateness of the Investments’ allowance for impairment losses based on the credit risk characteristics of the underlying assets, and by reference to the level of CITIC Bank’s collective impairment allowance for its corporate loans and advances to customers with similar credit risk characteristics.

Based on the procedures performed above, in the context of the inherent uncertainties associated with impairment assessments, the assessment approaches, methodologies and key assumptions adopted by management were considered acceptable.

Consolidation of structured entities – non-principal guaranteed wealth management products of CITIC Bank

We evaluated and tested the design and operating effectiveness of management’s relevant controls over the consolidation of structured entities for nonprincipal guaranteed WMPs. These controls primarily included the review and approval of the contractual terms, the results in variable return calculations, and the consolidation assessment conclusions for these structured entities.

We selected samples of structured entities for nonprincipal guaranteed WMPs and performed the following tests:

• assessed the contractual rights and obligations of CITIC Bank in light of the transaction structures, and evaluated the power of CITIC Bank over the structured entities;
• performed independent analyses and tests on the variable returns from the structured entities, including but not limited to commission income and asset management fees earned, retention of residual income, and, if any, liquidity and other support provided to the structured entities;
• assessed whether CITIC Bank acted as a principal or an agent through analysis of the scope of the decision-making authority of CITIC Bank, its remuneration entitlement, other interests CITIC Bank held, and the rights held by other parties.

Based on the procedures performed above, we found management’s judgement relating to the consolidation of structured entities for non-principal guaranteed WMPs acceptable.

De-recognition of financial assets of CITIC Bank

We evaluated and tested the design and operating effectiveness of the relevant controls over transfers of financial assets, including the review and approval of the structure designs and contractual terms of the transactions, the approval of models for testing the transfer of risks and rewards of ownership and the key parameters and assumptions used in the models, as well as the review and approval of management’s assessment results.

We selected samples and read through transaction agreements to assess the contractual rights and obligations of CITIC Bank, and whether CITIC Bank transferred the rights to receive contractual cash flows from the financial assets, or the transfer qualified for the “pass through” of those cash flows, to independent third parties.

We also assessed the appropriateness of the models, the parameters and assumptions, the discount rates, and the variability factors. We also tested the mathematical accuracy of the calculations.

For financial assets where CITIC Bank neither retained nor transferred substantially all of the risks and rewards associated with their ownership, we analysed whether CITIC Bank had relinquished its control over these financial assets, and if CITIC Bank had a continuing involvement in these transferred financial assets.

Based on the procedures performed above, we found management’s assessment over de-recognition of transferred financial assets acceptable.

Disclosure of the possible impact of HKFRS 9 implementation of CITIC Bank

We obtained management’s judgement and logic on classification under HKFRS 9 and its result, checked the consistency of the classification against the relevant requirements of HKFRS 9, and assessed the accuracy of the classification;

We obtained management’s valuation method and results of parameters selection for financial products measured at fair value, and assessed the reasonableness of the valuation method and parameters selected with the involvement of our valuation specialists;

For Expected Credit Losses(“ECL”) under HKFRS 9 estimated by management, we performed the following procedures:

• Obtained an understanding of methodology for ECL model, development processes and its relevant controls, through review of documentation and discussion with management and credit modelling specialists. With the involvement of our modelling specialists, we assessed the reasonableness of assumptions and judgement made by management on model adoption and parameters selection;
• Examined the key data inputs to the ECL model on a sample basis to assess their accuracy and completeness.

We obtained an understanding of the key processes related to information disclosure, and inspected the management’s approval documents on the information disclosure related to change in accounting policies.

Impairment of the Sino Iron Project

In evaluating management’s valuation of the Project we undertook the following procedures:

• Evaluated the reasonableness of management’s judgement in relation to non-current asset impairment indicators, cash flow forecasts and the adoption of the FVLCD model;
• Assessed whether management had included all appropriate assets and liabilities in the cash generating unit with appropriate consideration of tax impact;
• Compared assumptions adopted in cash flow forecasts on production, future capital and operating expenditure with approved Life of Mine Plans, operating budgets and, where applicable, actual performance outcomes achieved to date;
• With the support of our valuation experts, benchmarked key market related assumptions included in the valuation model, being base price, foreign exchange rates and the discount rate, against external market data; assessed the forecast premium on product grade with actual premiums achieved to date; and validated the competence and objectivity of the third party experts utilised by management to develop these assumptions;
• Performed sensitivity analysis on the key assumptions.

Based on the above procedures, we found the assumptions and judgements applied by management to be reasonable and consistent with the audit evidence we obtained.

Other Information

The directors of the Company are responsible for the other information. The other information comprises all of the information included in the annual report other than the consolidated financial statements and our auditor’s report thereon.

Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated.

If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

Responsibilities of Directors and Audit and Risk Management Committee for the Consolidated Financial Statements

The directors of the Company are responsible for the preparation of the consolidated financial statements that give a true and fair view in accordance with HKFRSs issued by the HKICPA and the Hong Kong Companies Ordinance, and for such internal control as the directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, the directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so.

Audit and Risk Management Committee is responsible for overseeing the Group’s financial reporting process.

Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. We report our opinion solely to you, as a body, in accordance with Section 405 of the Hong Kong Companies Ordinance and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with HKSAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with HKSAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors.
• Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

We communicate with Audit and Risk Management Committee regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide Audit and Risk Management Committee with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with Audit and Risk Management Committee, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

The engagement partner on the audit resulting in this independent auditor’s report is Chan Kwong Tak.

PricewaterhouseCoopers
Certified Public Accountants

Hong Kong, 28 March 2018