AAC Technologies Holdings Inc. - Annual Report 2011

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(incorporated in the Cayman Islands with limited liability) Stock Code: 02018

2011 Annual Report

02 Corporate Information
03 Chairman’s Statement
05 Management Discussion and Analysis
08 Biographies of Directors and Senior Management
16 Directors’ Report
27 Corporate Governance Report
33 Independent Auditor’s Report
35 Consolidated Statement of Comprehensive Income
36 Consolidated Statement of Financial Position
38 Consolidated Statement of Changes in Equity
40 Consolidated Statement of Cash Flows
42 Notes to the Consolidated Financial Statements 90 Financial Summary

CORPORATE INFORMATION

DIRECTORS

Executive Directors

Mr. Benjamin Zhengmin Pan (Chief Executive Officer) Mr. Mok Joe Kuen Richard

REGISTERED OFFICE

Cricket Square, Hutchins Drive, P.O. Box 2681 Grand Cayman KY1-1111 Cayman Islands

PLACE OF BUSINESS IN HONG KONG

Non-executive Director

Ms. Ingrid Chunyuan Wu

Independent Non-executive Directors

Mr. Koh Boon Hwee (Chairman) Mr. Poon Chung Yin Joseph Dato’ Tan Bian Ee Ms. Chang Carmen I-Hua

COMPANY SECRETARY

Mr. Lo Tai On

AUDIT COMMITTEE

Mr. Poon Chung Yin Joseph (Chairman) Mr. Koh Boon Hwee Ms. Ingrid Chunyuan Wu

REMUNERATION COMMITTEE

Mr. Koh Boon Hwee (Chairman) Dato’ Tan Bian Ee Ms. Chang Carmen I-Hua

NOMINATION COMMITTEE

Dato’ Tan Bian Ee (Chairman) Mr. Poon Chung Yin Joseph Ms. Chang Carmen I-Hua

AUTHORIZED REPRESENTATIVES

Mr. Benjamin Zhengmin Pan Mr. Mok Joe Kuen Richard

AUDITOR

Deloitte Touche Tohmatsu Certified Public Accountants 35th Floor, One Pacific Place 88 Queensway Hong Kong

Unit 2003, 20th Floor 100 Queen’s Road Central Central, Hong Kong

CAYMAN ISLANDS PRINCIPAL SHARE REGISTRAR AND TRANSFER OFFICE

Bank of Bermuda (Cayman) Limited P.O. Box 513 Strathvale House North Church Street George Town Grand Cayman KY1-1106 Cayman Islands

HONG KONG BRANCH SHARE

REGISTRAR AND TRANSFER OFFICE

Computershare Hong Kong Investor Services Limited Shops 1712–1716, 17th Floor Hopewell Centre 183 Queen’s Road East Wanchai, Hong Kong

PRINCIPAL BANKERS

Industrial and Commercial Bank of China, Shenzhen Nantou Sub-branch Bank of China, Wujin Sub-branch The Hongkong and Shanghai Banking Corporation Limited, Hung Hom Branch

STOCK CODE

02018

WEBSITE

www.aactechnologies.com

CHAIRMAN’S STATEMENT

Dear Shareholders,

We delivered a strong performance in the year 2011. In the interim period, AAC Technologies Holdings Inc. (“AAC” or the “Company”) reported positive growth results for the first half of 2011, and in the second half of the year, we continued to generate increased sales from existing and new business customers. The Company maintained its strong growth by adopting appropriate business strategies to capture the momentum of the smart phone segment of the mobile phone market and the growing tablet market. The Company’s focus on technology capabilities ensures that we capture significant market share in these segments. The continuous enhancement of design specifications increases the value of the components embedded in our customers’ devices. In addition, improved operational efficiency also contributed to this year’s solid financial performance.

The Company reported increased sales revenue and posted record high operating profits. Our sales revenue reached RMB4,059.7 million, 21.2% higher than our 2010 sales revenue of RMB3,349.0 million. Our overall gross profit rose to a record high of RMB1,784.4 million, representing an increase of 18.1% over 2010 gross profit of RMB1,510.4 million. We booked a record high net profit for owners of the Company of RMB1,036.2 million, which was 5.0% higher than RMB986.7 million in 2010. Basic earnings per share for 2011 were RMB84.38 cents versus RMB80.35 cents for 2010.

With this strong performance in the year, AAC improved its balance sheet. By the end of 2011, we had a total of RMB1.4 billion in bank balances and cash.

The Board will recommend the payment of a final dividend for the year ended 31st December, 2011 of HK21.6 cents per ordinary share. This final dividend, together with the interim dividend of HK20.0 cents, represents a payout ratio of about 40.0% of the profit attributable to owners of AAC.

During 2011, we delivered a gross margin of 44.0% and net profit margin of 25.5%. The Company continued to increase operational efficiency by implementing better internal management processes and automation in production processes. Addressing specific customers’ requirements with successful product offerings also created a favourable product mix.

The following were some of the major achievements during the year:

Increased business in existing leading global mobile phone customers, particularly in the smart phone sector
Penetration into the tablet market and increased business in the electronic book segment
Broadened our product range with existing and new customers
Completed new strategic investments in new technologies
Further progress in enhancing automation for production efficiency

In the first half of 2011, the Company changed its name to “AAC Technologies Holdings Inc.”. It signified our commitment to deliver non-acoustic technology component solutions in addition to our acoustic capabilities. AAC is already an established global miniaturised acoustic components provider and we have strengthened our technology capability into advanced micro optics and design and manufacture of Micro Electro Mechanical Systems (MEMS).

CHAIRMAN’S STATEMENT

The following are some of the research areas which we are committed to:

(i) in the acoustic segment, the design and packaging of MEMS microphones and technologies related to noise-cancellation and sound projection, related digital processing and software development;
(ii) in the optics segment, Voice Coil Motor (VCM) auto-focus mechanisms, lens design and related imaging technologies; and
(iii) other miniaturized technology components such as haptic vibrators, antennas and ceramic products.

In 2011, we successfully obtained 233 additional patents bringing our portfolio to a total of 649 patents. In 2011, we filed another 291 patents pending, which brings us to a total of 480 patents pending by the end of 2011. We also intend to strengthen our technology portfolio via strategic acquisitions and investments. In 2011, we made an investment in the battery materials sector and, as planned, increased our equity interest in the wafer-level glass moulding company.

There have been significant growth in the smartphone segment of the mobile handsets and the tablet devices in the year 2011. Industry analysts forecast that these devices will continue to grow with exciting prospects in the years to come. As these devices continue to evolve in upgrading their design and functional specifications, more advanced and effective technology solutions will be required. To date, AAC has been successful in capturing a significant global market share in the acoustic segment. By leveraging on effective directed research, product development capabilities and engineering know-how, we aim to increase market share in the acoustic segment and penetrate into other non-acoustic segments such as optics components and wireless solution segments.

AAC is committed to offer the most advanced high-end value-adding components and to become the world’s leading miniature components solutions provider.

I am deeply grateful to all our staff and management for their contribution to a very good set of results. On behalf of the Company, I also want to thank all our customers and suppliers for their continued support. And, finally, my sincere thanks to our Board members for their insightful guidance during the year.

Koh Boon Hwee Chairman

30th March, 2012

MANAGEMENT DISCUSSION AND ANALYSIS

OVERVIEW

AAC is one of the world’s foremost vertically integrated manufacturers of miniature technology components. Our Company designs, manufactures and distributes a comprehensive suite of receivers, speakers, speaker modules, multi-function devices, microphones, vibrators, headsets, antennas and ceramic products. In the first half of 2011, the Company changed its name to “AAC Technologies Holdings Inc.” to signify our capabilities in delivering acoustic as well as non-acoustic technology components solutions.

Our components are designed for use in mobile handsets, tablets, game consoles, notebook computers and other consumer electronics devices such as electronic book-readers and MP4 players. Our innovative technology design solutions cover wide ranging applications in different markets such as mobile telecommunications, consumer electronics, home appliances, automobile and medical.

We continue to deploy internal research and development resources on developing and expanding of our intellectual property portfolio. In addition, our management team is committed to identify and evaluate appropriate opportunities in forming alliances, investing or mergers and acquisitions in global companies and technologies that will further broaden and strengthen the Company’s existing technology capabilities.

MARKET REVIEW

The year 2011 started with good momentum carried over from the latter half of 2010. The mobile devices market, driven by growth for smartphones and the launch of new tablets, showed secular growth throughout the year. There have been changes to ownership to the different global brands of the mobile handsets industry and new strategic alliances formed. When different brands executed their strategies, their market positions were reshuffled. We continue to offer quality miniature components designs by working closely with our key and new global customers and addressing their specific design requirements. As a result, the Company has delivered and sustained solid financial performance with revenue and profit growth for 2011.

The Company is focused on developing our in-house intellectual property to extend our technological leadership in miniaturized technology components beyond the acoustic arena. During 2011, we have successfully obtained 233 additional acoustic and non-acoustic patents, bringing our total portfolio to 649 patents. In the same period, we filed another 291 patents, which brings patents pending to a total of 480.

Leveraging on our research capability, design and production knowhow, the broadening of our product range to include non-acoustic components, such as haptic vibrator components and ceramic products, will expand our offering of different technology solutions for the mobile devices market.

FINANCIAL REVIEW

Our strong performance in this year, generated RMB945.5 million in net cash flow from operations. Revenue of the Group ended 31st December, 2011 amounted to RMB4,059.7 million, an increase of RMB710.7 million, or 21.2%, compared with 2010. Gross profit of RMB1,784.4 million was RMB274.0 million, or 18.1%, higher than 2010. Profit attributable to owners of the Company amounted to RMB1,036.2 million, representing an increase of 5.0% from RMB986.7 million for the corresponding period of 2010. Basic earnings per share amounted to RMB84.38 cents, up 5.0% from RMB80.35 cents for 2010.

MANAGEMENT DISCUSSION AND ANALYSIS

GEARING RATIO AND INDEBTEDNESS

The gearing ratio of the Group, computed by dividing short-term bank loans by total assets, was 13.3% as at 31st December, 2011 compared with 8.4% as at 31st December, 2010.

As at 31st December, 2011, the Group had RMB891.1 million of short-term bank loans compared with RMB470.3 million as at 31st December, 2010.

LIQUIDITY, FINANCIAL RESOURCES AND CAPITAL STRUCTURE

As at 31st December, 2011, the Group had RMB1,374.1 million in cash and cash equivalents. In addition, the Group had restricted short-term bank deposits of RMB0.9 million. Management believes that the Group’s current cash and cash equivalents, together with available credit facilities and expected cash flow from operations, will be sufficient to satisfy the current operational requirements of the Group.

FOREIGN EXCHANGE

Given our international operations and presence, the Group faces foreign exchange exposure including transaction and translation exposure.

It is the Group’s policy to centralize foreign exchange management to monitor total foreign currency exposure, to net off affiliate positions and to consolidate hedging transactions with banks. As far as possible, the Group aims to achieve natural hedging by investing and borrowing in the functional currencies. Where a complete hedge is not possible, the Group will protect our anticipated foreign currency revenue with appropriate foreign exchange contracts.

The Group will not enter into derivative transactions for trading or speculative purposes.

During the year 2011, the Company has entered into foreign currency forward contracts to minimise the effect of exchange rate fluctuations between the Euro and the US dollar.

CHARGES ON GROUP ASSETS

Apart from the bank deposits amounts of RMB0.9 million and RMB28.0 million pledged to banks respectively as at 31st December, 2011 and 31st December, 2010, no other Group asset was under charge to any financial institution.

ACQUISITION OF A SUBSIDIARY

In June 2010, the Group acquired a 31.95% equity interest in Kaleido Technology ApS (“Kaleido”), a private company incorporated in Denmark and engaged in wafer-level glass molding. In accordance with the Shareholders’ agreement, the Company made further investment in Kaleido in March 2011 to acquire an additional 38.95% shareholding for a total consideration of DKK35.1 million (RMB43.8 million), thereby increasing our equity interest in Kaleido to 70.9%.

A goodwill of RMB8.7 million was attributed to the anticipated profitability arising from the distribution of the Group’s products in the new markets and the future operating synergies from the combination.

MANAGEMENT DISCUSSION AND ANALYSIS

EMPLOYEE INFORMATION

As at 31st December, 2011, the Group employed 13,789 permanent employees. Employees of the Group are remunerated based on their individual performance, professional qualifications, experience in the industry and relevant market trends. Management regularly reviews the Group’s remuneration policy and appraises the work performance of its staff. Employee remuneration includes salaries, allowances, social insurance and mandatory pension fund. As required by the relevant regulations in the PRC, the Group participates in the social insurance schemes operated by the relevant local government authorities. The Group also participates in the mandatory pension fund and social insurance schemes for our employees in Hong Kong, Taiwan, Singapore, South Korea, USA and various countries in Europe.

PROSPECTS

With our sizeable global market share in acoustic product segment, we aim to increase existing market share by raising penetration level into new customers and moving up in the technology value-added of the components offered. Our strengths in research and development enable us to timely provide and ramp up new products platforms to serve existing and new customers. We will enhance our competitive edge in delivering vertically-integrated production models for complex customised components’ solutions and from increased efficient use of fully automatic and semi-automatic manufacturing processes.

We strive to achieve long term sustainable growth by advancing our integrated solution products in the acoustic, optics, haptics and wireless solution segments. We believe our advanced components technology solutions will open up new industry markets in addition to the existing mobile devices sector.

Leveraging on a diversified customer base and a wide range of technology solutions, we are wellpositioned for solid sustainable growth. Our ultimate goal is to become one of the world’s leading micro components solution provider for manufacturers of different kind of consumer products.

DIVIDENDS

From time to time, the Company will consider the declaration of dividends based on its financial position, results of operations, debt repayment ability, capital expenditures, earnings and other factors as the Board may deem appropriate. The Board may recommend the amount of dividend to be declared and the declaration and payment of dividends will be determined by the Shareholders in general meeting. The Board may also from time to time pay to Shareholders such interim dividends to be justified by the profits of the Company.

During the six months ended 31st December, 2011, an interim dividend in respect of the six months ended 30th June, 2011 of HK20.0 cents (2010: HK14.2 cents) per share was paid to Shareholders of the Company.

The Board resolved to recommend the payment of a final dividend of HK21.6 cents (2010: HK23.7 cents) per ordinary share in respect of the year ended 31st December, 2011. This proposed final dividend together with the interim dividend already paid amount to total dividends of HK41.6 cents (2010: HK37.9 cents) representing a total payout ratio of about 40% of the profit attributable to owners of the Company for the year.

Subject to the Shareholders’ approval at the forthcoming annual general meeting to be held on 21st May, 2012, the said final dividend will be payable to Shareholders of the Company, whose names appeared on the registers of members of the Company on 30th May, 2012 and payable on or about 6th June, 2012.

BIOGRAPHIES OF DIRECTORS AND SENIOR MANAGEMENT

EXECUTIVE DIRECTOR

Mr. Benjamin Zhengmin Pan (“Mr. Pan”), aged 43, is an executive Director and chief executive officer of the Company. Mr. Pan co-founded the Group in 1993. Mr. Pan is responsible for providing strategic direction and leadership and for developing and implementing the Group’s strategic objectives and business plans. Specifically, Mr. Pan is responsible for overseeing the coordination between sales and marketing, research and development, manufacturing, and other functions including quality assurance, finance and human resources. Mr. Pan has been instrumental in spearheading the Group’s expansion outside the PRC. In 1996, he co-founded and was appointed President and Chief Executive Officer of American Audio Component Inc. (“AAC U.S.”). Mr. Pan also co-founded Shenzhen Meiou Electronics Corporation (“Shenzhen Meiou”) in 1998 and American Audio Components (Changzhou) Co., Ltd. (“Changzhou AAC”) in 2000. In addition to his experience in sales and marketing, manufacturing and management, he has also been instrumental in leading our research and development strategy, and has developed a number of patents used in the design and manufacturing of our polyphonic speakers, miniature receivers, transducers and Electret Condenser Microphones. Mr. Pan graduated from the 江蘇省武進師範學校 (Jiangsu Province Wujin Teacher School) in 1987. Mr. Pan is the spouse of Ms. Ingrid Chunyuan Wu (“Ms. Wu”), the nonexecutive Director and a substantial Shareholder of the Company.

Save as disclosed above, Mr. Pan does not have any relationships with other Directors, senior management, substantial Shareholders or controlling Shareholders (as defined in the Listing Rules) of the Group. Save as aforesaid, Mr. Pan did not hold other directorship in any public companies the securities of which are listed on any securities market in Hong Kong or overseas in the past three years but he has directorship in a number of subsidiaries of the Company.

Mr. Pan has entered into a service agreement with the Company for a term of three years commencing from 15th July, 2011. His appointment may be terminated by either party giving not less than 60 days’ prior notice in writing or 60 days’ payment in lieu of notice to the other party. He is subject to retirement by rotation and re-election in accordance with the article of association of the Company. He is entitled to a basic salary of approximately US$200,000 per year (which is covered by the service agreement) and will be paid monthly in arrears which is determined upon negotiation between Mr. Pan and the Company at arm’s length on the basis of his previous experience, professional qualifications, responsibilities to be involved in the Company and the amount of time devoted to the Company’s business as well as the current financial position of the Company and the prevailing market conditions and which is subject to review periodically as determined by the Company.

The interests of Mr. Pan in the Shares (within the meaning of Divisions 7 and 8 of Part XV of the SFO), were as follows:

Name of Director	Capacity/Nature of Interest	Number of Ordinary Shares	Approximate percentage of shareholding
Mr. Pan	Beneficial owner/interest of spouse	533,886,532	43.48%
	and child under 18/interest of	(Note)
	controlled corporation/personal,
	family and corporate interest

BIOGRAPHIES OF DIRECTORS AND SENIOR MANAGEMENT

Note:

Mr. Pan beneficially owns 69,512,565 shares. In addition, Mr. Pan is deemed or taken to be interested in the following shares for the purposes of the SFO:

(i) 51,439,440 shares which are beneficially owned by Silver Island Limited, a company wholly-owned by Mr. Pan;
(ii) 295,820,525 shares which are beneficially owned by Ms. Wu and as Ms. Wu is his spouse, he is deemed to be interested in such 295,820,525 shares; and
(iii) 117,114,002 shares representing the aggregate of (a) 112,375,158 shares which are deemed to be interested by Mr. Pan and Ms. Wu’s descendents, as beneficiaries of the Pan 2005 Irrevocable Trust dated 10th May, 2005; and (b) 4,738,844 shares which are deemed to be interested by Mr. Pan and Ms. Wu’s descendents, as beneficiaries of the Pan 2005 Exempt Trust dated 10th May, 2005. One child of Mr. Pan and Ms. Wu is over and the other is under the age of 18.

Save as disclosed above, Mr. Pan does not hold any interests or short positions in the Shares, underlying shares and debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) which would be required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO, including interests and short position which they are deemed or taken to have under such provisions of the SFO, or which would be required, pursuant to Section 352 of the SFO, to be entered in the register referred to therein, or otherwise notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers in the Listing Rules.

Mr. Mok Joe Kuen Richard (“Mr. Mok”), aged 48, is an executive Director of the Company. With over 20 years of experience in finance, Mr. Mok is a Hong Kong certified public accountant and a chartered accountant in the United Kingdom. Mr. Mok held a diploma in applied psychology from Hong Kong Baptist University and graduated from the London School of Economics and Political Science, London University.

Mr. Mok does not have any relationships with other Directors, senior management, substantial Shareholders, or controlling Shareholders (as defined in the Listing Rules) of the Group. Save as aforesaid, Mr. Mok did not hold other directorship in any public companies the securities of which are listed on any securities market in Hong Kong or overseas in the past three years and he does not hold any other position in the Group.

Mr. Mok has entered into a service agreement with the Company for a term of three years commencing from 5th October, 2009. His appointment may be terminated by either party giving not less than 60 days’ prior notice in writing or 60 days’ payment in lieu of notice to the other party. He is subject to retirement by rotation and re-election in accordance with the article of association of the Company. He is entitled to a basic salary of approximately HK$1,860,000 per year (which is covered by the service agreement) and will be paid monthly in arrears which is determined upon negotiation between Mr. Mok and the Company at arm’s length on the basis of his previous experience, professional qualifications, responsibilities to be involved in the Company and the amount of time devoted to the Company’s business as well as the current financial position of the Company and the prevailing market conditions, and, is subject to review periodically as determined by the Company.

BIOGRAPHIES OF DIRECTORS AND SENIOR MANAGEMENT

Mr. Mok does not hold any interests or short positions in the Shares, underlying shares and debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) which would be required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO, including interests and short position which they are deemed or taken to have under such provisions of the SFO, or which would be required, pursuant to Section 352 of the SFO, to be entered in the register referred to therein, or otherwise notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers in the Listing Rules.

NON-EXECUTIVE DIRECTOR

Ms. Ingrid Chunyuan Wu, aged 41, is a non-executive Director of the Company. She is also a member of the audit committee of the Company. Ms. Wu co-founded the Group in 1993. In 1996, she co-founded and later became chief financial officer of AAC U.S.. She also co-founded Shenzhen Meiou in 1998, Changzhou AAC in 2000, and YEC Electronics Limited in 2001. Before Mr. Du Kuang-Yang joined the Group as the chief operating officer in March 2005, Ms. Wu was responsible for the day-to-day operations of these companies. Ms. Wu graduated from 常州衛生學校 (Changzhou School of Public Health) in 1989. Ms. Wu is the spouse of Mr. Pan, the executive Director, chief executive officer and a substantial Shareholder of the Company.

Save as disclosed above, Ms. Wu does not have any relationships with other Directors, senior management, substantial Shareholders, or controlling Shareholders (as defined in the Listing Rules) of the Group. Save as aforesaid, Ms. Wu did not hold other directorship in any public companies the securities of which are listed on any securities market in Hong Kong or overseas in the past three years but she has directorship in a number of subsidiaries of the Company.

Ms. Wu has entered into a letter of appointment with the Company for a term of two years commencing from 16th April, 2011. Her appointment may be terminated by either party giving prior notice in writing at such period as both parties may agree. She is subject to retirement by rotation and re-election in accordance with the article of association of the Company. She is entitled to the director’s fee of US$50,000 per year (which is covered in the letter of appointment) or such other sum as the Company may from time to time decide, which is determined upon negotiation between Ms. Wu and the Company at arm’s length on the basis of her previous experience, professional qualifications, responsibilities to be involved in the Company and the amount of time devoted to the Company’s business as well as the current financial position of the Company and the prevailing market conditions. Her director’s fee is subject to Shareholders’ approval at the annual general meeting.

The interests of Ms. Wu in the Shares (within the meaning of Divisions 7 and 8 of Part XV of the SFO), were as follows:

Name of Director	Capacity/Nature of Interest	Number of Ordinary Shares	Approximate percentage of shareholding
Ms. Wu	Beneficial owner/interest of spouse	533,886,532	43.48%
	and child under 18/personal and	(Note)
	family interest

BIOGRAPHIES OF DIRECTORS AND SENIOR MANAGEMENT

Note:

Ms. Wu beneficially owns 295,820,525 shares. Ms. Wu is also deemed or taken to be interested in the following shares for the purposes of the SFO:

(i) 120,952,005 shares representing the aggregate of (a) 51,439,440 shares which are beneficially owned by Silver Island Limited, a company wholly-owned by Mr. Pan; and (b) 69,512,565 shares which are beneficially owned by Mr. Pan; and as Mr. Pan is her spouse, she is deemed to be interested in such 120,952,005 shares; and
(ii) 117,114,002 shares representing the aggregate of (a) 112,375,158 shares which are deemed to be interested by Mr. Pan and Ms. Wu’s descendents, as beneficiaries of the Pan 2005 Irrevocable Trust dated 10th May, 2005; and (b) 4,738,844 shares which are deemed to be interested by Mr. Pan and Ms. Wu’s descendents, as beneficiaries of the Pan 2005 Exempt Trust dated 10th May, 2005. One child of Mr. Pan and Ms. Wu is over and the other is under the age of 18.

Save as disclosed above, Ms. Wu does not hold any interests or short positions in the Shares, underlying shares and debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) which would be required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO, including interests and short position which they are deemed or taken to have under such provisions of the SFO, or which would be required, pursuant to Section 352 of the SFO, to be entered in the register referred to therein, or otherwise notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers in the Listing Rules.

INDEPENDENT NON-EXECUTIVE DIRECTORS

Mr. Koh Boon Hwee (“Mr. Koh”), aged 61, is the Chairman of the Board and an independent non-executive Director. He is Chairman of the remuneration committee and a member of the audit committee. Mr. Koh has been appointed to the Board since November 2004. He brings with him extensive management experience and leadership, and has over 30 years of experience in the IT-related and electronics industries. He is currently the Chairman of Sunningdale Tech Ltd, Yeo Hiap Seng Limited and Yeo Hiap Seng (Malaysia) Berhad. Mr. Koh also serves on the Board of Agilent Technologies, Inc and is a Director of the Hewlett Foundation in the United States. Mr. Koh is also the Chairman of the Nanyang Technological University Board of Trustees. Mr Koh was previously Chairman of DBS Group Holdings Ltd and DBS Bank Ltd (2005-2010), Singapore Airlines Ltd (2001-2005), SIA Engineering Company Ltd (2003-2005), Singapore Telecom Group and its predecessor organizations (1986-2001), Omni Industries Ltd (19962001), Executive Chairman of Wuthelam Holdings Pte Limited (1991-2000) and, before that, Managing Director of Hewlett Packard Singapore (1985-1990), where he started his career in 1977. Mr Koh was also a Director of Temasek Holdings Pte Ltd (1996-2010), and a member of the Executive Committee of the Board (1997-2010). Mr. Koh graduated from the Imperial College, University of London, with a Bachelor’s Degree (First Class Honours) in Mechanical Engineering. Mr. Koh also holds a Master’s Degree in Business Administration (Distinction) from Harvard Business School. Mr. Koh was awarded Singapore’s Public Service Star in 1991, the Meritorious Service Medal in 1995, and the Distinguished Service Order in 2008 by the President of Singapore.

Mr. Koh does not have any relationships with other Directors, senior management, substantial Shareholders, or controlling Shareholders (as defined in the Listing Rules) of the Group. Save as aforesaid, Mr. Koh did not hold other directorship in any public companies the securities of which are listed on any securities market in Hong Kong or overseas in the past three years and he does not hold any other position in the Group.

BIOGRAPHIES OF DIRECTORS AND SENIOR MANAGEMENT

Mr. Koh has entered into a letter of appointment with the Company for a term of two years commencing from 16th April, 2011. His appointment may be terminated by either party giving prior notice in writing at such period as both parties may agree. He is subject to retirement by rotation and re-election in accordance with the article of association of the Company. He is entitled to the director’s fee of US$105,000 per year (which is covered by the letter of appointment) or such other sum as the Company may from time to time decide, which is determined upon negotiation between Mr. Koh and the Company at arm’s length on the basis of his previous experience, professional qualifications, responsibilities to be involved in the Company and the amount of time devoted to the Company’s business as well as the current financial position of the Company and the prevailing market conditions. His director’s fee is subject to Shareholders’ approval at the annual general meeting.

The interests of Mr. Koh in the Shares (within the meaning of Divisions 7 and 8 of Part XV of the SFO), was as follows:

Name of Director	Capacity/Nature of Interest	Number of Ordinary Shares	Approximate percentage of shareholding
Mr. Koh	Beneficial owner	1,307,562	0.11%

Save as disclosed above, Mr. Koh does not hold any interests or short positions in the Shares, underlying shares and debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) which would be required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO, including interests and short position which they are deemed or taken to have under such provisions of the SFO, or which would be required, pursuant to Section 352 of the SFO, to be entered in the register referred to therein, or otherwise notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers in the Listing Rules.

Dato’ Tan Bian Ee (“Dato’ Tan”), aged 65, was appointed as an independent non-executive Director, the Chairman of the nomination committee and a member of the remuneration committee of the Company on 11th September, 2009. He was appointed as an independent Director in September 2010 and recently on 18th February, 2010 re-appointed as the chief executive officer and executive Director of MFS Technology Ltd., a company listed in Singapore. He has stepped down from Singapore Airlines Engineering Company on July 2010 after 6 years of service. Dato’ Tan was the chief operating officer of Avago Technologies and Worldwide Sales and Global Operations prior to his retirement in February 2009. He joined HewlettPackard in 1973 and was promoted to Hewlett-Packard Malaysia Managing Director in 1989. He was then appointed as the President of Agilent Technologies Malaysia and Singapore in 1999 when HewlettPackard spun off its Semiconductor Component Operations to form Agilent Technologies Inc.. Dato’ Tan has been council member in the Industrial Coordination Council under the Ministry of International Trade & Industry of Malaysia since 2000. Dato’ Tan was a Director of Singapore Workforce Development Agency under the Singapore Ministry of Manpower from 2004-2005. He was also the Northern Region Chairman for Young Enterprise from 2003-2004, a community educational programme under the auspices of the American Malaysian Chamber of Commerce and a founder member of Penang Skills Development Corporation.

BIOGRAPHIES OF DIRECTORS AND SENIOR MANAGEMENT

Dato’ Tan holds a Diploma in Medical Laboratory Technology and Management Studies, as well as a Master of Business Administration with Distinctions from the Golden Gate University. He was awarded the Pingat Kelakuan Tertinggi (Exemplary Leadership Award), Darjah Johan Negeri (DJN – Second Highest State Award) and the Darjah Setia Pangkuan Negeri which carries the title Dato’ (DSPN) in 1991, 1995 and 1999 respectively from the State Government of Penang, Malaysia.

Dato’ Tan does not have any relationships with other Directors, senior management, substantial Shareholders, or controlling Shareholders (as defined in the Listing Rules) of the Group. Save as aforesaid, Dato’ Tan did not hold other directorship in any public companies the securities of which are listed on any securities market in Hong Kong or overseas in the past three years and he does not hold any other position in the Group.

Dato’ Tan has entered into a letter of appointment with the Company for a term of two years commencing from 11th September, 2011, which can be terminated by either party giving prior notice in writing at such period as both parties may agree. He is subject to retirement by rotation and re-election in accordance with the articles of association of the Company. Dato’ Tan is entitled to a director’s fee of US$42,500 per year (which is covered in the letter of appointment) or such other sum as the Company may from time to time decide, which is determined upon negotiation between Dato’ Tan and the Company at arm’s length on the basis of his previous experience, professional qualifications, responsibilities to be involved in the Company and the amount of time devoted to the Company’s business as well as the current financial position of the Company and the prevailing market conditions. His director’s fee is subject to Shareholders’ approval at the annual general meeting.

Dato’ Tan does not hold any interests or short positions in the Shares, underlying shares and debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) which would be required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO, including interests and short position which they are deemed or taken to have under such provisions of the SFO, or which would be required, pursuant to Section 352 of the SFO, to be entered in the register referred to therein, or otherwise notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers in the Listing Rules.

Mr. Poon Chung Yin Joseph (“Mr. Poon”), aged 57, was appointed as an independent non-executive Director, the Chairman of the audit committee and a member of the nomination committee of the Company on 5th October, 2009. He is group managing Director of a private company and an independent nonexecutive Director of Hysan Development Company Ltd., a company listed in Hong Kong. Mr. Poon was formerly the managing Director and deputy chief executive Director of Hang Seng Bank Limited and had held several senior management posts in HSBC Group and a number of international renowned financial institutions. Mr. Poon is a member of the Board of Inland Revenue of Hong Kong Special Administrative Region, a committee member of the Chinese General Chamber of Commerce and a member of the Environmental and Conservation Fund Investment Committee. Previously, he was also the Chairman of Hang Seng Index Advisory Committee of Hang Seng Indexes Company Limited. Mr. Poon graduated with a Bachelor of Commerce degree from the University of Western Australia. Mr. Poon is a member of the Hong Kong Institute of Certified Public Accountants and the Institute of Chartered Accountants in Australia.

Mr. Poon does not have any relationships with other Directors, senior management, substantial Shareholders, or controlling Shareholders (as defined in the Listing Rules) of the Group. Save as aforesaid, Mr. Poon did not hold other directorship in any public companies the securities of which are listed on any securities market in Hong Kong or overseas in the past three years and he does not hold any other position in the Group.

BIOGRAPHIES OF DIRECTORS AND SENIOR MANAGEMENT

Mr. Poon has entered into a letter of appointment with the Company for a term of two years commencing from 5th October, 2011. His appointment may be terminated by either party giving prior notice in writing at such period as both parties may agree. He is subject to retirement by rotation and re-election in accordance with the articles of association of the Company. He is entitled to the director’s fee of US$67,500 per year (which is covered by the letter of appointment) or such other sum as the Company may from time to time decide, which is determined upon negotiation between Mr. Poon and the Company at arm’s length on the basis of his previous experience, professional qualifications, responsibilities to be involved in the Company and the amount of time devoted to the Company’s business as well as the current financial position of the Company and the prevailing market conditions. His director’s fee is subject to Shareholders’ approval at the annual general meeting.

Mr. Poon does not hold any interests or short positions in the Shares, underlying shares and debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) which would be required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO, including interests and short position which they are deemed or taken to have under such provisions of the SFO, or which would be required, pursuant to Section 352 of the SFO, to be entered in the register referred to therein, or otherwise notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers in the Listing Rules.

Ms. Chang Carmen I-Hua (“Ms. Chang”), aged 64, was appointed as an independent non-executive Director, a member of the remuneration committee and a member of the nomination committee of the Company on 3rd May, 2010. Ms. Chang retired as a Partner at Wilson Sonsini Goodrich & Rosati (WSGR) in February 2012, and has joined New Enterprise Associates, Inc. (NEA) as a Special Senior Advisor. In addition to her senior advisory role with NEA, Ms. Chang is a fellow for the Arthur and Toni Rembe Rock Center for Corporate Governance, a joint initiative of Stanford Law School and the Stanford Graduate School of Business, founded in 2006 to advance the practice and study of corporate governance in the US and internationally.

Ms. Chang’s practice at WSGR focused on the representation of public and private technology companies and financial institutions in public offerings, mergers and acquisitions, joint ventures, financings, and other types of transactions in the United States and abroad, particularly in the People’s Republic of China (the “PRC”), Taiwan, and other Asian countries. Among many other transactions, Ms. Chang represented Semiconductor Manufacturing International Corporation in its acquisition of Motorola’s manufacturing operation in Tianjin.

Ms. Chang does not have any relationships with other Directors, senior management, substantial Shareholders, or controlling Shareholders (as defined in the Listing Rules) of the Group. Save as aforesaid, Ms. Chang did not hold other directorship in any public companies the securities of which are listed on any securities market in Hong Kong or overseas in the past three years and she does not hold any other position in the Group.

Ms. Chang has entered into a letter of appointment with the Company for a term of two years commencing from 3rd May, 2010. Her appointment may be terminated by either party giving prior notice in writing at such period as both parties may agree. She is subject to retirement by rotation and reelection in accordance with the articles of association of the Company. She is entitled to the director’s fee of US$40,000 per year (which is covered by the letter of appointment) or such other sum as the Company may from time to time decide, which is determined upon negotiation between Ms. Chang and the Company at arm’s length on the basis of her previous experience, professional qualifications, responsibilities to be involved in the Company and the amount of time devoted to the Company’s business as well as the current financial position of the Company and the prevailing market conditions. Her director’s fee is subject to Shareholders’ approval at the annual general meeting.

BIOGRAPHIES OF DIRECTORS AND SENIOR MANAGEMENT

Ms. Chang does not hold any interests or short positions in the Shares, underlying shares and debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) which would be required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO, including interests and short position which they are deemed or taken to have under such provisions of the SFO, or which would be required, pursuant to Section 352 of the SFO, to be entered in the register referred to therein, or otherwise notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers in the Listing Rules.

SENIOR MANAGEMENT

Mr. Du Kuang-Yang (“Mr. Du”), aged 62, is the chief operating officer of the Company. Mr. Du is responsible for daily operations, including sales and marketing, of the Company and reports directly to the CEO. Mr. Du has over 30 years’ managerial experience in electronics manufacturing industry. From 2001 to 2005, Mr. Du was Vice President of Supply Chain Management of Solectron (Suzhou) Technology Co., Ltd.. From 1988 to 2001, Mr. Du worked for Motorola’s various subsidiaries where he was the managing Director of components products sector for Motorola’s Tianjin subsidiary and general manager of Personal Communication Sector for Motorola’s Taiwan subsidiary. Mr. Du obtained a certificate in business administration from the National Taichung Institute of Technology (previously known as 台灣省立台中商業專科學校 (Taiwan Provincial School of Commerce of Tai-Chung)) in Taiwan in 1971. Mr. Du joined the Group in March 2005.

Mr. David Plekenpol (“Mr. Plekenpol”), aged 52, is the chief strategy officer of the Company. Mr. Plekenpol is responsible for future business strategy, including assessing and identifying technology trends and development, for the Company and reports directly to the CEO. Mr. Plekenpol has spent eighteen years in the telecom industry, with executive positions in both Lucent and Alcatel. He founded two Silicon Valley VC-backed startup companies, led sales & marketing for an optical component startup in Scotland and spent two years with a VC-backed Chinese mobile design startup in Shanghai before joining AAC. He has an undergraduate degree from Dartmouth College and an MBA from the Graduate School of Business at Stanford University. Mr. Plekenpol also serves as Chairman of the Board of the Community Center Shanghai. Mr. Plekenpol joined AAC in February 2010.

DIRECTORS’ REPORT

The Directors present their annual report and the audited consolidated financial statements for the year ended 31st December, 2011.

CHANGE OF COMPANY NAME

With effect from 26th May, 2011, the name of the Company was changed from AAC Acoustic Technologies Holdings Inc. to AAC Technologies Holdings Inc., and the Chinese name (previously for identification purpose only) from 瑞聲聲學科技控股有限公司 to 瑞聲科技控股有限公司.

PRINCIPAL ACTIVITIES

The Company acts as an investment holding company. The principal activities of its principal subsidiaries are set out in note 34 to the consolidated financial statements.

RESULTS AND DIVIDEND

The results of the Group for the year are set out in the consolidated statement of comprehensive income on page 35.

An interim dividend of HK20.0 cents was paid during the year. The Directors have resolved to recommend the payment of a final dividend of HK21.6 cents per share.

PROPERTY, PLANT AND EQUIPMENT

Details of the movements in property, plant and equipment of the Group during the year are set out in note 13 to the consolidated financial statements.

DISTRIBUTABLE RESERVES

The Company’s reserves available for distribution represent the aggregate of the share premium accounts and the contributed surplus less deficit which amounted to RMB1,156,364,000 (2010: RMB507,526,000). Under the Companies Law Chapter 22 of the Cayman Islands, the share premium of the Company is available for distribution or paying dividends to Shareholders subject to the provisions of its Memorandum and Articles of Association and provided that immediately following the distribution or dividend, the Company is able to pay its debts as they fall due in the ordinary course of business.

PRE-EMPTIVE RIGHTS

There are no provisions for pre-emptive rights under the Articles of Association of the Company and there are no restrictions against such rights under the laws of the Cayman Islands which would oblige the Company to offer new shares on a pro rata basis to existing Shareholders.

DIRECTORS’ REPORT

DIRECTORS AND SERVICE CONTRACTS

The Directors of the Company during the period and up to the date of this report were:

Executive Directors:

Mr. Benjamin Zhengmin Pan (Chief Executive Officer) Mr. Mok Joe Kuen Richard

Non-executive Director:

Ms. Ingrid Chunyuan Wu

Independent non-executive Directors:

Mr. Koh Boon Hwee (Chairman) Mr. Poon Chung Yin Joseph Dato’ Tan Bian Ee Ms. Chang Carmen I-Hua

In accordance with Article 87 of the Company’s Articles of Association, Mr. Pan, Mr. Poon and Dato’ Tan will retire by rotation and, being eligible, offer themselves for re-election at the forthcoming annual general meeting of the Company.

Mr. Pan has entered into a service agreement with the Company for a term of three years from 15th July, 2011, subject to termination by either party giving not less than 60 days’ prior notice in writing or 60 days’ payment in lieu of notice.

Mr. Mok has entered into a service agreement with the Company for a term of three years commencing from 5th October, 2009, which can be terminated by either party giving not less than 60 days’ prior notice in writing or 60 days’ payment in lieu of notice to the other party.

Each of Ms. Wu and Mr. Koh has entered into a letter of appointment with the Company for a term from 16th April, 2011 until the conclusion of the annual general meeting of the Company to be held in 2013, subject to termination by either party giving prior notice in writing at such period as both parties may agree.

Dato’ Tan has entered into a letter of appointment with the Company for a term of from 11th September, 2011 until the conclusion of the annual general meeting of the Company to be held in 2013, which can be terminated by either party giving prior notice in writing at such period as both parties may agree.

Mr. Poon has entered into a letter of appointment with the Company for a term of from 5th October, 2011 until the conclusion of the annual general meeting of the Company to be held in 2013, which can be terminated by either party giving prior notice in writing at such period as both parties may agree.

Ms. Chang has entered into a letter of appointment with the Company for a term of two years commencing from 3rd May, 2010, which can be terminated by either party giving at least three months’ notice in writing or such shorter period as both parties may agree.

Other than as disclosed above, no Director proposed for re-election at the forthcoming annual general meeting has a service contract which is not determinable by the Group within one year without payment of compensation (other than statutory compensation).

DIRECTORS’ REPORT

The Company confirms that it has received from each of its independent non-executive Directors an annual confirmation of their independence pursuant to rule 3.13 of the Rules Governing the Listing of Securities (the “Listing Rules”) on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”), and it still considers that the independent non-executive Directors are independent.

Biographical details of the Directors and senior management of the Group as at the date of this annual report are set out on pages 8 to 15.

DIRECTORS’ AND CHIEF EXECUTIVE’S INTEREST IN SHARES AND UNDERLYING SHARES AND DEBENTURES

As at 31st December, 2011, the beneficial interests of the Directors and chief executive in any shares, underlying shares and debentures of the Company and any of its associated corporations (within the meaning of Part XV of the Securities and Futures Ordinance (Chapter 571 of Laws of Hong Kong) (the “SFO”)) as recorded in the register of interests required to be kept by the Company under Section 352 of the SFO, or as otherwise notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests or short positions) which they are taken or deemed to have taken under such provisions of the SFO and pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers (the “Model Code”), were as follows:

Long positions in ordinary shares of US$0.01 each of the Company:

	Number of ordinary shares Percentage of the Company’s issued share capital as at
Name of Directors Capacity	Personal interests Joint interests Corporate interests Spouse interests Other interests Total number of shares 31st December, 2011
Mr. Pan(1) Beneficial owner/interest of child under 18 and spouse/ interest of controlled corporation Ms. Wu(2) Beneficial owner/interest of child under 18 and spouse Mr. Koh Beneficial owner	69,512,565 – 51,439,440 295,820,525 117,114,002 533,886,532 43.48% 295,820,525 – – 120,952,005 117,114,002 533,886,532 43.48% 1,307,562 – – – – 1,307,562 0.11%

DIRECTORS’ REPORT

Notes:

(1) Mr. Pan beneficially owns 69,512,565 shares. In addition, Mr. Pan is also deemed or taken to be interested in the following shares for the purpose of the SFO:
(i) 51,439,440 shares which are beneficially owned by Silver Island Limited, a company wholly-owned by Mr. Pan;
(ii) 295,820,525 shares which are beneficially owned by Ms. Wu and as Ms. Wu is his spouse, he is deemed to be interested in such 295,820,525 shares; and
(iii) 117,114,002 shares representing the aggregate of (a) 112,375,158 shares which are deemed to be interested by Mr. Pan and Ms. Wu’s descendents, as beneficiaries of the Pan 2005 Irrevocable Trust dated 10th May, 2005; and (b) 4,738,844 shares which are deemed to be interested by Mr. Pan and Ms. Wu’s descendents, as beneficiaries of the Pan 2005 Exempt Trust dated 10th May, 2005. One child of Mr. Pan and Ms. Wu is over and the other is under the age of 18.
(2) Ms. Wu beneficially owns 295,820,525 shares. Ms. Wu is also deemed or taken to be interested in the following shares for the purposes of the SFO:
(i) 120,952,005 shares representing the aggregate of (a) 51,439,440 shares which are beneficially owned by Silver Island Limited, a company wholly-owned by Mr. Pan; and (b) 69,512,565 shares which are beneficially owned by Mr. Pan and as Mr. Pan is her spouse, she is deemed to be interested in such 120,952,005 shares; and
(ii) 117,114,002 shares representing the aggregate of (a) 112,375,158 shares which are deemed to be interested by Mr. Pan and Ms. Wu’s descendents, as beneficiaries of the Pan 2005 Irrevocable Trust dated 10th May, 2005; and (b) 4,738,844 shares which are deemed to be interested by Mr. Pan and Ms. Wu’s descendents, as beneficiaries of the Pan 2005 Exempt Trust dated 10th May, 2005. One child of Mr. Pan and Ms. Wu is over and the other is under the age of 18.

Other than as disclosed above, as at 31st December, 2011, none of the Directors, chief executive nor their associates had any interests or short positions in the shares, underlying shares and debentures of the Company or any of its associated corporations as recorded in the register of interests required to be kept by the Company under Section 352 of the SFO.

SHARE OPTION SCHEME

Details of the Company’s share option scheme adopted on 15th July, 2005 are set out in note 28 to the consolidated financial statements. The Company has not granted any option under the share option scheme since its adoption.

ARRANGEMENTS TO PURCHASE SHARES OR DEBENTURES

At no time during the year was the Company, or any of its subsidiaries, a party to any arrangements to enable the Directors of the Company to acquire benefits by means of the acquisition of shares in, or debentures of, the Company or any other body corporate.

DIRECTORS’ REPORT

CONNECTED TRANSACTIONS

On 3rd August, 2011, AAC New Power Development (Changzhou) Co., Ltd. (“AAC New Power”), an indirect wholly-owned subsidiary of the Company entered into the Changzhou Assets and Technology Rights Transfer Agreement with 常州中科來方能源發展有限公司 (Changzhou Zhongke Laifang Power Development Co., Ltd. (“Changzhou ZKLF”)). Changzhou ZKLF agreed to transfer the Changzhou Assets and Changzhou Technology Rights to AAC New Power for a consideration of RMB42.5 million in cash payable by AAC New Power.

On 3rd August, 2011, AAC New Power entered into the Jiangsu Yuanyu Technology Rights Transfer Agreement with 江蘇遠宇電子集團有限公司 (Jiangsu Yuanyu Electronics Group Co., Ltd. (“Jiangsu Yuanyu”)). Jiangsu Yuanyu agreed to transfer the Jiangsu Yuanyu Technology Rights to AAC New Power for a consideration of RMB12.6 million in cash payable by AAC New Power.

On 3rd August, 2011, AAC Acoustic Technologies Limited (“AAC HK”), an indirect wholly-owned subsidiary of the Company, entered into the Capital Injection Agreement with Changzhou ZKLF and Jiangsu Yuanyu. They agreed that Changzhou ZKLF will make a capital contribution of US$6.57 million in cash to the registered capital of AAC New Power, a wholly-owned subsidiary of AAC HK and that Jiangsu Yuanyu will make a capital contribution of US$1.95 million to the registered capital of AAC New Power. Upon completion of the Capital Injection Agreement, the total registered capital of AAC New Power will be increased from US$35.0 million to US$43.52 million; On the assumption that the registered capital of US$35.0 million is fully paid-up by AAC HK, the equity interest held by the Group in AAC New Power will be reduced from 100% to 80.42%; Changzhou ZKLF will be interested in 15.10% of the equity interest in AAC New Power and Jiangsu Yuanyu will be interested in 4.48% of the equity interest in AAC New Power. And AAC New Power will continue to be a subsidiary of the Group upon completion of the Capital Injection Agreement.

As Changzhou ZKLF is a wholly-owned subsidiary of Jiangsu Yuanyu, 21.72% of the equity interest of Jiangsu Yuanyu is held by 常州來方圓電子有限公司 (Changzhou Laifangyuan Electronics Co., Ltd. (“Changzhou LFY”)), a company beneficially owned as to 50% by each of the Pan’s Father and Pan’s Mother; 30% of the equity interest of Jiangsu Yuanyu is held by 常州市裕來電子有限公司 (Changzhou Yulai Electronics Co., Ltd. (“Changzhou Yulai”)), a company beneficially owned as to 50% by each of the Pan’s Father and Pan’s Mother; and 48.28% of the equity interest of Jiangsu Yuanyu is held by Silver Island Limited, a company beneficially owned as to 100% by Mr. Pan. As such, both Jiangsu Yuanyu and Changzhou ZKLF are associates of Mr. Pan and therefore connected persons of the Company under Rule 14A.11(4) of the Listing Rules.

Details of the above are set out in Company’s announcement dated 4th August, 2011.

CONTINUING CONNECTED TRANSACTIONS

During the year, the Group had the following transactions with the associate(s) of connected person(s) of the Company, which constitute continuing connected transactions for the Company under the Listing Rules:

(1) One purchase agreement was entered into between the Group (AAC New Power) and Changzhou ZKLF on 3rd August, 2011 (the “Changzhou ZKLF Agreement”). The term of the Changzhou ZKLF Agreement is for a term of two years and four months commencing from 3rd August, 2011 and expiring on 31st December, 2013. The Board expects the annual purchase amount under the Changzhou ZKLF Agreement will not exceed RMB4.26 million, RMB10.22 million and RMB51.08 million for the two years and four months ending 31st December, 2013.

DIRECTORS’ REPORT

(2) One purchase agreement was entered into between the Group (AAC New Power) and 成都茵地樂電源科技有限公司 (Chengdu Yindile Power Supply Technologies Co., Ltd.), an indirect subsidiary of Jiangsu Yuanyu on 3rd August, 2011 (the “Chengdu Yindile Agreement”). The term of the Chengdu Yindile Agreement is for a term of two years and four months commencing from 3rd August, 2011 and expiring on 31st December, 2013. The Board expects the annual purchase amount under the Chengdu Yindile Agreement will not exceed RMB1.12 million, RMB2.69 million and RMB13.46 million for the two years and four months ending 31st December, 2013.
(3) Five purchase agreements were entered into between the Group (AAC Acoustic Technologies (Changzhou) Co., Ltd. (“Changzhou Ruisheng”), Changzhou AAC, AAC Acoustic Technologies (Shenzhen) Co., Ltd. (“AAC Shenzhen”), AAC Technologies (Shuyang) Co., Ltd. (“AAC Shuyang”) and AAC Microtech (Changzhou) Co., Ltd. (“Microtech Changzhou”)) and 常州市武進湖塘何家紅光沖件廠 (Wujin Hutang Hejia Hongguang Stamping Factory), a company wholly-owned by mother of Ms. Wu (“Wu’s Mother”), on 1st January, 2011 (the “New HGCJ Agreements”). The term of the New HGCJ Agreements is for a term of three years commencing from 1st January, 2011 and expiring on 31st December, 2013. The Board expects the annual purchase amount under the New HGCJ Agreements will not exceed RMB6.5 million, RMB8.5 million and RMB11.0 million for the three years ending 31st December, 2013.
(4) Five purchase agreements were entered into between the Group (Changzhou Ruisheng, Changzhou AAC, AAC Shenzhen, AAC Shuyang and Microtech Changzhou) and 常州市友晟電子有限公司 (Changzhou Yousheng Electronics Co., Ltd.), a company owned as to 30% by mother of Mr. Pan and 70% by sister of Mr. Pan, on 1st January, 2011 (the “New Yousheng Agreements”). The term of the New Yousheng Agreements is for a term of three years commencing from 1st January, 2011 and expiring on 31st December, 2013. The Board expects the annual purchase amount under the New Yousheng Agreements will not exceed RMB24.0 million, RMB32.0 million and RMB42.0 million for the three years ending 31st December, 2013.
(5) Five purchase agreements were entered into between the Group (Changzhou Ruisheng, Changzhou AAC, AAC Shenzhen, AAC Shuyang and Microtech Changzhou) and 常州遠宇精密模具製造有限公司 (Changzhou Yuanyu Precise Model Manufacturing Co., Ltd.), a company indirectly wholly-owned by father of Mr. Pan, on 1st January, 2011 (the “New Changzhou Model Agreements”). The term of the New Changzhou Model Agreements is for a term of three years commencing from 1st January, 2011 and expiring on 31st December, 2013. The Board expects the annual purchase amount under the New Changzhou Model Agreements will not exceed RMB25.0 million, RMB32.5 million and RMB43.0 million for the three years ending 31st December, 2013.
(6) Two agreements were entered into between the Group (AAC New Power and AAC Biotechnology (Changzhou) Co., Ltd. (“AAC Biotechnology”)) and Jiangsu Yuanyu for the leasing of properties by the Group in August 2011 (the “AAC New Power Lease Agreement” and the “AAC Biotechnology Lease Agreement”). The terms of the AAC New Power Lease Agreement are vary between the period from 3rd August, 2011 to 31st December, 2013. The Board expects the annual leasing rent payable under the AAC New Power Lease Agreement will not exceed RMB0.85 million, RMB2.29 million and RMB3.26 million for the period ending 31st December, 2013. The term of the AAC Biotechnology Lease Agreement is from 3rd August, 2011 and expiring on 31st December, 2013. The Board expects the annual leasing rent payable under the AAC Biotechnology Lease Agreement will not exceed RMB0.05 million, RMB0.09 million and RMB0.09 million for the period ending 31st December, 2013.

DIRECTORS’ REPORT

(7) One agreement was entered into between the Group (AAC Shenzhen) and 深圳市遠宇實業發展有限公司 (Shenzhen Yuanyu Industrial Development Co., Ltd.), a company directly wholly-owned by Wu’s Mother, for the leasing of properties by the Group on 28th December, 2010 (the ‘’New Shenzhen Yuanyu Agreement”). The term of the New Shenzhen Yuanyu Agreement is for a term of three years commencing from 1st January, 2011 and expiring on 31st December, 2013. The Board expects the annual leasing rent payable under the New Shenzhen Yuanyu Agreement will not exceed RMB4.79 million for each of the three years ending 31st December, 2013 respectively.
(8) On 4th November, 2010 and 28th December, 2010, owing to the need for maintaining the continuous business operation of the Group for its production, storage and office purposes, members of the Group (AAC Shenzhen) and Wu’s Mother entered into the New Wu’s Mother Agreement for the lease of a list of properties for a period of three years commencing from 1st January, 2011, and expiring on 31st December, 2013, at an annual rent of approximately RMB3.34 million for each of the three years respectively.
(9) Three agreements were entered into between the Group (Changzhou Ruisheng, Changzhou AAC and Microtech Changzhou) and Changzhou LFY, for the leasing of properties by the Group on 28th December, 2010 (the ‘’New Changzhou LFY Agreements”). The terms of the New Changzhou LFY Agreements are vary with each leasing agreement between the period from 1st January, 2011 to 31st December, 2013. The Board expects the annual leasing rent payable under the New Changzhou LFY Agreements will not exceed RMB1.51 million for each of the three years respectively.
(10) On 28th December, 2010, member of the Group (AAC U.S.) and Mr. Pan and Ms. Wu entered into the American Audio Agreement for the lease of a portion of a building for a period of three years commencing from 1st January, 2011, and expiring on 31st December, 2013, at an annual rent of approximately USD0.08 million for each of the three years respectively.

The Directors believe that the entering into of each of Changzhou ZKLF Agreement, Chengdu Yindile Agreement, New HGCJ Agreements, New Yousheng Agreements and New Changzhou Model Agreements facilitates the operations of the Group as the materials purchases and/or to be purchased by the Group from such parties are essential to the production of the Group’s products. In terms of the AAC New Power Lease Agreement, AAC Biotechnology Lease Agreement, New Shenzhen Yuanyu Agreement, New Wu’s Mother Agreement, New Changzhou LFY Agreements and American Audio Agreement, the Directors believe that the entering into of such agreements would allow the Group to continue its production activities at such locations which are located in close proximity to other facilities of the Group. As such, the Directors (including the independent non-executive Directors) consider that the entering into of the aforementioned agreements is beneficial to the overall business and operation of the Group. Details of the above are set out in the Company’s announcement dated 29th December, 2010, 4th August, 2011.

The independent non-executive Directors have reviewed the above continuing connected transactions and opined that the aforementioned agreements and transactions contemplated therein had been entered into:

(i) in the ordinary and usual course of business of the Company;
(ii) on terms no less favourable to the Company than terms available to independent third parties; and
(iii) in accordance with the relevant agreements governing them on terms that are fair and reasonable and in the interests of the Shareholders of the Company as a whole.

DIRECTORS’ REPORT

The Company’s auditor was engaged to report on the Group’s continuing connected transactions in accordance with Hong Kong Standard on Assurance Engagements 3000 “Assurance Engagements Other Than Audits or Reviews of Historical Financial Information” and with reference to Practice Note 740 “Auditor’s Letter on Continuing Connected Transactions under the Hong Kong Listing Rules” issued by the Hong Kong Institute of Certified Public Accountants. The auditor has issued an unqualified letter containing the auditor’s findings and conclusions in respect of the continuing connected transactions for the year ended 31st December, 2011 disclosed by the Group from pages 20 to 22 of the Annual Report in accordance with Main Board Listing Rule 14A.38. A copy of the auditor’s letter has been provided by the Company to Stock Exchange. The continuing connected transactions entered into by the Group for the year ended 31st December, 2011:

(a) have received the approval of the Directors of the Company;
(b) have been entered into in accordance with the terms of the relevant agreement governing such transactions;
(c) have not exceeded the relevant cap amount for the financial year ended 31st December, 2011 disclosed in previous announcements; and
(d) have been entered into in accordance with the pricing policies of the Company with reference to similar transactions with independent third parties.

Other than as disclosed above, no contracts of significance to which the Company or any of its subsidiaries was a party and in which a Director had a material interest, whether directly or indirectly, subsisted at the end of the year or at any time during the year.

SUBSTANTIAL SHAREHOLDERS

As at 31st December, 2011, the register of interests and short positions kept by the Company under Section 336 of the SFO other than the Directors and chief executive, showed that the following persons held interests or short positions in the Company’s shares:

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Percentage of the
Company’s issued
share capital as at
Name of Shareholders Capacity Number of shares Derivative interest 31st December, 2011
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JPMorgan Chase & Co.(1)	Benefit owner/Investment Manager/	184,642,039 (L)	–	15.04%
	Trustee/Custodian corporation/
	Approved lending agent	2,950,000 (S)		0.24%
		58,216,037 (P)		4.74%
Capital Research and	Investment Manager	87,014,100 (L)	–	7.09%
Management Company(2)
Credit Suisse Group(3)	Interested in controlled corporation	93,600,000(L)	46,800,000(L)	7.62%
		93,600,000(S)		7.62%
L – Long position
S – Short position
P – Lending pool

DIRECTORS’ REPORT

(1) JPMorgan Chase & Co. through its various controlled corporations is interested in an aggregate of 184,642,039 shares of the Company as follows:
(i) 2,950,000 shares are directly held by J.P. Morgan Securities Ltd., by virtue of J.P. Morgan Chase International Holdings’ 98.95% interest in J.P. Morgan Securities Ltd., J.P. Morgan Chase (UK) Holdings Limited’s 100% interest in J.P. Morgan Chase International Holdings, J.P. Morgan Capital Holdings Limited’s 100% interest in J.P. Morgan Chase (UK) Holdings Limited, J.P. Morgan International Finance Limited’s 100% interest in J.P. Morgan Capital Holdings Limited, Bank One International Holdings Corporation’s 100% interest in J.P. Morgan International Finance Limited, J.P. Morgan International Inc.’s 100% interest in Bank One International Holdings Corporation, JPMorgan Chase Bank, N.A.’s 100% interest in J.P. Morgan International Inc., JPMorgan Chase & Co.’s 100% interest in JPMorgan Chase Bank, N.A., each of J.P. Morgan Chase International Holdings, J.P. Morgan Chase (UK) Holdings Limited, J.P. Morgan Capital Holdings Limited, J.P. Morgan International Finance Limited, Bank One International Holdings Corporation, J.P. Morgan International Inc., JPMorgan Chase Bank, N.A. and JPMorgan Chase & Co. is deemed to be interested in these 2,950,000 shares;
(ii) 117,114,002 shares are directly held by J.P. Morgan Trust Company of Delaware, by virtue of CMC Holding Delaware Inc.’s 100% interest in J.P. Morgan Trust Company of Delaware, J.P. Morgan Equity Holdings, Inc.’s 100% interest in CMC Holding Delaware Inc., JPMorgan Chase & Co.’s 100% interest in J.P. Morgan Equity Holdings, Inc., each of CMC Holding Delaware Inc., J.P. Morgan Equity Holdings, Inc., JPMorgan Chase & Co. is deemed to be interested in these 117,114,002 shares and such shares held by J.P. Morgan Trust Company of Delaware as trustee of trusts;
(iii) 6,152,000 shares are directly held in aggregate by J.P. Morgan Investment Management Inc. (2,020,000 shares), JPMorgan Asset Management (UK) Limited (2,880,000 shares), JF Asset Management Limited (864,000 shares) and JPMorgan Asset Management (Taiwan) Limited (388,000 shares). J.P. Morgan Investment Management Inc. is 100% owned by JPMorgan Asset Management Holdings Inc. which in turn is 100% owned by JPMorgan Chase & Co.. Each of JPMorgan Chase & Co. and JPMorgan Asset Management Holdings Inc. is deemed to be interested in 2,020,000 shares held by J.P. Morgan Investment Management Inc.. JPMorgan Asset Management (UK) Limited is 100% owned by JPMorgan Asset Management Holdings (UK) Limited which in turn is 100% owned by JPMorgan Asset Management International Limited which in turn is 100% owned by JPMorgan Asset Management Holdings Inc.. Each of JPMorgan Chase & Co., JPMorgan Asset Management Holdings Inc., JPMorgan Asset Management International Limited and JPMorgan Asset Management Holdings (UK) Limited is deemed to be interested in 2,880,000 shares held by JPMorgan Asset Management (UK) Limited. JF Asset Management Limited and JPMorgan Asset Management (Taiwan) Limited are 100% owned by JPMorgan Asset Management (Asia) Inc., which in turn is 100% owned by JPMorgan Asset Management Holdings Inc.. Each of JPMorgan Chase & Co., JPMorgan Asset Management Holdings Inc. and JPMorgan Asset Management (Asia) Inc. is deemed to be interested in respectively 864,000 shares held by JF Asset Management Limited and 388,000 shares held by JPMorgan Asset Management (Taiwan) Limited;
(iv) 58,426,037 shares are directly held by JPMorgan Chase Bank, N.A. and JPMorgan Chase & Co. is deemed to be interested in these 58,426,037 shares by virtue of its 100% interest in JPMorgan Chase Bank, N.A.; and

JPMorgan Chase & Co. is also interested in 58,216,037 shares in the lending pool as described in the SFO. The term “lending pool” is defined as (i) shares that the approved lending agent holds as agent for a third party which he is authorised to lend and other shares that can be lent according to the requirements of the Securities Borrowing and Lending Rules; and (ii) shares that have been lent by the approved lending agent and only if the right of the approved lending agent to require the return of the shares has not yet been extinguished.

DIRECTORS’ REPORT

(2) By virtue of The Capital Group Companies, Inc.’s 100% interest in Capital Research and Management Company. The Capital Group Companies, Inc. is deemed to be interested in 87,014,100 shares in the Company directly held by Capital Research and Management Company.
(3) By virtue of Credit Suisse Group’s 100% interest in Credit Suisse, Credit Suisse’s 100% interest in Credit Suisse First Boston (International) Holding AG, Credit Suisse First Boston (International) Holding AG’s 100% interest in Credit Suisse First Boston International (Guernsey) Limited and 70.2% interest in Credit Suisse First Boston (Hong Kong) Limited; and Credit Suisse First Boston International (Guernsey) Limited also owns 29.8% interest in Credit Suisse First Boston (Hong Kong) Limited, each of Credit Suisse Group, Credit Suisse and Credit Suisse First Boston (International) Holding AG is deemed to be interested in 93,600,000 shares (and also unlisted derivative interests of 46,800,000 shares with physically settled (off exchange)) in the Company directly held by Credit Suisse First Boston (Hong Kong) Limited.

Save as the interests and short positions disclosed above, as at 31st December, 2011, so far as was known to any Director of the Company, no other persons had an interest or short position in the shares, equity derivatives, underlying shares or debenture of the Company which would fall to be disclosed under the provisions of Divisions 2 and 3 of Part XV of the SFO and Section 336 of the SFO or, who where interested in, directly or indirectly, 5% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meeting of the Company.

EMOLUMENT POLICY

The emolument policy of the employees of the Group is set up by the Remuneration Committee on the basis of their merit, qualifications and competence.

The emoluments of the Directors of the Company are recommended by the Remuneration Committee, having regard to the Company’s operating results, individual performance and comparable market statistics for the Board’s approval.

The Company has adopted a share option scheme as an incentive to Directors and eligible employees, details of the scheme is set out in note 28 to the consolidated financial statements.

PURCHASE, SALE AND REDEMPTION OF LISTED SECURITIES

There was no purchase, sale or redemption by the Company or any of its subsidiaries of any listed securities of the Company during the year ended 31st December, 2011.

MAJOR CUSTOMERS AND SUPPLIERS

During the year, the aggregate sales attributable to the Group’s five largest customers comprised approximately 74.6% of the Group’s total sales while the sales attributable to the Group’s largest customer was approximately 31.7% of the Group’s total sales.

During the year, the aggregate purchases attributable to the Group’s five largest suppliers were 31.6% of the Group’s total purchases.

None of the Directors, other than Mr. Pan, Ms. Wu, Mr. Koh’s interests, their associates or any Shareholders, which to the knowledge of the Directors own more than 5% of the Company’s issued share capital, had any interest in the share capital of the five largest customers or suppliers of the Company.

DIRECTORS’ REPORT

DIRECTORS’ INTERESTS IN COMPETING BUSINESS

During the years, no Directors of the Company or their respective associates (as defined in the Listing Rules) were considered to have an interest in a business which competes or is likely to compete, either directly or indirectly, with the business of the Group, other than those businesses of which the Directors of the Company were appointed as Directors to represent the interests of the Company and/or the Group.

SUFFICIENCY OF PUBLIC FLOAT

The Company has maintained a sufficient public float during the year ended 31st December, 2011.

AUDITOR

The consolidated financial statements for the year have been audited by Messrs. Deloitte Touche Tohmatsu. A resolution will be submitted to the annual general meeting of the Company to re-appoint Messrs. Deloitte Touche Tohmatsu as auditor of the Company.

On behalf of the Board AAC Technologies Holdings Inc.

KOH BOON HWEE Chairman

30th March, 2012

CORPORATE GOVERNANCE REPORT

CORPORATE GOVERNANCE PRACTICES

The Company is committed to achieving high standards of corporate governance that properly protect and promote the interests of the Shareholders of the Company.

The Board has reviewed its corporate governance practices and ensured that they are in compliance with the code on Corporate Governance Practices (the “CG Code“) as set out in the Appendix 14 of the Listing Rules on the Stock Exchange during the year ended 31st December, 2011. Existing corporate governance practices of the Company already comply with a number of key new code provisions which will take effect from 1st April, 2012. The Board regularly reviews and enhances the Company’s corporate governance framework and practices.

DIRECTORS’ SECURITIES TRANSACTIONS

The Company has adopted codes of conduct regarding securities transactions by Directors and by relevant employees (as defined in the CG Code) on terms not less exacting than the required standards set out in the Model Code as set out in Appendix 10 of the Listing Rules.

In addition, the Board also established written guidelines on no less exacting than the Model Code for the relevant employees of the Group in respect of their dealings in the securities of the Company.

On specific enquiries made, all the Directors have confirmed that they have complied with the required standards as set out in the Model Code and the Company’s code of conduct regarding the Directors’ securities transactions during the year ended 31st December, 2011.

DIRECTORS’ AND OFFICERS’ LIABILITIES INSURANCE

The Company has arranged Directors’ and officers’ liabilities insurance for the Directors and the senior management of the Company. The insurance covers them against costs, charges, expenses and liabilities incurred arising out of the corporate activities.

BOARD OF DIRECTORS

The Board currently comprises two executive Directors, a non-executive Director and four independent non-executive Directors. The Board members and the terms of appointment of the non-executive Directors (including independent non-executive Directors) are set out in the “Director and service contracts” section of the “Directors’ Report” on pages 17 to 18 of this annual report. In accordance with the Company’s articles of association, all Directors (including executive Directors, non-executive Director and independent non-executive Directors) are subject to retirement by rotation at least once every three years, which complies with the code provision A.4.2 of the CG Code.

The Directors’ biographical information is set out in the section headed “Biographies of Directors and Senior Management” on pages 8 to 15 of this annual report. Except for the family relationship between Mr. Pan and Ms. Wu, as disclosed in Directors’ biographical information on pages 8 to 11 of this annual report, there is no financial business, family or other material relationship between any members of the Board.

The operations of the Company are managed under the direction of the Board, within the framework set by the CG Code and related chapters of the Listing Rules as adopted by the Board.

CORPORATE GOVERNANCE REPORT

The Board represents the Company and is accountable to the Shareholders. The Board’s responsibilities include the responsibility to regulate and evaluate the strategic direction of the Company, management policies and the effectiveness with which management implements its policies. The Board’s responsibilities also include overseeing the structure and composition of the Company’s top management and monitoring legal compliance, the management of risks related to the Company’s operations. The Directors acknowledged their responsibility for preparing the accounts of the Company.

Independent Non-executive Directors

The Company has received, from each of the independent non-executive Director, an annual written confirmation of his/her independence pursuant to rule 3.13 of the Listing Rules. The Company considers that all of the independent non-executive Directors are independent.

Board meetings are held regularly at least 4 times a year. Apart from the regular Board meetings, the Board meets on other occasions when a board-level decision on a particular matter is required. During the year ended 31st December, 2011, the Board convened a total of 7 meetings and the attendance of the Directors at these Board meetings are as follows:

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Directors Attendance
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Executive Directors
Mr. Benjamin Zhengmin Pan (Chief Executive Officer)	7/7
Mr. Mok Joe Kuen Richard	7/7
Non-executive Director
Ms. Ingrid Chunyuan Wu	7/7
Independent Non-executive Directors
Mr. Koh Boon Hwee (Chairman)	7/7
Mr. Poon Chung Yin Joseph	7/7
Dato’ Tan Bian Ee	7/7
Ms. Chang Carmen I-Hua	6/7

Sufficient notice is given for regular Board meetings to all Directors enabling them to attend and reasonable notice will be given in case of other Board meetings. The Directors received details of agenda items for decision and summary minutes of the committee meetings in advance of each Board meeting.

Board minutes are kept by the company secretary of the Company and are sent to the Directors for records. They are also open for inspection by the Directors.

CHAIRMAN AND CHIEF EXECUTIVE OFFICER

Under the code provision A.2.1 of the CG Code, the roles of Chairman and chief executive officer (“CEO”) should be separated and should not be performed by the same individual. The posts of Chairman and CEO are taken up by different persons, namely Mr. Koh and Mr. Pan respectively.

AUDIT COMMITTEE

The audit committee of the Company (the “Audit Committee”) was established in April 2005 and is chaired by Mr. Poon (an independent non-executive Director) with two other members, Mr. Koh (Chairman of the Board and an independent non-executive Director) and Ms. Wu (a non-executive Director).

CORPORATE GOVERNANCE REPORT

The Audit Committee’s responsibilities include the oversight of the integrity of the Company’s financial statements and of the Company’s system of internal control and risk management. The Audit Committee needs to oversee management while ensuring that it does not step into the management’s role. The Audit Committee relies heavily on internal audit to provide an objective view on how well the Company is handling a number of key risks and controls. The external auditors also provide the Audit Committee with assurance regarding the Company’s financial reporting and any material weaknesses in internal control and risk management that they might come across as part of their review considered relevant to the audit. The Audit Committee oversees the relationship and coordination between the Company, internal audit and external auditors. The Audit Committee meets at least four times a year and when required, and meets the external auditors at least twice a year.

During the financial year ended 31st December, 2011, the Audit Committee held 4 meetings and the Audit Committee meets as and when required. Details of the attendance of its meetings are as follows:

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Members Attendance
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Mr. Poon Chung Yin Joseph	4/4
Mr. Koh Boon Hwee	4/4
Ms. Ingrid Chunyuan Wu	4/4

NOMINATION COMMITTEE

The nomination committee of the Company (the “Nomination Committee”) was established in April 2005 and is chaired by Dato’ Tan (an independent non-executive Director) with two other members, Mr. Poon (an independent non-executive Director) and Ms. Chang (an independent non-executive Director).

The Nomination Committee is responsible for reviewing, advising and making recommendations to the Board on matters in relation to the structure, size and composition of the Board, the appointment and reappointment of Directors and the assessment on independence of independent non-executive Directors, and ensuring the proper and transparent procedures for the appointment and re-appointment of Directors.

Current practice to appoint new Directors is that the Nomination Committee will identify, assess and nominate suitable candidates, including those proposed by the Shareholders, by considering their knowledge, skill and experience, and all valid nomination of candidates, accompanied with details of their biographical backgrounds, would be presented to the Board for consideration as soon as practicable. Consideration would be given to factors such as the candidate’s integrity, experience and qualifications relevant to the Company’s business. It is believed that members of the Nomination Committee collectively would have required relevant knowledge and skills to identify, invite and evaluate qualifications of nominated candidates for directorship.

The Nomination Committee convened 1 meeting during the year ended 31st December, 2011 to review the structure, size and composition of the Board, to assess the independence of independent nonexecutive Directors, to consider the renewal of terms of appointment of non-executive Directors, and recommending to the Board on re-election of retiring Directors. Details of the attendance of its meetings are as follows:

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Members Attendance
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Dato’ Tan Bian Ee	1/1
Mr. Poon Chung Yin Joseph	1/1
Ms. Chang Carmen I-Hua	1/1

CORPORATE GOVERNANCE REPORT

REMUNERATION COMMITTEE

The remuneration committee of the Company (the “Remuneration Committee”) was established in April 2005 and is chaired by Mr. Koh (Chairman of the Board and an independent non-executive Director) with two other members, Dato’ Tan (an independent non-executive Director) and Ms. Chang (an independent non-executive Director).

The responsibilities of the Remuneration Committee are to advise the Board in relation to the remuneration policy and structure of the executive Directors and senior management, and to review the fees and remuneration of the Chairman and other non-executive Directors prior to the annual general meeting. In addition, the Remuneration Committee considers management recommendation for key terms of new compensation and benefits plans and reviews management’s remuneration proposals with reference to the Board’s corporate goals and objectives.

The Remuneration Committee convened 1 meeting during the year ended 31st December, 2011 to review the remuneration package of the Board and the senior management; and consider the remuneration of non-executive Directors under the appointment letters. Details of the attendance of its meetings are as follows:

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Members Attendance
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Mr. Koh Boon Hwee	1/1
Dato’ Tan Bian Ee	1/1
Ms. Chang Carmen I-Hua	1/1

Emolument policy

The emolument policy of the employees of the Group is determined by the Remuneration Committee on the basis of their merit, qualifications and competence.

The emoluments of the Directors are reviewed and recommended by the Remuneration Committee and approved by the Board, having regard to the Company’s operating results, individual performance and comparable market statistics.

The Company has adopted a share option scheme as an incentive to the Directors and eligible employees. Details of the share option scheme are set out in note 28 to the financial statements.

AUDITOR’S REMUNERATION

During the year ended 31st December, 2011 the services provided to the Company by its external auditor, Messrs. Deloitte Touche Tohmatsu, and the respective fees paid are set out below:

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2011
Type of services HK$’000
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Audit services Non-audit services Interim review Total	2,785 750 3,535

CORPORATE GOVERNANCE REPORT

INTERNAL CONTROLS AND RISK MANAGEMENT

The Board is responsible for overseeing the Group’s system of internal controls and ensures sound and effective internal control to safeguard the Shareholders’ investment and the assets of the Group. During the year ended 31st December, 2011, the Board had reviewed the effectiveness of the internal control system and ensured that the internal control process had been properly carried out in making the investment decision and adequacy of resources, qualifications and experience of staff and the Group’s accounting and financial reporting were maintained properly. The Board considers that the Group’s internal control system covers all material aspects, including financial, operational, risk management functions and is in compliance with all relevant regulations.

DIRECTORS’ AND AUDITOR’S RESPONSIBILITY FOR THE FINANCIAL STATEMENTS

Reporting responsibilities of the Directors and the auditor of the Company are set out on page 33 of this annual report. Directors acknowledge their responsibilities for the preparation and the true and fair presentation of the financial statements for the year ended 31st December, 2011 in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board and the disclosure requirements of the Hong Kong Companies Ordinance.

COMMUNICATIONS WITH SHAREHOLDERS AND INVESTMENT COMMUNITY

The Board aims to ensure that its Shareholders and the investment community are provided with ready, equal and timely access to balanced and understandable information about the Company (including its financial performance, strategic goals and plans, material developments, governance and risk profile), in order to enable Shareholders to exercise their rights in an informed manner, and to allow Shareholders and the investment community to engage actively with the Company.

Shareholders and the investment community are kept well informed of key business imperatives by way of annual general meeting, extraordinary general meeting, annual report, interim report, announcements and circulars of the Company. The Company also updates its website regularly to ensure prompt dissemination of information about its latest development.

In the annual general meeting held on 21st May, 2011, the Board had ensured that:

Adequate notice period and all the relevant materials were given and sent to the Shareholders before the general meeting;
Computershare Hong Kong Investor Services Limited, the Company’s Hong Kong Branch Share Registrar, acted as scrutineer for all vote casted at the general meeting;
The Chairman of the meeting explained the detailed procedures for conducting a poll at the commencement of the general meeting; and
Board members (including the Chairman of the Board), in particular, the Chairmen of all committees or their delegates, and external auditor had attended to answer Shareholders’ questions.

In addition, the Company strives to uphold a high level of corporate transparency and provides full support to the investor relations team by involving senior management in ongoing dialogue with Shareholders and the investment community to keep them abreast of the Company’s latest development strategy, business management, financial information and business progress.

CORPORATE GOVERNANCE REPORT

The Company’s investor relations team is committed to meeting Shareholders’ and investment community’s requests on communicating business-related information in a timely manner, and to proactively communicate with the investment community. This is designed to ensure the Company’s strengths and competitive advantages, as well as its ability to manage changes in the business environment, are fully understood and hence reflected in the Company’s market valuation. The investor relations team also reports to the Board on a regular basis to keep the Board informed of the latest perceptions in the market regarding the Company and the issues of concern to Shareholders and the investment community.

As part of the corporate disclosure policy, the investor relations team observes “Quiet Periods” that begin one calendar month prior to the announcements of its quarterly, interim and year-end financial results to avoid the potential for selective disclosure or its perception of doing so. During the Quiet Periods, there will not be any IR-related access to senior management.

The Company analyses its shareholding structure on a regular basis, including a review of the register of institutional and retail investors, to keep track of changes in shareholdings by type of investor.

During 2011, the Company held a series of activities in relation to its quarterly, interim and annual results announcements, including panel discussions with Shareholders and the investment community via teleconferencing and participations in different conferences, forums and roadshows in Hong Kong and other parts of the world organized by different brokers. Factory visits were also organized periodically for Shareholders and the investment community. This helps the Company meet the goal of establishing sound relationships with Shareholders and the investment community and maintaining a solid and diverse shareholder base.

INDEPENDENT AUDITOR’S REPORT

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TO THE MEMBERS OF AAC TECHNOLOGIES HOLDINGS INC. 瑞聲科技控股有限公司

(FORMERLY KNOWN AS AAC ACOUSTIC TECHNOLOGIES HOLDINGS INC. 瑞聲聲學科技控股有限公司 ) (incorporated in the Cayman Islands with limited liability)

We have audited the consolidated financial statements of AAC Technologies Holdings Inc. (the “Company”) and its subsidiaries (collectively referred to as the “Group”) set out on pages 35 to 89, which comprise the consolidated statement of financial position as at 31st December, 2011, and the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information.

DIRECTORS’ RESPONSIBILITY FOR THE CONSOLIDATED FINANCIAL STATEMENTS

The Directors of the Company are responsible for the preparation of consolidated financial statements that give a true and fair view in accordance with International Financial Reporting Standards and the disclosure requirements of 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.

AUDITOR’S RESPONSIBILITY

Our responsibility is to express an opinion on these consolidated financial statements based on our audit and to report our opinion solely to you, as a body, in accordance with our agreed terms of engagement, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. We conducted our audit in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of the consolidated financial statements that give a true and fair view 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 entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Directors, as well as evaluating the overall presentation of the consolidated financial statements.

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

INDEPENDENT AUDITOR’S REPORT

OPINION

In our opinion, the consolidated financial statements give a true and fair view of the state of affairs of the Group as at 31st December, 2011, and of the Group’s profit and cash flows for the year then ended in accordance with International Financial Reporting Standards and in accordance with the disclosure requirements of the Hong Kong Companies Ordinance.

Deloitte Touche Tohmatsu

Certified Public Accountants Hong Kong 30th March, 2012

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31st December, 2011

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2011 2010
NOTES RMB’000 RMB’000
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	2011 RMB’000	2011 RMB’000	2011 RMB’000	2011 RMB’000
Revenue Cost of goods sold Gross profit Other income Net fair value loss on foreign currency forward contracts Gain on deregistration of a subsidiary Distribution and selling expenses Administrative expenses Research and development costs Share of results of associates Exchange loss Finance costs 7 Profit before taxation 8 Taxation 10 Profit for the year Other comprehensive expense: Exchange differences arising from translation Exchange difference released on deregistration of a subsidiary Other comprehensive expense Total comprehensive income for the year Profit for the year attributable to: Owners of the Company Non-controlling interests Total comprehensive income and expense attributable to: Owners of the Company Non-controlling interests Earnings per share – Basic 12		4,059,687 (2,275,273) 1,784,414 66,828 (3,829) – (136,875) (153,482) (358,238) (19,154) (32,592) (5,513) 1,141,559 (108,626) 1,032,933 (20,035) – (20,035) 1,012,898 1,036,192 (3,259) 1,032,933 1,017,289 (4,391) 1,012,898 RMB84.38 cents		3,349,020 (1,838,655) 1,510,365 46,744 (611) 583 (110,023) (126,886) (213,636) 810 (4,936) (3,272) 1,099,138 (111,661) 987,477 (28,854) (583) (29,437) 958,040 986,730 747 987,477 957,205 835 958,040 RMB80.35 cents

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

At 31st December, 2011

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2011 2010
NOTES RMB’000 RMB’000
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	2011 RMB’000	2011 RMB’000	2011 RMB’000	2011 RMB’000
Non-current assets Property, plant and equipment 13 Goodwill 14 Prepaid lease payments 15 Deposits made on acquisition of property, plant and equipment Deposits paid for additional interests in an associate Available-for-sale investment 16 Interests in associates 17 Intangible assets 18 Current assets Inventories 19 Trade and other receivables 20 Amounts due from related companies 21 Foreign currency forward contracts 22 Taxation recoverable Pledged bank deposits 23 Bank balances and cash 23 Current liabilities Trade and other payables 24 Amounts due to related companies 21 Taxation payable Foreign currency forward contracts 22 Short-term bank loans 25 Net current assets Total assets less current liabilities Non-current liabilities Deferred tax liabilities 26		2,697,120 11,803 109,290 123,428 – 3,254 181,882 162,144 3,288,921 558,780 1,487,575 – 1,139 2,868 874 1,374,069 3,425,305 898,742 19,656 77,475 65 891,128 1,887,066 1,538,239 4,827,160 15,738 4,811,422		1,751,559 6,753 98,278 153,367 26,417 – 103,749 41,325 2,181,448 342,943 1,292,678 173 585 3,348 28,035 1,734,609 3,402,371 857,391 16,423 54,597 9,231 470,286 1,407,928 1,994,443 4,175,891 – 4,175,891

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

At 31st December, 2011

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2011 2010
NOTES RMB’000 RMB’000
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Capital and reserves Share capital 27 Reserves Equity attributable to owners of the Company Non-controlling interests Total equity		99,718 4,650,352 4,750,070 61,352 4,811,422		99,718 4,074,827 4,174,545 1,346 4,175,891

The consolidated financial statements on pages 35 to 89 were approved and authorised for issue by the Board of Directors on 30th March, 2012 and are signed on its behalf by:

BENJAMIN ZHENGMIN PAN DIRECTOR

MOK JOE KUEN RICHARD DIRECTOR

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 31st December, 2011

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Attributable
Non- PRC to owners Non-
Share Share Special Capital Translation distributable statutory Retained of the controlling
capital premium reserve reserve reserve reserve reserves profits Company interests Total
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
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At 1st January, 2010 Exchange differences arising from translation of financial statements of foreign operations Reserve released on deregistration of a subsidiary Profit for the year Total comprehensive income and expense for the year Dividend paid Deregistration of a subsidiary Addition on acquisition of a subsidiary Transfers At 31st December, 2010 Exchange differences arising from translation of financial statements of foreign operations Profit for the year Total comprehensive income and expense for the year Dividend paid Dividend paid to non-controlling interests Capital contribution from non-controlling interests Acquisition of additional interests in a subsidiary Acquisition of a subsidiary Transfers At 31st December, 2011	99,718 – – – – – – – – 99,718 – – – – – – – – – 99,718	746,957 – – – – – – – – 746,957 – – – – – – – – – 746,957	(7,469) – – – – – 8,604 – – 1,135 – – – – – – – – – 1,135	23,391 – – – – – – – – 23,391 – – – – – – – – – 23,391	(18,591) (28,942) (583) – (29,525) – – – – (48,116) (18,903) – (18,903) – – – – – – (67,019)	87,245 – – – – – – – – 87,245 – – – – – – – – – 87,245	163,693 – – – – – (5,377) – 2,195 160,511 – – – – – – – – 4,826 165,337	2,439,432 – – 986,730 986,730 (317,036) (3,227) – (2,195) 3,103,704 – 1,036,192 1,036,192 (442,042) – 740 (462) – (4,826) 3,693,306	3,534,376 (28,942) (583) 986,730 957,205 (317,036) – – – 4,174,545 (18,903) 1,036,192 1,017,289 (442,042) – 740 (462) – – 4,750,070	381 88 – 747 835 – – 130 – 1,346 (1,132) (3,259) (4,391) – (200) 41,156 203 23,238 – 61,352	3,534,757 (28,854) (583) 987,477 958,040 (317,036) – 130 – 4,175,891 (20,035) 1,032,933 1,012,898 (442,042) (200) 41,896 (259) 23,238 – 4,811,422

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 31st December, 2011

The PRC statutory reserves comprise the statutory surplus reserve fund and an enterprise expansion fund, which are non-distributable. As stipulated by the relevant laws and regulations for foreign investment enterprises in the PRC, the PRC subsidiaries of the Company are required to maintain these funds. Appropriations to such reserves are made out of net profit after taxation of the statutory financial statements of the PRC subsidiaries of the Company and the allocation basis are decided by their Board of Directors annually. The PRC statutory reserves comprise the statutory surplus reserve and enterprise expansion fund. The statutory surplus reserve fund can be used to make up the PRC subsidiaries prior year losses, if any, and can be applied in conversion into capital by means of a capitalisation issue. The enterprise expansion fund is used for expanding the capital base of the PRC subsidiaries of the Company by means of capitalisation issue.

The special reserve of the Group represents the difference between the nominal amount of the shares issued by the Company and the aggregate amount of the paid-in capital of subsidiaries acquired pursuant to the Group’s reorganisation in preparation for the listing of the Company’s shares.

The capital reserve relates to a deemed capital contribution from a Shareholder.

The non-distributable reserve of the Group arose as a result of capitalisation of retained profits by subsidiaries of the Company.

CONSOLIDATED STATEMENT OF CASH FLOWS

For the year ended 31st December, 2011

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2011 2010
RMB’000 RMB’000
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	2011 RMB’000	2011 RMB’000	2011 RMB’000	2011 RMB’000
Operating activities Profit before taxation Adjustments for: Interest income Interest expense Depreciation Amortisation of intangible assets Net fair value loss on foreign exchange currency forward contracts Gain on deregistration of a subsidiary Impairment loss on goodwill Operating lease rentals in respect of prepaid lease payments Loss on disposal of property, plant and equipment Share of results of associates Net allowance for bad and doubtful debts Allowance for obsolete inventories Operating cash flows before movements in working capital Increase in inventories Increase in trade and other receivables Increase in trade and other payables Increase in amounts due to related companies Repayment from related companies (Increase) decrease in foreign currency forward contracts Cash from operations Taxation paid Net cash from operating activities		1,141,559 (27,913) 5,513 243,343 15,945 3,829 – 3,655 2,283 6,112 19,154 908 6,223 1,420,611 (221,655) (205,143) 34,259 3,233 173 (13,391) 1,018,087 (72,625) 945,462		1,099,138 (23,032) 3,272 188,966 8,022 611 (583) – 1,703 2,639 (810) 17 7,245 1,287,188 (119,970) (585,566) 351,265 7,458 19,007 11,445 970,827 (93,413) 877,414

CONSOLIDATED STATEMENT OF CASH FLOWS

For the year ended 31st December, 2011

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2011 2010
NOTE RMB’000 RMB’000
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	2011 RMB’000	2011 RMB’000	2011 RMB’000	2011 RMB’000
Investing activities Interest received Decrease (increase) in pledged bank deposits Proceeds from disposal of property, plant and equipment Acquisition of property, plant and equipment Acquisition of associates Deposits paid on acquisition of property, plant and equipment Additions to intangible assets Acquisition of a business (net of cash and cash equivalent acquired) 29 Prepaid rentals on land use rights Acquisition of available-for-sale investment Consideration paid for acquisition of additional interest in a subsidiary Deposits paid for additional interests in an associate Net cash used in investing activities Financing activities Bank loans raised Capital contribution from non-controlling interests Repayments of bank loans Dividend paid Dividend paid to non-controlling interests Interest paid Net cash from (used in) financing activities Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at 1st January Effect of foreign exchange rate changes Cash and cash equivalents at 31st December Analysis of the balances of cash and cash equivalents Bank balances and cash		27,913 27,161 485 (1,039,882) (92,354) (123,428) (62,566) (39,415) (13,295) (3,254) (259) – (1,318,894) 2,264,355 41,896 (1,837,504) (442,042) (200) (5,513) 20,992 (352,440) 1,734,609 (8,100) 1,374,069 1,374,069		23,032 (17,605) 2,155 (550,022) (75,263) (153,367) – (2,406) (32,859) – – (26,417) (832,752) 676,777 – (398,000) (317,036) – (3,272) (41,531) 3,131 1,735,212 (3,734) 1,734,609 1,734,609

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

1. GENERAL

The Company was incorporated and registered as an exempted company with limited liability in the Cayman Islands under the Companies Law of the Cayman Islands with its shares listed on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”). The addresses of the registered office and principal place of business of the Company are disclosed in the “Corporate Information” section to the annual report.

The Company acts as an investment holding company. The activities of its principal subsidiaries are set out in note 34.

The consolidated financial statements are presented in Renminbi (“RMB”), which is the same as the functional currency of the Company.

2. APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (“IFRSs”)

In the current year, the Group has applied the following new and revised standards and interpretations:

IAS 24 (as revised in 2009)	Related party disclosures
Amendments to IAS 32	Classification of rights issues
Amendments to IFRSs	Improvements to IFRSs issued in 2010
IFRIC 14	Prepayments of a minimum funding requirement
IFRIC 19	Extinguishing financial liabilities with equity instruments

The application of the above new and revised IFRSs in the current year has had no material impact on the Group’s financial performance and positions for the current and prior years and/or on the disclosures set out in the consolidated financial statements.

New and revised standards and interpretations issued but not yet effective

The Group has not early applied the following new and revised standards and interpretations that have been issued but are not yet effective:

Amendments to IFRS 7	Disclosures – Transfers of financial assets1
	Disclosures – Offsetting financial assets and financial liabilities2
	Mandatory effective date of IFRS 9 and transition disclosures3
IFRS 9	Financial instruments3
IFRS 10	Consolidated financial statements2
IFRS 11	Joint arrangements2
IFRS 12	Disclosure of interests in other entities2
IFRS 13	Fair value measurement2
Amendments to IAS 1	Presentation of items of other comprehensive income5
Amendments to IAS 12	Deferred tax – Recovery of underlying assets4
IAS 19 (as revised in 2011)	Employee benefits2
IAS 27 (as revised in 2011)	Separate financial statements2
IAS 28 (as revised in 2011)	Investments in associates and joint ventures2
Amendments to IAS 32	Offsetting financial assets and financial liabilites6
IFRIC 20	Stripping costs in the production phase of a surface mine2

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

2. APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (“IFRSs”) (CONTINUED)

New and revised standards and interpretations issued but not yet effective (continued) 1 Effective for annual periods beginning on or after 1st July, 2011.
2 Effective for annual periods beginning on or after 1st January, 2013. 3 Effective for annual periods beginning on or after 1st January, 2015.
4 Effective for annual periods beginning on or after 1st January, 2012.
5 Effective for annual periods beginning on or after 1st July, 2012.
6 Effective for annual periods beginning on or after 1st January, 2014.

IFRS 9 Financial instruments

IFRS 9 issued in 2009 introduces new requirements for the classification and measurement of financial assets. IFRS 9 amended in 2010 includes the requirements for the classification and measurement of financial liabilities and for derecognition.

Key requirements of IFRS 9 are described as follows:

IFRS 9 requires all recognised financial assets that are within the scope of IAS 39 Financial Instruments: Recognition and Measurement to be subsequently measured at amortised cost or fair value. Specifically, debt investments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at amortised cost at the end of subsequent accounting periods. All other debt investments and equity investments are measured at their fair values at the end of subsequent reporting periods. In addition, under IFRS 9, entities may make an irrevocable election to present subsequent changes in the fair value of an equity investment (that is not held for trading) in other comprehensive income, with only dividend income generally recognised in profit or loss.
The most significant effect of IFRS 9 regarding the classification and measurement of financial liabilities relates to the presentation of changes in the fair value of a financial liability (designated as at fair value through profit or loss) attributable to changes in the credit risk of that liability. Specifically, under IFRS 9, for financial liabilities that are designated as at fair value through profit or loss, the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability is presented in other comprehensive income, unless the recognition of the effects of changes in the liability’s credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit or loss. Changes in fair value attributable to a financial liability’s credit risk are not subsequently reclassified to profit or loss. Previously, under IAS 39, the entire amount of the change in the fair value of the financial liability designated as at fair value through profit or loss was presented in profit or loss.

The Directors anticipate that the adoption of IFRS 9 in the future may have significant impact on amounts reported in respect of the Group’s financial assets. Regarding the Group’s financial assets, it is not practicable to provide a reasonable estimate of that effect until a detailed review has been completed. Changes in credit risk of financial liabilities designated as at fair value through profit or loss are disclosed in note 4.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

2. APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (“IFRSs”) (CONTINUED)

New and revised Standards on consolidation, joint arrangements, associates and disclosures

In June 2011, a package of five standards on consolidation, joint arrangements, associates and disclosures was issued, including IFRS 10, IFRS 11, IFRS 12, IAS 27 (as revised in 2011) and IAS 28 (as revised in 2011).

Key requirements of these five standards are described below.

IFRS 10 replaces the parts of IAS 27 “Consolidated and separate financial statements” that deal with consolidated financial statements and SIC 12 “Consolidation – Special purpose entities”. IFRS 10 includes a new definition of control that contains three elements: (a) power over an investee, (b) exposure, or rights, to variable returns from its involvement with the investee, and (c) the ability to use its power over the investee to affect the amount of the investor’s returns. Extensive guidance has been added in IFRS 10 to deal with complex scenarios.

IFRS 11 replaces IAS 31 “Interests in joint ventures” and SIC 13 “Jointly controlled entities – Nonmonetary contributions by venturers”. IFRS 11 deals with how a joint arrangement of which two or more parties have joint control should be classified. Under IFRS 11, joint arrangements are classified as joint operations or joint ventures, depending on the rights and obligations of the parties to the arrangements. In contrast, under IAS 31, there are three types of joint arrangements: jointly controlled entities, jointly controlled assets and jointly controlled operations.

In addition, joint ventures under IFRS 11 are required to be accounted for using the equity method of accounting, whereas jointly controlled entities under IAS 31 can be accounted for using the equity method of accounting or proportionate accounting.

IFRS 12 is a disclosure standard and is applicable to entities that have interests in subsidiaries, joint arrangements, associates and/or unconsolidated structured entities. In general, the disclosure requirements in IFRS 12 are more extensive than those in the current standards.

These five standards are effective for annual periods beginning on or after 1st January, 2013. Earlier application is permitted provided that all of these five standards are applied early at the same time.

The Directors anticipate that these five standards will be adopted in the Group’s consolidated financial statements for the annual period beginning 1st January, 2013. The application of these five standards may have significant impact on amounts reported in the consolidated financial statements. The application of IFRS 10 may result in the Group no longer consolidating some of its investees, and consolidating investees that were not previously consolidated (e.g. the Group’s investments in associates may become the Group’s subsidiaries based on the new definition of control and the related guidance in IFRS 10). The Directors are currently assessing the impact on the adoption of these standards and is yet to quantify the impact.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

2. APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (“IFRSs”) (CONTINUED)

IFRS 13 Fair value measurement

IFRS 13 establishes a single source of guidance for fair value measurements and disclosures about fair value measurements. The standard defines fair value, establishes a framework for measuring fair value, and requires disclosures about fair value measurements. The scope of IFRS 13 is broad; it applies to both financial instrument items and non-financial instrument items for which other IFRSs require or permit fair value measurements and disclosures about fair value measurements, except in specified circumstances. In general, the disclosure requirements in IFRS 13 are more extensive than those in the current standards. For example, quantitative and qualitative disclosures based on the three-level fair value hierarchy currently required for financial instruments only under IFRS 7 “Financial instruments: Disclosures” will be extended by IFRS 13 to cover all assets and liabilities within its scope.

IFRS 13 is effective for annual periods beginning on or after 1st January, 2013, with earlier application permitted.

The Directors anticipate that IFRS 13 will be adopted in the Group’s consolidated financial statements for the annual period beginning 1st January, 2013 and that the application of the new standard will result in more extensive disclosures in the consolidated financial statements.

Amendments to IAS 1 Presentation of items of other comprehensive income

The amendments to IAS 1 retain the option to present profit or loss and other comprehensive income in either a single statement or in two separate but consecutive statements. However, the amendments to IAS 1 require additional disclosures to be made in the other comprehensive income section such that items of other comprehensive income are grouped into two categories: (a) items that will not be reclassified subsequently to profit or loss; and (b) items that may be reclassified subsequently to profit or loss when specific conditions are met. Income tax on items of other comprehensive income is required to be allocated on the same basis.

The amendments to IAS 1 are effective for annual periods beginning on or after 1st July, 2012. The presentation of items of other comprehensive income will be modified accordingly when the amendments are applied in the annual period beginning 1st January, 2012.

3. SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements have been prepared under the historical cost convention, except for certain financial instruments which are measured at fair values, as explained in the accounting policies set out below.

The consolidated financial statements have been prepared in accordance with IFRSs and include applicable disclosures required by the Rules Governing the Listing of Securities on the Stock Exchange and by the Hong Kong Companies Ordinance.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and entities (including special purpose entities) controlled by the Company (its subsidiaries). Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

The results of subsidiaries acquired or disposed of during the year are included in the consolidated statement of comprehensive income from the effective date of acquisition or up to the effective date of disposal, as appropriate.

Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Group. All intra-group transactions, balances, income and expenses are eliminated on consolidation.

Non-controlling interests in subsidiaries are presented separately from the Group’s equity therein.

Allocation of total comprehensive income to non-controlling interests

Total comprehensive income and expense of a subsidiary is attributed to the owners of the Company and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance.

Changes in the Group’s ownership interests in existing subsidiaries

Changes in the Group’s ownership interests in subsidiaries that do not result in the Group losing control over the subsidiaries are accounted for as equity transactions. The carrying amounts of the Group’s interests and the non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the noncontrolling interests are adjusted, being the change in proportionate share of the net book value of the subsidiary and the fair value of the consideration paid or received, is recognised directly in equity and attributed to owners of the Company.

When the Group loses control of a subsidiary, it (i) derecognises the assets (including any goodwill) and liabilities of the subsidiary at their carrying amounts at the date when control is lost, (ii) derecognises the carrying amount of any non-controlling interests in the former subsidiary at the date when control is lost (including any components of other comprehensive income attributable to them), and (iii) recognises the aggregate of the fair value of the consideration received and the fair value of any retained interest, with any resulting difference being recognise as a gain or loss in profit or loss attributable to the Group. When assets of the subsidiary are carried at revalued amounts or fair values and the related cumulative gain or loss has been recognised in other comprehensive income and accumulated in equity, the amounts previously recognised in other comprehensive income and accumulated in equity are accounted for as if the Group had directly disposed of the related assets (i.e. reclassified to profit or loss or transferred directly to retained earnings as specified by applicable IFRSs). The fair value of any investment retained in the former subsidiary at the date when control is lost is regarded as the fair value on initial recognition for subsequent accounting under IAS 39 Financial Instruments: Recognition and Measurement or, when applicable, the cost on initial recognition of an investment in an associate or a jointly controlled entity.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Business combinations

Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of the assets transferred by the Group, liabilities incurred by the Group to the former owners of the acquiree and the equity interests issued by the Group in exchange for control of the acquiree. Acquisition-related costs are generally recognised in profit or loss as incurred.

At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognised at their fair value, except that:

deferred tax assets or liabilities and liabilities or assets related to employee benefit arrangements are recognised and measured in accordance with IAS 12 “Income taxes” and IAS 19 “Employee benefits” respectively;
liabilities or equity instruments related to share-based payment arrangements of the acquiree or sharebased payment arrangements of the Group entered into to replace share-based payment arrangements of the acquiree are measured in accordance with IFRS 2 Sharebased Payment at the acquisition date; and
assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 “Non-current assets held for sale and discontinued operations” are measured in accordance with that standard.

Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer’s previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If, after re-assessment, the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the acquirer’s previously held interest in the acquiree (if any), the excess is recognised immediately in profit or loss as a bargain purchase gain.

Non-controlling interests that are present ownership interests and entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation may be initially measured either at fair value or at the non-controlling interests’ proportionate share of the recognised amounts of the acquiree’s identifiable net assets. The choice of measurement basis is made on a transactionby-transaction basis. Other types of non-controlling interests are measured at their fair value or, when applicable, on the basis specified in another Standard.

Where the consideration transferred by the Group in a business combination includes assets or liabilities resulting from a contingent consideration arrangement, the contingent consideration is measured at its acquisition-date fair value and considered as part of the consideration transferred in a business combination. Changes in the fair value of the contingent consideration that qualify as measurement period adjustments are adjusted retrospectively, with the corresponding adjustments being made against goodwill. Measurement period adjustments are adjustments that arise from additional information obtained during the measurement period about facts and circumstances that existed as of the acquisition date. The measurement period cannot exceed one year from the acquisition date.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Business combinations (continued)

The subsequent accounting for changes in the fair value of the contingent consideration that do not qualify as measurement period adjustments depends on how the contingent consideration is classified. Contingent consideration that is classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Contingent consideration that is classified as an asset or a liability is remeasured at subsequent reporting dates in accordance with IAS 39, or IAS 37 “Provisions, Contingent Liabilities and Contingent Assets”, as appropriate, with the corresponding gain or loss being recognised in profit or loss.

When a business combination is achieved in stages, the Group’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date (i.e. the date when the Group obtains control), and the resulting gain or loss, if any, is recognised in profit or loss. Amounts arising from interests in the acquiree prior to the acquisition date that have previously been recognised in other comprehensive income are reclassified to profit or loss where such treatment would be appropriate if that interest were disposed of.

If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period (see above), or additional assets or liabilities are recognised, to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the amounts recognised as of that date.

Business combinations achieved in stages were accounted for as separate steps. Goodwill was determined at each step. Any additional acquisition did not affect the previously recognised goodwill.

Goodwill

Goodwill arising on an acquisition of a business is carried at cost less any accumulated impairment losses.

Capitalised goodwill arising on an acquisition of a subsidiary is presented separately in the consolidated statement of financial position.

For the purposes of impairment testing, goodwill is allocated to each of the relevant cashgenerating units (“CGUs”), or groups of CGUs, that are expected to benefit from the synergies of the combination. A CGU to which goodwill has been allocated is tested for impairment annually, and whenever there is an indication that the unit may be impaired. For goodwill arising on an acquisition in a reporting period, the CGU to which goodwill has been allocated is tested for impairment before the end of that reporting period. If the recoverable amount of the CGU is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata on the basis of the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognised directly in the consolidated statement of comprehensive income. An impairment loss for goodwill is not reversed in subsequent periods.

On disposal of the relevant CGU, the attributable amount of goodwill capitalised is included in the determination of the amount of profit or loss on disposal.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Investments in associates

An associate is an entity over which the investor has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.

The results and assets and liabilities of associates are incorporated in these consolidated financial statements using the equity method of accounting. Under the equity method, investments in associates are initially recognised in the consolidated statement of financial position at cost and adjusted thereafter to recognise the Group’s share of the profit or loss and other comprehensive income of the associates. When the Group’s share of losses of an associate equals or exceeds its interest in that associate (which includes any long-term interests that, in substance, form part of the Group’s net investment in the associate), the Group discontinues recognising its share of further losses. Additional losses are recognised only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of that associate.

Any excess of the cost of acquisition over the Group’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities of an associate recognised at the date of acquisition is recognised as goodwill, which is included within the carrying amount of the investment.

Any excess of the Group’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of acquisition, after reassessment, is recognised immediately in profit or loss.

The requirements of IAS 39 are applied to determine whether it is necessary to recognise any impairment loss with respect to the Group’s investment in an associate. When necessary, the entire carrying amount of the investment (including goodwill) is tested for impairment in accordance with IAS 36 “Impairment of Assets” as a single asset by comparing its recoverable amount (higher of value in use and fair value less costs to sell) with its carrying amount. Any impairment loss recognised forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognised in accordance with IAS 36 to the extent that the recoverable amount of the investment subsequently increases.

Upon disposal of an associate that results in the Group losing significant influence over that associate, any retained investment is measured at fair value at that date and the fair value is regarded as its fair value on initial recognition as a financial asset in accordance with IAS 39. The difference between the previous carrying amount of the associate attributable to the retained interest and its fair value is included in the determination of the gain or loss on disposal of the associate. In addition, the Group accounts for all amounts previously recognised in other comprehensive income in relation to that associate on the same basis as would be required if that associate had directly disposed of the related assets or liabilities. Therefore, if a gain or loss previously recognised in other comprehensive income by that associate would be reclassified to profit or loss on the disposal of the related assets or liabilities, the Group reclassifies the gain or loss from equity to profit or loss (as a reclassification adjustment) when it loses significant influence over that associate.

When a group entity transacts with its associate, profits and losses resulting from the transactions with the associate are recognised in the Group’ consolidated financial statements only to the extent of interests in the associate that are not related to the Group.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Revenue recognition

Revenue is measured at the fair value of the consideration received and receivable and represents amounts receivable for goods sold in the normal course of business, net of discounts and sales related taxes.

Sales of goods are recognised when goods are delivered and title has passed.

Revenue from the sale of goods is recognised when the goods are delivered and titles have passed, at which time all the following conditions are satisfied:

the Group has transferred to the buyer the significant risks and rewards of ownership of the goods;
the Group retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;
the amount of revenue can be measured reliably;
it is probable that the economic benefits associated with the transaction will flow to the Group; and
the costs incurred or to be incurred in respect of the transaction can be measured reliably.

Interest income from a financial asset excluding financial assets at fair value through profit or loss is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts the estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount.

Property, plant and equipment

Property, plant and equipment, other than construction in progress, are stated at cost less subsequent accumulated depreciation and any accumulated impairment losses.

Construction in progress is stated at cost less any recognised impairment loss which includes all development expenditure in relation to the construction and other direct costs attributable to such projects including borrowing costs capitalised. Construction in progress is not depreciated until completion of construction and the asset is put into intended use. The cost of completed construction work is transferred to the appropriate category of property, plant and equipment.

Depreciation is provided to write off the cost of items of property, plant and equipment other than construction in progress over their estimated useful lives and after taking into account of their estimated residual values, using the straight-line method, at the following rates per annum:

Electronic equipment and furniture	20%
Motor vehicles	20%
Plant and machinery	10%

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Property, plant and equipment (continued)

The cost of buildings is depreciated over 20 years using the straight-line method.

The cost of leasehold improvements is depreciated over 10 years or the term of the leases if shorter, using the straight-line method.

An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the consolidated statement of comprehensive income in the year in which the item is derecognised.

Leasehold land and building

When a lease includes both land and building elements, the Group assesses the classification of each element as a finance or an operating lease separately based on the assessment as to whether substantially all the risks and rewards incidental to ownership of each element have been transferred to the Group unless it is clear that both elements are operating leases in which case the entire lease is classified as an operating lease. Specifically, the minimum lease payments (including any lumpsum upfront payments) are allocated between the land and the building elements in proportion to the relative fair values of the leasehold interests in the land element and building element of the lease at the inception of the lease.

To the extent the allocation of the lease payments can be made reliably, interest in leasehold land that is accounted for as an operating lease is presented as “prepaid lease payments” in the consolidated statement of financial position and is amortised over the lease term on a straightline basis. When the lease payments cannot be allocated reliably between the land and building elements, the entire lease is generally classified as a finance lease and accounted for as property, plant and equipment.

Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets are capitalised as part of the cost of those assets until such time as the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation.

All other borrowing costs are recognised in profit or loss in the period in which they are incurred.

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is calculated using the weighted average method.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Financial instruments

Financial assets and financial liabilities are recognised in the consolidated statement of financial position when a group entity becomes a party to the contractual provisions of the instrument. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognised immediately in profit or loss.

Effective interest method

The effective interest method is a method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees on points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial asset, or, where appropriate, a shorter period to the net carrying amount on initial recognition.

Interest income is recognised on an effective interest basis for debt instruments other than those financial assets designated as at fair value through profit or loss, of which interest income is included in net gains or losses.

Financial assets

The Group’s financial assets are classified as financial assets at fair value through profit or loss (comprising foreign currency forward contracts), available-for-sale investments, and loans and receivables. All regular way purchases or sales of financial assets are recognised and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace. The accounting policies adopted are set out below.

Financial assets at fair value through profit or loss

Financial assets at fair value through profit or loss has two subcategories, including financial assets held for trading and those designated at fair value through profit or loss on initial recognition.

A financial asset is classified as held for trading if:

it has been acquired principally for the purpose of selling in the near future; or
it is a part of an identified portfolio of financial instruments that the Group manages together and has a recent actual pattern of short-term profit-taking; or
it is a derivative that is not designated and effective as a hedging instrument.

Financial assets at fair value through profit or loss are measured at fair value, with changes in fair value arising from remeasurement recognised directly in profit or loss in the period in which they arise.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Financial instruments (continued)

Financial assets (continued)

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Subsequent to initial recognition, loans and receivables are carried at amortised cost using the effective interest method, less any identified impairment losses. (See accounting policy on impairment of financial assets below).

Available-for-sale financial assets

Available-for-sale financial assets are non-derivatives that are either designated or not classified as financial assets at fair value through profit or loss, loans and receivables, or held-to-maturity investments.

Available-for-sale equity investments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured and derivatives that are linked to and must be settled by delivery of such unquoted equity instruments are measured at cost less any identified impairment losses at the end of the reporting period (see accounting policy on impairment of financial assets below).

Impairment of financial assets

Financial assets, other than those at fair value through profit or loss, are assessed for indicators of impairment at the end of the reporting period. Financial assets are considered to be impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the financial assets have been impacted.

For financial assets, objective evidence of impairment could include:

significant financial difficulty of the issuer or counterparty; or
default or delinquency in interest or principal payments; or
it becoming probable that the borrower will enter bankruptcy or financial re-organisation.

For certain categories of financial assets, such as trade receivables, that are assessed not to be impaired individually are subsequently assessed for impairment on a collective basis. Objective evidence of impairment for a portfolio of receivables could include the Group’s past experience of collecting payments, an increase in the number of delayed payments in the portfolio past the credit period granted, and observable changes in national or local economic conditions that correlate with default on receivables.

For financial assets carried at amortised cost, an impairment loss is recognised in profit or loss when there is objective evidence that the asset is impaired, and is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Financial instruments (continued)

Impairment of financial assets (continued)

For financial assets carried at cost, the amount of the impairment loss is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment loss will not be reversed in subsequent periods.

The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade and other receivables, where the carrying amount is reduced through the use of an allowance account. Changes in the carrying amount of the allowance account are recognised in profit or loss. When trade and other receivables are considered uncollectible, they are written off against the allowance account. Subsequent recoveries of amounts previously written off are credited to profit or loss.

For financial assets measured at amortised cost, if, in a subsequent period, the amount of impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment losses was recognised, the previously recognised impairment loss is reversed through profit or loss to the extent that the carrying amount of the asset at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised.

Financial liabilities and equity

Financial liabilities and equity instruments issued by a group entity are classified at residual interest first according to the substance of the contractual arrangements entered into and the definition of a financial liability and an equity instrument.

An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. The accounting policies adopted in respect of consolidated financial liabilities are set out below.

Effective interest method

The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate.

Interest expense is recognised on an effective interest basis.

Financial liabilities

Financial liabilities excluding derivatives, which consist of short-term bank loans, trade and other payables and amounts due to related companies are subsequently measured at amortised cost, using the effective interest method.

Equity instruments

Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs.

Shares repurchased and cancelled are charged against the share capital and share premium account by its nominal value and the premium paid on repurchase, respectively.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Financial instruments (continued) Derivative financial instruments

Derivatives are initially recognised at fair value at the date a derivative contract is entered into and are subsequently remeasured to their fair value at the end of the reporting period. The resulting gain or loss is recognised in profit or loss immediately unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship.

Derecognition

Financial assets are derecognised when the rights to receive cash flows from the assets expire or, the financial assets are transferred and the Group has transferred substantially all the risks and rewards of ownership of the financial assets. On derecognition of a financial asset, the difference between the asset’s carrying amount and the sum of the consideration received or any new asset obtained and the cumulative gain or loss that had been recognised directly in equity is recognised in profit or loss.

Financial liabilities are derecognised when the obligation specified in the relevant contract is discharged, cancelled or expires. The difference between the carrying amount of the financial liability derecognised and the consideration paid including other liabilities assumed is recognised in profit or loss.

Research and development expenditure

Expenditure on research activities is recognised as an expense in the period in which it is incurred.

An internally-generated intangible asset arising from development (or from the development phase of an internal project) is recognised if, and only if, all of the following have been demonstrated:

the technical feasibility of completing the intangible asset so that it will be available for use or sale;
the intention to complete the intangible asset and use or sell it;
the ability to use or sell the intangible asset;
the intangible asset will generate probable future economic benefits;
the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and
the ability to measure reliably the expenditure attributable to the intangible asset during its development.

The amount initially recognised for an internally-generated intangible asset is the sum of the expenditure incurred from the date when the intangible asset first meets the recognition criteria listed above. Where no internally-generated intangible asset can be recognised, development expenditure is charged to profit or loss in the period in which it is incurred.

Subsequent to initial recognition, an internally-generated intangible asset is measured at cost less accumulated amortisation and accumulated impairment losses (if any), on the same basis as intangible assets acquired separately.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Taxation

Income tax expense represents the sum of the tax currently payable and deferred tax.

The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the consolidated statement of comprehensive income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period.

Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax base used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are generally recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at the end of the reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset is realised, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Current and deferred tax is recognised in profit or loss, except when it relates to items that are recognised in other comprehensive income or directly in equity, in which case, the current and deferred tax is also recognised in other comprehensive income or directly in equity respectively. Where current tax or deferred tax arises from the initial accounting for a business combination, the tax effect is included in the accounting for the business combination.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Government grants

Government grants are not recognised until there is reasonable assurance that the Group will comply with the conditions attaching to them and that the grants will be received.

Government grants that are receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the Group with no future related costs are recognised in profit or loss in the period in which they become receivable.

Impairment (other than goodwill and financial assets)

At the end of the reporting period the Group reviews the carrying amounts of its assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately.

Foreign currencies

In preparing the financial statements of each individual group entity, transactions in currencies other than the functional currency of that entity (foreign currencies) are recorded in its functional currency (i.e. the currency of the primary economic environment in which the entity operates) at the rates of exchanges prevailing on the dates of the transactions. At the end of the reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Nonmonetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not re-translated.

Exchange differences arising on the settlement of monetary items, and on the translation of monetary items, are recognised in profit or loss in the period in which they arise. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in profit or loss for the period except for differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognised directly in other comprehensive income, in which cases, the exchange differences are also recognised directly in other comprehensive income.

For the purposes of presenting the consolidated financial statements, the assets and liabilities of the Group’s foreign operations are translated into RMB, which is the functional currency of the Company, at the rate of exchange prevailing at the end of the reporting period, and their income and expenses are translated at the average exchange rates for the year, unless exchange rates fluctuate significantly during the period, in which case, the exchange rates prevailing at the dates of transactions are used. Exchange differences arising, if any, are recognised in other comprehensive income and accumulated in equity (the translation reserve).

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Foreign currencies (continued)

On the disposal of a foreign operation (i.e. a disposal of the Group’s entire interest in a foreign operation, or a disposal involving loss of control over a subsidiary that includes a foreign operation, a disposal involving loss of joint control over a jointly controlled entity that includes a foreign operation, or a disposal involving loss of significant influence over an associate that includes a foreign operation), all of the exchange differences accumulated in equity in respect of that operation attributable to the owners of the Company are reclassified to profit or loss. In addition, in relation to a partial disposal of a subsidiary that does not result in the Group losing control over the subsidiary, the proportionate share of accumulated exchange differences are re-attributed to non-controlling interests and are not recognised in profit or loss. For all other partial disposals (i.e. partial disposals of associates or jointly controlled entities that do not result in the Group losing significant influence or joint control), the proportionate share of the accumulated exchange differences is reclassified to profit or loss.

Operating leases

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

Rentals payable under operating leases are charged to profit or loss on a straight-line basis over the period of the respective leases. Benefits received and receivable as an incentive to enter into an operating lease are recognised as a reduction of rental expense over the lease term on a straight-line basis.

Retirement benefit costs

Payments to state-managed retirement benefit schemes and the Mandatory Provident Fund Scheme, which are defined contribution schemes, are charged as an expense when employees have rendered service entitling them to the contributions.

Intangible assets

Intangible assets acquired separately and with finite useful lives are carried at costs less accumulated amortisation and any accumulated impairment losses. Amortisation for intangible assets with finite useful lives is provided on a straight-line basis over their estimated useful lives. The estimated useful life and amortisation method are reviewed at the end of each reporting period, with the effective of any changes in estimate being accounted for on a prospective basis.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

4. FINANCIAL INSTRUMENTS

Categories of financial instruments

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2011 2010
RMB’000 RMB’000
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	2011 RMB’000	2011 RMB’000	2011 RMB’000	2011 RMB’000
Financial assets Fair value through profit or loss – Held for trading Available-for-sale investment Loans and receivables (including cash and cash equivalents) Financial liabilities Fair value through profit or loss – Held for trading Amortised cost		1,139 3,254 2,708,387 65 1,772,619		585 – 2,923,807 9,231 1,280,539

Financial risk management objectives and policies

The Group’s major financial instruments include trade and other receivables, amounts due to related companies, bank balances, trade and other payables, and short-term bank loans. Details of these financial instruments are disclosed in the respective notes. The risks associated with these financial instruments and the policies on how to mitigate these risks are set out below. Management manages and monitors these exposures to ensure appropriate measures are implemented in an effective manner. There has been no change to the Group’s exposure to market risks or the manner in which it manages and measures the risk.

Market risk

Currency risk – spot rates

With the Group’s international operations and presence, the Group faces foreign exchange exposure including transaction and translation exposure.

It is the Group’s policy to centralise foreign currency management to monitor the Group’s total foreign currency exposure, to net off affiliate positions and to consolidate hedging transactions with banks. As far as possible, the Group aims to achieve natural hedging by investing and borrowing in the functional currencies. Where a complete hedge is not possible, the Group will consider to protect its anticipated foreign currency revenue and foreign currency monetary items with appropriate foreign exchange contracts.

The Group will not enter into derivative transactions for pure trading or speculative purposes.

During the year 2011, the Group has entered into foreign currency forward contracts to minimise the effect of exchange rate fluctuations between the Euro, RMB and the United States dollar (“US$”).

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

4. FINANCIAL INSTRUMENTS (CONTINUED)

Financial risk management objectives and policies (continued) Market risk (continued)

Currency risk – spot rates (continued)

The carrying amounts of the Group’s and intra-Group’s foreign currency denominated monetary assets and monetary liabilities at the reporting date are as follows:

		Assets	Assets	Assets		Liabilities	Liabilities	Liabilities
		2011 RMB’000		2010 RMB’000		2011 RMB’000		2010 RMB’000
US$ Japanese Yen Euro HK$		2,460,238 77,744 218,443 742,469		1,620,666 32,015 179,397 796,153		2,549,975 293,560 119,834 212,233		1,558,835 58,083 164,378 224,748

Sensitivity analysis

The Group is mainly exposed to fluctuations in exchange rates of RMB against the US$, the Japanese Yen, Euro and HK$. Exposures on balances which are denominated in HK$ in group companies with US$ as its functional currency are not considered as HK$ is pegged to US$ and in which fluctuations during the year is insignificant. The following table details the Group’s sensitivity to a 5% increase in RMB against the relevant foreign currencies which represents management’s assessment of the reasonably possible change in foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the year end for a 5% change in foreign currency rates. The sensitivity analysis includes loans to foreign operations within the Group where the denomination of the loan is in a currency other than the functional currency of the lender or the borrower. A negative number (in bracket) below indicates a decrease in profit for the year where the RMB strengthen 5% against the relevant currency and vice versa. For a 5% weakening of the RMB against the relevant currency, there would be an equal and opposite impact on the profit, and the amounts below would be positive (negative for US dollar and Japanese Yen 2011).

		Impact	Impact	Impact
		2011 RMB’000		2010 RMB’000
Increase (decrease) in profit for the year US$ Japanese Yen Euro HK$		4,487 10,791 (4,930) (26,512)		(3,092) 1,303 (751) (28,570)

In management’s opinion, the sensitivity analysis is unrepresentative of the inherent foreign exchange risk as the year end exposure does not reflect the exposure during the year.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

4. FINANCIAL INSTRUMENTS (CONTINUED)

Financial risk management objectives and policies (continued) Market risk (continued)

Currency risk – forward rates

The Group is also exposed to currency risk on its outstanding foreign currency forward contracts.

Sensitivity analysis

If forward rates between US$ against the Euro increase by 5%, while all other variables are held constant, the profit for the year would decrease by RMB54,000 (2010: RMB433,000). For a 5% weakening of the US$ forward rates against the Euro, there would be an equal and opposite impact on the profit of the Group.

Interest rate risk

The Group’s cash flow interest rate risk relates primarily to variable-rate bank loans (see note 25) and bank balances and deposits (see note 23). The Group is also exposed to fair value interest rate risk in relation to fixed rate bank deposits (see note 23). The management considers the Group’s exposure on the variable-rate bank loans and bank balances and deposits and fixed rate bank deposits to interest rate risk is not significant as they have a short maturity period.

The Group’s exposures to interest rates on financial liabilities are detailed in the liquidity risk section of this note. The Group’s cash flow interest rate risk is mainly concentrated the fluctuation of London Inter-bank Offered Rate arising from the Group’s bank loans.

Sensitivity analysis

The sensitivity analysis below has been determined based on the exposure to interest rates at the end of the reporting period. The analysis is prepared assuming the amount of variable-rate bank loans at the end of the reporting period was the amount outstanding for the whole year. The sensitivity analysis has excluded certain bank balances which are not interest sensitive.

If interest rates had been 50 basis points (2010: 50 basis points) higher/lower and all other variables were held constant, the Group’s profit for the year ended 31st December, 2011 would increase/ decrease by RMB3,957,000 (2010: RMB4,167,000). This is mainly attributable to the Group’s exposure to interest rates on its variable-rate bank loans and bank deposits.

Credit risk

As at 31st December, 2011 and 2010, the Group’s maximum exposure to credit risk which will cause a financial loss to the Group due to failure to perform an obligation by the counterparties, is the carrying amount of the respective recognised financial assets as stated in the consolidated statement of financial position.

In order to minimise the credit risk, the management of the Group has delegated a team responsible for determination of credit limits, credit approvals and other monitoring procedures to ensure that follow-up action is taken to recover overdue debts. In addition, the Group reviews the recoverable amount of each individual trade debt at the end of the reporting period to ensure that adequate impairment losses are made for irrecoverable amounts. In this regard, the Directors of the Company consider that the Group’s credit risk is significantly reduced.

The credit risk on liquid funds is limited because the majority of the counterparties are reputable banks or banks with high credit-ratings assigned by international credit-rating agencies.

18.55% (2010: 19.68%) and 47.26% (2010: 38.51%) of total trade receivables are due from the Group’s largest debtor and the five largest debtors. These five customers are multi-national corporations who are mobile phone and consumer devices manufacturers. The management considers, based on the strong financial background, good creditability and repayment history of those debtors, there are no significant credit risks.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

4. FINANCIAL INSTRUMENTS (CONTINUED)

Financial risk management objectives and policies (continued)

Liquidity risk

In the management of the liquidity risk, the Group monitors and maintains a level of cash and cash equivalents deemed adequate by management to finance the Group’s operations and mitigates the effects of fluctuations in cash flows.

The following table details the Group’s contractual maturity for its financial liabilities:

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Weighted Total
average Less than undiscounted Carrying
interest rate On demand 1 year cash flow amount
RMB’000 RMB’000 RMB’000 RMB’000
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At 31st December, 2011 Non-derivative financial liabilities Non-interest bearing – Variable interest rate 0.95% Derivatives – gross settlement Foreign exchange forward contracts – inflow – outflow At 31st December, 2010 Non-derivative financial liabilities Non-interest bearing – Variable interest rate 1.04% Derivatives – gross settlement Foreign exchange forward contracts – inflow – outflow	79,553 – 79,553 – – – 42,501 – 42,501 – – –	801,938 891,949 1,693,887 26,779 (24,488) 2,291 767,752 470,597 1,238,349 262,430 (268,571) (6,141)	881,491 891,949 1,773,440 26,779 (24,488) 2,291 810,253 470,597 1,280,850 262,430 (268,571) (6,141)	881,491 891,128 1,772,619 1,074 810,253 470,286 1,280,539 (8,646)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

4. FINANCIAL INSTRUMENTS (CONTINUED)

Fair value

The fair value of financial assets and financial liabilities is determined in accordance with generally accepted pricing models based on discounted cash flow analysis using prices from observable current market transactions and dealer quotes for similar instruments.

The carrying amounts of financial assets and liabilities carried at amortised cost approximate their respective fair values due to the relatively short-term nature of these financial instruments.

The fair value of foreign currency forward contracts as at 31st December, 2011 is derived from inputs other than quoted prices that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). The valuation of all foreign currency forward contracts are classified in level 2 of the fair value hierarchy. Details of the foreign currency forward contracts are disclosed in note 22.

5. CAPITAL RISK MANAGEMENT

The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to Shareholders through the optimisation of the debt and equity balance. The Group’s overall strategy remains unchanged from prior years.

The capital structure of the Group consists of equity attributable to equity holders of the Company, comprising issued share capital, reserves and retained earnings.

The Directors of the Company review the capital structure regularly. As part of this review, the Directors consider the cost of capital and the risks associated with each class of capital. The Group will consider to balance its overall capital structure through the payment of dividends, new share issues and share buy-backs as well as the issue of new debt or the redemption of existing debt.

6. SEGMENT INFORMATION

Operating and reportable segments are identified on the basis of internal reports about components of the Group that are regularly reviewed by the Group’s chief operating decision maker in order to allocate resources to the segment and to assess its performance. The chief operating decision maker of the Group has been identified as the CEO.

Information reported to the CEO for the purpose of resource allocation and assessment of performances focuses specifically on the type of products sold. The Group’s operating and reportable segments under IFRS 8 are dynamic components (mainly including receivers and polyphonic speakers normally sold together in sets), microphones, headsets and other products (mainly including transducers and vibrators), which represent the major types of products manufactured and sold by the Group.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

6. SEGMENT INFORMATION (CONTINUED)

Information regarding these segments is presented below.

An analysis of the Group’s revenue and results by operating and reportable segments is as follows:

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2011 2010
RMB’000 RMB’000
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	2011 RMB’000	2011 RMB’000	2011 RMB’000	2011 RMB’000
Operating segments Segment revenue from external customers Dynamic components Microphones Headsets Other products Revenue Segment results Dynamic components Microphones Headsets Other products Total profit for operating segments Unallocated amounts: Interest income Other income Net fair value loss on foreign currency forward contracts Distribution and selling expenses Administrative expenses Research and development costs Share of results of associates Exchange loss Finance costs Profit before taxation		3,228,298 459,233 119,314 252,842 4,059,687 1,557,151 153,254 10,438 63,571 1,784,414 27,913 38,915 (3,829) (136,875) (153,482) (358,238) (19,154) (32,592) (5,513) 1,141,559		2,482,872 366,242 232,917 266,989 3,349,020 1,269,494 114,771 65,489 60,611 1,510,365 23,032 24,295 (611) (110,023) (126,886) (213,636) 810 (4,936) (3,272) 1,099,138

There are no inter-segment sales for both years. No analysis of the Group’s assets and liabilities by operating segments is disclosed as such information is not regularly provided to the CEO for review.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

6. SEGMENT INFORMATION (CONTINUED)

Depreciation and amortisation included in measure of segment results are as follows:

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2011 2010
RMB’000 RMB’000
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	2011 RMB’000	2011 RMB’000	2011 RMB’000	2011 RMB’000
Dynamic components Microphones Headsets Other products Other unallocated expenses		132,434 20,335 4,704 10,522 167,995 91,293 259,288		104,366 14,619 3,622 8,975 131,582 65,406 196,988

The accounting policies of the reportable segments are the same as the Group’s accounting policies described in note 3. Segment profit represents the profit earned by each segment without allocation of finance costs, interest income, administration expenses, research and development costs, distribution and selling expenses, other income, net fair value loss on foreign currency forward contracts, exchange loss and the share of results of associates. This is the measure reported to the CEO for the purpose of resource allocation and performance assessment.

Over 90% of the Group’s non-current assets other than financial instruments were located in the PRC, the place of domicile of the relevant group entities that hold those assets.

The Group’s revenue from external customers analysed by location of customers are detailed below:

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2011 2010
RMB’000 RMB’000
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	2011 RMB’000	2011 RMB’000	2011 RMB’000	2011 RMB’000
Greater China* (country of domicile) Other foreign countries: Other Asian countries America Europe		609,074 147,455 2,197,562 1,105,596 4,059,687		514,713 96,885 1,536,154 1,201,268 3,349,020

Greater China comprises the PRC, Hong Kong and Taiwan. Majority of the revenue from Greater China were derived from the PRC.

The geographical information of the Group’s revenue from external customer by individual countries in Europe and America is not available. In the opinion of management, such disclosure is harmful to the Group’s business.

During the year, the aggregate amount of revenue derived from the Group’s top customers which individually has contributed to over 10% of the Group’s revenue, amounted to RMB2,224,268,000 (2010: RMB2,091,906,000). These revenue were derived from two (2010: three) customers and included in all of the Group’s segments. No disclosure of the total amount of revenue by each customer is disclosed, as in the opinion of the Directors such disclosure is harmful to the Group’s business.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

7. FINANCE COSTS

		2011 RMB’000		2010 RMB’000
Interest on bank borrowings wholly repayable within five years		5,513		3,272

8. PROFIT BEFORE TAXATION

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2011 2010
RMB’000 RMB’000
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	2011 RMB’000	2011 RMB’000	2011 RMB’000	2011 RMB’000
Profit before taxation has been arrived at after charging: Directors’ emoluments (note 9) Other staff’s retirement benefits scheme contributions Other staff costs Total staff costs Less: Staff costs included in research and development costs Depreciation Less: Depreciation included in research and development costs Amortisation of intangible assets Net allowance for bad and doubtful debts Allowance for obsolete inventories, included in cost of goods sold Auditor’s remuneration Cost of inventories recognised as expense Cost of raw materials included in research and development costs Loss on disposal of property, plant and equipment Operating lease rentals in respect of – building premises – prepaid lease payments – equipment and after crediting: Government grants * Interest income Rental income		10,673 38,394 873,682 922,749 (145,945) 776,804 243,343 (36,614) 206,729 15,945 908 6,223 2,305 2,275,273 98,510 6,112 24,719 2,283 87 24,796 27,913 931		6,899 25,007 616,377 648,283 (85,500) 562,783 188,966 (21,733) 167,233 8,022 17 7,245 2,270 1,838,655 51,014 2,639 22,791 1,703 230 9,588 23,032 904

The amount mainly represents the incentives granted by the PRC local authorities to the Group for engaging in High Technology business, employment of expatriates and technologically advanced staff. All the grants were approved and received during the year of recognition.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

9. DIRECTORS’ AND EMPLOYEES’ EMOLUMENTS Directors’ emoluments

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Benjamin Ingrid Mok Poon Chang
Zhengmin Chunyuan Joe Kuen Koh Chung Yin Dato’ Tan Carmen
Pan Wu Richard Pei Kang Boon Hwee Joseph Bian Ee I-Hua Total
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
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31st December, 2011 Fees Salaries and other benefits Bonus Total Directors’ emoluments 31st December, 2010 Fees Salaries and other benefits Bonus Total Directors’ emoluments	– 1,520 2,171 3,691 – 1,560 1,605 3,165	322 – – 322 169 – – 169	– 1,539 3,490 5,029 – 1,618 857 2,475	N/A N/A N/A 109 – – 109	664 – – 664 406 – – 406	435 – – 435 304 – – 304	274 – –	258 – – 258 68 – – 68	1,953 3,059 5,661 10,673 1,259 3,178 2,462 6,899
							274
							203 – –
							203

Note: The bonus is determined with reference to the performance of the Group.

Employees’ emoluments

The five highest paid individuals included one (2010: two) Directors, details of whose emoluments are set out above. The emoluments of the remaining four (2010: three) highest paid individuals are as follows:

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2011 2010
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	2011 RMB’000	2011 RMB’000	2011 RMB’000
Employees – basic salaries and allowances – bonus		3,360 17,966 21,326	3,140 9,491 12,631

Note: The bonus is determined based on performance of the employees.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

9. DIRECTORS’ AND EMPLOYEES’ EMOLUMENTS (CONTINUED)

Employees’ emoluments (continued)

The emoluments were within the following bands:

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Number of employees
2011 2010
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	2011	2011	2011	2011
HK$3,500,001 to HK$4,000,000 HK$4,000,001 to HK$4,500,000 HK$5,000,001 to HK$5,500,000 HK$5,500,001 to HK$6,000,000 HK$6,500,001 to HK$7,000,000 HK$9,000,001 to HK$9,500,000		– – 2 1 – 1		1 1 – – 1 –

During the year, no emoluments were paid by the Group to the five highest paid individuals (including Directors and employees) as an inducement to join or as compensation for loss of office.

10. TAXATION

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2011 2010
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	2011 RMB’000	2011 RMB’000	2011 RMB’000	2011 RMB’000
The current tax charge (credit) comprises: PRC income tax Other jurisdictions (Overprovision) underprovision of taxation in prior years Deferred tax (see note 26)		75,512 34,061 (333) 109,240 (614) 108,626		90,553 20,304 804 111,661 – 111,661

Pursuant to the relevant laws and regulations in the PRC, certain of the Group’s PRC subsidiaries are entitled to exemption from PRC income tax for two years commencing from their first profit making year of operation and thereafter, these PRC subsidiaries will be entitled to a 50% relief from PRC income tax for the following three years (“Tax Holiday”). The Tax Holiday will expire gradually for these subsidiaries up to 2012.

Under the Law of the People’s Republic of China on Enterprise Income Tax (the “EIT Law”) and Implementation Regulation of the EIT Law, the tax rate of the Group’s PRC subsidiaries is 25% from 1st January, 2008 onwards.

Taxation in other jurisdiction is calculated at the rates prevailing in the respective jurisdictions.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

10. TAXATION (CONTINUED)

The charge for the year is reconciled to the profit before taxation as follows:

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2011 2010
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	2011 RMB’000	2011 RMB’000	2011 RMB’000	2011 RMB’000
Profit before taxation Tax at the applicable income tax rate* Tax effect of income not taxable for tax purposes Tax effect of expenses not deductible for tax purposes Tax effect of Tax Holiday Tax effect of tax losses not recognised Effect of different tax rates of subsidiaries operating in other jurisdictions (Overprovision) underprovision in prior years Others Tax charge for the year		1,141,559 285,389 (8,718) 1,059 (156,210) 4,618 (17,095) (333) (84) 108,626		1,099,138 274,785 (9,980) 1,079 (151,538) 84 (2,553) 804 (1,020) 111,661

The PRC Enterprise Income Tax rate of 25% (2010: 25%) is the domestic tax rate in the jurisdiction where the operations of the Group are substantially based.

11. DIVIDENDS

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2011 2010
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	2011 RMB’000	2011 RMB’000	2011 RMB’000	2011 RMB’000
Dividends recognised as distribution during the year: 2010 final dividend of HK23.7 cents (2009: HK15.5 cents) per ordinary share 2011 interim dividend of HK20.0 cents (2010: HK14.2 cents) per ordinary share		242,025 200,017 442,042		166,774 150,262 317,036

Subsequent to end of the reporting period, 2011 proposed final dividend of HK21.6 cents (2010: HK23.7 cents) per share has been proposed by the Board of Directors and is subject to approval by the Shareholders in the forthcoming annual general meeting.

12. EARNINGS PER SHARE

The calculation of the basic earnings per share for the year ended 31st December, 2011 is based on the profit for the year attributable to owners of the Company of RMB1,036,192,000 (2010: RMB986,730,000) and on the number of ordinary shares of 1,228,000,000 shares in issue during the year (2010: 1,228,000,000 shares).

No diluted earnings per share is presented as there were no potential ordinary shares outstanding during both years.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

13. PROPERTY, PLANT AND EQUIPMENT

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Electronic
equipment Leasehold Motor Plant and Construction
Buildings and furniture improvements vehicles machinery in progress Total
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
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COST At 1st January, 2010 Currency realignment Additions Acquisition through business combinations Disposals Transfers At 31st December, 2010 Currency realignment Additions Acquisition through business combinations Disposals Transfers At 31st December, 2011 DEPRECIATION AND IMPAIRMENT At 1st January, 2010 Currency realignment Provided for the year Eliminated on disposal At 31st December, 2010 Currency realignment Provided for the year Eliminated on disposal At 31st December, 2011 CARRYING VALUES At 31st December, 2011 At 31st December, 2010	262,506 (41) 18,066 1,212 (5,357) 78,385 354,771 (748) 11,784 – (6,949) 85,576 444,434 25,454 3 16,862 (758) 41,561 (37) 16,744 (1,329) 56,939 387,495 313,210	245,358 (11) 59,798 97 (351) 2,404 307,295 (961) 62,541 2,738 (4,252) 3,196 370,557 124,090 (81) 41,207 (318) 164,898 (387) 47,706 (3,713) 208,504 162,053 142,397	112,524 (9) – – – 6,051 118,566 (146) 18,402 797 – 2,047 139,666 29,858 (11) 12,185 – 42,032 (29) 25,578 – 67,581 72,085 76,534	17,474 13 4,336 – (1,083) – 20,740 (63) 3,734 – (1,145) – 23,266 9,419 – 2,948 (857) 11,510 (27) 2,935 (893) 13,525 9,741 9,230	1,089,005 166 212,025 – (45) 51,187 1,352,338 (824) 424,721 679 (643) 294,178 2,070,449 293,561 35 115,764 (111) 409,249 (385) 150,380 (485) 558,759 1,511,690 943,089	119,685 (258) 285,701 – (2) (138,027) 267,099 (85) 672,067 – (28) (384,997) 554,056 – – – – – – – – – 554,056 267,099	1,846,552 (140) 579,926 1,309 (6,838) – 2,420,809 (2,827) 1,193,249 4,214 (13,017) – 3,602,428 482,382 (54) 188,966 (2,044) 669,250 (865) 243,343 (6,420) 905,308 2,697,120 1,751,559

The Group’s buildings are situated in the PRC on land which is held under medium-term land use rights.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

14. GOODWILL

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COST At 1st January, 2010 Arising on business combinations At 31st December, 2010 Arising on business combinations Impairment loss recognised At 31st December, 2011	5,405 1,348 6,753 8,705 (3,655) 11,803

The goodwill acquired in business combination was allocated to each individual subsidiary which management considers represent separate CGUs. At the end of the reporting period, the carrying amount of goodwill had arisen from the acquisition of the following subsidiaries:

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2011 2010
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	2011 RMB’000	2011 RMB’000	2011 RMB’000	2011 RMB’000
AAC Wireless Technologies AB (“AAC Wireless”) 北京東微世紀科技有限公司 (“Eastmicro Technology (Beijing) Co., Ltd.”) * AAC Technologies Japan R&D Center Co., Ltd. (“AAC Japan”) (Formerly known as I. Square Research Co., Ltd.) Kaleido		– 1,750 1,348 8,705 11,803		3,655 1,750 1,348 – 6,753

For identification purpose only.

The recoverable amount of the CGU is determined from value in use calculations. These calculations use cash flow projections based on latest financial budgets approved by management covering a five year period, using an applicable discount rate.

During the year, the management determined that the recoverable amount of AAC Wireless was less than its carrying value and accordingly impairment loss of RMB3,655,000 was recognised to fully write off the goodwill.

15. PREPAID LEASE PAYMENTS

The amount represents the prepayment of rentals for medium-term land use rights situated in the PRC for a period of 50 years.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

16. AVAILABLE-FOR-SALE INVESTMENT

		2011 RMB’000		2010 RMB’000
Unlisted shares, at cost		3,254		–

In the current year, the Group has acquired 4.6% equity interest in an unlisted company which was incorporated in Korea. The company is engaged in research and development of integrated circuits. The investment is measured at cost less impairment as the range of reasonable fair value estimates is so significant that the Directors are of the opinion that the fair value cannot be measured reliably.

17. INTEREST IN ASSOCIATES

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2011 2010
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	2011 RMB’000	2011 RMB’000	2011 RMB’000	2011 RMB’000
Cost of investments in associates, unlisted Share of post-acquisition (loss) profits and other comprehensive (expense) income		200,226 (18,344) 181,882		102,939 810 103,749

Details of the Group’s principal associates are as follows:

Name of associate	Place of incorporation	Percentage equity interest 2011 % 2010 %	Percentage equity interest 2011 % 2010 %	Principal activity
Heptagon Advance Micro-Optics	Singapore	26.7%	16.4%	Micro-optics business
Pte. Ltd. (“Heptagon”)*
Kaleido**	Denmark	–	32.0%	Wafer-level glass lens precision
				moulding business
Xenon Technology (Cayman) Limited	Cayman Islands	39.2%	39.2%	Design and manufacture of
(“Xenon”)				Xenon-based flash lamp
				and flash modules
Mems Technology Pte. Ltd.	Singapore	50.0%***	–	Design and manufacture of
(“MemsTech”)				MEMS products

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

17. INTEREST IN ASSOCIATES (CONTINUED)

In October 2011, Heptagon Oy completed a change of domicile from Finland to Singapore by establishing Heptagon Advanced Micro-Optics Pte. Ltd.. As a result, the entity of the Group’s investment in this associate company changed from Heptagon Oy to Heptagon Advanced Micro-Optics Pte. Ltd..
** Kaleido became a subsidiary of the Group upon the step acquisition during the year, see note 29.
*** During the year, the Group acquired MemsTech for a total consideration of RMB38.3 million. According to the Shareholder’s agreement, the Group has the right to appoint 2 out of 4 Directors. The Chairman, who has casting vote, is appointed by the other Shareholder. Thus, the Group only has significant influence on MemsTech, and the investment was accounted for as an associate as at 31st December, 2011.

Included in the cost of investment in associates is goodwill of RMB41.7 million (2010: RMB31.1 million) arising on acquisitions of associates.

During the year, the management assessed the associates for impairment with reference to its recoverable amount. The recoverable amount was determined based on the value in use calculations using the cashflow projections based on financial budget for the next 3 to 5 years approved by management. Cash flows beyond the budgeted period have extrapolated using a rate of 2%. Discount rates of 16% to 19.4% were used, which were determined based on the weighted average cost of capital of the investees. Based on the estimated recoverable amount, no impairment loss was considered necessary.

Summarised financial information in respect of the assets and liabilities and post-acquisition results of the Group’s associates are set out below:

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2011 2010
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	2011 RMB’000	2011 RMB’000	2011 RMB’000	2011 RMB’000
Total assets Total liabilities Revenue (Loss) profit for the year Group’s share of (loss) profit of associates for the year		583,867 (178,389) 405,478 473,132 (61,616) (19,154)		214,898 (139,433) 75,465 144,861 2,223 810

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

18. INTANGIBLE ASSETS

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Development
Patents expenditure Total
RMB’000 RMB’000 RMB’000
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COST At 1st January, 2010 Currency realignment Acquisition through business combination At 31st December, 2010 Currency realignment Addition Acquisition through business combination At 31st December, 2011 AMORTISATION At 1st January, 2010 Currency realignment Provided for the year At 31st December, 2010 Currency realignment Provided for the year At 31st December, 2011 CARRYING VALUE At 31st December, 2011 At 31st December, 2010	– – 23,083 23,083 – 55,497 65,407 143,987 – – 1,155 1,155 (32) 9,230 10,353 133,634 21,928	44,869 (745) – 44,124 (905) 7,069 9,216 59,504 18,161 (301) 6,867 24,727 (448) 6,715 30,994 28,510 19,397	44,869 (745) 23,083 67,207 (905) 62,566 74,623 203,491 18,161 (301) 8,022 25,882 (480) 15,945 41,347 162,144 41,325

Patents represents the Group’s patents on designing small and sophisticated module structures. Development expenditure represents the Group’s development cost in MEMS Technology which is used to enhance the Group’s current products. Amortisation is provided to write off the cost of development expenditure and patents, using the straight-line method, over the estimated useful life of 5 years.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

19. INVENTORIES

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2011 2010
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	2011 RMB’000	2011 RMB’000	2011 RMB’000	2011 RMB’000
Raw materials Work in progress Finished goods		167,873 52,893 338,014 558,780		125,614 51,814 165,515 342,943

20. TRADE AND OTHER RECEIVABLES

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2011 2010
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	2011 RMB’000	2011 RMB’000	2011 RMB’000	2011 RMB’000
Trade receivables Bank acceptance bills Advance payment to suppliers Prepayments Other receivables		1,178,212 40,971 1,219,183 146,433 7,698 114,261 1,487,575		996,311 25,856 1,022,167 126,212 5,477 138,822 1,292,678

The following is an analysis of trade receivables by age, presented based on the invoice date. The analysis below is net of allowance for doubtful debts.

		2011 RMB’000		2010 RMB’000
Age 0 – 90 days 91 – 180 days Over 180 days		1,064,770 131,535 22,878 1,219,183		857,178 158,971 6,018 1,022,167

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

20. TRADE AND OTHER RECEIVABLES (CONTINUED)

Payment terms with customers are mainly on credit. Invoices are normally payable within 45 days to 120 days of issuance. The Group accepts bank acceptance bills with maturities ranging from 30 to 180 days at the end of the credit terms in lieu of immediate cash payment. The following is an aged analysis of trade receivables and bank acceptance bills which are past due but not impaired:

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2011 2010
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	2011 RMB’000	2011 RMB’000	2011 RMB’000	2011 RMB’000
Age Overdue 0 – 90 days Overdue 91 – 180 days Overdue over 180 days		103,710 9,954 4,945 118,609		158,971 4,576 1,442 164,989

Management closely monitors the credit quality of trade and other receivables and considers the trade and other receivables that are neither past due nor impaired to be of a good credit quality. Included in the Group’s trade receivables balance are debtors with an aggregate carrying amount of RMB118,609,000 (2010: RMB164,989,000) which are past due at the reporting date for which the Group has not provided for impairment loss. Based on historical experience the Group considers the amounts which are past due and which impairment loss has not been provided for to be of good credit quality and they are expected to be recovered. The Group does not hold any collateral over these balances.

The following is a movement in the allowance for bad and doubtful debts account:

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2011 2010
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	2011 RMB’000	2011 RMB’000	2011 RMB’000	2011 RMB’000
Balance at beginning of the year Currency realignment Allowance for bad and doubtful debts Reversal of allowance for bad and doubtful debts Amounts written off as uncollectible Balance at end of the year		4,970 (121) 3,722 (2,814) – 5,757		10,079 (144) 17 – (4,982) 4,970

Allowances are recognised based on the Group’s historical experience, aging analysis and internal assessment of the recoverability of the debt.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

20. TRADE AND OTHER RECEIVABLES (CONTINUED)

The Group’s trade receivables which are denominated in currencies other than the functional currencies of the relevant group entities are set out below:

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2011 2010
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	2011 RMB’000	2011 RMB’000	2011 RMB’000	2011 RMB’000
US$ Euro Japanese Yen HK$		179,550 101,944 – 9		168,703 95,178 772 135

21. AMOUNTS DUE FROM (TO) RELATED COMPANIES

Details of the amounts due from related companies, in which close family members of Ms. Ingrid Chunyuan Wu and Mr. Benjamin Zhengmin Pan, Directors of the Company have controlling interest, are as follows:

Name of related company	Balance at 31.12.2011 RMB’000	Balance at 1.1.2011 RMB’000 Maximum amount outstanding during the year RMB’000
常州遠宇精密模具製造有限公司
(Changzhou Yuanyu Precise Model
Manufacturing Co., Ltd.)*	–	173 173

For identification purpose only.

The above amount was unsecured, interest-free and repayable on demand.

The amounts due to related companies are unsecured, interest-free and are repayable on demand. Certain close family members of the substantial Shareholders of the Company have controlling interests in these related companies.

22. FOREIGN CURRENCY FORWARD CONTRACTS

		Assets	Assets	Assets		Liabilities	Liabilities	Liabilities
		2011 RMB’000		2010 RMB’000		2011 RMB’000		2010 RMB’000
Foreign currency forward contracts		1,139		585		65		9,231

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

22. FOREIGN CURRENCY FORWARD CONTRACTS (CONTINUED)

Details of the foreign currency forward contracts entered into by the Group with certain banks and outstanding as at the end of the reporting period (the “Forward Contracts”) are as follows:

At 31st December, 2011:

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Description Settlement date Exchange rates
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4 contracts to sell in	Settled monthly on various dates	At exchange rates ranging
aggregate Euro 3 million	from 19th January, 2012	from US$1.395 to US$1.43
for US$	until 29th February, 2012	for Euro 1.
4 contracts to purchase in	Settled monthly on various dates	At exchange rates ranging
aggregate US$4 million	from 1st February, 2012	from RMB6.3494 to RMB6.38
for RMB	until 27th April, 2012	for US$.
4 contracts to sell in	Settled monthly on various dates	At exchange rates ranging
aggregate US$4 million	from 19th January, 2012	from RMB6.3784 to RMB6.406
for RMB	until 23th April, 2012	for US$.
At 31st December, 2010:

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Description Settlement date Exchange rates
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4	contracts to sell in	Settled monthly on various dates	At exchange rates ranging
aggregate Euro 30.5 million		from 13th January, 2011	from US$1.29 to US$1.336
for US$		until 13th July, 2011	for Euro 1.
4	contracts to purchase in	Settled monthly on various dates	At exchange rates ranging
aggregate US$4 million		from 18th January, 2011	from RMB6.6253 to RMB6.6778
for RMB		until 18th April, 2011	for US$.
4	contracts to sell in	Settled monthly on various dates	At exchange rates ranging
aggregate US$4 million		from 14th January, 2011	from RMB6.722 to RMB6.758
for RMB		until 14th April, 2011	for US$.

At any time prior to maturity of certain of Forward Contracts, if the spot rate between the US$ and Euro falls below an agreed rate, the Forward Contracts will be automatically terminated. The Forward Contracts are not designated and effective as a hedging instrument. Therefore, the fair value gains or losses are recognised in profit or loss in the period in which they arise. At 31st December, 2011, the fair value of the Forward Contracts are determined by the respective issuing banks with reference to forward rates.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

23. PLEDGED BANK DEPOSITS AND BANK BALANCES AND CASH

The pledged bank deposits and bank balances carry variable and fixed interest rates ranging from 0% to 4.65% (2010: 0% to 3.66%).

The Group’s pledged bank deposits and bank balances and cash which are denominated in currencies other than the functional currencies of the relevant group entities are set out below:

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2011 2010
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	2011 RMB’000	2011 RMB’000	2011 RMB’000	2011 RMB’000
US$ HK$ Japanese Yen Euro		312,081 80,310 48,023 13,482		237,783 168,493 17,917 13,659

24. TRADE AND OTHER PAYABLES

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2011 2010
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	2011 RMB’000	2011 RMB’000	2011 RMB’000	2011 RMB’000
Trade payables Notes payables – secured Payroll and welfare payables Other payables and accruals Contingent consideration payable		431,925 204,544 636,469 82,265 170,186 9,822 898,742		389,422 248,483 637,905 117,198 92,466 9,822 857,391

Other payables are unsecured, interest-free and have no fixed repayment terms.

An aged analysis of trade and notes payables, presented based on the invoice date, is as follows:

		2011 RMB’000		2010 RMB’000
Age 0 – 90 days 91 – 180 days Over 180 days		556,916 78,607 946 636,469		595,404 41,045 1,456 637,905

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

24. TRADE AND OTHER PAYABLES (CONTINUED)

The Group’s trade payables which are denominated in currencies other than the functional currencies of the relevant group entities are set out below:

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2011 2010
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US$ HK$ Japanese Yen Euro		74,563 – 6,029 2,369		40,813 18 6,260 1,780

25. SHORT-TERM BANK LOANS

The Group’s short-term bank loans which are denominated in currencies other than the functional currencies of the relevant group entities are set out below:

		2011 RMB’000		2010 RMB’000
US$ Japanese Yen HK$		603,596 287,532 –		352,596 51,823 65,867

These loans are unsecured and carry interest ranging from 0.4% to 0.8% per annum over London Inter-bank Offered Rate (“LIBOR”) (as at 31st December, 2010: from 0.45% to 1.0% per annum over LIBOR).

26. DEFERRED TAX LIABILITIES

The following are the major deferred tax liabilities recognised by the Group and the movements thereon during the current and prior year.

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----- Start of picture text -----

RMB’000
----- End of picture text -----

At 1st January, 2010, 31st December, 2010 and 1st January, 2011 Credit to profit or loss Acquisition through business combinations At 31st December, 2011	– (614) 16,352 15,738

No deferred tax liability has been recognised in respect of temporary differences associated with undistributed earnings of subsidiaries because the Group is in a position to control the timing of the reversal of the temporary differences and it is probable that such differences will not reverse in the foreseeable future.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

26. DEFERRED TAX LIABILITIES (CONTINUED)

At the end of the reporting period, the Group has unused tax losses of RMB18,472,000 (2010: RMB336,000) available for offset against future profits. These losses may be carried forward indefinitely.

The deferred tax was recognised in respect of the acquisition of Kaleido during the year as a result of the fair value adjustment of RMB65,407,000 on patents related to wafer-level glass molding.

27. SHARE CAPITAL

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----- Start of picture text -----

Number of shares Amount
US$’000
Shares of US$0.01 each
Authorised:
Ordinary shares at 1st January, 2010, 31st December, 2010
and 31st December, 2011 5,000,000,000 50,000
Issued and fully paid:
Ordinary shares at 1st January, 2010, 31st December, 2010
and 31st December, 2011 1,228,000,000 12,280
RMB’000
At 1st January, 2010, 31st December, 2010 and 31st December, 2011 99,718
----- End of picture text -----

28. SHARE OPTION SCHEME

Pursuant to an ordinary resolution passed in the Company’s special general meeting held on 15th July, 2005, the Company approved and adopted a share option scheme (the “Scheme”) which will expire at its tenth anniversary.

The purpose of the Scheme is to provide the eligible participants with the opportunity to acquire proprietary interests in the Company, to attract and retain the best available personnel, to encourage and motivate participants to work towards enhancing the value of the Company and the shares and to allow them to participate in the growth of the Company and to align the interests of the Shareholders and the participants. Under the Scheme, the Directors may grant options to any eligible participants, including the Company’s Shareholders, all Directors and any employees of the Company or any subsidiaries and any consultants, professional and other advisors who will provide or have provided services to the Group.

Share options granted to a Director, chief executive or substantial Shareholder of the Company, or to any of their associates, are subject to approval of the independent non-executive Directors of the Company. In addition, any share options granted to a substantial Shareholder or any independent non-executive Director of the Company, or to any of their associates, which would result in the shares issued and to be issued upon exercise of all share options already granted and to be granted (including share options exercised, cancelled and outstanding) to such person in any one year up to and including the date of such grant (i) representing in aggregate value over 0.1% of the shares of the Company in issue on that date; and (ii) having an aggregate value, based on the closing price of the shares on the date of each grant, in excess of HK$5 million, are subject to Shareholders’ approval in a general meeting.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

28. SHARE OPTION SCHEME (CONTINUED)

The exercisable period of the options granted are determined by the Board of Directors of the Company at its absolute discretion. The share options will expire no later than ten years from the date of grant. At the time of grant of the share options, the Company may specify a minimum period for which an option must be held before it can be exercised. The acceptance date should not be later than 90 days after the date of offer. A nominal consideration of HK$1 is payable on acceptance of the grant of options. The subscription price of the option shares is not less than the higher of (i) the closing price of the shares on the date of grant; (ii) the average closing prices of the shares on the five trading days immediately preceding the date of grant; and (iii) the nominal value of the shares. The maximum number of shares in respect of which options may be granted under the Scheme may not exceed in nominal amount of 10% of the issued share capital of the Company at the date of approval of the Scheme. However, the total maximum number of shares which may be issued upon exercise of all outstanding share options must not exceed 30% of the issued share capital from time to time. The number of shares in respect of which options may be granted to each eligible participants in any one year is not permitted to exceed 1% of the shares of the Company in issue from time to time.

The Company has not granted any option under the Scheme since its adoption.

29. ACQUISITION OF A BUSINESS

Acquisition in 2011

The Group held 31.95% equity interest in an associate, Kaleido, as at 31st December, 2010. Pursuant to an agreement entered between the Company and other Shareholders of Kaleido, the Company acquired a further 38.95% equity interest in Kaleido for a consideration of RMB43,839,000. The transaction was completed on 31st March, 2011 and Kaleido is treated as a subsidiary of the Company from that date.

Kaleido is a private company incorporated in Denmark and engaged in wafer-level glass molding. The goodwill of RMB8,705,000 arising from the acquisition is attributable to the future economic benefits that are expected to accrue to the Group from operating synergies and revenue growth.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

29. ACQUISITION OF A BUSINESS (CONTINUED)

Acquisition in 2011 (continued)

The following table summarises the consideration paid for Kaleido and the amounts of the assets acquired and liabilities assumed recognised at the acquisition date.

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----- Start of picture text -----

Fair values
RMB’000
----- End of picture text -----

The assets acquired and liabilities recognised at the date of acquisition
were as follows:
Property, plant and equipment
Intangible assets
Inventories
Trade and other receivables
Bank balances and cash
Trade and other payables
Deferred tax liabilities
Goodwill arising on acquisition:
Consideration
Add: Non-controlling interest
Fair value of previously held interest in Kaleido
Less: Net assets acquired
Goodwill arising on acquisition
Net cash outflow arising on acquisition:
Cash consideration
Cash and cash equivalents acquired
Net outflow of cash and cash equivalents arising on acquisition

4,214
74,623
380
15,479
4,424
(2,912)
(16,352)
79,856
43,839
23,238
21,484
(79,856)
8,705
(43,839)
4,424
(39,415)

The non-controlling interest in Kaleido recognised at acquisition date was determined with reference to the proportionate share of the acquiree’s net assets at the acquisition date.

None of the goodwill arising on this acquisition is expected to be deductible for tax purposes.

The intangible assets represent technical know-how in relation to wafer-level glass molding which is used to enhance the Group’s current products. The fair value is estimated by an independent and professionally qualified valuer and calculated using relief from royalty method based on the cash flow projection, royalty rate and discount rate adopted by the management.

The trade and other receivables acquired amounting to RMB15,479,000 represents the fair value and the gross contractual amount. The best estimate at the date of acquisition is that all receivables will be collected.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

29. ACQUISITION OF A BUSINESS (CONTINUED)

Acquisition in 2011 (continued)

Acquisition-related costs amounting to RMB158,000 have been excluded from the cost of acquisition and have been recognised directly as an expense in the period and included in the administrative expenses.

The fair value of the previously held interest held by the Group was estimated by an independent and professionally qualified valuer. The fair value estimates are calculated using discounted cash flow method based on cash flow projection, growth rate and discount rate adopted by the management. The Group recognised the non-controlling interests at the proportionate share of net assets of Kaleido.

The Group recognised a gain of RMB111,000 as a result of the remeasurement of previously held interest. The gain was included in other income for the period ended 30th June, 2011.

Kaleido contributed a revenue of RMB7,338,000 and a loss of RMB664,000 to the Group since the step acquisition.

Had Kaleido been consolidated from 1st January, 2011, the Group’s consolidated statement of comprehensive income would have shown a revenue of RMB4,061,634,000 and the profit attributable to the equity holders of the Company would not be materially different.

Acquisition in 2010

On 1st October, 2010, the Group acquired a 96.4% equity interest in AAC Japan from independent third parties. Total consideration paid for the acquisition was RMB12,289,000. AAC Japan is engaged in design and manufacture of compact lens modules. The acquisition was made to expand the optical products operation and support the growth strategies of the Group. The acquisition has been accounted for using the purchase method.

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----- Start of picture text -----

RMB’000
----- End of picture text -----

Consideration transferred: Cash Contingent consideration (note 24)	2,467 9,822 12,289

Pursuant to the sales and purchase agreement the consideration payable is contingent on the sales volume of AAC Japan for a period of 14 months from the acquisition date. The target sales volume is divided into several stages and the contingent consideration is paid in cash to the sellers at each stage. The contingent consideration was determined with reference to future sales of AAC Japan based on the sales forecast for 14 months. The Directors estimate that the amount of contingent consideration payable will be between RMB9,822,000 and RMB10,278,000.

Acquisition-related costs amounting to RMB248,000 have been excluded from the consideration transferred and have been recognised as an expense for the year ended 31st December, 2010 within administrative expenses.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

29. ACQUISITION OF A BUSINESS (CONTINUED)

Acquisition in 2010 (continued)

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----- Start of picture text -----

Fair values
RMB’000
----- End of picture text -----

The assets acquired and liabilities recognised at the date of acquisition
were as follows:
Property, plant and equipment
Intangible assets
Inventories
Trade and other receivables
Bank balances and cash
Trade and other payables
Bank loans
Goodwill arising on acquisition:
Consideration
Add: Non-controlling interest
Less: Net assets acquired
Goodwill arising on acquisition
Net cash outflow arising on acquisition:
Cash consideration
Cash and cash equivalents acquired
Net outflow of cash and cash equivalents arising on acquisition

1,309
23,083
12
1,998
61
(5,536)
(9,856)
11,071
12,289
130
(11,071)
1,348
(2,467)
61
(2,406)

The goodwill is attributable to the anticipated profitability arising from the distribution of the Group’s products in the new markets and the future operating synergies from the combination.

The goodwill arising on the acquisition is expected to be non-deductible for tax purpose.

AAC Japan contributed a revenue of RMB674,000 and a loss of RMB2,324,000 for the period from the date of acquisition to 31st December, 2010.

If the acquisition had been completed on 1st January, 2010, based on the unaudited management accounts of the subsidiary, the impact on the Group’s revenue and profit for the year ended 31st December, 2010 would have been insignificant.

Non-controlling interests:

The non-controlling interests in AAC Japan recognised at the acquisition date was determined with reference to the proportionate share of the acquiree’s net assets of the acquisition date and amounted to RMB130,000.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

30. OPERATING LEASE COMMITMENTS

At the end of the reporting period, the Group was committed to make the following future minimum lease payments under non-cancellable operating leases which fall due as follows:

		Equipment	Equipment	Equipment		Building premises	Building premises	Building premises
		2011 RMB’000		2010 RMB’000		2011 RMB’000		2010 RMB’000
Within one year In the second to fifth year inclusive		108 – 108		– – –		16,203 12,776 28,979		17,728 28,654 46,382

Leases are negotiated and rentals are fixed for a lease term of 3 to 4 years.

31. CAPITAL COMMITMENTS

		2011 RMB’000		2010 RMB’000
Capital expenditure contracted for but not provided in the consolidated financial statements in respect of acquisition of property, plant and equipment		188,521		115,309

32. RETIREMENT BENEFITS SCHEME

The Group operates a Mandatory Provident Fund Scheme for all qualifying employees in Hong Kong. The assets of the scheme are held separately from those of the Group in funds under the control of trustees. The Group contributes 5% of relevant payroll costs to the scheme, which contribution is matched by employees but subject to a maximum amount of HK$1,000 per month for each employee.

The employees of the Group’s PRC subsidiaries are members of a state-managed retirement benefits scheme operated by the PRC government. The subsidiaries are required to contribute a certain percentage of their payroll to the retirement benefits scheme to fund the benefits. The only obligations of the Group with respect to the retirement benefits scheme is to make the required contributions under the scheme.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

33. RELATED PARTY TRANSACTIONS

In addition to the related party transactions disclosed elsewhere in the consolidated financial statements, during the year, the Group had the following significant transactions with related parties:

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----- Start of picture text -----

Relationship of related parties Nature of transactions 2011 2010
RMB’000 RMB’000
----- End of picture text -----

	2011 RMB’000	2011 RMB’000	2011 RMB’000	2011 RMB’000
Companies controlled by close family members of the Directors of the Company Purchase of raw materials Property rentals paid Sales of raw materials Purchase of patent Purchase of plant and machinery Close family members of the Directors of the Company Property rentals paid Substantial Shareholders Property rentals paid		51,988 7,037 76 27,628 22,857 3,336 533		48,437 6,047 1,862 – – 2,514 560

During the year, companies controlled by close family members of a Director of the Company, injected RMB38,596,000 into a subsidiary of the Group. The Group’s equity interest in the subsidiary was diluted from 100% to 80.42%.

Emoluments paid to the key management personnel of the Company which represents the executive Directors of the Company and the five highest paid individuals, are set out in note 9.

Balances with related parties are disclosed in note 21 to the consolidated financial statements.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

34. PRINCIPAL SUBSIDIARIES

Details of the Company’s principal subsidiaries, all of which are wholly-owned subsidiaries of the Group as at 31st December, 2010 and 31st December, 2011, are as follows:

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----- Start of picture text -----

Nominal value
Country of of issued and
establishment/ fully paid share/
Name of subsidiary operations registered capital Principal activities
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瑞聲聲學科技（常州）有限公司	PRC	Registered capital	Manufacture and sales of
AAC Acoustic Technologies		– US$8,000,000	acoustic products, research
(Changzhou) Co., Ltd. (note a)			and development
AAC Acoustic Technologies Limited	Hong Kong	Ordinary shares	Sales of acoustic related products
		– HK$10,000
AAC Technologies Pte. Ltd.	Singapore	Shares	Sale of acoustic related products
		– SGD500,000
瑞聲聲學科技（深圳）有限公司	PRC	Registered capital	Manufacture and sales of
AAC Acoustic Technologies		– US$33,000,000	acoustic products, research
(Shenzhen) Co., Ltd. (note b)			and development
瑞聲科技（沭陽）有限公司	PRC	Registered capital	Manufacture and sales of
AAC Technologies (Shuyang) Co., Ltd.		– US$9,000,000	precision components for
(note c)			acoustic products, research
			and development
瑞聲光電科技（常州）有限公司	PRC	Registered capital	Manufacture and sales of digital
AAC Microtech (Changzhou) Co., Ltd.		– US$72,800,000	cameras and its accessories,
(note d)			electronic components, research
			and development
常州美歐電子有限公司	PRC	Registered capital	Manufacture and sales of
American Audio Components		– US$23,000,000	precision components and
(Changzhou) Co., Ltd. (note e)			acoustic products, research
			and development
瑞聲精密制造科技（常州）有限公司	PRC	Registered capital	Manufacture and sales of tooling
AAC Module Technologies		– US$49,800,000	and precision components for
(Changzhou) Co., Ltd. (note f)			acoustic products
常州泰瑞美電鍍科技有限公司	PRC	Registered capital	Provision of electroplating service
Changzhou Tairuimei Electroplating		– RMB69,000,000
Technology Co., Ltd. (note g)
YEC Electronics Limited	Hong Kong	Ordinary shares	Sales of acoustic related products
		– HK$10,000

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st December, 2011

34. PRINCIPAL SUBSIDIARIES (CONTINUED)

Notes:

(a) Wholly-owned foreign enterprise for a term of 50 years commencing 28th September, 2003.
(b) Wholly-owned foreign enterprise for a term of 20 years commencing 12th January, 2004.
(c) Wholly-owned foreign enterprise for a term of 20 years commencing 8th November, 2006.
(d) Wholly-owned foreign enterprise for a term of 50 years commencing 13th April, 2006.
(e) Wholly-owned foreign enterprise for a term of 20 years commencing 28th January, 2000.
(f) Wholly-owned foreign enterprise for a term of 20 years commencing 8th May, 2007.
(g) Wholly-owned foreign enterprise for a term of 20 years commencing 11th April, 2005.

The above table lists the subsidiaries of the Company which, in the opinion of the Directors, principally affect the results or assets of the Group. To give details of other subsidiaries would, in the opinion of the Directors, results in particulars of excessive length.

None of the subsidiaries had issued any debt securities at the end of the year.

35. STATEMENT OF FINANCIAL POSITION OF THE COMPANY

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----- Start of picture text -----

2011 2010
NOTE RMB’000 RMB’000
----- End of picture text -----

	2011 RMB’000	2011 RMB’000	2011 RMB’000	2011 RMB’000
Non-current assets Interests in subsidiaries Current assets Other receivables Amounts due from subsidiaries Bank balances and cash Current liabilities Other payables Amounts due to subsidiaries Net current assets Net assets Capital and reserves Share capital 27 Reserves		1,171,857 86 659,885 2,346 662,317 1,724 576,368 578,092 84,225 1,256,082 99,718 1,156,364 1,256,082		61,857 89 715,593 5,374 721,056 3,517 172,152 175,669 545,387 607,244 99,718 507,526 607,244

FINANCIAL SUMMARY

		Year ended 31st December,	Year ended 31st December,	Year ended 31st December,
	2007 RMB’000	2008 RMB’000	2009 RMB’000	2010 RMB’000	2011 RMB’000
RESULTS Revenue Profit before taxation Taxation Profit for the year Attributable to: Owners of the Company Non-controlling interests	1,952,212 597,978 (49,936) 548,042 551,133 (3,091) 548,042	2,256,022 616,241 (25,638) 590,603 590,434 169 590,603	2,203,143 676,474 (66,674) 609,800 614,957 (5,157) 609,800	3,349,020 1,099,138 (111,661) 987,477 986,730 747 987,477	4,059,687 1,141,559 (108,626) 1,032,933 1,036,192 (3,259) 1,032,933

		As at 31st December,
	2007 RMB’000	2008 RMB’000	2009 RMB’000	2010 RMB’000	2011 RMB’000
ASSETS AND LIABILITIES Total assets Total liabilities Net assets Attributable to owners of the Company Non-controlling interests	3,211,748 (623,773) 2,587,975 2,577,336 10,639 2,587,975	3,704,217 (589,014) 3,115,203 3,107,768 7,435 3,115,203	4,253,666 (718,909) 3,534,757 3,534,376 381 3,534,757	5,583,819 (1,407,928) 4,175,891 4,174,545 1,346 4,175,891	6,714,226 (1,902,804) 4,811,422 4,750,070 61,352 4,811,422

AI assistant

AAC Technologies Holdings Inc. — Annual Report 2011

50345_rns_2012-04-13_a1e208ea-6a89-46e8-91af-e5a255b01fa2.pdf

CONTENTS

CORPORATE INFORMATION

DIRECTORS

Executive Directors

REGISTERED OFFICE

PLACE OF BUSINESS IN HONG KONG

Non-executive Director

Independent Non-executive Directors

COMPANY SECRETARY

AUDIT COMMITTEE

REMUNERATION COMMITTEE

NOMINATION COMMITTEE

AUTHORIZED REPRESENTATIVES

AUDITOR

CAYMAN ISLANDS PRINCIPAL SHARE REGISTRAR AND TRANSFER OFFICE

HONG KONG BRANCH SHARE

REGISTRAR AND TRANSFER OFFICE

PRINCIPAL BANKERS

STOCK CODE

WEBSITE

CHAIRMAN’S STATEMENT

Dear Shareholders,

CHAIRMAN’S STATEMENT

OVERVIEW

MARKET REVIEW

FINANCIAL REVIEW

MANAGEMENT DISCUSSION AND ANALYSIS

GEARING RATIO AND INDEBTEDNESS

LIQUIDITY, FINANCIAL RESOURCES AND CAPITAL STRUCTURE

FOREIGN EXCHANGE

CHARGES ON GROUP ASSETS

ACQUISITION OF A SUBSIDIARY

MANAGEMENT DISCUSSION AND ANALYSIS

EMPLOYEE INFORMATION

PROSPECTS

DIVIDENDS

BIOGRAPHIES OF DIRECTORS AND SENIOR MANAGEMENT

EXECUTIVE DIRECTOR

BIOGRAPHIES OF DIRECTORS AND SENIOR MANAGEMENT

Note:

BIOGRAPHIES OF DIRECTORS AND SENIOR MANAGEMENT

NON-EXECUTIVE DIRECTOR

BIOGRAPHIES OF DIRECTORS AND SENIOR MANAGEMENT

Note:

INDEPENDENT NON-EXECUTIVE DIRECTORS

BIOGRAPHIES OF DIRECTORS AND SENIOR MANAGEMENT

BIOGRAPHIES OF DIRECTORS AND SENIOR MANAGEMENT

BIOGRAPHIES OF DIRECTORS AND SENIOR MANAGEMENT

BIOGRAPHIES OF DIRECTORS AND SENIOR MANAGEMENT

SENIOR MANAGEMENT

DIRECTORS’ REPORT

CHANGE OF COMPANY NAME

PRINCIPAL ACTIVITIES

RESULTS AND DIVIDEND

PROPERTY, PLANT AND EQUIPMENT

DISTRIBUTABLE RESERVES

PRE-EMPTIVE RIGHTS

DIRECTORS’ REPORT

DIRECTORS AND SERVICE CONTRACTS

Executive Directors:

Non-executive Director:

Independent non-executive Directors:

DIRECTORS’ REPORT

DIRECTORS’ AND CHIEF EXECUTIVE’S INTEREST IN SHARES AND UNDERLYING SHARES AND DEBENTURES

DIRECTORS’ REPORT

SHARE OPTION SCHEME

ARRANGEMENTS TO PURCHASE SHARES OR DEBENTURES

DIRECTORS’ REPORT

CONNECTED TRANSACTIONS

CONTINUING CONNECTED TRANSACTIONS

DIRECTORS’ REPORT

DIRECTORS’ REPORT

DIRECTORS’ REPORT

SUBSTANTIAL SHAREHOLDERS

DIRECTORS’ REPORT

DIRECTORS’ REPORT

EMOLUMENT POLICY

AAC Technologies Holdings Inc. Annual Report 2011