THIS SUPPLEMENTAL CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

If you are in any doubt as to any aspect of this supplemental circular or as to the action to be taken, you should consult your licensed securities dealer, bank manager, solicitor, professional accountant or other professional adviser.

If you have sold or transferred all your shares in China Eagle Group Company Limited, you should at once hand this supplemental circular to the purchaser or to the bank, licensed securities dealer or other agent through whom the sale or transfer was effected for transmission to the purchaser or transferee.

The Stock Exchange of Hong Kong Limited takes no responsibility for the contents of this supplemental circular, makes no representation as to its accuracy or completeness and expressly disclaims any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this supplemental circular.

==> picture [53 x 53] intentionally omitted <==

CHINA EAGLE GROUP COMPANY LIMITED

(incorporated in Bermuda with limited liability)

Stock Code: 493

SUPPLEMENTAL CIRCULAR TO THE CIRCULAR TO SHAREHOLDERS DATED 5 JULY 2004 IN RESPECT OF VERY SUBSTANTIAL ACQUISITION RELATING TO

==> picture [159 x 41] intentionally omitted <==

(GOME APPLIANCE CO., LTD.) CONNECTED TRANSACTIONS CAPITAL REORGANISATION PROPOSED CHANGE OF COMPANY NAME AND PROPOSED CHANGE OF BOARD LOT SIZE

Joint financial advisers to the Company

Independent financial adviser to the Independent Board Committee and the Independent Shareholders

SOMERLEY LIMITED

This supplemental circular should be read together with the circular to shareholders of the Company dated 5 July 2004 (the “Circular”), of which this supplemental circular forms part. A supplemental letter from the Independent Board Committee containing its recommendations in respect of the Acquisition and the Continuing Connected Transactions to the Independent Shareholders is set out on page 4 of this supplemental circular, which should be read together with the letter from the Independent Board Committee as set out on pages 64 to 65 of the Circular. A supplemental letter from Somerley, the independent financial adviser, containing its advice to the Independent Board Committee and the Independent Shareholders is set out on page 5 of this supplemental circular, which should be read together with the letter from Somerley as set out on pages 66 to 113 of the Circular.

A notice convening the Special General Meeting to be held at JW Marriott Ballroom — Queensway & Victoria, Level 3, JW Marriott Hotel Hong Kong, Pacific Place, 88 Queensway, Hong Kong on Wednesday, 28 July 2004 at 9:00 a.m. was set out on pages N-1 to N-5 of the Circular. Whether or not you are able to attend the Special General Meeting, please complete and return the form of proxy sent to you together with the Circular in accordance with the instructions printed thereon and return it to the principal place of business of the Company in Hong Kong, Unit 6101, 61st Floor, The Center, 99 Queen’s Road Central, Hong Kong as soon as possible and in any event, not less than 48 hours before the time appointed for holding the Special General Meeting or any adjourned meeting. Completion and return of the form of proxy will not preclude you from attending and voting in person at the Special General Meeting or any adjourned meeting should you so wish.

* for identification purpose only

14 July 2004

			Page
Supplemental	letter	from the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Supplemental	letter	from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . .	4
Supplemental	letter	from Somerley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5
Appendix I	—	Accountants’ report of the Target Group for the three years ended
		31 December 2003 and the five months ended 31 May 2004 . . . . . .	6
Appendix II	—	Pro forma balance sheet of the Enlarged Group . . . . . . . . . . . . . . . . .	40
Appendix III	—	General information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	47

— i —

SUPPLEMENTAL LETTER FROM THE BOARD

CHINA EAGLE GROUP COMPANY LIMITED

(incorporated in Bermuda with limited liability)

Stock code: 493

Executive Directors:

Wong Kwong Yu (Chairman) Du Juan Lam Pang Ng Kin Wah

Principal place of business in Hong Kong: Unit 6101, 61st Floor, The Center 99 Queen’s Road Central Hong Kong

Independent non-executive Directors:

Michael Sze Tsai Ping Chan Yuk Sang Chen Huai

Registered office:

Canon’s Court 22 Victoria Street Hamilton HM12 Bermuda

14 July 2004

To the Shareholders

Dear Sir/Madam

SUPPLEMENTAL CIRCULAR TO THE CIRCULAR TO SHAREHOLDERS DATED 5 JULY 2004 RELATING TO VERY SUBSTANTIAL ACQUISITION RELATING TO

(GOME APPLIANCE CO., LTD.) CONNECTED TRANSACTIONS CAPITAL REORGANISATION PROPOSED CHANGE OF COMPANY NAME AND

PROPOSED CHANGE OF BOARD LOT SIZE

INTRODUCTION

This supplemental circular should be read together with the circular of the Company to the Shareholders dated 5 July 2004 (the “Circular”), of which this supplemental circular forms part. Terms used herein shall have the same meanings as those defined in the Circular, unless the context otherwise requires.

* for identification purpose only

— 1 —

SUPPLEMENTAL LETTER FROM THE BOARD

During the due diligence process undertaken by the Company on the Target Group, the Vendor provided the Company with the audited financial information of the Target Group for the five months ended 31 May 2004, the text of which is reproduced together with the report of the independent auditors, Ernst & Young, in Appendix I to this supplemental circular.

As set out in the “Letter from the Board” in the Circular, the offering circular in connection with the Placing will contain factual information in relation to the Enlarged Group. As this supplemental circular forms part of the Circular, the Circular and this supplemental circular, with the exclusion of the “Letter from Somerley” and the “Supplemental letter from Somerley”, will form the basis of the offering circular to be issued by the Vendor in connection with the Placing in the international markets after Completion, subject to the passing of resolution no. 3 as set out in the notice of the Special General Meeting. By approving the said resolution, the Independent Shareholders would have given consent to use the Circular, this supplemental circular and the information contained therein as a basis of the offering of circular(s) issued in connection with the proposed Placing(s).

The purpose of this supplemental circular is:

(a) to provide you with additional information on the Acquisition and the Connected Transactions, in particular, the audited financial information of the Target Group for the five months ended 31 May 2004 and the pro forma balance sheet of the Enlarged Group;
(b) to set out the advice of Somerley to the Independent Board Committee and the Independent Shareholders in respect of the Acquisition and the Continuing Connected Transactions, in view of the additional information set out in this supplemental circular; and
(c) to set out the recommendations of the Independent Board Committee to the Independent Shareholders in respect of the Acquisition and the Continuing Connected Transactions, in view of the additional information set out in this supplemental circular.

RECENT DEVELOPMENTS

Subsequent to the issue of the Circular, the Company has prepared, and the independent auditors have audited, the combined financial information of the Target Group for the five months ended 31 May 2004. During this period, the Target Group’s revenue was approximately RMB5,256.2 million, with gross profit of approximately RMB458.1 million (representing a gross profit margin of approximately 8.7%), other operating income of approximately RMB196.2 million, profit from operating activities of approximately RMB327.4 million and net profit of approximately RMB191.0 million. During the five months ended 31 May 2004, the Target Group continued to have strong growth, which was principally attributable to the expansion of the sales network with 15 additional retail outlets opened during the five months. The Target Group also had strong sales during the PRC labour day holiday period in early May. Further, the Target Group’s continuing implementation of standardised supply contracts, reflected in the Target Group’s gross profit margin during the period.

— 2 —

SUPPLEMENTAL LETTER FROM THE BOARD

The Target Group’s other operating income for the five months ended 31 May 2004 reflected continuing growth in management and purchasing service fees from a related party, as well as increasing amounts from suppliers pursuant to standardised supply contracts. Combined with relatively stable operating expenses, the Target Group’s profit from operating activities continued on a positive trend.

Primarily as a result of the Target Group’s net profit for the five months ended 31 May 2004, the Target Group’s net asset value (total assets minus total liabilities and minority interests) grew to RMB347.4 million as at 31 May 2004.

RECOMMENDATION

Your attention is drawn to the supplemental letter from the Independent Board Committee and the supplemental letter from Somerley, in view of the additional information set out in this supplemental circular and as set out on page 4 and page 5 of this supplemental circular, respectively, which should be read together with the letters of the Independent Board Committee and the letter of Somerley as set out on pages 64 to 65 and pages 66 to 113 of the Circular, respectively.

Your attention is also drawn to the additional information set out in the appendices to this supplemental circular.

By Order of the Board China Eagle Group Company Limited Ng Kin Wah Executive Director

— 3 —

SUPPLEMENTAL LETTER FROM THE INDEPENDENT BOARD COMMITTEE

CHINA EAGLE GROUP COMPANY LIMITED

*

(incorporated in Bermuda with limited liability)

Stock Code: 493

14 July 2004

To the Independent Shareholders

Dear Sir/Madam,

PROPOSED ACQUISITION OF THE ENTIRE ISSUED SHARE CAPITAL OF OCEAN TOWN INT’L INC. —

A VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTIONS, AND CONTINUING CONNECTED TRANSACTIONS

We refer to the supplemental circular of the Company dated 14 July 2004 (the “Supplemental Circular”), of which this letter forms part. Terms defined in the circular of the Company dated 5 July 2004 (the “Circular”) shall have the same meanings herein unless the context otherwise requires. This supplemental letter from the Independent Board Committee and the supplemental letter from Somerley set out on page 5 of this supplemental circular should be read together with the letter of the Independent Board Committee and the letter from Somerley as set out on pages 64 to 65 and pages 66 to 113 of the Circular, respectively.

We wish to draw your attention to the “Supplemental letter from the Board” set out on pages 1 to 3 of the Supplemental Circular, which contains, inter alia, additional information of the Acquisition and the Connected Transactions, as well as the supplemental letter from Somerley set out on page 5 of the Supplemental Circular which contains its advice in respect of the terms of the Acquisition and the Continuing Connected Transactions, in view of the additional information set out in the Supplemental Circular.

Having taken into account the advice of Somerley as set out in the Supplemental Circular, we confirm that our advice and recommendations to the Independent Shareholders contained in the Circular in respect of the Acquisition (including the extension of time for the repayment of the Beijing Gome Debt and the Assistance) and the Continuing Connected Transactions remain unchanged.

Yours faithfully,

For and on behalf of

Independent Board Committee MICHAEL SZE TSAI PING CHAN YUK SANG CHEN HUAI

Independent non-executive Directors

* for identification purposes only

— 4 —

SUPPLEMENTAL LETTER FROM SOMERLEY

The following is the full text of the supplemental letter of advice to the Independent Board Committee and the Independent Shareholders from Somerley, the independent financial adviser, dated 14 July 2004 prepared for incorporation in this supplemental circular.

Somerley Limited Suite 2201, 22nd Floor Two International Finance Centre 8 Finance Street Central Hong Kong 14 July 2004

To the Independent Board Committee and the Independent Shareholders

PROPOSED ACQUISITION OF THE ENTIRE ISSUED SHARE CAPITAL OF OCEAN TOWN INT’L INC. — A VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTIONS, AND CONTINUING CONNECTED TRANSACTIONS

Dear Sirs,

We refer to our letter of advice dated 5 July 2004 in respect of the terms of the Acquisition (including the extension of time for the repayment of the Beijing Gome Debt and the Assistance) and the Continuing Connected Transactions contained on pages 66 to 113 of the Circular. Subsequent to the issue of our letter of advice on 5 July 2004, the Company was provided by the Vendor with the audited financial statements of the Target Group for the five months ended 31 May 2004, the text of which is reproduced together with the report of the independent auditors, Ernst & Young, in Appendix I to the supplemental circular to shareholders of China Eagle Group Company Limited dated 14 July 2004 (the “Supplemental Circular”), of which this supplemental letter forms part. Unless otherwise defined, terms used in this letter have the same meanings as defined in our letter of advice dated 5 July 2004.

Having reviewed the additional information on the Acquisition and the Continuing Connected Transactions contained in the Supplemental Circular, in particular, the audited financial statements of the Target Group for the five months ended 31 May 2004, we confirm that our advice and recommendations to the Independent Board Committee and Independent Shareholders contained in our letter of advice in the Circular in respect of the Acquisition (including the extension of time for the repayment of the Beijing Gome Debt and the Assistance) and the Continuing Connected Transactions remain unchanged.

Yours faithfully, for and on behalf of

SOMERLEY LIMITED Mei H. Leung Managing Director

— 5 —

APPENDIX I ACCOUNTANTS’ REPORT OF THE TARGET GROUP FOR THE THREE YEARS ENDED 31 DECEMBER 2003 AND THE FIVE MONTHS ENDED 31 MAY 2004

The following is the text of the accountants’ report for the three years ended 31 December 2003 and the five months ended 31 May 2004 prepared for inclusion in this supplemental circular from the independent reporting accountants of Ocean Town, Ernst & Young, certified public accountants, Hong Kong.

15th Floor Hutchison House 10 Harcourt Road Central Hong Kong

14 July 2004

The Directors Ocean Town Int’l Inc. China Eagle Group Company Limited

Dear Sirs,

We set out below our report on the financial information regarding Ocean Town Int’l Inc. (the “Company”) and its subsidiaries (hereinafter collectively referred to as the “Group”) for each of the three years ended 31 December 2001, 2002 and 2003 and the five months ended 31 May 2004 (the “Relevant Periods”), prepared on the basis set out in Section 1 below, for inclusion in the supplemental circular of China Eagle Group Company Limited (“China Eagle”) dated 14 July 2004 (the “Circular”) in connection with the proposed acquisition of the entire issued share capital of the Company by Eagle Decade Investments Limited (the “Purchaser”), a wholly-owned subsidiary of China Eagle, pursuant to the Acquisition Agreement dated 3 June 2004 entered into between Gome Holdings Limited (the “Vendor”), Mr. Wong Kwong Yu (“Mr. Wong”), the ultimate shareholder of the Company and Vendor, and the Purchaser.

The Company was incorporated in the British Virgin Islands on 28 December 2001 with limited liability and has not carried out any business since the date of its incorporation other than acting as the holding company of Gome Appliance Co., Ltd. (“Gome Appliance”), a company registered in the People’s Republic of China (the “PRC”) on 2 April 2003 and beneficially owned by Mr. Wong, pursuant to the Reorganisation as defined below.

The Group is engaged in the retailing of electrical appliances and consumer electronic products in designated cities within the PRC (the “Relevant Business”), including Beijing, Tianjin, Langfang, Chongqing, Chengdu, Zigong, Xian, Kunming, Shenzhen, Fuzhou, Guangzhou, Wuhan, Shenyang, Jinan, Zibo, Qingdao, Weifang, Foshan, Dongguan, Huizhou, Fuqing and Zhongshan. The Relevant Business was previously operated by 19 companies registered in the PRC (the “Relevant Companies”),

— 6 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP FOR THE THREE YEARS ENDED 31 DECEMBER 2003 AND THE FIVE MONTHS ENDED 31 MAY 2004

APPENDIX I

which are beneficially owned by Mr. Wong. Pursuant to a group reorganisation (the “Reorganisation”), during the period from 2 April 2003 to 6 April 2004, the following were transferred to Gome Appliance:

1) all the relevant assets, liabilities and the Relevant Business in Beijing owned by Beijing Gome Electrical Appliance Co., Ltd. (“Beijing Gome”), one of the Relevant Companies, excluding certain assets and liabilities set out in Section 1 below; and
2) the entire equity interests in each of the remaining 18 Relevant Companies.

The above transfers were settled by total cash considerations amounting to RMB475 million and such considerations were determined based on net asset values being transferred to Gome Appliance as at the respective transfer dates.

In addition to the above, pursuant to the Reorganisation, with effect from 20 April 2004, a 65% equity interest in Gome Appliance was transferred to the Company with a consideration of RMB241 million, which was determined based on the net asset value of Gome Appliance and its subsidiaries as at the transfer date. The Company thereby became the holding company of the companies now comprising the Group set out in Section 1 below. The purchase price was satisfied by a cash consideration of RMB241 million. As Mr. Wong controlled the Company, Gome Appliance and the Relevant Companies before and after the completion of the Reorganisation, the Reorganisation has been accounted for as a reorganisation of entities under common control in a manner similar to a pooling of interests. Accordingly, the operating results of the Relevant Companies in respect of the Relevant Business for the Relevant Periods and the relevant assets and liabilities thereof as at 31 December 2001, 2002 and 2003 and 31 May 2004 have been included in the combined statement of operations, combined cash flow statements and combined balance sheets of the Group on this basis.

The financial information set out in this report (the “Financial Information”) has been prepared based on the audited combined financial statements of the Group for the three years ended 31 December 2001, 2002 and 2003 and the five months ended 31 May 2004 which have been audited by us, and on the basis set out in Sections 1 below.

For the purpose of this report, we have examined the audited combined financial statements of the Group in accordance with Auditing Standards and Guidelines issued by the Hong Kong Society of Accountants (the “HKSA”) and have carried out such additional procedures as we considered necessary in accordance with the Auditing Guideline “Prospectuses and the Reporting Accountant” issued by HKSA.

The directors of the Company are responsible for preparing the Financial Information. In preparing the Financial Information which gives a true and fair view, it is fundamental that appropriate accounting policies are selected and applied consistently. It is our responsibility to form an independent opinion, based on our examination, on the Financial Information and to report our opinion thereon.

— 7 —

APPENDIX I ACCOUNTANTS’ REPORT OF THE TARGET GROUP FOR THE THREE YEARS ENDED 31 DECEMBER 2003 AND THE FIVE MONTHS ENDED 31 MAY 2004

In our opinion, the Financial Information together with the notes thereto give, for the purpose of this report, a true and fair view of the combined state of affairs of the Group as at 31 December 2001, 2002, 2003 and 31 May 2004 and the combined results and combined cash flows of the Group for each of the Relevant Periods.

1. BASIS OF PRESENTATION

The Reorganisation has been accounted for as a reorganisation of entities under common control in a manner similar to a pooling of interests since Mr. Wong controlled the Company, Gome Appliance and the Relevant Companies before and after the completion of the Reorganisation. Accordingly, the Financial Information includes the results, assets and liabilities and cash flows of Beijing Gome in respect of the Relevant Business and the companies now comprising the Group as if the current Group structure as at 20 April 2004 had been in existence from the beginning of the Relevant Periods or since the respective dates of their registration where this is a shorter period. All material intra-group transactions and balances have been eliminated on combination.

In preparing this Financial Information, all the relevant assets and liabilities, revenue and expenses attributable to the Relevant Business are reflected in the Financial Information. As a result of the segregation and separate management of the Relevant Business of Beijing Gome by the Group beginning 1 April 2004, the transfer date, all the relevant assets and liabilities and Relevant Business in Beijing which were previously owned by Beijing Gome have been transferred to Gome Appliance, with the exception of the following:

Fixed assets Pledged deposits Cash and cash equivalents Other current assets Due from related parties Trade payable and bills payable Other current liabilities Minority interests	RMB’000 2,848 189,178 106,336 28,042 1,196,000 (804,399) (9,467) (247,988) 460,550

The aforesaid assets and liabilities have been retained by Beijing Gome and have been reflected as a distribution to the owner in the combined statements of changes in owner’s equity for the period ended 31 May 2004.

— 8 —

APPENDIX I

ACCOUNTANTS’ REPORT OF THE TARGET GROUP FOR THE THREE YEARS ENDED 31 DECEMBER 2003 AND THE FIVE MONTHS ENDED 31 MAY 2004

As at the date of these Financial Information, the Company had direct or indirect interests in the following subsidiaries, all of which are private companies (or, if registered outside of Hong Kong, have characteristics substantially similar to a private company incorporated in Hong Kong), the particulars of which are set out below:

					Percentage
					of equity
					interest
			Place and date		attributable	Principal
Company name			of registration	Paid-up capital	to the Group	activities
				RMB
Gome -	Appliance Co., Ltd.		Beijing, PRC 2 April 2003	300,000,000	100	Note (i)
Tianjin Gome Electrical			Tianjin, PRC	40,000,000	100	Note (i)
Appliance Co., Ltd.			12 May 1999
(“Tianjin Gome”) -
Langfang Gome Electrical			Langfang, PRC	1,000,000	100	Note (i)
Appliance Co., Ltd.			10 June 2003
(“Langfang Gome”)
- Tianjin Gome Logistics			Tianjin, PRC	18,000,000	100	Note (ii)
Company Limited			11 November 2002
(“Tianjin Logistics”)
-
Chongqing Gome Electrical			Chongqing, PRC	20,000,000	100	Note (i)
Appliance Co., Ltd.			6 October 2000
(“Chongqing Gome”) -

Chengdu Gome Electrical			Chengdu, PRC	20,000,000	100	Note (i)
Appliance Co., Ltd.			17 August 2000
(“Chengdu Gome”)
-
Zigong Gome Electrical			Zigong, PRC	1,000,000	100	Note (i)
Appliance Co., Ltd.			28 December 2003
(“Zigong Gome”) -
Xi’an	Gome Electrical		Xi’an, PRC	10,000,000	100	Note (i)
Appliance Co., Ltd.			7 February 2001
(“Xi’an		Gome”)
-

— 9 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP FOR THE THREE YEARS ENDED 31 DECEMBER 2003 AND THE FIVE MONTHS ENDED 31 MAY 2004

APPENDIX I

					Percentage
					of equity
					interest
			Place and date		attributable	Principal
Company name			of registration	Paid-up capital	to the Group	activities
				RMB
Kunming		Gome Electrical	Kunming, PRC	10,000,000	100	Note (i)
Appliance Co., Ltd.			29 January 2003
(“Kunming Gome”)
- Shenzhen		Gome Electrical	Shenzhen, PRC	10,000,000	100	Note (i)
Appliance Co., Ltd.			26 April 2002
(“Shenzhen Gome”)
- Fuzhou	Gome Electrical		Fuzhou, PRC	10,000,000	100	Note (i)
Appliance Co., Ltd.			11 July 2003
(“Fuzhou		Gome”)
- Guangzhou Gome Electrical			Guangzhou, PRC	10,000,000	100	Note (i)
Appliance Co., Ltd.			9 April 2002
(“Guangzhou Gome”)
- Wuhan Gome Electrical			Wuhan, PRC	10,000,000	100	Note (i)
Appliance Co., Ltd.			28 May 2002
(“Wuhan Gome”)
- Shenyang		Gome Electrical	Shenyang, PRC	10,000,000	100	Note (i)
Appliance Co., Ltd.			24 April 2001
(“Shenyang Gome”)
- Jinan Gome Electrical			Jinan, PRC	10,000,000	100	Note (i)
Appliance Co., Ltd.			30 April 2001
(“Jinan Gome”)
- Zibo Eagle Gome			Zibo, PRC	2,000,000	100	Note (i)
Appliance Co., Ltd.			21 May 2003
(“Zibo Gome”)
-

— 10 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP FOR THE THREE YEARS ENDED 31 DECEMBER 2003 AND THE FIVE MONTHS ENDED 31 MAY 2004

APPENDIX I

			Percentage
			of equity
			interest
	Place and date		attributable	Principal
Company name	of registration	Paid-up capital	to the Group	activities
		RMB
Qingdao Gome Electrical	Qingdao, PRC	10,000,000	100	Note (i)
Appliance Co., Ltd.	25 April 2001
(“Qingdao Gome”)
-
Weifang Gome Electrical	Weifang, PRC	3,000,000	100	Note (i)
Appliance Co., Ltd.	21 April 2003
(“Weifang Gome”)
-
Tianjin Gome Commercial	Tianjin, PRC	3,000,000	100	Note (iii)
Consultancy Company Limited	25 November 2003
(“Tianjin Consultancy”) -

Notes:

(i) The retailing of electrical appliances and consumer electronic products
(ii) The provision of logistic services

(iii) The provision of business management services

2. PRINCIPAL ACCOUNTING POLICIES

The principal accounting policies adopted by the Group in arriving at the Financial Information set out in this report, which are in conformity with the International Financial Reporting Standards (“IFRS”), are set out below. The IFRS comprises standards and interpretations approved by the International Accounting Standards Board, and interpretations issued by its Standing Interpretations Committee.

The Financial Information set out in this report are prepared under the historical cost convention.

Subsidiaries

A subsidiary is a company whose financial and operating policies the Company controls, directly or indirectly, so as to obtain benefits from its activities. Subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group.

— 11 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP FOR THE THREE YEARS ENDED 31 DECEMBER 2003 AND THE FIVE MONTHS ENDED 31 MAY 2004

APPENDIX I

Minority interests represent the interests in the subsidiaries not held by the Group.

Foreign currency transactions

The companies now comprising the Group maintain their books and records in Renminbi (“RMB”). Transactions in foreign currencies are recorded at the applicable exchange rates ruling at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated into RMB at the exchange rates ruling at the balance sheet date. All foreign exchange gains or losses are recorded in the combined statements of operations.

Fixed assets

Fixed assets are stated at cost less accumulated depreciation and any impairment in value.

Depreciation is calculated on a straight-line basis over the estimated useful life of each asset, after taking into account its estimated residual value. The estimated useful lives of property, plant and equipment are as follows:

Categories Estimated useful life

Leasehold improvements 5 years or the remaining term of any non-renewable lease, whichever is the shorter Motor vehicles 5 years Equipment and fixtures 5 years

The carrying values of fixed assets are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. If any such indication exists and where the carrying values exceed the estimated recoverable amounts, the assets or cash-generating units are written down to their recoverable amount. The recoverable amount of fixed assets is the greater of the net selling price and its or the value in use. In assessing the value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. Impairment losses are realisable in the combined statements of operations.

Construction in progress

Construction in progress represents stores and storage facilities under construction, or renovation works in progress and is stated at cost. Cost comprises development and construction expenditure incurred and other direct costs attributable to the development less any accumulated impairment losses. No depreciation is provided on construction in progress. On completion, the relevant assets are transferred to fixed assets at cost less accumulated impairment losses.

— 12 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP FOR THE THREE YEARS ENDED 31 DECEMBER 2003 AND THE FIVE MONTHS ENDED 31 MAY 2004

APPENDIX I

Inventories

Inventories comprise merchandise purchased for resale and are stated at the lower of cost and net realisable value. Cost is determined on the first-in, first-out basis. Net realisable value is based on estimated selling prices less any estimated costs to be incurred to disposal.

Consumables are stated at cost less any impairment losses.

Trade and other receivables

Trade and other receivables are recognised and carried at the original invoice amount less any allowances for any uncollectable amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off when identified.

Cash and cash equivalents

Cash and cash equivalents comprise cash at banks and in hand, and short term deposits with an original maturity of three months or less.

For the purposes of the combined statements of cash flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts.

Provisions

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation when a reliable estimate can be made of the amount of the obligation. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risk specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as an interest expense.

Contingent liabilities and contingent assets

A contingent liability is a possible obligation that arises from past events for which existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Group. It can also be a present obligation arising from past events that is not recognised because it is not probable that an outflow of economic resources will be required, or that the amount of the obligation cannot be measured reliably.

— 13 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP FOR THE THREE YEARS ENDED 31 DECEMBER 2003 AND THE FIVE MONTHS ENDED 31 MAY 2004

APPENDIX I

A contingent liability is not recognised but is disclosed in the notes to the combined Financial Information. When a change in the probability of an outflow occurs so that an outflow is probable, they will then be recognised as a provision.

A contingent asset is a possible asset that arises from past events for which existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain events not wholly within the control of the Group.

Contingent assets are not recognised but are disclosed in the notes to the combined financial information when an inflow of economic benefits is probable. When an inflow is virtually certain, an asset is recognised.

Retirement benefits scheme

Pursuant to the relevant PRC laws and regulations, the Group is required to participate in a retirement benefits scheme organised by the local municipal government whereby the Group is required to contribute a certain percentage of the salaries of its employees to the retirement benefits scheme. The only obligation of the Group with respect to the retirement benefits scheme is to pay the ongoing required contributions. Contributions made to the defined contribution retirement benefits scheme are charged to the combined statements of operations as incurred.

Operating leases

Leases where the lessor retains substantially all the risks and rewards of ownership of the assets are accounted for as operating leases. Operating lease payments are recognised as expenses in the combined statements of operations and are charged thereto on a straight-line basis over the lease terms.

Revenue

Revenue is recognised when it is probable that the economic benefits will flow to the Group and when the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised:

Sales of merchandise

Revenue is recognised when the significant risks and rewards of ownership of the merchandise have passed to the buyer and the amount of revenue can be measured reliably.

Income from suppliers

Income from suppliers comprise promotion income, management fee income, display space leasing fee and product listing fee. Revenue is recognised according to the underlying contract terms and as these services are provided in accordance therewith.

— 14 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP FOR THE THREE YEARS ENDED 31 DECEMBER 2003 AND THE FIVE MONTHS ENDED 31 MAY 2004

APPENDIX I

Management fee income from a related party and contractors for air-conditioner installations

Revenue is recognised as these services are provided.

Royalty income from franchise stores

Revenue is recognised on a time proportion basis over the franchise period.

Interest

Revenue is recognised as the interest accrues (taking into account the effective yield on the relevant asset).

Income tax

PRC corporate income tax (“CIT”) is provided at rates applicable to entities in the PRC on their income for financial reporting purposes, as adjusted for income and expense items which are not assessable or deductible for income tax purposes.

Deferred income tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred income tax liabilities are recognised for all taxable temporary differences:

(i) except where the deferred income tax liability arises from goodwill or the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
(ii) in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, except where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused income tax assets and unused income tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused income tax assets and unused income tax losses can be utilised:

(i) except where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

— 15 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP FOR THE THREE YEARS ENDED 31 DECEMBER 2003 AND THE FIVE MONTHS ENDED 31 MAY 2004

APPENDIX I

(ii) in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred income tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.

The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised.

Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date.

Related parties

Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. Related parties may be individuals or corporate entities.

Dividends

Final dividends proposed by the directors are classified as a separate allocation of retained earnings within the capital and reserves section of the combined balance sheets, until they have been approved by the shareholders in a general meeting. When these dividends have been approved by the shareholders and declared, they are recognised as a liability.

Interim dividends are simultaneously proposed and declared, because the Company’s memorandum and articles of association grant the directors the authority to declare interim dividends. Consequently, interim dividends are recognised immediately as a liability when they are proposed and declared.

Segment information

A business segment is a distinguishable component of the Group that is engaged in providing products or services and is subject to risks and rewards that are different from those of other segments.

For the periods presented, the Group has one operating segment which is engaged in the retailing of electrical appliances and consumer electronic products. All the Group’s operating activities are carried out in the PRC. Accordingly, no further segment analyses are presented.

— 16 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP FOR THE THREE YEARS ENDED 31 DECEMBER 2003 AND THE FIVE MONTHS ENDED 31 MAY 2004

APPENDIX I

3. COMBINED STATEMENTS OF OPERATIONS

The following is a summary of the combined statements of operations the Group for the Relevant Periods, prepared on the basis set out in Section 1 above:

Year ended 31 December 2001 2002 2003 RMB’000 RMB’000 RMB’000 3,872,571 6,619,006 9,346,396 (3,644,424) (6,198,203) (8,671,727)	Year ended 31 December 2001 2002 2003 RMB’000 RMB’000 RMB’000 3,872,571 6,619,006 9,346,396 (3,644,424) (6,198,203) (8,671,727)	Year ended 31 December 2001 2002 2003 RMB’000 RMB’000 RMB’000 3,872,571 6,619,006 9,346,396 (3,644,424) (6,198,203) (8,671,727)	Five months ended 31 May 2004 RMB’000 5,256,155 (4,798,085) 458,070 196,241 (244,957) (59,338) (22,575) 327,441 (226) 7,601 7,375 334,816 (41,012) 293,804 (102,831) 190,973
228,147 25,273 (168,199) (42,813) (8,655) 33,753 — 2,003 2,003 35,756 (10,317) 25,439 (8,904)	420,803 88,286 (303,850) (60,610) (17,081) 127,548 — 4,571 4,571 132,119 (25,673) 106,446 (37,256)	674,669 278,422 (486,776) (91,216) (36,428) 338,671 (325) 13,300 12,975 351,646 (77,073) 274,573 (96,101)	458,070 196,241 (244,957 (59,338 (22,575
			327,441 (226 7,601
			7,375 334,816 (41,012
			293,804 (102,831
16,535	69,190	178,472

— 17 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP FOR THE THREE YEARS ENDED 31 DECEMBER 2003 AND THE FIVE MONTHS ENDED 31 MAY 2004

APPENDIX I

Notes:

(a) Revenue and other operating income

Revenue represents the net invoiced value of goods sold, after allowances for returns and trade discounts.

An analysis of the Group’s total revenue for the Relevant Periods is as follows:

Revenue:

				Five months
		Year ended 31 December		ended 31 May
	2001	2002	2003	2004
	RMB’000	RMB’000	RMB’000	RMB’000
Sale of electrical appliances and consumer
electronic products	3,872,571	6,619,006	9,346,396	5,256,155

Other operating income comprises the following:

Income from suppliers: - Promotion income - Management fee income - Display space leasing fee - Product listing fee Management and purchasing service fees from a related party Management fees for air-conditioner installations Royalty income from franchise stores (note (a) below) Others	Year ended 31 December Five months ended 31 May 2001 2002 2003 2004 RMB’000 RMB’000 RMB’000 RMB’000 15,469 33,539 142,057 90,148 — 9,199 40,355 24,457 — 14,652 24,412 14,816 — — 15,237 15,057 — — — 28,793 5,208 12,472 30,672 11,809 2,145 5,012 5,708 726 2,451 13,412 19,981 10,435 25,273 88,286 278,422 196,241	Year ended 31 December Five months ended 31 May 2001 2002 2003 2004 RMB’000 RMB’000 RMB’000 RMB’000 15,469 33,539 142,057 90,148 — 9,199 40,355 24,457 — 14,652 24,412 14,816 — — 15,237 15,057 — — — 28,793 5,208 12,472 30,672 11,809 2,145 5,012 5,708 726 2,451 13,412 19,981 10,435 25,273 88,286 278,422 196,241
		196,241

Note:

(a) The royalty income represents annual fees received from franchisees. With effect from 1 April 2004, the franchise agreements and arrangements are retained by Beijing Gome and are not transferred to the Group.

— 18 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP FOR THE THREE YEARS ENDED 31 DECEMBER 2003 AND THE FIVE MONTHS ENDED 31 MAY 2004

APPENDIX I

(b) Profit from operating activities

The Group’s profit from operating activities is arrived at after charging:

				Five months
		Year ended 31 December		ended 31 May
	2001	2002	2003	2004
	RMB’000	RMB’000	RMB’000	RMB’000
Cost of inventories recognised as expenses	3,644,424	6,198,203	8,671,727	4,798,085
Depreciation	8,316	8,260	16,813	11,729
Loss on disposal of fixed assets	—	7	3	108
Minimum lease payments under operating
leases in respect of land and buildings	47,126	78,347	132,284	79,873
Staff costs excluding directors’
remuneration (note (d)):
Wages, salaries and bonuses	39,553	72,466	122,805	70,393
Pension costs	4,840	8,247	13,477	7,562
Social welfare and other costs	6,214	11,602	19,958	11,814
	50,607	92,315	156,240	89,769

(c) Interest expense

									Five months
						Year	ended 31 December		ended 31 May
					2001		2002	2003	2004
					RMB’000		RMB’000	RMB’000	RMB’000
Interest	on	a	bank	loan	—		—	325	226

— 19 —

APPENDIX I

ACCOUNTANTS’ REPORT OF THE TARGET GROUP FOR THE THREE YEARS ENDED 31 DECEMBER 2003 AND THE FIVE MONTHS ENDED 31 MAY 2004

(d) Directors’, senior executives’ and supervisors’ emoluments

Details of the directors’ remuneration are as follows:

Fees Other emoluments: Salaries, allowances, bonuses and other benefits Pension costs	Year ended 31 December Five months ended 31 May 2001 2002 2003 2004 RMB’000 RMB’000 RMB’000 RMB’000 — — — — 1,285 1,431 1,312 458 51 52 52 22 1,336 1,483 1,364 480	Year ended 31 December Five months ended 31 May 2001 2002 2003 2004 RMB’000 RMB’000 RMB’000 RMB’000 — — — — 1,285 1,431 1,312 458 51 52 52 22 1,336 1,483 1,364 480
		480

During the Relevant Periods, the Group had no independent non-executive directors.

The number of directors whose remuneration fell within the following band is as follows:

				Five months
		Year ended 31 December		ended 31 May
	2001	2002	2003	2004
	Number of	Number of	Number of	Number of
	directors	directors	directors	directors
RMB nil to RMB1,060,000
(equivalent to HK$1,000,000)	5	5	5	5

There was no arrangement under which a director waived or agreed to waive any remuneration during the Relevant Periods.

The five highest paid individuals in the Group during the Relevant Periods included five directors, four directors, four directors and three directors. Information relating to their emoluments has been disclosed above. The emoluments paid to the remaining non-director, highest-paid individuals during the Relevant Periods, were as follows:

										Five months
							Year	ended 31 December		ended 31 May
						2001		2002	2003	2004
						RMB’000		RMB’000	RMB’000	RMB’000
Salaries,	allowances,	bonuses	and	other	benefits	—		194	235	181
Pension	costs					—		10	10	9
						—		204	245	190

— 20 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP FOR THE THREE YEARS ENDED 31 DECEMBER 2003 AND THE FIVE MONTHS ENDED 31 MAY 2004

APPENDIX I

The remuneration of these remaining highest-paid individuals for each of the Relevant Periods fell within the band of nil to RMB1,060,000 (equivalent to HK$1,000,000).

(e) Retirement benefits scheme

The Group is required to participate in employee pension schemes operated by the relevant local government authorities in the PRC. The PRC government is responsible for the pension liability to these retired employees. The Group and the employers are required to make contributions to the employee pension funds at rates ranging from 18% to 26% of the standard salaries set by the local authorities annually.

The Group’s pension cost contributions for the Relevant Periods amounted to approximately of RMB4,891,000, RMB8,299,000, RMB13,529,000 and RMB7,584,000, respectively.

(f) Income tax

The Group is subject to income tax on an entity basis on profit arising in or derived from the tax jurisdictions in which members of the Group are domiciled and operate. The Group is not liable for income tax in Hong Kong as it does not have assessable income currently sourced from Hong Kong. Under the relevant PRC income tax law, except for certain preferential treatment available to the Relevant Companies, the Relevant Companies are subject to CIT at a rate of 33% on their respective taxable income.

The determination of current and deferred income tax was based on the enacted tax rates.

An analysis of the provision for tax in the combined statements of operations is as follows:

Hong Kong profits tax: Overseas income taxes: PRC corporate income tax: Current income tax Deferred income tax (Section 4 note (b)) Income tax expenses reported in the combined statements of operations	Year ended 31 December Five months ended 31 May 2001 2002 2003 2004 RMB’000 RMB’000 RMB’000 RMB’000 — — — — — — — — 15,836 27,658 69,105 40,876 (5,519) (1,985) 7,968 136 10,317 25,673 77,073 41,012	Year ended 31 December Five months ended 31 May 2001 2002 2003 2004 RMB’000 RMB’000 RMB’000 RMB’000 — — — — — — — — 15,836 27,658 69,105 40,876 (5,519) (1,985) 7,968 136 10,317 25,673 77,073 41,012
		41,012

Pursuant to applicable income tax laws and regulations of the PRC on those enterprises established in the Shenzhen Special Economic Zone, Shenzhen Gome is subject to income tax at a preferential rate of 15%.

Pursuant to applicable income tax laws and regulations of the PRC, newly formed trading enterprises are eligible to apply for income tax exemption for a period of three years, provided that they have fulfilled the prescribed conditions regarding the recruitment of unemployed PRC citizens. Fuzhou Gome was approved by the relevant PRC tax authority to have income tax exemption for 2003, 2004 and 2005.

— 21 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP FOR THE THREE YEARS ENDED 31 DECEMBER 2003 AND THE FIVE MONTHS ENDED 31 MAY 2004

APPENDIX I

Pursuant to applicable income tax laws and regulations of the PRC, newly formed labor-intensive service enterprises are eligible to apply for income tax exemption for a period of three years, provided that they have fulfilled the prescribed conditions regarding the recruitment of unemployed PRC citizens. Tianjin Gome was approved by the relevant PRC tax authority to have an income tax exemption for 2001, 2002 and 2003. Tianjin Logistics was approved by the relevant PRC tax authority to have income tax exemption for the period from 1 September 2003 to 31 August 2006. Tianjin Management was approved by the relevant PRC tax authority to have income tax exemption for the period from 1 December 2003 to 30 November 2006.

Pursuant to applicable income tax laws and regulations of the PRC, newly formed trading enterprises are eligible to apply for income tax exemption of one year. Jinan Gome was approved by the relevant PRC tax authority to have a one year income tax exemption for 2002. Shenzhen Gome, Guangzhou Gome and Wuhan Gome were approved by the relevant PRC tax authority to have a one year income tax exemption for 2003.

Pursuant to applicable income tax laws and regulations of the PRC, enterprises that carried out encouraged businesses in the western district of the PRC are eligible to apply for a preferential income tax rate of 15% on a year-by-year basis, provided that they have fulfilled the prescribed conditions. Chongqing Gome and Xian Gome were both approved to enjoy a preferential income rate of 15% for 2002. Chengdu Gome was approved to enjoy a preferential income rate of 15% for 2003.

Pursuant to applicable income tax laws and regulations of the PRC, eligible newly formed enterprises in Yunnan Province with registered capital in excess of RMB5 million and with 51% of its contributed capital sourced outside Yunnan Province are eligible to apply for income tax exemption for a period of three years and a 50% reduction in the next two years. Pursuant to which, Kunming Gome was exempted from CIT for the three years ending 31 December 2005, and will be entitled to a 50% reduction in income tax rate for the two years ending 31 December 2007.

A reconciliation of the income tax expense applicable to profit from operating activities before income tax and minority interests at the statutory income tax rate to the income tax expense at the Group’s effective income tax rate, is as follows:

				Five months
	Year	ended 31 December		ended 31 May
	2001	2002	2003	2004
	RMB’000	RMB’000	RMB’000	RMB’000
Profit before income tax and minority interests	35,756	132,119	351,646	334,816
Income tax at the statutory income tax rate of 33%	11,799	43,599	116,043	110,489
- Effect of preferential income tax rate	(5,920)	(19,021)	(41,639)	(76,168)
- Expenditure not deductible for income tax	4,438	1,095	2,669	6,691
	10,317	25,673	77,073	41,012

(g) Minority interests

The balance represented the 35% equity interest in Gome Appliance which beneficially owned by Mr. Wong.

— 22 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP FOR THE THREE YEARS ENDED 31 DECEMBER 2003 AND THE FIVE MONTHS ENDED 31 MAY 2004

APPENDIX I

(h) Related party transactions

In addition to such transactions and balances which are disclosed elsewhere in these Financial Information, the Group had the following significant transactions with the Parent Group, as defined below and Beijing Xinhengji Property Co., Ltd. (“Beijing Xinhengji”). The Parent Group comprises Beijing Eagle Investment Co., Ltd., Beijing Gome and other companies which are engaged in the retail sales and related operations of electrical appliances and consumer electronic products under the trade mark of “Gome Electrical Appliance” in cities other than the designated cities of the PRC in which the Group operates. The companies comprising the Parent Group are controlled by Mr. Wong. Beijing Xinhengji is owned by the family member of Mr. Wong.

Continuing transactions:

A) Sales to the Parent Group (note (a) below) B) Purchases from the Parent Group (note (a) below) C) Provision of management and purchasing services to the Parent Group (note (b) below) D) Rental expenses and management fee to Beijing Xinhengji (note (c) below)	Year ended 31 December Five months ended 31 May 2001 2002 2003 2004 RMB’000 RMB’000 RMB’000 RMB’000 44,464 95,601 318,939 443,232 6,788 3,013 12,860 465,063 — — — 28,793 — — — 1,410	Year ended 31 December Five months ended 31 May 2001 2002 2003 2004 RMB’000 RMB’000 RMB’000 RMB’000 44,464 95,601 318,939 443,232 6,788 3,013 12,860 465,063 — — — 28,793 — — — 1,410
		465,063
		28,793
		1,410

Notes:

(a) During the Relevant Periods, the sales and purchase transactions entered into between the Group and the Parent Group in respect of the retailing electrical appliances and consumer electronic products were conducted based on the prevailing equivalent item purchase cost from the Group’s third party suppliers.
(b) The Group provides management services to the Parent Group in respect of the retailing of electrical appliances and consumer electronic products in cities other than the designated cities of the PRC in which the Group operates. In addition, the Group negotiates with various suppliers for both the Group and the Parent Group on a centralised basis. The total amount of management service fee and purchasing service fee for the five months ended 31 May 2004 was charged based on 0.75% and 0.9%, respectively, of the total turnover of the Parent Group for the five months ended 31 May 2004, as agreed between the Group and the Parent Group.
(c) During the Relevant Periods, the Group occupied certain properties owned by Beijing Xinhengji at nil consideration. On 20 December 2003, the Group entered a rental agreement with Beijing Xinhengji to lease the properties for a term of two years at an annual rental expenses and management fee of approximately RMB3,384,000. In the opinion of the directors, the rental has been determined with respect to the prevailing market rental of offices within the same distinct.

— 23 —

APPENDIX I

ACCOUNTANTS’ REPORT OF THE TARGET GROUP FOR THE THREE YEARS ENDED 31 DECEMBER 2003 AND THE FIVE MONTHS ENDED 31 MAY 2004

Pursuant to the supplementary agreement for the Reorganisation entered into between the Company, Gome Appliance, Beijing Gome and Mr. Wong, except for liabilities constituting or arising out of or relating to business undertaken by the Group, no other liabilities were assumed by the Group. Beijing Gome and Mr. Wong have also undertaken to indemnify the Company in respect of any loss or damage incurred in connection with or arising from the transfer of the subsidiaries and assets and liabilities to the Group in the Reorganisation. Beijing Gome and Mr. Wong also agreed to indemnify the Company against, among other things, any contingent tax liabilities exist prior to the completion of the Reorganisation and tax liabilities payable in respect of assets transferred to the Group pursuant to the Reorganisation and which were not provided for in the Group’s accounts.

Discontinued transactions:

Discontinued transactions:	Discontinued transactions:

Provision of corporate guarantees from the Parent Group and Beijing Xinhengji in respect of - bills payable - a bank loan	Year ended 31 December Five months ended 31 May 2001 2002 2003 2004 RMB’000 RMB’000 RMB’000 RMB’000 260,500 1,278,570 3,865,240 3,767,170 — — 10,000 10,000

The provision of corporate guarantees is at nil consideration. The Group intends to replace the aforesaid guarantees as soon as practicable after the completion of the proposed acquisition of the entire issued share capital of the Company by the Purchaser.

During the three years ended 31 December 2003 and the five months ended 31 May 2004, the Group issued bills payable aggregating approximately RMB13 million, RMB53 million, RMB127 million and RMB160 million, respectively, to the Parent Group. The bills payable to the Parent Group as at the respective balance sheet dates are set out in Section 4 note (j). The directors are of the opinion that such transactions would not be continued after 1 June 2004.

— 24 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP FOR THE THREE YEARS ENDED 31 DECEMBER 2003 AND THE FIVE MONTHS ENDED 31 MAY 2004

APPENDIX I

4. COMBINED BALANCE SHEETS

A summary of the combined balance sheets of the Group as at the end of each of the Relevant Periods are prepared on the basis set out in Section 1 above and is set out below:

2001 RMB’000 23,108 7,309	31 December 2002 2003 RMB’000 RMB’000 41,092 97,055 9,347 2,379	31 December 2002 2003 RMB’000 RMB’000 41,092 97,055 9,347 2,379	31 May 2004 RMB’000 110,686 1,232
30,417	50,439	99,434 974,880 2,983 — 108,174 2,099,057 1,057,999 360,261 4,603,354 10,000 3,412,607 19,029 309,782 2,119 3,753,537 849,817 949,251 332,238	111,918
333,429 1,355 — 45,038 482,384 142,024 55,079	550,084 9,136 — 87,266 796,402 374,005 260,193		1,129,423 185,382 59,959 125,073 1,088,542 882,304 599,695
1,059,309	2,077,086		4,070,378
— 772,937 2,807 74,379 1,066	— 1,603,547 6,550 171,326 1,119		10,000 3,144,097 33,727 458,848 1,108
851,189	1,782,542		3,647,780
208,120	294,544		422,598
238,537	344,983		534,516
83,488	120,744		187,080
155,049	224,239	617,013 617,013	347,436
155,049	224,239		347,436

— 25 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP FOR THE THREE YEARS ENDED 31 DECEMBER 2003 AND THE FIVE MONTHS ENDED 31 MAY 2004

APPENDIX I

Notes:

(a) Fixed assets

Leasehold improvements RMB’000 Cost: At 1 January 2001 5,495 Additions 13,104 At 31 December 2001 and 1 January 2002 18,599 Additions 8,953 Transferred from construction in progress — Disposals — At 31 December 2002 and 1 January 2003 27,552 Additions 40,121 Transferred from construction in progress — Disposals — At 31 December 2003 and 1 January 2004 67,673 Additions 20,542 Transferred from construction in progress — Disposals — Distribution to the owner upon Reorganisation — At 31 May 2004 88,215	Motor vehicles Equipment and fixtures Construction in progress RMB’000 RMB’000 RMB’000 1,582 2,173 — 4,126 5,024 —	Motor vehicles Equipment and fixtures Construction in progress RMB’000 RMB’000 RMB’000 1,582 2,173 — 4,126 5,024 —	Motor vehicles Equipment and fixtures Construction in progress RMB’000 RMB’000 RMB’000 1,582 2,173 — 4,126 5,024 —	Total RMB’000 9,250 22,254
18,599 8,953 — — 27,552 40,121 — — 67,673 20,542 — — —	5,708 4,453 — — 10,161 2,404 — — 12,565 1,172 — (155) (3,919)	7,197 12,725 58 (12) 19,968 28,747 572 (4) 49,283 6,422 523 (46) —	— 120 (58) — 62 1,507 (572) — 997 180 (523) — —	31,504 26,251 — (12)
				57,743 72,779 — (4)
				130,518 28,316 — (201) (3,919)
88,215	9,663	56,182	654	154,714

— 26 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP FOR THE THREE YEARS ENDED 31 DECEMBER 2003 AND THE FIVE MONTHS ENDED 31 MAY 2004

APPENDIX I

Leasehold improvements RMB’000 Accumulated depreciation: At 1 January 2001 — Provided during the year 6,248 At 31 December 2001 and 1 January 2002 6,248 Provided during the year 5,117 Disposals — At 31 December 2002 and 1 January 2003 11,365 Provided during the year 8,999 Disposals — At 31 December 2003 and 1 January 2004 20,364 Provided during the period 7,233 Disposals — Distribution to the owner upon Reorganisation — At 31 May 2004 27,597 Net book value: At 31 December 2001 12,351 At 31 December 2002 16,187 At 31 December 2003 47,309 At 31 May 2004 60,618	Motor vehicles Equipment and fixtures Construction in progress RMB’000 RMB’000 RMB’000 69 11 — 838 1,230 —	Motor vehicles Equipment and fixtures Construction in progress RMB’000 RMB’000 RMB’000 69 11 — 838 1,230 —	Motor vehicles Equipment and fixtures Construction in progress RMB’000 RMB’000 RMB’000 69 11 — 838 1,230 —	Total RMB’000 80 8,316
6,248 5,117 — 11,365 8,999 — 20,364 7,233 — —	907 969 — 1,876 1,877 — 3,753 763 (79) (1,071)	1,241 2,174 (5) 3,410 5,937 (1) 9,346 3,733 (14) —	— — — — — — — — — —	8,396 8,260 (5)
				16,651 16,813 (1)
				33,463 11,729 (93) (1,071)
27,597 12,351 16,187 47,309 60,618	3,366 4,801 8,285 8,812 6,297	13,065 5,956 16,558 39,937 43,117	— — 62 997 654	44,028
				23,108
				41,092
				97,055
				110,686

— 27 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP FOR THE THREE YEARS ENDED 31 DECEMBER 2003 AND THE FIVE MONTHS ENDED 31 MAY 2004

APPENDIX I

(b) Deferred income tax assets and liabilities

The principal components of the Group’s deferred income tax assets and liabilities at the end of each of the Relevant Periods and the movements in deferred income tax for the Relevant Periods are as follows:

Balance at 1 January 2001 Recognised in the combined statements of operations Balance at 31 December 2001 RMB’000 RMB’000 RMB’000 Deferred income tax assets: Write off of pre-operating expenses 594 (149) 445 Income tax losses 130 6,734 6,864 724 6,585 7,309 Deferred income tax liabilities: Prepaid expenses — (1,066) (1,066 — (1,066) (1,066 724 5,519 6,243 Balance at 1 January 2002 Recognised in the combined statements of operations Balance at 31 December 2002 RMB’000 RMB’000 RMB’000 Deferred income tax assets: Write off of pre-operating expenses 445 2,315 2,760 Income tax losses 6,864 (277) 6,587 7,309 2,038 9,347 Deferred income tax liabilities: Prepaid expenses (1,066) (53) (1,119 (1,066) (53) (1,119 6,243 1,985 8,228	Balance at 1 January 2001 Recognised in the combined statements of operations Balance at 31 December 2001 RMB’000 RMB’000 RMB’000 Deferred income tax assets: Write off of pre-operating expenses 594 (149) 445 Income tax losses 130 6,734 6,864 724 6,585 7,309 Deferred income tax liabilities: Prepaid expenses — (1,066) (1,066 — (1,066) (1,066 724 5,519 6,243 Balance at 1 January 2002 Recognised in the combined statements of operations Balance at 31 December 2002 RMB’000 RMB’000 RMB’000 Deferred income tax assets: Write off of pre-operating expenses 445 2,315 2,760 Income tax losses 6,864 (277) 6,587 7,309 2,038 9,347 Deferred income tax liabilities: Prepaid expenses (1,066) (53) (1,119 (1,066) (53) (1,119 6,243 1,985 8,228	Balance at 1 January 2001 Recognised in the combined statements of operations Balance at 31 December 2001 RMB’000 RMB’000 RMB’000 Deferred income tax assets: Write off of pre-operating expenses 594 (149) 445 Income tax losses 130 6,734 6,864 724 6,585 7,309 Deferred income tax liabilities: Prepaid expenses — (1,066) (1,066 — (1,066) (1,066 724 5,519 6,243 Balance at 1 January 2002 Recognised in the combined statements of operations Balance at 31 December 2002 RMB’000 RMB’000 RMB’000 Deferred income tax assets: Write off of pre-operating expenses 445 2,315 2,760 Income tax losses 6,864 (277) 6,587 7,309 2,038 9,347 Deferred income tax liabilities: Prepaid expenses (1,066) (53) (1,119 (1,066) (53) (1,119 6,243 1,985 8,228
7,309 (1,066) (1,066)	2,038 (53) (53)	9,347
		(1,119
		(1,119
6,243	1,985	8,228

— 28 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP FOR THE THREE YEARS ENDED 31 DECEMBER 2003 AND THE FIVE MONTHS ENDED 31 MAY 2004

APPENDIX I

Balance at 1 January 2003 Recognised in the combined statements of operations Balance at 31 December 2003 RMB’000 RMB’000 RMB’000 Deferred income tax assets: Write off of pre-operating expenses 2,760 (764) 1,996 Income tax losses 6,587 (6,204) 383 9,347 (6,968) 2,379 Deferred income tax liabilities: Prepaid expenses (1,119) (1,000) (2,119 (1,119) (1,000) (2,119 8,228 (7,968) 260 Balance at 1 January 2004 Recognised in combined statements of operations Balance at 31 May 2004 RMB’000 RMB’000 RMB’000 Deferred income tax assets: Write off of pre-operating expenses 1,996 (764) 1,232 Income tax losses 383 (383) — 2,379 (1,147) 1,232 Deferred income tax liabilities: Prepaid expenses (2,119) 1,011 (1,108 (2,119) 1,011 (1,108 260 (136) 124	Balance at 1 January 2003 Recognised in the combined statements of operations Balance at 31 December 2003 RMB’000 RMB’000 RMB’000 Deferred income tax assets: Write off of pre-operating expenses 2,760 (764) 1,996 Income tax losses 6,587 (6,204) 383 9,347 (6,968) 2,379 Deferred income tax liabilities: Prepaid expenses (1,119) (1,000) (2,119 (1,119) (1,000) (2,119 8,228 (7,968) 260 Balance at 1 January 2004 Recognised in combined statements of operations Balance at 31 May 2004 RMB’000 RMB’000 RMB’000 Deferred income tax assets: Write off of pre-operating expenses 1,996 (764) 1,232 Income tax losses 383 (383) — 2,379 (1,147) 1,232 Deferred income tax liabilities: Prepaid expenses (2,119) 1,011 (1,108 (2,119) 1,011 (1,108 260 (136) 124	Balance at 1 January 2003 Recognised in the combined statements of operations Balance at 31 December 2003 RMB’000 RMB’000 RMB’000 Deferred income tax assets: Write off of pre-operating expenses 2,760 (764) 1,996 Income tax losses 6,587 (6,204) 383 9,347 (6,968) 2,379 Deferred income tax liabilities: Prepaid expenses (1,119) (1,000) (2,119 (1,119) (1,000) (2,119 8,228 (7,968) 260 Balance at 1 January 2004 Recognised in combined statements of operations Balance at 31 May 2004 RMB’000 RMB’000 RMB’000 Deferred income tax assets: Write off of pre-operating expenses 1,996 (764) 1,232 Income tax losses 383 (383) — 2,379 (1,147) 1,232 Deferred income tax liabilities: Prepaid expenses (2,119) 1,011 (1,108 (2,119) 1,011 (1,108 260 (136) 124
2,379 (2,119) (2,119)	(1,147) 1,011 1,011	1,232
		(1,108
		(1,108
260	(136)	124

A valuation allowance on the deferred tax assets is recorded if it is probable that some portion or all of the deferred income tax assets will not be realised through the recovery of taxes previously paid and/or future taxable income. The allowance is subject to ongoing adjustments based on changes in circumstances that affect the Group’s assessment of the realisability of the deferred income tax assets. The Group has reviewed its deferred income tax assets as at 31 December 2001, 2002, 2003 and 31 May 2004. Based on projections for future taxable income over the periods in which the deferred income tax assets are deductible, the directors believe that it is probable that the Group will realise the benefits of these temporary differences. Therefore, no valuation allowances were provided for the years ended 31 December 2001, 2002, 2003 and the five months ended 31 May 2004, respectively, in respect of the deferred income tax assets arising from these temporary differences.

— 29 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP FOR THE THREE YEARS ENDED 31 DECEMBER 2003 AND THE FIVE MONTHS ENDED 31 MAY 2004

APPENDIX I

(c) Inventories

Merchandise for resale Consumables	As 2001 RMB’000 332,110 1,319 333,429	at 31 December 2002 2003 RMB’000 RMB’000 545,343 963,247 4,741 11,633 550,084 974,880	As at 31 May 2004 RMB’000 1,118,798 10,625
			1,129,423

(d) Bills receivable

An aged analysis of the bills receivable, net of provision for bad and doubtful debts, is analysed as follows:

							As at
				As	at 31 December		31 May
			2001		2002	2003	2004
			RMB’000		RMB’000	RMB’000	RMB’000
Within	three	months	1,355		9,136	2,983	185,382

(e) Trade receivables

An aged analysis of the trade receivables, net of provision for bad and doubtful debts, is analysed as follows:

							As at
				As	at 31 December		31 May
			2001		2002	2003	2004
			RMB’000		RMB’000	RMB’000	RMB’000
Within	three	months	—		—	—	59,959

— 30 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP FOR THE THREE YEARS ENDED 31 DECEMBER 2003 AND THE FIVE MONTHS ENDED 31 MAY 2004

APPENDIX I

(f) Prepayments and other receivables

Prepaid expenses and deposits Advances to suppliers Other receivables	As 2001 RMB’000 11,560 25,708 7,770 45,038	at 31 December 2002 2003 RMB’000 RMB’000 17,120 32,384 58,484 47,544 11,662 28,246 87,266 108,174	As at 31 May 2004 RMB’000 34,340 52,322 38,411
			125,073

(g) Due from related parties

The amounts due from related parties were unsecured and interest-free. Mr. Wong and the Parent Group, as defined in Section 3 note (h) to this Financial Information, agreed to provide security for the balance of amounts due from related parties of RMB1,088,542,000 (the “Beijing Gome Debt”) in the following manner:

(i) the proceeds from the proposed placing of Mr. Wong’s shares of China Eagle will first be used to repay the Beijing Gome Debt;
(ii) dividend derived from the 35% interest in Gome Appliance which is beneficially owned by Mr. Wong; and
(iii) convertible notes in the amount of RMB1,089 million to be issued by China Eagle in accordance with the Sale and Purchase Agreement (the “Sale and Purchase agreement”) dated 3 June 2004.
(h) Cash and cash equivalents and pledged deposits

Cash and bank balances Time deposits Less: Time deposits pledged for bills payable (Note (j)) Cash and cash equivalents	As 2001 RMB’000 55,079 142,024	at 31 December 2002 2003 RMB’000 RMB’000 260,193 360,261 374,005 1,057,999	at 31 December 2002 2003 RMB’000 RMB’000 260,193 360,261 374,005 1,057,999	As at 31 May 2004 RMB’000 599,695 882,304
	197,103 (142,024)	634,198 (374,005)	1,418,260 (1,057,999)	1,481,999 (882,304
	55,079	260,193	360,261	599,695

All the cash and bank balances of the Group, which are denominated in RMB, are placed with banks in the PRC. The remittance of these funds out of the PRC is subject to the exchange control restrictions imposed by the PRC Government.

— 31 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP FOR THE THREE YEARS ENDED 31 DECEMBER 2003 AND THE FIVE MONTHS ENDED 31 MAY 2004

APPENDIX I

(i) Interest-bearing bank loan

											As at
								As	at 31 December		31 May
							2001		2002	2003	2004
							RMB’000		RMB’000	RMB’000	RMB’000
Bank	loan	wholly	repayable	within	one	year	—		—	10,000	10,000

As at the balance sheet date, the Group’s bank loan was guaranteed by the Parent Group which amounted to nil, nil, RMB10,000,000 and RMB10,000,000 as at 31 December 2001, 2002, 2003 and 31 May 2004 respectively.

(j) Trade payables and bills payable

An aged analysis of the Group’s trade payables and bills payable is as follows:

Within three months Three to six months Over six months	As 2001 RMB’000 652,810 111,130 8,997 772,937	at 31 December 2002 2003 RMB’000 RMB’000 1,337,968 2,332,367 251,343 1,063,200 14,236 17,040 1,603,547 3,412,607	As at 31 May 2004 RMB’000 2,183,513 943,632 16,952
			3,144,097

Included in the trade payable and bills payable balances as at 31 December 2001, 2002, 2003 and 31 May 2004 are trade payable of nil, nil, nil and RMB16,098,000 due to Parent Group, which are repayable within 90 days, which represents similar credit terms to those offered by the related companies to their major customers.

The Group’s bills payable are secured by the pledge of certain of the Group’s time deposits as described in note (h) above and corporate guarantees provided by the Parent Group and Beijing Xinhengji which had an aggregate balance of approximately RMB228,500,000, RMB1,199,570,000, RMB2,855,670,000 and RMB2,788,070,000 as at 31 December 2001, 2002, 2003 and 31 May 2004 respectively, as described in Section 3 note (h).

Included in the Group’s balances above are bills payable to the Parent Group:

										As at
							As	at 31 December		31 May
						2001		2002	2003	2004
						RMB’000		RMB’000	RMB’000	RMB’000
Bills	payable	to	the	Parent	Group	7,414		6,136	73,881	104,095

— 32 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP FOR THE THREE YEARS ENDED 31 DECEMBER 2003 AND THE FIVE MONTHS ENDED 31 MAY 2004

APPENDIX I

(k) Customers’ deposits, other payables and accruals

Customers’ deposits Other payables and accruals	As 2001 RMB’000 28,369 46,010 74,379	at 31 December 2002 2003 RMB’000 RMB’000 86,034 146,650 85,292 163,132 171,326 309,782	As at 31 May 2004 RMB’000 253,041 205,807
			458,848

(l) Contingent liabilities

The Group did not have any significant contingent liabilities at the end of each of the Relevant Periods.

(m) Commitments

(i) Investment commitments

				As at
		As at 31 December		31 May
	2001	2002	2003	2004
	RMB’000	RMB’000	RMB’000	RMB’000
Commitment in respect of the acquisition of
a 65% equity interest in Gome Appliance	—	—	—	241,000

As part of the Reorganisation, an agreement dated 8 February 2004, was entered into between the Company and Beijing Eagle Yi Fu Network Technologies Co., Ltd. (“Yi Fu”), a PRC company beneficially owned by Mr. Wong. Pursuant to which the Company agreed to acquire a 65% equity interest in Gome Appliance from Yi Fu at a cash consideration of RMB241,000,000, payable on or before 20 July 2004.

Subsequent to 31 May 2004, the Company had fully settled the outstanding consideration.

(ii) Operating lease commitments

The Group leases certain of its business premises and office properties under operating lease arrangements, which are negotiated for terms ranging from one to ten years.

— 33 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP FOR THE THREE YEARS ENDED 31 DECEMBER 2003 AND THE FIVE MONTHS ENDED 31 MAY 2004

APPENDIX I

The Group had the following minimum lease payments under non-cancellable operating leases:

Within one year In the second to fifth years, inclusive After five years	As 2001 RMB’000 64,365 264,350 164,003 492,718	at 31 December 2002 2003 RMB’000 RMB’000 98,875 180,901 401,627 646,531 170,812 174,723 671,314 1,002,155	As at 31 May 2004 RMB’000 207,962 729,743 131,373
			1,069,078

(n) Fair value of financial instruments

The financial instruments of the Group mainly consist of cash and bank balances, pledged deposits, trade receivables, amounts due from related parties, prepayments and other receivables, bills receivable, trade payable and bills payable, customers’ deposits, other payables, accruals and short term interest-bearing bank loan.

The carrying amounts of the Group’s financial instruments were stated approximately at their fair value as at 31 December 2001, 2002 and 2003 and 31 May 2004 because of the short term maturities of these instruments.

Fair value estimates are made at a specific point in time and based on relevant market information about the financial instruments. These estimates are subjective in nature and involve uncertainties and matters of significant judgement and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

(o) Concentration of risk

The Group is exposed to credit risk, interest rate risk and foreign currency transactions risk, as further explained below.

(i) Credit risk

The Group’s cash and cash equivalents are deposited with banks in the PRC.

The trade and other receivables included in the Financial Information represent the Group’s major exposure to the credit risk attributable to its financial assets. The Group has no other significant concentrations of credit risk.

(ii) Interest rate risk

The Group has no other loans except for the short term bank loan disclosed in note (i) above and as a result, it has no significant interest rate risk.

(iii) Foreign currency transactions risk

The Group’s businesses are principally conducted in RMB which cannot freely be exchanged into foreign currencies. As at 31 December 2001, 2002 and 2003 and 31 May 2004, substantially all of the Group’s assets and liabilities were denominated in RMB.

— 34 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP FOR THE THREE YEARS ENDED 31 DECEMBER 2003 AND THE FIVE MONTHS ENDED 31 MAY 2004

APPENDIX I

5. COMBINED STATEMENTS OF CHANGES IN OWNER’S EQUITY

The following is a summary of the combined statements of changes in owner’s equity of the Group for the Relevant Periods prepared on the basis set out in Section 1 above:

Issued share capital PRC reserve fund Retained earnings/ owner’s capital RMB’000 RMB’000 RMB’000 Note (a) Note (b) At 1 January 2001 — 2,628 18,886 Contributions from the owner - (Note (c)) — — 117,000 Net profit for the year — — 16,535 Transfer to the PRC reserve fund — 2,480 (2,480) At 31 December 2001 and 1 January 2002 — 5,108 149,941 Net profit for the year — — 69,190 Transfer to the PRC reserve fund — 10,378 (10,378) At 31 December 2002 and 1 January 2003 — 15,486 208,753 Contributions from the owner - (Note (c)) — — 214,302 Net profit for the year — — 178,472 Transfer to the PRC reserve fund — 26,770 (26,770) At 31 December 2003 and 1 January 2004 — 42,256 574,757 Net profit for the period — — 190,973 Distribution to the owner - (Note (d)) — (26,868) (433,682) At 31 May 2004 — 15,388 332,048	Issued share capital PRC reserve fund Retained earnings/ owner’s capital RMB’000 RMB’000 RMB’000 Note (a) Note (b) At 1 January 2001 — 2,628 18,886 Contributions from the owner - (Note (c)) — — 117,000 Net profit for the year — — 16,535 Transfer to the PRC reserve fund — 2,480 (2,480) At 31 December 2001 and 1 January 2002 — 5,108 149,941 Net profit for the year — — 69,190 Transfer to the PRC reserve fund — 10,378 (10,378) At 31 December 2002 and 1 January 2003 — 15,486 208,753 Contributions from the owner - (Note (c)) — — 214,302 Net profit for the year — — 178,472 Transfer to the PRC reserve fund — 26,770 (26,770) At 31 December 2003 and 1 January 2004 — 42,256 574,757 Net profit for the period — — 190,973 Distribution to the owner - (Note (d)) — (26,868) (433,682) At 31 May 2004 — 15,388 332,048	Issued share capital PRC reserve fund Retained earnings/ owner’s capital RMB’000 RMB’000 RMB’000 Note (a) Note (b) At 1 January 2001 — 2,628 18,886 Contributions from the owner - (Note (c)) — — 117,000 Net profit for the year — — 16,535 Transfer to the PRC reserve fund — 2,480 (2,480) At 31 December 2001 and 1 January 2002 — 5,108 149,941 Net profit for the year — — 69,190 Transfer to the PRC reserve fund — 10,378 (10,378) At 31 December 2002 and 1 January 2003 — 15,486 208,753 Contributions from the owner - (Note (c)) — — 214,302 Net profit for the year — — 178,472 Transfer to the PRC reserve fund — 26,770 (26,770) At 31 December 2003 and 1 January 2004 — 42,256 574,757 Net profit for the period — — 190,973 Distribution to the owner - (Note (d)) — (26,868) (433,682) At 31 May 2004 — 15,388 332,048	Total RMB’000 21,514 117,000 16,535 — 155,049 69,190 — 224,239 214,302 178,472 — 617,013 190,973 (460,550) 347,436
— — — — — — — — — —	5,108 — 10,378 15,486 — — 26,770 42,256 — (26,868)	149,941 69,190 (10,378) 208,753 214,302 178,472 (26,770) 574,757 190,973 (433,682)	155,049 69,190 —
			224,239 214,302 178,472 —
			617,013 190,973 (460,550
—	15,388	332,048

— 35 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP FOR THE THREE YEARS ENDED 31 DECEMBER 2003 AND THE FIVE MONTHS ENDED 31 MAY 2004

APPENDIX I

Notes:

(a) Share capital

Authorised: 50,000 ordinary shares of US$1 each Issued and fully paid: 1 ordinary share of US$1	As 2001 RMB 415,000 8.3	at 31 December 2002 2003 RMB RMB 415,000 415,000 8.3 8.3	As at 31 May 2004 RMB 415,000
			8.3

In December 2001, the Company issued one ordinary share to its subscriber at par value of US$1.

(b) Distributable reserves

In accordance with the relevant PRC regulations, each of the subsidiaries within the Group is required to transfer 10% of the year end profit after income tax, as determined under PRC accounting regulations, to the statutory common reserve, until the balance of the fund reaches 50% of the registered capital of that company. Subject to certain restrictions as set out in the relevant PRC regulations, the statutory common reserve may be used to offset against accumulated losses, if any.

Pursuant to the relevant PRC regulations, each of the subsidiaries within the Group is also required to transfer 5% to 10% of net profit, as determined under PRC accounting regulations, to the statutory common welfare fund. This fund can only be used to provide staff welfare facilities and other collective benefits to the employees of that company. This fund is non-distributable other than in the event of liquidation.

The subsidiaries within the Group had proposed to transfer 10% and 5% of the net profit, as determined under PRC accounting regulations, for the years ended 31 December 2001, 2002 and 2003 amounting to approximately RMB2,480,000, RMB10,378,000, RMB26,770,000 to the statutory common reserve and the statutory common welfare fund, respectively.

There were no distributable reserves attributable to the Company’s equity owner as at 31 December 2001, 2002, 2003 and 31 May 2004.

(c) Contributions from the owner

This represented the relevant capital contributions from the owner in respect of the formation of the companies now comprising the Group during the Relevant Periods.

(d) Distribution to the owner

This represented the balance of assets and liabilities retained by Beijing Gome with effect from 1 April 2004 pursuant to the Reorganisation and the basis of presentation set out in Section 1 to this Financial Information.

— 36 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP FOR THE THREE YEARS ENDED 31 DECEMBER 2003 AND THE FIVE MONTHS ENDED 31 MAY 2004

APPENDIX I

6. COMBINED CASH FLOW STATEMENTS

The following is a summary of the consolidated cash flow statements of the Group for the Relevant periods prepared on the basis set out in Section 1 above:

Year ended 31 December Five months ended 31 May 2001 2002 2003 2004 RMB’000 RMB’000 RMB’000 RMB’000 35,756 132,119 351,646 334,816 (2,003) (4,571) (13,300) (7,601) — — 325 226 8,316 8,260 16,813 11,729 — 7 3 108 42,069 135,815 355,487 339,278 (170,339) (216,655) (424,796) (154,755) 2,445 (7,781) 6,153 (182,799) 124,217 (42,228) (20,908) (104,287) (7,724) (54,912) (176,409) 122,538 266,231 830,610 1,809,060 535,889 (5,061) 96,947 138,456 158,911 251,838 741,796 1,687,043 714,775 — — (325) (226) (13,029) (23,915) (56,626) (26,178) 238,809 717,881 1,630,092 688,371	Year ended 31 December Five months ended 31 May 2001 2002 2003 2004 RMB’000 RMB’000 RMB’000 RMB’000 35,756 132,119 351,646 334,816 (2,003) (4,571) (13,300) (7,601) — — 325 226 8,316 8,260 16,813 11,729 — 7 3 108 42,069 135,815 355,487 339,278 (170,339) (216,655) (424,796) (154,755) 2,445 (7,781) 6,153 (182,799) 124,217 (42,228) (20,908) (104,287) (7,724) (54,912) (176,409) 122,538 266,231 830,610 1,809,060 535,889 (5,061) 96,947 138,456 158,911 251,838 741,796 1,687,043 714,775 — — (325) (226) (13,029) (23,915) (56,626) (26,178) 238,809 717,881 1,630,092 688,371	Year ended 31 December Five months ended 31 May 2001 2002 2003 2004 RMB’000 RMB’000 RMB’000 RMB’000 35,756 132,119 351,646 334,816 (2,003) (4,571) (13,300) (7,601) — — 325 226 8,316 8,260 16,813 11,729 — 7 3 108 42,069 135,815 355,487 339,278 (170,339) (216,655) (424,796) (154,755) 2,445 (7,781) 6,153 (182,799) 124,217 (42,228) (20,908) (104,287) (7,724) (54,912) (176,409) 122,538 266,231 830,610 1,809,060 535,889 (5,061) 96,947 138,456 158,911 251,838 741,796 1,687,043 714,775 — — (325) (226) (13,029) (23,915) (56,626) (26,178) 238,809 717,881 1,630,092 688,371	Year ended 31 December Five months ended 31 May 2001 2002 2003 2004 RMB’000 RMB’000 RMB’000 RMB’000 35,756 132,119 351,646 334,816 (2,003) (4,571) (13,300) (7,601) — — 325 226 8,316 8,260 16,813 11,729 — 7 3 108 42,069 135,815 355,487 339,278 (170,339) (216,655) (424,796) (154,755) 2,445 (7,781) 6,153 (182,799) 124,217 (42,228) (20,908) (104,287) (7,724) (54,912) (176,409) 122,538 266,231 830,610 1,809,060 535,889 (5,061) 96,947 138,456 158,911 251,838 741,796 1,687,043 714,775 — — (325) (226) (13,029) (23,915) (56,626) (26,178) 238,809 717,881 1,630,092 688,371
42,069 (170,339) 2,445 124,217 (7,724) 266,231 (5,061) 251,838 — (13,029) 238,809	135,815 (216,655) (7,781) (42,228) (54,912) 830,610 96,947 741,796 — (23,915) 717,881	355,487 (424,796) 6,153 (20,908) (176,409) 1,809,060 138,456 1,687,043 (325) (56,626) 1,630,092	339,278 (154,755 (182,799 (104,287 122,538 535,889 158,911
			714,775 (226 (26,178
			688,371

— 37 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP FOR THE THREE YEARS ENDED 31 DECEMBER 2003 AND THE FIVE MONTHS ENDED 31 MAY 2004

APPENDIX I

Year ended 31 December Five months ended 31 May 2001 2002 2003 2004 RMB’000 RMB’000 RMB’000 RMB’000 (22,254) (26,251) (72,779) (28,316) (75,464) (231,981) (683,994) (13,483) 2,003 4,571 13,300 7,601 (95,715) (253,661) (743,473) (34,198) 143,094 464,220 886,619 654,173 (444,709) (259,106) (1,126,245) (308,403) — — 10,000 — 180,000 — 329,694 — (264,709) (259,106) (786,551) (308,403) (121,615) 205,114 100,068 345,770 176,694 55,079 260,193 360,261 — — — (106,336) 55,079 260,193 360,261 599,695	Year ended 31 December Five months ended 31 May 2001 2002 2003 2004 RMB’000 RMB’000 RMB’000 RMB’000 (22,254) (26,251) (72,779) (28,316) (75,464) (231,981) (683,994) (13,483) 2,003 4,571 13,300 7,601 (95,715) (253,661) (743,473) (34,198) 143,094 464,220 886,619 654,173 (444,709) (259,106) (1,126,245) (308,403) — — 10,000 — 180,000 — 329,694 — (264,709) (259,106) (786,551) (308,403) (121,615) 205,114 100,068 345,770 176,694 55,079 260,193 360,261 — — — (106,336) 55,079 260,193 360,261 599,695	Year ended 31 December Five months ended 31 May 2001 2002 2003 2004 RMB’000 RMB’000 RMB’000 RMB’000 (22,254) (26,251) (72,779) (28,316) (75,464) (231,981) (683,994) (13,483) 2,003 4,571 13,300 7,601 (95,715) (253,661) (743,473) (34,198) 143,094 464,220 886,619 654,173 (444,709) (259,106) (1,126,245) (308,403) — — 10,000 — 180,000 — 329,694 — (264,709) (259,106) (786,551) (308,403) (121,615) 205,114 100,068 345,770 176,694 55,079 260,193 360,261 — — — (106,336) 55,079 260,193 360,261 599,695	Year ended 31 December Five months ended 31 May 2001 2002 2003 2004 RMB’000 RMB’000 RMB’000 RMB’000 (22,254) (26,251) (72,779) (28,316) (75,464) (231,981) (683,994) (13,483) 2,003 4,571 13,300 7,601 (95,715) (253,661) (743,473) (34,198) 143,094 464,220 886,619 654,173 (444,709) (259,106) (1,126,245) (308,403) — — 10,000 — 180,000 — 329,694 — (264,709) (259,106) (786,551) (308,403) (121,615) 205,114 100,068 345,770 176,694 55,079 260,193 360,261 — — — (106,336) 55,079 260,193 360,261 599,695
(95,715) 143,094 (444,709) — 180,000 (264,709) (121,615) 176,694 —	(253,661) 464,220 (259,106) — — (259,106) 205,114 55,079 —	(743,473) 886,619 (1,126,245) 10,000 329,694 (786,551) 100,068 260,193 —	(34,198
			654,173 (308,403 — —
			(308,403
			345,770 360,261 (106,336
55,079	260,193	360,261

— 38 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP FOR THE THREE YEARS ENDED 31 DECEMBER 2003 AND THE FIVE MONTHS ENDED 31 MAY 2004

APPENDIX I

7. DIRECTORS’ REMUNERATION

Save as disclosed above, no remuneration has been paid or is payable in respect of any of the Relevant Periods referred to in this report by the Company or any of its subsidiaries to the directors of the Company. Under the arrangements currently in force, the estimated amount of directors’ fees and other emoluments payable to the directors of the Company for the year ending 31 December 2004 will be approximately RMB1,192,000.

8. ULTIMATE HOLDING COMPANY

The directors consider Ever Ocean Investments Ltd., a company incorporated in the British Virgin Islands and beneficially wholly-owned by Mr. Wong, to be the ultimate holding company.

9. SUBSEQUENT EVENTS

On 3 June 2004, Mr. Wong, the Purchaser and the Vendor entered into a sale and purchase agreement in respect of the conditional sale and purchase of the entire issued share of the Company between the Vendor and the Purchaser.

Save as disclosed above and in Section 4 note(m)(i) to this Financial Information, no other significant events took place subsequent to 31 May 2004.

10. SUBSEQUENT FINANCIAL STATEMENTS

No financial statements have been prepared by the Company or any of its subsidiaries in respect of any period subsequent to 31 May 2004.

Yours faithfully,

Ernst & Young

Certified Public Accountants Hong Kong

— 39 —

PRO FORMA BALANCE SHEET OF THE ENLARGED GROUP

APPENDIX II

15th Floor Hutchison House 10 Harcourt Road Central Hong Kong 14 July 2004

The Directors China Eagle Group Company Limited

Dear Sirs,

We set out below our report on the unaudited pro forma balance sheet of the Enlarged Group as set out in Appendix II to supplemental circular to the shareholders’ circular of China Eagle Group Company Limited (the “Company”) dated 14 July 2004 (the “Pro Forma Balance Sheet”), which has been prepared by the Company solely for illustrative purposes to provide information on how the proposed acquisition of the entire equity interests in Ocean Town Int’l Inc. (individually referred to as “Ocean Town”, together with its subsidiaries referred to as the “Target Group”), to be accounted for under the pooling-of-interests accounting method, and the reorganisation of the Target Group, as described in the accompanying introduction and notes to the pro forma balance sheet, or may have affected the historical financial information presented therein. The basis of preparation for the pro forma balance sheet is set out in the accompanying introduction thereto. Terms used herein shall have the same meanings as those defined in the circular of the Company dated 5 July 2004, unless the context otherwise required.

Responsibilities

It is the responsibility solely of the directors of the Company to prepare the Pro Forma Balance Sheet in accordance with Paragraph 29 of Chapter 4 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”).

It is our responsibility to form an opinion, as required by the Listing Rules, on the Pro Forma Balance Sheet and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the pro forma balance sheet beyond that owed to those to whom the reports were addressed by us at the dates of their issue.

Basis of opinion

Where applicable, we conducted our work in accordance with the Statements of Investment Circular Reporting Standards and Bulletin 1998/8 “Reporting on pro forma financial information pursuant to the Listing Rules” issued by the Auditing Practices Board in the United Kingdom. Our work consisted primarily of comparing the historical financial information contained therein with the source documents provided by the management, considering the evidence supporting the adjustments and discussing the Pro Forma Balance Sheet with the directors of the Company.

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APPENDIX II PRO FORMA BALANCE SHEET OF THE ENLARGED GROUP

Our work does not constitute an audit or review made in accordance with the Statements of Auditing Standards issued by the Hong Kong Society of Accountants, and accordingly, we do not express any such audit or review assurance on the Pro Forma Balance Sheet.

The Pro Forma Balance Sheet is for illustrative purposes only, based on the directors’ judgements and assumptions, and because of its nature, it does not provide any assurance or indication that any event will take place in the future and may not be indicative of the financial position of the Company and its subsidiaries had the acquisition of the Target Group actually been completed on 31 May 2004 or at any future date, and the reorganisation of the Target Group actually taken effect at the beginning of relevant period, or for any future periods.

Opinion

In our opinion:

(a) the unaudited Pro Forma Balance Sheet has been properly compiled on the basis stated;
(b) such a basis is consistent with the accounting policies of the Company; and
(c) the adjustments are appropriate for the purposes of the Pro Forma Balance Sheet as disclosed pursuant to Paragraph 29(1) of Chapter 4 of the Listing Rules.

Yours faithfully,

Ernst & Young

Certified Public Accountants Hong Kong

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APPENDIX II PRO FORMA BALANCE SHEET OF THE ENLARGED GROUP

INTRODUCTION TO UNAUDITED PRO FORMA BALANCE SHEET OF THE ENLARGED GROUP

The accompanying unaudited Pro Forma Balance Sheet of the Enlarged Group, as defined below, has been prepared to illustrate the effect of the Company’s proposed acquisition (the “Acquisition”) of the entire equity interests in Ocean Town from Mr. Wong Kwong Yu (“Mr. Wong”). The Company together with its subsidiaries is referred to as the “Listed Group”. The acquisition consideration will be satisfied i) to HK$243.5 million by the issue of the Consideration Shares at the Issue Price; and ii) to HK$7,031.4 million by the issue of the First Convertible Note and to HK$1,026.9 million by the issue of the Second Convertible Note. Further details of the First Convertible Note and the Second Convertible Note are set out in the “Summary of the principal terms of the Convertible Notes” section in the shareholders’ circular of the Company dated 5 July 2004.

As both the Target Group and the Company were under common control prior to the Acquisition, the Acquisition will be treated for accounting purposes as a “combination of entities under common control”. Under a combination of entities under common control, the equity interest of Ocean Town to be acquired by the Company will be accounted for at historical amounts in a manner similar to a pooling of interests (“pooling-of-interests accounting”). In pooling-of-interests accounting, the consolidated financial statements of the Company for periods prior to the combination will be restated to include the assets and liabilities and results of operations of the Target Group for those periods on an Enlarged Group basis (the Listed Group and the Target Group are hereinafter referred to as the “Enlarged Group”). The consideration for the Acquisition will be treated as an equity transaction at the completion date of the Acquisition.

The accompanying unaudited Pro Forma Balance Sheet of the Enlarged Group as at 31 May 2004, which was prepared based on the audited consolidated balance sheet of the Listed Group as at 31 March 2004 and the audited combined balance sheet of the Target Group as at 31 May 2004, being the latest available audited financial information of the Listed Group and the Target Group respectively, gives effect to the Acquisition as if the Acquisition had been completed on 31 May 2004.

The accompanying unaudited Pro Forma Balance Sheet of the Enlarged Group is based upon the historical combined financial statements of the Target Group and the historical consolidated financial statements of the Listed Group after giving effect to the pro forma adjustments described in the accompanying note. A narrative description of the pro forma adjustments of the Acquisition that are (i) directly attributable to the transactions; (ii) expected to have a continuing impact on the Enlarged Group; and (iii) factually supportable, are summarised in the accompanying note.

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APPENDIX II PRO FORMA BALANCE SHEET OF THE ENLARGED GROUP

The accompanying unaudited Pro Forma Balance Sheet of the Enlarged Group is based on a number of assumptions, estimates, uncertainties and currently available information. As a result of these assumptions, estimates and uncertainties, the accompanying unaudited Pro Forma Balance Sheet of the Enlarged Group does not purport to describe the actual financial position of the Enlarged Group that would have been attained had the Acquisition been completed, and the Reorganisation taken effect at the date indicated herein. Further, the accompanying unaudited Pro Forma Balance Sheet of the Enlarged Group does not purport to predict the Enlarged Group’s future financial position.

The unaudited Pro Forma Balance Sheet of the Enlarged Group should be read in conjunction with the audited financial information of the Target Group as set out in Appendix I to this supplemental shareholders’ circular and the audited financial statements of the Listed Group as set out in Appendix V and other financial information included elsewhere in the shareholders’ circular of the Company dated 5 July 2004.

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PRO FORMA BALANCE SHEET OF THE ENLARGED GROUP

APPENDIX II

UNAUDITED PRO FORMA BALANCE SHEET OF THE ENLARGED GROUP

Listed Group Historical As at 31 March 2004 HK$’000 NON-CURRENT ASSETS Fixed assets 4,748 Intangible assets (13,461) Property under development 750,441 Investment properties 4,438 Other investment 124 Deferred income tax assets — Total Non-Current Assets 746,290 CURRENT ASSETS Other investment 804 Inventories — Margin deposits with brokers and financial institutions 64,323 Bills receivable — Trade and other receivables 62,829 Amount due from related Parties 12,866 Pledged deposits — Cash and cash equivalents 83,976 Total Current Assets 224,798	Target Group Historical Pro Forma Combined Pro Forma Adjustments Pro Forma Enlarged Group As at 31 May 2004 HK$’000 HK$’000 HK$’000 Note HK$’000 104,421 109,169 109,169 — (13,461) (13,461) — 750,441 750,441 — 4,438 4,438 — 124 124 1,162 1,162 1,162 105,583 851,873 851,873 — 804 804 1,065,494 1,065,494 1,065,494 — 64,323 64,323 174,889 174,889 174,889 174,558 237,387 237,387 1,026,926 1,039,792 1,039,792 832,362 832,362 832,362 565,750 649,726 649,726 3,839,979 4,064,777 4,064,777	Target Group Historical Pro Forma Combined Pro Forma Adjustments Pro Forma Enlarged Group As at 31 May 2004 HK$’000 HK$’000 HK$’000 Note HK$’000 104,421 109,169 109,169 — (13,461) (13,461) — 750,441 750,441 — 4,438 4,438 — 124 124 1,162 1,162 1,162 105,583 851,873 851,873 — 804 804 1,065,494 1,065,494 1,065,494 — 64,323 64,323 174,889 174,889 174,889 174,558 237,387 237,387 1,026,926 1,039,792 1,039,792 832,362 832,362 832,362 565,750 649,726 649,726 3,839,979 4,064,777 4,064,777	Target Group Historical Pro Forma Combined Pro Forma Adjustments Pro Forma Enlarged Group As at 31 May 2004 HK$’000 HK$’000 HK$’000 Note HK$’000 104,421 109,169 109,169 — (13,461) (13,461) — 750,441 750,441 — 4,438 4,438 — 124 124 1,162 1,162 1,162 105,583 851,873 851,873 — 804 804 1,065,494 1,065,494 1,065,494 — 64,323 64,323 174,889 174,889 174,889 174,558 237,387 237,387 1,026,926 1,039,792 1,039,792 832,362 832,362 832,362 565,750 649,726 649,726 3,839,979 4,064,777 4,064,777
746,290 804 — 64,323 — 62,829 12,866 — 83,976 224,798	105,583 — 1,065,494 — 174,889 174,558 1,026,926 832,362 565,750 3,839,979	851,873 804 1,065,494 64,323 174,889 237,387 1,039,792 832,362 649,726 4,064,777	851,873
			804 1,065,494 64,323 174,889 237,387 1,039,792 832,362 649,726
			4,064,777

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APPENDIX II PRO FORMA BALANCE SHEET OF THE ENLARGED GROUP

Listed Group Historical As at 31 March 2004 HK$’000 CURRENT LIABILITIES Convertible notes 24,000 Interest-bearing bank loan — Trade payables, bills payable and other payables 44,001 Amounts due to related parties 87,044 Tax payable 5,500 Deferred income tax liabilities — Total Current Liabilities 160,545 NET CURRENT ASSETS 64,253 TOTAL ASSETS LESS CURRENT LIABILITIES 810,543 NON-CURRENT LIABILITIES Long term payable 157,547 MINORITY INTERESTS 1,547 NET ASSETS 651,449 EQUITY Share capital 283,930 Reserves 67,519 Mandatory convertible notes 300,000 651,449	Target Group Historical Pro Forma Combined Pro Forma Adjustments Pro Forma Enlarged Group As at 31 May 2004 HK$’000 HK$’000 HK$’000 Note HK$’000 — 24,000 24,000 9,434 9,434 9,434 3,399,004 3,443,005 3,443,005 — 87,044 87,044 31,818 37,318 37,318 1,045 1,045 1,045	Target Group Historical Pro Forma Combined Pro Forma Adjustments Pro Forma Enlarged Group As at 31 May 2004 HK$’000 HK$’000 HK$’000 Note HK$’000 — 24,000 24,000 9,434 9,434 9,434 3,399,004 3,443,005 3,443,005 — 87,044 87,044 31,818 37,318 37,318 1,045 1,045 1,045	Target Group Historical Pro Forma Combined Pro Forma Adjustments Pro Forma Enlarged Group As at 31 May 2004 HK$’000 HK$’000 HK$’000 Note HK$’000 — 24,000 24,000 9,434 9,434 9,434 3,399,004 3,443,005 3,443,005 — 87,044 87,044 31,818 37,318 37,318 1,045 1,045 1,045
160,545 64,253 810,543 157,547 1,547	3,441,301 398,678 504,261 — 176,491	3,601,846 462,931 1,314,804 157,547 178,038	3,601,846
			462,931
			1,314,804
			157,547 178,038
651,449	327,770	979,219	979,219
283,930 67,519 300,000	— 327,770 —	283,930 4,411 1 395,289 (327,770) 1 300,000 323,359 1	288,341 67,519 623,359
651,449	327,770	979,219	979,219

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APPENDIX II PRO FORMA BALANCE SHEET OF THE ENLARGED GROUP

NOTE TO UNAUDITED PRO FORMA BALANCE SHEET OF THE ENLARGED GROUP

(1) In connection with the Acquisition, the Company conditionally agreed to purchase the Sale Shares, representing the entire interest in the Ocean Town, from the Vendor, a company ultimately wholly-owned by Mr. Wong, for RMB8.8 billion (approximately HK$8,301.8 million). Such consideration will be satisfied i) as to HK$243.5 million by the issue of the Consideration Shares being approximately 44.1 million New Shares, at the Issue Price; and ii) as to HK$7,031.4 million by the issue of the First Convertible Note and HK$1,026.9 million by the issue of the Second Convertible Note.

As further explained in “Introduction to Unaudited Pro forma Balance Sheet of the Enlarged Group” above, under a combination of entities under common control, the equity interest of Ocean Town to be acquired by the Company will be accounted for at historical amounts in a manner similar to a pooling of interests. In pooling-of-interests accounting, the consolidated financial statements of the Company for periods prior to the combination will be restated to include the assets and liabilities and results of operations of the Target Group for those periods on an Enlarged Group basis. The consideration for the Acquisition will be treated as an equity transaction.

The pro forma balance sheet adjustments reflect i) the share capital amounting to approximately HK$4,411,000 attributable to 44,110,000 Consideration Shares and the Convertible Notes amounting to approximately HK$323,359,000 to be issued by the Company to satisfy the consideration for the Sale Shares in accordance with the Acquisition Agreement and ii) the elimination of the reserves of the Target Group of HK$327,770,000 upon the combination as if the Acquisition had been completed on 31 May 2004.

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GENERAL INFORMATION

APPENDIX III

RESPONSIBILITY STATEMENTS

This supplemental circular includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Group and the Target Group.

The Directors collectively and individually accept full responsibility for the accuracy of the information contained in this supplemental circular and confirm, having made all reasonable enquiries, that to the best of their knowledge, opinions expressed in this supplemental circular have been arrived at after due and careful consideration and there are no other facts not contained in this supplemental circular the omission of which would make any such statement contained in this supplemental circular misleading.

The directors of Gome Appliance collectively and individually accept full responsibility for the accuracy of the information contained in this supplemental circular relating to the Target Group and confirm, having made all reasonable enquiries, that to the best of their knowledge, opinions expressed in this supplemental circular relating to the Target Group have been arrived at after due and careful consideration and there are no other facts relating to the Target Group not contained in this supplemental circular the omission of which would make any such statement contained in this supplemental circular misleading.

EXPERTS AND CONSENTS

The followings are the qualifications of the experts who have been named in this supplemental circular or have given opinions, letters or advice contained in this supplemental circular:

Name

Qualifications

Somerley a deemed corporation licensed to carry out type 1 (dealings in securities), type 4 (advising on securities), type 6 (advising on corporate finance) and type 9 (asset management) regulated activities under the SFO Ernst & Young certified public accountants

Each of Somerley and Ernst & Young has given and has not withdrawn its written consent to the issue of this supplemental circular with the inclusion therein of its letter and/or references to its name, in the form and context in which it appears.

MISCELLANEOUS

The English text of this supplemental circular shall prevail over the Chinese text in the case of any inconsistency.

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GENERAL INFORMATION

APPENDIX III

DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection at Sidley Austin Brown & Wood at 39th Floor, International Finance Centre Two, 8 Finance Street, Hong Kong during normal business hours on any weekday, except public holidays, from the date of this supplemental circular up to and including Wednesday, 28 July 2004:

(a) the memorandum of association and bye-laws of the Company;
(b) the annual reports of the Company for the three years ended 31 March 2004;
(c) the Acquisition Agreement;
(d) the accountants’ report of the Target Group for each of the three years ended 31 December 2003 and the five months ended 31 May 2004, the text of which is set out in Appendix I to this supplemental circular;
(e) the letters from the Independent Board Committee, the text of which is set out on pages 64 to 65 of the Circular and page 4 of this supplemental circular respectively;
(f) the letters from Somerley, the text of which is set out on pages 66 to 113 of the Circular and page 5 to this supplemental circular respectively;
(g) the property valuation report from American Appraisal China Limited, the text of which is set out in Appendix VII to the Circular;
(h) the property valuation report from B.I. Appraisal Limited, the text of which is set out in Appendix VIII to the Circular;
(i) the material contracts referred to in the paragraph headed “Material contracts” to Appendix X to the Circular; and
(j) the written consents referred to in the paragraph headed “Experts and consents” to Appendix X to the Circular and this appendix respectively.

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AI assistant

APT Satellite Holdings Limited — Proxy Solicitation & Information Statement 2004

49643_rns_2004-07-14_2935ab7e-e816-4984-89cf-f5f0dad089cd.pdf

THIS SUPPLEMENTAL CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

CHINA EAGLE GROUP COMPANY LIMITED

SOMERLEY LIMITED

CONTENTS

CHINA EAGLE GROUP COMPANY LIMITED

Stock code: 493

SUPPLEMENTAL CIRCULAR TO THE CIRCULAR TO SHAREHOLDERS DATED 5 JULY 2004 RELATING TO VERY SUBSTANTIAL ACQUISITION RELATING TO

PROPOSED CHANGE OF BOARD LOT SIZE

INTRODUCTION

RECENT DEVELOPMENTS

SUPPLEMENTAL LETTER FROM THE BOARD

RECOMMENDATION

CHINA EAGLE GROUP COMPANY LIMITED

*

Stock Code: 493

PROPOSED ACQUISITION OF THE ENTIRE ISSUED SHARE CAPITAL OF OCEAN TOWN INT’L INC. —

A VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTIONS, AND CONTINUING CONNECTED TRANSACTIONS

Yours faithfully,

For and on behalf of

SUPPLEMENTAL LETTER FROM SOMERLEY

PROPOSED ACQUISITION OF THE ENTIRE ISSUED SHARE CAPITAL OF OCEAN TOWN INT’L INC. — A VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTIONS, AND CONTINUING CONNECTED TRANSACTIONS

Dear Sirs,

1. BASIS OF PRESENTATION

ACCOUNTANTS’ REPORT OF THE TARGET GROUP FOR THE THREE YEARS ENDED 31 DECEMBER 2003 AND THE FIVE MONTHS ENDED 31 MAY 2004

2. PRINCIPAL ACCOUNTING POLICIES

Subsidiaries

Foreign currency transactions

Fixed assets

Categories Estimated useful life

Construction in progress

Inventories

Trade and other receivables

Cash and cash equivalents

Provisions

Contingent liabilities and contingent assets

Retirement benefits scheme

Operating leases

Revenue

Sales of merchandise

Income from suppliers

Income tax

Related parties

Dividends

Segment information

3. COMBINED STATEMENTS OF OPERATIONS

(a) Revenue and other operating income

Revenue:

(b) Profit from operating activities

(c) Interest expense

ACCOUNTANTS’ REPORT OF THE TARGET GROUP FOR THE THREE YEARS ENDED 31 DECEMBER 2003 AND THE FIVE MONTHS ENDED 31 MAY 2004

(d) Directors’, senior executives’ and supervisors’ emoluments

(e) Retirement benefits scheme

(f) Income tax

(h) Related party transactions

Continuing transactions:

ACCOUNTANTS’ REPORT OF THE TARGET GROUP FOR THE THREE YEARS ENDED 31 DECEMBER 2003 AND THE FIVE MONTHS ENDED 31 MAY 2004

4. COMBINED BALANCE SHEETS

(a) Fixed assets

(b) Deferred income tax assets and liabilities

(c) Inventories

(d) Bills receivable

(e) Trade receivables

(f) Prepayments and other receivables

(g) Due from related parties

(i) Interest-bearing bank loan

(j) Trade payables and bills payable

(k) Customers’ deposits, other payables and accruals

(l) Contingent liabilities

(m) Commitments

(ii) Operating lease commitments

(n) Fair value of financial instruments

(o) Concentration of risk

(i) Credit risk

(ii) Interest rate risk

(iii) Foreign currency transactions risk

5. COMBINED STATEMENTS OF CHANGES IN OWNER’S EQUITY

(a) Share capital

APT Satellite Holdings Limited Proxy Solicitation & Information Statement 2004