APT Satellite Holdings Limited — Proxy Solicitation & Information Statement 2004

Jul 5, 2004

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

If you are in any doubt as to any aspect of this 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 circular and the accompanying form of proxy 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 and Hong Kong Securities Clearing Company Limited take no responsibility for the contents of this circular, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular.

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CHINA EAGLE GROUP COMPANY LIMITED

(incorporated in Bermuda with limited liability) Stock code: 493

VERY SUBSTANTIAL ACQUISITION RELATING TO

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(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

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

SOMERLEY LIMITED

A letter from the Independent Board Committee containing its recommendations in respect of, inter alia, the Acquisition and the Connected Transactions to the Independent Shareholders is set out on pages 64 to 65 of this circular. A letter from Somerley, the independent financial adviser, containing its advice to the Independent Board Committee and the Independent Shareholders is set out on pages 66 to 113 of this 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. is set out on pages N-1 to N-5 of this circular. Whether or not you are able to attend the Special General Meeting, please complete and return the enclosed form of proxy 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

5 July 2004

CONTENTS

		Page
Expected timetable . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	iii
Definitions . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board. . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	10
Introduction . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	10
The Acquisition Agreement . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	12
Summary of the principal terms of	the Convertible Notes . . . . . . . . . . . . . . . . . . . . . .	16
Shareholding structure before and after Completion . . . . . . . . . . . . . . . . . . . . . . . . . . .		19
Information on the Target Group .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	21
General overview . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	21
Business objectives . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	22
Competitive strengths . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	22
Structure of the Target Group	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	23
History and development . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	24
Retail network . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	26
Expansion strategies and future plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		27
Product range . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	30
Sales and marketing . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	31
Purchasing . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	33
Inventory and cash management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		35
ERP system . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	36
Management . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	36
Staff . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	38
Human resources policies . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	39
Insurance . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	40
Litigation and environmental compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		40
Brand management . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	40
Competition . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	42
Relationship between the Target Group and the Parent Group . . . . . . . . . . . . . . . . . . .		42
Continuing Connected Transactions	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	51
Management of the Enlarged Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		52
Reasons for and benefits of the Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		55
Proposed change of company name	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	56
Capital Reorganisation and proposed change of board lot size . . . . . . . . . . . . . . . . . . .		57
Placing arrangement . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	59

— i —

CONTENTS

				Page
Maintenance of the listing of the New Shares		. . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . .	61
Information on the Group, Mr. Wong and the		Vendor . . . . .	. . . . . . . . . . . . . . . . . . . . .	61
General	. . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . .	61
Special General Meeting . . . . . . . . . . . . . . .		. . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . .	62
Recommendations . . . . . . . . . . . . . . . . . . . .		. . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . .	63
Letter from the Independent Board Committee		. . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . .	64
Letter from Somerley . . . . . . . . . . . . . . . . . . . . .		. . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . .	66
Appendix I	— Industry overview . . . . . . .	. . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . .	I-1
Appendix II	— Risk factors . . . . . . . . . . .	. . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . .	II-1
Appendix III	— **Accountants’ report of the **	Target Group	. . . . . . . . . . . . . . . . . . . .	III-1
Appendix IV	— **Management’s discussion and analysis of **		financial condition
	**and results of operations **	**of the Target **	Group . . . . . . . . . . . . . . .	IV-1
Appendix V	— Financial and additional information of the Group . . . . . . . . . . . .			V-1
Appendix VI	— Pro forma financial information on the Enlarged Group . . . . . . . .			VI-1
Appendix VII	— Property valuation of the Target Group		. . . . . . . . . . . . . . . . . . . . .	VII-1
Appendix VIII — Property valuation of the Group . . . . . .			. . . . . . . . . . . . . . . . . . . . .	VIII-1
Appendix IX	— Other information on the Target Group		. . . . . . . . . . . . . . . . . . . . .	IX-1
Appendix X	— General information . . . . .	. . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . .	X-1
**Notice of the **	Special General Meeting . . . . . . .	. . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . .	N-1

— ii —

EXPECTED TIMETABLE

Expected timetable and trading arrangements

Subject to the Capital Reorganisation becoming unconditional and effective which is expected to be on Thursday, 29 July 2004, Shareholders may on or after Thursday, 29 July 2004 and until Tuesday, 7 September 2004 submit certificates for the existing Shares in light yellow to the Company’s branch share registrar in Hong Kong, Abacus Share Registrars Limited at Ground Floor, Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong, at the expense of the Company, in exchange for new certificates in blue for New Shares in issue. Thereafter, certificates for the existing Shares will be accepted for exchange only on payment of a fee of HK$2.50 (or such higher amount as may from time to time be allowed by the Stock Exchange) for each new certificate issued for the New Shares. Nevertheless, certificates for the existing Shares will continue to be evidence of title and may be exchanged for certificates for the New Shares at any time but will not be valid for trading and settlement purposes after the last day of parallel trading. However, certificates for New Shares will continue to be valid for trading and settlement purpose after the change of name of the Company becomes effective. Immediately after the change of name of the Company has become effective, there will not be a period for free exchange of share certificates but certificates for the existing Shares or the New Shares will be accepted for exchange on payment of a fee of HK$2.50 (or such higher amount as may from time to time be allowed by the Stock Exchange) for each new certificate issued for the New Shares.

The following expected timetable is indicative only and is subject to change:

Latest time for lodging of proxy forms for the Special General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9:00 a.m. on Monday, 26 July 2004 Expected time and date of the Special General Meeting . . . . . . . . . . . . . . . . . . . .9:00 a.m. on Wednesday, 28 July 2004 Effective time and date of the Capital Reorganisation . . . . . . . . . . . . . . . . . . . . .9:30 a.m. on Thursday, 29 July 2004 Dealing in the New Shares commences. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9:30 a.m. on Thursday, 29 July 2004 Original counter for trading in the existing Shares (represented by existing Share certificates) in board lots of 2,000 Shares temporarily closes . . . . . . . . . . . . . . . . . . . . . . . . . .9:30 a.m. on Thursday, 29 July 2004 Temporary counter for trading in the New Shares (represented by existing Share certificates) in board lots of 50 New Shares opens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9:30 a.m. on Thursday, 29 July 2004

— iii —

EXPECTED TIMETABLE

First day of free exchange of existing Share certificates for

the Shares for new Share certificates for the New Shares . . . . . . . . .Thursday, 29 July 2004

Original counter for trading in the New Shares (represented by new share certificates for New Shares) in board lots of 1,000 New Shares re-opens . . . . . . . . . . . . . . . . . . . . . . . . . . .9:30 a.m. on Thursday, 12 August 2004 Parallel trading commences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9:30 a.m. on Thursday, 12 August 2004 Effective date for the change of name of the Company . . . . . . . . . . . .Friday, 27 August 2004 Temporary counter for trading the New Shares (represented by existing Share certificates) in board lots of 50 New Shares closes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4:00 p.m. on Thursday, 2 September 2004 Parallel trading ends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4:00 p.m. on Thursday, 2 September 2004 Last day for free exchange of existing share certificates for the Shares for new share certificates for the New Shares . . . . . .Tuesday, 7 September 2004

It is expected that the board lot size of the New Shares will become 1,000 New Shares with effect from 9:30 a.m. on Thursday, 29 July 2004. Further announcement(s) will be made by the Company in the event that there is any change to the above expected timetable.

— iv —

DEFINITIONS

In this circular, the following expressions shall have the meanings set out below unless the context requires otherwise:

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|||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|“Acquisition”|the|acquisition|by|the|Company|of|the|Sale|Shares|from|the|
|Vendor|
|“Acquisition|Agreement”|the|agreement|dated|3|June|2004|and|entered|into|between|the|
|Vendor,|Mr.|Wong|and|the|Purchaser|in|respect|of|the|
|Acquisition|
|“Announcement”|the|announcement|of|the|Company|dated|4|June|2004|
|“Assistance”|the|consent|to|use|this|circular|and|the|information|contained|
|herein|as|a|basis|for|the|offering|circular(s)|issued|in|
|connection|with|the|proposed|Placing(s)|
|“associate”|has|the|meaning|given|that|term|in|the|Listing|Rules|
|“Audio|Visual|Products|Counters|the|agreements|entered|and|to|be|entered|into|between|certain|
|Sub-lease|Agreements”|members|of|the|Target|Group|and|certain|members|of|the|
|Parent|Group,|brief|particulars|of|which|are|set|out|in|
|paragraph|(9)|of|the|section|headed|“Relationship|between|the|
|Target|Group|and|the|Parent|Group”|in|the|“Letter|from|the|
|Board”|of|this|circular|
|“Bank|Guarantees|Deed”|the|agreement|to|be|entered|into|between|certain|members|of|
|the|Parent|Group|and|the|Company|on|Completion|in|
|accordance|with|the|Acquisition|Agreement,|brief|particulars|
|of|which|are|set|out|in|paragraph|(3)|of|the|section|headed|
|“Relationship|between|the|Target|Group|and|the|Parent|
|Group”|in|the|“Letter|from|the|Board”|of|this|circular|
|“Beijing|Eagle”|(Beijing|Eagle|Investment|Co.,|Ltd.),|a|
|company|incorporated|with|limited|liability|under|the|laws|of|
|the|PRC|and|the|holding|company|of|the|Parent|Group|
|“Beijing|Gome”|(Beijing|Gome|Electrical|Appliance|Co.,|
|Ltd.),|a|company|incorporated|with|limited|liability|under|the|
|laws|of|the|PRC|and|a|member|of|the|Parent|Group|
|“Beijing|Gome|Debt”|the|amount|of|RMB1,088.5|million|(approximately|
|HK$1,026.9|million)|owed|by|Beijing|Gome|to|Gome|
|Appliance|as|at|the|date|of|the|Acquisition|Agreement|
|“Beijing|Shenren”|(Beijing|Shenren|Consultancy|Co.,|Ltd.),|
|a|company|incorporated|with|limited|liability|under|the|laws|
|of|the|PRC|

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— 1 —

DEFINITIONS

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||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
|“Board”|the|board|of|Directors|
|“Capital|Reduction”|the|reduction|of|the|par|value|of|each|Consolidated|Share|in|
|issue|as|particularised|in|the|section|headed|“Capital|
|Reorganisation”|in|the|“Letter|from|the|Board”|of|this|
|circular|
|“Capital|Reorganisation”|the|Share|Consolidation,|the|Capital|Reduction|and|the|Share|
|Subdivision|
|“CCASS”|the|Central|Clearing|and|Settlement|System|established|and|
|operated|by|HKSCC|
|“CGCC”|(China|General|Chamber|of|Commerce),|
|a|national|social|organisation|under|direct|
|administration|of|MOFCOM|(formerly|known|as|
|(State|Economic|&|Trade|
|Commission|of|the|PRC))|
|“Chengdu|Gome”|(Chengdu|Gome|Electrical Appliance|Co.,|
|Ltd.),|a|company|incorporated|on|17|August|2000|with|
|limited|liability|under|the|laws|of|the|PRC|and|a|member|of|
|the|Target|Group|
|“Chongqing|Gome”|(Chongqing|Gome|Electrical|Appliance|
|Co.,|Ltd.),|a|company|incorporated|on|17|August|2000|with|
|limited|liability|under|the|laws|of|the|PRC|and|a|member|of|
|the|Target|Group|
|“Company”|China|Eagle|Group|Company|Limited,|a|company|
|incorporated|on|31|January|1992|with|limited|liability|under|
|the|laws|of|Bermuda,|the|shares|of|which|are|listed|on|the|
|main|board|of|the|Stock|Exchange|
|“Completion”|completion|of|the|sale|and|purchase|of|the|Sale|Shares|in|
|accordance|with|the|Acquisition|Agreement|
|“Completion|Date”|the|date|on|which|Completion|takes|place|
|“connected|person”|has|the|meaning|given|that|term|in|the|Listing|Rules|
|“Connected|Transactions”|the|transactions|pursuant|to|the|Beijing|Gome|Debt,|the|
|Transitional|Purchasing|Service|Agreement,|the|Purchasing|
|Service|Agreement,|the|Management|Agreement,|the|Audio|
|Visual|Products|Counters|Sub-lease|Agreements|and|the|
|Assistance|

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— 2 —

DEFINITIONS

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|||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|“Continuing|Connected|the|transactions|contemplated|under|the|Transitional|
|Transactions”|Purchasing|Agreement,|the|Purchasing|Service|Agreement,|
|the|Management|Agreement|and|the|Audio|Visual|Products|
|Counters|Sub-lease|Agreements|
|“Consideration|Shares”|approximately|44.1|million|New|Shares|to|be|allotted|and|
|issued|by|the|Company|to|satisfy|part|of|the|consideration|for|
|the|Sale|Shares|in|accordance|with|the Acquisition Agreement|
|“Consolidated|Shares”|shares|of|HK$4.00|each|in|the|capital|of|the|Company|upon|
|the|Share|Consolidation|becoming|effective|
|“controlling|shareholder”|has|the|meaning|given|that|term|in|the|Listing|Rules|
|“Convertible|Notes”|the|First|Convertible|Note|and|the|Second|Convertible|Note|
|“Deed|of|Indemnity”|the|deed|of|indemnity|to|be|entered|into|between|Mr.|Wong,|
|the|Vendor|and|the|Company|at|Completion,|brief|particulars|
|of|which|are|set|out|in|the|section|headed|“Indemnities”|in|the|
|“Letter|from|the|Board”|of|this|circular|
|“Director(s)”|the|director(s)|of|the|Company|
|“Enlarged|Group”|the|Group|and|the|Target|Group|
|“ERP|system”|enterprise|resource|planning|system|
|“First|Convertible|Note”|the|convertible|note|in|the|amount|of|approximately|
|HK$7,031.4|million|to|be|issued|by|the|Company|on|
|Completion|to|satisfy|part|of|the|consideration|for|the|Sale|
|Shares|in|accordance|with|the|Acquisition|Agreement|
|“Fuzhou|Gome”|(Fuzhou|Gome|Electrical|Appliance|Co.,|
|Ltd.),|a|company|incorporated|on|11|July|2003|with|limited|
|liability|under|the|laws|of|the|PRC|and|a|member|of|the Target|
|Group|
|“GDP”|gross|domestic|products|
|“GFK”|GFK|Market|Consulting|(Shanghai)|Co.,|Ltd.|
|(|),|a|company|which|is|engaged|in|
|market|research|in|the|industrial,|retail|and|services|sectors|
|“Gome|Appliance”|(Gome|Appliance|Co.,|Ltd.),|a|Sino-foreign|
|equity|joint|venture|established|on|20|April|2004|under|the|
|laws|of|the|PRC|and|a|member|of|the|Target|Group|in|which|
|Ocean|Town|holds|a|65.0%|shareholding|

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|||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
|DEFINITIONS|
|“GOME|Group”|the Target|Group|and|the|Parent|Group|(other|than|Hong|Kong|
|Gome)|
|“Group”|the|Company|and|its|subsidiaries|
|“Guangzhou|Gome”|(Guangzhou|Gome|Electrical|Appliance|
|Co.,|Ltd.),|a|company|incorporated|on|9|April|2002|with|
|limited|liability|under|the|laws|of|the|PRC|and|a|member|of|
|the|Target|Group|
|“holding|company”|has|the|meaning|given|that|term|under|the|Listing|Rules|
|“HKSCC”|Hong|Kong|Securities|Clearing|Company|Limited|
|“Hong|Kong”|the|Hong|Kong|Special Administrative|Region|of|the|People’s|
|Republic|of|China|
|“Hong|Kong|Gome”|Gome|Home|Appliances|(H.K.)|Limited,|a|company|
|incorporated|with|limited|liability|under|the|laws|of|Hong|
|Kong|and|is|ultimately|wholly-owned|by|Mr.|Wong|
|“Independent|Board|Committee”|the|independent|committee|of|the|Board,|comprising|Messrs.|
|Michael|Sze|Tsai|Ping,|Chan|Yuk|Sang|and|Chen|Huai,|
|independent|non-executive|Directors|
|“Independent|Shareholders”|Shareholders|other|than|Mr.|Wong|and|his|associates,|who|are|
|not|involved|in|or|interested|in|the|Acquisition|or|any|of|the|
|Connected|Transactions|
|“Issue|Price”|the|price|of|HK$5.52|per|New|Share|
|“Jinan|Gome”|(Jinan|Gome|Electrical|Appliance|Co.,|
|Ltd.),|a|company|incorporated|on|30|April|2001|with|limited|
|liability|under|the|laws|of|the|PRC|and|a|member|of|the Target|
|Group|
|“Kunming|Gome”|(Kunming|Gome|Electrical|Appliance|
|Co.,|Ltd.),|a|company|incorporated|on|29|January|2003|with|
|limited|liability|under|the|laws|of|the|PRC|and|a|member|of|
|the|Target|Group|
|“Langfang|Gome”|(Langfang|Gome|Electrical|Appliance|
|Co.,|Ltd.),|a|company|incorporated|on|10|June|2003|with|
|limited|liability|under|the|laws|of|the|PRC|and|a|member|of|
|the|Target|Group|
|“Latest|Practicable|Date”|30|June|2004,|being|the|latest|practicable|date|for|
|ascertaining|certain|information|included|in|this|circular|

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— 4 —

DEFINITIONS

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||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
|“Listing|Committee”|has|the|meaning|given|that|term|in|the|Listing|Rules|
|“Listing|Rules”|the|Rules|Governing|the|Listing|of|Securities|on|the|Stock|
|Exchange|
|“Management|Agreement”|the|agreement|to|be|entered|into|between|Tianjin|Consultancy|
|and|Beijing|Gome|on|Completion|in|accordance|with|the|
|Acquisition|Agreement,|brief|particulars|of|which|are|set|out|
|in|paragraph|(7)|of|the|section|headed|“Relationship|between|
|the|Target|Group|and|the|Parent|Group”|in|the|“Letter|from|
|the|Board”|of|this|circular|
|“MOFCOM”|(the|Ministry|of|Commerce|of|the|PRC)|
|“Mr.|Wong”|Mr.|Wong|Kwong|Yu|(|)|
|“Ms.|Huang”|(Ms.|Huang|Yan|Hong)|
|“New|Shares”|shares|of|HK$0.10|in|the|capital|of|the|Company|upon|the|
|Capital|Reorganisation|becoming|effective|
|“Non-competition|Undertaking”|the|undertaking|to|be|executed|by|Mr. Wong|and|the|Company|
|on|Completion|in|accordance|with|the Acquisition Agreement,|
|brief|particulars|of|which|are|set|out|in|paragraph|(1)|of|the|
|section|headed|“Relationship|between|the|Target|Group|and|
|the|Parent|Group”|in|the|“Letter|from|the|Board”|of|this|
|circular|
|“Ocean|Town”|Ocean|Town|Int’l|Inc.,|a|company|incorporated|on|28|
|December|2001|with|limited|liability|under|the|laws|of|the|
|British|Virgin|Islands|and|is|ultimately|wholly-owned|by|Mr.|
|Wong|
|“Ocean|Town|Debt”|the|amount|of|approximately|RMB135.1|million|
|(approximately|HK$127.4|million)|as|owed|by|Ocean Town|to|
|Yi|Fu|in|connection|with|the|purchase|by|Ocean|Town|of|a|
|65.0%|interest|in|Gome|Appliance|from|Yi|Fu|as|at|the|date|
|of|the|Announcement,|which|has|been|repaid|in|full|as|at|the|
|Latest|Practicable|Date|

----- End of picture text -----

— 5 —

DEFINITIONS

“Parent Group”	(1) Beijing Gome; (2) companies which are engaged in or
	have been registered to be engaged in the retail sales of
	electrical appliances and consumer electronic products under
	the “GOME Electrical Appliances” trade mark at the locations
	under the column headed “Operated by the Parent Group” as
	set out in the section headed “Relationship between the Target
	Group and the Parent Group” in the “Letter from the Board”
	of this circular; and (3) Hong Kong Gome, all of which do not
	form part of the Target Group or the Group
“Placing(s)”	the possible placing(s) of part or all of the Consideration
	Shares and/or the Underlying Shares by Mr. Wong and/or the
	Vendor
“Placing Announcement(s)”	one or more announcements to be made by the Company in
	relation to the Placing
“PRC”	the People’s Republic of China (for the purposes of this
	circular, excluding Hong Kong, the Macau Special
	Administrative Region and Taiwan)
“Products”	electrical appliances and consumer electronic products which
	are sold by the Target Group
“Purchaser”	Eagle Decade Investments Limited, a company incorporated
	on 8 January 2003 under the laws of the British Virgin Islands
	and a wholly-owned subsidiary of the Company
“Purchasing Service Agreement”	the agreement to be entered into between Tianjin Logistics
	and Beijing Gome on Completion in accordance with the
	Acquisition Agreement, brief particulars of which are set out
	in paragraph (6) of the section headed “Relationship between
	the Target Group and the Parent Group” in the “Letter from
“Qingdao Gome”	the Board” of this circular (Qingdao Gome Electrical Appliance Co.,
	Ltd.), a company incorporated on 25 April 2001 with limited
	liability under the laws of the PRC and a member of the Target
	Group
“Right of First Refusal Deed”	the deed to be entered into between Mr. Wong and the
	Company on Completion in accordance with the Acquisition
	Agreement, brief particulars are set out in paragraph (2) of the
	section headed “Relationship between the Target Group and
	the Parent Group” in the “Letter from the Board” of this
	circular

— 6 —

DEFINITIONS

==> picture [456 x 602] intentionally omitted <==

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

||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
|“SARS”|severe|acute|respiratory|syndrome|
|“Sale|Shares”|all|of|the|issued|shares|of|Ocean|Town|at|Completion|
|“Second|Convertible|Note”|the|convertible|note|in|the|amount|of|approximately|
|HK$1,026.9|million|to|be|issued|by|the|Company|on|
|Completion|to|satisfy|part|of|the|consideration|for|the|Sale|
|Shares|in|accordance|with|the|Acquisition|Agreement|
|“SFO”|the|Securities|and|Futures|Ordinance|(Chapter|571|of|the|
|Laws|of|Hong|Kong)|
|“Shareholder(s)”|holder(s)|of|the|Shares|or|New|Shares|(as|the|case|may|be)|
|“Share(s)”|share(s)|of|par|value|HK$0.10|each|in|the|share|capital|of|the|
|Company|before|the|Capital|Reorganisation|becoming|
|effective|
|“Share|Consolidation”|the|consolidation|of|40|Shares|into|one|Consolidated|Share|as|
|particularised|in|the|section|headed|“Capital|Reorganisation”|
|in|the|“Letter|from|the|Board”|of|this|circular|
|“Share|Subdivision”|the|division|of|each|unissued|Consolidated|Share|into|40|New|
|Shares|as|particularised|in|the|section|headed|“Capital|
|Reorganisation”|in|the|“Letter|from|the|Board”|of|this|
|circular|
|“Shenyang|Gome”|(Shenyang|Gome|Electrical|Appliance|
|Co.,|Ltd.),|a|company|incorporated|on|24|April|2001|with|
|limited|liability|under|the|laws|of|the|PRC|and|a|member|of|
|the|Target|Group|
|“Shenzhen|Gome”|(Shenzhen|Gome|Electrical|Appliance|
|Co.,|Ltd.),|a|company|incorporated|on|26|April|2002|with|
|limited|liability|under|the|laws|of|the|PRC|and|a|member|of|
|the|Target|Group|
|“Somerley”|Somerley|Limited,|the|independent|financial|adviser|to|the|
|Independent|Board|Committee|and|the|Independent|
|Shareholders|in|relation|to|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|and|a|deemed|licensed|corporation|
|for,|among|other|things,|Type|6|(advising|on|corporate|
|finance)|regulated|activities|under|the|SFO|

----- End of picture text -----

— 7 —

DEFINITIONS

==> picture [456 x 630] intentionally omitted <==

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

|||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|“Special|General|Meeting”|the|special|general|meeting|of|the|Company|to|be|convened|
|for|the|purpose|of|considering|and,|if|thought|fit,|approving,|
|among|other|things,|the|Acquisition,|the|Connected|
|Transactions,|the|Capital|Reorganisation|and|the|change|of|
|company|name|
|“State|Information|Centre”|(State|Information|Centre),|an|organisation|
|authorised|by|the|State|Council|of|the|PRC|
|(|)|
|“Stock|Exchange”|The|Stock|Exchange|of|Hong|Kong|Limited|
|“subsidiary”|has|the|meaning|given|that|term|in|the|Listing|Rules|
|“Target|Group”|Ocean|Town|and|its|subsidiaries|
|“Tianjin|Consultancy”|(Tianjin|Gome|Commercial|
|Consultancy|Company|Limited),|a|company|incorporated|on|
|25|November|2003|with|limited|liability|under|the|laws|of|the|
|PRC|and|a|member|of|the|Target|Group|
|“Tianjin|Gome”|(Tianjin|Gome|Electrical|Appliance|Co.,|
|Ltd.),|a|company|incorporated|on|10|May|1999|with|limited|
|liability|under|the|laws|of|the|PRC|and|a|member|of|the Target|
|Group|
|“Tianjin|Logistics”|(Tianjin|Gome|Logistics|Company|
|Limited),|a|company|incorporated|on|11|November|2002|with|
|limited|liability|under|the|laws|of|the|PRC|and|a|member|of|
|the|Target|Group|
|“Trade|Mark|Licence|Agreement”|the|agreement|to|be|entered|into|between|Beijing|Gome|and|
|Gome|Appliance|on|Completion|in|accordance|with|the|
|Acquisition|Agreement,|brief|particulars|of|which|are|set|out|
|in|paragraph|(8)|of|the|section|headed|“Relationship|between|
|the|Target|Group|and|the|Parent|Group”|in|the|“Letter|from|
|the|Board”|of|this|circular|
|“Transitional|Purchasing|Service|the|agreement|to|be|entered|into|between|Beijing|Gome|and|
|Agreement”|Gome|Appliance|on|Completion|in|accordance|with|the|
|Acquisition|Agreement,|brief|particulars|of|which|are|set|out|
|in|paragraph|(5)|of|the|section|headed|“Relationship|between|
|the|Target|Group|and|the|Parent|Group”|in|the|“Letter|from|
|the|Board”|of|this|circular|
|“Underlying|Shares”|the|New|Shares|to|be|issued|by|the|Company|pursuant|to|the|
|exercise|of|the|conversion|rights|under|the|Convertible|Notes|

----- End of picture text -----

— 8 —

DEFINITIONS

“Vendor” l “Weifang Gome” l “WTO” “Wuhan Gome” l “Xian Gome” l t “Yi Fu” l “Zibo Gome” l “Zigong Gome” l t “HK$” “RMB” “%”

Gome Holdings Limited, a company incorporated with limited iability under the laws of the British Virgin Islands and ultimately wholly-owned by Mr. Wong (Weifang Gome Electrical Appliance Co., Ltd.), a company incorporated on 21 April 2003 with limited iability under the laws of the PRC and a member of the Target Group World Trade Organization (Wuhan Gome Electrical Appliance Co., Ltd.), a company incorporated on 28 May 2002 with limited iability under the laws of the PRC and a member of the Target Group (Xian Gome Electrical Appliance Co., Ltd.), a company incorporated on 7 February 2001 with imited liability under the laws of the PRC and a member of he Target Group (Beijing Eagle Yi Fu Network Technologies Co. Ltd.), a company incorporated with limited iability under the laws of the PRC and ultimately wholly- owned by Mr. Wong (Zibo Eagle Gome Appliance Co., Ltd.), a company incorporated on 21 May 2003 with limited iability under the laws of the PRC and a member of the Target Group (Zigong Gome Electrical Appliance Co., Ltd.), a company incorporated on 28 October 2003 with imited liability under the laws of the PRC and a member of he Target Group Hong Kong dollar, the lawful currency of Hong Kong Renminbi, the lawful currency of the PRC per cent.

For the purpose of this circular, conversion of Renminbi into Hong Kong dollar is calculated at the exchange rate of RMB1.06 to HK$1.00. Such conversion has been included for the purpose of illustration only and does not constitute a representation that any amounts have been, could have been, or may be, exchanged at this or any other rate.

— 9 —

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:

Sze Tsai Ping, Michael Chan Yuk Sang Chen Huai

Registered office: Canon’s Court 22 Victoria Street Hamilton HM12 Bermuda

5 July 2004

To the Shareholders

Dear Sir/Madam

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

The Company announced in the Announcement that on 4 June 2004, the Vendor, the Purchaser and Mr. Wong entered into the Acquisition Agreement pursuant to which the Company has conditionally agreed to purchase the Sale Shares, representing the entire issued share capital of Ocean Town, from the Vendor, a company ultimately wholly-owned by Mr. Wong, for RMB8.8 billion (approximately HK$8.3 billion). Such consideration will be satisfied as to HK$243.5 million by the issue of the Consideration Shares, being approximately 44.1 million New Shares, at the Issue Price, as to approximately HK$7,031.4 million by the issue of the First Convertible Note and as to approximately HK$1,026.9 million by the issue of the Second Convertible Note.

• For identification purposes only

— 10 —

LETTER FROM THE BOARD

The Acquisition constitutes a very substantial acquisition and a connected transaction for the Company under the Listing Rules. Pursuant to the Acquisition Agreement and upon Completion, the Company will enter into the Connected Transactions which will also require the approval of the Independent Shareholders in accordance with the Listing Rules.

The Board has proposed the change of the Company’s name to “GOME Electrical Appliances Holding Limited” and the adoption of “ ” as the Chinese translation of the English name of the Company.

The Board has also proposed the Capital Reorganisation which will involve: (1) the Share Consolidation; (2) the Capital Reduction; and (3) the Share Subdivision and a change in board lot size of the New Shares.

The Board has proposed to give the Assistance in connection with the Placing(s) subject to Completion.

ABN AMRO Asia Corporate Finance Limited and N M Rothschild & Sons (Hong Kong) Limited have been appointed as the joint financial advisers to the Company in relation to the Acquisition.

The Independent Board Committee has been formed to advise the Independent Shareholders in relation to the Acquisition and the Connected Transactions. Somerley has been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders as to whether or not the terms of the Acquisition and the Connected Transactions are fair and reasonable so far as the Independent Shareholders are concerned, and whether the Acquisition and the Connected Transactions are in the interest of the Company.

The purpose of this circular is:

• (a) to provide you with details on the Acquisition, the Connected Transactions, the Capital Reorganisation, the proposed change in board lot size of the New Shares and the proposed change of the Company’s name;

• (b) to set out the advice of Somerley to the Independent Board Committee and the Independent Shareholders 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;

• (c) to set out the recommendations of the Independent Board Committee 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; and

• (d) to give you notice of the Special General Meeting to consider and if thought fit, to approve the Acquisition, the Connected Transactions, the Capital Reorganisation, the proposed change in board lot size of the New Shares and the proposed change of the Company’s name.

— 11 —

LETTER FROM THE BOARD

Your attention is hereby drawn to pages N-1 to N-5 of this circular where you will find a notice of the Special General Meeting to be held on Wednesday, 28 July 2004.

Upon Completion, it is the Company’s intention to change the financial year end of the Enlarged Group to 31 December going forward to conform with the financial year end of the Target Group to provide a consistent accounting period for the Enlarged Group in order to consolidate the results of the Target Group with those of the Group. Further announcement will be made by the Company to the Shareholders once such decision is finalised.

THE ACQUISITION AGREEMENT

Date:

3 June 2004

Parties:

Gome Holdings Limited, as the Vendor.

Mr. Wong Kwong Yu ( ), as the guarantor of the Vendor’s obligations under the Acquisition Agreement.

Eagle Decade Investments Limited, as the Purchaser.

Subject matter of sale and purchase:

The Sale Shares, representing the entire issued share capital of Ocean Town at Completion.

Consideration:

The consideration for the Sale Shares is RMB8.8 billion (approximately HK$8.3 billion). Such consideration will be satisfied at Completion as follows:

1. as to HK$243.5 million by the allotment and issue, at the Issue Price, of approximately 44.1 million New Shares, which will not be subject to any lock-up provisions;

2. as to approximately HK$7,031.4 million by the issue of the First Convertible Note; and

3. as to approximately HK$1,026.9 million by the issue of the Second Convertible Note.

Based on the closing price of the Shares on 21 May 2004 (being the last trading day of the Shares prior to the suspension of trading in the Shares on the Stock Exchange before the date of the Announcement) of HK$0.148 per Share, the market value attached to the Acquisition (i.e. the market value of the Consideration Shares and the face value of the Convertible Notes) is approximately HK$8.3 billion.

— 12 —

LETTER FROM THE BOARD

The consideration has been determined after arm’s length negotiations with reference to the leading position, extensive network, well-established brand, business potential and growth prospect of the Target Group. The Directors consider that the terms of the Acquisition Agreement are fair and reasonable so far as the Company and the Shareholders as a whole are concerned.

An application will be made by the Company to the Stock Exchange for the listing of, and permission to deal in, the Consideration Shares and the Underlying Shares.

The Issue Price

The Issue Price of the Consideration Shares and the price at which the Convertible Notes are to be converted into the Underlying Shares represents:

1. a discount of approximately 6.8% from HK$5.92, the closing price of the Shares (adjusted for effects of the Share Consolidation) on the Stock Exchange on 21 May 2004, being the last trading day prior to the suspension of trading in the Shares prior to the date of the Announcement;

2. a discount of approximately 14.2% from approximately HK$6.43, the average closing price of Shares (adjusted for effects of the Share Consolidation) on the Stock Exchange for the last 10 full trading days prior to the suspension of trading in the Shares prior to the date of the Announcement;

3. a discount of approximately 49.6% from approximately HK$10.95, the average closing price of the Shares (adjusted for effects of the Share Consolidation) on the Stock Exchange for the last 30 full trading days prior to the suspension of trading in the Shares prior to the date of the Announcement;

4. a discount of approximately 31.3% from approximately HK$8.04, the closing price of the Shares (adjusted for effects of the Share Consolidation) on the Stock Exchange on the Latest Practicable Date;

5. a discount of approximately 41.1% to the latest audited consolidated net tangible assets of the Group of approximately HK$9.37 per New Share as at 31 March 2004; and

6. a premium of approximately 11.1% to the audited consolidated net tangible assets of the Group of approximately HK$4.97 per New Share as at 31 March 2004 as adjusted by the conversion of the convertible notes into 2,700 million Shares subsequent to 31 March 2004.

The Issue Price was determined with reference to the consolidated net tangible asset value per Share and the latest closing prices of the Shares prior to the suspension of trading in the Shares prior to the date of the Announcement.

The Consideration Shares have an aggregate market value of approximately HK$261.2 million (calculated on the basis of HK$5.92 per New Share with reference to the closing price of the Shares on the Stock Exchange on 21 May 2004, being the last trading day prior to the suspension of trading in the Shares prior to the date of the Announcement).

— 13 —

LETTER FROM THE BOARD

Discharge of the Ocean Town Debt

As at the date of the Announcement, Ocean Town was indebted to Yi Fu in the amount of the Ocean Town Debt. Pursuant to an agreement dated 8 February 2004 entered into between Ocean Town and Yi Fu, Ocean Town has acquired a 65.0% equity interest in Gome Appliance from Yi Fu at a consideration of RMB241.0 million (approximately HK$227.4 million). As at the Latest Practicable Date, Ocean Town has repaid in full the Ocean Town Debt, representing the balance of the consideration due from Ocean Town to Yi Fu pursuant to the said agreement. Pursuant to the Acquisition Agreement, Mr. Wong has subscribed for shares in Ocean Town in cash in that amount and has procured such subscription proceeds to discharge in full the Ocean Town Debt. At Completion, the Company will acquire the entire issued share capital of Ocean Town.

Conditions precedent

Completion is subject to the fulfillment of the following conditions:

1. the Acquisition not being deemed to be a reverse takeover under the Listing Rules;

2. the approval by the Independent Shareholders in general meeting by way of a poll of (a) the Acquisition; (b) the allotment and issue of the Consideration Shares and the Underlying Shares and the issue of the Convertible Notes by the Company; (c) all other transactions contemplated under the Acquisition Agreement; and (d) the Connected Transactions;

3. the Listing Committee of the Stock Exchange granting the listing of, and permission to deal in, the Consideration Shares and the Underlying Shares;

4. (where required) the Bermuda Monetary Authority granting its permission to the allotment and issue of the Consideration Shares and the Underlying Shares;

5. the obtaining of all licences, consents, approvals, authorisations, permissions, waivers, orders or exemptions from government or regulatory authorities or third parties which are necessary or desirable in connection with the execution and performance of the Acquisition Agreement and any of the transactions contemplated under the Acquisition Agreement (collectively, the “Consents”);

6. Mr. Wong having provided funds to Ocean Town by way of share subscription and having procured Ocean Town to use such funds to discharge in full the Ocean Town Debt on or before Completion;

7. the Capital Reorganisation becoming effective and unconditional;

8. the legal and financial due diligence on the Target Group having been completed to the satisfaction of the Purchaser; and

9. Mr. Wong and the Vendor having complied with their obligations under the Acquisition Agreement.

— 14 —

LETTER FROM THE BOARD

The Vendor and the Purchaser may jointly waive the condition precedent in item 5 above at any time if it is agreed that the Consent(s) which have not been obtained is/are not material to the business of the Group and the Target Group taken as a whole, and such waiver may be subject to such terms and conditions as may be jointly determined by the Vendor and the Purchaser. All the other conditions precedent above cannot be waived.

The conditions precedent as set out in items 4 and 6 above have been satisfied. Other than the conditions precedent as set out in items 4 and 6, all other conditions precedent have not been satisfied as at the Latest Practicable Date.

The legal and financial due diligence to be undertaken by the Purchaser and/or its advisers on the Target Group in paragraph 8 above will be conducted on, and during the process, will also verify, the financial and operational data of the Target Group as set out in this circular.

Warranty

Pursuant to the Acquisition Agreement, each of the Vendor and Mr. Wong has warranted and undertaken with the Purchaser that the net asset value of the Target Group as at Completion will be at least RMB241.0 million (approximately HK$227.4 million). Under the terms of the Acquisition Agreement, an international accounting firm will be engaged by the Purchaser to determine the net asset value of the Target Group as at Completion. In the event of a shortfall, the Purchaser will be entitled to claim against each of the Vendor and Mr. Wong for the shortfall and any related costs within a two-year period after Completion. The Directors are of the view that the Purchaser would have sufficient time during the two-year period after Completion to initiate any claims against the Vendor or Mr. Wong in the event of a shortfall given that the Company will be in a position to determine the net asset value of the Target Group after Completion. Pursuant to the terms of the Acquisition Agreement, each of Mr. Wong and the Vendor has undertaken to indemnify the Purchaser against all costs, expenses, damages and liabilities which the Purchaser would incur in respect of any breach of such warranty by Mr. Wong and the Vendor. The Company will issue a further announcement in the event that there is a shortfall of the net asset value of the Target Group as at Completion.

Completion

Completion will take place within five business days after all the conditions precedent have either been fulfilled and/or waived. If any of the conditions precedent to Completion has not been fulfilled (or waived by the relevant parties) by 30 November 2004 (or such later date as the parties to the Acquisition Agreement may agree in writing), the Acquisition Agreement will lapse and all obligations and liabilities of all parties thereunder will cease except for antecedent breaches.

Indemnities

For the benefit of the Enlarged Group, each of Mr. Wong, the Vendor and Beijing Gome will, upon Completion, give an indemnity under the Deed of Indemnity to the following effect.

— 15 —

LETTER FROM THE BOARD

Each of Mr. Wong and the Vendor has covenanted with the Purchaser that he/it will indemnify and at all times keep the relevant member of the Target Group indemnified against any costs, claims, losses and liabilities of whatsoever nature arising from, or which may be incurred or suffered by it due to or in connection with:

• (1) the transfer of assets and liabilities to Ocean Town or any tax liability which may arise as a result of the reorganisation of the Target Group prior to the date of the Acquisition Agreement; and

• (2) any tax liability which has not been provided for in the audited accounts of the Target Group for the three years ended 31 December 2003 and the three months ended 31 March 2004, including without limitation any value added tax, capital gain tax, tax and ancillary payments in connection with its business, penalty and any interest for non-payment;

other than as a result of or in connection with the ordinary course of business of the Target Group or to the extent that provision has been made for such taxation in the audited accounts of the Target Group for the three years ended 31 December 2003 and the three months ended 31 March 2004.

Each of Mr. Wong and the Vendor will also indemnify the Group against, under the Deed of Indemnity, any liability, costs or expenses incurred by any member of the Target Group arising from or caused by the Target Group being prohibited from using and occupying or being evicted from any of the properties, leased on or before Completion, by the Target Group in the PRC (the “PRC Leased Premises”) by any third party (including any PRC governmental authorities, any other competent authorities, the legal or beneficial owner of the relevant PRC Leased Premises) on the grounds that the landlord does not have the building ownership right or land use right to the relevant PRC Leased Premises and/or has not obtained the requisite land use right certificate and/or building ownership certificate.

SUMMARY OF THE PRINCIPAL TERMS OF THE CONVERTIBLE NOTES

The following are the principal terms of the First Convertible Note and the Second Convertible Note:

Amount:	Approximately HK$8,058.3 million (being the aggregate principal
	amount of the First Convertible Note and the Second Convertible
	Note).
Interest:	Non-interest bearing.
Maturity:	In respect of the First Convertible Note, the third anniversary of the
	date of issue. In respect of the Second Convertible Note, (1) the third
	anniversary of the date of issue or (2) the payment date of the
	Beijing Gome Debt, whichever is the later.

— 16 —

LETTER FROM THE BOARD

• In the event that the repayment of the Beijing Gome Debt takes place after the third anniversary of the issue date, mandatory conversion of the Second Convertible Note will occur on the repayment date of the Beijing Gome Debt.

Conversion price:

• Equivalent to the Issue Price, being HK$5.52 per New Share.

• Based on the conversion price of HK$5.52 per New Share, approximately 1,459.8 million New Shares will be issued upon the full conversion of the Convertible Notes, representing:

• (a) approximately 1,054.1% of the existing issued share capital of the Company after the Capital Reorganisation;

• (b) approximately 91.3% of the issued share capital of the Company after the Capital Reorganisation and as enlarged by the exercise in full of the conversion rights attached to the Convertible Notes; and

• (c) approximately 88.9% of the issued share capital of the Company after the Capital Reorganisation and as enlarged by the issue of the Consideration Shares and the exercise in full of the conversion rights attached to the Convertible Notes.

Exercisable period: Any time prior to maturity. The conversion rights under the Second Convertible Note are only exercisable after the repayment of the Beijing Gome Debt.

• Redemption: No early redemption, mandatory conversion upon maturity and no cash redemption so that the Company will not have any funding requirement for repayment.

Transferability: The First Convertible Note may be assigned or transferred to any third party who is not a connected person and is approved by the Company.

The Second Convertible Note, subject to the repayment of the Beijing Gome Debt, may be assigned or transferred to any third party who is not a connected person of, and is approved by, the Company.

— 17 —

LETTER FROM THE BOARD

The following table sets out the capital structure of the Company (a) as at the Latest Practicable Date; (b) immediately after the Capital Reorganisation; (c) after Completion; and (d) after full conversion of the Convertible Notes.

Reduction of

			Reduction of
			the par value	Subdivision of
		Consolidation	of each	each authorised
	As at	of 40 Shares	Consolidated	but unissued		After full
	Latest	into one	Share in issue	Consolidated		conversion of
	Practicable	Consolidated	from HK$4.00	Share into	After	the Convertible
	Date	Share	to HK$0.10	40 New Shares	Completion	Notes
		(Note 1)	_(Note 1) _	(Notes 1 and 2)	(Note 3)	(Note 4)
Authorised share capital
(HK$ million)	5,000.0	5,000.0	5,000.0	5,000.0	5,000.0	5,000.0
Authorised number of
shares (million)	50,000.0	1,250.0	1,250.0	50,000.0	50,000.0	50,000.0
Issued and fully paid
share capital
(HK$ million)	553.9	553.9	13.8	13.8	18.3	164.2
Issued and fully paid
number of shares
(million)	5,539.3	138.5	138.5	138.5	182.6	1,642.4
					(Note 5)
Book value of the
Convertible Notes
(HK$ million)	—	—	—	—	222.9	—
					(Note 6)
Underlying number of
New Shares (million)	—	—	—	—	1,459.8	—

Notes:

1. Without taking into account of the Consideration Shares and the Underlying Shares.

2. Immediately upon completion of the Capital Reorganisation.

3. Assuming the Capital Reorganisation has become effective, the Consideration Shares have been issued and none of the Convertible Notes have been converted into Underlying Shares.

4. Assuming the Capital Reorganisation has become effective.

5. Includes the Consideration Shares.

6. As set out in the section headed “Unaudited pro forma balance sheet of the Enlarged Group” in Appendix VI to this circular.

— 18 —

LETTER FROM THE BOARD

SHAREHOLDING STRUCTURE BEFORE AND AFTER COMPLETION

As at the Latest Practicable Date, Mr. Wong was interested in 3,706,003,500 Shares, representing approximately 66.9% of the issued share capital of the Company.

Mr. Wong will be interested in approximately 136.8 million New Shares, representing approximately 74.9% of the issued share capital of the Company as enlarged by the issue of the Consideration Shares upon Completion, or if the Convertible Notes are converted in full into the Underlying Shares, approximately 1,596.6 million New Shares, representing approximately 97.2% of the issued share capital of the Company as enlarged by the issue of the Consideration Shares and the Underlying Shares.

The following chart shows the simplified holding structure of the Company as at the Latest Practicable Date.

==> picture [350 x 173] intentionally omitted <==

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

Mr. Wong Public Shareholders
66.9% 33.1%
100%
Ocean Town
the Company
65%
35.0%
Gome Appliance
100%
the Parent Group
----- End of picture text -----

— 19 —

LETTER FROM THE BOARD

The following chart shows the simplified holding structure of the Company immediately following Completion (but before the exercise of the conversion rights under the Convertible Notes and the occurrence of any Placing) and assuming that there have been no other changes in the issued share capital of the Company after the Latest Practicable Date.

		Mr. Wong and his associates	Mr. Wong and his associates	Mr. Wong and his associates								Public Shareholders	Public Shareholders
				74.9%								25.1%
									the Company
										100.0%
		100.0%							Ocean Town
										65.0%
								Gome Appliance
						35.0%
		the Parent Group
	The shareholding structure of the Company								(a)	as at the Latest Practicable Date; (b)				immediately
after	Completion but			before conversion of the Convertible Notes; and (c)									after Completion and full
conversion of the Convertible Notes is as								follows:
									Number of New
									Shares directly				Number of New
									and indirectly				Shares directly
									**held **	immediately			and indirectly
				**Number **	of				after Completion				held after
				Shares directly						but before			Completion and
				and indirectly						conversion	Approximate		full conversion	Approximate
				**held as **	at	Approximate				of the	% of total		of the	% of total
				the Latest		**% **	of total			Convertible	issued New		Convertible	issued New
Name				Practicable Date		**issued **		Shares		Notes		Shares	Notes	Shares
Mr. Wong and his		associates		3,706,003,500				66.9		136,767,841		74.9	1,596,615,086	97.2
Public	Shareholders			1,833,300,000				33.1		45,832,500		25.1	45,832,500	2.8
Total				5,539,303,500				100.0		182,600,341		100.0	1,642,447,586	100.0

If the Placing were to be effected, the shareholdings of the above parties in the Company immediately following Completion would be subject to material changes.

Immediately upon Completion and after full conversion of the Convertible Notes, it is expected that there will not be any change of control of the Company.

— 20 —

LETTER FROM THE BOARD

INFORMATION ON THE TARGET GROUP

General overview

In this circular, information relating to the Target Group has been included based on the information provided by the management of the Target Group. As set out in the section headed “Conditions precedent” above, a legal and financial due diligence on the Target Group will be completed to the satisfaction of the Purchaser prior to Completion and the financial and operational data relating to the Target Group as set out in this circular has been verified during the due diligence process carried out by the Group.

According to the State Information Centre, the GOME Group, which comprises the Target Group and the Parent Group (other than Hong Kong Gome), was the largest retail chain operator of electrical appliances and consumer electronic products in the PRC in terms of turnover for 2002 and 2003. As at the Latest Practicable Date, the Target Group operated 96 retail outlets in the PRC and the Parent Group operated 39 retail outlets in the PRC and Hong Kong.

The Target Group began its operation in 1987 with the opening of its first electrical appliance retail outlet in Beijing. In 1993, the GOME Group began to develop its chain store network and adopted the “GOME Electrical Appliances” brand name for all of the retail outlets it was then operating. The GOME Group began to expand beyond Beijing in 1999, establishing its first outlet in Tianjin. This was followed by the establishment of further retail outlets in other major cities in the PRC such as Chengdu, Chongqing and Xian.

The Target Group has a strong operating history. In addition to the improved living standards and increased household consumption in the PRC (as discussed in Appendix I to this circular (Industry overview)) over the past few years, the Target Group’s established retail network and well-recognised brand name have jointly contributed to the growth in the turnover and net profit of the Target Group over the past few years. The audited turnover of the Target Group for the three years ended 31 December 2003 was approximately RMB3,872.6 million, RMB6,619.0 million and RMB9,346.4 million, respectively, representing increases of approximately 70.9% in 2002 and 41.2% in 2003, as compared to the turnover for the previous year. The Target Group’s audited net profit after taxation and minority interests for the three years ended 31 December 2003 was approximately RMB16.5 million, RMB69.2 million and RMB178.5 million, respectively, representing increases of approximately 319.4% in 2002 and 157.9% in 2003, as compared to the Target Group’s audited net profit after taxation and minority interests for the previous year.

The Directors have decided that going forward, the Company’s resources will be focused on the PRC retail sector. The Directors have identified the Target Group for acquisition by the Company as they consider that the retail outlets operated by the Target Group have established track records and therefore provide a stable base for future development. Pursuant to the Management Agreement to be entered into between Tianjin Consultancy, a member of the Target Group, and Beijing Gome, a member of the Parent Group, on or around Completion, the Target Group will also manage the Parent Group after Completion. Further details of the Management Agreement are set out in the section headed “Relationship between the Target Group and the Parent Group” below.

— 21 —

LETTER FROM THE BOARD

Business objectives

The Target Group intends to further deepen its market penetration of, and enhance its leading position in, the retail market of electrical appliances and consumer electronics in the PRC through leveraging and enhancing its strengths. To achieve this, the Target Group has developed the following business objectives:

• (i) develop comprehensive geographical and population network coverage in the retail industry;

• (ii) leverage on its economies of scale and profitability;

• (iii) establish itself as a high service quality retailer while maintaining the lowest prices in the location in which it operates; and

• (iv) provide new shopping experience in terms of competitive pricing and variety of merchandise.

Competitive strengths

The management of the Target Group considers that the success of the Target Group is attributable to the following key competitive strengths, a view which is also shared by the Directors:

• Large scale enhances competitive pricing structure and ability to react quickly to changing market conditions. The Target Group has established a leading position in the PRC retail market for electrical appliances and consumer electronic products. As at the Latest Practicable Date, the Target Group operated 96 retail outlets in 22 cities with revenue totalling approximately RMB9,346.4 million in 2003. This extensive sales network has resulted in significant product turnover enabling the Target Group to establish direct purchasing relationships and to strengthen the Target Group’s negotiating power with product manufacturers and suppliers. As a result, the Target Group can offer its customers a wide range of products at competitive prices.

• Strong brand recognition. As measured by turnover, the Target Group, together with the Parent Group (excluding Hong Kong Gome), was the largest nationwide retail chain operator for electrical appliances and consumer electronic products in the PRC in 2002 and 2003. With a reputation for competitive prices, service and quality products, the “GOME” brand is well-established in the PRC retail industry. The Target Group emphasises selling its customers quality products with a high standard of service, and endeavours to link these goals with the “GOME” brand.

• Demonstrated management experience. The Target Group’s senior management has demonstrated experience in the electrical appliances and consumer electronic products sector in the PRC. Mr. Wong, the founder of the Target Group, has over 17 years of

— 22 —

LETTER FROM THE BOARD

experience in the electrical appliances and consumer electronics products retail industry. Members of the senior management team have worked in this sector, on average, for over eight years. The Directors intend to retain all members of the Target Group’s senior management team after Completion.

• Recent PRC government recognition facilitates expansion strategy. In 2004, the Target Group, together with the Parent Group, was selected by MOFCOM as one of the PRC’s fifteen key commercial enterprises. The Target Group’s management and the Directors believe that such recognition has elevated the Target Group’s status compared to its competitors, facilitates the expansion of its retail sales network and enhances its endurance against increased competition arising from the development of PRC’s retail sector.

Structure of the Target Group

The following chart shows the simplified corporate structure of the Target Group as at the Latest Practicable Date.

==> picture [455 x 283] intentionally omitted <==

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

Ocean Town
(BVI)
65%
Gome Appliance
(PRC)
(Note 1)
100%
Tianjin Guang- Chong-
Tianjin Tianjin Jinan Shenyang Qingdao Shenzhen Xian Chengdu Kunming Wuhan Fuzhou Beijing
Consul- zhou qing
Gome Logistics Gome Gome Gome Gome Gome Gome Gome Gome Gome outlet
tancy Gome Gome
(PRC) (PRC) (PRC) (PRC) (PRC) (PRC) (PRC) (PRC) (PRC) (PRC) (PRC) (Note 2)
(PRC) (PRC) (PRC)
100% 100% 100% 100%
Langfang Zibo Weifang Zigong
Gome Gome Gome Gome
(PRC) (PRC) (PRC) (PRC)
----- End of picture text -----

Note 1: The interests in the subsidiaries of Gome Appliance are held directly by Gome Appliance and/or indirectly by its nominees.

Note 2: A business operation and a non-corporate entity.

— 23 —

LETTER FROM THE BOARD

History and development

The GOME Group was founded by Mr. Wong, the Chairman and controlling shareholder of the Company, when he opened the first electrical appliance retail outlet in Beijing in 1987. In 1993, the GOME Group first developed the identity of an electrical appliance retail chain operator as it began to adopt the “GOME Electrical Appliances” name for all of the retail outlets it was then operating. The GOME Group began to expand beyond Beijing in 1999 and established its first retail outlet in Tianjin. This was followed by the establishment of further retail outlets in other major cities in the PRC such as Chengdu, Chongqing and Xian. According to the State Information Centre, the GOME Group was the largest retail chain operator of electrical appliances and consumer electronic products in the PRC in terms of turnover for 2002 and 2003.

The GOME Group underwent a reorganisation over the period from April 2003 to April 2004. Pursuant to such group reorganisation, (i) all assets and liabilities owned by Beijing Gome in Beijing, with the exclusion of certain assets and liabilities which were unrelated to the Relevant Business or which were untransferable, and (ii) the entire equity interests of each of the remaining 18 companies were transferred to Gome Appliance. Further, with effect from 20 April 2004, a 65.0% equity interest in Gome Appliance was transferred to Ocean Town and Gome Appliance was reformed into a Sino-foreign equity joint venture. Ocean Town then became the holding company of the companies now comprising the Target Group. As at the Latest Practicable Date, Ocean Town was a holding company holding 65.0% equity interest in Gome Appliance as its sole asset.

The following table sets out the growth in the number of outlets operated by the Target Group as at the end of each of 2001, 2002 and 2003 and as at 31 March 2003 and 2004 and the Latest Practicable Date based on the information provided by the management of the Target Group.

							Latest
	**Year **	**ended 31 **	December	**31 **	March		Practicable
	2001	2002	2003	2003	2004		Date
Number of outlets	32	47	79	54		86	96
Number of cities covered	7	11	19	11		20	22
	(Note 1)	(Note 2)	(Note 3)	(Note 2)	_(Note _	4)	(Note 5)
Number of provinces and	7	9	11	9		11	11
directly administered
municipalities covered
Approximate usable area	98,000	148,000	271,000	172,000	303,000		338,000
(square metre)
Approximate weighted usable	75,000	122,000	204,000	N/A	N/A		N/A
area (square metre) (Note 6)
Approximate annual revenue	51,600	54,300	45,800	N/A	N/A		N/A
per weighted usable area of
retail outlets (RMB) (Note 7)

— 24 —

LETTER FROM THE BOARD

• Note 1: The cities in which the Target Group operated were Chengdu, Xian, Shenyang, Qingdao, Chongqing, Beijing and Tianjin.

• Note 2: In addition to the cities as referred to in Note 1, the cities in which the Target Group operated included Jinan, Guangzhou, Shenzhen and Wuhan.

• Note 3: In addition to the cities as referred to in Notes 1 and 2, the cities in which the Target Group operated included Langfang, Zigong, Weifang, Zibo, Kunming, Fuzhou, Huizhou and Dongguan.

• Note 4: In addition to the cities as referred to in Notes 1, 2 and 3, the cities in which the Target Group operated included Foshan.

• Note 5: In addition to the cities as referred to in Notes 1, 2, 3 and 4, the cities in which the Target Group operated included Zhongshan and Fuqing.

• Note 6: Weighted by the actual number of months that the retail outlets have operated during the relevant year.

• Note 7: Calculated as annual revenue divided by approximate weighted usable area. N/A: Not applicable

As at the Latest Practicable Date, the Target Group has not encountered any major difficulties in establishing any outlets and expanding the number of outlets in accordance with its plan.

As at the Latest Practicable Date, the total usable area of the retail outlets operated by the Target Group was approximately 338,000 square metres and the usable area for the majority of the outlets ranges from 3,000 to 6,000 square metres per outlet. As at the Latest Practicable Date, all retail outlets were located at premises which have been leased by the Target Group from independent third parties, who are not connected persons of the Company, with lease terms generally ranging from five to 10 years. Rentals are negotiated by reference to prevailing market rates. Such leases will continue after Completion. Such retail outlets all carry the name of the established “GOME” brand with a standardised visual image including shop front and merchandise display system. The valuation of the property interests of the Target Group is set out in Appendix VIII to this circular.

— 25 —

LETTER FROM THE BOARD

Retail network

As at the Latest Practicable Date, the Target Group had 96 retail outlets located across 22 cities in the PRC.

==> picture [453 x 524] intentionally omitted <==

— 26 —

LETTER FROM THE BOARD

Expansion strategies and future plans

The Target Group plans to further deepen its market penetration of, and enhance its leading position in, the retail market for electrical appliances and consumer electronic products in the PRC. To achieve such expansion, the Target Group intends to undertake the following actions:

Expand its retail sales network through organic growth and acquisition

The Target Group plans to establish additional retail outlets in cities where it already has retail outlets and to expand into cities with strong growth potential but no existing Target Group retail outlets. For traditional retail outlets with a floor area of approximately 3,500 square metres and with existing outlets in the same city, the Target Group’s management will strive to limit the average start-up cost per outlet to approximately RMB1.2 million. Typically, the Target Group’s management estimates that such outlets can be opened within 30 days from the signing of the lease for the premises. The Target Group’s expansion plan for traditional retail outlets up to the end of 2006 is as follows:

				After the Latest
				Practicable Date and
				up to the end of 2004	2005	2006
Number	of	new	outlets	24	35	35

The establishment of a retail outlet is subject to the assessment and approval by both the outlet development department and the senior management of Gome Appliance.

When evaluating any prospective outlet location in a region where the Target Group does not have any retail outlet, the outlet development department of Gome Appliance will prepare a detailed feasibility report. In addition to an evaluation of the site location (including pedestrian flow and existing and potential competition), the feasibility report will also include factors such as the population size, GDP, per capita income, consumer expenditures and other economic indicators of the selected region.

When evaluating any prospective outlet location in a region where the Target Group has existing operations, the regional outlet development department will prepare a feasibility report focusing primarily on the evaluation of the site selected.

The management of the Target Group considers that selective acquisitions of other retailers will not only allow the Target Group to further enhance its economies of scale, it will also allow the Target Group to improve its business performance, a belief which is shared by the Directors. The Company, after Completion, will carefully evaluate options to acquire the remaining 35.0% interest in Gome

— 27 —

LETTER FROM THE BOARD

Appliance and/or any member of the Parent Group or its business, if such opportunities arise. In considering available acquisitions, the Target Group intends to take a disciplined approach to maintain its competitive position and financial integrity. The key elements of such approach are:

• critically evaluating the competitive environments in which the prospective acquisition targets operate, the profitability of their outlets and the potential returns on equity invested;

• avoiding excessive gearing and maintaining a strong and healthy balance sheet that will exhibit the Target Group’s financial strength to its suppliers and creditors;

• leveraging the Target Group’s already established infrastructure, including its information management and distribution systems; and

• maintaining adequate liquidity for the Target Group’s operations.

The expansion of the retail sales network of the Target Group is subject to the terms of the Non-competition Deed to be entered into between Mr. Wong and the Company on Completion. Details of the Non-competition Deed is set out in the sub-section headed “1. Non-competition Undertaking” in the section headed “Relationship between the Target Group and the Parent Group” below.

Establish digital shops to increase market penetration

The Target Group’s management believes that mobile telephones and accessories, digital products and computer products attract significant consumer demand, thereby increasing sales growth and presenting opportunities to increase operating margins of the Target Group, a belief which is shared by the Directors. The Target Group plans to establish specialty shops, referred to as “digital shops”, to sell such products in districts with heavy pedestrian flow, a plan which is endorsed by the Directors. The average digital shop’s floor area will be approximately 260 square metres. The Target Group’s expansion plan for digital shops up to the end of 2006 is as follows:

After the Latest

					After the Latest
					Practicable Date and
					up to the end of 2004	2005	2006
Number	of	new	digital	shops	143	152	183

Site evaluation for digital shops will be conducted in the same manner as for traditional retail outlets. The Target Group’s management estimates that such digital shops can be opened in approximately 20 days from the signing of the lease for the premises and that the average start-up cost will be RMB300,000 to RMB400,000 per digital shop. The same branding will be adopted as in traditional retail outlets. As at the Latest Practicable Date, no digital shops had been opened by the Target Group.

— 28 —

LETTER FROM THE BOARD

Establish mega stores to drive sales volumes

After the reduction of tariffs on foreign goods following the PRC’s accession to the WTO, the Target Group’s management believes that consumer choices will be increased as a result of increases in imported goods, a belief which is shared by the Directors. The Target Group intends to open large retail outlets, referred to as “mega stores”, each having a floor area of over 15,000 square metres, in cities with higher GDP and a population exceeding two million people, and to open six to nine mega stores by the end of 2006, a plan which is endorsed by the Directors. As at the Latest Practicable Date, no mega store had been opened.

Mega stores will carry products in new product categories and a wider range of consumer electronic products within each product category as compared to traditional retail outlets, thereby offering consumers greater variety of electrical appliances and consumer electronic products. A mega store will serve clients within a radius of 15 to 20 kilometres from such mega store. The same approach for site evaluation will be adopted for mega stores as for traditional retail outlets. The Target Group’s management estimates that such mega stores can be opened in approximately four to six months from the signing of the lease for the premises and that the average start-up cost will be around RMB10 million to 15 million per mega store, a belief which is shared by the Directors.

Collaborate with other retailers to increase sales channels

The Target Group plans to explore opportunities for collaboration with other retail operators by establishing traditional retail outlets or digital shops within their department stores, supermarket chains and large-scale building materials or home furnishing stores, a plan which is endorsed by the Directors.

Maintain strong supply chain infrastructure and ERP system

The management of the Target Group considers that, as the network of the Target Group’s retail outlets expands, more distribution centres for handling the deliveries of the products should be established to support the business and to achieve efficient supply chain management, a belief which is shared by the Directors. The management of the Target Group intends to develop a localised logistics network whereby there is at least one distribution centre for each city where the Target Group has a presence. The Target Group plans to set up an appropriate number of distribution centres in the newly-developed regions to accommodate the expansion of the Target Group’s retail outlets in those areas. The aforesaid plans have been endorsed by the Directors.

The Target Group will continue to develop its ERP system, which is aimed to further enhance the operational efficiency of the Target Group. These include a localised procurement and logistics system, inventory management systems, sales and financial management systems, with centralised controlling and reporting systems.

— 29 —

LETTER FROM THE BOARD

Preserve the quality of the Target Group’s employees

The management of the Target Group recognises that its investment in human resources has contributed substantially to its performance in prior periods, and the Directors share the same view. As such, the Target Group will continue to enhance the quality of its employees, which can be translated into management efficiency and quality services (both before and after points of sale) and lay down the foundation of the Target Group’s expansion.

Product range

A wide range of electrical appliances and consumer electronic products of international and domestic brands (including Haier, LG, SAMSUNG, SONY, Panasonic, Whirlpool and SIEMENS) are sold at each retail outlet operated by the Target Group. Such products are divided into the following seven categories:

Product category	Main products
Audio visual	Televisions, DVD players, CD players, VCD players,
	video tape recorders, amplifiers and speakers
Refrigerators and washing machines	Refrigerators, washing machines and clothes dryers
Air-conditioners	Air-conditioners
Telecommunications	Mobile telephones and accessories
Computers	Personal computers, notebook computers, monitors,
	printers, scanners, facsimile machines and accessories
Small electrical appliances	Rice cookers, vacuum cleaners, irons, water heaters,
	microwave ovens, mixers, dish-washers and similar
	products
Digital	Digital video recorders, digital cameras, MP3 players,
	portable DVD and CD players and similar products

The management of the Target Group has devised strict standards in respect of the use of the floor area within a retail outlet to be used for the display of the above seven product categories. These standards have been set by reference to factors such as the size of the product, expected customer flow, customer purchasing habits, growth potential of different types of products and suppliers’ specific requests (for which the suppliers would be charged an additional fee). The Target Group constantly strives to achieve the highest revenue output ratio on the basis of the floor area of each retail outlet.

— 30 —

LETTER FROM THE BOARD

Sales and marketing

Sales

As the Target Group is principally engaged in retail sales, none of its customers accounted for more than 1% of its turnover in any of the three years ended 31 December 2003.

Most of the sales of the Target Group are paid for at the time of purchase by cash, credit cards or debit cards, while a small proportion is paid in cash on delivery. Where payment is to be made on delivery, it is collected by the delivery staff. All sales of the Target Group are denominated in Renminbi. Over the three years ended 31 December 2003, the Target Group had a minimal level of trade receivables and did not incur any substantial loss from any bad debt.

The following table sets out a breakdown of the revenue of the Target Group by product category derived from the financial statements of the Target Group during the three years ended 31 December 2003.

		Approximate % of
	total revenue of the Target Group
	Years ended 31 December
Product category	2001	2002	2003
Audio visual	45.6	34.7	31.1
Refrigerators and washing machines	12.3	15.8	16.3
Air-conditioners	18.4	17.0	15.1
Telecommunications	4.6	14.1	17.0
Computers	0.1	4.1	4.5
Small electrical appliances	13.6	10.5	11.3
Digital	5.3	3.9	4.6

Note: Due to rounding, the above percentage figures may not add up to 100%.

Apart from deriving its revenue principally from the sale of electrical appliances and consumer electronic products in the PRC, the Target Group also derives income from the following activities:

• promotion income, which is paid by suppliers to the Target Group for participating in the promotional activities of the Target Group;

• management fee income, which is paid by suppliers in relation to management services provided by the Target Group for promotion of their products (including managing and training of the suppliers’ sales representatives);

• product listing fees, which are paid by suppliers for placing and displaying their products on the shelves of the outlets of the Target Group;

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LETTER FROM THE BOARD

• display space leasing fees, which are paid by suppliers for selling their products in the outlets of the Target Group;

• management fees from air-conditioning installation, which are paid by air-conditioning installation contractors to the Target Group for installation services for customers referred by the Target Group; and

• fees for provision of management and purchasing services to the Parent Group in respect of the retailing of electrical appliances and consumer electronic products in designated cities in the PRC in which the Parent Group operates.

The breakdown of the Target Group’s turnover for the three years ended 31 December 2003 is as follows:

		Year ended 31 December
	2001	2002	2003
	(audited)	(audited)	(audited)
	RMB million	RMB million	RMB million
Sale of electrical
appliances and consumer
electronic products	3,872.6	6,619.0	9,346.4
Other operating income	25.3	88.3	278.4

Pricing

The Target Group offers its customers a wide range of quality products at competitive prices. The high sales volume achieved by the Target Group, in turn, strengthens its bargaining power and enables it to obtain better sales terms in negotiation with manufacturers and to pass on such benefits to its customers. One of the pricing strategies followed by the Target Group is to offer the lowest price in the location in which it operates to command market share.

Marketing

The management of the Target Group considers that effective marketing is crucial to the success of the business of the Target Group, a belief which is shared by the Directors. The Target Group publishes a price bulletin in newspapers twice every week which provides the latest pricing information on selected items to its customers. The Target Group advertises in a wide range of media with an aim of reaching the largest number of people through a high frequency of display at relatively low cost and high viewing rate. The Target Group has also maintained a uniform image in advertisements placed throughout the PRC.

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LETTER FROM THE BOARD

The Target Group has launched a wide variety of promotional campaigns, particularly during holiday periods. These include sales and price reductions, daily specials, free gifts, lucky draws and new product launches. Most of the Target Group’s promotional campaigns are planned at the head office level. For the three years ended 31 December, 2003, advertising and promotion expenses incurred by the Target Group amounted to approximately RMB45.6 million, RMB100.1 million and RMB122.7 million, respectively.

Retail outlet design and layout

The management of the Target Group considers that a key factor to the success of a retail chain operation is its ability to establish a distinct store identity through the creation of a standardised visual image for its retail outlets, a belief which is shared by the Directors. The Target Group aims to enhance the image of its retail outlets by ensuring a uniform visual presentation across its retail outlets, in terms of consistent design of the shop fronts, store directories, merchandise display systems, information displays for promotional sale, price tags, function cards, service counters, cashier counters and staff uniforms.

Purchasing

The principal purchasing strategy of the Target Group is to leverage on its significant purchasing volume to establish a direct relationship with major manufacturers of electrical appliances and consumer electronic products. By purchasing directly from such manufacturers, the Target Group is able to achieve cost savings. For the year ended 31 December 2003, approximately 80% of all products purchased by the Target Group were purchased directly from manufacturers, while the remainder were purchased from distributors. Based on the value of the purchases made, most of the purchasing contracts are negotiated and agreed at the head office level, while some are concluded at the regional level. At the regional level, most purchases are made by the regional offices pursuant to the master terms agreed with the suppliers at the head office level. The Target Group has entered into standardised contracts with most of its suppliers, which effectively consolidate its commercial bargaining power.

Pursuant to the supply agreements entered into between the Target Group and its suppliers, some of the suppliers have granted an exclusive right to the Target Group to sell their new products at its retail outlets within an agreed period of time.

Since November 2003, Tianjin Logistics has taken on part of the centralised purchasing for the Target Group. It is intended that the majority of the purchasing for the Target Group will eventually be undertaken through Tianjin Logistics.

In most cases, the credit terms offered to the Target Group by its suppliers, coupled with the bills payable utilised by the Group, range from approximately seven days to seven months. The creditors’ turnover days of the Target Group vary among different categories of products sold by the Target Group and an analysis of the trade payables and bills payable of the Target Group is set out in Appendix IV to this circular. All purchases made by the Target Group are paid for in Renminbi.

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LETTER FROM THE BOARD

The Target Group purchased from a total of over 500 manufacturers and distributors in the year ended 31 December 2003. For the three years ended 31 December 2003, the five largest suppliers of the Target Group, in aggregate, accounted for approximately 25.7%, 33.9% and 30.3%, of its total purchases, respectively. None of the Directors or any Shareholder who owned 5% or more of the issued share capital of the Company as at the Latest Practicable Date or any of their respective associates holds or hold any interest in any of the five largest suppliers of the Target Group in any of the three years ended 31 December 2003. Over such three-year period and up to the Latest Practicable Date, the Target Group did not experience any material dispute with any of its major suppliers or any material disruption to its operations as a result of any shortage in supply of merchandise.

Standardised contracts

Since the beginning of 2003, the Target Group has adopted a series of standardised purchase contracts. These standardised contracts are used in connection with all purchasing whether it is undertaken at the head office or regional level. The Target Group has also adopted a uniform procedure for reviewing and approving such contracts.

One of the standardised purchase contracts is the framework supply agreement which the Target Group enters into with suppliers in connection with centralised purchasing of Products on an annual basis. Pursuant to most of these supply agreements entered into between the Target Group and the suppliers, the relevant suppliers have warranted that (a) the Target Group could offer the lowest retail prices in certain agreed locations; and/or (b) the Target Group’s minimum gross profit margin on the products to be sold, and any losses arising from retail price adjustments will be compensated by such suppliers.

Logistics

As at the Latest Practicable Date, the Target Group had 16 distribution centres throughout the PRC to serve outlets operated by the Target Group. All stock is delivered by suppliers to the warehouses leased by the distribution centres, except some small electrical appliances which are delivered directly to and stored at the retail outlets. The warehouses of the Target Group are fully secured.

Each distribution centre of the Target Group is equipped with ERP system terminals to assist in product procurement, store delivery, inventory management and pricing accuracy. The management of the Target Group considers that an effective inventory logistics management system is a key factor in meeting consumer requirements and in improving the Target Group’s overall business performance.

In addition to its own delivery staff, the Target Group also engages independent contractors to undertake product deliveries to its customers and sets down high standards of service that are required of these contractors. All independent contractors engaged by the Target Group to undertake delivery are required to place a deposit which helps to safeguard against risks associated with delivery (including amongst others, the risk of theft). Through this arrangement, the Target Group is able to maintain the provision of efficient services and yet not be required to bear the costs of maintaining its own delivery team and vehicles. Staff at distribution centres are responsible for co-ordinating such delivery services.

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LETTER FROM THE BOARD

The logistics department within the after-sales service division of the Target Group’s head office is responsible for the organisation, control and coordination of the whole logistics system within the Target Group. This department is one of the three main departments within the after-sales service division which oversees the 16 distribution centres within the Target Group.

Inventory and cash management

Inventory control

It is the Target Group’s policy to maintain an optimal level of inventory based on the internal guideline on estimated inventory turnover of 16 days (other than the display items in the retail outlets of the Target Group). The following chart demonstrates the inventory movement:

==> picture [411 x 131] intentionally omitted <==

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

Regional office to
approve if order is
within authorised
amount
Purchasing
Submit orders Purchasing
department to Suppliers to
through the ERP department to
send orders to deliver goods
system submit orders
Headquarter to suppliers
approve if
authorised amount
is exceeded
----- End of picture text -----

The whole process from submitting orders to delivery normally takes approximately one to two days. Each product will be assigned a unique item code by the Target Group for its identification in the ERP system, which integrates the inventory control, sales and purchase and products delivery systems. The ERP system instantly records each product being sold and its delivery details. A sales report is then generated and the corresponding information such as sales, cost of sales, movement of inventory and gross margin is posted to the finance and accounting system on a daily basis for the review by the management of the Target Group. The ERP system, which has been implemented in all outlets and distribution centres, allows the management of the Target Group to centrally monitor and achieve an optimal level of inventory of a particular product.

The regional sales department is responsible for monitoring the stock level in respect of its region. If it is necessary to replenish the stock of any product, such regional sales department will send a request through the ERP system to the purchasing department in the same region or at the head office level if the amount of the order exceeds the authorised amount. The purchase order will be placed by the purchasing department with Tianjin Logistics, in the case of products which are purchased on a centralised basis, or in the case of products which are purchased on a localised basis, with the supplier. The sales and purchasing departments at the head office level are primarily responsible for regularly monitoring the overall stock level of each type of product. Stock levels are assessed on a regular basis.

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LETTER FROM THE BOARD

Cash management

Given the cash-based nature of the retail industry, the Target Group handles a significant amount of cash everyday. The Target Group has adopted strict internal measures for cash handling at all retail outlets. Collection of payment for products sold is centralised at the cashier counters and cash collected is deposited with banks on a daily basis. Sales representatives are not allowed to collect payment. Daily sales records are produced by the ERP system, which information is posted to the finance and accounting system on the same day. Sample checks are conduced on the surplus cash generated by each retail outlet by the Target Group’s accounting staff.

ERP system

The management of the Target Group considers that an efficient ERP system is critical to the success of its business and the maintenance of an efficient operation, a belief which is shared by the Directors. The Target Group has invested approximately RMB15 million to upgrade its ERP system in the past two years. The ERP system which the Target Group now uses fully integrates the functions of procurement, inventory control, logistics and distribution and sales and financial management. The system allows smooth and timely information flow among retail outlets, regional offices, distribution centres, purchasing departments and the head office of the Target Group to enhance management efficiency.

The Target Group intends to further upgrade the ERP system to allow better exchange of information between different departments in varying formats, and to implement a centralised management reporting system to further enhance efficiency, a plan which is endorsed by the Directors.

Management

The members of the senior management team of the Target Group are:

==> picture [430 x 230] intentionally omitted <==

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

|||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
|Year|of|joining|Years|of|
|the|GOME|experience|in|
|Name|Position|Age|Group|retail|industry|
|Mr.|WONG|Kwong|Yu|President|35|1987|17|
|(|)|
|Mr.|ZHANG|Zhi|Ming|Executive|Vice-President|34|1993|11|
|(|)|
|Ms.|HUANG|Yan|Hong|Head|of|Internal|Compliance|28|1995|9|
|(|)|
|Mr.|HUA|Tian|General|Manager,|Sales|and|31|1995|9|
|(|)|Purchasing|
|Mr.|ZHOU|Ya|Fei|Chief|Financial|Officer|36|2000|4|
|(|)|
|Ms.|WEI|Qiu|Li|Head|of|Administration|and|Human|37|2000|4|
|(|)|Resources|

----- End of picture text -----

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LETTER FROM THE BOARD

Mr. WONG Kwong Yu ( ) — President, aged 35. Mr. Wong founded the GOME Group in 1987 and has since developed the GOME Group into the largest retail chain operators in terms of turnover for electrical appliances and consumer electronic products in the PRC. Mr. Wong has 17 years of experience in the retailing of electrical appliances and consumer electronic products. In 1993, Mr. Wong established the “GOME” brand name and conceived the strategies for chain store operations. In 1998, Mr. Wong completed the “GOME operation management manual” which became the standard and guideline for the retail chain stores of the GOME Group. Since 2000, Mr. Wong has been focusing on the enhancement of the GOME Group’s organisational structure and operating systems which include (a) refinement on the business plan, delegation and budgeting systems, (b) restructuring of operational flow, (c) establishment of the ERP system, (d) recruitment and training of senior management personnel, and (e) entrenchment of the corporate culture of the GOME Group. All of the above became the foundation for the rapid and continued development of the GOME Group.

Mr. Wong is the Chairman and executive Director and is also a director of Capital Machinery Agency & Supplies Limited, China Eagle Management Limited, Artway Development Limited and Eagle Decade Investments Limited, all being wholly-owned subsidiaries of the Company. Besides the Group and the GOME Group, Mr. Wong also has real estate business interests in the PRC. Mr. Wong is the husband of Ms. Du Juan, the brother of Ms. Huang Yan Hong and the brother-in-law of Mr. Zhang Zhi Ming. Mr. Wong’s address is Unit 6101, 61st Floor, The Center, 99 Queen’s Road Central, Hong Kong.

Mr. ZHANG Zhi Ming ( ) — Executive Vice-President, aged 34, joined the GOME Group in 1993. In 1996, Mr. Zhang implemented the structural change of converting the GOME Group from selling only imported goods to include locally manufactured products. In 1998, Mr. Zhang implemented changes to the GOME Group’s retail outlet by closing down the then existing small outlets and opening large retail outlets of over 2,000 square metres in Beijing, the PRC. In 1999, he implemented the expansion of the GOME Group into Tianjin and Shanghai, the PRC. Mr. Zhang also held various posts outside the GOME Group, such as the committee member of the PRC Political Consultative Conference (Beijing Committee) and the executive committee member of the PRC Industry and Commerce Association. Mr. Zhang is the husband of Ms. Huang Yan Hong and the brother-in-law of Mr. Wong Kwong Yu. Mr. Zhang’s residential address is No. 305 Gu Lou Road, Dongcheng District, Beijing, the PRC.

Ms. HUANG Yan Hong ( ) — Head of Internal Compliance, aged 28. Since joining the GOME Group in 1995, Ms. Huang has acted as Accounting Manager, Regional General Manager and Deputy Chief Financial Officer of the Gome Group. Ms. Huang is the sister of Mr. Wong Kwong Yu and the spouse of Mr. Zhang Zhi Ming. Ms. Huang’s residential address is No. 305 Gu Lou Road, Dongcheng District, Beijing, the PRC.

Mr. HUA Tian ( ) — General Manager, Sales & Purchasing, aged 31. Mr. Hua joined the GOME Group in 1995 and has since acted as its Deputy General Manager of Sales & Purchasing, and Regional General Manager. In 2003, Mr. Hua became the General Manager of Sales & Purchasing and has since been focusing on improving the competitiveness and profitability of the GOME Group. These include the rapid expansion of the sales channels on information technology and telecommunication products, and the direct purchasing of most products sold by the GOME Group from manufacturers. He has over nine years of experience in electrical appliances retailing. Mr. Hua’s residential address is Flat 203, Unit 2, No.2 Hu Jia Lou Bei Li, Chaoyang District, Beijing, the PRC.

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LETTER FROM THE BOARD

Mr. ZHOU Ya Fei ( ) — Chief Financial Officer, aged 36. Since joining the GOME Group in 2000, Mr. Zhou has been acting as the chief financial officer of the GOME Group. Mr. Zhou is responsible for the planning and implementation of the internal budgeting and auditing systems, and is also involved in all major investment decisions of the GOME Group. Mr. Zhou led the effort of designing and integrating the ERP system to enhance corporate efficiency. Prior to joining the GOME Group, Mr. Zhou has worked in an accounting firm and an accounting consultancy firm both in the PRC, and the Beijing municipal government. Mr. Zhou has over 10 years of experience in PRC accounting, finance and tax consulting. Mr. Zhou is a registered accountant (non-practicing) and a registered tax agent (non-practicing) in the PRC. Mr. Zhou’s residential address is No.8 Che Gong Zhuang Road, Xicheng District, Beijing, the PRC.

Ms. WEI Qiu Li ( ) — Head of Administration and Human Resources, aged 37. Ms. Wei joined the GOME Group in 2000 and has over 10 years of experience in human resources and administration management. Ms. Wei is responsible for human resources and staff training of the GOME Group. Ms. Wei’s residential address is No.22 Tu Yang Shan Hu Tong, Xicheng District, Beijing, the PRC.

Staff

In addition to its own sales staff, the Target Group’s retail outlets also have long term secondment of sales representatives from various manufacturers to promote their products. The salaries of such sales representatives are borne by the relevant manufacturer, though the Target Group will provide performance-based sales incentives to them.

The table below sets out the number of staff of the Target Group and the sales representatives seconded from manufacturers as at the following dates.

Staff Management Sales & marketing Purchasing After-sales and logistics Finance, accounting, internal compliance, human resources and administration and outlet development Total Sales representatives from manufacturers	2001 20 1,958 155 435 310 2,878 3,668	31 December 2002 2003 48 49 3,137 5,529 219 322 589 868 507 968 4,500 7,736 6,833 13,432	31 March 31 May 2003 2004 2004 44 52 52 3,893 5,190 5,433 244 314 298 672 835 839 561 1,013 1,082 5,414 7,404 7,704 9,681 15,618 15,614	31 March 31 May 2003 2004 2004 44 52 52 3,893 5,190 5,433 244 314 298 672 835 839 561 1,013 1,082 5,414 7,404 7,704 9,681 15,618 15,614
				7,704
				15,614

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LETTER FROM THE BOARD

Human resources policies

The Target Group seeks to cultivate and maintain employee satisfaction, and believes that its leading position in the industry, comprehensive training programme and competitive remuneration schemes have all contributed to attracting talented individuals to join and stay with the Target Group. The Target Group places strong emphasis on continuous development of its staff and encourages internal promotion to retain outstanding employees.

The Target Group has a central training department which provides extensive training programmes for its staff. All new recruits are required to undergo a training programme of 120 to 240 hours before reporting to duty. All existing employees are also required to attend on-the-job training regularly. The annual minimum training required for each staff member varies depending on his position held. The training provided includes the Target Group’s management philosophies, corporate culture, operation system, customer service philosophies and technical skills.

To reward the employee’s contributions to the business, the Target Group has a remuneration system of salary increments, bonuses and other incentives based on performance. The Target Group also regularly reviews the salaries and benefits of its employees against the market rate to ensure competitiveness.

The Target Group also recognises the importance of implementing bonus and other incentive schemes for its employees, and the Directors share the same view.

The management of the Target Group considers that the constant improvement of the quality of its employees and their continued motivation are key to the maintenance of a high standard of customer service, a belief which is shared by the Directors. The Target Group has also devised an assessment system for its staff and the assessment results will be used in salary reviews and promotion decisions. The Target Group encourages its management staff to identify and train junior staff, to support the rapid, organic growth of its business operations. As one of the measures to enhance the quality of its staff, the Target Group has been recruiting graduates from major universities in the PRC each year.

The employees of the Target Group are not represented by any workers’ union, and the Target Group has never experienced any dispute with its employees that interfered with its business operations. The management of the Target Group considers that the Target Group enjoys satisfactory relations with its employees.

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LETTER FROM THE BOARD

Insurance

The Target Group maintains insurance coverage against loss of or damage to inventories in all of its outlets and distribution centres as well as third-party injuries. The Target Group’s insurance coverage includes natural disaster, accident, theft, replacement and third party insurances. The Target Group does not carry business interruption insurance. As at the Latest Practicable Date, the Target Group maintained approximately RMB1,213 million in insurance coverage and paid an annual insurance premium of approximately RMB441,500.

The Target Group has not maintained insurance cover against any product liability which may arise in relation to products being sold by it. The terms of the standardised purchase contracts of the Target Group entered into with suppliers provide that all product liability in respect of any product supplied to the Target Group will be borne by such suppliers.

Litigation and environmental compliance

The management of the Target Group has confirmed that, as at the Latest Practicable Date, no member of the Target Group is engaged in any litigation or arbitration of material importance and no litigation or claims of material importance are known to the Directors to be pending or threatened against any member of the Target Group.

The management of the Target Group and the PRC legal advisers of the Company have also confirmed that there is no specific environmental regulations on retail sector in the PRC that is applicable to the Target Group.

Brand management

One of the most important assets identified by the Directors and senior management of the Target Group is the “ ” brand name. In order for the Target Group to continue to operate under the “ ” trade mark which is owned by Beijing Gome and registered in the PRC, Beijing Gome and Gome Appliance will enter into the Trade Mark Licence Agreement pursuant to which Beijing Gome will license the “ ” trade mark to Gome Appliance and its subsidiaries for use in connection with retail sales of electrical appliances and consumer electronic products in the PRC for a perpetual term and at no cost.

The management of the Target Group considers that one of the success factors of the GOME Group is public recognition of the GOME brand and logo “ ” in major cities in the PRC such as Beijing, Tianjin, Guangzhou, Chengdu, Chongqing, Shenyang and Shenzhen, a belief which is shared by the Directors. The management of the Target Group will utilise the following strategies to further enhance market recognition of its brand and deepen the Target Group’s market penetration.

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LETTER FROM THE BOARD

(i) Customer driven product mix and pricing strategy

The Target Group constantly conducts market research to ensure customer needs are met and an optimal mix of products is offered to its customers. The market research covers areas such as consumer behaviour, market trends, brand preferences and feedback from customers on the products sold.

The high sales volume achieved by the Target Group strengthens its bargaining power and enables it to obtain better sales terms in negotiation with manufacturers and suppliers, and to pass on such benefits to its customers.

The Target Group conducts daily research on the prices set by its competitors and immediately reflects this information in its own product pricing, while still maintaining fixed gross margins as agreed in the supply agreements with the manufacturers. This allows the Target Group’s management to react to changes in the market place ahead of its competitors and maintains its position as a market leader in price setting, while ensuring a profitable operation.

(ii) Quality products

All products are subject to random inspection by quality control staff at the time they are delivered by the suppliers to the distribution centres (or in the case of smaller items such as small electrical appliances and mobile telephones, the retail outlets) of the Target Group. If any defects are detected in any product, the Target Group has the right to return such defective products to the supplier for replacement.

The Mandatory Product Certification Administration Regulations on Compulsory Product Certification ( / ) promulgated in May 2002 prohibit the sale in the PRC of any electric home appliance which has not obtained the “3C certification” referred to in the regulations. The purchasing and sales departments of the Target Group have adopted stringent control procedures to ensure that all products to be sold in the retail outlets of the Target Group are in compliance with these regulations.

(iii) Quality customer services

The Target Group places significant emphasis on providing its customers with high-quality service. It has implemented various customer services in collaboration with its suppliers, such as full cash refund on return within seven days of any products purchased at any retail outlet, free design consultation and installation, and free delivery of large items such as refrigerators purchased within 80 kilometres of a retail outlet, with the carrying out of these services monitored by the ERP system to maintain a high standard of service.

As a testament to the high quality of its customer service, the Target Group has received approximately 70 different awards or recognitions throughout the PRC including the awards for “Creditworthy Store for After Sales Services” and “Creditworthy Enterprise”.

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LETTER FROM THE BOARD

As at the Latest Practicable Date, the Target Group had 13 after-sales service centres throughout its retail network in the PRC. A team of customer service representatives, employed by the Target Group, provides toll-free telephone after-sales services to answer any enquiries from its customers. It also contacts customers for their opinions on services provided by the Target Group and handles complaints and delivery enquiries.

Competition

The Target Group faces competition in varying degrees from one location to another, depending on factors such as the number and strength of the competitors involved. There have been occasions in the past when the Target Group established its first retail outlet in a new geographical area and faced intense price cutting from local competitors such as retailers of electrical appliances or other retail channels such as department stores. The management of the Target Group and the Directors consider that such local competitors should not pose any material threat to the development of the Target Group as the Target Group can offer competitive prices, quality products and services and possesses an established brand.

Although foreign ownership and investment in certain segments of the retail sector in the PRC are currently subject to restrictions under PRC law and regulations, a process of relaxation on foreign ownership is underway following the PRC’s accession to WTO and the restrictions are expected to be completely lifted in December 2004. The management of the Target Group and the Directors expect that competition will intensify over time with the opening up of the retail sector in the PRC.

RELATIONSHIP BETWEEN THE TARGET GROUP AND THE PARENT GROUP

The Target Group and the Parent Group are owned and controlled by Mr. Wong. As at the Latest Practicable Date, there were 39 retail outlets operated by the Parent Group under the “GOME Electrical Appliances” trade mark in the PRC and Hong Kong. Beijing Gome is the owner of the “GOME Electrical Appliances” trade mark registered in the PRC and Infinity Income Investments Limited, a company beneficially owned by Mr. Wong, is the owner of the “GOME Electrical Appliances” trade mark registered in Hong Kong. The Parent Group has also granted franchises to independent third parties to operate retail outlets for the sale of electrical appliances and consumer electronics products under the “GOME Electrical Appliances” trade mark in the PRC. As at the Latest Practicable Date, there were 23 such franchise outlets, 14 of these franchise arrangements will expire by the end of 2004 and the last one will expire in 2008. Four of them are located in cities where the

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LETTER FROM THE BOARD

Target Group operates. The management of the Target Group and the Directors believe that these four franchise outlets are not within the physical range of the Target Group’s retail outlets to pose any significant competition with the Target Group although they are in the same cities. The unaudited turnover and number of outlets of the Parent Group are set out below:

				Latest
	Year ended 31 December			Practicable
	2001	2002	2003	Date
Turnover (unaudited)	RMB1,158.0 million	RMB1,726.0 million	RMB2,641.5 million	N/A
	(approximately	(approximately	(approximately
	HK$1,092.4 million)	HK$1,628.3 million)	HK$2,492.0 million)
Number of outlets (Note)	11	14	24	39
			(Note)	(Note)
Number of cities covered	4	4	10	15
(Note)			(Note)	(Note)
Number of provinces, directly	3	3	7	12
administered municipalities
and special administrative
region covered

Note: Includes the retail outlets operated by Hong Kong Gome.

According to the State Information Centre, the Gome Group was the largest retail chain operator of electrical appliances and consumer electronic products in the PRC in terms of turnover for 2002 and 2003.

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LETTER FROM THE BOARD

A breakdown by location of the outlets operated by the Target Group and those operated by the Parent Group as at the Latest Practicable Date is set out below:

**Operated **	**by **	**the **	Target Group	Operated by the Parent Group (Note)	Operated by the Parent Group (Note)
Location			Number of outlets	Location	Number of outlets
Beijing			16	Anshan		1
Chengdu			6	Baotou		2
Chongqing			8	Changchun		1
Dongguan			2	Changsha		2
Foshan			1	Dalian		2
Fuqing			1	Hangzhou		3
Fuzhou			3	Harbin		2
Guangzhou			6	Hong Kong		4
Huizhou			1	Luoyang		1
Jinan			5	Ningbo		1
Kunming			3	Shanghai	12
Langfang			1	Shijiazhuang		2
Qingdao			4	Wuxi		1
Shenyang			6	Xianyang		1
Shenzhen			5	Zhengzhou		4
Tianjin			12
Weifang			1
Wuhan			7
Xian			5
Zhongshan			1
Zibo			1
Zigong			1
Total:			96	Total:	39

Note: The Parent Group is in the process of setting up outlets in Nanning, Nanjing, Urumqi, Guiyang, Nanchang, Xiamen and Taiyuan, the PRC.

The Directors have identified the Target Group for acquisition by the Company for the following reasons: (a) the Target Group has a more established track record and hence a stable base for future development; and (b) as compared with the Target Group, the business of the Parent Group is less developed and hence entails higher business risks.

None of the outlets operated by the Parent Group is located in a city in which outlets operated by the Target Group are located. The Parent Group’s existing operations do not pose direct competition or bear any significance to the Target Group except for the centralised purchasing arrangement as summarised in the section headed “6. Purchasing Service Agreement” below, the management services to be provided by the Target Group to the Parent Group as summarised in the section headed “7. Management Agreement” below, and the granting of the trade mark licence by Beijing Gome to the

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LETTER FROM THE BOARD

Target Group as summarised in the section headed “8. Trade Mark Licence Agreement” below, which are of mutual benefit to both the Parent Group and the Target Group. Other than pursuant to these arrangements, the operations of the Parent Group and the Target Group are entirely independent.

After Completion, as set out in the section headed “2. Right of First Refusal Deed” below, the Company has the right of first refusal to acquire (1) the 35.0% interest in Gome Appliance which is not already owned directly or indirectly by the Company and/or (2) any member of the Parent Group or its business. The Company may consider to acquire the remaining 35.0% interest in Gome Appliance if such opportunity arises, the necessary governmental and/or regulatory approvals have been obtained. The Company may also consider to acquire a member or members of the Parent Group if such opportunities arise.

To regulate the relationship between the Target Group and the Parent Group, members of the Target Group have entered or will, on Completion, enter into the following arrangements with the Parent Group.

1. Non-competition Undertaking

Mr. Wong and the Company will enter into the Non-competition Undertaking which will remain in effect for so long as Mr. Wong remains a controlling shareholder of the Company within the meaning of the Listing Rules.

Mr. Wong will undertake to the Company that he will not and will procure that the Parent Group will not, directly or indirectly, engage in retail sales of electrical appliances and/or consumer electronic products (whether under the “GOME Electrical Appliances” trade mark or otherwise) in any of the cities, directly administered municipalities, towns or other locations in the PRC in which any member of the Target Group had established any retail outlet for the sale of electrical appliances and consumer electronic products under the “GOME Electrical Appliances” trade mark as at the date of the Acquisition Agreement.

The Company will undertake to Mr. Wong not, directly or indirectly, to engage in the retail sales of electrical appliances or consumer electronic products (whether under the “GOME Electrical Appliances” trade mark or otherwise) in any of the cities, directly administered municipalities, towns or other locations in the PRC in which any of the Parent Group had established or was in the course of establishing any retail outlet for the sale of electrical appliances and consumer electronic products under the “GOME Electrical Appliances” trade mark as at the date of the Acquisition Agreement (i.e. the locations as referred to in the table setting out the breakdown of locations of the outlets operated by the Parent Group above) save as provided in the Right of First Refusal Deed.

Mr. Wong will also undertake to the Company that he will procure that no new franchise to operate retail outlets under the “GOME Electrical Appliances” trade mark will be granted by Mr. Wong and existing franchises will not be renewed or extended upon expiry.

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LETTER FROM THE BOARD

2. Right of First Refusal Deed

For the benefit of the Company, Mr. Wong agrees that the Company will have the right of first refusal to consider any investment opportunity in the acquisition of any company that is engaged in a business similar to or in competition with that of the Target Group or the setting up of a business in the retail sales of electrical appliances or consumer electronic products (whether under the “GOME Electrical Appliances” trade mark or otherwise) in the cities, directly administered municipalities, towns or other locations in the PRC that members of the Parent Group and members of the Target Group have not established or were not in the course of establishing any retail outlet as at the date of the Acquisition Agreement. Mr. Wong and his associates will abstain from voting at the board meetings at which such investment decisions are to be made. Such investment decisions will be determined by the Board (including independent non-executive Directors). Only when the Company decides not to proceed with such acquisition or invest in such location would Mr. Wong or his associates be permitted to acquire or invest.

Mr. Wong will undertake that if Mr. Wong intends to sell or procure the sale of (1) the 35.0% interest in Gome Appliance which is not already owned directly or indirectly by the Company and/or (2) any member of the Parent Group or its business, Mr. Wong will inform the Company and the Company will have the first opportunity to acquire such interests. Mr. Wong and his associates will abstain from voting at the board meetings at which such investment decisions are to be made. Such investment decisions will be determined by the Board (including independent non-executive Directors). Only when the Company decides not to acquire such interest could Mr. Wong sell or procure the sale of such interests to other party.

For each of the above transactions, the Directors will ensure compliance with the Listing Rules.

3. Bank Guarantees Deed

As of 31 May 2004, certain members of the Parent Group have provided certain guarantees for members of the Target Group in relation to their available banking facilities and a short term bank loan (in the amount of RMB10,000,000 (approximately HK$9,430,000)) in the total amount of approximately RMB2,626,180,000 (approximately HK$2,477,530,000). As a transitional arrangement, the Company and certain members of the Parent Group will enter into the Bank Guarantees Deed and the relevant members of the Parent Group will undertake to continue to act as guarantor at no cost and without any securities. The Company intends to replace such unsecured guarantees as soon as practicable after Completion with guarantees to be provided by members of the Target Group.

The Bank Guarantees Deed constitutes a connected transaction for the Company falling within the exemption under Rule 14A.65(4) of the Listing Rules and will, therefore not be subject to any disclosure or shareholders’ approval requirements under the Listing Rules when it is entered into on Completion.

The details of the bank facilities and short term bank loan extended to the members of the Target Group for which guarantee has been given by certain members of the Parent Group and/or Mr. Wong and/or Beijing Eagle has been set out in Appendix IX to this circular.

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LETTER FROM THE BOARD

4. The Beijing Gome Debt

As at 31 March 2004, the Beijing Gome Debt of approximately RMB1,088.5 million (approximately HK$1,026.9 million) was owed by Beijing Gome to Gome Appliance. The Beijing Gome Debt is interest-free and there is no fixed term for repayment. Beijing Gome has requested an extension for repayment from Completion up to 31 March 2005. In consideration for the time extension, Mr. Wong agrees to pay Ocean Town which will own 65.0% of Gome Appliance upon Completion, an extension fee at the rate equal to 6.8% per annum for 65.0% of the Beijing Gome Debt for the actual extended period. Security for the Beijing Gome Debt will be provided in the following manner: (1) the Second Convertible Note will be charged; (2) dividend derived from the 35.0% interest in Gome Appliance held in the name of Ms. Huang and Yi Fu will first be applied to repay the Beijing Gome Debt; and (3) the proceeds from the Placing (if any) will first be applied to repay the Beijing Gome Debt.

The Company does not have any present intention to provide financial assistance to Mr. Wong or any of his associates. The Company will comply with the Listing Rules in the event that the Company would provide financial assistance to any connected persons of the Company in the future.

1. Transitional Purchasing Service Agreement

Beijing Gome has entered into purchasing contracts with various suppliers. It has been purchasing Products from such suppliers for supply to other members of the Parent Group as well as members of the Target Group. Such on-sell arrangement will end by 30 September 2004. The Company does not intend that Beijing Gome will continue to undertake such purchasing for any member of the Target Group after the expiry on 30 September 2004.

As a transitional arrangement, Beijing Gome and Gome Appliance will enter into the Transitional Purchasing Service Agreement upon Completion pursuant to which Beijing Gome will agree to continue to purchase Products from suppliers under such purchasing contracts after Completion. All Products so purchased by Beijing Gome will be supplied to members of the Target Group at cost. The total purchases (including the value added tax) will not exceed RMB2.0 billion (approximately HK$1.9 billion).

For each of the three years ended 31 December 2003 and the five months ended 31 May 2004, the unaudited values of goods purchased (including the value added tax) by Beijing Gome principally for outlets located in Beijing amounted to approximately RMB2,428.8 million (approximately HK$2,290.9 million), RMB2,796.4 million (approximately HK$2,638.1 million), RMB2,426.7 million (approximately HK$2,289.3 million) and RMB1,264.8 million (approximately HK$1,193.2 million) respectively.

The Directors propose that the cap amounts of the purchases of the Products (including the value added tax) under the Transitional Purchasing Service Agreement by the Target Group from the Parent Group will not exceed RMB2.0 billion (approximately HK$1.9 billion) for the year ending 31 December 2004 for the term of the Transitional Purchasing Service Agreement. The

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basis of the cap amounts is determined with reference to: (i) the historical values of goods purchased by Beijing Gome for the Target Group; and (ii) the Target Group’s expectation of purchasing more Products to cater for the targeted increasing demand for the Products as a result of the anticipated business growth.

6. Purchasing Service Agreement

Tianjin Logistics, a member of the Target Group, and Beijing Gome, a member of the Parent Group, will enter into the Purchasing Service Agreement pursuant to which Tianjin Logistics will provide purchasing services to the Parent Group (other than Hong Kong Gome).

Tianjin Logistics will negotiate with various suppliers for both the Target Group and the Parent Group (other than Hong Kong Gome) on a centralised basis. The Target Group will benefit from the volume purchases which enable Tianjin Logistics to secure more favourable terms with suppliers than if members of the Target Group and the Parent Group were to undertake their purchasing individually.

Tianjin Logistics will charge Beijing Gome a fee at the rate of 0.9% of the revenue generated from the sales of electrical appliances and consumer electronic products (excluding value added tax) of the Parent Group (other than Hong Kong Gome) payable every three calendar months.

The consideration to be received by Tianjin Logistics under the Purchasing Service Agreement has been determined based on arm’s length negotiations between Tianjin Logistics and Beijing Gome and with reference to the gross profit margin of the Parent Group.

The Purchasing Service Agreement will continue for a term of 36 months from Completion unless and until terminated by Tianjin Logistics by giving not less than 30 days’ prior notice to Beijing Gome. Beijing Gome does not have the right to terminate the Purchasing Service Agreement.

For each of the three years ended 31 December 2003 and the five months ended 31 May 2004, the unaudited revenue of the Parent Group (other than Hong Kong Gome) generated from the sales of electrical appliances and consumer electronic products amounted to approximately RMB1,158.0 million (approximately HK$1,092.4 million), RMB1,726.0 million (approximately HK$1,628.3 million), RMB2,587.0 million (approximately HK$2,440.6 million) and RMB1,718.0 million (approximately HK$1,620.8 million) respectively.

The Directors propose that the cap amounts of the fees to be received under the Purchasing Services Agreement by the Target Group from the Parent Group for each of the three years ending 31 December 2006 will not exceed RMB55.0 million (approximately HK$51.9 million), RMB85.0 million (approximately HK$80.2 million) and RMB125.0 million (approximately HK$117.9 million) respectively. The basis of the cap amounts is determined with reference to: (i) the historical revenue generated from the sales of electrical appliances and consumer electronic products by the Parent Group; (ii) the targeted increase in the number of outlets to be

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opened in the next three years by the Parent Group; (iii) the targeted improvement of the revenue generated from the existing outlets of the Parent Group; and (iv) the targeted increasing demand for electrical appliances and consumer electronic products as a result of the targeted business growth of the Parent Group.

The Purchasing Service Agreement will constitute a non-exempt continuing connected transaction for the Company under the Listing Rules subject to Completion. The Company will comply with the Listing Rules regarding connected transactions in respect of the Purchasing Service Agreement.

1. Management Agreement

Both the Target Group and the Parent Group are currently under the same senior management team (including Mr. Wong and Ms. Du Juan, an executive Director) which is employed by the Target Group. It would be in the interest of the Target Group in terms of a systematic brand building, enhanced market information and optimising the use of resources in the PRC and Hong Kong, if the same team continues to manage the Parent Group. To avoid any conflict of interest which may arise, Mr. Wong and his associates will abstain from any board decisions of the Company at which he has a material interest pursuant to the Listing Rules and the bye-laws of the Company.

Tianjin Consultancy, a member of the Target Group, and Beijing Gome, a member of the Parent Group, will enter into the Management Agreement pursuant to which Tianjin Consultancy will provide and will procure other members of the Target Group to provide management services for the Parent Group. Tianjin Consultancy will charge an annual fee at the rate of 0.75% of the total revenue of the Parent Group generated from the sales of electrical appliances and consumer electronic products (excluding value added tax) if such revenue is equal to or less than RMB5.0 billion (approximately HK$4.7 billion) or at the rate of 0.6% if such revenue exceeds RMB5.0 billion.

The consideration to be received by Tianjin Consultancy under the Management Agreement has been determined based on arm’s length negotiations between Tianjin Consultancy and Beijing Gome. The consideration was determined with reference to: (a) the expected expenses of the head office level to be allocated to the Parent Group (i.e. share of the expenses at the head office level based on the expenses incurred in respect of the previous years); and (b) the expected revenue to be generated from the Parent Group based on the anticipated business growth.

The Management Agreement will continue for a term of 36 months from Completion unless and until terminated by Tianjin Consultancy by giving not less than 30 days’ prior notice to Beijing Gome. Beijing Gome does not have the right to terminate the Management Agreement.

For each of the three years ended 31 December 2003 and the five months ended 31 May 2004, the unaudited revenue of the Parent Group amounted to approximately RMB1,158.0 million (approximately HK$1,092.4 million), RMB1,726.0 million (approximately HK$1,628.3 million), RMB2,642.0 million (approximately HK$2,492.0 million) and RMB1,885.0 million (approximately HK$1,778.1 million) respectively.

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The Directors propose that the cap amounts of the fees to be received by the Target Group from the Parent Group under the Management Agreement for each of the three years ending 31 December 2006 will not exceed RMB43.0 million (approximately HK$40.6 million), RMB65.0 million (approximately HK$61.3 million) and RMB101.0 million (approximately HK$95.3 million) respectively. The basis of the cap amounts is determined with reference to: (i) the historical revenue generated from the sales of electrical appliances and consumer electronic products by the Parent Group; (ii) the targeted increase in the number of outlets to be opened in the next three years by the Parent Group; (iii) the targeted improvement of the revenue generated from the existing outlets of the Parent Group; and (iv) the targeted increasing demand for electrical appliances and consumer electronic products as a result of the targeted business growth of the Parent Group.

8. Trade Mark Licence Agreement

The retail outlets of both the Target Group and the Parent Group are operated under the “GOME Electrical Appliances” trade mark which is owned by Beijing Gome and is registered in the PRC.

Beijing Gome and Gome Appliance will enter into the Trade Mark Licence Agreement pursuant to which Beijing Gome will license the “GOME Electrical Appliances” trade mark to Gome Appliance and its subsidiaries for use in connection with the retail sales of electrical appliances and consumer electronic products in the PRC for an indefinite term and at no cost, such terms being more favourable to the Target Group than normal commercial terms.

9. Audio Visual Products Counters Sub-lease Agreements

Certain members of the Parent Group have set up counters on the premises of various retail outlets operated by the Target Group to engage in the retail sales of digital video discs and compact discs and audio cassettes, particulars of which are set out in Appendix VII to this circular.

Each of these members of the Parent Group have entered into an Audio Visual Products Counters Sub-lease Agreement with each of the relevant members of the Target Group pursuant to which such member of the Target Group will sub-lease part of its retail outlet to the relevant member of the Parent Group.

The Audio Visual Products Counters Sub-lease Agreements which have been entered into between certain members of the Target Group and certain member of the Parent Group have taken effect from 15 April 2004 and will terminate on the earlier of: (i) 31 December 2006; or (ii) the expiry of the lease in relation to the relevant outlet. In respect of each such sub-lease agreement, the relevant member of the Target Group will charge a fixed rent of RMB12.0 (approximately HK$11.3) per square metre per day and a fee at the rate of 5.0% of the total revenue generated from the sales of the audio visual products (excluding value added tax), which will be payable on a monthly basis. The Target Group expects that it will enter into additional Audio Visual Products Counters Sub-lease Agreements with the Parent Group based on similar terms.

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The consideration to be received by the Target Group under the Audio Visual Products Counters Sub-lease Agreement has been determined based on arm’s length negotiations between the Target Group and the Parent Group. The consideration was determined with reference to: (a) the rental cost of the Target Group; (b) the location of the audio visual counters within each retail outlet; (c) other ancillary costs relating to the rental of the premises to be shared by the Parent Group such as management fees, security, electricity and water expenses; and (d) the expected revenue to be generated from the sales of the audio visual products by the Parent Group.

The Directors propose that the cap amounts of the fees to be received by the Target Group from the Parent Group under the Audio Visual Products Counters Sub-lease Agreements for each of the three years ending 31 December 2006 will not exceed RMB50.0 million (approximately HK$47.2 million), RMB115.0 million (approximately HK$108.5 million) and RMB140.0 million (approximately HK$132.1 million) respectively. The basis of the cap amounts is determined with reference to: (i) the targeted average area to be sub-leased to the Parent Group by the Target Group; (ii) the targeted revenue to be generated from the sales of audio visual products by the Parent Group; and (iii) the targeted increase in demand for audio visual products of the Parent Group as a result of the targeted business growth of the Parent Group.

The Bank Guarantees Deed and the Trade Mark Licence Agreement will constitute connected transactions which fall within the exemption under Rule 14A.65(4) and 14A.31(2) of the Listing Rules respectively and will, therefore, not be subject to any disclosure or shareholders’ approval requirements under the Listing Rules when they are entered into on Completion.

The Transitional Purchasing Service Agreement, the Purchasing Service Agreement, the Management Agreement and the Audio Visual Products Counters Sub-lease Agreements and the Beijing Gome Debt will, on Completion, constitute connected transactions for the Company and are subject to disclosure and approval by the Independent Shareholders by poll.

CONTINUING CONNECTED TRANSACTIONS

As Mr. Wong is the ultimate owner of the Parent Group, Beijing Gome will constitute a connected person of the Company under the Listing Rules.

Upon Completion, transactions between the Enlarged Group and the Parent Group therefore constitute continuing connected transactions of the Company under the Listing Rules.

The Directors consider that each of the Continuing Connected Transactions will be entered into in the usual and ordinary course of businesses of the Enlarged Group upon Completion. They also consider the terms of the Continuing Connected Transactions have been negotiated and will be conducted on an arm’s length basis and on normal commercial terms between the Enlarged Group and the Parent Group.

The Directors are of the view that as far as the Independent Shareholders are concerned, the Continuing Connected Transactions and the terms, including the relevant cap amounts, are fair and reasonable and in the interest of the Enlarged Group and the Independent Shareholders as a whole.

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Each of the Continuing Connected Transactions are subject to reporting, announcement and approval of the Independent Shareholders at the Special General Meeting which Mr. Wong and his associates will abstain from voting. The Continued Connected Transactions were negotiated on an arm’s length basis and the Directors believe that the proposed cap amount for each of the Continuing Connected Transactions are fair and reasonable and the Continuing Connected Transactions are in the interest of the Company and the Shareholders as a whole.

The Company will therefore seek the approval of the Independent Shareholders of the Continuing Connected Transactions and the respective cap amounts in relation to the Continuing Connected Transactions on the following conditions:

• (a) (i) the cap amounts of the purchases of the Products under the Transitional Purchasing Agreement by the Target Group from the Parent Group will not exceed RMB2.0 billion (approximately HK$1.9 billion) for the year ending 31 December 2004;

• (ii) the cap amounts of the fees to be received under the Purchasing Services Agreement by the Target Group from the Parent Group for each of the three years ending 31 December 2006 will not exceed RMB55.0 million (approximately HK$51.9 million), RMB85.0 million (approximately HK$80.2 million) and RMB125.0 million (approximately HK$117.9 million) respectively;

• (iii) the cap amounts of the fees to be received by the Target Group from the Parent Group under the Management Agreement for each of the three years ending 31 December 2006 will not exceed RMB43.0 million (approximately HK$40.6 million), RMB65.0 million (approximately HK$61.3 million) and RMB101.0 million (approximately HK$95.3 million) respectively; and

• (iv) the cap amounts of the fees to be received by the Target Group from the Parent Group under the Audio Visual Products Counters Sub-lease Agreements for each of the three years ending 31 December 2006 will not exceed RMB50.0 million (approximately HK$47.2 million), RMB115.0 million (approximately HK$108.5 million) and RMB140.0 million (approximately HK$132.1 million) respectively.

• (b) The Company will comply with Rules 14A.37 to 14A.41 and 14A.46 of the Listing Rules in relation to the Continuing Connected Transactions.

MANAGEMENT OF THE ENLARGED GROUP

It is expected that no variaton will be made to the remuneration payable or benefits in kind receivable by the Directors as a result of the Acquisition. The current Board comprises the following members:

Executive Directors

Mr. WONG Kwong Yu ( ) — aged 35, has been the Chairman of the Company and an executive Director since April 2002. Mr. Wong is also a director of Capital Machinery Agency & Supplies Limited, China Eagle Management Limited, Artway Development Limited and Eagle Decade Investments Limited, all being wholly-owned subsidiaries of the Company.

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Mr. Wong has 17 years of experience in the retailing of electrical appliances and consumer electronic products. Mr. Wong founded the GOME Group in 1987 and has since developed the GOME Group into one of the largest chain operators for electrical appliances and consumer electronic products in the PRC. In 1993, Mr. Wong established the “GOME” brand name and conceived the strategies for chain store operations. In 1998, Mr. Wong completed the “GOME operation management manual”, which became the standard and guideline for the retail chain stores of the GOME Group. Since 2000, Mr. Wong has been focusing on the enhancement of the GOME Group’s organisational structure and operating systems, which include (a) refinement on the goal setting, delegation and budgeting systems, (b) restructuring of the operational flow, (c) establishment of the ERP system, (d) recruitment and training of senior management personnel, and (e) entrenching the corporate culture of the GOME Group. All of the above became the foundation for the rapid and continued development of the GOME Group. Besides the Group and the GOME Group, Mr. Wong also has real estate business interests in the PRC. Mr. Wong is the husband of Ms. Du Juan, the brother of Ms. Huang Yan Hong and the brother-in-law of Mr. Zhang Zhi Ming. Mr. Wong’s address is Unit 6101, 61st Floor, The Center, 99 Queen’s Road Central, Hong Kong.

Ms. DU Juan ( ), aged 31, has been an executive Director since August 2002. Ms. Du is a director of each of the subsidiaries of the Company (other than Capital Automation (BVI) Limited, Citimate (Hong Kong) Limited, Capital Computerised Machinery Manufacturing (Shaoxing) Company Limited and Smartech Cyberworks Limited). Ms. Du has extensive experience in banking and finance industry. From 1998 to 2002, Ms. Du worked in two diversified conglomerates and was responsible for financial and administrative management. Ms. Du is a fellow member of Hong Kong Institute of Directors Limited. Ms. Du is the spouse of Mr. Wong. Ms. Du’s address is Unit 6101, 61st Floor, The Center, 99 Queen’s Road Central, Hong Kong.

Mr. LAM Pang ( ), aged 35, has been the executive Director since September 2000. Mr. Lam is also a director of each of the subsidiaries of the Company (other than Artway Development Limited, Eagle Decade Investments Limited, Bestly Legend Limited, Eagle Legend Securities Limited and Eagle Legend Futures Limited). He was the Chairman of the Group in the period between 7 December 2000 and 17 April 2002. Mr. Lam has extensive experience in the trade between the PRC and Hong Kong, and the property investment in the PRC. Mr. Lam’s residential address is Flat G, 46th Floor, 1 Queen’s Street, Tower One, Queen’s Terrace, Sheung Wan, Hong Kong.

Mr. NG Kin Wah ( ), aged 44, has been the executive Director since September 2000. Mr. Ng is also a director of each of the subsidiaries of the Company (other than Artway Development Limited, Eagle Decade Investments Limited, Bestly Legend Limited, Eagle Legend Securities Limited and Eagle Legend Futures Limited). Mr. Ng has over 20 years’ experience in securities investment in Hong Kong. Mr. Ng’s residential address is Flat A, 29th Floor, Comfort Garden, 58 King’s Road, North Point, Hong Kong.

Independent non-executive Directors

Mr. SZE Tsai Ping, Michael ( ), aged 59, was appointed as an independent non-executive director of the Company on 31 October 2002. Mr. Sze has over 30 years of experience in the financial and securities field. He was a former Council Member of the Stock Exchange from 1996 to 2000 and a former member of the Listing Committee of the Stock Exchange from 1997 to 2003. Currently, he

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is a Member of the Cash Market Consultative Panel of Hong Kong Exchanges and Clearing Limited. Mr. Sze is a fellow member of the Institute of Chartered Accountants in England and Wales (having qualified and admitted in 1973), a fellow member of the Association of Chartered Certified Accountants, a fellow of the Hong Kong Society of Accountants and a certified public accountant. Mr. Sze is a fellow member of Hong Kong Institute of Directors Limited. Mr. Sze’s residential address is Flat A, 10th Floor, 26 Magazine Gap Road, The Peak, Hong Kong.

Mr. CHAN Yuk Sang ( ), aged 59, was appointed as an independent non-executive Director on 20 May 2004. Mr. Chan was the chairman of Century Legend (Holdings) Limited since September 1999 until July 2002 and a director of Hong Kong Building & Loan Agency Ltd. from 1993 to 1995. Both of these companies are listed on the main board of the Stock Exchange. Mr. Chan was a senior general manager of a local bank and was an executive director of a joint Chinese-foreign bank in Shenzhen. Mr. Chan has more than 30 years of experience in the banking and finance industry. Mr. Chan is currently an independent non-executive director of Four Sea Mercantile Holdings Limited, a company listed on the main board of the Stock Exchange. Mr. Chan’s residential address is Room 14, Block C, 5th Floor, Fontana Gardens, Ka Ning Path, Causeway Hill, Hong Kong.

Mr. CHEN Huai ( ), aged 52, was appointed as an independent non-executive Director on 20 May 2004. Mr. Chen was an independent director of Henan Lianhua Gourmet Powder Co. Ltd. since August 2001. He was an independent director of Neimenggu Ningchenglaojiao Biology Technology Company Limited during the period from November 2002 to December 2003. Both of these companies are listed companies in the PRC. He had been an associate professor at the Department of Industrial Economics in the Renmin University of China from 1987 to 1992. He was a visiting scholar of The Stanford University from 1992 to 1993 and of the Tokai University in Japan from 1987 to 1989. He was the vice-director of the Market Study Department of the Development Research Center of the State Council of the PRC during the period from 1992 to April 2004. Mr. Chen is presently the officer of the Policy Research Centre of the Ministry of Construction in the PRC. Mr. Chen holds a doctor degree from the Department of Industrial Economics in the Renmin University of China and his studies cover industrialisation theories, structural theories of properties, regional economic theories and population employment theories. Mr. Chen’s publications has won merit prizes. Mr. Chen’s residential address is Room 301, Unit 6, Building 3, No 37, Xishiku Street, Xicheng District, Beijing, the PRC.

Director proposed to be appointed upon Completion

Upon Completion, the following member of the senior management of the Target Group will be appointed Director:

Mr. ZHANG Zhi Ming ( ) — Executive Vice-President, aged 34, joined the GOME Group in 1993. In 1996, Mr. Zhang implemented the structural change of converting the GOME Group from selling only imported goods to include locally manufactured products. In 1998, Mr. Zhang implemented changes to the GOME Group’s retail outlet by closing down the then existing small outlets and opening large retail outlets of over 2,000 square metres in Beijing, the PRC. In 1999, he implemented the expansion of the GOME Group into Tianjin and Shanghai, the PRC. Mr. Zhang also held various posts outside the GOME Group, such as the committee member of the PRC Political Consultative Conference (Beijing Committee) and the executive committee member of the PRC

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Industry and Commerce Association. It is proposed that Mr. Zhang will receive an annual remuneration of HK$600,000. Mr. Zhang is the husband of Ms. Huang Yan Hong and the brother-in-law of Mr. Wong Kwong Yu. Mr. Zhang does not hold any interests in shares of the Company within the meaning of Part XV of the SFO. Mr. Zhang’s residential address is No. 305 Gu Lou Road, Dongcheng District, Beijing, the PRC.

Further announcement will be made by the Company in respect of the appointment of any Director pursuant to the Listing Rules.

REASONS FOR AND BENEFITS OF THE ACQUISITION

The Directors consider that the Acquisition represents an attractive opportunity, which was only offered by Mr. Wong recently, for the Group to diversify into the retail of electrical appliances and consumer electronic products in the PRC, an area which the Directors expect to have a substantial growth potential. The Directors agree with the view of and assessment by the management of the Target Group in respect of the retail industry in the PRC and the future plans and prospects of the Target Group. After Completion, the Directors expect that the Target Group, one of the leaders in this area with significant strengths as set out in the section headed “Competitive strengths” above, to make immediate and substantial contribution to the earnings of the Group by providing another source of income, in addition to the Group’s existing businesses. While the Group will have separate lines of business upon Completion, the Directors have decided that going forward, the Company’s resources will be focused on the PRC retail sector. The Directors consider that the retail outlets operated by the Target Group have an established track record and therefore provide a stable base for future development.

Shareholding by a foreign enterprise in a company engaged in retail business in the PRC is subject to MOFCOM approval. Prior to 1 June 2004, 65.0% was the maximum permissible shareholding by a foreign enterprise in a company engaged in retail business in the PRC. Hence, Ocean Town had only acquired a 65.0% interest in Gome Appliance.

The Directors refer to the announcement of the Company dated 24 February 2004 and the circular of the Company dated 15 March 2004 in relation to the property development located at Area no.7, Xi Ba He Bei Lane, Chaoyang District, Beijing, the PRC. Based on the historical trend of the performance of the Target Group, the market trend of the retail sector and property development in the PRC, the Directors believe that relative to this property project, diversification into the retail of electrical appliances and electronic consumer products in the PRC through the Acquisition will offer more promising growth potential to the Company and thus it will be in the interest of the Company and the Shareholders as a whole to enter into Acquisition Agreement to realise this opportunity. In order to maximise the growth potential offered by the Acquisition and deliver the best return to the Company and the Shareholders, the Directors have therefore decided that the Company will focus its management and financial resources on the development of the business of the Target Group after Completion. The opportunity in relation to the Acquisition was only recently offered by Mr. Wong to the Company in May 2004. At the time of the entering into of the Sale and Purchase Agreement (as defined in the circular of the Company dated 15 March 2004) on 6 February 2004, the Company had not considered the Acquisition or commenced the negotiation on the terms of the Acquisition Agreement.

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The Directors have decided that no further commitments will be made to such property investment beyond those contractually committed or necessary to preserve value, namely the balance of the purchase price (excluding land premium, initial development cost and construction cost) in the amount of RMB167 million (approximately HK$157.5 million). As at the Latest Practicable Date, no decision has been made by the Directors in relation to the development of such property. The Company will make further announcement to keep the Shareholders informed of any decision made as and when appropriate. For the other existing business of the Group, namely property development and investment and securities and futures broking and investments, such business will remain in the Group and will not form a material portion of the Enlarged Group.

The Group’s securities broking operations are agency business in nature and have no proprietary trading activities or positions as at the Latest Practicable Date. The Group has been engaging in currency, securities and futures proprietary trading activities, which have been monitored and managed by professional managers, and the Directors have decided that such activities will cease upon completion of the Acquisition.

The Target Group will also manage the Parent Group after Completion. Further details are set out in the section headed “Relationship between the Target Group and the Parent Group” above.

PROPOSED CHANGE OF COMPANY NAME

The Board proposed the name of the Company be changed to “GOME Electrical Appliances Holding Limited”. The Company proposes to change the company name so as to reflect the focus of the Enlarged Group’s resources on the Target Group in the future.

The change of the Company’s name is subject to:

• (a) the approval of the Shareholders by way of a special resolution at the Special General Meeting;

• (b) the Registrar of Companies in Bermuda granting approval for the change of name; and

• (c) the Acquisition Agreement becoming unconditional in accordance with its terms.

The effective date of the change of name will be the date on which the new name is entered by the Registrar of Companies in Bermuda on the register in place of the existing name. Upon the change of name becoming effective, all certificates for the existing Shares or the New Shares bearing the existing name of the Company will continue to be evidence of title. Certificates for the New Shares will continue to be valid for trading and settlement purposes and the rights of the Shareholders will not be affected as a result of the proposed change of name. Should the change of name becomes effective, any issue of Share certificates thereafter will be in the new company name and the securities of the Company will be traded on the Stock Exchange under the new name. A further announcement will be made should the proposed change of name of the Company becomes effective.

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The Board has also proposed to adopt “ ” as the new Chinese translation of the English name of the Company for the purpose of registration at the Companies Registry in Hong Kong on the effective date and such Chinese name will remain for the purpose of identification only.

CAPITAL REORGANISATION AND PROPOSED CHANGE OF BOARD LOT SIZE

Capital Reorganisation

The Board proposed the Capital Reorganisation which will involve:

• (1) the consolidation of 40 Shares into one Consolidated Share;

• (2) the reduction of the par value of each Consolidated Share in issue from HK$4.00 to HK$0.10; and

• (3) the subdivision of each authorised but unissued Consolidated Share into 40 New Shares.

Change in board lot size

The Board also proposed a change of board lot size from 2,000 Shares to 1,000 New Shares upon the Capital Reorganisation becoming unconditional and effective. Based on the last closing price of HK$0.148 per Share on 21 May 2004 (being the last trading day before the trading in the Shares was suspended prior to the date of the Announcement), the market value per new board lot of 1,000 New Shares is HK$5,920.

Effects of the Capital Reorganisation

As at the Latest Practicable Date, the authorised share capital of the Company was HK$5,000,000,000 divided into 50,000,000,000 Shares, of which 5,539,303,500 Shares have been issued and are fully paid up. Immediately after the Capital Reorganisation becoming effective, the authorised share capital of the Company will be HK$5,000,000,000 divided into 50,000,000,000 New Shares and the issued share capital of the Company will be about HK$13,848,259 divided into about 138,482,587 New Shares. As a result of the reduction of the par value of each Consolidated Share in issue from HK$4.00 to HK$0.10, the credit arising therefrom will be transferred to the contributed surplus account of the Company, and will be applied in accordance with Bermuda law and bye-laws of the Company.

Conditions of the Capital Reorganisation

The Capital Reorganisation is conditional upon:

• (1) the passing by the Shareholders of a special resolution to approve the Capital Reorganisation at the Special General Meeting; and

• (2) the Listing Committee of the Stock Exchange granting the listing of and permission to deal in New Shares in issue following the Capital Reorganisation becoming effective,

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and will become effective on the business day (as defined in the Listing Rules) following the date on which the special resolution is passed by the Shareholders.

Reason for the Capital Reorganisation and the change in board lot size

The Board considers that the Capital Reorganisation and the new board lot size will be in the interest of the Shareholders as the increased market price per share and per board lot is more appealing to institutional investors.

Listing and dealings

Upon the Capital Reorganisation becoming effective, the arrangement proposed for dealings in the New Shares are expected to be as follows:

• (a) from 9:30 a.m. on Thursday, 29 July 2004, the original counter for trading in the existing Shares in board lots of 2,000 Shares will be temporarily closed. A temporary counter will be established for trading in the New Shares in board lots of 50 New Shares. Only existing certificates for the Shares may be trading at this counter;

• (b) with effect from 9:30 a.m. on Thursday, 12 August 2004, the original counter for trading will be re-opened for trading in the New Shares in board lots of 1,000 New Shares;

• (c) during the period from 9:30 a.m. on Thursday, 12 August 2004 to 4:00 p.m. on Thursday, 2 September 2004, both days inclusive, there will be parallel trading of the New Shares at the above counters; and

• (d) the temporary counter for trading in board lots of 50 New Shares will be removed after the close of business at 4:00 p.m. on Thursday, 2 September 2004, and thereafter, trading will be in board lots of 1,000 New Shares in the form of new share certificates only and the existing share certificates for Shares will cease to be acceptable for delivery, transfer and settlement purpose. However, such existing share certificates will remain effective as documents of title.

Subject to the Capital Reorganisation becoming effective which is expected to be on Thursday, 29 July 2004, Shareholders may on or after Thursday, 29 July 2004 and until Tuesday, 7 September 2004 submit certificates for the existing Shares in light yellow to the Company’s branch share registrar in Hong Kong, Abacus Share Registrars Limited at Ground Floor, Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wan Chai, Hong Kong, at the expense of the Company, in exchange for new certificates in blue for New Shares in issue. Thereafter, certificates for the existing Shares will be accepted for exchange only on payment of a fee of HK$2.50 (or such higher amount as may from time to time be allowed by the Stock Exchange) for each new certificate issued for the New Shares. Nevertheless, certificates for the existing Shares will continue to be good evidence of legal title and may be exchanged for certificates for the New Shares at any time.

The shares of the Company are currently traded in board lots of 2,000 Shares. Upon the Capital Reorganisation becoming effective, the New Shares will be traded in board lots of 1,000 New Shares.

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LETTER FROM THE BOARD

In order to alleviate the difficulties arising from the existing odd lots of the New Shares as a result of the Capital Reorganisation and the change of the board lot size from 2,000 Shares to 1,000 New Shares, arrangements have been made for Eagle Legend Securities Limited to stand in the market to provide matching services on a best-effort basis for the purchase and sale of odd lots of the New Shares at the relevant market price per New Share for the period from 9:30 a.m. on Thursday, 29 July 2004 to 4:00 p.m. on Thursday, 2 September 2004 (both days inclusive). Holders of odd lots of the New Shares who wish to take advantage of the facility either to dispose of their odd lots of the New Shares or to top up their odd lots to a full board lot of 1,000 Shares may contact Mr. Danny Kua of Eagle Legend Securities Limited of Unit 3212-13, 32nd Floor, The Center, 99 Queen’s Road Central, Hong Kong at telephone number (852) 2152 3388 and facsimile number (852) 2854 1109 as soon as possible from 9:30 a.m. on Thursday, 29 July 2004 to 4:00 p.m. on Thursday, 2 September 2004 (both days inclusive). Holders of odd lots of the New Shares should note that the matching of odd lots is not guaranteed and they are recommended to consult their professional advisers if they are in any doubt as to the above facility.

The purpose of the above facility is to provide a mechanism to holders of odd lots of the New Shares, after the effective date of the change in board lot size of Shares for trading, to round up or dispose of their odd lot holdings. However, holders of the odd lots of the New Shares may purchase additional New Shares or dispose of their odd lot holdings in the market if they so wish.

Subject to the granting of listing of, and permission to deal in, the New Shares on the Stock Exchange, the New Shares will be accepted as eligible securities by HKSCC for deposit, clearance and settlement in CCASS with effect from the commencement date of dealings in the New Shares on the Stock Exchange or such other date as determined by HKSCC. Settlement of transactions between participants of the Stock Exchange on any trading day is required to take place in CCASS on the second trading day thereafter. All activities under CCASS are subject to the General Rules of CCASS and CCASS Operational Procedures in effect from time to time.

PLACING ARRANGEMENT

Mr. Wong and the Vendor have informed the Company that they may enter into one or more placing and underwriting arrangements with one or more placing agents (the “Placing Agents”) for such international placement(s) of all or part of the Consideration Shares and/or Underlying Shares after Completion. The timing and size of any Placing(s) and the placing price per Share pursuant to the Placing(s) have not yet been determined. In consideration of the Vendor agreeing to accept the consideration for the Acquisition in the form of the Consideration Shares and the Convertible Notes, the Company has agreed at the time of the entering into of the Acquisition Agreement, and as part of the Acquisition, to provide reasonable assistance if Mr. Wong proceeds with such Placing(s); and such reasonable assistance represents the consent to use this circular and the information contained herein as a basis of the offering circular(s) issued in connection with the proposed Placing(s).

— 59 —

LETTER FROM THE BOARD

The offering circular in connection with the Placing will contain factual information in relation to the Enlarged Group. This circular, with the exclusion of the “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.

The Board has considered that the Acquisition (including the Assistance) would be in the best interest of the Company, further details of which are set out in the section headed “Reasons for and benefits of the Acquisition” in the “Letter from the Board” of this circular, having considered all the terms of the Acquisition including the provision of the reasonable assistance to the Vendor for the possible Placing(s). The Directors consider that, for the benefit of the Company, Mr. Wong has agreed to accept the Consideration Shares and the Convertible Notes for the sale of the Sale Shares instead of cash consideration. The Directors also considered that the giving of the Assistance will facilitate the Placing(s).

The Directors are of the view that, while the issue of the Consideration Shares and the Convertible Notes to the Vendor on Completion will not of itself enlarge the public market capitalisation of the Company so as to attract the interest of a broader base of investors, it is important for the Company that the Vendor is able to place some or all of the Consideration Shares and/or Underlying Shares to professional, institutional and other third party investors and that it will be beneficial to the Company to broaden its shareholder base. The Directors further believe that such successful Placing(s) will increase the liquidity of the Shares and provide the Company better opportunities to raise funds through the local and international capital markets in the future.

The Company has agreed to provide the Assistance on the basis that each of Mr. Wong and the Vendor will indemnify and keep indemnified the Company against any costs, claims, losses and liabilities incurred or suffered by it due to or in connection with the provision of the Assistance. The Company has performed due diligence on the Target Group, and has conducted verification on the contents of this circular to ensure the accuracy of the information provided by the Company under the Assistance. On this basis, the Directors have also taken on the responsibility of the contents of this circular. The Directors therefore are of the view that the risk on any potential liabilities which may arise from the inclusion of inaccurate information in this circular and the omission of information which would make any such statement contained in this circular misleading is a controlled risk. All costs and expenses in relation to the Placing(s) (including the preparation of the offering circular(s)) will be borne by Mr. Wong and/or the Vendor.

Furthermore, as set out in the section headed “Relationship between the Target Group and the Parent Group” below, Mr. Wong has undertaken to Beijing Gome that the proceeds from the Placing(s) will first be applied to repay the Beijing Gome Debt.

In view of the above, the Directors are of the view that the giving of the Assistance by the Company, thereby facilitating the Placing(s), is in the interest of the Company and the Shareholders as a whole.

The giving of the Assistance by the Company to facilitate the Placing(s) (as part of the Acquisition) is subject to disclosure and approval by Independent Shareholders by a poll.

— 60 —

LETTER FROM THE BOARD

MAINTENANCE OF THE LISTING OF THE NEW SHARES

The Company intends to maintain its listing on the Stock Exchange after Completion. The Company will use its reasonable endeavours to ensure that the public float of the Company will not be less than 25% (or such lower percentage as may be allowed under the Listing Rules) of its issued share capital immediately after Completion as required under the Listing Rules.

It is the intention of Mr. Wong to maintain the listing of the New Shares on the Stock Exchange upon completion of the Acquisition and the Placing(s). Mr. Wong has undertaken to each of the Company and the Stock Exchange that, subject to completion of the Acquisition, he will not exercise the conversion rights under the Convertible Notes beneficially owned by him to the extent that such conversion of the Convertible Notes would result in the public float of the Company fall below 25%, and he will use his best endeavours to take appropriate steps including but not limited to placing of the Convertible Notes and/or the Consideration Shares and/or the Underlying Shares beneficially owned by him to ensure compliance with Rule 8.08 of the Listing Rules upon any mandatory and/or voluntary conversion of the Convertible Notes beneficially owned by him.

After the date of this circular, Mr. Wong may enter into agreement(s) to effect a placing of part or all of the Consideration Shares and/or the Underlying Shares. In such event, the Company will make the Placing Announcement as and when appropriate.

If less than 25% (or such lower percentage as may be allowed under the Listing Rules) of the New Shares are held by the public, it will constitute a breach of the Listing Rules, and if the Stock Exchange believes that:

• a false market exists or may exist in the trading in the New Shares; or

• there are too few New Shares in public hands to maintain an orderly market,

then it will consider exercising its discretion to suspend trading in the New Shares until a sufficient public float is attained.

INFORMATION ON THE GROUP, MR. WONG AND THE VENDOR

The Group is principally engaged in property development and investment, securities broking and investments and general trading.

Mr. Wong became and has remained the controlling shareholder of the Company since March 2002. As at the Latest Practicable Date, he was interested in 3,706,003,500 Shares, representing approximately 66.9% of the issued share capital of the Company. Mr. Wong is and has been throughout their existence the ultimate owner of the Vendor, the Parent Group and the Target Group.

GENERAL

Mr. Wong is a Director and the controlling shareholder of the Company and hence a connected person of the Company.

— 61 —

LETTER FROM THE BOARD

The Acquisition constitutes a very substantial acquisition and a connected transaction for the Company which requires the approval of the Independent Shareholders by a poll at the Special General Meeting.

The Independent Board Committee has been established to advise the Independent Shareholders on the Acquisition and the Connected Transactions. Somerley has been appointed the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders on the Acquisition and the Connected Transactions.

ABN AMRO Asia Corporate Finance Limited and N M Rothschild & Sons (Hong Kong) Limited have been appointed as the joint financial advisers to advise the Company in relation to the Acquisition.

Shareholders and potential investors should note that the Acquisition, which are subject to a number of conditions precedent, may or may not be completed. Shareholders and potential investors are reminded to exercise caution when dealing in the securities of the Company.

SPECIAL GENERAL MEETING

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. or any adjournment thereof is set out on pages N-1 to N-5 of this circular for the purpose of considering and, if thought fit, passing, inter-alia, the resolutions in respect of (i) the Acquisition, (ii) the Connected Transactions, (iii) the Capital Reorganisation, and (iv) the proposed change of company name.

A form of proxy for use by the Shareholders at the Special General Meeting is enclosed. Whether or not you are able to attend the meeting in person, you are requested to complete and return the form of proxy in accordance with the instructions printed thereon 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 later than 48 hours before the time appointed for holding such meeting or any adjourned meeting (as the case may be). 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 thereof (as the case may be) should you so wish.

Pursuant to Bye-law 70 of the bye-laws of the Company, a poll may be demanded by the Chairman or by:

• (a) at least three Shareholders present in person (or in the case of a corporation, by its duly authorised representative) or by proxy and entitled to vote at the meeting; or

• (b) any Shareholder or Shareholders present in person (or in the case of a corporation, by its duly authorised representative) or by proxy and representing in the aggregate not less than one-tenth of the total voting rights of all the shareholders having the right to vote at the meeting; or

— 62 —

LETTER FROM THE BOARD

• (c) a Shareholder or Shareholders present in person (or in the case of a corporation, by its duly authorised representative) or by proxy and holding Shares conferring a right to vote at the meeting being Shares on which an aggregate sum has been paid up equal to not less than one-tenth of the total sum paid up on all shares conferring that right.

As at the Latest Practicable Date, Mr. Wong was beneficially interested in 3,706,003,500 Shares, representing approximately 66.9% of the issued share capital of the Company and was the controlling shareholder of the Company. No voting trust, other agreement, arrangement or understanding was entered into by or binding upon Mr. Wong in respect of his beneficial interests in the Company. As the Acquisition constitutes a very substantial acquisition and a connected transaction for the Company, the votes of the Shareholders to be taken at the Special General Meeting will be by a poll where Mr. Wong and his associates will abstain from voting.

RECOMMENDATIONS

Your attention is drawn to the letter of advice from the Independent Board Committee and the letter from the Somerley containing its recommendations to the Independent Board Committee and the Independent Shareholders in relation to 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 set out on pages 64 to 65 and pages 66 to 113 of this circular, respectively.

Your attention is also drawn to the additional information set out in the appendices to this circular and the notice of the Special General Meeting.

By Order of the Board China Eagle Group Company Limited NG KIN WAH Executive Director

— 63 —

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

CHINA EAGLE GROUP COMPANY LIMITED

*

(incorporated in Bermuda with limited liability)

Stock Code: 493

To the Independent Shareholders

5 July 2004

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 circular dated 5 July 2004 of the Company (the “Circular”) of which this letter forms part. Terms defined in the Circular shall have the same meanings herein unless the context otherwise requires.

We have been appointed to form the Independent Board Committee to consider and to advise the Independent Shareholders as to whether, in our opinion, 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 are fair and reasonable so far as the Independent Shareholders are concerned. Somerley has been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders 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.

We wish to draw your attention to the “Letter from the Board” set out on pages 10 to 63 of the Circular which contains, inter alia, information of the Acquisition (including the extension of time for the repayment of the Beijing Gome Debt and the Assistance) and the Continuing Connected Transactions, as well as the letter from Somerley set out on pages 66 to 113 of the Circular which contains its advice 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.

* For identification purposes only

— 64 —

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

Having taking into account the advice of Somerley, we consider that 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 are fair and reasonable so far as the Independent Shareholders are concerned and are in the interest of the Company and the Independent Shareholders as a whole to enter into the same. Accordingly, we recommend the Independent Shareholders to vote in favour of the ordinary resolutions 3 to 7 to be proposed at the Special General Meeting 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.

Yours faithfully For and on behalf of Independent Board Committee MICHAEL SZE TSAI PING CHAN YUK SANG

CHEN HUAI

Independent non-executive Directors

— 65 —

LETTER FROM SOMERLEY

The following is the full text of the letter of advice to the Independent Board Committee from Somerley, the independent financial adviser, dated 5 July 2004 prepared for incorporation in this circular.

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

5 July 2004

The Independent Board Committee and Independent Shareholders

Dear Sirs

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

INTRODUCTION

We refer to our appointment to act as the independent financial adviser to advise the Independent Board Committee and Independent Shareholders in relation to 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, details of which are contained in the circular to the shareholders of China Eagle Group Company Limited dated 5 July 2004 (the “Circular”), of which this letter forms part. Unless otherwise defined, terms used in this letter have the same meanings as defined in the Circular.

On 3 June 2004, the Vendor and the Purchaser (a wholly-owned subsidiary of the Company) entered into the Acquisition Agreement, pursuant to which the Purchaser has conditionally agreed to purchase the Sale Shares, representing the entire issued share capital of Ocean Town, from the Vendor at RMB8.8 billion (approximately HK$8.3 billion). The Acquisition constitutes a very substantial acquisition of the Company under the Listing Rules. The Vendor is ultimately wholly owned by Mr. Wong who is a director, chairman and the controlling shareholder of the Company holding directly and indirectly approximately 66.9% of its issued share capital and hence a connected person of the Company. The Acquisition therefore also constitutes a connected transaction of the Company under the Listing Rules. The Acquisition requires the approval of the Independent Shareholders at the Special General Meeting to be taken by poll.

— 66 —

LETTER FROM SOMERLEY

To regulate the relationship between the Target Group and the Parent Group, members of the Target Group have entered or will, on Completion, enter into certain arrangements which are or will constitute connected transactions or continuing connected transactions of the Company under the Listing Rules and are subject to disclosure requirements and approval of the Independent Shareholders at the Special General Meeting to be taken by poll. These arrangements include: (i) the extension of time for the repayment of the Beijing Gome Debt and the giving of the Assistance as connected transactions; and (ii) the Transitional Purchasing Service Agreement, the Purchasing Service Agreement, the Management Agreement and the Audio Visual Products Counters Sub-lease Agreements as Continuing Connected Transactions.

An independent committee of the Board, comprising Messrs Michael Sze Tsai Ping, Chan Yuk Sang and Chen Huai who are independent non-executive Directors, has been formed to make recommendation to the Independent Shareholders as regards 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. We have been appointed as independent financial adviser to advise the Independent Board Committee and Independent Shareholders in this regard.

In formulating our opinion and advice, we have relied on the information and facts supplied, and opinions expressed, by the Directors, which we have assumed to be true, accurate and complete. We have been provided with, among other things, the accountants’ report of the Target Group for the three years ended 31 December 2003 and the three months ended 31 March 2004, the audited financial statements of the Group for the three years ended 31 March 2004, the pro forma financial information on the Enlarged Group, the cashflow projections of each of the Group and the Target Group for the period from 1 July 2004 to 30 June 2005, the unaudited management accounts of the Parent Group for three years ended 31 December 2003, the Acquisition Agreement, the draft copies of the agreement relating to the Beijing Gome Debt, Transitional Purchasing Service Agreement, the Purchasing Service Agreement, the Management Agreement, the Trade Mark Licence Agreement, the Audio Visual Products Counters Sub-lease Agreements, Non-competition Undertaking, Right of First Refusal Deed and Bank Guarantees Deed which will be entered into at Completion, the major terms of which are set out in the “Letter from the Board” of the Circular. We have discussed with the Company’s management the basis on which the aforesaid financial information has been prepared and the terms on which the aforesaid agreements have been arrived at.

We consider that the information which we have received is sufficient for us to formulate the opinion and advice as set out in this letter. We have no reason to doubt the truth and accuracy of the information provided to us or that any material facts have been omitted or withheld. We have, however, not conducted an independent investigation into the business and affairs of the Group, the Target Group or the Parent Group. We have also assumed that all facts and representations contained or referred to in the Circular were true at the time they were made and will continue to be true up to the date of the Special General Meeting.

— 67 —

LETTER FROM SOMERLEY

PRINCIPAL FACTORS AND REASONS TAKEN INTO ACCOUNT

In arriving at our opinion on the terms of Acquisition and the Continuing Connected Transactions, we have taken the following principal factors and reasons into consideration:

1. Background to the Acquisition

The Company was listed on the Stock Exchange in April 1992 under its former name of Capital Automation Holdings Limited. At the time of listing, the Company and its then subsidiaries were principally engaged in the manufacture and sale of computer aided design systems and machinery. However, following a number of years of losses since 1995, in 2000 the Group ceased its business in the manufacture of computer aided design systems and machinery, but had continued with the business in sale of computer aided design systems and machinery until 2003 when the Group discontinued all its related business in sale of computer aided design systems and machinery. Since 2001, the Group has turned to other new businesses, including property investment in the PRC in 2001, general trading and investment in a property development company in the PRC in 2002, securities brokerage and trading in securities, futures and foreign exchanges in 2003.

The change in business direction of the Group had coupled with a change in control of the Company. In March 2002, Mr. Wong, through Shinning Crown Holdings Inc. (“Shinning Crown”) which is beneficially wholly owned by him, acquired a majority control in the Company by way of a subscription of new shares in the Company. The said subscription resulted in Mr. Wong, together with Shinning Crown, holding approximately 85.6% of the issued share capital of the Company at the time when the said subscription was completed. A mandatory offer for all the Shares was made by Shinning Crown in compliance with the Hong Kong Code on Takeovers and Mergers. Following the close of the mandatory offer, Shinning Crown had placed down its shareholding in the Company to about 74% in order to restore the minimum 25% public float level as stipulated under the Listing Rules. Mr. Wong was appointed as the Chairman and an executive Director of the Company in April 2002 and the existing management took control of the Group. To reflect the change in management and controlling Shareholder, the Company adopted its present name of China Eagle Group Company Limited in June 2002.

Subsequent to the change of control in 2002, the Company has completed a number of corporate transactions involving the issues of new shares or convertible notes for cash or as consideration for acquisition of assets. All of the convertible notes previously issued by the Company have been converted into Shares in accordance with their terms prior to the Latest Practicable Date. As at the Latest Practicable Date, Mr. Wong and Shinning Crown together held 3,706,003,500 Shares, representing approximately 66.9% of the existing issued share capital of the Company.

On 4 June 2004, the Board announced a reorganisation of the share capital structure of the Company, as well as a major business development for the Group. The Capital Reorganisation involves a consolidation of every 40 existing Shares of HK$0.10 each into one Consolidated Share of HK$4.0 each, a reduction of the par value of each Consolidated Share in issue from HK$4.0 to HK$0.10 and a subdivision of each unissued Consolidated Share into 40 New Shares of HK$0.10 each. The effect of the Capital Reorganisation will be that, among other things, the value attributable to one New Share to be in issue immediately following the Capital Reorganisation becoming effective will be equivalent to the aggregate value attributable to 40 Shares immediately before the Capital Reorganisation becoming effective. Shareholders are asked to refer to the “Letter from the Board” in the Circular which sets out details of the terms and conditions of the Capital Reorganisation.

The major business development for the Group is the proposed acquisition by the Group of an effective 65% interest in Gome Appliance, which is currently ultimately wholly owned by Mr. Wong.

— 68 —

LETTER FROM SOMERLEY

Gome Appliance together with its wholly-owned subsidiaries comprise the Target Group which retails a wide range of electrical appliances and consumer electronic products in the PRC. The Target Group operates a large retail chain network under the trade name of “GOME Electrical Appliances” which spans over 22 major cities in the PRC with a total of 96 outlets as at the Latest Practicable Date. The Acquisition is for a total consideration of RMB8.8 billion (about HK$8.3 billion) to be satisfied partly by the issue of the Consideration Shares and partly by the Convertible Notes. The Acquisition constitutes a very substantial acquisition and a connected transaction for the Company under the Listing Rules. We will assess the terms, benefits and associated risks of the Acquisition in detail in the following sections of this letter.

2. The Acquisition

The Acquisition involves the sale by the Vendor and the purchase by the Purchaser of the entire issued share capital of Ocean Town which has a 65% interest in Gome Appliance for a total consideration of RMB8.8 billion (about HK$8.3 billion) (the “Consideration”). The Vendor is ultimately owned by Mr. Wong, who is also the guarantor for the Vendor’s obligation under the Acquisition Agreement. The Purchaser is a wholly-owned subsidiary of the Company.

(a) Business of Ocean Town, Gome Appliance and the Target Group

Ocean Town

Ocean Town is an investment company incorporated in the British Virgin Islands in December 2001 with limited liability. Ocean Town has not carried on any business since its incorporation except for the acquisition of a 65% interest in Gome Appliance from Yi Fu pursuant to an agreement dated 8 February 2004 for a consideration of RMB241.0 million (about HK$227.4 million), and transactions incidental to the said acquisition. Yi Fu is ultimately wholly owned by Mr. Wong. As at the date of the Acquisition Agreement, HK$99.9 million has been paid and Ocean Town was still indebted to Yi Fu in the amount of RMB135.1 million, being the Ocean Town Debt. The Ocean Town Debt has been fully repaid prior to the Latest Practicable Date. The 65% shareholding in Gome Appliance is the only principal asset of Ocean Town as at the date of the Acquisition Agreement.

Gome Appliance

Gome Appliance was established as a Sino-foreign equity joint venture in the PRC in April 2004. Gome Appliance and its subsidiaries together operate a large portion of the retail outlets run by the GOME Group, which retails electrical appliances and consumer electronic products. The business of the GOME Group (which comprises the Target Group and the Parent Group other than Hong Kong Gome) was founded by Mr. Wong in Beijing, the PRC in 1987. In 1993, the GOME Group began to develop its retail chain network and adopted the “GOME Electrical Appliances” brand name for all of the retail outlets it was then operating. By 1999, the GOME Group had seven retail chain outlets operated in Beijing. In July 1999, the GOME Group made foray into its first market outside Beijing, the Tianjin city. The GOME Group has since built up an extensive network of retail outlets in the PRC operated under the brand name of “GOME Electrical Appliances” . According to the State Information Centre, the GOME Group was the largest retail chain operator of electrical appliances and consumer electronic products in the PRC in terms of turnover for 2002 and 2003. Its turnover (including sales of franchise stores and the value added tax) of approximately RMB17.8 billion in 2003 far exceeds the second and third largest chain retailers of electrical appliances and consumer electronic products in the PRC, which recorded a turnover of about RMB8.8 billion and RMB8.5 billion respectively in the same year.

— 69 —

LETTER FROM SOMERLEY

Pursuant to a group reorganisation of the GOME Group (which is ultimately wholly owned by Mr. Wong) completed in April 2004 (the “GOME Group Private Reorganisation”), the then business and operations of GOME Group was restructured to the effect that:

• (i) all the assets, liabilities and business of retailing of electrical appliances and consumer electronic products in Beijing city owned by Beijing Gome, with the exclusion of certain assets and liabilities as set out in Section 1 of the Accountants’ Report contained in Appendix III to this Circular; and

• (ii) the entire equity interests in 18 specified subsidiary companies

which together operates a retail chain network in a total of 22 cities in the PRC were transferred to Gome Appliance.

As a result of the aforesaid reorganisation of the GOME Group, Gome Appliance and members of the Target Group now operate the “GOME Electrical Appliances” retail chain network in the following cities:

Location	**Number **	**of **	outlets
Beijing			16
Chengdu			6
Chongqing			8
Dongguan			2
Foshan			1
Fuqing			1
Fuzhou			3
Guangzhou			6
Huizhou			1
Jinan			5
Kunming			3
Langfang			1
Qingdao			4
Shenyang			6
Shenzhen			5
Tianjin			12
Weifang			1
Wuhan			7
Xian			5
Zhongshan			1
Zibo			1
Zigong			1
Total			96

— 70 —

LETTER FROM SOMERLEY

Following completion of the GOME Group Private Reorganisation, Ocean Town acquired 65% of the equity interest in Gome Appliance. The other remaining retail outlets do not form part of the Target Group and are continued to be operated by the Parent Group after the GOME Group Private Reorganisation. The Parent Group at present runs its “GOME Electrical Appliance” retail chain network in the following cities:

Location	Number of outlets
Anshan	1
Baotou	2
Changchun	1
Changsha	2
Dalian	2
Hangzhou	3
Harbin	2
Hong Kong	4
Luoyang	1
Ningbo	1
Shanghai	12
Shijiazhuang	2
Wuxi	1
Xianyang	1
Zhengzhou	4
Total	39

Note: As at the Latest Practicable Date, the Parent Group was in the process of setting up outlets in Nanning, Nanjing, Urumqi, Guiyang, Nanchang, Xiamen and Taiyuan, the PRC.

The Parent Group does not form part of the Acquisition.

(b) Financial Information

Set out below are a summary of the audited combined statements of operations of the Target Group for the three years ended 31 December 2003 and the three months ended 31 March 2004 and a summary of the combined balance sheets of the Target Group as at 31 March 2004 and 31 December 2003, 2002 and 2001 respectively, as extracted from the Accountants’ Report contained in Appendix III to the Circular. The audited combined statements of operations and combined balance sheets have been prepared as if the current group structure of the companies comprising the Target Group as at 20 April 2004 (being the date upon which Ocean Town acquired the 65% equity interest in Gome Appliance) had been in existence from the beginning of the year/period as referred to in the summary statements. Shareholders’ attention is drawn to the Section 1 of the Accountants’ Report headed “Basis of presentation” which sets out the basis on which the audited financial information of the Target Group for the abovementioned years/period have been prepared, Section 2 which sets out the principal accounting policies adopted by the Target Group in arriving at the financial information as set out in the Accountants’ Report and the notes to the financial information in the combined statements.

— 71 —

LETTER FROM SOMERLEY

(i) Audited combined statements of operations

Notes Revenue (1) Cost of sales Gross profit Other operating income (2) Distributing, administrative and other operating expenses Profit from operating activities Finance income net of interest cost (3) Profit from operating activities before income tax and minority interests Income tax Net profit from ordinary activities Minority interest (4) Net profit Gross margin Operating profit margin Net profit margin Number of outlets at end of year/period	2001 (audited) RMB’000 3,872,571 (3,644,424)	Year ended 31 December 2002 (audited) Growth rate 2003 (audited) RMB’000 (%) RMB’000 6,619,006 70.9% 9,346,396 (6,198,203) (8,671,727)	Year ended 31 December 2002 (audited) Growth rate 2003 (audited) RMB’000 (%) RMB’000 6,619,006 70.9% 9,346,396 (6,198,203) (8,671,727)	Year ended 31 December 2002 (audited) Growth rate 2003 (audited) RMB’000 (%) RMB’000 6,619,006 70.9% 9,346,396 (6,198,203) (8,671,727)	Growth rate (%) 41.2%	Three months ended 31 March 2003 (audited) RMB’000 2,078,258 (1,932,688)	Three months ended 31 March 2004 (audited) RMB’000 2,918,126 (2,667,068)	Growth rate (%) 40.4%
	228,147 25,273 (219,667)	420,803 88,286 (381,541) 127,548 4,571 132,119 (25,673) 106,446 (37,256)	84.4%	674,669 278,422 (614,420) 338,671 12,975 351,646 (77,073) 274,573 (96,101)	60.3%	145,570 25,858 (120,950)	251,058 99,890 (200,327) 150,621 5,328 155,949 (25,892) 130,057 (45,520)	72.5%
	33,753 2,003		277.9%		165.5%	50,478 2,877		198.4%
	35,756 (10,317)		269.5%		166.2%	53,355 (14,406)		192.3%
	25,439 (8,904)		318.4%		157.9%	38,949 (13,632)		233.9%
	16,535	69,190 6.4% 1.9% 1.0% 47	318.4%	178,472 7.2% 3.6% 1.9% 79	157.9%	25,317	84,537 8.6% 5.2% 2.9% 86	233.9%
	5.9% 0.9% 0.4% 32					7.0% 2.4% 1.2% 54

Notes:

(1) Comprising sale of electrical appliances and consumer electronic products.

(2) Largely comprising various income from suppliers including promotion income, management fee income, leasing of storage space and product listing fee, and in the case of the three months ended 31 March 2004 also include management and purchasing service fees from the Parent Group. A detailed analysis on other operating income is set out under note (a) to Section 3 of the Accountants’ Report.

(3) The interest expenses incurred by the Target Group for the years/period under review were: year ended 31 December 2001 and 2002 - nil, year ended 31 December 2003 - RMB325,000, three months ended 31 March 2003 and 2004 - nil and RMB134,000 respectively.

• (4) Representing 35% equity interest in Gome Appliance ultimately owned by Mr. Wong.

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LETTER FROM SOMERLEY

The Target Group has shown a significant growth in revenue over the periods under review, and an even stronger growth in profits. As more particularly discussed in the Appendix IV in the Circular, the gross profit margin of the Target Group has improved over the years: from 5.9% for year 2001 to 6.4% for year 2002, to 7.2% for year 2003 and to 8.6% for the three months ended 31 March 2004. The improvement was attributable to the Target Group’s improving bargaining position with its suppliers due to increasing purchase volume. This has resulted in, among other things, increase in volume purchase rebate rates obtained from the suppliers. With the improved gross profit margins, the Target Group was able to register a bigger percentage increase in gross profit than in revenue.

The profit from operating activities saw a greater percentage growth than gross profits largely due to the contribution from other operating income. As discussed in the “Letter from the Board”, primarily due to the expansion of sales network over the country during the years/period under review, which resulted in increase in sales and accordingly the amounts of purchase by the Target Group, there had been an increased number of suppliers accepting the standardised commercial terms adopted by the Target Group for its purchases. These commercial terms included commitments from the suppliers on promotion income and management fee income, payment for leasing of storage space and product listing fee. We understand from the Directors that although the rates of these payments by suppliers may vary between suppliers and are negotiated on basis of individual supply contracts, it is expected that such income from suppliers will continue to contribute to the results of the Target Group in the normal and ordinary course of business of the Target Group. For the three months ended 31 March 2004, there was a new source of income for the Target Group, being the management and purchasing service fees from the Parent Group which amounted to approximately RMB16.5 million (see our discussion in paragraph headed “Continuing Connected Transactions” below). Primarily due to the contribution from these other operating income, the operating profit margins of the Target Group also improved during the years/periods under review: from 0.9% for year 2001 to 1.9% for year 2002, to 3.6% for year 2003, and to 5.2% for the three months ended 31 March 2004.

The growth in the profit after taxation but before minority interest and in net profit of the Target Group during the years/periods under review were basically in line with the performance of the profits from operating activities.

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LETTER FROM SOMERLEY

(ii) Audited combined balance sheets

Non current assets Fixed assets Deferred tax assets Current assets Inventories Bills and other receivables and prepayments Due from related parties (note) Cash and cash equivalents and pledged deposits Current liabilities Interest-bearing bank loan Trade payable and bills payable Tax payable Customers’ deposits, other payables and accruals Deferred income tax liabilities Net current assets Total assets less current liabilities Minority interests Net Assets	As at 31 December 2001 2002 2003 (audited) (audited) (audited) RMB’000 RMB’000 RMB’000 23,108 41,092 97,055 7,309 9,347 2,379	As at 31 December 2001 2002 2003 (audited) (audited) (audited) RMB’000 RMB’000 RMB’000 23,108 41,092 97,055 7,309 9,347 2,379	As at 31 December 2001 2002 2003 (audited) (audited) (audited) RMB’000 RMB’000 RMB’000 23,108 41,092 97,055 7,309 9,347 2,379	As at 31 March 2004 (audited) RMB’000 106,591 1,232 107,823 831,303 88,625 1,088,542 1,075,718 3,084,188 (10,000) (2,470,057) (25,892) (314,193) (1,108) (2,821,250) 262,938 370,761 (129,761) 241,000
	30,417 333,429 46,393 482,384 197,103 1,059,309 — (772,937) (2,807) (74,379) (1,066) (851,189) 208,120 238,537 (83,488)	50,439 550,084 96,402 796,402 634,198 2,077,086 — (1,603,547) (6,550) (171,326) (1,119) (1,782,542) 294,544 344,983 (120,744)	99,434 974,880 111,157 2,099,057 1,418,260 4,603,354 (10,000) (3,412,607) (19,029) (309,782) (2,119) (3,753,537) 849,817 949,251 (332,238)	107,823 831,303 88,625 1,088,542 1,075,718
				3,084,188
				(10,000 (2,470,057 (25,892 (314,193 (1,108
				(2,821,250
				262,938
				370,761
				(129,761
	155,049	224,239	617,013

Note: The balance as at 31 March 2004 represents the amount of Beijing Gome Debt. Under the Acquisition Agreement, Beijing Gome will repay the amount on or before 31 March 2005 (see the paragraph headed “Beijing Gome Debt” below).

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LETTER FROM SOMERLEY

As discussed under Section 5 of the Accountants’ Report of the Target Group set out in Appendix III to the Circular, the owner’s equity increased from RMB155 million in year 2001 to RMB224 million in 2002 and further to RMB617 million in 2003 due to (a) net profits attained over the years 2001 to 2003 and (b) capital contribution from owner in respect of the formation of the companies now comprising the Target Group over the said years. Owner’s equity decreased by a net amount of about RMB376 million to about RMB241 million as at 31 March 2004 because (i) of the net profits attained during three months period ended 31 March 2004 and (ii) as part of the Gome Group Private Reorganisation, certain assets and liabilities have been retained by Beijing Gome and such transfers have been reflected as a distribution to the owner in the accounts of the Target Group.

On the basis of the above audited balance sheets, we set out below the analysis of the following financial ratios:

		As at 31 December	As at 31 December	As at 31 December	**As at 31 **	March
	Notes	2001	2002	2003	2003	2004
Inventory turnover (days)		24.9	26.0	32.1	N/A	N/A
Liquid ratio (times)	(1)	1.24	1.17	1.23	1.16	1.09
Quick ratio (times)	(2)	0.85	0.86	0.97	0.91	0.82
Net debt/equity ratio (times)	(3)	1.34	1.82	2.04	2.06	3.76

Notes:

(1) Calculated as current assets over current liabilities.

(2) Calculated as (current assets — inventory)/current liabilities.

(3) Net debt is equal to the aggregate of interest-bearing bank loan and bills payable minus cash and cash equivalents and pledged deposit.

In general, the Target Group operated with a fast inventory turnover between 25 days to 32 days during the years/period under review. As the Target Group is a retailer and principally receives cash from its customers on sale of goods, the Target Group’s debtor balances are kept at a relatively low level for the years/period under review. It can be seen that the operation of the Target Group is largely financed by external sales and by bills facilities which are secured by the pledge of certain of the Target Group’s time deposits. The Target Group had quite substantial bills payable (RMB404.2 million, RMB1,043.4 million, RMB2,664.5 million and RMB1,974.1 million for each of 31 December 2001, 2002 and 2003 and 31 March 2004, respectively). A majority of the bills payable are due within three months. Further breakdown on the aging is set out in the notes to Section 4 of the Accountants’ Report. Except for a bank loan in the amount of RMB10 million which has been utilised to finance the opening of new retail outlet at Wuhan, the Target Group has no bank debts.

Included in the current assets of the Target Group is the amount due from related parties, which amounted to approximately RMB482 million as at 31 December 2001, approximately RMB796 million as at 31 December 2002, approximately RMB2,099 million as at 31 December 2003, and approximately RMB1,089 million (being the Beijing Gome Debt) as at 31 March 2004. As advised by the management of the Target Group, the balance represented the amount advanced to related parties owned and/or controlled by Mr. Wong for the purpose of funding his business activities.

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LETTER FROM SOMERLEY

Under the terms of the Acquisition Agreement, Beijing Gome has requested an extension for repayment from Completion up to 31 March 2005, subject to the provision of certain securities and at a fee. This will be discussed in detail in the paragraph headed “Beijing Gome Debt” below.

Overall, the Target Group maintained a rather stable liquidity and gearing ratio during the years/period under review. The Target Group has a quick ratio of less than one time, which means current liabilities are greater than its “quick” current assets which do not include inventory. In the case of the Target Group, we consider it more appropriate to refer to the liquid ratio as the Target Group has fast moving inventory which is almost as liquid as the other current assets. The Target Group has maintained its liquid ratio at around one time, which indicates that its current liabilities were sufficiently covered by current assets. The gearing ratio increases from approximately 1.34 times at 31 December 2001 to approximately 3.76 times at 31 March 2004, due to increase in bills payable which is in line with the growth in revenue and the decrease in net assets by about RMB376 million during the three months ended 31 March 2004. The latest recorded 3.76 times gearing ratio is high by conventional standard. However, the net debt comprises the outstanding bills payable of approximately RMB900 million, which size is acceptable if measured against the total sales of approximately RMB9.3 billion recorded for the year ended 31 December 2003. Majority of the bills payable have a payment term of three to six months and is normally settled by proceeds from cash sales of inventory which on average has only around 32 turnover days. On this basis, we consider a gearing ratio of 3.76 times manageable.

In addition, the Target Group has an approximately HK$1 billion receivable from Mr. Wong. As stated in the “Letter from the Board” of the Circular, Mr. Wong and the Vendor may enter into one or more placing and underwriting agreements with one or more placing agents for international placement(s) of all or part of the Consideration Shares and/or the Underlying Shares after Completion. Any proceeds from the Placing will first be applied to repay the Beijing Gome Debt. In any event, the Beijing Gome Debt will be repaid upon its maturity on 31 March 2005. Upon repayment in full of the Beijing Gome Debt and assuming such cash is not applied for capital use, the Enlarged Group shall be in a debt free position.

The net current asset positions of the Target Group at the end of the years/period under review were undoubtedly weakened by the balance of the amount due from related parties. Had the Target Group encountered difficulty in recovering the entire Beijing Gome Debt, the Target Group would have suffered a net liability position of approximately RMB825.6 million. This would have put the Target Group in an unhealthy financial position. However, we are advised by the Directors that during the years/period under review, the Target Group had never failed to meet payment of any debts due, and the amounts due from related parties had been duly received on demand by the Target Group. As the Target Group is also part of a private business of Mr. Wong and Mr. Wong is also engaged in other businesses, we consider that it is not unusual for an entrepreneur to have allocated funds generated by his private businesses between different business activities owned by him. As set out in the “Letter from the Board” of the Circular, the Company has no present intention to make further advances to Mr. Wong and his associates. Should any advances be made to Mr. Wong and his associates after Completion, the Company will have to comply in full with the applicable Listing Rule requirements.

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LETTER FROM SOMERLEY

(c) Competitive Strengths

As a major player in the electrical appliances and consumer electronic product retailing industry in the PRC, the Directors consider that the Target Group has a number of key competitive strengths which will continue to contribute to the success of the business, details of which are set out in the “Letter from the Board” of the Circular. We would like to highlight in the following those that we consider particularly important to an electrical appliances and consumer electronic product retail chain operator:

• Large scale enhances competitive pricing structure and ability to react quickly to changing market conditions. The Target Group has established a leading position in the PRC retail market for electrical appliances and consumer electronic products. This has resulted in significant product turnover, thereby enabling the Target Group to establish direct purchasing relationship with manufacturers and to strengthen its negotiating power with product manufacturers and suppliers.

In our view, the strong negotiating power that Gome Appliance has achieved puts it in a competitive positioning over its local competitors, and well positions it to face foreign competition anticipated with the gradual opening up of the market particularly after China’s accession to WTO.

• Strong brand recognition. The Gome Group was the largest nationwide retail chain operator for electrical appliances and consumer electronic products in the PRC in 2001, 2002 and 2003 in terms of turnover. The Directors believe that with a reputation for competitive prices, service and quality products, the “GOME” brand is well established in the PRC retail industry.

We agree with the Directors that the Gome Group has a strong brand recognition. This has enabled the Gome Group to attain the first position, in terms of turnover, in the nationwide electrical appliances and consumer electronic product retail industry in PRC. In year 2003, the Gome Group recorded a turnover of about RMB17.8 billion. This figure is much higher than the respective RMB8.8 billion and RMB8.5 billion turnover recorded in the same year by the second and third largest market players. As set out in Appendix I to the Circular, these turnover figures are inclusive of value added tax and sales of franchise stores.

(d) Consideration

The consideration for the acquisition of the entire issued share capital of Ocean Town which holds a 65% interest in Gome Appliance is RMB8.8 billion (about HK$8.3 billion). The consideration will be satisfied at Completion as to HK$243.5 million by the allotment and issue of the Consideration Shares at the Issue Price, as to HK$7,031.4 million by the issue of the First Convertible Note and as to the balance of HK$1,026.9 million by the issue of the Second Convertible Note. The Convertible Notes are non-interest bearing and mandatory convertible into New Shares at the Issue Price on or prior to maturity which falls on the third anniversary of the date of issue of the Convertible

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LETTER FROM SOMERLEY

Notes. The Issue Price has been agreed at HK$5.52 per New Share (equivalent to an issue price of HK$0.138 per Share prior to the Capital Reorganisation becoming effective). The Acquisition Agreement is conditional on, among others, the Capital Reorganisation becoming effective and unconditional.

All the terms of the First Convertible Note and the Second Convertible Note are largely the same, except that the Second Convertible Note will be charged to secure the obligation of Mr. Wong to repay the Beijing Gome Debt (as discussed below) and shall not be converted into New Shares until the entire Beijing Gome Debt is repaid.

On the basis of the Consideration, the Acquisition values the entire Target Group at approximately RMB13.5 billion (approximately HK$12.8 billion). The directors have stated that the Consideration was determined with reference to the leading position, extensive network, wellestablished brand, business potential and growth prospect of the Target Group.

3. Business of and financial information on the Group

(a) Business

The present principal activities of the Group comprise property development and investment, securities broking and investment and general trading. As discussed in paragraph 1 above, these activities have been operated for two years and are relatively new for the Group. It appears to us that following the cessation of the original business of the Group in manufacturing of computer aided design systems and machinery in 2000, the Group has not yet established a new business of significance as more particularly discussed below.

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LETTER FROM SOMERLEY

(b) Audited profit and loss account

Set out below is an analysis of the results of the Group for the last four years:

Notes Revenue Sale of computer aided design systems and machinery 1 Rentals General trading 2 Commission income 3 Profit on trading of securities, foreign exchange and futures 3 Other operating income 4 Profit/(loss) from ordinary activities after taxation but before minority interest Profit/(loss) attributable to Shareholders	For the year 2001 2002 HK$’000 HK$’000 (Audited) (Audited) 13,067 2,238 — 1,835 — — — — — — 13,067 4,073 678 4,024 (14,205) (7,159) (14,205) (7,159)	ended 31 March 2003 2004 HK$’000 HK$’000 (Audited) (Audited) 450 6 1,043 145 2,631 — — 7,200 — 37,464 4,124 44,815 7,366 907 (12,360) 19,999 (12,360) 19,881

Notes:

1. This line of business was discontinued during the year ended 31 March 2004.

2. Involved trading of household and electric appliance products.

3. The commission income were income generated by the securities broking business, which was acquired in 2003. Trading in securities, foreign exchange and futures activities is a new line of business commencing in 2003.

4. Other operating income in 2002 mainly represented gain on disposal of other investments in securities. Other operating income in 2003 mainly represented a waiver of loan from a former director.

5. The financial statements of the Group for the accounting years up to and including the one ended 31 December 2003 have been prepared in accordance with the applicable Hong Kong Financial Reporting Standards issued by the Hong Kong Society of Accountants and accounting principles generally accepted in Hong Kong. For the year ended 31 March 2004, the Group adopted the International Financial Reporting Standard promulgated by the International Accounting Standards Board in the preparation of its financial statements and the comparative figures for that year (i.e. for the year ended 31 March 2003) have been adjusted accordingly. Figures for earlier years remain unchanged.

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LETTER FROM SOMERLEY

The Group recorded a turnaround in profit for the year ended 31 March 2004 after years of loss since 1995, and revenue had also increased from merely a few million Hong Kong dollars in the past few years to nearly HK$45 million. However, Shareholders should note that the major contributor to the improved results for year 2004 was trading in securities, foreign exchange and futures and contribution from the other new lines of business was still relatively weak. Given that the Group has not had any track records in securities, foreign exchange and futures trading activities in the past, we are not able to comment whether the satisfactory contribution from this line of activities would sustain in coming years. From the fourth quarter of year 2003 to 31 March 2004, the stock market indices saw a significant rebound from their lows in the earlier part of 2003 when the Hong Kong economy was severely affected by the occurrence of SARS.

All stock market indices recorded gains over the six months ended 31 March 2004 as follows:

	Index figure	Index figure
	as at	as at
	2 October	31 March	Gain
	2003	2004	(%)	High	Low
Hang Seng Index	11,546	12,681	9.8%	13,928	11,546
Hang Seng China Enterprises Index	3,268	4,778	46.2%	5,391	3,268
Hang Seng China-Affiliated
Corporations (Red Chip) Index	1,234	1,419	15.0%	1,660	1,234
Hong Kong Property Index	15,361	16,060	4.6%	18,353	13,448
Hang Seng Hong Kong Mid-cap
Index (“HSHKMI”)	1,972	2,136	8.3%	2,332	1,891

During the period from 2 October 2003 to 31 March 2004, we also note that the volatility of the local market was relatively high. The spread of the high/low of the above indices was relatively large when compared with their opening and closing figures during the period under review. This demonstrates the volatility and fluctuation of the market, which may have created a favourable market condition for short term trading in securities.

However, Shareholders should note that future performance of trading in securities, foreign exchange and futures is likely to be subject to a higher degree of uncertainties than other existing lines of business of the Group. These uncertainties include but not limited to the market volatility, as well as changes in economic, fiscal and political conditions of the market.

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LETTER FROM SOMERLEY

(c) Audited balance sheet

Set out below is a summary of the audited consolidated balance sheet of the Group as at 31 March 2003 and 31 March 2004:

Notes Non-current assets Property, plant and equipment Intangible assets Property under development Investment properties Investment in associates Other investments Current assets Other investments Inventories Deposits with brokers and financial institutions Amounts due from related parties 1 Trade and other receivables 2 Cash and cash equivalents Current liabilities Convertible notes Trade and other payables 3 Amounts due to related parties 4 Current taxation Net current assets/(liabilities) Total assets less current liabilities Non-current liabilities Long-term payables 5 Minority interests Net assets	As at 31 March 2003 2004 HK$’000 HK$’000 (Audited) (Audited) 10,195 4,748 (950) (13,461) — 750,441 330 4,438 203,246 — — 124 212,821 746,290 — 804 2,675 — — 64,323 25,341 12,866 2,661 62,829 19,902 83,976 50,579 224,798 (75,000) (24,000) (2,440) (44,001) — (87,044)_ — (5,500) (77,440) (160,545) (26,861) 64,253 185,960 810,543 — (157,547) — (1,547) 185,960 651,449	As at 31 March 2003 2004 HK$’000 HK$’000 (Audited) (Audited) 10,195 4,748 (950) (13,461) — 750,441 330 4,438 203,246 — — 124 212,821 746,290 — 804 2,675 — — 64,323 25,341 12,866 2,661 62,829 19,902 83,976 50,579 224,798 (75,000) (24,000) (2,440) (44,001) — (87,044)_ — (5,500) (77,440) (160,545) (26,861) 64,253 185,960 810,543 — (157,547) — (1,547) 185,960 651,449
	212,821 — 2,675 — 25,341 2,661 19,902 50,579 (75,000) (2,440) — — (77,440) (26,861) 185,960 — —	746,290
		804 — 64,323 12,866 62,829 83,976
		224,798
		(24,000 (44,001 (87,044 (5,500
		(160,545
		64,253
		810,543 (157,547 (1,547
	185,960

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LETTER FROM SOMERLEY

Notes:

1. The amount represents the balance due from Mr. Han Yue Jun (“Mr. Han”).

2. The 2004 balance mainly comprises trade receivables arising from the new line of business of dealing in securities; and equity options due from the Group’s clients and HKFE Clearing Corporation.

3. The 2004 payable balance mainly represents margin deposits received from clients for their trading of futures and options. Dealing in futures and options is a new line of business that the Group entered into in 03/04.

4. The amount mainly comprises the balance due to Mr. Han and his associate of RMB69.5 million. The RMB69.5 million represents the amount in excess of Mr. Han’s attributable shareholding in the PRC Property Subsidiary (as defined below) and arose when the Company acquired an attributable interest in a property development project located at the Chaoyang District, Beijing (the “Property”), details of which are mentioned below.

5. The amount represents the balance of consideration of RMB167 million (or HK$157.5 million) payable to Beijing Bus Company Limited in relation to the acquisition of the Property. Pursuant to the transfer contract and the supplemental contracts, an amount of RMB80 million will be settled on or before 30 September 2005 and the remaining balance of RMB87.0 million will be settled on or before 30 September 2006.

The single largest asset of the Group is an interest in a property development project in Beijing, which had a book cost of about HK$750 million as at 31 March 2004. The Property is located at the Chaoyang District, Beijing which is held through an indirectly wholly-owned subsidiary of the Company in the PRC (the “PRC Property Subsidiary”). The Group first acquired an indirect 39.2% interest in the PRC Property Subsidiary in 2002, and later the remaining 60.8% in March 2004. The cost for the acquisition of the PRC Property Subsidiary is equivalent to HK$750 million. The PRC Property Subsidiary has entered into a contract with Beijing Bus Company Limited (an independent third party) for the acquisition and development of the Property (but not including the land use right) at a consideration of RMB250 million (approximately HK$235.8 million), of which RMB83 million (approximately HK$78.3 million) has been paid and the remaining RMB167 million remains outstanding. The PRC Property Subsidiary shall also repay RMB69.5 million to Mr. Han who was the minority shareholder of the PRC Property Subsidiary prior to it becoming wholly owned by the Group. The RMB69.5 million represented the amount in excess of Mr. Han’s then attributable shareholding in the PRC Property Subsidiary. The PRC Property Subsidiary is yet to acquire the land use right of the Property. It is presently estimated that the appropriate land use premium for the Property to be paid to the relevant PRC authority is approximately RMB470 million (approximately HK$443.4 million). The Property is presently vacant (except that a public bus factory is erected thereon but is not in use any more) and does not generate any revenue.

The Directors consider that relative to the property project as mentioned above, diversification into the retail of electrical appliances and electronic consumer products in the PRC will offer more promising growth potential to the Company and the Shareholders. Accordingly, the Directors have decided that no further commitments will be made to the above property project beyond the contractually committed of RMB167 million in order to preserve value of the property project. As at the Latest Practicable Date, no decision has been made in relation to the development of the Property.

As at 31 March 2004, the Group had investment in securities of approximately HK$804,000, which has been disposed of prior to the Latest Practicable Date. As stated in the “Letter from the Board” of the Circular, the Directors have decided not to engage in any currency, securities and futures proprietary trading activities upon completion of the Acquisition.

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LETTER FROM SOMERLEY

4. Rationale for the Acquisition

As set out in the “Letter from the Board” in the Circular, the Directors consider that the Acquisition represents an attractive opportunity for the Group to diversify into the retail of electrical appliances and consumer electronic products in the PRC, an area which the Directors expect to have a substantial growth potential. The Directors agree with the view of and assessment by the management of the Target Group in respect of the retail industry in the PRC and the future plans and prospects of the Target Group. After Completion, the Target Group, one of the leaders in this area with significant strengths, is expected to make immediate and substantial contribution to the earnings of the Group by providing a significant source of income, in addition to the Group’s existing businesses. Whilst the Group will have separate lines of business upon Completion, the Directors have decided that going forward, the Company’s resources will be focused on the PRC retail sector. The Directors consider that the retail outlets operated by the Target Group have an established track record and therefore provide a stable base for future development.

After the cessation of its former core business in sale of computer aided design systems and machinery, the Group is, in our view, yet to establish a core business that it can concentrate on and further develop. As discussed in paragraph 3(c) above, although the Group has a contractual right to develop the Property in due course, no decision has been made in relation to the development plan. In the circumstances, completion of the Acquisition will, in our view, give a solid line of business to the Group that it does not have at the moment. And this new line of business has proven track record and management. We believe that there shall not be any uncertainty surrounding the continuation of management of the Target Group after completion of the Acquisition as the business of the Target Group is founded by Mr. Wong, the Chairman of the Company, who has been heading the GOME Group since its establishment.

We concur with the Directors’ view that the acquisition of the Target Group will give an immediate boost to the Group’s income and provide a stable base for future development and there is commercial justification to re-focus on the retail sector.

5. Terms of the Acquisition

• (a) Evaluation of the Consideration

• (i) By reference to historical price/earnings multiple and growth potential

The consideration of RMB8.8 billion (approximately HK$8.3 billion) for the Sale Shares implies a historical price/earnings multiple of approximately 49.5 times on Ocean Town’s 2003 consolidated net profit in the Accountants’ Report, which is, in our view, a high price/earnings multiple. However, we consider that in evaluating a business which is still in the period of high growth, the growth potential should be considered.

As discussed under paragraph 2(b) above, the Target Group recorded an enormous growth in profit over the last three years being reported on. Sales increased by 1.4 times from approximately RMB3,873 million (approximately HK$3,654 million) for year 2001 to approximately RMB9,346 million (approximately HK$8,817 million) for year 2003, while net

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LETTER FROM SOMERLEY

profit increased nearly 10 folds from approximately RMB16.5 million (approximately HK$15.6 million) to approximately RMB178.5 million (approximately HK$168.4 million) over the same period. Significant growth continues into the first quarter of the current year. The Target Group recorded sales of approximately RMB2,918 million (approximately HK$2,752 million) and net profit of approximately RMB84.5 million (approximately HK$79.7 million) for the first quarter of 2004, an increase of 40.4% and 233.9% respectively over the same period in 2003. The compound annual growth rate (the “CAGR”) in revenue of the Target Group over 2001-2003 was approximately 55.3% while the CAGR growth in net profit over the same period was 228.5%.

As mentioned in the “Letter from the Board” of this Circular, the Target Group has formulated an expansion plan which includes, among others, establishing additional retail outlets. The following table lists out the number of retail outlets that the Target Group plans to establish from July of 2004 through to year 2006. For comparison purpose, we also set out the number of retail outlets that the Target Group has established during the three years ended 31 December 2003 and the three months ended 31 March 2004 and the average revenue per weighted usable area of the retail outlets over the three years ended 31 December 2003:

12 months ended 2001 2002 2003 Number of retail outlets at the end of year/period 32 47 (+15) 79 (+32) Revenue (RMB ’m) 3,872.6 6,619 9,346.4 Net profit (RMB ’m) 16.5 69.2 178.5 Net profit margin 0.43% 1.05% 1.91% Approximate weighted usable area of retail outlets (’000 sq.m.) (note 1) 75 122 204 Approximate revenue per weighted usable area of retail outlets (RMB ’000) (note 2) 51.6 54.3 45.8	3 months ended 12 months ended 31 March 2004 2004 2005 2006 86 (+7) 120 (+41) 155 (+35) 190 (+35) 2,918.1 84.5 2.90%

Notes:

(1) weighted by the actual number of months that the retail outlets have been operated during the relevant year.

(2) calculated as annual revenue over approximate weighted usable area of retail outlets.

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LETTER FROM SOMERLEY

We consider that the continued expansion of the retail chain network would allow the Target Group to maintain high growth for the following reasons:

• (A) There would be growth from increase in market share

As set out in Appendix I to the Circular, the Gome Group accounts for only approximately 4% market share of the whole electrical appliances and consumer electronic product retail industry in 2003. We consider that there is therefore plenty of room for further growth by the Target Group in the industry on the reasons as follows:

• (aa) the Target Group’s leading position in the industry and competitive strengths would at least in medium term continue to put it in an advantageous position to compete against local competitors and large international retail chain operators who are recently allowed to enter into the market as a result of the opening up policy adopted by PRC following its entry into the WTO. The competitive strengths that Gome Group possesses have enabled it to secure the leading position in the PRC electrical appliances and consumer electronic products retail market. Its sales of about RMB18 billion in 2003 far exceeded the second rank market player which had a turnover of RMB8.8 billion in the same year. As set out in Appendix I to the Circular, these turnover figures are inclusive of value added tax and sales of franchise stores;

• (bb) the Target Group would benefit from the increasing popularity of chain store operation. As discussed in Appendix I to the Circular, chain store retail operation has become increasingly popular in PRC, their aggregate sales as a percentage of total retail sales in the PRC increased from approximately 0.5% in 1995 to approximately 15.0% in 2003. Gome Group has to-date built up a proven business model for its chain store operation and this puts it in an advantageous position to compete against local small retail shops; and

• (cc) there would be increase in number of cities/regions covered by the retail chain network of the Target Group.

• (B) There would be growth from increase in market size

We consider the PRC electrical appliances and consumer electronic products market will continue to grow given the expected growth in GDP and consequently the living standard and spending power of the population.

As discussed in Appendix I to the Circular, real GDP grew by a CAGR of approximately 9.3% from 1992 to 2002. According to the Tenth Five-Year Plan as approved by the National People’s Congress, the State Council targeted GDP to grow at an average annual growth rate of approximately 7.0% between 2001 and 2005. Retail sales of electrical appliances and consumer electronic products in PRC increased from approximately RMB202 billion in 1996 to about RMB394 billion in 2002. As discussed in Appendix I to the Circular, the State Information Centre expects the trend of growth in electrical

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appliances and consumer electronic products to continue and forecasts that the annual growth in the retail sales of electrical appliances and consumer electronic products will be 10.6% in 2004 and 11.4% in 2005. On this basis and as the total retail sales for 2002 has already reached RMB394 billion, we expect that the growth in retail sales of electrical appliances and consumer electronic products would be over RMB40 billion for each of 2004 and 2005.

For our assessment of the growth potential of the Target Group, we have focused on the likely business development in 2004 of the Target Group as any business projection longer than a year will be subject to high variability. We have tried to establish a range of values rather than a single point of valuation as any estimation of value is subject to variations. In evaluating the Target Group, we have established a base case for an evaluation based on our assessment of the growth potential of the Target Group for 2004 and carried out a sensitivity analysis on certain factors to arrive at a range of values for the Target Group. Independent shareholders should note that neither the Company nor the Target Group has produced any forecast in respect of the future earnings of the Target Group for the purpose of inclusion in the Circular. The following assessment of the growth potential of the Target Group for 2004 is our independent analysis and does not represent the view of the Company or the directors or the management of the Target Group.

Our base case valuation of the Target Group has been arrived at on the basis of the historical financial data and the future expansion plan (in terms of number of retail outlets) of the Target Group, details of which are set out in the “Letter from the Board” of Appendix III to the Circular. The following is a detailed discussion of the bases that we have used in arriving at the base case valuation:

• (AA)We have reviewed the historical average revenue per weighted usable area of the retail outlets. From Gome Group management’s past experience, when Gome Group expanded its retail chain network in an existing city/region with certain number of retail outlets, the effect on the revenue pattern of that city/region had been that the revenue per usable area of the retail outlets tended to decrease, but the aggregate sales of the Gome Group in that particular area increased. We believe this pattern is probably attributable to the fact while the opening of new outlets would expand the sale network and attract new customers, some existing customers might have been attracted to the new outlets opened in the same area. The average revenue per weighted usable area in 2003 recorded about 15.7% decrease from about RMB54,300 in 2002 to about RMB45,800 in 2003. We are advised by the Directors that the decrease was also attributable to the outbreak of SARS which has depressed retail sales. As we are not able to single out the impact of SARS on the Target Group’s 2003 financial performance, we have on prudent basis ignored the exceptional factor of SARS in 2003 and, in order to build in extra margin, assumed a higher rate of decrease in average revenue per weighted usable area of retail outlets in 2004 than that recorded in 2003;

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• (BB) The Target Group plans to establish 41 retail outlets in 2004, of which 7 and 10 retail outlets have already been opened in the first and second quarter of 2004 respectively. On conservative basis, we have allowed a 10% buffer and built our base case on the assumption that only 37 (versus 41 as planned) retail outlets would eventually be opened in 2004. The usable area for the majority of the existing retail outlets ranges from 3,000 to 6,000 square metres per retail outlet. We have in our base case valuation assumed that the 20 retail outlets to be opened in 2004 would have an average size of approximately 3,500 square metres; and

• (CC) As discussed in Appendix IV to the Circular, the Target Group’s net profit margin showed an improvement over the entire period under review which covers the three years ended 31 December 2003 and the three months ended 31 March 2004. This was largely due to the Target Group’s improvement in bargaining position with its suppliers following its increase in sales volume. Our view is the Target Group has established a business scale that enables it to achieve competitive pricing in supply contracts and it is expected that this competitive advantage would be maintained in 2004. On this basis, we have assumed in our base case valuation that the current 2.9% net profit margin can be maintained in 2004.

After building our base case for the business performance of the Target Group for 2004, we have carried out a sensitivity analysis on the factors discussed under sub-paragraphs (AA) to (CC) above with a 10% variation.

On the basis of our base case and the aforesaid sensitive analysis, we conclude that the imputed price/earnings multiples implied by the Consideration as evaluated by us using the above methodology are within a reasonable range as further discussed in paragraph headed “(ii) Comparisons against market comparables” below.

(ii) Comparison against market comparables

In evaluating the consideration for the Acquisition, we have conducted a comparable company analysis using price/earnings multiple. There are no listed companies in the PRC or in Hong Kong which business nature and scale of operation are directly comparable to that of Gome Appliance. However, there are a few listed comparables overseas. In the circumstances, we have selected comparables (“Market Comparables”) using the following criteria:

• for listed comparables in the PRC and Hong Kong, include all companies engaging in the retailing and/or department stores business in PRC and with last audited sales of not less than RMB1,000 million (or HK$ equivalent); and

• for overseas listed comparables, our comparables include all UK/USA listed companies engaging in the retailing of consumer electronic products and electrical appliances in Europe/USA and with last audited sales of not less than US$120 million (approximately RMB954 million or HK$900 million).

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Set out below is the analysis of the comparables:

(A) Listed PRC and Hong Kong companies

					Market capitalisation	Market capitalisation	Price/
					as at Latest		earnings
	Sales		**Latest net **	profit	Practicable Date		(times)	Business
	RMB’ m	HK$’ m	RMB’ m	HK$’ m	RMB’ m	HK$’ m
Wuhan Zhongbai	3,177.5	2,997.6	22.4	21.1	1,037.2	978.5	42.3	Mainly operates
Group Co.								several department
								stores and
								supermarkets
Wumart Stores,	1,574.9	1,485.8	71.6	67.5	N/A	4,259.8	41.7	Operates and manages
Inc.								supermarkets and
								convenient stores in
								Beijing, Tianjin and
								Hebei
Lianhua	9,282.2	8,756.8	163.6	154.3	N/A	4,611.9	25.2	Operates
Supermarket								hypermarkets,
Holdings								supermarkets and
Limited								convenience stores in
								the PRC
Hualian	3,988.9	2,763.1	62.0	58.5	1,515.0	1,429.2	24.8	Mainly operates a
Supermarket								supermarket chain all
Co. Ltd.								over China

(B) Listed companies in United States and United Kingdom

					Market capitalisation	Market capitalisation	Price/
					**as at **	Latest	earnings
	Sales		**Latest net **	profit	Practicable Date		(times)	Business
	US$’ m	HK$’ m	US$’ m	HK$’ m	US$’ m	HK$’ m
Best Buy Co.,	24,547.0	191,466.6	705.0	5,499.0	16,507.6	128,759.3	19.8	Operates retail stores
Inc.								for consumer
								electronic, personal
								computers and
								appliances in United
								States
	GBP’ m	HK$’ m	GBP’ m	HK$’ m	GBP’ m	HK$’ m
Kesa Electricals	3,771	54,302	113.3	1,631.5	1,531.7	21,597.0	13.5	Retails consumer
plc								electronics in Europe
Dixons Group	6,458.0	91,057.8	280.4	3,953.6	3,197.2	45,080.5	11.5	Conducts retailing
plc								operations for
								consumer electronics,
								communication
								equipment, computer
								products and
								domestic appliances
								in United Kingdom

Source: Bloomberg

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The above table shows that the Market Comparables have a price/earnings multiple between 12 and 42 times. The price/earnings multiples of the UK/USA comparables are at the lower end of the range. In our view, this is because in UK and USA which are more mature markets, retail chain business does not command as high a price/earnings multiple as in the PRC retail market which is still in high growth. If we exclude the UK/USA comparables which in our view are less comparable to the Target Group which is operating in fast growing economy, the comparables companies have a price/earnings multiples between 25 to 42 times, and a mean of approximately 34 times.

The historical 2003 price/earnings multiple of 49.5 times represented by the Consideration is outside the above market ranges. However, if we take into account the growth potential that Gome Appliance may achieve, the range of imputed price/earnings multiples implied by the Consideration as evaluated by us using the above methodology falls within the market range indicated by the Hong Kong/PRC comparable companies.

(iii) Comparison with net assets

Pursuant to the Acquisition Agreement, the Vendor and Mr. Wong have warranted and undertaken to the Purchaser that the net asset value of the Target Group as at Completion, as determined by an international accounting firm, will not be less than the Target Group’s net asset value as at 31 March 2004 which was approximately RMB241.0 million (approximately HK$227.4 million). In the event of a shortfall, the Purchaser will be entitled to claim against each of the Vendor and Mr. Wong for the shortfall and the related costs within two-year period after Completion within a two-year period after Completion.

The Consideration represents a premium of approximately RMB8,559 million over the Target Group’s guaranteed net asset value. However, we consider that the potential of a retail business should be assessed by its earning power rather than asset base. Moreover, the book assets of the Parent Group have not included a value for the “GOME” trade mark and the sophisticated retail chain network that the Target Group has established. In our opinion, these intangible assets would continue to contribute positively to the revenue and profit of the Target Group and to the Enlarged Group after Completion. On this basis, we consider the significant premium over net book assets justified.

(iv) Method of payment

The Group is not paying in cash but the consideration for the Acquisition will be satisfied partly by the issue of Consideration Shares and largely by the Convertible Notes. Terms for the issue of the Convertible Notes are set out in detail in the “Letter from the Board” of the Circular. The Convertible Notes are non-interest bearing and will be mandatorily converted into Shares upon maturity. On these bases, the Convertible Notes would be accounted for as part of the equity of the Enlarged Group. The Acquisition is therefore effectively an “all-share” deal. This non-cash form of payment is unlikely to be acceptable to a majority of vendors in the context of a wholly arms length commercial transaction. Paying the Acquisition by the Consideration Shares and the Convertible Notes enables the Group to make an acquisition of a very solid business with high growth potential which it could not have afforded if cash consideration had been required.

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(v) Trade Mark Licence

As mentioned above, the success of the Target Group is attributable to the well brand recognition of “GOME” . As a term of the Acquisition, Beijing Gome will license the “GOME Electrical Appliances” trade mark to the Target Group for use in connection with the retail sales of electrical appliances and consumer electronic products in the PRC for an indefinite term at no extra cost. The Consideration has, in our view, built in a fee for the licence right of the “GOME” brand which is considered a key contributor to the promising results that the Target Group has achieved over the past years.

(vi) Competitive positioning in the newly opened retail market

China’s entry into the WTO has allowed foreign retailers entry into the PRC retail market on a gradually opened-up basis. Wholly foreign owned enterprises will be permitted to engage in retail business in the PRC by the end of 2004. Restrictions regarding geographic locations, number of stores, and equity/form of establishment will eventually be removed. The Group may as an alternative to the Acquisition choose to establish its own retail network which will take time. If the Group was to enter into the market as a new entrant, it would have to face fierce competition, both from established local market players and overseas large international retail chain operators. The Acquisition would give the Group an opportunity to acquire an established retail chain operation that commands a competitive positioning in the PRC retail market, which could not otherwise be achieved by a foreign market player within a short period of time.

Consequently, we are of a view that the Consideration is fair and reasonable bearing in mind that the Group will gain control of a solid business with high growth potential and the Consideration is in non-cash form.

(b) Beijing Gome Debt

Beijing Gome has requested an extension for repayment of the Beijing Gome Debt, which is interest-free and has no fixed terms for repayment, from Completion up to 31 March 2005. In consideration for such extension of payment, Mr. Wong agrees to pay Ocean Town which will be a wholly-owned subsidiary of the Company upon Completion an extension fee at the rate equal to 6.8% per annum for 65% of the Beijing Gome Debt for the actual extended period. Security for the Beijing Gome Debt will be provided in the following manner: (1) the Second Convertible Note will be charged; (2) dividend derived from the 35% interest in Gome Appliance held in the name of Ms. Huang and Yi Fu will first be applied to repay the Beijing Gome Debt; and (3) the proceeds from the Placing, if any, will first be applied to repay the Beijing Gome Debt.

The Directors have confirmed that the Target Group has never failed to recover any amounts due from related parties. On this basis and given that the Group has been given the above securities for the Beijing Gome Debt, we agree with the Directors that it is commercially justified to grant such an extension for a fee. The agreed extension fee of 6.8% per annum is at a premium of 1.8% over the current prime rate of 5% in Hong Kong and a premium of 1.49% premium over the prevailing 12-month best lending rate of 5.31% in PRC. On this basis, we consider the extension fee a fair term.

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We have sought confirmation from the management of the Target Group that there is no immediate need for the cash from the repayment of the Beijing Gome Debt. We have reviewed the cashflow projections prepared by the Directors on the Group as enlarged by the Target Group for the period from 1 July 2004 to 30 June 2005 and have discussed the projections with the Directors, the financial advisers to the Company and Ernst & Young, the Reporting Accountants on the Target Group. The said cashflow projections have been prepared on the prudent basis that the Beijing Gome Debt will be repaid on maturity on 31 March 2005. On the basis of the said cashflow projection and even in the unlikely scenario that the entire Beijing Gome Debt cannot be recovered, the Directors are satisfied that the Enlarged Group, including the Target Group, will have sufficient working capital to meet its present requirements, taking into account the present internal financial resources and available credit facilities. However, Independent Shareholders should note that the cashflow projection is built on certain assumptions including that the Target Group is able to continue to secure an approximate level of bills facilities that are currently available to the Target Group to finance its trade purchases.

Having considered the cashflow requirements of the Target Group, the nature of securities given and the extension fee as compared to the market rates, we are of the view that the requested extension for repayment of the Beijing Gome Debt on the proposed terms is fair and reasonable to Independent Shareholders.

(c) Discharge of the Ocean Town Debt

Pursuant to the Acquisition Agreement, Mr. Wong has subscribed for shares in Ocean Town in cash at a consideration of about HK$227.4 million and such amount has been applied to discharge in full the Ocean Town Debt. As the Consideration for the entire equity interest in Ocean Town has been agreed on the basis that the shares of Ocean Town and Gome Appliance are debt free, the way that the Ocean Town Debt has been dealt with is in our view fair to the Purchaser.

(d) Provision of assistance in relation to the Placing

As stated in the “Letter from the Board” of the Circular, in consideration for the Vendor agreeing to accept the Consideration in the form of the Consideration Shares and the Convertible Notes, the Company has agreed at the time of entering into the Acquisition Agreement and as part of the Acquisition to provide reasonable assistance if Mr. Wong proceeds with Placing(s); such reasonable assistance represents the giving of consent to the use of the Circular and the information contained therein, with the exclusion of this letter, as a basis for the offering circular(s) issued in connection with the proposed Placings. The Company has agreed to provide the Assistance on the basis that each of Mr. Wong and the Vendor will indemnify and keep indemnified the Company against any costs, claims, losses and liabilities incurred or suffered by it due to or in connection with the provision of the Assistance. The reasons for giving the Assistance are set out fully in the “Letter from the Board”. In particular, the Directors consider that if some of the Consideration Shares and/or Underlying Shares can be placed to professional, institutional and other third party investors, the shareholder base of the Company can be broadened, thereby improving the liquidity of the Shares and providing the Company better opportunities to raise funds through the local and international capital markets in the future.

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Having discussed the basis for giving the Assistance with the Directors and after balancing the merits of the Acquisition against the Company’s obligations under the Assistance, we concur with the Board that it is in the interests of the Company to give the Assistance in order to facilitate the Placing(s). In arriving at this view, we have considered the following:

• 1) we are advised that the Board has considered the possibility of raising funds from the market to fund the Acquisition. However, having considered the time that may be required to effect a placing of a size that can fund the Acquisition, the Board considers that the completion risk to the Acquisition would be high if the Acquisition Agreement is made conditional upon completion of a fund raising from the capital markets. We consider that the issue of the Consideration Shares and the Convertible Notes to the Vendor as consideration for the Acquisition would allow the Company to pass on the market risk of the Placing to the Vendor, thereby enabling the Company to complete the Acquisition in accordance with the timeframe contemplated under the Acquisition Agreement. In the circumstances, we consider it fair for the Company to provide the Assistance to facilitate the Placing(s) by the Vendor or Mr. Wong;

• 2) in giving the consent to the use of the Circular and the information contained therein, with the exclusion of this letter, as a basis for the offering circular(s) issued in connection with the proposed Placing(s), the Company has performed due diligence on the Enlarged Group and has conducted verification for the purpose of ensuring that the contents of the Circular does not contain untrue or misleading information of a material fact. In the circumstances, the potential risk to the Company arising from the provision of the Assistance as set out in the “Letter from the Board” of the Circular is in our view a controlled one and is manageable by the Company; and

• 3) Each of Mr. Wong and the Vendor has agreed to indemnify and keep the Company indemnified against any costs, claims, losses and liabilities incurred or suffered by it due to or in connection with the provision of the Assistance. We consider this counter-indemnity to be in the interests of the Company.

• (e) Relationship between the Target Group and the Parent Group

Non-competition Undertaking

Currently both the Target Group and the Parent Group retail electrical appliances and consumer electronic products in PRC. The Directors have identified the Target Group for acquisition by the Company for the reasons that (a) the Target Group has a more established track record and hence a stable base for future development; and (b) as compared with the Target Group, the business of the Parent Group is less developed and hence entails higher business risks.

We have not conducted an independent investigation into the business and affairs of the Parent Group. However, we have been provided with the unaudited profit and loss account of the Parent Group for the three years ended 31 December 2003 and the three months ended 31 March 2004 and discussed them with the management of Gome Group. Except for Shanghai, the cities

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in which the Parent Group have retail outlets are in general less affluent than those cities in which the Target Group are operating. Most of the cities in which the Parent Group has established retail outlets are newly developed markets. The Parent Group has yet to establish in those newly entered cities a scale of operation that commands a competitive positioning. In Shanghai, the Parent Group faces fierce competition from local competitors. These have affected the financial results of the Parent Group and make its performance less stable. On this basis, we agree with the Directors that it may not be an appropriate time for the Company to acquire the Parent Group now, together with the Target Group. However, the exclusion of the Parent Group may give rise to the issue of potential conflict of interests that may arise when Mr. Wong and his associates have to make decisions that would affect the development of the Parent Group and the Target Group. This issue will be discussed in detail in the paragraphs below.

The Parent Group now operates 39 retail outlets. None of the outlets operated by the Parent Group is located in a city in which outlets operated by the Target Group are located. The Parent Group’s existing operations do not pose direct competition to the Target Group.

Mr. Wong will undertake to the Company that, for so long as Mr. Wong remains a controlling shareholder of the Company within the meaning of the Listing Rules, he will not and will procure that the Parent Group will not, directly or indirectly, engage in retail sales of electrical appliances and/or consumer electronic products (whether under the “GOME Electrical Appliances” trade mark or otherwise) in any of the cities, directly administered municipalities, towns or other locations in the PRC in which any members of the Target Group, has as at the date of the Acquisition Agreement, established any retail outlet for the sale of electrical appliances and consumer electronic products under the “GOME Electrical Appliances” trade mark.

On the other hand, the Company will undertake to Mr. Wong not to engage, directly or indirectly, in the retail sales of electrical appliances or consumer electronic products (whether under the “GOME Electrical Appliances” trade mark or otherwise) in any of the cities, directly administered municipalities, towns or other locations in the PRC in which any of the Parent Group has, as at the date of the Acquisition Agreement, established or was in the course of establishing any retail outlets for the sale of electrical appliances and consumer electronic products under the “GOME Electrical Appliances” trade mark, pursuant to the Right of First Refusal Deed (as discussed below).

In addition to the retail outlets run by itself, the Parent Group has also granted franchises to independent third parties to operate retail outlets for the sale of electrical appliances and consumer electronics products under the “GOME Electrical Appliances” trade mark in the PRC. As at the Latest Practicable Date, there were 23 such franchise outlets, 14 of these franchise arrangements will expire by the end of 2004 and the last one will expire in 2008. Mr. Wong will undertake to the Company that, for so long as Mr. Wong remains a controlling shareholder of the Company within the meaning of the Listing Rules, he will procure that no such new franchises will be granted and the existing franchises will not be renewed or extended upon expiry. Four of the existing franchise outlets are located in cities where the Target Group operates. The management of the Target Group and the Directors believe that these four franchise outlets are not within the physical range of the Target Group’s retail outlets to pose any significant competition with the Target Group although they are in the same cities.

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Right of First Refusal Deed

There are cities not yet covered by either the Target Group or the Parent Group. For the benefit of the Company, Mr. Wong agrees that the Company will have the right of first refusal (i) to consider any investment opportunity to acquire any company that is engaged in a business similar to or in competition with that of the Target Group, or (ii) the setting up a business in the retail sales of electrical appliances or consumer electronic products (whether under the “GOME Electrical Appliances” trade mark or otherwise) in the cities, directly administered municipalities, towns or other locations in the PRC that members of the Parent Group and members of the Target Group have not established or was in the course of establishing any retail outlet as at the date of the Acquisition Agreement. Mr. Wong and his associates will abstain from voting at the board meetings at which such investment decisions are to be made. Such investment decisions will be determined by the board of Directors (including independent non-executive Directors).

Prior to 1 June 2004, foreigners are not permitted to hold more than 65% in a company which engages in retail business in PRC. Consequently, the Acquisition only covers an effective 65% interest in Gome Appliance. The Company will also be given the first opportunity to acquire (i) the 35% interest in Gome Appliance which is not already owned directly or indirectly by the Company and/or (ii) any member of the Parent Group or its business if Mr. Wong intends to sell any of those interests. Mr. Wong and his associates will abstain from voting at the board meetings at which such investment decisions are to be made. Such investment decisions will be determined by the board of Directors (including independent non-executive Directors).

Except for the franchise arrangements, majority of which will expire in year 2004, there is a clear delineation of markets between the Target Group and the Parent Group. The Non-competition Undertaking further serves to bar out any future direct competition from the Parent Group which will only open outlets in new cities in which the independent Directors decide not to invest. The Right of First Refusal Deed will give the Target Group absolute freedom to further expand in the areas in which the Parent Group does not have nor is establishing a presence. By comparison, the future expansion of the Parent Group is more limited. Though the Target Group cannot expand into cities in which the Parent Group has or is establishing a presence, it may nevertheless has the first right to buy out the Parent Group’s interests in those areas should Mr. Wong have the intention to sell them out.

In overall terms, the Non-competition Undertaking and the Right of First Refusal Deed are able to give the Target Group a satisfactory degree of protection to deal with the potential conflict of interest situation which is inevitable as the Directors have decided, for reasons mentioned above, not to acquire the Parent Group and both the Target Group and the Parent Group are under the same management.

The first right of refusal over the remaining 35% in the Target Group gives the Group a pre-emptive right over third parties to top up its interest in an established business and further benefit from its revenue contribution when the PRC retail market further opens up.

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(f) Other Material Terms

• (i) Indemnity in respect of leased premises

All of Gome Appliance’s retail outlets are housed in leasehold properties. Those tenancies normally have a term of 5 to 10 years. As highlighted in the property valuation report of the Target Group contained in Appendix VII to the Circular, landlord of certain properties does not have the building ownership right or land use rights to the relevant leased premises. However, we have sought confirmation from the management that Gome Appliance has not in the past been prohibited from use or evicted out of the leased premises. For the benefit of the Enlarged Group, each of Mr. Wong and the Vendor will indemnify the Group against any liability, costs or expenses incurred by any members of the Target Group arising from or caused by the Target Group being prohibited from using and occupying or being evicted by any third party (including any PRC governmental authorities, any other competent authorities, the legal or beneficial owner of the relevant PRC Leased Premises) from any of the premises that are leased by the Target Group on or before Completion on the grounds that the landlord does not have the building ownership right or land use right to the relevant PRC leased premises and/or has not obtained the requisite land use right certificate and building ownership certificate.

On the above basis, we consider the potential risk to the Enlarged Group is mitigated to an acceptable level.

(ii) Bank Guarantees Deed

As at 31 May 2004, certain members of the Parent Group have provided guarantees for members of the Target Group in relation to their banking facilities and short-term bank loan in the total amount of approximately RMB2,626 million (approximately HK$2,478 million). As a transitional arrangement, the Company and certain members of the Parent Group will enter into the Bank Guarantees Deed and the relevant members of the Parent Group will undertake to continue to act as guarantor at no cost. The Company intends to replace such guarantees as soon as practicable after Completion with guarantees to be provided by the members of the Target Group. We are advised that the Directors believe, given the established relationship between the Target Group and their bankers, the Target Group would not encounter significant difficulties to secure replacement of such guarantees.

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1. Share price performance and comparison with Issue Price and Conversion Price

2. (a) Analysis of share price

The chart below shows the closing prices of the Shares traded on the Stock Exchange during the 28 months preceding 21 May 2004 (the “Last Trading Day”), being the last trading day before suspension of trading of the Shares pending release of the Announcement (the “Comparison period”), and up to and including the Latest Practicable Date:

Share price performance of the Company

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Closing price
(HK$)
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
1/1/02 3/1/02 5/1/02 7/1/02 9/1/02 11/1/02 1/1/03 3/1/03 5/1/03 7/1/03 9/1/03 11/1/03 1/1/04 3/1/04 5/1/04
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Issue Price
(HK$0.138 per
Share or
HK$5.52 per
New Share
equivalent)
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The following chart shows the performance of the Shares against the markets as measured by the Hang Seng Index and the HSHKMI during the Comparison Period and up to the Latest Practicable Date:

Relative share price performance

% change (Note)

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250
200
150
100
50
0
Company Hang Seng Index HSHKMI
1/1/02 3/1/02 5/1/02 7/1/02 9/1/02 11/1/02 1/1/03 3/1/03 5/1/03 7/1/03 9/1/03 11/1/03 1/1/04 3/1/04 5/1/04
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Note: The base figures are the closing price per Share, the Hang Seng Index and the HSHKMI on 2 January 2002.

The closing price of the Shares during the Comparison Period ranged from HK$0.12 to HK$0.67. On 18 February 2002, the Company announced that Mr. Wong, through Shinning Crown which is beneficially wholly-owned by him, acquired a majority control in the Company by way of a subscription of new shares in the Company. The share price rose 31.7% from 19 February 2002 to 12 April 2002, the last trading day immediately preceding the suspension of the Shares pending the release of an announcement of a major transaction in respect of the acquisition of an attributable interest of 39.2% in the Property. The rise probably reflected the market speculation of the change of control of the Company and the possible asset acquisition by the Group from the new controlling shareholder. After that, the Shares maintained at a relative high level for about half year to October 2002.

During the period from October 2002 to June 2003, there was a downward trend in the Share price from the closing price of HK$0.54 on 2 October 2002 to HK$0.132 on 30 June 2003; thereafter, the closing price traded in a relatively low range of about HK$0.12 to HK$0.26. The downward trend over such eight month period possibly reflected market perception of poor financial results of the Group. The share price was weak and continued to trade at depressed levels until 5 February 2004. Following the Company’s announcement on 18 February 2004 regarding the acquisition of a further 60.8% interest in the Property, the share price rose during most of February to March 2004 with a year

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high of HK$0.44. Since mid-April 2004, the Hong Kong stock market has suffered from download adjustments which was mainly due to market reaction on the tightening of central policy of the PRC government, anticipation of increase in interest rate and the sustained high level of worldwide oil price. Under such poor market sentiment, the share price of the Company dropped significantly and reached a low of HK$0.145 on 17 and 18 May 2004, represented an accumulated decrease of 65.1% since 15 April 2004.

These market prices have, in our opinion, been chiefly influenced by market speculation of the property project acquired by the Group and are not, in our view, supported by the fundamentals of the Group. Although the Group had achieved a turnaround for the year ended 31 March 2004 due to mainly the new line of business of trading of securities, the Group has made continuous losses for previous consecutive financial years. In fact, the two major jumps of the price of the Shares in April 2002 and February 2004 were due, in our opinion, to market speculation of the acquisition of the Property, which is exaggerated by the thin trading volume of the Shares during the Comparison Period as discussed in detail under the section headed “(c) Analysis of trading volume” below.

The share price strengthened from HK$0.148 to HK$0.315 on resumption of trading after the release of the Announcement which probably is attributable to positive reaction of the market to the Acquisition. On the Latest Practicable Date, the share price closed at HK$0.201.

• (b) Comparison of the Issue Price for the Consideration Shares and conversion price of the Convertible Notes

The Issue Price of the Consideration Shares and at which the Convertible Notes are to be converted into Underlying Shares of HK$5.52 represents:

• (i) a discount of approximately 6.8% to the closing price of the Shares of HK$5.92 (adjusted for the Share Consolidation) on the Last Trading Day;

• (ii) a discount of approximately 14.2% to the average closing price of the Shares of HK$6.43 (adjusted for the Share Consolidation) for the 10 consecutive trading days up to and including the Last Trading Day;

• (iii) a discount of approximately 49.6% to the average closing price of the Shares of HK$10.95 (adjusted for the Share Consolidation) for the 30 consecutive trading days up to and including the Last Trading Day;

• (iv) a discount of approximately 41.0% to the average closing price of the Shares of HK$9.36 (adjusted for the Share Consolidation) for the 180 consecutive trading days up to and including the Last Trading Day;

• (v) a discount of approximately 31.3% to the closing price of the Shares of HK$8.04 (adjusted for the Share Consolidation) on the Latest Practicable Date; and

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• (vi) a premium of approximately 11.1% to the audited consolidated net tangible assets of the Group of approximately HK$4.97 per New Share as at 31 March 2004 as adjusted by the conversion of convertible notes into 2,700 million Shares subsequent to 31 March 2004 and the Share Consideration (the “Adjusted Consolidated Net Tangible Asset Value”).

As set out in the “Letter from the Board” to the Circular, the Issue Price was determined with the reference to the consolidated net tangible asset per Share and the latest closing prices of the Shares prior to the Last Trading Day. In view of the volatility of the share price in the period shortly before the Announcement and speculative nature of the Shares in general as mentioned in paragraphs headed “(a) Analysis of share price” above, we are of the view that it is not appropriate to place much weight on a comparison of the Issue Price to the market price of the Shares, especially during the periods after release of the announcements in relation to the acquisition of the Property. We consider that the assessment of the Issue Price by reference to the net tangible assets of the Group would be more appropriate. The Issue Price represents a premium of approximately 11.1% to the Adjusted Consolidated Net Tangible Asset Value, which we consider favourable to the Company whose major assets comprise principally properties and shares of property company are normally traded at a discount to net asset value.

(c) Analysis of trading volume

The chart below shows the trading volume of the Shares traded on the Stock Exchange for the period from January 2002 to June 2004:

Monthly trading volume of the Shares

Number of Shares

==> picture [353 x 222] intentionally omitted <==

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

(million)
700
600
500
400
300
200
100
0
Jan-02 Mar-02 May-02 Jul-02 Sep-02 Nov-02 Jan-03 Mar-03 May-03 Jul-03 Sep-03 Nov-03 Jan-04 Mar-04 May-04
----- End of picture text -----

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The following table sets out the total number of Shares traded on the Stock Exchange per month and the percentage of the monthly trading volume to the issued share capital of the Company for the period commencing from January 2002 to June 2004:

		Monthly
	Monthly	trading volume
	trading volume	to issued Shares
	Number of Shares	% (Note)
2002
January	3,322,000	1.8
February	1,288,000	0.7
March	11,170,000	0.7
April	335,410,000	20.7
May	629,431,108	38.9
June	329,276,000	20.3
July	174,618,000	10.8
August	132,068,893	8.2
September	86,220,000	5.3
October	42,154,000	2.6
November	45,320,000	2.8
December	43,326,000	2.7
2003
January	55,016,000	3.4
February	41,210,000	2.5
March	50,142,000	3.1
April	57,624,000	3.6
May	22,416,000	1.4
June	10,600,000	0.7
July	2,926,000	0.1
August	1,488,000	0.06
September	3,260,000	0.1
October	7,982,000	0.3
November	38,782,000	1.6
December	3,420,000	0.1
2004
January	475,152,000	16.7
February	22,114,000	0.8
March	28,628,290	1.0
April	172,488,000	6.1
May	49,774,000	1.8
June	210,254,000	3.8

Note: Based on the number of issued Shares at end of each month (2002 January to February: 179,703,500; 2002 March to 2003 June: 1,618,303,500; 2003 July to December: 2,366,303,500; 2004 January to February: 2,839,303,500; 2004 March: 5,339,303,500; 2004 April to June: 5,539,303,500)

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LETTER FROM SOMERLEY

Based on the above table, the Shares were in general thinly traded on the Stock Exchange during the period from 1 January 2002 up to and including 30 June 2004 except for the period from April to June 2002 and in January 2004. The monthly trading volumes in the market represented between 0.06% and 16.7% of the Company’s issued shares as at the end of each corresponding month, except in April (20.7%), May (38.9%), June 2002 (20.3%) and January 2004 (16.7%). The trading volume of the Shares increased significantly during the period from April 2002 to June 2002, ranging from 20.3% to 38.9% of the issued share capital of the Company. The increase in monthly trading volume during April 2002 to June 2002 was, we believe, attributable to the market reaction to the Company’s announcement on 12 April 2002 to the acquisition of an attributable interest of 39.2% in the Property as mentioned above. On 8 January 2004, the Company announced a top-up placing of 473 million Shares to raise approximately HK$55.3 million. We believe the increase in monthly trading volume in January 2004 was attributable to market reaction on the placing. Save for the aforesaid periods, the trading volume of the Shares maintained at a relative low level during the period from January 2002 to June 2004.

Our conclusion is that trading in Shares has been relatively inactive except for periods when there were corporate exercises. We believe that completion of the Acquisition will improve the prospects for higher and more consistent liquidity in the Shares.

7. Effect of the Acquisitions on the financial position of the Enlarged Group

(a) Profits

The Group has returned to profit after a number of years of losses since 1995 and recorded an audited revenue and profit of approximately HK$44.8 million and approximately HK$22.6 million respectively for the year ended 31 March 2004. However, as analysed above, the major contributor to the positive results achieved in the year ended 31 March 2004 was trading of securities, foreign exchange and futures, which future performance is subject to a relatively higher degree of uncertainties than a manufacturing or trading business.

The Acquisition will significantly enlarge the revenue and profit base of the Group. According to the pro forma statement of operations of the Enlarged Group as set out in Appendix VI of the Circular, the pro forma revenue and net profit of the Enlarged Group, prepared on the basis of the audited financial results of the Group for the year ended 31 March 2004 and the audited financial results of the Target Group for the year ended 31 December 2003, are approximately HK$8.9 billon and HK$188.3 million respectively. The HK$8.9 billion represents approximately 199 times of the historical revenue of approximately HK$45 million achieved by the Group for the year ended 31 March 2004. The pro forma net profit of the Enlarged Group of approximately HK$188.3 million also represents a significant jump by 9 times from the historical profit figure of the Group of approximately HK$20 million.

On per Share basis, the audited earnings per Share for the year ended 31 March 2004 was HK0.80 cents, or HK$0.32 per New Share had the 40 into 1 Share Consolidation become effective (calculated on the basis of the weighted average number of ordinary shares outstanding during the year ended 31 March 2004 of 2,580,194,000 Shares and taking into account the dilution effect of the convertible

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LETTER FROM SOMERLEY

notes with an aggregate amount of HK$324 million, which were converted into an aggregate of 2,700 million Shares in April 2004). As set out in the pro forma statement of operations of the Enlarged Group in Appendix VI to the Circular, upon Completion and assuming full conversion of the Convertible Notes, the pro forma earnings per New Share would be significantly diluted to HK$0.12, which is approximately 62.5% lower than the equivalent of the historical earnings per New Share of HK$0.32. Despite this, the above calculation of the pro forma earnings per New Share has not taken into account the possible growth potential of the Target Group. The Directors consider it in the interest of the Group to acquire a controlling interest in the Target Group which has grown a solid business and is expected to sustain high growth in the medium term. On this basis, we concur with the Directors’ view that it is beneficial to the Independent Shareholders if the Group can diversify into a solid business that generates steady revenue stream, is of promising growth potential and possibly bears lower business risk than a business in securities or futures trading.

(b) Net assets

The audited balance sheet of the Group as at 31 March 2004 is set out in Appendix V of the Circular. It shows net assets of approximately HK$651 million (or approximately HK$0.12 per Share and HK$4.8 per equivalent of New Share), net current assets of approximately HK$64.3 million and long term payables of approximately HK$157.5 million.

The unaudited pro forma balance sheet of the Enlarged Group is set out in Appendix VI of the Circular. This balance sheet may be summarised as follows:

	HK$ million
Fixed assets	105
Properties	755
Negative goodwill	(13)
Other non-current assets	1
Current assets	3,134
	3,982
Less: Current liabilities	(2,822)
Less: Long-term payables	(157)
Minority interests	(124)
	879

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LETTER FROM SOMERLEY

At 31 December 2003, the Target Group had net assets of approximately HK$350 million (or approximately HK$227 million for a 65% interest) and Mr. Wong has undertaken that the Target Group’s net assets as at Completion would not be less than that figure. The Acquisition would increase the pro forma net assets of the Enlarged Group significantly from HK$651 million to HK$879 million. However, as the Acquisition is a “share” deal to be financed by issue of Consideration Shares and mandatory Convertible Notes, on a fully diluted basis, the pro forma net assets per New Share after Completion and full conversion of the Convertible Notes is HK$0.56, as compared to the historical net asset of HK$4.8 per equivalent of the New Share. However, as the Group is acquiring a retail business which potential should be assessed by its earning power rather than its asset basis, we consider such dilution in net assets is acceptable given the Acquisition’s ability to significantly enlarge the revenue base of the Enlarged Group.

Shareholders should bear in mind that the pro forma financial information on the Enlarged Group as set out in the Appendix VI of the Circular and the analysis in the paragraph 7(a) and 7(b) above have not taken into account the effect of the Purchasing Service Agreement and the Management Agreement, details of the which are set out in the section headed “Continuing Connected Transactions” below.

(c) Cashflow

The Target Group was historically self-contained in terms of cashflow. The Target Group has a short inventory turnover period. Inventory turnover for the financial year ended 31 December 2003 was around 32 days. On average, about 99% of the sales of the Target Group are settled in cash or by credit cards. This provides finance to the Group to pay off the bills payables, majority of which have a payment term of three to six months. As shown in the combined cash flow statements of the Target Group set out in Appendix III of the Circular, the Target Group has managed to generate positive cashflow after funding its normal operation and capital expenditure. Net increase in cash and cash equivalent of the Target Group was approximately RMB205 million (or approximately HK$193 million) for the year ended 31 March 2002 and approximately RMB100 million (or approximately HK$94 million) for the year ended 31 March 2003. The net increase in cash of the Target Group would have been much higher had the Target Group not made any advances to the related parties. As at 31 March 2004, the Beijing Gome Debt amounted to approximately RMB1,089 million (or approximately HK$1,027 million). Pursuant to the Acquisition Agreement, the Beijing Gome Debt will be repaid by 31 March 2005, or earlier if Mr. Wong successfully effected any placing of the Consideration Shares and the Underlying Shares.

With such strong cash inflow from operations, the Target Group shall be able to finance its future expansion plans by internally generated funds. We have reviewed the cashflow projections prepared by the Directors on the Group as enlarged by the Target Group for the period from 1 July 2004 to 30 June 2005 (the “Review Period”) and have discussed the projections with the Directors, the financial advisers to the Company and Ernst & Young, the Reporting Accountants on the Target Group. The said cashflow projections have been prepared on the basis of a number of assumptions, including (i) that the current level of bills facility are available to fund the Target Group’s future operations; (ii) the Beijing Gome Debt will be repaid upon its maturity on 31 March 2005; (iii) the RMB10 million bank loan would be repaid when it is due on 13 October 2004; and (iv) no new third party funding will be required and the Target Group would be entirely funded by internally generated funds.

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LETTER FROM SOMERLEY

On the basis of the said cashflow projections, the Directors have confirmed that they are satisfied that the Enlarged Group, including the Target Group, will have sufficient working capital to meet its present requirements. Having reviewed the bases and assumptions and after discussing the cashflow projections with the above-mentioned parties, we concur with the Directors that the cashflow projections indicate that the Enlarged Group, including the Target Group, shall have enough working capital to fund its normal operation.

Independent Shareholders should note that the net current assets of the Target Group of approximately RMB263 million comprise Beijing Gome Debt which will be repaid by 31 March 2005, or earlier if Mr. Wong successfully conducts any placing(s) of the Consideration Shares and/or the Underlying Shares. It is possible that Mr. Wong will repay the Beijing Gome Debt prior to 31 March 2005 if Placing(s) are done. In the unlikely scenario that the Target Group encounters difficulties in recovering the entire Beijing Gome Debt, the Directors estimate that the Enlarged Group would still have sufficient cashflow to fund its normal operations, after taking into account the basis and assumptions used in preparing the cashflow projections for the Review Period.

(d) Gearing

As discussed in 7(b) above, as a result of the Acquisition, there will be an increase in the net assets of the Enlarged Group to HK$879 million. At present, the Group is a debt free company. As the Target Group had quite substantial amount of short term bills payable, the total debts of the Enlarged Group will increase substantially as a result of the Acquisition. As at 31 March 2004, the amount of the bills payable was approximately RMB1,974.1 million. In addition, the Target Group had a short term bank loan of RMB10 million as at 31 March 2004. Based on the pro forma net assets of the Enlarged Group of approximately HK$879 million, the net debt (defined as aggregate of interestbearing bank loan and bills payable minus cash and cash equivalents) to equity ratio of the Enlarged Group is 0.88.

We consider this gearing ratio acceptable for a retail chain business which has high inventory turnover and transacts sales almost on a cash basis.

(e) Operating Lease and Capital Commitments

The Target Group operates in leasehold properties. As at 31 March 2004, its outstanding operating lease commitments was approximately RMB1 billion, which is acceptable given the Target Group’s scale of operation.

The Target Group does not have significant capital commitments. Consequently, the Acquisition would not result in any material effect on the capital commitments level of the Enlarged Group.

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LETTER FROM SOMERLEY

8. Dilution and potential dilution of existing shareholders’ holdings

As at the Latest Practicable Date, Mr. Wong is interested in 3,706,003,500 Shares, representing approximately 66.9% of the issued share capital of the Company.

Mr. Wong will be interested in approximately 136.8 million New Shares, representing approximately 74.9% of the issued share capital of the Company as enlarged by the issue of the Consideration Shares upon Completion, which will take place after the Capital Reorganisation becoming effective. In the event that the Convertible Notes are converted in full into the Underlying Shares, Mr. Wong will be interested in approximately 1,596.6 million New Shares, representing approximately 97.2% of the issued share capital of the Company as enlarged by the issue of the Consideration Shares and the Underlying Shares.

Below is a table setting out the issued share capital of the Company at various relevant time:

	Million
	New Share
As at the Latest Practicable Date 5,539,303,500 Shares	5,539.3 Shares
	(equivalent to
	138.5 million
	New Shares)
Immediately upon Completion and before conversion of the
Convertible Notes	182.6
Assuming in addition the First Convertible Note is fully converted
at the equivalent Issue Price of HK$5.52 per New Share	1,456.4
Assuming in addition the Second Convertible Note is fully converted
at the equivalent Issue Price of HK$5.52 per New Share	1,642.4

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LETTER FROM SOMERLEY

(a) At present

The following chart depicts the simplified holding structure of the Company as at the Latest Practicable Date:

==> picture [401 x 193] intentionally omitted <==

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

Mr. Wong Public Shareholders
66.9% 33.1%
100%
Ocean Town
the Company
65%
35%
Gome Appliance
100%
the Parent Group
----- End of picture text -----

(b) After completion

The following chart shows the simplified holding structure of the Company immediately following Completion, but before the exercise of the conversion rights under the Convertible Notes (assuming that no other changes in shareholding in the Company after the Latest Practicable Date):

==> picture [376 x 243] intentionally omitted <==

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

Mr. Wong and his associates Public Shareholders
74.9% 25.1%
the Company
100%
Ocean Town
100%
65%
Gome Appliance
35%
the Parent Group
----- End of picture text -----

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LETTER FROM SOMERLEY

(c) After Conversion

The following chart shows the shareholding structure of the Company immediately following Completion and as if the Convertible Notes are fully converted at the Issue Price of HK$5.52 per Share (assuming no other changes in shareholding in the Company after the Latest Practicable Date):

==> picture [367 x 238] intentionally omitted <==

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

Mr. Wong and his associates Public Shareholders
97.2% 2.8%
the Company
100%
Ocean Town
100%
65%
Gome Appliance
35%
the Parent Group
----- End of picture text -----

Upon issue in full of the Consideration Shares and the Underlying Shares, the shareholding of the Independent Shareholders would be diluted from approximately 33.1% to approximately 2.8%, which is substantial. Mr. Wong has undertaken to the Company that he will not voluntarily convert the Convertible Notes to the extent that the Company would suffer a shortfall in public float prior to expiry of the Convertible Notes. On this basis, the dilution to the individual shareholding of the Independent Shareholders would be to an extent that the New Shares can be absorbed by the market.

However, the anticipated Placing may have downward pressure on the price of the Shares, which, in our view, would be off-set by the prospect of improved liquidity if the Placing can bring in institutional and professional investors. Nevertheless, we are not in a position to estimate the magnitude of either effect.

Despite the above-mentioned, we consider the potential benefits from the Acquisition outweigh the aforesaid disadvantages. The Acquisition would significantly improve the revenue base and profitability of the Enlarged Group which is likely to lead to improved or more consistent liquidity of the Shares. The prospect of broadened shareholder base through the Placing to institutional and professional investors is also a factor that we have considered in coming up to our view.

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9. Public float

We mention in the above paragraph that Mr. Wong has undertaken to the Company that he will not voluntarily convert the Convertible Notes to the extent that the Company would suffer a shortfall in public float prior to expiry of the Convertible Notes. In addition, Mr. Wong will use best endeavour to take appropriate steps including placing of Convertible Notes, and/or the Consideration Shares and/or the Underlying Shares to avoid shortfall in public float upon mandatory conversion of the Convertible Notes at the end of their three-year terms. Notwithstanding this, the Company would suffer shortfall in public float upon mandatory conversion of the Convertible Notes at the end of their three-year terms (unless otherwise extended, in the case of the Second Convertible Note, if the Beijing Gome Debt is not by then repaid) in the event that the Company or Mr. Wong and his associates are not able to place out sufficient Shares and/or Convertible Notes to allow full conversion of the Convertible Notes at the end of their three-year terms. Our view is that the three-year terms of the Convertible Notes provide a reasonable timeframe for the Company to deal with the potential public float issue and that risk is acceptable when measured against the overall benefits that the Acquisition will bring to the Group.

10. Risk factors

The Acquisition will change the business risk profile of the Enlarged Group, though not necessarily increasing it. Independent Shareholders shall bear in mind the risk factors as discussed in detail in Appendix II to the Circular.

11. Continuing Connected Transactions

To regulate the relationship between the Target Group and the Parent Group, members of the Target Group will enter into, among others, the following transactions with the Parent Group on an ongoing basis.

(a) Transitional Purchasing Service Agreement

Beijing Gome has entered into purchasing contracts with various suppliers. It has been purchasing Products from such suppliers for supply to other members of the Parent Group as well as members of the Target Group. It is intended that Beijing Gome will cease to undertake such purchasing for any member of the Target Group after the expiry of such arrangement by 30 September 2004.

As a transitional arrangement, Beijing Gome and Gome Appliance will enter into the Transitional Purchasing Service Agreement pursuant to which Beijing Gome will agree to continue to purchase Products from suppliers under such purchasing contracts. All Products so purchased by Beijing Gome will be supplied to members of the Target Group at cost. The total purchases (including the value added tax) will not exceed RMB2 billion (approximately HK$1.9 billion).

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LETTER FROM SOMERLEY

It is proposed that the cap amounts of the purchases of the Products (including the value added tax) under the Transitional Purchasing Service Agreement by the Target Group will be RMB2.0 billion (approximately HK$1.9 billion) for the year ending 31 December 2004.

As set out in the “Letter from the Board”, the above cap amount is determined with reference to, among others, the historical figures of value of goods purchased by Beijing Gome for the Target Group. Taking into account that Beijing Gome will supply the Products to the Target Group at cost, we consider the terms of the Transitional Purchasing Service Agreement including the caps, which gives the Company reasonable flexibility to secure supply of the Products, are fair and reasonable to the Independent Shareholders and the Company as a whole.

(b) Purchasing service and management service

• Purchasing Service Agreement

Tianjin Logistics and Beijing Gome will enter into the Purchasing Service Agreement pursuant to which Tianjin Logistics will provide purchasing services to the Parent Group (other than Hong Kong Gome).

Tianjin Logistics will negotiate with various suppliers for the benefit of both the Target Group and the Parent Group (other than Hong Kong Gome) on a centralised basis. The Target Group will benefit from the volume purchases which enable Tianjin Logistics to secure more favourable terms with suppliers than if members of the Target Group and the Parent Group were to undertake their purchasing individually.

Tianjin Logistics will charge Beijing Gome a fee, at the rate of 0.9% of the revenue generated from the sales of electrical appliances and consumer electronic products (excluding value added tax) by the Parent Group (other than Hong Kong Gome), which is payable every three calendar months. The above consideration has been determined based on arm’s length negotiations between Tianjin Logistics and Beijing Gome and with reference to the gross profit margin of the Parent Group.

The unaudited turnover of the Parent Group (other than Hong Kong Gome) for each of the three years ended 31 December 2003 was RMB1,158.0 million, RMB1,726.0 million and RMB2,587.0 million respectively. On the above basis and as if the arrangement had taken effect on 1 January 2001, Tianjin Logistics would charge Beijing Gome a fee of RMB10.4 million, RMB15.5 million and RMB23.3 million for the three years ended 31 December 2003.

It is proposed that the respective cap amounts of the service fees to be received under the Purchase Service Agreement by the Target Group will be RMB55.0 million (approximately HK$51.9 million), RMB85.0 million (approximately HK$80.2 million) and RMB125.0 million (approximately HK$117.9 million) respectively for each of the three years ending 31 December 2006.

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LETTER FROM SOMERLEY

● Management Agreement

Tianjin Consultancy and Beijing Gome will enter into the Management Agreement pursuant to which Tianjin Consultancy will provide and will procure other members of the Target Group to provide management services for the Parent Group. Tianjin Consultancy will charge an annual fee at the rate of 0.75% of the total revenue of the Parent Group generated from the sales of electrical appliances and consumer electronic products (excluding value added tax) if such revenue is equal to or less than RMB5 billion (approximately HK$4.7 billion) or at the rate of 0.6% if the such revenue exceeds RMB5 billion. The above consideration has been determined based on arm’s length negotiations between Tianjin Consultancy and Beijing Gome with reference to (a) the expected expenses of the head office attributable to the Parent Group; and (b) the expected revenue to be generated from the Parent Group, after taking into account the estimated business growth.

The unaudited turnover of the Parent Group for each of the three years ended 31 December 2003 was RMB1,158.0 million, RMB1,726.0 and RMB2,642.0 million respectively. On the above basis and as if the arrangement had taken effect on 1 January 2001, Tianjin Consultancy would charge Beijing Gome a respective fee of RMB8.7 million, RMB12.9 million and RMB19.8 million for the three years ended 31 December 2003. As advised by the management of the GOME Group, the expenses of the head office of the GOME Group was approximately RMB45 million for the year ended 31 December 2003. The management fee of 2003 represented approximately 44% of the aggregate head office expenses. Given the scale of business of the Parent Group is smaller than the Target Group in terms of the number of outlets and turnover, we consider the management fee is fair and reasonable.

It is proposed that the respective cap amounts of the management fees to be received under the Management Agreement by the Target Group will be RMB43.0 million (approximately HK$40.6 million), RMB65.0 million (approximately HK$61.3 million) and RMB101.0 million (approximately HK$95.3 million) for each of the three years ending 31 December 2006, respectively.

The Enlarged Group will charge an aggregate of at least 1.5% (the aggregate of 0.9% purchase service fee and 0.6% management fee) of the revenue generated from the sales of electrical appliances and consumer electronic products of the Parent Group (in the case of purchase service fee excluding sales of Hong Kong Gome) pursuant to the Purchase Service Agreement and the Management Agreement. As discussed with the management of the GOME Group, the gross profit of the business of the Parent Group is about 6% to 7%. On the above basis and having considered that the purchase service fee and management fee to be received by the Target Group are expected to be at a reasonable margin over the cost to be incurred by the Target Group in this regard, we consider the terms of the Purchasing Service Agreement and the Management Agreement are fair and reasonable to the Independent Shareholders.

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LETTER FROM SOMERLEY

As set out in the “Letter from the Board”, cap amounts for both of the above-mentioned fees pursuant to the Purchasing Service Agreement and the Management Agreement are arrived at with reference to, among others, the targeted increase in the number of outlets to be opened by the Parent Group in the next three years. Though the cap amounts represent a significant growth over the historical fee, we consider them reasonable as the businesses of the Parent Group are expected to continue to be in high growth until they reach a more mature stage in a longer term.

(c) Audio Visual Products Counters Sub-lease Agreements

Certain members of the Parent Group will set up counters on the premises of various retail outlets operated by the Target Group to engage in the retail sales of digital video discs, compact discs and audio cassettes.

Each of these members of the Parent Group have entered into an Audio Visual Products Counters Sub-lease Agreement with each of the relevant members of the Target Group pursuant to which such member of the Target Group will sub-lease part of its retail outlet to the relevant member of the Parent Group.

The Audio Visual Products Counters Sub-lease Agreements which have been entered into between certain members of the Target Group and certain member of the Parent Group have taken effect from 15 April 2004 and terminate on the earlier of: (i) 31 December 2006; or (ii) the expiry of the lease in relation to the relevant outlet. In respect of each such sub-lease agreement, the relevant member of the Target Group will charge a fixed rent of RMB12 (approximately HK$11.3) per square metre per day and a fee at the rate of 5% of the total revenue generated from the sales of audio visual products (excluding value added tax), which will be payable on a monthly basis.

As discussed with the management of the Target Group, the part of its retail outlet to be sub-leased to the Parent Group will be in general prime area within each retail outlet. Based on the existing tenancy agreements of the retail outlets of the Target Group, the average rent is approximately RMB1.5 per square metre per day. Given that the rent to be charged to the Parent Group is substantially higher than the rental cost, we consider the Audio Visual Products Counters Sub-lease Agreements fair and reasonable to the Independent Shareholders.

It is proposed that the respective cap amounts of the fees to be received under the Audio Visual Products Counters Sub-lease Agreements by the Target Group will be RMB50.0 million (approximately HK$47.2 million), RMB115.0 million (approximately HK$108.5 million) and RMB140.0 million (approximately HK$132.1 million) for each of the three years ending 31 December 2006.

As set out in the “Letter from the Board”, cap amounts for the above fees are arrived at with reference to, among others, the targeted average area to be sub-leased to the Parent Group by the Target Group and the targeted revenue to be generated from the sales of audio visual products by the Parent Group. As advised by the management of the Target Group, the targeted average area of each outlet to be sub-leased to the Parent Group is about 100 square metre. The targeted revenue of the sales of audio visual products by the Parent Group used to determine the cap amount is based on the average

— 111 —

LETTER FROM SOMERLEY

daily sales of such products since the commencement of operation of this arrangement in May 2004 and the expected business growth. We consider the cap amounts, which allow sufficient room for the expansion of the Parent Group’s sales of audio visual products in future, are fair and reasonable from the Independent Shareholders’ perspective.

The Company will seek the approval of the Independent Shareholders of the Continuing Connected Transactions and the respective cap amounts on the conditions including:

• (i) the relevant cap amounts have not been exceeded; and

• (ii) the Company will comply with Rules 14A.37 to 14A.41 and 14A.46 of the Listing Rules in relation to the Continuing Connected Transactions.

The Continuing Connected Transactions are subject to, among others, annual review by independent non-executive Directors and Company’s auditors. Such annual review shall serve to ensure that these Continuing Connected Transactions are conducted on normal commercial terms or on terms that are no less favourable than those available to or from (as appropriate) independent third parties, thereby safeguarding the interests of the Independent Shareholders. We also consider that the cap amounts are set in order to allow the Enlarged Group reasonable flexibility in doing business with the Parent Group. On this basis, we are of the view that the entering into of the Continuing Connected Transactions and the cap amounts are fair and reasonable to the Independent Shareholders and in the interests of the Company.

DISCUSSION AND CONCLUSIONS

Though the Group has returned to profit in year 2003, it is, in our view, still working to establish a business of significance. The year 2003 profit relied on the contribution from trading of securities, foreign exchange and futures which is highly volatile. The Acquisition will allow the Group to acquire an established retail business that provides recurring revenue and profits. It will also place the Group in a competitive positioning in the newly opened up PRC retail market which the Group could not have achieved had it decided to build up its own retail chain network.

The valuation represented by the Consideration is, in our view, fair and reasonable after taking into account factors including the potential growth of the business operated by the Target Group, its leading position in the market and the non-cash form of payment for the Acquisition. However, Independent Shareholders should note that any estimation of the value of the Target Group is inevitably subject to a high degree of variability.

The Acquisition will be paid by the Consideration Shares and the Convertible Notes. The Issue Price of HK$5.52 is at an approximately 11.1% premium over the Adjusted Consolidated Net Tangible Asset Value per Share. The price is at a significant discount to the market price of the Shares which is in our view highly speculative and unsupported by the fundamentals of the Group which is still working to establish a business of significance. In the circumstances, assessment of the Issue Price against net asset value is in our view a more appropriate yardstick.

— 112 —

LETTER FROM SOMERLEY

Independent Shareholders would suffer huge dilution in shareholding percentage which is inevitable if the Company can only afford to make the Acquisition, the size of which is substantial, by Shares. Such dilution is, in our view, justified when weighed against the Target Group’s future revenue and profit contribution to the Enlarged Group.

The Enlarged Group is expected to have enough cashflow to fund its operations and its gearing ratio is acceptable for a retail chain business which sales are almost made on cash basis and has a fast inventory turnover. However, the Beijing Gome Debt will remain outstanding until 31 March 2005, unless Mr. Wong successfully conducts any placing(s) of the Consolidation Shares or the Underlying Shares earlier. In the unlikely event that the Beijing Gome Debt would not be repaid, the Enlarged Group would have a net current liability position which might affect the financial standing of the Enlarged Group as a whole. However, based on the repayment history of the current accounts due from the related parties as discussed in sub-section (2)(b)(ii) headed “Audited combined balance sheets” under section headed “The Acquisition” above and the cashflow projections of the Group as enlarged by the Target Group prepared by the Directors for the Review Period as discussed in paragraph (7)(c) headed “Cashflow” above, we consider that the credit and other financial risks borne by the Target Group in relation to the Beijing Gome Debt is manageable.

As the Directors decide not to acquire the Parent Group at this stage and both the Target Group and the Parent Group are under the same management, there may exist potential conflict of interests. However, Mr. Wong will execute the Non-competition Undertaking and the Right of First Refusal Deed in favour of the Company. This is, in our view, a favourable way to deal with the potential conflict of interests from the Independent Shareholders’ perspective.

OPINION AND ADVICE

On the above basis, we consider that 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 are fair and reasonable so far as the Independent Shareholders are concerned and the entering into of the Acquisition and the Continuing Connected Transactions are in the interests of the Company and the Independent Shareholders as a whole. We advise the Independent Board Committee to recommend the Independent Shareholders to vote in favour of the ordinary resolutions 3 to 7 to implement the Acquisition and the Continuing Connected Transactions.

Yours faithfully for and on behalf of SOMERLEY LIMITED Mei H. Leung Managing Director

— 113 —

INDUSTRY OVERVIEW

APPENDIX I

The PRC economy

For the past 25 years, the PRC has experienced rapid economic growth due to the implementation of economic reform programme and the adoption of an open door policy. According to China Statistical Yearbook, GDP (based on current prices) has grown from approximately RMB2,663.8 billion in 1992 to approximately RMB10,479.1 billion in 2002. On an inflation adjusted basis, real GDP (based on comparable prices) grew by a compound annual growth rate of approximately 9.3%.

As a result of the growth of the PRC economy, the living standard of people in the PRC has improved significantly. The chart below illustrates the GDP per capita in the PRC from 1992 to 2002.

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

RMB
9,000
8,184
8,000 7,651
7,086
7,000 6,551
6,054 6,038
6,000 5,576
5,000 4,854
3,923
4,000
2,939
3,000
2,287
2,000
1,000
0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
----- End of picture text -----

Source: China Statistical Yearbook 2003.

According to the Tenth Five-Year Plan as approved by the National People’s Congress, the State Council targeted GDP to grow at an average annual growth rate of approximately 7.0% between 2001 and 2005. As the PRC economy continues to expand, the Directors believe the per capita GDP will continue to grow.

The consumer market of the PRC

The improvement of living standard in the PRC has fuelled the growth of private consumption in recent years. Such trend has been evidenced by the growth of consumer spending in the PRC for the past decade. According to the China Statistical Yearbook, the total size of the retail market in the PRC has grown from approximately RMB1,099 billion in 1992 to approximately RMB4,091 billion in 2002, with a compound annual growth rate of approximately 14.0%.

— I-1 —

APPENDIX I

INDUSTRY OVERVIEW

According to the China Statistical Yearbook, retail sales in urban areas have been increasing over the past decade and accounted for approximately 63.3% of the total retail sales in the PRC in 2002. The table below illustrates the per capita GDP and total retail sales for the major provinces/municipalities of the PRC in which the Target Group operates.

		Per capital GDP	Per capital GDP			Total retail sales	Total retail sales
	1992	1997	2002	CAGR(1)	1992	1997	2002	CAGR(1)
		RMB thousand				RMB billion
Beijing	6.4	16.7	28.4	16.1%	43.0	105.2	174.5	15.0%
Tianjin	4.5	13.8	22.4	17.4%	19.2	53.5	94.1	17.2%
Guangdong	3.4	10.4	15.0	16.0%	106.0	291.9	501.4	16.8%
Fujian	2.3	9.3	13.5	19.4%	32.0	98.8	166.3	17.9%
Liaoning	3.2	8.5	13.0	15.1%	58.9	145.1	225.8	14.4%
Shandong	2.3	7.6	11.6	17.6%	79.6	191.4	318.2	14.9%
Hebei	1.8	6.1	9.1	17.6%	49.7	119.5	196.8	14.8%
Hubei	1.8	5.9	8.3	16.5%	46.5	134.5	219.8	16.8%
Chongqing	2.8	4.5	6.3	8.5%	14.4	50.8	76.3	18.1%
Sichuan	1.3	4.0	5.8	16.1%	71.9	121.2	185.0	9.9%
Shaanxi	1.5	3.7	5.5	13.9%	23.7	49.1	72.8	11.9%
Yunnan	1.3	4.0	5.2	14.9%	23.5	46.7	71.1	11.7%

Source: China Statistics Yearbook 1993, 1998 and 2003.

Note:

1. CAGR represents the compound annual growth rate between 1992 to 2002.

Development of the PRC retail industry for electrical appliances and consumer electronic products

The following graph sets out the retail sales of electrical appliances and consumer electronic products in the PRC from 1992 to 2002.

==> picture [327 x 150] intentionally omitted <==

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

RMB billion
500
394
400
341
297
300 266
244
222
202
200 177 189
161
134
100
0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
----- End of picture text -----

Source: State Information Centre.

— I-2 —

INDUSTRY OVERVIEW

APPENDIX I

According to the State Information Centre, the trend of growth in electrical appliances and consumer electronic products is expected to continue and it is forecasted that the annual growth in the retail sales of consumer electronic products will be 10.6% and 11.4% for 2004 and 2005 respectively.

The following graph sets out the breakdown of sales of electrical appliances and consumer electronic products in the PRC between 1992 and 2002.

==> picture [434 x 273] intentionally omitted <==

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

0% 0% 1% 1% 1% 1% 1% 1% 1% 1% 1%
100%
5%3% 4%4% 5%5% 4%5% 4%6% 5%5% 5%5% 6% 7% 8% 10%
8%
10% 10% 11% 11% 12% 14% 13% 10% 11% 10%
80% 13%
13%
18% 18% 17% 14% 13%
19% 17% 16% 17%
17%
60% 10% 18%
11% 12% 17% 18%
11% 12% 14%
15%
16%
19%
40% 20% 20%
54% 52% 49% 51% 48% 46% 44%
20% 40%
32%
29% 28%
0%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Audio visual Telecommunications Refrigerators and washing machines
Air-conditioners Computers Small electrical appliances
Digital
----- End of picture text -----

Source: State Information Centre.

The following table sets out the breakdown of sales and growth rates of electrical appliances and consumer electronic products in the PRC between 1992 and 2002.

Audio visual Telecommunications Refrigerators and washing machines Air-conditioners Computers Small electrical appliances Digital Total	1992 1997 RMB billion 72.6 101.2 13.4 30.2 23.5 35.5 13.4 31.1 4.0 11.1 6.7 11.1 0.4 1.8 134.0 221.9	2002 CAGR(1) 110.0 4.2% 78.9 19.4% 69.0 11.4% 52.0 14.5% 41.0 26.2% 38.9 19.2% 4.0 25.9% 393.8 11.4%

Source: State Information Centre.

Notes:

1. CAGR represents the compound annual growth rate between 1992 and 2002.

2. Due to rounding, the above figures may not add up to the total.

— I-3 —

APPENDIX I

INDUSTRY OVERVIEW

Small electrical appliances, computers, air-conditioners and digital products were among the fastest growing electrical and electronic products in terms of sales between 1992 and 2002. According to the State Information Centre, digital products and computers are projected to be the fastest growing products with compound annual growth rates of approximately 17.5% and 17.2% between 2004 and 2008, respectively.

As the consumer market of the PRC develops, stores of various sizes, styles and product specialisation have been established by retailers which aimed to target different customer groups. Currently, the sales of electrical appliances and consumer electronic products can be found in department stores, speciality stores, hypermarkets, franchise stores, warehouse and through the Internet and mail order. According to the statistics from MOFCOM and CGCC, the aggregate sales of chain store retailers as a percentage of total retail sales in the PRC, increased from approximately 0.5% in 1995 to approximately 15.0% in 2003.

According to the State Economic & Trade Commission, PRC ( ), total sales generated by chain stores will reached approximately RMB700 billion by 2005, representing an average annual increase of approximately 35.0% which is higher than the forecasted annual growth rate of the retail sales of consumer electronic products for 2004 and 2005 as stated above.

Penetration of electrical appliances and consumer electronic products in the PRC

As illustrated in the charts below, the penetration rates of electrical appliances and consumer electronic products in the PRC are substantially lower than those in Japan. For example, in 2003, the penetration rate of audio visual products in the PRC was approximately 156 units per 100 households while Japan has already achieved a penetration rate of approximately 317 units per 100 households in 2002.

— I-4 —

APPENDIX I

INDUSTRY OVERVIEW

The penetration of electrical appliances and consumer electronic products in the PRC is currently similar to the level in Japan in the 1990s. The following charts illustrate the penetration of electrical appliances and consumer electronic products in the PRC and Japan.

Penetration in the PRC

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

Units per 100 household
180
160
140
120
100
80
60
40
20
0
1990 1995 1999 2000 2001 2002 2003
Audio visual 59 100 131 139 144 152 156
Washing machine 78 89 91 91 92 93 94
Refrigerator 42 66 78 80 82 87 89
Air-conditioner 0 8 25 31 36 51 61
DVD 0 0 25 38 43 53 58
Microwave oven 0 0 12 18 22 31 36
Video camera 0 0 1 1 2 2 2
----- End of picture text -----

Source: GFK

Penetration in Japan

==> picture [331 x 224] intentionally omitted <==

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

Units per 100 household
350
300
250
200
150
100
50
0
1990 1995 1999 2000 2001 2002
Audio visual 263 295 302 308 310 317
Washing machine 108 109 108 109 110 111
Refrigerator 116 121 121 123 124 126
Air-conditioner 114 160 201 208 217 228
DVD 0 18 18 17 19 20
Microwave oven 71 91 98 99 101 102
Video camera 82 109 117 122 121 122
----- End of picture text -----

Source: GFK

— I-5 —

INDUSTRY OVERVIEW

APPENDIX I

Product trends

As noted above, the penetration rates of certain traditional electrical appliance such as white goods (including refrigerators and washing machines) and audio visual products (including colour televisions) in the PRC were above 85 units per 100 households in 2003, while the penetration rates for other products such as DVD players and air conditioners are relatively lower.

According to the State Information Centre, the forecast sales of traditional electrical appliances other than telecommunications, computers and digital products between 2000 and 2003 was estimated to grow at a compound annual growth rate of approximately 12.6%, whereas the forecast growth rate for telecommunications, computers and digital products was estimated to grow at a compound annual growth rate of approximately 17.1%. The following table sets out the breakdown of sales and growth rates of electrical appliances and consumer electronic products in the PRC between 1998 and 2002.

	1998	1999	2000	2001	2002	CAGR(1)
Audio visual	107.7	105.2	93.9	99.3	110.0	0.5%
Telecommunications	36.6	42.6	56.5	68.0	78.9	21.2%
Refrigerators and
washing machines	40.3	45.2	53.4	58.8	69.0	14.4%
Air-conditioners	31.8	33.3	39.7	47.6	52.0	13.1%
Computers	12.2	21.3	29.5	36.5	41.0	35.4%
Small electrical
appliances	13.4	16.0	21.0	27.6	38.9	30.5%
Digital	2.2	2.5	2.9	3.3	4.0	16.1%
Total	244.3	266	296.9	341.1	393.8	12.7%

Source: State Information Centre.

Notes:

1. CAGR represents the compound annual growth rate between 1998 and 2002.

2. Due to rounding, the above figures may not add up to the total.

According to the State Information Centre, sales of traditional electrical appliances between 2003 and 2008 is estimated to grow at a compound annual growth rate of approximately 10.1%, whereas the corresponding growth rate for telecommunications, computers and digital products is estimated to be approximately 16.7%. As the PRC retail market continues to develop and open up, the Directors believe that more innovative digital products will be available to PRC consumers to support an even faster rate of growth.

— I-6 —

INDUSTRY OVERVIEW

APPENDIX I

Major electrical appliances and consumer electronic products retailers

As a result of the above growth in the retail market and the increasing popularity of the chain store format in the PRC retail sector, sales of electrical appliances and consumer electronic products by chain stores have dominated the PRC retail market. As shown in the table below, the turnover and percentage of sales of the top electrical chain stores for the years 2002 and 2003 were:

	Sales(1) (RMB billion) 1 GOME Group 10.9 2 Shanghai Yongle Domestic Electrical Goods 4.9 3 Suning Electrical Goods Chain Store Group 5.9 4 Chongqing Commercial Group 5.3 5 Sanlian Corp 4.6 6 Jiangsu Five Stars Electrical Appliances 3.2 7 Dazhong Electrical Appliances 2.3 Total of top seven 37.1	Sales(1) (RMB billion) 1 GOME Group 10.9 2 Shanghai Yongle Domestic Electrical Goods 4.9 3 Suning Electrical Goods Chain Store Group 5.9 4 Chongqing Commercial Group 5.3 5 Sanlian Corp 4.6 6 Jiangsu Five Stars Electrical Appliances 3.2 7 Dazhong Electrical Appliances 2.3 Total of top seven 37.1	2002 % of total Number of outlets Sales(1) (RMB billion) 2.8% 109 17.8 1.2% 32 8.8 1.5% 84 8.5 1.3% 77 6.6 1.2% 132 6.4 0.8% 76 5.1 0.6% 15 4.0 9.4% 525 57.1	2002 % of total Number of outlets Sales(1) (RMB billion) 2.8% 109 17.8 1.2% 32 8.8 1.5% 84 8.5 1.3% 77 6.6 1.2% 132 6.4 0.8% 76 5.1 0.6% 15 4.0 9.4% 525 57.1	2003 % of total Number of outlets 4.1% 139 2.0% 55 1.9% 148 1.5% 81 1.5% 202 1.2% 96 0.9% 33 13.0% 754
	Market total	393.8		439.7

Source: State Information Centre.

Notes:

1. Included sales of franchise stores and the value added tax.

2. Due to rounding, the above figures may not add up to the total.

Regulations governing the PRC retail industry

In the past, domestic retail enterprises in the PRC were protected from direct competition from foreign enterprises although the PRC government has made efforts since the early 1990’s to open up its retail industry to foreign enterprises.

According to (PRC Company Law), the minimum registered capital for a retail enterprise is RMB300,000 and RMB500,000 for a wholesale enterprise. There is no geographical restriction on their operations within the PRC.

— I-7 —

INDUSTRY OVERVIEW

APPENDIX I

According to the “Interim Measures on Foreign Investments in Retail Business” ( ), a Sino-foreign joint venture is required to have a minimum registered capital of RMB50 million (or RMB30 million in the central and western regions of the PRC) in order to apply for a PRC retail business licence and such enterprises are allowed to operate only in selected cities in the PRC. Foreign ownership of equity interests in a Sino-foreign joint venture in retail business is limited to 65.0%. The basic requirements for such joint venture are:

• average annual sales of the foreign partner in excess of US$2 billion for each of the three years prior to application for a joint venture;

• total asset value of the foreign partner for the year prior to application in excess of US$200 million;

• average annual sales of the PRC partner (if a commercial enterprise) in excess of RMB300 million for each of the three years prior to application;

• average annual total amounts of self-managed imports and exports of the PRC partner in excess of US$50 million, of which export sales must represent at least US$30 million for each of the three years prior to application;

• total asset value of the PRC partner for the year prior to application in excess of RMB50 million;

• registered capital of the joint venture in excess of RMB50 million; and

• approvals from both PRC local and central governments.

Chain stores are also required to be registered with the relevant offices of the Administration for Industry and Commerce ( ).

The PRC’s entry into the WTO has provided foreign retailers with easier entry into the PRC retail market. Wholly foreign owned enterprises will be permitted to engage in retail business in the PRC by the end of 2004. In addition, restrictions regarding geographic locations, number of stores, and equity/form of establishment will be removed. It is expected that the potential entry of large international chain store groups through investment in joint ventures in the PRC will intensify competition in the PRC retail market as well as introduce reform to the management of the PRC’s retail chain store operations.

— I-8 —

RISK FACTORS

APPENDIX II

RISKS ASSOCIATED WITH THE TARGET GROUP

Ability to expand into new markets and to achieve expansion plan

The Target Group intends to continuously expand its retail operations geographically across the PRC. The Directors believe that the Target Group’s success in the future will, to a certain extent, depend on its ability to implement its expansion plans. Due to the WTO commitments made by the PRC government, all foreign investment enterprises will be able to operate nationwide in the PRC without most of the existing restrictions after 11 December 2004. Gome Appliance, as a foreign investment enterprise, will also need to obtain approvals and licenses for the establishment of outlets in cities, towns or locations in the PRC in which the Target Group does not have any retail outlet at present. There can be no assurance that such approvals and licenses could be readily obtained. The failure to obtain such approvals and licenses in a timely manner may adversely affect the expansion plan of the Target Group.

In addition, there are a number of factors that could affect the ability of any of its newly opened outlets to achieve sales and profitability levels comparable with its existing outlets, or to become profitable at all. These factors include the identification and choice of suitable sites and the negotiation of acceptable leases for such sites, the hiring, training and retention of skilled personnel, the adaptation of its distribution and other operational and management systems to new retail outlets, and continued consumer demand for its products at levels that can support acceptable profit margins. Such expansion plans may not prove to be successful and the Target Group may be adversely affected as a result of over-expansion.

Ability to increase sales in its existing outlets

The continued growth of the Target Group depends in part on its ability to increase sales in its existing outlets. The opening of additional outlets in an existing market may result in lower net sales at existing outlets in that market. The Target Group’s ability to increase sales in existing outlets, however, may be affected by its ability to attract customers into its outlets, to maintain sufficient number of well-trained employees, to keep its outlets stocked with the right merchandise, and to choose the right mix of products to sell.

Credit terms

The Target Group relies on the credit terms contained in the supply agreements with its suppliers and the credit terms of its banking facilities. Pursuant to these supply agreements, most of the suppliers have granted favourable credit terms which range from seven days to seven months in exchange for, among others things, receiving acceptance drafts from the Target Group’s banks for settlement of the invoices. The issuing banks currently require an upfront pledge over the Target Group’s accounts with such banks for approximately 30% of the amounts covered under the bank acceptance drafts with the remainder to be settled upon the expiry of such bank acceptance drafts. The Target Group relies heavily on these favourable credit terms granted by the suppliers and issuing banks in order to conserve its working capital. In the event that the suppliers or issuing banks are unable or unwilling to offer these favourable credit terms to the Target Group, the operations and profitability of the Target Group may be adversely affected.

— II-1 —

RISK FACTORS

APPENDIX II

Terms of the supply agreements

One of the competitive strengths of the Target Group is its ability to offer products at competitive prices. Pursuant to most of the supply agreements between the Target Group and its suppliers, these suppliers have undertaken to guarantee the gross profit margin of the Target Group with respect to specific products supplied and sold and to offer the lowest product prices to the Target Group within specific locations where the Target Group operates. However, there is no guarantee that the Target Group will be able to secure these favourable terms with its suppliers after the expiry of the existing supply agreements. In the event that the Target Group is unable to maintain its leading position and scale of operations in the PRC retail market of electrical appliances and consumer electronics products, the suppliers may not offer the same terms to the Target Group after the expiry of the existing supply agreements. In such event, the business performance and profitability of the Target Group may be adversely affected.

Exercising stringent stock control

As at 31 March 2004, the Target Group had a total stock value of approximately RMB0.8 billion, representing approximately 26.0% of its total assets. The Target Group recognised that excessive inventory would tie up cash which would in turn prevent its utilisation for other purposes, while inadequate inventory could adversely affect sales. With a view to conserving inventory carrying costs and working capital yet at the same time ensuring timely delivery of goods to its retail outlets and customers and maintaining the variety of products available to the Target Group’s customers, the Target Group’s policy is to maintain an optimal level of inventory and to review its stock control methods and procedures periodically. However, in the event that the Target Group fails to maintain such optimal levels, the Target Group’s operations and financial position may be adversely affected.

Inability to offer attractive and up-to-date products

The success of the Target Group in maintaining growth is attributable to its ability to offer a wide selection of attractive and up-to-date products to its customers and, in particular, the latest in consumer electronics. There is no assurance that the Target Group can continue to purchase and offer attractive and up-to-date products and to keep up with the fast changing lifestyle of its customers. In the event the Target Group is unable to purchase and offer attractive and up-to-date products to its customers, the business of the Target Group may be adversely affected.

Information system

The advanced ERP system currently used by the Target Group is crucial to its business operations, as the system enables the exchange of a vast quantity of information among the retail outlets, the regional divisions, the distribution centres, the purchasing department and the head office of the Target Group. Any malfunctioning of this system for any extended period of time could lead to a material disruption to the operations of the Target Group and hence, adversely affects its business performance and profitability.

— II-2 —

RISK FACTORS

APPENDIX II

Decline in profit margin

The Target Group maintains a pricing strategy of offering the most competitive price in the locations where it operates in order to command market share. The high sales volume achieved by the Target Group in turn compensates for the lower selling prices of the products offered to customers. There is no assurance that further competition in the retailing sector for electrical appliances and consumer electronic products will not erode the profit margin of the Target Group, making the Target Group’s high volume and low margin strategy undesirable. In such event, the business and profitability of the Target Group may be adversely affected.

Reliance on key management personnel

The success of the Target Group in expanding its growth in operations and maintaining growth in its profitability relies on the strategy and vision of its key management including its founder, efforts of key members of the management and their experience in the PRC electrical appliance and consumer electronics products retail market. The unanticipated resignation or departure of any of these key management members of the Target Group could have a material adverse impact on the operations of the Target Group. There is no assurance that the Target Group will be able to manage its expansion by retaining its existing management team and by attracting additional qualified employees.

Location of outlets and lease renewal

One of the key factors in the success of the Target Group is its ability to establish its retail outlets at suitable and convenient locations where there is high pedestrian flow and good accessibility (whether by public transportation or otherwise). As at the Latest Practicable Date, almost all of the retail outlets of the Target Group were situated at premises leased by the Target Group with a term of five to 10 years. Given the scarcity of retail premises at these suitable and convenient locations, there is no assurance that the Target Group will be able to find premises suitable for its retail operations or to lease them on commercially acceptable terms. In the event that there is any material difficulty in finding retail premises at suitable locations or securing the leasing of such premises on commercially acceptable terms, the Target Group’s expansion plans and business performance may be adversely affected.

Leased properties

In respect of approximately 29% of the properties leased by the Target Group for retail outlet, office and warehouse purposes in the PRC, the Target Group is unable to ascertain whether the landlords have title to the respective properties or the rights or authorisations to lease the respective properties to the Target Group. If the landlord of any of the leased properties does not have title to that property or the right or authorisation to lease that property, the relevant lease agreement may be invalid and unenforceable against third parties. In such event, the registered owner of that property would have the right to take possession and may evict the Target Group from such premises. In such circumstances, the Target Group may suffer losses and would have to incur additional costs and expenses for relocation and the operations of the Target Group may be adversely affected.

— II-3 —

RISK FACTORS

APPENDIX II

Infringement of trade mark

Pursuant to the Trademark Licence Agreement, Beijing Gome will license the “GOME Electrical Appliances” trade mark to the Target Group for use in connection with the retail sales of electrical appliances and consumer electronic products in the PRC for an indefinite term and at no cost. The Directors believe that the use of the “GOME Electrical Appliances” trade mark is key to establishing the Target Group’s distinctive corporate and market identity. There have been instances of trade mark infringements and there is no assurance that there will not be any more infringements of the “GOME Electrical Appliances” trade mark in the future. Should the Target Group fail to stop such infringements as they occur, the Target Group’s reputation and its business may be adversely affected.

Product liability claims

Under current PRC laws, manufacturers and vendors of defective products in the PRC are liable for loss and injury caused by such products they manufacture or sell. Pursuant to the General Principles of the Civil Law of the People’s Republic of China ( ) (the “PRC Civil Law”), which took effect in 1987, defective products causing any property damages or physical injuries to any person may expose the manufacturer or vendor of such products to civil liability. In 1994, the Law of the People’s Republic of China on Protection of Consumers’ Rights and Interests ( ) (the “Consumers Protection Law”) was promulgated which accords further protection to consumers in connection with the purchase or use of goods and services. At present, all business entities must observe and comply with the Consumers Protection Law in providing goods and/or services for sale.

Although the supply agreements between the Target Group and its suppliers generally provide for indemnity for any product liability in respect of the products sold by the Target Group, there is no assurance that the suppliers will have the financial resources or proper insurance coverage to deliver such indemnity.

Given that the Target Group is not required under PRC laws to maintain, and does not maintain, any product liability insurance, it is possible that product liability claims may be brought against the Target Group by those customers who have experienced adverse reactions to products purchased at any of the Target Group’s retail outlets. Depending on the nature and scope of such claims, if the suppliers of the Target Group is unable to satisfy or discharge these claims, the reputation and financial position of the Target Group may be adversely affected.

Transactions with the Parent Group

As set out in the sub-sections headed “6. Purchasing Service Agreement” and “7. Management Agreement” in the section headed “Relationship between the Target Group and the Parent Group”, the Target Group has entered into the Purchasing Service Agreement and the Management Agreement with the Parent Group, pursuant to which the Target Group is entitled to receive a fee equal to a percentage of the turnover generated from the sales of electrical appliances and consumer electronics products by the Parent Group. In the event that the Parent Group is unable to sustain its sales in the future, the profitability of the Target Group may be adversely affected.

— II-4 —

RISK FACTORS

APPENDIX II

RISKS ASSOCIATED WITH THE INDUSTRY

Changes in consumer preferences and/or purchasing power

The demand from the Target Group’s retail customers depends primarily upon their selection of electrical appliance and consumer electronic product retail outlets and the purchasing power of these customers. There can be no assurance that the Target Group’s customers will continue to purchase from the Target Group’s retail outlets in the future. If the purchasing habits of the Target Group’s customers change in the future, the Target’s Group business and financial results may be adversely affected. In addition, although the PRC has experienced rapid economic development in recent years, there can be no assurance that such a rate of growth can be sustained in the future. A prolonged period of slow economic development or economic recession in the PRC may cause a reduction in consumer spending and in turn may have a material adverse effect on the Target Group’s overall financial results.

PRC’s accession to the WTO and local competition

Aside from foreign entrants to the PRC market, the Group also faces competition from domestic players whose operations tend to be smaller, as compared to the retail outlets operated by the Target Group. Although the Target Group believes that the product knowledge of its sales staff, the range of products it offers, the competitive pricing of its products and the prime locations of its retail network are all critical factors which have contributed to its success in the PRC, the Target Group’s profitability may be adversely affected if there is an oversupply of products or if competitors drastically reduce their product prices.

The electrical appliance and consumer electronics markets in the PRC are becoming increasingly competitive, in particular after PRC’s accession to the WTO. In accordance with the PRC’s commitments to the WTO, most of the restrictions on foreign investment in the retail sector will be lifted after 11 December 2004. Accordingly, competition is likely to intensify in the future.

The outbreak of Severe Acute Respiratory Syndrome in the PRC

The Directors recognise that the outbreak of SARS in the PRC in early 2003 had an adverse impact on the PRC’s retail industry. There can be no assurance that there will not be any outbreak of SARS or similar infectious diseases in the future or that the operations of the Target Group will not be materially disrupted. Should any staff member of the Target Group be infected with SARS or a similar infectious disease, the relevant retail outlet may be suspended from operations temporarily. Should this happen, it would cause abrupt disruption to the business of the Target Group in part or as a whole and hence adversely affect the financial position of the Target Group. If there is a SARS outbreak in the location where the Target Group operates, the profitability of the Target Group may be adversely affected.

— II-5 —

RISK FACTORS

APPENDIX II

RISKS ASSOCIATED WITH THE PRC

Political and economic policies of the PRC government

The Target Group’s operations are located in the PRC. Changes in the economic and political situation in the PRC and the economic, financial, fiscal and other policies adopted by the PRC government may affect the Target Group’s operations, performance and profitability.

The PRC’s economy has traditionally been subject to central planning, with a series of economic plans promulgated and implemented by the PRC government. Over the past 25 years, the PRC government has been reforming the economic and political systems in the PRC. Such reforms have resulted in significant economic and social advancements. Many of these reforms were unprecedented and are expected to continue while political, economic and social factors may also lead to further adjustments to the PRC’s reform measures. The reforms and adjustments, however, may not always have a positive effect on the operations of the Target Group. Accordingly, there can be no assurance that the Target Group’s performance and profitability will not be adversely affected due to changes in political, economic and social conditions in the PRC or due to changes in the PRC government policies such as changes in laws and regulations (or the interpretation thereof), the introduction of measures to control inflation from time to time, changes in the rate or types of taxation and the imposition of additional restrictions on currency conversion and overseas remittances. In addition, there can be no guarantee that the PRC government will continue to pursue economic liberalisation and other reforms.

The PRC legal system

The PRC’s legal system is a civil law system which is based on statutory law. Prior legal decisions and judgments have little precedential value. The PRC is still in the process of developing a comprehensive statutory framework and its legal system is still considered to be underdeveloped in comparison with the legal systems in some western countries. Since 1979, the PRC government has formulated and enacted a large number of laws and regulations governing economic matters, securities activities and foreign investments.

Despite significant development in its legal system, the PRC does not have a comprehensive system of laws. The interpretation of the PRC law by courts and tribunals may be inconsistent and influenced by government policies and other considerations. In addition, the enforcement of existing laws and regulations, including those governing the retail industry in the PRC, can be uncertain and unpredictable. Judgments and arbitration rulings may be unenforceable. The promulgation of new laws, changes to existing laws and the inconsistency between local regulations and national laws could have a negative impact on the business and prospects of the Target Group’s business in the PRC.

— II-6 —

RISK FACTORS

APPENDIX II

Changes in foreign exchange regulations and fluctuation of RMB

All of the operating revenues of the Target Group are denominated in RMB. In order to fund its foreign currency needs, including its payment of dividends to Shareholders, a portion of the Target Group’s RMB-denominated revenue must be converted into Hong Kong dollars. Pursuant to current PRC laws and regulations on foreign exchange, foreign currencies required for the distribution of profits and payment of dividends must be purchased from designated foreign exchange banks upon presentation of tax clearance certificates issued by the relevant government authorities in respect of such dividends and board resolutions authorising the distribution of profits or dividends of the Target Group. The PRC government has abolished most of the restrictions on convertibility of RMB in respect of current account items while retaining restrictions on foreign exchange transactions in respect of capital account items. Despite such developments, RMB is still not freely convertible into other foreign currencies. Under the current foreign exchange control system, there is no guarantee that sufficient foreign currency will be available at a given exchange rate to the Target Group to enable it to fund its foreign currency needs or to pay dividends declared.

OTHER RISKS

Statistics contained in this circular were derived from various publicly available sources which may not be reliable

Certain statistical and other information contained in this circular which relates to the PRC and the retail industry is derived from various unofficial publications which have not been independently verified by the Group and may be inaccurate, incomplete or out-dated. Moreover, statistics derived from multiple sources may not be prepared on a comparable basis. The Group makes no representation as to the correctness or accuracy of such information and, accordingly, such information should not be unduly relied upon.

— II-7 —

APPENDIX III ACCOUNTANTS’ REPORT OF THE TARGET GROUP

The following is the text of the accountant’s report prepared for inclusion in this circular from the independent reporting accountants of Ocean Town Int’l Inc., Ernst & Young, Certified Public Accountants, Hong Kong

15th Floor Hutchison House 10 Harcourt Road Central Hong Kong

5 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 three months ended 31 March 2004 (the “Relevant Periods”), prepared on the basis set out in Section 1 below, for inclusion in the circular of China Eagle Group Company Limited (“China Eagle”) dated 5 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”),

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ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

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 RMB 475 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 RMB 241 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 RMB 241 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 March 2004 have been included in the combined statements 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 three months ended 31 March 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.

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ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

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 March 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 these 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 as at 31 March 2004.

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ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

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”)
- Xian			Gome Electrical		Xian, PRC	10,000,000	100	Note (i)
Appliance Co., Ltd.					7 February 2001
(“Xian Gome”)
-

— III-4 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

								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”)
- Qingdao				Gome Electrical		Qingdao, PRC	10,000,000	100	Note (i)
Appliance Co., Ltd.						25 April 2001
(“Qingdao Gome”)
-

— III-5 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

					Percentage
					of equity
					interest
			Place and date		attributable	Principal
Company name			of registration	Paid-up capital	to the Group	activities
				RMB
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.

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

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ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

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.

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ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

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.

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.

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ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

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.

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

Revenue is recognised as these services are provided.

— III-9 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

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

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ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

• (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.

— III-11 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

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:

Notes Revenue (a) Cost of sales (b) Gross profit Other operating income (a) Selling and distribution costs Administrative expenses Other operating expenses Profit from operating activities (b) Finance income Interest expense (c) Interest income Profit from operating activities before income tax and minority interests Income tax (f) Net profit from ordinary activities Minority interests (g) Net profit	Year 2001 RMB’000 3,872,571 (3,644,424)	ended 31 December 2002 2003 RMB’000 RMB’000 6,619,006 9,346,396 (6,198,203) (8,671,727)	ended 31 December 2002 2003 RMB’000 RMB’000 6,619,006 9,346,396 (6,198,203) (8,671,727)	Three months ended 31 March 2003 2004 RMB’000 RMB’000 2,078,258 2,918,126 (1,932,688) (2,667,068) 145,570 251,058 25,858 99,890 (97,730) (146,714) (17,212) (39,798) (6,008) (13,815) 50,478 150,621 — (134) 2,877 5,462 2,877 5,328 53,355 155,949 (14,406) (25,892) 38,949 130,057 (13,632) (45,520) 25,317 84,537	Three months ended 31 March 2003 2004 RMB’000 RMB’000 2,078,258 2,918,126 (1,932,688) (2,667,068) 145,570 251,058 25,858 99,890 (97,730) (146,714) (17,212) (39,798) (6,008) (13,815) 50,478 150,621 — (134) 2,877 5,462 2,877 5,328 53,355 155,949 (14,406) (25,892) 38,949 130,057 (13,632) (45,520) 25,317 84,537
	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)	145,570 25,858 (97,730) (17,212) (6,008) 50,478 — 2,877 2,877 53,355 (14,406) 38,949 (13,632)	251,058 99,890 (146,714 (39,798 (13,815
					150,621 (134 5,462
					5,328 155,949 (25,892
					130,057 (45,520
	16,535	69,190	178,472	25,317

— III-12 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

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:

				**Three **	months
	**Year **	ended 31 December		ended 31 March
	2001	2002	2003	2003	2004
	RMB’000	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	2,078,258	2,918,126

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 2001 2002 2003 RMB’000 RMB’000 RMB’000 15,469 33,539 142,057 — 9,199 40,355 — 14,652 24,412 — — 15,237 — — — 5,208 12,472 30,672 2,145 5,012 5,708 2,451 13,412 19,981 25,273 88,286 278,422	Three months ended 31 March 2003 2004 RMB’000 RMB’000 9,435 46,594 5,486 11,584 2,218 6,947 480 7,243 — 16,500 2,953 4,306 1,403 726 3,883 5,990 25,858 99,890	Three months ended 31 March 2003 2004 RMB’000 RMB’000 9,435 46,594 5,486 11,584 2,218 6,947 480 7,243 — 16,500 2,953 4,306 1,403 726 3,883 5,990 25,858 99,890
			99,890

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.

— III-13 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

(b) Profit from operating activities

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

				**Three **	months
	**Year **	ended 31 December		ended 31 March
	2001	2002	2003	2003	2004
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
Cost of inventories recognised
as expenses	3,644,424	6,198,203	8,671,727	1,932,688	2,667,068
Depreciation	8,316	8,260	16,813	2,820	7,100
Loss on disposal of fixed assets	—	7	3	—	74
Minimum lease payments under operating
leases in respect of land and buildings	47,126	78,347	132,284	25,578	45,694
Staff costs excluding directors’
remuneration (note (d)):
Wages, salaries and bonuses	39,553	72,466	122,805	25,100	45,552
Pension costs	4,840	8,247	13,477	2,729	4,754
Social welfare and other costs	6,214	11,602	19,958	4,092	7,421
	50,607	92,315	156,240	31,921	57,727

(c) Interest expense

								Three months
					**Year **	ended 31 December		ended 31 March
					2001	2002	2003	2003 2004
					RMB’000	RMB’000	RMB’000	RMB’000 RMB’000
Interest	on	a	bank	loan	—	—	325	— 134

— III-14 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

(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 2001 2002 2003 RMB’000 RMB’000 RMB’000 — — —	Year ended 31 December 2001 2002 2003 RMB’000 RMB’000 RMB’000 — — —	Year ended 31 December 2001 2002 2003 RMB’000 RMB’000 RMB’000 — — —	Three months ended 31 March 2003 2004 RMB’000 RMB’0000 — —	Three months ended 31 March 2003 2004 RMB’000 RMB’0000 — —
	1,285 51	1,431 52	1,312 52	364 13	285 13
	1,336	1,483	1,364	377	298

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:

				**Three **	months
	**Year **	ended 31 December		ended 31 March
	2001	2002	2003	2003	2004
	Number of	Number of	Number of	Number of	_Number _	of
	directors	directors	directors	directors	directors
RMB nil to RMB1,060,000
(equivalent to HK$1,000,000)	5	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, 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:

Salaries, allowances, bonuses and other benefits Pension costs	Year ended 31 December 2001 2002 2003 RMB’000 RMB’000 RMB’000 — 194 235 — 10 10 — 204 245	Three months ended 31 March 2003 2004 RMB’000 RMB’000 58 104 3 5 61 109	Three months ended 31 March 2003 2004 RMB’000 RMB’000 58 104 3 5 61 109
			109

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).

— III-15 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

(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, RMB2,742,000 and RMB4,767,000, 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 2001 2002 2003 RMB’000 RMB’000 RMB’000 — — — — — — 15,836 27,658 69,105 (5,519) (1,985) 7,968 10,317 25,673 77,073	Three months ended 31 March 2003 2004 RMB’000 RMB’000 — — — — 12,780 25,756 1,626 136 14,406 25,892	Three months ended 31 March 2003 2004 RMB’000 RMB’000 — — — — 12,780 25,756 1,626 136 14,406 25,892
			25,892

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.

— III-16 —

APPENDIX III

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

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 tax 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:

Profit before income tax and minority interests Income tax at the statutory income tax rate of 33% - Effect of preferential income tax rate - Expenditure not deductible for income tax	Year ended 31 December 2001 2002 2003 RMB’000 RMB’000 RMB’000 35,756 132,119 351,646	Year ended 31 December 2001 2002 2003 RMB’000 RMB’000 RMB’000 35,756 132,119 351,646	Year ended 31 December 2001 2002 2003 RMB’000 RMB’000 RMB’000 35,756 132,119 351,646	Three months ended 31 March 2003 2004 RMB’000 RMB’000 53,355 155,949 17,607 51,463 (4,395) (31,982) 1,194 6,411 14,406 25,892	Three months ended 31 March 2003 2004 RMB’000 RMB’000 53,355 155,949 17,607 51,463 (4,395) (31,982) 1,194 6,411 14,406 25,892
	11,799 (5,920) 4,438	43,599 (19,021) 1,095	116,043 (41,639) 2,669	17,607 (4,395) 1,194	51,463 (31,982 6,411
	10,317	25,673	77,073	14,406

(g) Minority interests

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

— III-17 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

(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 2001 2002 2003 RMB’000 RMB’000 RMB’000 44,464 95,601 318,939 6,788 3,013 12,860 — — — — — —	Three months ended 31 March 2003 2004 RMB’000 RMB’000 1,079 416,008 1,574 5,008 — 16,500 — 846	Three months ended 31 March 2003 2004 RMB’000 RMB’000 1,079 416,008 1,574 5,008 — 16,500 — 846
			5,008
			16,500
			846

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 three months ended 31 March 2004 was charged based on 0.75% and 0.9%, respectively, of the total turnover of the Parent Group for the three months ended 31 March 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 expense 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 district.

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.

— III-18 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

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:

Provision of corporate guarantees from Parent Group and Beijing Xinhengji in respect of - bills payable - a bank loan	Year ended 31 December Three months ended 31 March 2001 2002 2003 2003 2004 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 260,500 1,278,570 3,865,240 1,849,570 3,175,670 — — 10,000 — 10,000 260,500 1,278,570 3,875,240 1,849,570 3,185,670	Year ended 31 December Three months ended 31 March 2001 2002 2003 2003 2004 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 260,500 1,278,570 3,865,240 1,849,570 3,175,670 — — 10,000 — 10,000 260,500 1,278,570 3,875,240 1,849,570 3,185,670
		3,185,670

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 three months ended 31 March 2003 and 2004, the Group issued bills payable aggregating approximately RMB13 million, RMB53 million, RMB127 million, RMB36 million and RMB85 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 (i). The directors are of the opinion that such transactions would not be continued after 1 June 2004.

— III-19 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

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:

Notes NON-CURRENT ASSETS Fixed assets (a) Deferred income tax assets (b) CURRENT ASSETS Inventories (c) Bills receivable (d) Prepayments and other receivables (e) Due from related parties (f) Pledged deposits (g) Cash and cash equivalents (g) CURRENT LIABILITIES Interest-bearing bank loan (h) Trade payables and bills payable (i) Tax payable Customers’ deposits, other payables and accruals (j) Deferred income tax liabilities (b) NET CURRENT ASSETS TOTAL ASSETS LESS CURRENT LIABILITIES MINORITY INTERESTS NET ASSETS OWNER’S EQUITY Section 5	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 March 2004 RMB’000 106,591 1,232
	30,417 333,429 1,355 45,038 482,384 142,024 55,079	50,439 550,084 9,136 87,266 796,402 374,005 260,193	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	107,823 831,303 939 87,686 1,088,542 807,210 268,508
	1,059,309	2,077,086		3,084,188
	— 772,937 2,807 74,379 1,066	— 1,603,547 6,550 171,326 1,119		10,000 2,470,057 25,892 314,193 1,108
	851,189	1,782,542		2,821,250
	208,120	294,544		262,938
	238,537	344,983		370,761
	83,488	120,744		129,761
	155,049	224,239	617,013 617,013	241,000
	155,049	224,239		241,000

— III-20 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

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 13,689 Transferred from construction in progress — Disposals — Distribution to the owner upon Reorganisation — At 31 March 2004 81,362	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 13,689 Transferred from construction in progress — Disposals — Distribution to the owner upon Reorganisation — At 31 March 2004 81,362	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 31,504 26,251 — (12) 57,743 72,779 — (4) 130,518 19,558 — (121) (3,919) 146,036
	18,599 8,953 — — 27,552 40,121 — — 67,673 13,689 — — —	5,708 4,453 — — 10,161 2,404 — — 12,565 917 — (75) (3,919)	7,197 12,725 58 (12) 19,968 28,747 572 (4) 49,283 4,952 91 (46) —	— 120 (58) — 62 1,507 (572) — 997 — (91) — —	31,504 26,251 — (12
					57,743 72,779 — (4
					130,518 19,558 — (121 (3,919
	81,362	9,488	54,280	906

— III-21 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

			Equipment
	Leasehold	Motor	and	Construction
improvements		vehicles	fixtures	in progress	Total
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
Accumulated depreciation:
At 1 January 2001	—	69	11	—	80
Provided during the year	6,248	838	1,230	—	8,316
At 31 December 2001 and 1 January 2002	6,248	907	1,241	—	8,396
Provided during the year	5,117	969	2,174	—	8,260
Disposals	—	—	(5)	—	(5)
At 31 December 2002 and 1 January 2003	11,365	1,876	3,410	—	16,651
Provided during the year	8,999	1,877	5,937	—	16,813
Disposals	—	—	(1)	—	(1)
At 31 December 2003 and 1 January 2004	20,364	3,753	9,346	—	33,463
Provided during the period	3,874	411	2,815	—	7,100
Disposals	—	(33)	(14)	—	(47)
Distribution to the owner upon Reorganisation	—	(1,071)	—	—	(1,071)
At 31 March 2004	24,238	3,060	12,147	—	39,445
Net book value:
At 31 December 2001	12,351	4,801	5,956	—	23,108
At 31 December 2002	16,187	8,285	16,558	62	41,092
At 31 December 2003	47,309	8,812	39,937	997	97,055
At 31 March 2004	57,124	6,428	42,133	906	106,591

— III-22 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

(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:

		Recognised
	Balance at	in the combined	Balance at
	1 January	statements of	31 December
	2001	operations	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
		Recognised
	Balance at	in the combined	Balance at
	1 January	statements of	31 December
	2002	operations	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

— III-23 —

APPENDIX III

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

		Recognised
	Balance at	in the combined	Balance at
	1 January	statements of	31 December
	2003	operations	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
		Recognised in
	Balance at	combined	Balance at
	1 January	statements of	31 March
	2004	operations	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

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 March 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 three months ended 31 March 2004, respectively, in respect of the deferred income tax assets arising from these temporary differences.

— III-24 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

• (c) Inventories

Merchandise for resale Consumables	As at 31 December 2001 2002 RMB’000 RMB’000 332,110 545,343 1,319 4,741 333,429 550,084	2003 RMB’000 963,247 11,633 974,880	As at 31 March 2004 RMB’000 819,882 11,421
			831,303

(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 March
			2001			2002	2003	2004
			RMB’000			RMB’000	RMB’000	RMB’000
Within	three	months	1,355			9,136	2,983	939

(e) Prepayments and other receivables

				As at
		As at 31 December		31 March
	2001	2002	2003	2004
	RMB’000	RMB’000	RMB’000	RMB’000
Prepaid expenses and deposits	11,560	17,120	32,384	33,316
Advances to suppliers	25,708	58,484	47,544	37,309
Other receivables	7,770	11,662	28,246	17,061
	45,038	87,266	108,174	87,686

(f) 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 as defined in Section 9 to this Financial Information.

— III-25 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

(g) Cash and cash equivalents and pledged deposits

Cash and bank balances Time deposits Less: Time deposits pledged for bills payable (Note (i)) Cash and cash equivalents	As at 31 December 2001 2002 RMB’000 RMB’000 55,079 260,193 142,024 374,005	As at 31 December 2001 2002 RMB’000 RMB’000 55,079 260,193 142,024 374,005	2003 RMB’000 360,261 1,057,999	As at 31 March 2004 RMB’000 268,508 807,210
	197,103 (142,024)	634,198 (374,005)	1,418,260 (1,057,999)	1,075,718 (807,210
	55,079	260,193	360,261	268,508

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.

(h) Interest-bearing bank loan

				As at
		As at 31 December		31 March
	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 and 2003 and 31 March 2004, respectively.

(i) Trade payables and bills payable

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

				As at
		As at 31 December		31 March
	2001	2002	2003	2004
	RMB’000	RMB’000	RMB’000	RMB’000
Within three months	652,810	1,337,968	2,332,367	1,548,091
Three to six months	111,130	251,343	1,063,200	910,311
Over six months	8,997	14,236	17,040	11,655
	772,937	1,603,547	3,412,607	2,470,057

— III-26 —

APPENDIX III

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

The Group’s bills payable are secured by the pledge of certain of the Group’s time deposits as described in note (g) 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 RMB2,083,670,000 as at 31 December 2001, 2002 and 2003 and 31 March 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 March
						2001			2002	2003	2004
						RMB’000			RMB’000	RMB’000	RMB’000
Bills	payable	to	the	Parent	Group	7,414			6,136	73,881	67,953

• (j) Customers’ deposits, other payables and accruals

Customers’ deposits Other payables and accruals	As at 31 December 2001 2002 RMB’000 RMB’000 28,369 86,034 46,010 85,292 74,379 171,326	2003 RMB’000 146,650 163,132 309,782	As at 31 March 2004 RMB’000 165,308 148,885
			314,193

(k) Contingent liabilities

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

• (l) Commitments

• (i) Investment commitments

				As at
		As at 31 December		31 March
	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 March 2004, the Company had fully settled the outstanding consideration.

— III-27 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

(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.

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

				As at
		As at 31 December		31 March
	2001	2002	2003	2004
	RMB’000	RMB’000	RMB’000	RMB’000
Within one year	64,365	98,875	180,901	188,772
In the second to fifth years, inclusive	264,350	401,627	646,531	672,296
After five years	164,003	170,812	174,723	154,805
	492,718	671,314	1,002,155	1,015,873

(m) Fair value of financial instruments

The financial instruments of the Group mainly consist of cash and bank balances, pledged deposits, 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 March 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.

(n) 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 (h) 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 March 2004, substantially all of the Group’s assets and liabilities were denominated in RMB.

— III-28 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

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 RMB’000 Note (a) At 1 January 2001 — Contributions from the owner - (Note (c)) — Net profit for the year — Transfer to the PRC reserve fund — At 31 December 2001 and 1 January 2002 — Net profit for the year — Transfer to the PRC reserve fund — At 31 December 2002 and 1 January 2003 — Contributions from the owner - (Note (c)) — Net profit for the year — Transfer to the PRC reserve fund — At 31 December 2003 and 1 January 2004 — Net profit for the period — Distribution to the owner - (Note (d)) — At 31 March 2004 —	Issued share capital RMB’000 Note (a) At 1 January 2001 — Contributions from the owner - (Note (c)) — Net profit for the year — Transfer to the PRC reserve fund — At 31 December 2001 and 1 January 2002 — Net profit for the year — Transfer to the PRC reserve fund — At 31 December 2002 and 1 January 2003 — Contributions from the owner - (Note (c)) — Net profit for the year — Transfer to the PRC reserve fund — At 31 December 2003 and 1 January 2004 — Net profit for the period — Distribution to the owner - (Note (d)) — At 31 March 2004 —	PRC reserve fund RMB’000 Note (b) 2,628 — — 2,480	Retained earnings/ owner’s capital RMB’000 18,886 117,000 16,535 (2,480)	Total RMB’000 21,514 117,000 16,535 — 155,049 69,190 — 224,239 214,302 178,472 — 617,013 84,537 (460,550) 241,000
	— — — — — — — — — —	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 84,537 (433,682)	155,049 69,190 —
				224,239 214,302 178,472 —
				617,013 84,537 (460,550
	—	15,388	225,612

— III-29 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

Notes:

(a) Share capital

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

Since the Company became the holding company of Gome Appliance on 20 April 2004, there were no distributable reserves attributable to the Company’s equity owner as at 31 December 2001, 2002, 2003 and 31 March 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 as at 31 March 2004 retained by Beijing Gome pursuant to the Reorganisation and the basis of presentation set out in Section 1 to these financial information.

— III-30 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

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:

CASH FLOWS FROM OPERATING ACTIVITIES Profit from operating activities before income tax and minority interests Adjustments for: Interest income Finance costs Depreciation Loss on disposal of fixed assets Operating profit before working capital changes (Increase)/decrease in inventories (Increase)/decrease in bills receivable (Increase)/decrease in prepayments and other receivables (Increase)/decrease in amounts due from related parties Increase/(decrease) in trade payables and bills payable Increase/(decrease) in customers’ deposits, other payables and accruals Cash generated from operating activities Interest paid Income tax paid Net cash inflow from operating activities	Year ended 31 December Three months ended 31 March 2001 2002 2003 2003 2004 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 35,756 132,119 351,646 53,355 155,949 (2,003) (4,571) (13,300) (2,877) (5,462) — — 325 — 134 8,316 8,260 16,813 2,820 7,100 — 7 3 — 74 42,069 135,815 355,487 53,298 157,795 (170,339) (216,655) (424,796) 29,723 143,365 2,445 (7,781) 6,153 6,836 1,644 124,217 (42,228) (20,908) 23,708 (6,942) (7,724) (54,912) (176,409) 93,082 122,530 266,231 830,610 1,809,060 286,990 (138,151) (5,061) 96,947 138,456 1,350 14,257 251,838 741,796 1,687,043 494,987 294,498 — — (325) — (134) (13,029) (23,915) (56,626) (11,702) (18,893) 238,809 717,881 1,630,092 483,285 275,471	Year ended 31 December Three months ended 31 March 2001 2002 2003 2003 2004 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 35,756 132,119 351,646 53,355 155,949 (2,003) (4,571) (13,300) (2,877) (5,462) — — 325 — 134 8,316 8,260 16,813 2,820 7,100 — 7 3 — 74 42,069 135,815 355,487 53,298 157,795 (170,339) (216,655) (424,796) 29,723 143,365 2,445 (7,781) 6,153 6,836 1,644 124,217 (42,228) (20,908) 23,708 (6,942) (7,724) (54,912) (176,409) 93,082 122,530 266,231 830,610 1,809,060 286,990 (138,151) (5,061) 96,947 138,456 1,350 14,257 251,838 741,796 1,687,043 494,987 294,498 — — (325) — (134) (13,029) (23,915) (56,626) (11,702) (18,893) 238,809 717,881 1,630,092 483,285 275,471	Year ended 31 December Three months ended 31 March 2001 2002 2003 2003 2004 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 35,756 132,119 351,646 53,355 155,949 (2,003) (4,571) (13,300) (2,877) (5,462) — — 325 — 134 8,316 8,260 16,813 2,820 7,100 — 7 3 — 74 42,069 135,815 355,487 53,298 157,795 (170,339) (216,655) (424,796) 29,723 143,365 2,445 (7,781) 6,153 6,836 1,644 124,217 (42,228) (20,908) 23,708 (6,942) (7,724) (54,912) (176,409) 93,082 122,530 266,231 830,610 1,809,060 286,990 (138,151) (5,061) 96,947 138,456 1,350 14,257 251,838 741,796 1,687,043 494,987 294,498 — — (325) — (134) (13,029) (23,915) (56,626) (11,702) (18,893) 238,809 717,881 1,630,092 483,285 275,471	Year ended 31 December Three months ended 31 March 2001 2002 2003 2003 2004 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 35,756 132,119 351,646 53,355 155,949 (2,003) (4,571) (13,300) (2,877) (5,462) — — 325 — 134 8,316 8,260 16,813 2,820 7,100 — 7 3 — 74 42,069 135,815 355,487 53,298 157,795 (170,339) (216,655) (424,796) 29,723 143,365 2,445 (7,781) 6,153 6,836 1,644 124,217 (42,228) (20,908) 23,708 (6,942) (7,724) (54,912) (176,409) 93,082 122,530 266,231 830,610 1,809,060 286,990 (138,151) (5,061) 96,947 138,456 1,350 14,257 251,838 741,796 1,687,043 494,987 294,498 — — (325) — (134) (13,029) (23,915) (56,626) (11,702) (18,893) 238,809 717,881 1,630,092 483,285 275,471	Year ended 31 December Three months ended 31 March 2001 2002 2003 2003 2004 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 35,756 132,119 351,646 53,355 155,949 (2,003) (4,571) (13,300) (2,877) (5,462) — — 325 — 134 8,316 8,260 16,813 2,820 7,100 — 7 3 — 74 42,069 135,815 355,487 53,298 157,795 (170,339) (216,655) (424,796) 29,723 143,365 2,445 (7,781) 6,153 6,836 1,644 124,217 (42,228) (20,908) 23,708 (6,942) (7,724) (54,912) (176,409) 93,082 122,530 266,231 830,610 1,809,060 286,990 (138,151) (5,061) 96,947 138,456 1,350 14,257 251,838 741,796 1,687,043 494,987 294,498 — — (325) — (134) (13,029) (23,915) (56,626) (11,702) (18,893) 238,809 717,881 1,630,092 483,285 275,471
	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	53,298 29,723 6,836 23,708 93,082 286,990 1,350 494,987 — (11,702) 483,285	157,795 143,365 1,644 (6,942 122,530 (138,151 14,257
					294,498 (134 (18,893
					275,471

— III-31 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

CASH FLOWS FROM INVESTING ACTIVITIES Purchases of fixed assets (Increase)/decrease in pledged time deposits Interest received Net cash inflow/(outflow) from investing activities Net cash inflow before financing activities CASH FLOWS FROM FINANCING ACTIVITIES Increase in amounts due from related parties New bank loan Cash contributions from the owner Net cash outflows from financing activities NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at beginning of year/period Cash distribution to the owner upon Reorganisation CASH AND CASH EQUIVALENTS AT END OF YEAR/PERIOD	Year ended 31 December 2001 2002 2003 RMB’000 RMB’000 RMB’000 (22,254) (26,251) (72,779) (75,464) (231,981) (683,994) 2,003 4,571 13,300	Year ended 31 December 2001 2002 2003 RMB’000 RMB’000 RMB’000 (22,254) (26,251) (72,779) (75,464) (231,981) (683,994) 2,003 4,571 13,300	Year ended 31 December 2001 2002 2003 RMB’000 RMB’000 RMB’000 (22,254) (26,251) (72,779) (75,464) (231,981) (683,994) 2,003 4,571 13,300	Three months ended 31 March 2003 2004 RMB’000 RMB’000 (12,176) (19,558) (107,850) 61,611 2,877 5,462 (117,149) 47,515 366,136 322,986 (319,386) (308,403) — — — — (319,386) (308,403) 46,750 14,583 260,193 360,261 — (106,336) 306,943 268,508	Three months ended 31 March 2003 2004 RMB’000 RMB’000 (12,176) (19,558) (107,850) 61,611 2,877 5,462 (117,149) 47,515 366,136 322,986 (319,386) (308,403) — — — — (319,386) (308,403) 46,750 14,583 260,193 360,261 — (106,336) 306,943 268,508
	(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 —	(117,149) 366,136 (319,386) — — (319,386) 46,750 260,193 —	47,515
					322,986 (308,403 — —
					(308,403
					14,583 360,261 (106,336
	55,079	260,193	360,261	306,943

— III-32 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

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 (l)(i) to this Financial Information, no other significant events took place subsequent to 31 March 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 March 2004.

Yours faithfully, Ernst & Young

Certified Public Accountants Hong Kong

— III-33 —

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE TARGET GROUP

APPENDIX IV

Overview

The GOME Group, which comprises the Target Group and the Parent Group, is the leading retailer of electrical appliances and consumer electronic products in the PRC. As at the Latest Practicable Date, the Target Group operated 96 retail outlets and the Parent Group operated 39 retail outlets.

The Directors have decided that going forward, the Company’s resources will be focused on the PRC retail sector in respect of electrical appliances and consumer electronic products. The Directors have identified the Target Group for acquisition by the Company for the following reasons: (i) the Target Group has a more established track record and therefore provide a stable base for future development; and (ii) as compared with the Target Group, the business of the Parent Group is less developed and hence entails higher business risk. The Target Group will also manage the Parent Group after Completion. Further details are set out in the sub-section headed “Relationship between the Target Group and the Parent Group” in the “Letter from the Board” of this Circular.

The business of the Target Group was founded by Mr. Wong and the first electrical appliances retail outlet was opened in Beijing, the PRC in 1987. In 1993, the GOME Group began to develop its chain store network and adopted the “GOME Electrical Appliances” brand name for all of the retail outlets it was then operating. The GOME Group began to expand beyond Beijing in 1999, establishing its first outlet in Tianjin. This was followed by the establishment of further retail outlets in other major cities in the PRC such as Chengdu, Chongqing and Xian.

The Target Group has a strong operating history. In addition to the increase in the living standards and household consumption in the PRC, the Target Group’s established retail network and well-recognised brand name have jointly contributed to the growth in the turnover and net profit of the Target Group over the past few years. The turnover of the Target Group for the three years ended 31 December 2003 was approximately RMB3,872.6 million, RMB6,619.0 million and RMB9,346.4 million respectively. The increases of turnover in 2002 and 2003 represented approximately 70.9% and 41.2%, as compared to the turnover for the respective previous years. The Target Group’s net profit after taxation and minority interests for the three years ended 31 December 2003 was approximately RMB16.5 million, RMB69.2 million and RMB178.5 million respectively. The increases of such net profit in 2002 and 2003 represented approximately 319.4% and 157.9%, as compared to the Target Group’s net profit after taxation and minority interests for the respective previous years.

The Target Group is engaged in the retailing of electrical appliances and consumer electronic products in various cities of the PRC (the “Relevant Business”). The main products currently sold by the Target Group are classified into seven categories: (i) audio-visual products (such as televisions, DVD, CD and VCD players); (ii) refrigerators and washing machines; (iii) air-conditioners; (iv) telecommunications (such as mobile telephones and accessories); (v) computers (such as personal computers, notebook computers, monitors and printers); (vi) small electrical appliances (such as rice cookers, vacuum cleaners, irons, water heaters and microwave ovens); and (vii) digital products (such as digital video recorders, digital cameras, MP3 players and portable DVD and CD players).

— IV-1 —

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE TARGET GROUP

APPENDIX IV

The Relevant Business was previously operated by 19 companies registered in the PRC, including Beijing Gome. Pursuant to a group reorganisation during the period from April 2003 to April 2004, (i) all the relevant assets, liabilities and the Relevant Business in Beijing owned by Beijing Gome, with the exclusion of certain assets and liabilities which are unrelated to the Relevant Business or which are untransferable (the “Asset Segregation”), and (ii) the entire equity interests of each of the remaining 18 companies were transferred to Gome Appliance, a company incorporated in the PRC. Further, with effect from 20 April 2004, a 65.0% equity interest in Gome Appliance was transferred to Ocean Town and Gome Appliance was reformed into a PRC Sino-foreign equity joint venture. Ocean Town then became the holding company of the companies now comprising the Target Group. Ocean Town is a holding company with its 65.0% interest in Gome Appliance as its sole asset.

Factors affecting the Target Group’s financial condition and results of operations

The Target Group’s financial condition and results of operations have been and will continue to be affected by a number of factors, including those set out below:

• sales volume, which depends on, among other things, the size of the sales network of the Target Group;

• product mix and variety;

• purchase prices for products paid by the Target Group to suppliers, which depend in part on the Target Group’s scale of operations and its bargaining power with suppliers and manufacturers of products;

• pricing of its products;

• business relationship with suppliers and other revenues received from suppliers;

• effectiveness of the Target Group’s sales network in the PRC, which depends on the choice of location for outlets and the number of outlets;

• rental expenses for retail outlets;

• level of competition;

• changes in the regulatory environment, including control over and regulation of the retail sector and policy changes adopted by the PRC Government from time to time;

• political and economic policies of the PRC Government affecting the economy and business environment of China as a whole;

• management fee and purchasing service fee income from the Parent Group; and

• taxes, which vary depending on the availability of various preferential tax treatments or exemptions.

— IV-2 —

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE TARGET GROUP

APPENDIX IV

Combined income statements

The following table sets forth each of the line items of the Target Group’s combined income statements in RMB which are extracted from the Accountants’ Report set out in Appendix III to this Circular and as a percentage of sales for the three years ended 31 December 2003 and each of the three months ended 31 March 2003 and 2004.

Revenue Cost of sales Gross profit Other operating income Selling and distribution costs Administrative expenses Other operating expenses Profit from operating activities Finance income Interest expense Interest income Profit from operating activities before income tax and minority interests Income tax Net profit from ordinary activities Minority interests Net profit EBITDA	2001 (audited) RMB’000 % of sales 3,872,571 100.0 (3,644,424) 94.1	Year ended 31 December 2002 (audited) 2003 (audited) RMB’000 % of sales RMB’000 % of sales 6,619,006 100.0 9,346,396 100.0 (6,198,203) 93.6 (8,671,727) 92.8	Year ended 31 December 2002 (audited) 2003 (audited) RMB’000 % of sales RMB’000 % of sales 6,619,006 100.0 9,346,396 100.0 (6,198,203) 93.6 (8,671,727) 92.8	Three months 2003 (audited) RMB’000 % of sales 2,078,258 100.0 (1,932,688) 93.0	ended 31 March 2004 (audited) RMB’000 % of sales 2,918,126 100.0 (2,667,068) 91.4
	228,147 5.9 25,273 0.7 (168,199) 4.3 (42,813) 1.1 (8,655) 0.2 33,753 0.9 — 0.0 2,003 0.0 2,003 35,756 0.9 (10,317) 0.3 25,439 0.7 (8,904) 0.2	420,803 6.4 88,286 1.3 (303,850) 4.6 (60,610) 0.9 (17,081) 0.3 127,548 1.9 — 0.0 4,571 0.1 4,571 132,119 2.0 (25,673) 0.4 106,446 1.6 (37,256) 0.6	674,669 7.2 278,422 3.0 (486,776) 5.2 (91,216) 1.0 (36,428) 0.4 338,671 3.6 (325) 0.0 13,300 0.1 12,975 351,646 3.8 (77,073) 0.8 274,573 2.9 (96,101) 1.0	145,570 7.0 25,858 1.2 (97,730) 4.7 (17,212) 0.8 (6,008) 0.3 50,478 2.4 — 0.0 2,877 0.1 2,877 53,355 2.6 (14,406) 0.7 38,949 1.9 (13,632) 0.7	251,058 8.6 99,890 3.4 (146,714) 5.0 (39,798) 1.4 (13,815) 0.5 150,621 5.2 (134) 0.0 5,462 0.2 5,328 155,949 5.3 (25,892) 0.9 130,057 4.5 (45,520) 1.6
	16,535 0.4 44,072 1.1	69,190 1.0 140,379 2.1	178,472 1.9 368,784 3.9	25,317 1.2 56,175 2.7	84,537 2.9 163,183 5.6

Note: EBITDA means earnings before interest expense, income tax, depreciation and amortisation. It is not a Hong Kong GAAP or U.S. GAAP Concept. EBITDA should not be construed as a proxy for operating profit, net income or cash flows from operating activities for purposes of analysing the Target Group’s operating performance, financial position and cash flows. EBITDA as described in this Circular is not necessarily comparable with similarly titled measures for other companies.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE TARGET GROUP

APPENDIX IV

Results of operations

Revenue

The Target Group’s revenue consists wholly of income arising from retail sales of electrical appliances and consumer electronic products. Revenue equals the net invoiced value of goods sold, after allowances for goods returned, trade discounts and the value of services rendered, subject to the Target Group’s revenue recognition policy.

Revenue from the sale of electrical appliances and consumer electronic products is recognised when the significant risks and rewards of ownership of the products have been transferred to the customer and the amount of revenue can be measured reliably.

For the purpose of this circular, the Target Group has assembled information relating to annual “comparable store sales”, or sales information from those retail outlets which were in commercial operation throughout the entirety of both periods in any period to period comparison. This information is unaudited, and is compiled on a different accounting basis than is the information underlying the Target Group’s turnover in its audited financial statements, and should therefore not be compared to such audited information. Despite these differences, the management of the Target Group and the Directors believe that comparable store sales data may provide relevant information concerning growth trends within the Target Group’s existing retail outlets, as opposed to turnover data which combines growth in existing retail outlets with that attributable to increases in the number of such retail outlets.

Cost of sales

The Target Group’s cost of sales consists wholly of inventory costs (net of volume purchase rebates).

Gross profit

The Target Group’s gross profit varies principally as a result of the conditions of the retail market for electrical appliances and consumer electronic products, their effect on product pricing and the Target Group’s cost of sales. The Target Group sets the prices for its products with reference to the selling prices of suppliers and manufacturers, the prices charged by competitors in the same locality, and minimum gross profit margin (if any) on the products sold by the Target Group guaranteed by suppliers and manufacturers in accordance with contract terms.

Other operating income

The Target Group also derives other sources of income in connection with its retail operations which include promotion income (consisting of income received from suppliers for participating in the promotional activities of the Target Group), management fee income (consisting of fees paid by suppliers in relation to management services provided by the Target Group for the promotion of their

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE TARGET GROUP

APPENDIX IV

products, including managing and training of the suppliers’ sales representatives), display space leasing fees from suppliers (consisting of fees paid by suppliers for the selling of their products in the outlets of the Target Group), product listing fees (consisting of fees paid by suppliers in connection with the placing and displaying of their products on the shelves of the outlets of the Target Group), management fees from air-conditioner installations (consisting of fees paid by air-conditioning installation contractors in connection with the installation services for customers referred by the Target Group), and management and purchasing service fees from a related party (consisting of fees paid by the related party in connection with the provision of management and purchasing services to the Parent Group in respect of the retailing of electrical appliances and consumer electronic products in designated cities in the PRC in which the Parent Group operates).

The table below sets out a breakdown of the other operating income derived by the Target Group for each of the years ended 31 December 2001, 2002 and 2003 and the three months ended 31 March 2003 and 2004, which are extracted from the Accountants’ Report set out in Appendix III to this Circular.

				Three months	Three months
	**Year **	ended 31 December		ended 31 March
	2001	2002	2003	2003	2004
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
Income from suppliers:
- Promotion income	15,469	33,539	142,057	9,435	46,594
- Management fee income	—	9,199	40,355	5,486	11,584
- Display space leasing fee	—	14,652	24,412	2,218	6,947
- Product listing fee	—	—	15,237	480	7,243
Management and purchasing
service fees from a related party	—	—	—	—	16,500
Management fees for
air-conditioner installations	5,208	12,472	30,672	2,953	4,306
Royalty income from
franchise stores (Note)	2,145	5,012	5,708	1,403	726
Others	2,451	13,412	19,981	3,883	5,990
	25,273	88,286	278,422	25,858	99,890

Note: 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 Target Group.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE TARGET GROUP

APPENDIX IV

Operating expenses

The Target Group’s total operating expenses consist of selling and distribution costs, administrative expenses and other operating expenses.

Selling and distribution costs consist primarily of transportation costs, rental of retail outlets, marketing and promotional expenses, wages, salaries and bonuses, pension and social security costs of staff at the retail outlet level, utilities and advertising expenses.

Administrative expenses consist primarily of rental of offices, wages, salaries, bonuses, pension and social security costs of staff at the management level, other administration costs and depreciation costs.

Other operating expenses consist primarily of bills payable handling charges, miscellaneous expenses of retail outlets and payments of city protection construction tax, education levies and various other government duties.

Finance income

Finance costs comprise interest expenses on bank loans less any interest income. The Target Group had a RMB 10.0 million principal amount interest bearing unsecured bank loan as at 31 March 2004 obtained from the Wuhan Commercial Bank, Development Daidao Branch ( ), with a term commencing from 13 October 2003 and expiring on 13 October 2004 (the “Wuhan Bank Loan”). It was obtained primarily to assist in financing the opening of retail outlets in Wuhan, and was guaranteed by Beijing Gome.

Interest income comprises interest received from banks for pledged deposits and deposits of cash and cash equivalents.

Taxation

The general provision for PRC income tax is calculated at 33% of the estimated assessable profits determined in accordance with relevant income tax laws and regulations in the PRC.

Effective from 20 April 2004, Gome Appliance was approved to be a Sino-foreign equity joint venture. In accordance with the relevant tax laws and regulations in the PRC, since Gome Appliance is not engaged in production activities, it is not entitled to any preferential tax treatment enjoyed by production foreign investment enterprises.

The 18 subsidiaries of Gome Appliance, which are all limited liability companies incorporated in the PRC, are subject to PRC income tax rates ranging from zero to 33%, depending on the business localities of the subsidiaries and the national and local government preferential tax policies.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE TARGET GROUP

APPENDIX IV

Hong Kong profits tax has not been provided for, as the Target Group has not carried out any operations in Hong Kong during the relevant period and therefore does not have assessable income currently sourced from Hong Kong.

Review of past performance

Three months ended 31 March 2004 compared to three months ended 31 March 2003

Revenue

The Target Group’s revenue increased from approximately RMB2,078.3 million for the three months ended 31 March 2003 to approximately RMB2,918.1 million for the three months ended 31 March 2004, an increase of approximately 40.4%. Between 1 April 2003 to 31 March 2004, a total of 32 new retail outlets were opened, of which 18 were opened in cities in which the Target Group already had a presence and 14 retail outlets were opened in nine new cities where there were no retail outlets operated by the Target Group before. The substantial increase in the number of retail outlets during this period contributed significantly to the increase in revenue of the Target Group. However, the shorter pre-Chinese new year sales peak period in 2004 partially offset the increase in revenue of the Target Group in the first quarter of 2004 as a portion of the pre-Chinese new year sales were pushed back to December 2003.

Cost of sales

The Target Group’s cost of sales increased from approximately RMB1,932.7 million for the three months ended 31 March 2003 to approximately RMB2,667.1 million for the three months ended 31 March 2004, an increase of approximately 38.0%. The rate of increase in cost of sales was lower than that of revenue principally as a result of the re-negotiation and finalisation of the supply contracts between the Target Group and a majority of its suppliers following the first quarter of 2003. The revised terms under the supply contracts, which were more favourable to the Target Group, enabled the Target Group to set product prices at a level where the Target Group was able to undercharge its competitors in a given location by a certain percentage or amount, while at the same time maintaining a minimum gross profit margin. In addition, the Target Group was able to negotiate with a number of suppliers better volume purchase rebates in 2004 than in 2003.

Gross profit

As a result of the above principal factors, the Target Group’s gross profit increased from approximately RMB145.6 million for the three months ended 31 March 2003 to approximately RMB251.1 million for the three months ended 31 March 2004, an increase of approximately 72.5%. For the three months ended 31 March 2004, the Target Group’s gross profit margin increased to approximately 8.6% from approximately 7.0% for the three months ended 31 March 2003.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE TARGET GROUP

APPENDIX IV

Other operating income

The Target Group’s other operating income increased from approximately RMB25.9 million for the three months ended 31 March 2003 to approximately RMB99.9 million for the three months ended 31 March 2004. The increase was primarily due to an increased number of suppliers which accepted the standardised commercial terms adopted by the Target Group, which included commitments from such suppliers on promotion income and the management fee income. In addition, the expansion of sales network and the commencement of the collection of the management and purchasing service fee from a related party with effect from 1 January 2004 also contributed to the increase of other operating income of the Target Group.

Selling and distribution costs

The Target Group’s selling and distribution costs increased from approximately RMB97.7 million for the three months ended 31 March 2003 to approximately RMB146.7 million for the three months ended 31 March 2004, an increase of approximately 50.1%. The increase was principally due to the increase in the number of retail outlets operated by the Target Group.

Administrative expenses

The Target Group’s administrative expenses increased from approximately RMB17.2 million for the three months ended 31 March 2003 to approximately RMB39.8 million for the three months ended 31 March 2004. The increase was principally due to the increase in the number of retail outlets operated by the Target Group, an increase in the number of management personnel due to the segregation of management departments and the hosting of corporate activities such as a global home appliances conference held by the Target Group in the first quarter of 2004.

Other operating expenses

The Target Group’s other operating expenses increased from approximately RMB6.0 million for the three months ended 31 March 2003 to approximately RMB13.8 million for the three months ended 31 March 2004. The increase was principally due to the expansion of the sales network of the Target Group through the opening of new retail outlets and the increase in bills payable handling charges as a result of an increase in bills payable due to the increase in purchase of inventories and the percentage of use of bills payable pursuant to better terms from suppliers obtained by the Target Group.

Profit from operating activities

As a result of the above principal factors, the Target Group’s operating profit increased from approximately RMB50.5 million for the three months ended 31 March 2003 to approximately RMB150.6 million for the three months ended 31 March 2004 and the operating profit margin increased to approximately 5.2% for the three months ended 31 March 2004 from approximately 2.4% for the three months ended 31 March 2003.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE TARGET GROUP

APPENDIX IV

Finance income

The Target Group incurred approximately RMB0.1 million of interest expenses in respect of the Wuhan Bank Loan for the three months ended 31 March 2004. The Target Group did not have any bank loans for the three months ended 31 March 2003.

The Target Group’s interest income increased from approximately RMB2.9 million for the three months ended 31 March 2003 to approximately RMB5.5 million for the three months ended 31 March 2004. The increase was primarily due to the increase in bills payable, which required a corresponding increase in pledged deposits to banks. As a result of the increase in pledged deposits and cash and cash equivalents arising from expansion of operations, interest income increased. Further, certain of the Target Group’s deposits were transferred to higher-yielding fixed term deposits since the beginning of 2003.

Taxation

The Target Group’s PRC income tax expense increased from approximately RMB14.4 million for the three months ended 31 March 2003 to approximately RMB25.9 million for the three months ended 31 March 2004. Despite the increase, the effective tax rates for the three months ended 31 March 2003 and 31 March 2004 were approximately 27.0% and 16.6%, respectively. The income tax expense in the first three months of 2004 was limited as a result of an exemption from PRC income tax liability in the first quarter of 2004 for one of Gome Appliance’s subsidiaries, Tianjin Logistics. The decrease in the effective tax rate, notwithstanding the increase in expense, was primarily due to centralised purchasing of certain products by Tianjin Logistics and volume purchase rebates arising from such arrangement being treated as income to Tianjin Logistics and exempted from income tax.

Net profit

The Target Group’s net profit increased from approximately RMB25.3 million for the three months ended 31 March 2003 to approximately RMB84.5 million for the three months ended 31 March 2004. Net profit margin for the three months ended 31 March 2004 was approximately 2.9% as compared to net profit margin of approximately 1.2% for the three months ended 31 March 2003.

Year ended 31 December 2003 compared to year ended 31 December 2002

Revenue

The Target Group’s revenue increased from approximately RMB6,619.0 million in 2002 to approximately RMB9,346.4 million in 2003, an increase of approximately 41.2%. The increase was principally attributable to the expansion of the sales network with 32 more retail outlets opened, including 11 retail outlets in eight new cities where there were no retail outlets operated by the Target

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE TARGET GROUP

APPENDIX IV

Group before. The increase in revenue as a result of the expansion of the number of retail outlets was partially offset by the decreasing revenue per weighted average number of retail outlets in 2003 and the outbreak of SARS, which had a material adverse effect on the revenue of the Target Group in 2003.

The revenue per weighted average number of retail outlets decreased to approximately RMB149.1 million in 2003 from approximately RMB168.3 million in 2002. Generally, revenue contribution from a new retail outlet only increases after a few months of operation.

The Target Group had 31 retail outlets which were in operation for the entire years ended 31 December 2002 and 2003. Comparable store sales increased approximately 5.5% from 2002 to 2003. The increase was significantly lesser, on a percentage basis, than the increase in comparable store sales from 2001 to 2002, principally as a result of the outbreak of SARS in 2003.

Cost of sales

The Target Group’s cost of sales increased from approximately RMB6,198.2 million in 2002 to approximately RMB8,671.7 million in 2003, an increase of approximately 39.9%. The rate of increase was less than that of revenue due mainly to the renegotiation and finalisation of the supply contracts between the Target Group and a majority of its suppliers in 2003 as discussed above.

Gross profit

The Target Group’s gross profit increased from approximately RMB420.8 million in 2002 to approximately RMB674.7 million in 2003, an increase of approximately 60.3% and the Target Group’s gross profit margin increased from approximately 6.4% in 2002 to approximately 7.2% in 2003.

Other operating income

The Target Group’s other operating income increased from approximately RMB88.3 million in 2002 to approximately RMB278.4 million in 2003. Promotion income increased from approximately RMB33.5 million in 2002 to approximately RMB142.1 million in 2003, management fee income increased from approximately RMB9.2 million in 2002 to approximately RMB40.4 million in 2003, product listing fees of approximately RMB15.2 million first collected in 2003, display space leasing fees increased from approximately RMB14.7 million in 2002 to approximately RMB24.4 million in 2003 and management fees for air-conditioner installations increased from approximately RMB12.5 million in 2002 to approximately RMB30.7 million in 2003. The increases were primarily due to more favourable terms and the inclusion of new fee items in the supply contracts entered into in 2003.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE TARGET GROUP

APPENDIX IV

Selling and distribution costs

The Target Group’s selling and distribution costs increased from approximately RMB303.9 million in 2002 to approximately RMB486.8 million in 2003, an increase of approximately 60.2%. The increase was principally due to the increase in the number of retail outlets operated by the Target Group.

Administrative expenses

The Target Group’s administrative expenses increased from approximately RMB60.6 million in 2002 to approximately RMB91.2 million in 2003, an increase of approximately 50.5%. The higher rate of increase compared to that of revenue principally resulted from the relocation of the headquarters of the Target Group and the opening of new regional head offices. Further, the installation of a new information system and increases in wages, salaries, bonuses, pension and social security costs of staff at the management level also contributed to the increase in administrative expenses.

Other operating expenses

The Target Group’s other operating expenses increased from approximately RMB17.1 million in 2002 to approximately RMB36.4 million in 2003. The increase was primarily due to the expansion of the sales network of the Target Group through the opening of new retail outlets and the increase in bills payable handling charges as a result of the increase in bills payable due to the increase in purchase of inventories and the percentage of use of bills payable pursuant to better terms from suppliers obtained by the Target Group.

Profit from operating activities

As a result of the above principal factors, the Target Group’s operating profit increased from approximately RMB127.5 million in 2002 to approximately RMB338.7 million in 2003. In 2003, the Target Group’s operating profit margin increased to approximately 3.6% from approximately 1.9% in 2002.

Finance income

In 2003, the Target Group incurred approximately RMB0.3 million of interest expenses in respect of bank loans. The Target Group did not have any bank loans in 2002.

The Target Group’s interest income increased from approximately RMB4.6 million in 2002 to approximately RMB13.3 million in 2003. The increase was primarily due to an increase in pledged deposits to banks, which was related to the increase in bills payable. Further, certain deposits were transferred to higher-yielding fixed term deposits since the beginning of 2003.

— IV-11 —

APPENDIX IV

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE TARGET GROUP

Taxation

The Target Group’s PRC income tax expense increased from approximately RMB25.7 million in 2002 to approximately RMB77.1 million in 2003. The effective tax rates in 2002 and 2003 were approximately 19.4% and 21.9%, respectively. The slight increase in the effective tax rate was primarily due to the difference in the respective tax benefits and profit contribution before tax from operations in different cities.

Net profit

The Target Group’s net profit increased from approximately RMB69.2 million in 2002 to approximately RMB178.5 million in 2003. Net profit margin in 2003 was approximately 1.9% as compared to net profit margin of approximately 1.0% in 2002.

Year ended 31 December 2002 compared to year ended 31 December 2001

Revenue

The Target Group’s revenue increased from approximately RMB3,872.6 million in 2001 to approximately RMB6,619.0 million in 2002, an increase of approximately 70.9%. The increase was mainly attributable to the expansion of sales network with eight more retail outlets opened in cities where the Target Group operated other retail outlets, and seven new retail outlets in four cities where the Target Group had no presence before. The revenue per weighted average number of retail outlets increased in 2002 to approximately RMB168.3 million from approximately RMB150.4 million in 2001. In addition, the introduction of the new mobile phone product line in the second half of 2001 and the increase in sales of air-conditioners, refrigerators and washing machines also had a significant and positive impact on revenue.

The Target Group had 20 retail outlets which were in operation for the entire years ended 31 December 2001 and 2002. Comparable store sales increased approximately 33.8% from 2001 to 2002.

Cost of sales

The Target Group’s cost of sales increased from approximately RMB3,644.4 million in 2001 to approximately RMB6,198.2 million in 2002, an increase of approximately 70.1%. Such increase was generally in line with the increase in the Target Group’s revenue during the same period. The slightly less rapid growth in cost of sales than that in revenue was attributable to the Target Group’s renegotiation of terms with its suppliers resulting, among other things, improved volume purchase rebate rates.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE TARGET GROUP

APPENDIX IV

Gross profit

The Target Group’s gross profit increased from approximately RMB228.1 million in 2001 to approximately RMB420.8 million in 2002, an increase of approximately 84.5%. The Target Group’s gross profit margin increased slightly to approximately 6.4% in 2002 from approximately 5.9% in 2001.

Other operating income

The Target Group’s other operating income increased from approximately RMB25.3 million in 2001 to approximately RMB88.3 million in 2002. The increase was a result of increases in promotion income from approximately RMB15.5 million in 2001 to approximately RMB33.5 million in 2002, management fees for air-conditioner installations from approximately RMB5.2 million in 2001 to approximately RMB12.5 million in 2002 as well as new sources of income in 2002, including management fee income of approximately RMB9.2 million and display space leasing fee of approximately RMB14.7 million. The increase in these items was primarily due to the expansion of sales network and the opening of new retail outlets in both cities where the Target Group was already operating and in new cities.

Selling and distribution costs

The Target Group’s selling and distribution costs increased from approximately RMB168.2 million in 2001 to approximately RMB303.9 million in 2002, an increase of approximately 80.7%. The increase was primarily due to the expansion of sales network and higher marketing and promotional expenses incurred.

Administrative expenses

The Target Group’s administrative expenses increased from approximately RMB42.8 million in 2001 to approximately RMB60.6 million in 2002, an increase of approximately 41.6%. The increase was principally due to the increase in the number of retail outlets, though the expenses increased at a less rapid pace than the growth in sales because the majority of the new retail outlets in new cities were opened towards the end of 2002.

Other operating expenses

The Target Group’s other operating expenses increased from approximately RMB8.7 million in 2001 to approximately RMB17.1 million in 2002. The increase was primarily due to the expansion of the sales network of the Target Group through the opening of new retail outlets and the increase in bills payable handling charges as a result of an increase in bills payable due to the increase in purchase of inventories and the percentage of use of bills payable pursuant to better terms from suppliers obtained by the Target Group.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE TARGET GROUP

APPENDIX IV

Profit from operating activities

The Target Group’s operating profit increased from approximately RMB33.8 million in 2001 to approximately RMB127.5 million in 2002. In 2002, the Target Group’s operating profit margin increased to approximately 1.9% from approximately 0.9% in 2001.

Finance income

The Target Group did not have either bank borrowings or interest expense in either 2001 or 2002. The Target Group’s interest income increased from approximately RMB2.0 million in 2001 to approximately RMB4.6 million in 2002. The increase was primarily due to the increase in bills payable, which required a corresponding increase in pledged deposits to banks. As a result of the increase in pledged deposits and cash and cash equivalents arising from expansion of operations, interest income increased.

Taxation

The Target Group’s PRC income tax expense increased from approximately RMB10.3 million in 2001 to approximately RMB25.7 million in 2002. The effective tax rates in 2001 and 2002 were approximately 28.9% and 19.4%, respectively. The decrease in the effective tax rate was primarily due to the reduction of applicable income tax rate from 33% to 15% in 2002 for three of Gome Appliance’s subsidiaries and tax benefits for certain operations in new regions.

Net profit

The Target Group’s net profit increased from approximately RMB16.5 million in 2001 to approximately RMB69.2 million in 2002. Net profit margin in 2002 was approximately 1.0% as compared to net profit margin of approximately 0.4% in 2001.

Liquidity and Capital Resources

Historically, the Target Group has financed both its working capital and capital expenditure requirements principally through cash flow from operations. As at 31 March 2004, the working capital of the Target Group, which represents current assets less current liabilities, amounted to approximately RMB262.9 million.

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APPENDIX IV

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE TARGET GROUP

The following table shows the Target Group’s audited combined cash flows from operating activities, investing activities and financing activities for the three years ended 31 December 2003 and each of the three months ended 31 March 2003 and 2004, which are extracted from the Accountants’ Report set out in Appendix III to this Circular.

				Three months ended	Three months ended
	Year ended 31 December			31 March
	2001	2002	2003	2003	2004
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
Net cash inflow from operating
activities	238,809	717,881	1,630,092	483,285	275,471
Net cash inflow/(outflow) from
investing activities	(95,715)	(253,661)	(743,473)	(117,149)	47,515
Net cash outflows from financing
activities	(264,709)	(259,106)	(786,551)	(319,386)	(308,403)
Net increase/(decrease) in cash and
cash equivalents	(121,615)	205,114	100,068	46,750	14,583
Cash and cash equivalents at
beginning of the year/period	176,694	55,079	260,193	260,193	360,261
Cash and cash equivalents at end
of year/period	55,079	260,193	360,261	306,943	268,508

Operating activities

The Target Group’s net cash inflow from operating activities for the three months ended 31 March 2004 was approximately RMB275.5 million, derived principally from net profit from ordinary activities for the three months ended 31 March 2004 of approximately RMB130.1 million, increased by, among other things, decreases of approximately RMB143.4 million in inventories and approximately RMB122.5 million due from related parties. These cash inflows were partially offset by a decrease of approximately RMB138.2 million in trade payables and bills payable.

The Target Group had a balance of approximately RMB831.3 million of inventories as at 31 March 2004 as compared to a balance of approximately RMB974.9 million as at 31 December 2003. This approximately 14.7% decrease relates principally to seasonal factors, namely the Western New Year and Chinese New Year. Typically, the sales of the Target Group are higher during the few weeks before and during holiday seasons and it is the business practice of the Target Group to increase its inventory level prior to holiday seasons in anticipation of higher sales during holiday seasons. Further, the relatively early Chinese New Year in 2004 (22 January) had a greater impact on 31 December inventories than would have been the case had the holiday occurred later. Sales of the Target Group are generally lower after holiday seasons, and the Target Group reduces its level of inventories accordingly.

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APPENDIX IV

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE TARGET GROUP

The amount due from related parties represents the Beijing Gome Debt which was owed by Beijing Gome to Gome Appliance. As at 31 March 2004, the amount due from related parties was approximately RMB1,088.5 million, a decrease of approximately 48.1% from approximately RMB2,099.1 million as at 31 December 2003. The decrease was mainly attributable to the Asset Segregation, through which only a portion of the due from related parties associated to the business of retailing of electrical appliances and consumer electrical products was contributed to the Target Group and the remaining portion, with an amount of approximately RMB1,196.0 million, were retained by Beijing Gome. Pursuant to an agreement to be entered into between Beijing Gome and Gome Appliance upon Completion, the Beijing Gome Debt is to be repaid on or before 31 March 2005.

The Target Group’s trade payables and bills payable as at 31 March 2004 was approximately RMB2,470.1 million, a decrease of approximately 27.6% from approximately RMB3,412.6 million as at 31 December 2003. The decrease was also mainly due to the Asset Segregation. Trade payables and bills payable valued at approximately RMB804.4 million were respectively retained by Beijing Gome.

The Target Group’s net cash inflow from operating activities in 2003 was approximately RMB1,630.1 million, derived principally from its net profit from ordinary activities for the year of approximately RMB274.6 million, increased by, among other things, increase of approximately RMB1,809.1 million in trade payables and bills payable due to the increase in the volume of purchases of inventories and the corresponding use of bills payable. These cash inflows were partially offset by increases of approximately RMB424.8 million in inventories due to expansion of operations and approximately RMB176.4 million in due from related parties.

The Target Group’s net cash inflow from operating activities in 2002 was approximately RMB717.9 million, derived principally from its net profit from ordinary activities for the year of approximately RMB106.4 million, increased by, among other things, increase of approximately RMB830.6 million in trade payables and bills payable due to the increase in the volume of purchases of inventories and the corresponding use of bills payable. These cash inflows were partially offset by an increase of approximately RMB216.7 million in inventories due to expansion of operations.

The Target Group’s net cash inflow from operating activities in 2001 was approximately RMB238.8 million, derived principally from its net profit from ordinary activities for the year of approximately RMB25.4 million, increased by, among other things, a decrease of approximately RMB124.2 million in prepayments and other receivables, increases of approximately RMB266.2 million in trade payables and bills payable due to the increase in the volume of purchases of inventories and the corresponding use of bills payable. These cash inflows were partially offset by an increase of approximately RMB170.3 million in inventories due to expansion of operations.

Investing activities

The Target Group’s investing activity relates primarily to payments for the purchase of fixed assets, which includes leasehold improvements, motor vehicles, equipment and fixtures and construction in progress, and the arrangement of pledged deposits.

— IV-16 —

APPENDIX IV

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE TARGET GROUP

Net cash inflow from investing activities for the three months ended 31 March 2004 was approximately RMB47.5 million. This consisted principally of approximately RMB19.6 million in purchases of fixed assets for the expansion of operations. This cash outflow was more than fully offset by a decrease of approximately RMB61.6 million in pledged deposits. Since the Target Group uses bills payable in its purchase of inventories from suppliers and these bills payable are secured by pledges of certain of the Target Group’s time deposits in favour of banks, the decrease in inventory level from 31 December 2003 to 31 March 2004 resulted in a corresponding decrease in bills payable and pledged deposits. Balance of the Target Group’s pledged deposits as at 31 March 2004 was approximately RMB807.2 million, a decrease of approximately 23.7% from approximately RMB1,058.0 million as at 31 December 2003. The decrease was also due to the Asset Segregation. Pledged deposits valued at approximately RMB189.2 million were retained by Beijing Gome.

Net cash outflow from investing activities in 2003 was approximately RMB743.5 million. This consisted principally of approximately RMB72.8 million in purchases of fixed assets and an increase of approximately RMB684.0 million in pledged deposits due to an increase in the use of bills payable in the purchase of inventories.

Net cash outflow from investing activities in 2002 was approximately RMB253.7 million. This consisted principally of approximately RMB26.3 million in purchases of fixed assets and an increase of approximately RMB232.0 million in pledged deposits due to an increase in the use of bills payable in the purchase of inventories.

Net cash outflow from investing activities in 2001 was approximately RMB95.7 million. This consisted principally of approximately RMB22.3 million in purchases of fixed assets and an increase of approximately RMB75.5 million in pledged deposits due to an increase in the use of bills payable in the purchase of inventories.

Financing activities

The Target Group’s cash flows from financing activities for the three years ended 31 December 2003 and the three months ended 31 March 2004 reflect principally changes in the amount due from related parties and cash contributions from the owner. The Target Group’s only outstanding bank loan as at 31 March 2004 was the Wuhan Bank Loan.

Net cash outflow from financing activities in the three months ended 31 March 2004 was approximately RMB308.4 million, which consisted solely of an increase in the amount due from related parties.

Net cash outflow from financing activities in 2003 was approximately RMB786.6 million. This consisted principally of an increase of approximately RMB1,126.2 million in amounts due from related parties, which was partially offset by cash contribution from owner of approximately RMB329.7 million. Such contribution represented the relevant capital contribution from the owner in respect of the formation of the subsidiaries of the Target Group.

— IV-17 —

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE TARGET GROUP

APPENDIX IV

Net cash outflow from financing activities in 2002 was approximately RMB259.1 million, which consisted solely of an increase in amounts due from related parties.

Net cash outflow from financing activities in 2001 was approximately RMB264.7 million. This consisted principally of an increase of approximately RMB444.7 million in amounts due from related parties, which was partially offset by cash contribution from owner of approximately RMB180.0 million. Such contribution represented the relevant capital contribution from the owner in respect of the formation of the subsidiaries of the Target Group.

For the three years ended 31 December 2003 and the three months ended 31 March 2004, the Target Group’s debt to equity ratios were relatively low. The interest bearing loans for each of the three years ended 31 December 2001, 2002 and 2003 and the three months ended 31 March 2004 represents approximately 0%, 0%, 1.6% and 4.2% of the Target Group’s owner’s equity, respectively.

Contributions from owner

The owner of the Target Group had contributed approximately RMB117.0 million, nil and RMB214.3 million for the year ended 31 December 2001, 31 December 2002, and 31 December 2003, respectively, in the form of equity capital to subsidiaries of the Target Group. Further details of the changes in owner’s equity are set out in the section headed “5. Combined Statements of Changes in Owner’s Equity” of the Accountants’ Report as set out in Appendix III to this Circular.

Distribution to owner

The Target Group distributed approximately RMB460.6 million as at 31 March 2004. Such distribution related to the Asset Segregation as at 31 March 2004 where approximately RMB106.3 million of cash and approximately RMB189.2 million of pledged deposits were retained by the owner.

— IV-18 —

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE TARGET GROUP

APPENDIX IV

Inventory analysis

Level of inventories

The following table sets forth a breakdown of the level of inventories for the three years ended 31 December 2003 and the three months ended 31 March 2004 which are extracted from the Accountants’ Report set out in Appendix III to this Circular.

							As at
			**As **	**at **	31 December		31 March
			2001		2002	2003	2004
			RMB’000		RMB’000	RMB’000	RMB’000
Merchandise	for	resale	332,110		545,343	963,247	819,882
Consumables			1,319		4,741	11,633	11,421
			333,429		550,084	974,880	831,303

Inventory Turnover

The following table shows the average inventory turnover days of the Target Group for the three years ended 31 December 2003.

					**Year **	**ended **	31 December
					2001		2002	2003
Inventory	turnover	days	_(Note _	1)	25_(Note _	2)	26	32

Note:

1. Average inventory equals inventory at the beginning of the year plus inventory at the end of the year, divided by two. Inventory turnover days equal average inventory divided by cost of sales of the year and multiplied by 365.

2. Average inventory for the year ended 31 December 2001 was determined through the use of an unaudited figure as at 31 December 2000.

Inventory turnover days have increased from each year shown to the next. Further, all inventory turnover day figures exceed the optimal 16 day figure utilised in the Target Group’s internal policies (see “Letter from the Board — Inventory and cash management — Inventory control”). The increases from year to year are principally attributable to two factors, namely (1) during periods in which relatively large numbers of retail outlets are being opened, inventory growth precedes growth in turnover and cost of sales, leading to increases in inventory turnover days, and (2) display inventory, which cannot be centralised and which is slower than other inventory to transform into turnover and cost of sales, also increases rapidly as new retail outlets are opened.

— IV-19 —

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE TARGET GROUP

APPENDIX IV

The are also two principal reasons for inventory days exceeding the optimal 16 days throughout the track record period. First, seasonal factors, primarily the western and Chinese new year holidays, result in inventory levels which are higher than average on the first and last days of each calendar year, leading to inventory turnover day calculations at year end which are higher than true annual averages, and second, while display inventories are included in the Target Group’s inventory turnover day calculations, they are not included within the Target Group’s strategic optimal levels.

Trade payables and bills payable analysis

Turnover of trade and bills payable

The following table shows the average trade and bills payable days of the Target Group for three years ended 31 December 2003.

							**Year **	**ended **	31 December
							2001		2002	2003
Trade	and	bills	payable	days	_(Note _	1)	64_(Note _	2)	70	106

Note:

1. Average trade and bills payable equals trade payables and bills payable at the beginning of the year plus trade payables and bills payable at the end of the year, divided by two. Trade and bills payable days equal average trade and bills payable divided by cost of sales of the year and multiplied by 365.

2. Average trade and bills payable for the year ended 31 December 2001 was determined through the use of an unaudited figure as at 31 December 2000.

Average age of trade and bills payable

An aged analysis of the Target Group’s trade payables and bills payable is as follows (extracted from the Accountants’ Report set out in Appendix III to this Circular):

As at 31 December 2001 2002 2003 RMB’000 RMB’000 RMB’000 Within three months 652,810 1,337,968 2,332,367 Three to six months 111,130 251,343 1,063,200 Over six months 8,997 14,236 17,040 772,937 1,603,547 3,412,607	As at 31 March 2004 RMB’000 1,548,091 910,311 11,655
	2,470,057

— IV-20 —

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE TARGET GROUP

APPENDIX IV

INDEBTEDNESS

Borrowings and debt securities

The only outstanding non-trade indebtedness of the Target Group as at 31 March 2004 was the Wuhan Bank Loan, which is discussed above.

As at the close of business on 30 April 2004, the Target Group had no debt securities issued outstanding, or authorised or otherwise created but unissued.

Mortgages, charges and security

As at 30 April 2004, the Target Group had no mortgages, charges or other security.

CAPITAL COMMITMENTS

The Target Group had no material capital commitments as at 31 March 2004.

CONTINGENT LIABILITIES

The Target Group did not have any material contingent liabilities at the end of the three years ended 31 December 2001, 2002 and 2003 and the three months ended 31 March 2004.

DIRECTOR’S OPINION ON SUFFICIENCY OF WORKING CAPITAL

The Target Group has historically met its working capital principally from cash provided by operations, whilst raising the remainder of its requirements primarily through extending the payable days to suppliers by way of using trade payables and bills payable. The Directors are of the opinion that, taking into account its internally generated funds and its currently available banking facilities, the Target Group has sufficient working capital to satisfy its present requirements.

DISCLAIMER

Save as disclosed or as otherwise disclosed herein, the Target Group did not, as at the close of business on 30 April 2004, have any outstanding loan capital issued and outstanding or agreed to be issued, bank overdrafts, shares or debentures, mortgages, loans, or other similar indebtedness or any finance lease commitments, hire purchase commitments, liabilities under acceptances (other than normal trade bills), acceptance credits or any guarantees or other material contingent liabilities.

The Directors confirm that there has not been any material change in the indebtedness or contingent liabilities since 30 April 2004.

— IV-21 —

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE TARGET GROUP

APPENDIX IV

DISTRIBUTABLE RESERVES

Since Ocean Town became the holding Company of Gome Appliance on 20 April 2004, there were no distributable reserves attributable to Ocean Town’s equity owner as at 31 December 2001, 2002, 2003 and 31 March 2004.

NO MATERIAL ADVERSE CHANGE

The Directors are not aware of any material adverse change in the financial or trading position or prospects of the Target Group since 31 March 2004, the date to which the latest audited combined financial statements of the Target Group were made up.

— IV-22 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

1. The following is a summary of the audited financial information of the Group for the three years ended 31 March 2004, the audited consolidated income statement of the Group for the two years ended 31 March 2004, the audited consolidated balance sheet of the Group and the audited balance sheet of the Company as at 31 March 2004 and 31 March 2003, the audited consolidated statement of changes in equity and the audited consolidated cash flow statement of the Group for the two years ended 31 March 2004, together with the accompanying notes extracted from the annual report of the Company for the year ended 31 March 2004. In previous years, the financial statements of the Group have been prepared in accordance with the applicable Hong Kong Financial Reporting Standard (“HKFRS”) issued by the Hong Kong Society of Accountants and accounting principles generally accepted in Hong Kong. For the year ended 31 March 2004, the Group adopted the International Financial Reporting Standard (“IFRS”) promulgated by the International Accounting Standards Board in the preparation of its financial statements. Therefore, figures for the year ended 31 March 2003 have been adjusted. Figures for earlier years remain unchanged.

2. (a) Three year financial summary

Summary of results for the three years ended 31 March 2004

	**For the **	**year ended 31 **	March
	2004	2003	2002
	HK$’000	HK$’000	HK$’000
Turnover	44,815	4,124	4,073
Profit/(Loss) before taxation	25,499	(12,360)	(7,159)
Profit/(Loss) attributable to the shareholders	19,881	(12,360)	(7,159)
Earnings/(Loss) per Share (cents)	0.89	(0.76)	(2.8)
Dividend	Nil	Nil	Nil

For the three years ended 31 March 2004, no exceptional items or extraordinary items has been recorded.

— V-1 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

Summary of consolidated balance sheet as at 31 March 2004, 2003 and 2002

		**As **	at 31 December
	2004		2003	2002
	HK$’000		HK$’000	HK$’000
Non-current assets	746,290		212,821	38,571
Current assets	224,798		50,579	161,023
Current liabilities	160,545		77,440	1,274
Net current assets/(liabilities)	64,253		(26,861)	159,749
Total assets less current liabilities	810,543		185,960	198,320
Non-current liabilities	157,547		—	—
Minority interests	1,547		—	—
Net assets	651,449		185,960	198,320

— V-2 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

• (b) Audited financial statements of the Group for the year ended 31 March 2004

CONSOLIDATED INCOME STATEMENT

For the year ended 31 March 2004

(Expressed in Hong Kong dollars)

Note Revenue 2 Cost of sales Gross profit/(loss) Other operating income 6 Distribution expenses Administrative expenses Other operating expenses 7 Profit/(loss) from operations Net financing costs 9 Shares of losses of associate Profit/(loss) from ordinary activities before taxation 10 Income tax expense 11 Profit/(loss) from ordinary activities after taxation Minority interests Profit/(loss) attributable to shareholders 14 Earnings/(loss) per share (in Hong Kong cents) Basic 35 Diluted 35	Continuing operations 2004 2003 $’000 $’000 44,809 3,674 — (3,466)	Continuing operations 2004 2003 $’000 $’000 44,809 3,674 — (3,466)	Discontinued operation 2004 2003 $’000 $’000 6 450 — (1,679)	Discontinued operation 2004 2003 $’000 $’000 6 450 — (1,679)	Total consolidated 2004 2003 $’000 $’000 44,815 4,124 — (5,145) 44,815 (1,021) 907 7,366 (3,004) (58) (16,659) (17,601) (179) (535) 25,880 (11,849) (380) (487) (1) (24) 25,499 (12,360) (5,500) — 19,999 (12,360) (118) — 19,881 (12,360) 0.89 (0.76) 0.80 N/A	Total consolidated 2004 2003 $’000 $’000 44,815 4,124 — (5,145) 44,815 (1,021) 907 7,366 (3,004) (58) (16,659) (17,601) (179) (535) 25,880 (11,849) (380) (487) (1) (24) 25,499 (12,360) (5,500) — 19,999 (12,360) (118) — 19,881 (12,360) 0.89 (0.76) 0.80 N/A
	44,809 907 (2,982) (13,975) (179) 28,580 (380) (1) 28,199 (5,500) 22,699 (118)	208 7,366 (39) (16,881) (163) (9,509) (487) (24) (10,020) — (10,020) —	6 — (22) (2,684) — (2,700) — — (2,700) — (2,700) —	(1,229) — (19) (720) (372) (2,340) — — (2,340) — (2,340) —	44,815 907 (3,004) (16,659) (179) 25,880 (380) (1) 25,499 (5,500) 19,999 (118)	(1,021 7,366 (58 (17,601 (535
						(11,849 (487 (24
						(12,360 —
						(12,360 —
	22,581 1.01 0.90	(10,020) (0.62) N/A	(2,700)	(2,340)	19,881 0.89 0.80

— V-3 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 31 March 2004

(Expressed in Hong Kong dollars)

Note Balance at 1 April 2002 Net loss for the year Balance at 31 March 2003 Balance at 1 April 2003 Net profit for the year Movements in shareholders’ equity arising from capital transactions with shareholders: - Shares issued upon conversion of convertible notes 32, 33 - Placing of shares 32, 33 Mandatory convertible notes issued 34 Balance at 31 March 2004	Share capital $’000 161,830 — 161,830	Share premium Reserve on consolidation Mandatory convertible notes (Accumulated losses)/ Retained earnings $’000 $’000 $’000 $’000 40,734 620 — (4,864) — — — (12,360) 40,734 620 — (17,224)	Share premium Reserve on consolidation Mandatory convertible notes (Accumulated losses)/ Retained earnings $’000 $’000 $’000 $’000 40,734 620 — (4,864) — — — (12,360) 40,734 620 — (17,224)	Share premium Reserve on consolidation Mandatory convertible notes (Accumulated losses)/ Retained earnings $’000 $’000 $’000 $’000 40,734 620 — (4,864) — — — (12,360) 40,734 620 — (17,224)	Share premium Reserve on consolidation Mandatory convertible notes (Accumulated losses)/ Retained earnings $’000 $’000 $’000 $’000 40,734 620 — (4,864) — — — (12,360) 40,734 620 — (17,224)	Total $’000 198,320 (12,360) 185,960 185,960 19,881 51,000 94,608 300,000 651,449
	161,830 — 42,500 79,600 —	40,734 — 8,500 15,008 —	620 — — — —	— — — — 300,000	(17,224) 19,881 — — —	185,960 19,881 51,000 94,608 300,000
	283,930	64,242	620	300,000	2,657

— V-4 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

CONSOLIDATED BALANCE SHEET

As at 31 March 2004

(Expressed in Hong Kong dollars)

Note Non-current assets Property, plant and equipment 15 Intangible assets 16 Property under development 17 Investment properties 18 Investments in associates 19 Other investments 20 Current assets Other investments 20 Inventories 22 Deposits with brokers and financial institutions 23 Amounts due from related parties 24 Trade and other receivables 25 Cash and cash equivalents 26 Current liabilities Convertible notes 27 Trade and other payables 28 Amounts due to related parties 29 Current taxation 30	2004 $’000 4,748 (13,461) 750,441 4,438 — 124	2003 $’000 10,195 (950) — 330 203,246 — 212,821 --------- — 2,675 — 25,341 2,661 19,902 50,579 --------- 75,000 2,440 — — 77,440 --------- -----------------------------------
	746,290 --------- 804 — 64,323 12,866 62,829 83,976 224,798 --------- 24,000 44,001 87,044 5,500	212,821 --------- — 2,675 — 25,341 2,661 19,902
		50,579 --------- 75,000 2,440 — —
	160,545 --------- -----------------------------------

— V-5 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

Note Net current assets/(liabilities) Total assets less current liabilities Non-current liabilities Long-term payables 31 Minority interests Net assets Capital and reserves Share capital 32 Reserves 33 Mandatory convertible notes 34	2004 $’000 64,253 --------- ----------------------------------- 810,543 --------- 157,547 --------- 1,547 --------- ----------------------------------- 651,449	2003 $’000 (26,861) --------- ----------------------------------- 185,960 --------- — --------- — --------- ----------------------------------- 185,960 161,830 24,130 185,960 — 185,960
	283,930 67,519 351,449 300,000	161,830 24,130
		185,960 —
	651,449

— V-6 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

BALANCE SHEET

As at 31 March 2004 (Expressed in Hong Kong dollars)

Note Non-current assets Investments in subsidiaries 21 Current assets Other investments 20 Deposits with brokers and financial institutions 23 Other debtors, deposits and prepayments 25 Cash and cash equivalents 26 Current liabilities Convertible notes 27 Other payables 28 Current taxation 30 Net current assets/(liabilities) Net assets Capital and reserves Share capital 32 Reserves 33 Mandatory convertible notes 34	2004 $’000 559,112 --------- 804 64,323 315 45,725	2003 $’000 243,806 --------- — — 1,039 16,762 17,801 --------- 75,000 716 — 75,716 --------- ----------------------------------- (57,915) --------- ----------------------------------- 185,891 161,830 24,061 185,891 — 185,891
	111,167 --------- 24,000 1,523 5,500	17,801 --------- 75,000 716 —
	31,023 --------- ----------------------------------- 80,144 --------- ----------------------------------- 639,256
	283,930 55,326 339,256 300,000	161,830 24,061
		185,891 —
	639,256

— V-7 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

CONSOLIDATED STATEMENT OF CASH FLOW

For the year ended 31 March 2004

(Expressed in Hong Kong dollars)

Note Operating activities Profit/(loss) from ordinary activities before taxation Adjustments for: - Depreciation - Waiver of loan from a former director - Amortisation of positive goodwill/(negative goodwill) - Amortisation of other intangible assets - Share of losses of associates - (Gain)/loss on disposal of fixed assets - Interest income - Finance costs Operating profit/(loss) before changes in working capital Increase in deposits with brokers and financial institutions (Increase)/decrease in other investments Decrease in inventories Increase in trade and other receivables (Decrease)/increase in trade and other payables Decrease/(increase) in amounts due from related parties Increase in amounts due to related parties Cash used in operations Interest received Interest paid Net cash used in operating activities Investing activities Payment for purchase of fixed assets Proceeds from disposal of fixed assets Acquisitions of subsidiaries, net of cash acquired Net cash used in investing activities	2004 $’000 25,499 977 — 92 87 1 (510) (401) 780	2003 $’000 (12,360) 815 (7,271) (50) — 24 578 (759) 1,251 (17,772) — 3,800 3,267 (1,336) 508 (25,341) — (36,874) 759 (595) (36,710) --------- (393) 27,046 (119,998) (93,345) ---------
	26,525 (64,323) (928) 2,675 (7,489) (74,860) 12,475 87,044 (18,881) 401 (1,195) (19,675) --------- (2,966) 4,075 (11,968)	(17,772 — 3,800 3,267 (1,336 508 (25,341 —
		(36,874 759 (595
		(36,710 --------- (393 27,046 (119,998
	(10,859) ---------

— V-8 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

Note Financing activities Issue of shares - share capital - share premium Net cash from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at 1 April Cash and cash equivalents at 31 March 26	2004 $’000 79,600 15,008	2003 $’000 — — — --------- ----------------------------------- (130,055) 149,957 19,902
	94,608 --------- ----------------------------------- 64,074 19,902	— --------- ----------------------------------- (130,055 149,957
	83,976

Notes to cash flow statement

The major non-cash transactions incurred during the year were as follows:

(a) Conversion of convertible notes

Pursuant to the acquisition agreement dated 10 April 2002, First and Second Convertible Notes (issued on 22 April 2002 and 10 July 2002 respectively) amounting to $75,000,000 were issued to Link Zone International Limited as the balance of total consideration of $195,000,000.

These Notes were issued up to an aggregate principal amount of $75,000,000 due 2004, convertible into shares of the Company at the option of the holders. The Notes were in registered form in the denomination of $500,000 each or integral multiples thereof. On 17 July 2003, the Notes totalling $51,000,000, comprising the entire amount of the First Notes and partial amount of the Second Notes of amounts $37,500,000 and $13,500,000 respectively were converted into 425,000,000 ordinary shares of $0.10 each (note 27). The conversion price was $0.12 per ordinary share.

(b) Acquisition of a subsidiary

On 31 March 2004, the Group acquired the entire share capital of Bestly Legend Limited (“Bestly”) at the consideration of $300,000,000. The acquisition was financed by the issue of mandatory convertible notes of the equivalent amount to Shinning Crown Holdings Inc. (“Shinning Crown”). The consideration was settled by cash payment of $300,000,000 made by Shinning Crown directly to Mr Han Yuejun, the previous shareholder of Bestly (note 5).

— V-9 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

NOTES ON THE FINANCIAL STATEMENTS

For the year ended 31 March 2004

(Expressed in Hong Kong dollars)

1. SIGNIFICANT ACCOUNTING POLICIES

China Eagle Group Company Limited (“the Company”) is a company incorporated in Bermuda with limited liability and domiciled in Hong Kong. The address of its registered office is Canon’s Court, 22 Victoria Street, Hamilton HM12, Bermuda. The consolidated financial statements of the Company for the year ended 31 March 2004 comprise the Company and its subsidiaries (together referred to as the “Group”) and the Group’s interest in associates. The financial statements were authorised for issue by the directors on 20 May 2004.

(a) Statement of compliance

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) promulgated by the International Accounting Standards Board (“IASB”).

Although it is not required to do so under the Bye-Laws of the Company, the financial statements of the Company and the Group have been prepared so as to also comply with the disclosure requirements of the Hong Kong Companies Ordinance. These financial statements also comply with the applicable disclosure provisions of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited.

In previous years, the financial statements have been prepared in accordance with all applicable Hong Kong Financial Reporting Standards (“HKFRS”) (which includes all applicable Statements of Standard Accounting Practice and Interpretations) issued by the Hong Kong Society of Accountants and accounting principles generally accepted in Hong Kong.

As a result of the increase in the size and geographic spread of the Group, the directors decided to switch from HKFRS to IFRS.

These are the Group’s first consolidated financial statements prepared in accordance with IFRS. The adoption of IFRS has not resulted in any significant changes in the accounting policies of the Company or in the quantification of the Company’s assets and liabilities when compared with accounting principles generally accepted in Hong Kong.

(b) Basis of preparation

The financial statements are presented in Hong Kong dollars, rounded to the nearest thousand. They are prepared on the historical cost basis except that the following assets and liabilities are stated at their fair value: derivative financial instruments, investments held for trading and investment property.

The accounting policies set out below have been applied consistently by the Group to all periods presented in these consolidated financial statements and in preparing an opening IFRS balance sheet at 1 April 2002 for the purposes of the transition to IFRS.

(c) Basis of consolidation

(i) Subsidiaries

Subsidiaries are those entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable or convertible are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.

— V-10 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

(ii) Associates

Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. The consolidated financial statements include the Group’s share of the total recognised gains and losses of associates on an equity accounted basis, from the date that significant influence commences until the date that significant influence ceases. When the Group’s share of losses exceeds the carrying amount of the associate, the carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred obligations in respect of the associate.

(iii) Transactions eliminated on consolidation

Intra-group balances and transactions, and any unrealised gains arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with associates are eliminated to the extent of the Group’s interest in the entity. Unrealised gains arising from transactions with associates are eliminated against the investments in associates. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.

(d) Foreign currency

Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated into Hong Kong dollars at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated into Hong Kong dollars at foreign exchange rates ruling at the dates the values were determined.

(e) Property, plant and equipment

(i) Owned assets

Items of property, plant and equipment are stated at cost or deemed cost less accumulated depreciation (see below) and impairment losses (see accounting policy (l)). The cost of self-constructed assets includes the cost of materials, direct labour and an appropriate proportion of production overheads.

Property that is being constructed or developed for future use as investment property is classified as property, plant and equipment and stated at cost until construction or development is complete, at which time it is reclassified as investment property.

Where an item of property, plant and equipment comprises major components having different useful lives, they are accounted for as separate items of property, plant and equipment.

(ii) Subsequent expenditure

Expenditure incurred to replace a component of an item of property, plant and equipment that is accounted for separately, including major inspection and overhaul expenditure, is capitalised. Other subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the item of property, plant and equipment. All other expenditure is recognised in the income statement as an expense as incurred.

(iii) Depreciation

Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of items of property, plant and equipment and major components that are accounted for separately. Leasehold land is depreciated over the terms of the leases. Buildings are depreciated on a straight-line basis over the shorter of their estimated useful lives, being 50 years from the date of completion, and the unexpired terms of the leases. Leasehold improvements are depreciated on a straight-line basis over the remaining term of the lease.

— V-11 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

The estimated useful lives of fixed assets are as follows:

Land and buildings over the remaining lease terms Leasehold improvements over the remaining lease terms Other fixed assets 5-15 years Computer equipment 4 years

(f) Properties under development

Land and buildings other than investment properties are carried at purchased price, less accumulated depreciation and impairment losses.

(g) Intangible assets

• (i) Goodwill and negative goodwill

Goodwill (positive and negative) represents amounts arising on acquisition of subsidiaries, associates and joint ventures. In respect of acquisitions that have occurred since 1 January 2001, goodwill (positive and negative) represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired.

Positive goodwill is stated at cost less accumulated amortisation (see below) and impairment losses (see accounting policy (l)). In respect of associates, the carrying amount of goodwill is included in the carrying amount of the investments in associates.

To the extent that negative goodwill relates to an expectation of future losses and expenses that are identified in the plan of acquisition and can be measured reliably, but which have not yet been recognised, it is recognised in the income statement when the future losses and expenses are recognised. Any remaining negative goodwill, but not exceeding the fair values of the non-monetary assets acquired, is recognised in the income statement over the weighted average useful life of those assets that are depreciable/amortisable. Negative goodwill in excess of the fair values of the non-monetary assets acquired is recognised immediately in the income statement.

In respect of associates, the carrying amount of negative goodwill is included in the carrying amount of the investments in associates. The carrying amount of other negative goodwill is deducted from the carrying amount of intangible assets.

(ii) Exchange trading rights

The trading right in Hong Kong Futures Exchange Limited is stated in the balance sheet at cost less accumulated amortisation and impairment losses (see accounting policy (l)). Amortisation of the trading rights is charged to the profit and loss account on a straight-line basis over its estimated useful life of 10 years.

(iii) Subsequent expenditure

Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred.

— V-12 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

• (iv) Amortisation

Amortisation is charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets. Goodwill is amortised from the date of initial recognition: other intangible assets are amortised from the date they are available for use. The estimated useful lives are as follows:

Goodwill 20 years Trading rights 10 years

(h) Investments

• (i) Investments in equity securities

Investments held for trading are classified as current assets and are stated at fair value, with any resultant gain or loss recognised in the income statement.

The fair value of investments held for trading and investments available-for-sale is their quoted bid price at the balance sheet date.

Investments held for trading are recognised/derecognised by the Group on the date it commits to purchase/sell the investments.

• (ii) Investment property

Investment property is stated at fair value. Fair value is based on current prices in an active market for similar properties in the same location and condition. Any gain or loss arising from a change in fair value is recognised in the income statement. Rental income from investment property is accounted for as described in accounting policy (r)(ii).

When an item of property, plant and equipment (see accounting policy (e)) becomes an investment property following a change in its use, any difference arising at the date of transfer between the carrying amount of the item and its fair value is recognised directly in equity if it is a gain. Upon disposal of the item, the gain is transferred to retained earnings. Any loss is recognised in the income statement immediately.

(i) Trade and other receivables

Trade and other receivables are stated at their cost less impairment losses (see accounting policy (l)).

(j) Inventories

Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses.

The cost of other inventories is based on the weighted average principle and includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition.

(k) Cash and cash equivalents

Cash and cash equivalents comprises cash balances and call deposits. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows.

— V-13 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

(l) Impairment

The carrying amounts of the Group’s assets, other than investment property (see accounting policy (h)(ii)), inventories (see accounting policy (j)) and deferred tax assets (see accounting policy (o)), are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. For intangible assets that are not yet available for use, the recoverable amount is estimated at each balance sheet date. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement.

Goodwill was tested for impairment at 1 April 2002, the date of transition to IFRS, even through no indication of impairment existed.

(i) Calculation of recoverable amount

The recoverable amount of the Group’s receivables is calculated as the present value of expected future cash flows, discounted at the original effective interest rate inherent in the asset. Receivables with a short duration are not discounted.

The recoverable amount of other assets is the greater of their net selling price and value in use. In assessing 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.

(ii) Reversals of impairment

An impairment loss in respect of a receivable is reversed if the subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognised.

An impairment loss in respect of goodwill is not reversed unless the loss was caused by a specific external event of an exceptional nature that is not expected to recur, and the increase in recoverable amount relates clearly to the reversal of the effect of that specific event.

In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount.

An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

(m) Convertible notes

Convertible notes that can be converted to share capital at the option of the holder, where the number of shares issued does not vary with changes in their fair value, are accounted for as compound financial instruments, net of attributable transaction costs. The equity component of the convertible notes is calculated as the excess of the issue proceeds over the present value of the future interest and principal payments, discounted at the market rate of interest applicable to similar liabilities that do not have a conversion option. The interest expense recognised in the income statement is calculated using the effective interest rate method.

To the extent that the liability element of a compound financial instrument was no longer outstanding at 1 April 2002, the date of transition to IFRS, the amounts within equity that are attributable to the equity and liability elements have not been identified separately.

— V-14 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

Mandatory convertible notes are those convertible notes that are not redeemable and mandatorily converted to share capital. Mandatory convertible notes are classified as equity in the financial statements.

(n) Interest-bearing borrowings

Interest-bearing borrowings are recognised initially at cost, less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost under redemption value being recognised in the income statement over the period of the borrowings on an effective interest basis.

(o) Income tax

Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date.

A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

(p) Trade and other payables

Trade and other payables are stated at their cost.

(q) Provisions

A provision is recognised in the balance sheet when the Group has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect 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 risks specific to the liability.

(r) Revenue

(i) Sale of goods

Revenue from the sale of goods is recognised in the income statement when the significant risks and rewards of ownership have been transferred to the buyer.

— V-15 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

• (ii) Rental income

Rental income from investment property is recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives granted are recognised as an integral part of the total rental income.

(iii) Commission income from brokerage services

Commission and brokerage on dealing in securities and futures contracts is recognised when the relevant contract is executed.

(iv) Trading gains on investments

Realised gains and losses arising from the trading in forex and futures contracts are accounted for in the year in which the positions are closed as the difference between the net sales proceeds and the carrying amount of the contracts. Open positions are valued at market rate with unrealised gains and losses included in the consolidated income statement.

Revenue from the sale of listed securities is recognised when the relevant contract is executed.

• (s) Expenses

• (i) Operating lease payments

Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives received are recognised in the income statement as an integral part of the total lease expense.

• (ii) Net financing costs

Net financing costs comprise interest expense on borrowings, interest income on bank deposits, foreign exchange gains and losses and bank charges.

Interest income from bank deposits is accrued on a time-apportioned basis by reference to the principal outstanding and at the rate applicable.

All interest and other costs incurred in connection with borrowings are expensed as incurred as part of net financing costs, except to the extent that they are capitalised as being directly attributable to the acquisition or construction of an asset which necessarily takes a substantial period of time to get ready for its intended use or sale.

• (t) Employee benefits

• (i) Salaries, bonuses, paid annual leave, leave passage and the cost to the Group of non-monetary benefits are accrued in the year in which the associated services are rendered by employees of the Group. Where payment or settlement is deferred and the effect would be material, these amounts are stated at their present values.

• (ii) Contributions to defined contribution retirement plans, including contributions payable under the Hong Kong Mandatory Provident Fund Schemes Ordinance, are recognised as an expense in the consolidated income statement as incurred.

— V-16 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

• (iii) Termination benefits are recognised when, and only when, the Group demonstrably commits itself to terminate employment or to provide benefits as a result of voluntary redundancy by having a detailed formal plan which is without realistic possibility of withdrawal.

(u) Trust accounts

Trust accounts maintained by subsidiaries of the Group to hold clients’ monies are not recognised in the financial statements.

(v) Segment reporting

A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments.

(w) Discontinuing operations

A discontinuing operation is a clearly distinguishable component of the Group’s business that is abandoned or terminated pursuant to a single plan, and which represents a separate major line of business or geographical area of operations.

(x) Related parties

For the purposes of these financial statements, parties are considered to be related to the Group if the Group has the ability, directly or indirectly, to control the party or exercise significant influence over the party in making financial and operating decisions, or vice versa, or where the Group and the party are subject to common control or common significant influence. Related parties may be individuals or other entities.

2. REVENUE

The principal activities of the Group are property development and investment, securities broking and investment and general trading.

Revenue represents the commission on securities and commodity broking, rental income and the sales value of goods supplied to customers. The amount of each significant category of revenue recognised in turnover during the year is as follows:

Profit on trading of securities, foreign exchange and futures Commission on securities and commodity broking Rental income Sales of computer-aided-design-systems and machineries General trading	2004 $’000 37,464 7,200 145 6 — 44,815	2003 $’000 — — 1,043 450 2,631
		4,124

— V-17 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

3. SEGMENT REPORTING

Segment information is presented in respect of the Group’s business and geographical segments. The primary format, business segments, is based on the Group’s management and internal reporting structure.

Inter-segment pricing is determined on an arm’s length basis.

Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly income-earning assets and revenue, interest-bearing loans, borrowings and expenses, and corporate assets and expenses.

Segment capital expenditure is the total cost incurred during the year to acquire segment assets that are expected to be used for more than one period.

Another business segment, computer-aided-design-systems, ceased production since 2000 and has been treated as a discontinued operation (see note 4).

Geographical segments

The Group’s business is managed in Hong Kong and other cities in the People’s Republic of China (“PRC”).

In presenting information on the basis of geographical segments, segment revenue is based on the geographical location of customers. Segment assets are based on the geographical location of the assets.

Business segments

The Group comprises the following main business segments:

Property development and investment : Development of properties and leasing of properties

Securities broking and investment : Stockbroking business and dealing in futures contracts and options and investments

General trading

: Trading of household and electric appliance products

— V-18 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

Revenue from external customers: Sales Commission income Profit on trading of securities, foreign exchange and futures Rentals Total revenue from external customers Segment result Unallocated expenses Profit/(loss) from operations Net financing costs Share of losses of associates Income tax expense Minority interests Net profit/(loss) for the year Segment assets Investments in associates Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities Capital expenditure Depreciation charge and amortisation expense	Securities broking and investment 2004 2003 $’000 $’000 — — 7,200 — 37,464 — — — 44,664 — 31,095 — 212,466 — 72,751 — 2,139 — 583 —	Property development and investment 2004 2003 $’000 $’000 — — — — — — 145 1,043 145 1,043 30 (2,470) 757,837 12,145 245,127 75,503 827 393 573 765	General trading 2004 2003 $’000 $’000 — 2,631 — — — — — — — 2,631 — 179 27 50 34 186 — — — —	Sale of computer- aided-design- systems and machinery 2004 2003 $’000 $’000 6 450 — — — — — — 6 450 (2,700) (2,340) 391 2,683 100 33 — — — —	Sale of computer- aided-design- systems and machinery 2004 2003 $’000 $’000 6 450 — — — — — — 6 450 (2,700) (2,340) 391 2,683 100 33 — — — —	Consolidated 2004 2003 $’000 $’000 6 3,081 7,200 — 37,464 — 145 1,043 44,815 4,124 28,425 (4,631	Consolidated 2004 2003 $’000 $’000 6 3,081 7,200 — 37,464 — 145 1,043 44,815 4,124 28,425 (4,631
							4,124
							(4,631
						(2,545) 25,880 (380) (1) (5,500) (118)	(7,218
							(11,849 (487 (24 — —
					2,683 33 — —	19,881	(12,360
						970,721 — 367	14,878 203,246 45,276
						971,088	263,400
						318,012 80	75,722 1,718
						318,092 2,966 1,156	77,440
							393
							765

— V-19 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

Geographical segments

Revenue from external customers Segment assets Capital expenditure	Hong Kong 2004 2003 $’000 $’000 44,815 3,149 219,951 54,876 2,966 393	PRC 2004 2003 $’000 $’000 — 975 751,137 208,524 — —	Consolidated 2004 2003 $’000 $’000 44,815 4,124 971,088 263,400 2,966 393	Consolidated 2004 2003 $’000 $’000 44,815 4,124 971,088 263,400 2,966 393
				263,400
				393

4. DISCONTINUED OPERATION

The Group closed its computer-aided-design-systems and machinery manufacturing plant located in the PRC which was subsequently sold in November 2000 for a cash consideration of $3,519,000. A loss on disposal of the plant of $799,000 was recognised in the consolidated income statement for the year ended 31 March 2001.

Subsequent to the cessation of production in 2000, the Group sold the remaining inventories of computer-aided-designsystems and machinery through June 2003. During the year ended 31 March 2004, inventories of computer-aided-designsystems and machinery with cost totalling $5,867,000 were fully written off.

At 31 March 2004, the computer-aided-design-systems business (“CAD business”) had net liabilities of $8,261,000, comprising assets of $391,000 less liabilities $8,652,000. During the year, the CAD business had cash outflows from operating activities $26,000 (2003: $11,000), and no cash flows from investing activities and financing activities (2003: $Nil).

5. ACQUISITIONS OF SUBSIDIARIES

On 20 and 23 May 2003, the Group acquired a 95% equity interests in Eagle Legend Futures Limited (“Eagle Legend Futures”) and Eagle Legend Securities Limited (“East Legend Securities”) respectively, with all acquisitions satisfied in cash. Eagle Legend Securities is engaged in securities dealing and brokerage while Eagle Legend Futures is engaged in futures contracts dealing. The acquisitions were accounted for using the purchase method of consolidation.

On 31 March 2004, the Group acquired the entire share capital of Bestly. The acquisition was financed by issuing of mandatory convertible notes to Shinning Crown. Bestly’s principal activity is investment holding. It holds 100% interests in Beijing Wenyean Software Development Limited (“Beijing Wenyean”) and Beijing Xinwenan Technology Limited (“Beijing Xinwenan”) which in turn holds the remaining 20% interest in Beijing Jin Zun Property Development Limited (“Beijing Jin Zun Property”) and 51% interest in Beijing Jin Zun Technology Development Limited (“Beijing Jin Zun Technology”). The acquisition was accounted for using the purchase method of accounting.

— V-20 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

Effect of acquisitions

The acquisitions had the following effect on the Group’s assets and liabilities.

Interest in associate Property, plant and equipment Trading rights Property under development Trade and other receivables Cash and cash equivalents Relocation and compensation fee payable Trade and other payables Net identifiable asset and liabilities Negative goodwill on acquisition Gross consideration Cash (acquired) Net consideration Represented by: Cash consideration First convertible notes Second convertible notes Mandatory convertible notes Legal and professional fees paid	Acquisitions 2004 2003 $’000 $’000 — 195,999 239 — 218 — 459,955 — 51,260 2 11,626 2 (95,789) — (91,365) (3) 336,144 196,000 (12,550) (1,000) 323,594 195,000 (11,626) (2) 311,968 194,998 22,727 120,000 — 37,500 — 37,500 300,000 — 322,727 195,000 867 — 323,594 195,000	Acquisitions 2004 2003 $’000 $’000 — 195,999 239 — 218 — 459,955 — 51,260 2 11,626 2 (95,789) — (91,365) (3) 336,144 196,000 (12,550) (1,000) 323,594 195,000 (11,626) (2) 311,968 194,998 22,727 120,000 — 37,500 — 37,500 300,000 — 322,727 195,000 867 — 323,594 195,000
	336,144 (12,550) 323,594 (11,626)	196,000 (1,000
		195,000 (2
	311,968
	22,727 — — 300,000 322,727 867	120,000 37,500 37,500 —
		195,000 —
	323,594

— V-21 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

6. OTHER OPERATING INCOME

Gain on disposal of property, plant and equipment Waiver of loan from a former director Others	2004 $’000 510 — 397 907	2003 $’000 — 7,271 95
		7,366

7. OTHER OPERATING EXPENSES

Amortisation of positive goodwill/(negative goodwill) Amortisation of other intangible assets Loss on disposal of property, plant and equipment Others PERSONNEL EXPENSES Wages and salaries Retirement benefit costs	2004 $’000 92 87 — — 179 2004 $’000 6,169 193 6,362	2003 $’000 (50) — 578 7
		535
		2003 $’000 7,490 130
		7,620

8. PERSONNEL EXPENSES

The average number of employees during the year ended 31 March 2004 was 17 (2003: 10).

The Group makes contributions to defined contribution plans pursuant to the rules and regulations applicable to the Group in the countries where the Group operates.

The Group has no obligation for the payment of retirement benefits beyond the contributions.

— V-22 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

9. NET FINANCING COSTS

Other interest expense Interest on convertible notes Bank interest expense Less: borrowing costs capitalised into property under development* Net interest expense Bank interest income Other interest income Net foreign exchange (loss)/gain Net financing costs	2004 $’000 (4,774) (780) —	2003 $’000 — (1,249) (2) (1,251) — (1,251) 166 593 5 (487)
	(5,554) 4,774 (780) 110 291 (1)	(1,251 —
		(1,251 166 593 5
	(380)

* The borrowing costs have been capitalised at a rate of 0.49% per annum.

10. PROFIT/(LOSS) FROM ORDINARY ACTIVITIES BEFORE TAXATION

Profit/(loss) from ordinary activities before taxation is arrived at after charging/(crediting):

	2004	2003
	$’000	$’000
Operating lease charges in respect of land and buildings	2,210	1,961
Depreciation	977	815
Cost of goods sold	—	5,795
Provision of inventories	—	650
Rental receivable from investment properties less
direct outgoings of $Nil (2003: $Nil)	145	1,043
Amortisation of positive goodwill/(negative goodwill)	92	(50)
Auditors’ remuneration	600	200

— V-23 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

11. INCOME TAX EXPENSE

• (a) (i) In March 2003, the Hong Kong Government announced an increase in the Profits Tax rate applicable to the Group’s operations in Hong Kong from 16% to 17.5%. This increase is taken into account in the preparation of the Group’s financial statements for the year ended 31 March 2004. Accordingly, the provision for Hong Kong Profits Tax for the year ended 31 March 2004 is calculated at 17.5% (2003: 16%) of the estimated assessable profits for the year.

Income tax expense in the consolidated income statement represents provision for Hong Kong Profits Tax charged at 17.5% (2003: 16%).

• (ii) No provision has been made for the PRC income tax as the PRC subsidiary companies of the Group sustained losses for taxation purposes during the year (2003: $Nil).

• (iii) The Group has tax losses carried forward. However, no provision for deferred taxation has been made as it is not probable for the Group to have sufficient taxable profits from which the temporary differences can be utilised in the foreseeable future.

(b) Reconciliation of effective tax rate:

Profit/(loss) before tax Notional tax on profit/(loss) before tax at 17.5% (2003: 16%) Tax effect of non-deductible expenses Tax effect of non-taxable revenue Unused tax losses not recognised in the income statement Income tax expense	2004 $’000 25,499	2003 $’000 (12,360) (1,978) 3,225 (1,525) 278 —
	4,462 861 (112) 289	(1,978 3,225 (1,525 278
	5,500

— V-24 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

12. DIRECTORS’ REMUNERATION

Directors’ remuneration disclosed pursuant to section 161 of the Hong Kong Companies Ordinance is as follows:

Fees Salaries and other emoluments Retirement scheme contributions	2004 $’000 216 2,118 36 2,370	2003 $’000 90 3,530 36
		3,656

Included in the directors’ remuneration were fees of $216,000 (2003: $90,000) paid to the independent non-executive directors during the year.

The remuneration of the directors is within the following bands:

	2004	2003
	Number of	Number of
$	directors	directors
Nil - 1,000,000	5	5
1,000,001 - 1,500,000	1	—
1,500,001 - 2,000,000	—	—
2,500,001 - 3,000,000	—	1

13. INDIVIDUALS WITH HIGHEST EMOLUMENTS

Of the five individuals with the highest emoluments, four (2003: three) are directors whose emoluments are disclosed in note 12.

14. PROFIT/(LOSS) ATTRIBUTABLE TO SHAREHOLDERS

The profit attributable to shareholders included a profit of $8,893,000 (2003: loss of $11,571,000) which has been dealt with in the financial statements of the Company.

— V-25 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

15. PROPERTY, PLANT AND EQUIPMENT

The Group

Cost: At 1 April 2003 Additions through acquisitions of subsidiaries Additions during the year Transfer to investment properties (note 18) Disposals At 31 March 2004 Accumulated depreciation: At 1 April 2003 Additions through acquisitions of subsidiaries Charge for the year Transfer to investment properties (note 18) Written back on disposal At 31 March 2004 Net book value: At 31 March 2004 At 31 March 2003	Land and buildings Leasehold improvements $’000 $’000 10,533 2,570 — 384 — 1,934 (5,520) — (3,523) (507)	Land and buildings Leasehold improvements $’000 $’000 10,533 2,570 — 384 — 1,934 (5,520) — (3,523) (507)	Other fixed assets Computer equipment $’000 $’000 3,303 5,108 335 1,270 457 575 — — (154) (1,041)	Other fixed assets Computer equipment $’000 $’000 3,303 5,108 335 1,270 457 575 — — (154) (1,041)	Total $’000 21,514 1,989 2,966 (5,520) (5,225) 15,724 - - - - - - - - - 11,319 1,750 977 (1,412) (1,658) 10,976 - - - - - - - - - ----------------------------------- 4,748 10,195
	1,490 - - - - - - - - - 2,037 — 125 (1,412) (86)	4,381 - - - - - - - - - 1,499 308 473 — (399)	3,941 - - - - - - - - - 2,871 270 153 — (132)	5,912 - - - - - - - - - 4,912 1,172 226 — (1,041)	15,724 - - - - - - - - - 11,319 1,750 977 (1,412 (1,658
	664 - - - - - - - - - ----------------------------------- 826 8,496	1,881 - - - - - - - - - ----------------------------------- 2,500 1,071	3,162 - - - - - - - - - ----------------------------------- 779 432	5,269 - - - - - - - - - ----------------------------------- 643 196

Land and buildings are located in the PRC under medium-term leases.

— V-26 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

16. INTANGIBLE ASSETS

The Group

Cost: At 1 April 2003 Acquisitions of subsidiaries (see note 5) At 31 March 2004 Accumulated amortisation: At 1 April 2003 Amortisation for the year At 31 March 2004 Net book value: At 31 March 2004 At 31 March 2003	Negative goodwill $’000 (1,000) (14,768)	Positive goodwill Exchange trading right $’000 $’000 — — 2,218 218	Positive goodwill Exchange trading right $’000 $’000 — — 2,218 218	Total $’000 (1,000) (12,332)
	(15,768) - - - - - - - - - 50 —	2,218 - - - - - - - - - — (92)	218 - - - - - - - - - — (87)	(13,332) - - - - - - - - - 50 (179)
	50 - - - - - - - - - ----------------------------------- (15,718) (950)	(92) - - - - - - - - - ----------------------------------- 2,126 —	(87) - - - - - - - - - ----------------------------------- 131 —	(129) - - - - - - - - - ----------------------------------- (13,461)
				(950)

Negative goodwill as at 1 April 2003 arose from the acquisition of the entire equity interests in Artway Development Limited (“Artway”) on 10 April 2002. The additions of positive goodwill in the current year arose from the acquisitions of a 95% interests in Eagle Legend Futures and a 95% interests in Eagle Legend Securities. The negative goodwill in current year arose from the acquisition of a 100% equity interests in Bestly (note 5).

Exchange trading right is the right for trading and dealing of futures granted by Hong Kong Futures Exchange Limited.

17. PROPERTY UNDER DEVELOPMENT

Property acquisition cost Relocation and compensation fees Interest capitalised Other expenses	The Group 2004 2003 $’000 $’000 509,434 — 235,849 — 4,774 — 384 — 750,441 —

— V-27 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

The Company’s subsidiary, Beijing Jin Zun Property entered into a contract (“the transfer contract”) on 1 February 2002, whereby Beijing Jin Zun Property agreed to acquire and develop the parcel of the property located at “Area No. 7, Xi Ba He Bei Lane, Chaoyang District, Beijing, the PRC (the “Property”)” at a consideration of RMB250,000,000 (the “consideration”) from Beijing Bus Company Limited (“Beijing Bus”). Beijing Jin Zun Property intends to construct a multi-purpose complex on the Property.

The consideration is payable by Beijing Jin Zun Property to Beijing Bus by instalments. An amount of RMB83,000,000 was paid in 2002 pursuant to the transfer contract. By a supplementary contract, Beijing Bus agreed that RMB80,000,000 would be settled on or before 30 September 2005 and the balance of the consideration of RMB87,000,000 would be settled on or before 30 September 2006. Upon the completion of the application procedures and the payment of land premium of RMB470,000,000 to the relevant PRC authorities, Beijing Jin Zun Property would obtain the Land Use Rights of the Property.

According to Provisional Regulations for Grant and Transfer of State-owned Land Use Rights in Cities and Towns in the PRC, the terms regarding the land use rights of the Property are 70 years for residential use, 40 years for commercial/entertainment uses and 50 years for composite use. The land is in initial stage of development.

As discussed in note 5, during the year, the Company purchased a 100% interest in Bestly, which increased the Group’s interest in the Property from 39.2% to 100% as at 31 March 2004. Consequently, the Group began to consolidate the Property from 31 March 2004. In connection with the acquisition of Bestly, the fair market value of the property was determined by the directors of the Company with reference to an appraisal by a professional third party valuer, as at 31 December 2003 amounted to RMB540,000,000.

During the year, the Group capitalised interest costs of approximately $4,774,000 in respect of property under development (note 9), details of which are set out in to the financial statements.

18. INVESTMENT PROPERTIES

At 1 April Transfer from property, plant and equipment (note 15) At 31 March	2004 $’000 330 4,108 4,438	2003 $’000 330 —
		330

The carrying amount of investment properties is the fair value of the properties as determined by the directors of the Company. Fair values were determined having regard to recent market transactions for similar properties in the same location as the Group’s investment properties. The Group’s current lease arrangements, which were entered into on an arm’s length basis and which are comparable to those for similar properties in the same location, were taken into account.

Investment properties comprise an industrial property and a car park that are leased to a related party and a third party respectively. The leases do not contain an initial non-cancellable period. No contingent rents are charged.

Investment properties are located in Hong Kong under medium-term leases.

— V-28 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

19. INVESTMENTS IN ASSOCIATES

The Group has acquired the remaining interest of the associate companies during the year. The Group has the following investments in associates as at 31 March 2003:

				**Proportion **	**of ownership **	interest
	Form of	Place of	Particulars of	Group’s	Held	Held
	business	incorporation	issued and	effective	by the	by an	Principal
Name of	structure	and operation	paid-up capital	interest	Company	associate	activities
Beijing Jin Zun	Sino-foreign	PRC	Registered	49%	49%	—	Property
Technology	equity joint		capital				management,
Development Ltd	venture		RMB16,000,000				research and
							development of
							computing
							software and
							investment
							holding
Beijing Jin Zun Property	Limited	PRC	Registered	39.2%	—	80%	Development
Development Ltd	liability		capital				and sales of
	company		RMB10,000,000				real property

The Group’s share of post-acquisition total recognised losses in the above associates for the year ended 31 March 2004 was $1,000 (2003: $24,000).

		The Group
	2004		2003
	$’000		$’000
Share of net assets	203,245	203,246
Less: Re-classified as subsidiaries	(203,245)		—
Balance at 31 March	—	203,246

On 31 March 2004, the Company acquired the remaining 51% and 60.8% interest in Beijing Jin Zun Technology and Beijing Jin Zun Property respectively. Beijing Jin Zun Technology and Beijing Jin Zun Property became the wholly owned subsidiaries of the Company as at 31 March 2004.

20. OTHER INVESTMENTS

		The Group
	2004		2003
	$’000		$’000
Non-current investments
Equity securities available-for-sale
- listed in Hong Kong, at fair value	124		—

— V-29 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

	The Group and	The Group and
	the Company
	2004	2003
	$’000	$’000
Current investments
Equity securities held for trading
- listed in Hong Kong, at fair value	804	—

21. INVESTMENTS IN SUBSIDIARIES

Unlisted shares at cost Amounts due from subsidiaries Amounts due to subsidiaries Less: Impairment loss	The Company 2004 2003 $’000 $’000 540,624 240,624 150,474 76,334 (72,704) (27,452)	The Company 2004 2003 $’000 $’000 540,624 240,624 150,474 76,334 (72,704) (27,452)
	618,394 (59,282)	289,506 (45,700)
	559,112	243,806

Amounts due from/(to) subsidiaries are interest-free, unsecured and have no fixed terms of repayment, except for an amount of $30,142,000 (2003: $25,057,000) due from a subsidiary which is interest bearing at 7.5% per annum (2003: 2% per annum).

Details of the Company’s principal subsidiaries at 31 March 2004 are set out below:

	Place of	Particulars of
	incorporation	issued and	Percentage of	Principal
Name of Company	and operation	paid-up capital	equity held	activities
Shares held by Company directly:
Artway Development Limited*	British Virgin	Ordinary US$1	100	Investment
	Islands (“BVI”)			holding
Capital Automation (BVI) Limited*	BVI	Ordinary	100	Investment
		US$50,000		holding
Eagle Decade Investments Limited*	BVI	Ordinary US$1	100	Dormant
Smartech Cyberworks Limited*	BVI	Ordinary US$1	100	Investment
				holding

— V-30 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

	Place of	Particulars of
	incorporation	issued and	Percentage of	Principal
Name of Company	and operation	paid-up capital	equity held	activities
Bestly Legend Limited*	BVI	1 share of	100	Investment
		US$1 each		holding
Shares held indirectly:
Capital Computerized Machinery	PRC	Registered	100	Dormant
Manufacturing (Shaoxing) Company		capital
Limited* (limited liability company)		$6,286,189
Capital Machinery Agency and	Hong Kong	Ordinary	100	Marketing of
Supplies Limited		$10,000		machinery
Capital Realty Development Company	Hong Kong	Ordinary	100	Property
Limited		$100,000		holding
China Eagle Capital Company Limited	Hong Kong	Ordinary	100	Investment
		$10,000		holding
China Eagle Management Limited	Hong Kong	Ordinary	100	Management
		$10,000		services
China Sino Technology Limited	Hong Kong	Ordinary	100	Dormant
		$10,000
Citimate (Hong Kong) Limited	Hong Kong	Ordinary	100	Investment
		$100		holding
		Non-voting
		deferred
		$1,000,000
Beijing Jin Zun Technology	PRC	RMB	100	Property
Development Limited* (sino-foreign		16,000,000		management,
equity joint venture)				research and
				development of
				computing
				software and
				investment
				holding
Beijing Jin Zun Property Development	PRC	RMB	100	Development
Limited* (limited liability company)		10,000,000		and sales of
				real property
Beijing Wenyean Software	PRC	RMB	100	Sales,
Development Limited* (sino-foreign		16,760,000		research and
equity joint venture)				development of
				software

— V-31 —

APPENDIX V

FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

	Place of	Particulars of
	incorporation	issued and	Percentage of	Principal
Name of Company	and operation	paid-up capital	equity held	activities
Beijing Xinwenan Technology	PRC	RMB 9,900,000	100	Development of
Limited* (sino-foreign equity joint				technology,
venture)				property
				consulting	and
				management
Eagle Legend Securities Limited	Hong Kong	Ordinary	95	Stockbroking
		$20,000,000		business
Eagle Legend Futures Limited	Hong Kong	Ordinary	97.5	Dealing in
		$20,000,000		futures
				contracts and
				options on
				Hong Kong
				Futures
				Exchange
				Limited
Hong Kong Punching Centre Limited	Hong Kong	Ordinary	100	Property
		$100,000		holding
New Smarter Trading Limited	Hong Kong	Ordinary	100	Dormant
		$100
Profit Made Properties Limited	Hong Kong	Ordinary	100	Dormant
		$10,000
Top Advance Technology Limited	Hong Kong	Ordinary	100	Dormant
		$10,000
* Companies not audited by KPMG
INVENTORIES
			2004			2003
			$’000		$’000
Computer-aided-design-system products			—		1,310
Raw materials			—			634
Work in progress			—			731
			—		2,675
Inventories other than construction work in progress
Inventories stated at net realisable value			—		2,675

22. INVENTORIES

— V-32 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

23. DEPOSITS WITH BROKERS AND FINANCIAL INSTITUTIONS

At 31 March 2004, the Group had placed deposits with brokers and financial institutions amounted to $64,323,000. The Group had entered into certain margin transactions in foreign currency and futures contracts with carrying value totalling $21,273,000 and $8,650,000 respectively. The notional amount for foreign currency and futures contracts totalled to $685 million and $126 million at 31 March 2004. At 31 March 2004, open foreign currency and futures contracts were valued at market rate with unrealised losses included in the consolidated income statement.

Subsequent to 31 March 2004, the foreign currency contracts realised gains amounting to $2,059,000 and the futures contracts realised losses amounting to $4,587,000 (note 39(a)).

24. AMOUNTS DUE FROM RELATED PARTIES

The amounts due from related parties are unsecured, interest-free and have no fixed terms of repayment. The amounts also included rent receivables of $90,000 (2003: $Nil) from a related party which is expected to be settled within one year.

25. TRADE AND OTHER RECEIVABLES

Trade receivables arising from the ordinary course of business of dealing in Securities and equity options transactions: - Cash clients - Margin clients - HKFE Clearing Corporation Other debtors, deposits and prepayments	The Group 2004 2003 $’000 $’000 13,233 — 22,361 — 22,618 — 58,212 — 4,617 2,661 62,829 2,661	The Company 2004 2003 $’000 $’000 — — — — — — — — 315 1,039 315 1,039	The Company 2004 2003 $’000 $’000 — — — — — — — — 315 1,039 315 1,039
			— 1,039
			1,039

The settlement terms of accounts receivable arising from the ordinary course of business of dealing in securities and equity options transactions are two days after the trade date. The balances are all aged within 30 days.

26. CASH AND CASH EQUIVALENTS

	**The **	Group	**The **	Company
	2004	2003	2004	2003
	$’000	$’000	$’000	$’000
Bank balances	80,824	3,902	45,725	762
Call deposits	3,152	16,000	—	16,000
Cash and cash equivalents in
the statement of cash flows	83,976	19,902	45,725	16,762

— V-33 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

27. CONVERTIBLE NOTES

									**The **	Group and
									**the **	Company
									2004		2003
									$’000		$’000
Proceeds	from	issue	of	48	(2003:	150)	convertible	notes	24,000		75,000

Pursuant to an acquisition agreement dated 10 April 2002 as part of the total consideration of $195,000,000 for the acquisition of Artway, First and Second Convertible Notes (issued on 22 April and 10 July 2002 respectively) totalling $75,000,000 were issued to Link Zone International Limited.

These Notes are due in 2004 and convertible by Link Zone International Limited to ordinary shares of the Company of $0.10 each at a conversion price of the lower of (i) the price of $0.12 per ordinary share, subject to adjustment and (ii) 93% of the average closing price per share for the five trading days immediately prior to the date of the exercise date, at the option of the note-holders in the denomination of $500,000 each or integral multiples thereof.

The Notes bear interest from the date of their issue at a fixed rate of 2% per annum, which is payable semi-annually in arrears.

On 20 April 2004, convertible notes totalling $24,000,000 were converted into 200,000,000 ordinary shares of $0.10 each (note 39(b)).

28. TRADE AND OTHER PAYABLES

Amount payable arising in the ordinary course of business of dealing in Securities and equity options transactions: - Cash clients - Margin clients - Hong Kong Securities Clearing Company Limited (“HKSCC”) Other payables	The Group 2004 2003 $’000 $’000 6,855 — 22,515 — 11,243 —	The Group 2004 2003 $’000 $’000 6,855 — 22,515 — 11,243 —	The Company 2004 2003 $’000 $’000 — — — — — —	The Company 2004 2003 $’000 $’000 — — — — — —
	40,613 3,388	— 2,440	— 1,523	— 716
	44,001	2,440	1,523	716

— V-34 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

The settlement terms of accounts payable arising from the ordinary course of business of dealing in securities and equity options transactions in respect of cash clients are two days after the trade date.

Accounts payable to clients arising from the ordinary course of business of dealing in futures and options transactions represent margin deposits received from clients for their trading of futures and options respectively. The excesses of the outstanding amounts over the required margin deposit stipulated are repayable to clients on demand.

No ageing analysis of cash clients is disclosed as, in the opinion of the directors, an aged analysis is not meaningful in view of the nature of the business of dealing in securities and options contracts.

29. AMOUNTS DUE TO RELATED PARTIES

The amounts due to related parties are unsecured, interest-bearing at 0.4868% per annum and have no fixed terms of repayment. The amounts also include rent payable of $80,000 (2003: $Nil) to a related party which is expected to be settled within one year.

30. INCOME TAX IN THE BALANCE SHEET

(a) Current taxation in the balance sheet represents:

	The Group		**The **	Company
	2004	2003	2004	2003
	$’000	$’000	$’000	$’000
Provision for Hong Kong Profits Tax
for the year	5,500	—	5,500	—

• (b) Deferred taxation

Deferred tax assets not recognised

The Group has not recognised deferred tax assets in respect of tax losses of $42,481,000 (2003: $42,375,000) as it is not probable that there will be sufficient future taxable income. The tax losses do not expire under the current tax legislation.

31. LONG-TERM PAYABLES

The amount represents the balance of the consideration of RMB167,000,000 (equivalent to $157,547,000) payable to Beijing Bus. Pursuant to the transfer contract and the supplementary contracts, an amount of RMB80,000,000 would be settled on or before 30 September 2005 and the remaining balance of RMB87,000,000 would be settled on or before 30 September 2006 (note 17).

— V-35 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

32. SHARE CAPITAL

Authorised: Ordinary shares of $0.10 each Issued and fully paid: At 1 April 2002 and 31 March 2003 At 1 April 2003 Share issued upon conversion of convertible notes Placing of shares At 31 March 2004	The Group and the Company 2004 2003 Number of shares Number of shares ’000 $’000 ’000 $’000 50,000,000 5,000,000 20,000,000 2,000,000 The Group and the Company Number of shares Note ’000 $’000 1,618,304 161,830 1,618,304 161,830 (i) 425,000 42,500 (ii) 796,000 79,600 2,839,304 283,930	The Group and the Company 2004 2003 Number of shares Number of shares ’000 $’000 ’000 $’000 50,000,000 5,000,000 20,000,000 2,000,000 The Group and the Company Number of shares Note ’000 $’000 1,618,304 161,830 1,618,304 161,830 (i) 425,000 42,500 (ii) 796,000 79,600 2,839,304 283,930	The Group and the Company 2004 2003 Number of shares Number of shares ’000 $’000 ’000 $’000 50,000,000 5,000,000 20,000,000 2,000,000 The Group and the Company Number of shares Note ’000 $’000 1,618,304 161,830 1,618,304 161,830 (i) 425,000 42,500 (ii) 796,000 79,600 2,839,304 283,930
		1,618,304 425,000 796,000	161,830 42,500 79,600
		2,839,304	283,930

Notes:

• (i) On 17 July 2003, convertible notes totalling $51,000,000, comprising the entire amount of the First Notes and partial amount of the Second Notes of amounts $37,500,000 and $13,500,000 respectively, were converted into 425,000,000 ordinary shares of $0.10 each (note 27). The conversion price was $0.12 per ordinary share.

• (ii) On 26 June 2003, the Company entered into a placing arrangement with Ricofull Securities Limited as Placing Agent to place 323,000,000 ordinary shares of $0.10 each to 10 placees, independent external parties, at a price of $0.12 per ordinary share. The net proceeds from the placing were $37,985,000, after deducting expenses of $775,000, which has been used for general working capital.

On 7 January 2004, the Company entered into a placing arrangement with Eagle Legend Securities, a subsidiary of the Company, as Placing Agent to place 473,000,000 ordinary shares of $0.10 each to a placee, Shinning Crown, at a price of $0.12 per ordinary share. The net proceeds from the placing were $55,487,000, after deducting expenses of $1,273,000, which is intended to be used for future business expansion when investment opportunities arise.

— V-36 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

33. RESERVES

Reconciliation of movements in capital and reserves

The Group

At 1 April 2002 Net loss for the year At 31 March 2003 At 1 April 2003 Net profit for the year Shares issued upon conversion of convertible notes Placing of shares At 31 March 2004 The Company At 1 April 2002 Net loss for the year At 31 March 2003 At 1 April 2003 Net profit for the year Shares issued upon conversion of convertible notes Placing of shares At 31 March 2004	Share premium Reserve on consolidation (Accumulated losses)/ Retained earnings $’000 $’000 $’000 (Note (i)) 40,734 620 (4,864) — — (12,360) 40,734 620 (17,224)	Share premium Reserve on consolidation (Accumulated losses)/ Retained earnings $’000 $’000 $’000 (Note (i)) 40,734 620 (4,864) — — (12,360) 40,734 620 (17,224)	Share premium Reserve on consolidation (Accumulated losses)/ Retained earnings $’000 $’000 $’000 (Note (i)) 40,734 620 (4,864) — — (12,360) 40,734 620 (17,224)	Total $’000 36,490 (12,360) 24,130 24,130 19,881 8,500 15,008 67,519 Total $’000 35,632 (11,571) 24,061 24,061 8,893 8,500 13,872 55,326
	40,734 — 8,500 15,008	620 — — —	(17,224) 19,881 — —	24,130 19,881 8,500 15,008
	64,242 620 2,657 Share premium Reserve on consolidation Accumulated losses $’000 $’000 $’000 (Note (i)) (Note (ii)) 40,734 40,423 (45,525) — — (11,571) 40,734 40,423 (57,096)
	40,734 — 8,500 13,872	40,423 — — —	(57,096) 8,893 — —	24,061 8,893 8,500 13,872
	63,106	40,423	(48,203)

— V-37 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

(i) Share premium

The net proceeds of the June 2003 placement of 323,000,000 shares (note 32(ii)) in excess of the par value of shares issued resulted in a share premium of $5,680,000.

The net proceeds of the January 2004 placement of 473,000,000 shares (note 32(ii)) in excess of the par value of the shares issued resulted in a share premium of $9,328,000 (The Company: $8,192,000).

The excess of the total value of converted shares (notes 27 and 32(i)) $51,000,000 over the par value of the converted share ($42,500,000) has been treated as share premium.

(ii) Contributed surplus

The contributed surplus of the Company represents the difference between the nominal value of the Company’s shares issued in exchange for the issued ordinary shares of Capital Automation (BVI) Limited and the value of net assets of the underlying subsidiaries acquired as at 27 March 1992. At the group level, the contributed surplus is reclassified into its components of reserves of the underlying subsidiaries.

Under the Companies Act 1981 of Bermuda (as amended), the contributed surplus account of the Company is available for distribution. However, the Company cannot declare or pay a dividend, or make a distribution out of contributed surplus if:

• (a) it is, or would the payment be, unable to pay its liabilities as they become due; or

• (b) the realisable value of its assets would thereby be less than the aggregate of its liabilities and its issued share capital and share premium.

34. MANDATORY CONVERTIBLE NOTES

			**The **	Group and
			**the **	Company
			2004	2003
			$’000	$’000
Mandatory	convertible	notes	300,000	—

Pursuant to an acquisition agreement dated 6 February 2004 regarding the acquisition of the entire issued share capital of Bestly for a consideration of $300,000,000, convertible notes totalling $300,000,000 were issued to Shinning Crown.

These Notes, in $3,000,000 denominations each or integral multiples thereof, are due in 2007. These notes are convertible at any time from the date of issue, with mandatory conversion of the entire outstanding convertible notes on maturity. These Notes are convertible into ordinary shares in the capital of the Company of $0.10 each at a conversion price the lower of (i) the price of $0.12 per share, subject to adjustment and (ii) 90% of the average closing price per share for the ten trading days immediately prior to the date of the exercise date.

The Notes bear interest from the date of their issue at a fixed rate of 2% per annum, which is payable semi-annually in arrears.

On 6 April 2004, the notes totalling $300,000,000 were converted into 2,500,000,000 ordinary shares of $0.10 each (note

39(b)).

— V-38 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

35. EARNINGS/(LOSS) PER SHARE

(a) Basic earnings/(loss) per share

The calculation of basic earnings per share at 31 March 2004 was based on the net profit attributable to ordinary shareholders of $19,881,000 (2003: loss of $12,360,000) and a weighted average number of ordinary shares outstanding during the year ended 31 March 2004 of 2,239,508,979 (2003: 1,618,303,500) calculated as follows:

Net profit/(loss) attributable to ordinary shareholders Note Weighted average number of ordinary shares Issued ordinary shares at 1 April 32 Effect of shares issued in July 2003 32 Effect of shares issued in January 2004 32 Weighted average number of ordinary shares at 31 March Basic earnings/(loss) per share	2004 $’000 19,881 2004 Number ’000 1,618,304 530,493 90,712 2,239,509 0.89	2003 $’000 (12,360)
		2003 Number ’000 1,618,304 — —
		1,618,304
		(0.76)

(b) Diluted earnings per share

The calculation of diluted earnings per share for the year ended 31 March 2004 was based on net profit attributable to ordinary shareholders of $20,556,000 (2003: Not applicable) and a weighted average number of ordinary shares outstanding during the year ended 31 March 2004 of 2,580,194,000 (2003: Not applicable), calculated as follows:

Net profit attributable to ordinary shareholders (diluted)

Net profit attributable to ordinary shareholders After-tax effect of interest on convertible notes Net profit attributable to ordinary shareholders (diluted)	2004 $’000 19,881 675
	20,556

— V-39 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

Weighted average number of ordinary shares (diluted)

Weighted average number of ordinary shares at 31 March Effect of conversion of convertible notes Weighted average number of ordinary shares (diluted) at 31 March	2004 Number ’000 2,239,509 340,685
	2,580,194

(c) Earnings per share for continuing operations

For the year ended 31 March 2004, earnings per share for continuing operations has been calculated using the same figures as earnings per share, except that the net profit for the year used in the calculation is the net profit relating to continuing operations of $22,581,000 (2003: loss of $10,020,000).

36. FINANCIAL INSTRUMENTS

(a) Effective interest rates and repricing analysis

Financial assets of the Group include cash and cash equivalents, deposits with banks and non-bank financial institutions, investments, trade receivables, advance payments, prepayments, amounts due from related parties and other receivables. Financial liabilities of the Group include trade payables, amounts due to related parties and other creditors. The Group had no positions in derivative contracts that are designed and qualified as hedging instruments at 31 March 2004 and 2003.

In respect of interest-bearing financing liabilities, the following table indicates their effective interest rates at the balance sheet date and the periods in which they reprice.

Effective interest rate Convertible notes 2% Mandatory convertible notes 2%	Total 6 months or less $’000 $’000 24,000 24,000 300,000 — 324,000 24,000	6-12 months $’000 — — —	2004 1-2 years $’000 — — —	2-5 years $’000 — 300,000 300,000	More than 5 years $’000 — —
					—

— V-40 —

FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

APPENDIX V

							2003
		Effective							More
		interest		**6 **	months	6-12	1-2	2-5	than
		rate	Total		or less	months	years	years	5 years
			$’000		$’000	$’000	$’000	$’000	$’000
Convertible	notes*	2%	75,000		—	—	75,000	—	—

• These liabilities bear interest at a fixed rate.

Exposure to credit, interest and currency risk arises in the normal course of the Group’s business.

(b) Credit risk

Credit risk represents the accounting loss that would be recognised at the reporting date if counterparties failed to perform as contracted. At balance sheet date there were no significant concentrations of credit risks. Credit risks on trade and other receivables and deposits with non-bank financial institution (non-current assets) are limited to receivables and deposits are shown net of provision for bad and doubtful debts.

Investments are allowed only in liquid securities and only with counterparties that have a credit rating equal to or better than the Group. Transactions involving derivative financial instruments are dealt with brokers with whom the Group has a signed investment agreement as well as sound credit ratings.

(c) Interest rate risk

There are no bank loans obtained by the Group as at 31 March 2004. Certain amounts due to related parties are interest bearing at a fixed rate of 0.4868% per annum. Convertible notes issued also bear a fixed interest rate of 2% per annum.

(d) Foreign currency risk

The Group has entered into certain foreign currency transactions denominated in Swiss Franc. All gains and losses on foreign currency contracts are recognised in the income statement. Details of foreign currency contracts outstanding as at 31 March 2004 has been disclosed in note 23.

(e) Fair values

The fair values of cash, deposits with banks and financial institutions, trade and other receivables, trade and other payables, trading and non-trading securities are not materially different from their carrying amounts.

Due to the related party nature, it is not practical to estimate the fair value of the amounts due from/to related parties.

Fair values of the convertible notes are not materially different from their carrying amounts as all the notes have been converted into ordinary shares in April 2004 as disclosed in note 39.

— V-41 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

37. COMMITMENTS

(a) Capital commitments

Capital commitments outstanding at 31 March 2004 not provided for in the financial statements were as follows:

Authorised but not contracted for: - Acquisition of property under development Operating lease commitments Non-cancellable operating lease rentals are payable as follows: Less than one year Between one and five years	The Group 2004 2003 $’000 $’000 443,396 — The Group 2004 2003 $’000 $’000 1,691 675 2,497 — 4,188 675	The Group 2004 2003 $’000 $’000 443,396 — The Group 2004 2003 $’000 $’000 1,691 675 2,497 — 4,188 675
		675

• (b) Operating lease commitments

The Group leases a number of office premises under operating leases. The leases typically run for an initial period of one year to three years with an option to renew the lease after that date. Lease payments are increased annually to reflect market rentals. None of the leases includes contingent rentals.

During the year ended 31 March 2004, $2,210,000 was recognised as an expense in the income statement in respect of operating leases (2003: $2,079,000).

38. MATERIAL RELATED PARTY TRANSACTIONS

The Group has the following material transactions with related parties during the year.

Transaction with directors and shareholders:

• (i) The Company acquired the entire issued share capital of Bestly from Mr Han Yuejun.

Mr Han Yuejun is a shareholder of the Company and also has equity interest in Beijing Xin Yi Tian Property Agents Company Limited.

• (ii) A subsidiary made unsecured advancements to Mr Han Yuejun in the preceding year. The amount was fully settled during the current year (2003: $24,957,000).

— V-42 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

• (iii) The Company issued $300,000,000 of mandatory convertible notes to Shinning Crown as consideration for the purchase of Bestly. Shinning Crown is a shareholder of the Company (note 34).

• (iv) A director of the Company, Mr Ng Kin Wah, traded securities and futures contracts through Eagle Legend Securities Limited and Eagle Legend Futures Limited, subsidiary companies of the Company. The total transaction volume incurred during the year for securities trading amounted to $7,292,000. The total number of futures contracts entered during the year amounted to 506. The total commission charged by the subsidiaries to the director amounted to $14,000. The amount has been fully settled as at year end.

Other related party transactions:

• (i) The Company’s subsidiary, Beijing Wenyean, purchased a 20% equity interest in the capital of Beijing Xinwenan from Beijing Xin Yi Tian Property Agents Company Limited (“Beijing Xin Yi Tian”) at the consideration of RMB1,980,000. Mr Han Yuejun is a shareholder of the Company and also has equity interest in Beijing Xin Yi Tian.

• (ii) The Company’s subsidiary, Beijing Xinwenan, purchased a 20% equity interest in the capital of Beijing Wenyean from Beijing Xin Yi Tian at a consideration of RMB3,352,000. Mr Han Yuejun is a shareholder of the Company and also has equity interest in Beijing Xin Yi Tian.

• (iii) The Company’s subsidiary, Beijing Xinwenan purchased a 20% equity interest in the capital of Beijing Jin Zun Property from Mr Han Yuejun, a shareholder of the Company, at a consideration of RMB1,600,000.

• (iv) The Company’s subsidiary, Beijing Wenyean purchased a 51% equity interests in the capital of Beijing Jin Zun Technology from Beijing Xin Yi Tian at the consideration of RMB6,400,000. Mr Han Yuejun is a shareholder of the Company and also has equity interest in Beijing Xin Yi Tian.

• (v) The Company’s subsidiary, Beijing Jin Zun Property paid the interest of RMB3,987,000 to Mr Han Yuejun, a shareholder of the Company.

• (vi) The Company paid operating lease rentals in respect of the Group’s office premises to Gome Home Appliances (Hong Kong) Limited (“Gome”), a related company of the Group totalling $917,000 (2003: $Nil) during the year. At 31 March 2004, the rental payable to Gome amounted to $80,000 (2003: $Nil). Mr. Wong Kwong Yu and Miss Du Juan, who are the directors of the Company, are also the directors of Gome.

• (vii) The Company’s subsidiary, Hong Kong Punching Centre Limited, received operating lease rentals in respect of the Group’s factory premises from Gome, a related Company of the Group totalling $90,000 (2003: $Nil), during the year. At 31 March 2004, the rental receivable from Gome amounted to $90,000 (2003: $Nil). Mr. Wong Kwong Yu and Miss Du Juan, who are the directors of the Company, are also the directors of Gome.

• (viii) Beijing Eagle Investment Co., Limited (“Beijing Eagle Investment”), a related company, received operating lease rentals on behalf of a subsidiary in the preceding year. At 31 March 2004, reimbursement payable to the subsidiary amounted to $Nil (2003: $384,000). Mr Wong Kwong Yu, who is the director of the Company is also the chief executive officer of Beijing Eagle Investment.

The directors of the Company are of the opinion that the above related parties transactions were conducted on normal commercial terms and in the ordinary course of business.

— V-43 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

39. POST BALANCE SHEET EVENTS

• (a) At 31 March 2004, the Group had exposure to foreign currency and futures contracts with principal amounts totalling $21,274,000 and $8,650,000 respectively. Subsequent to 31 March 2004, the foreign currency contracts realised gains amounting to $2,059,000 and the futures contracts realised losses amounting to $4,587,000.

• (b) On 6 April 2004, mandatory convertible notes totalling $300,000,000 were converted into 2,500,000,000 ordinary shares of $0.10 each. The conversion price was $0.12 per ordinary shares. The net proceeds over the par value of the shares issued resulted in a share premium of $50,000,000.

On 20 April 2004, convertible notes totalling $24,000,000, were converted into 200,000,000 ordinary shares of $0.10 each. The conversion price was $0.12 per ordinary shares. The net proceeds over the par value of the shares issued resulted in a share premium of $4,000,000.

2. BUSINESS OVERVIEW

Overview

The Group is principally engaged in property development and investment, securities broking and investments and general trading.

Mr. Wong became and has remained the controlling Shareholder since March 2002. Subsequent to becoming the controlling shareholder of the Company, he was appointed as an executive Director and the Chairman of the Group on 18 April 2002. To reflect the changes in management and substantial Shareholder, the Company’s name was changed to China Eagle Group Company Limited with effect from 20 June 2002.

After the change in management and control of the Company as discussed above, the Group has undertaken various acquisitions and changes in business activities.

In April 2002, the Group acquired a 39.2% interest in relation to the property development located at Area no. 7, Xi Ba He Bei Lane, Chaoyang District, Beijing, the PRC (the “Property”). The total consideration was HK$195 million, which was settled as to HK$120 million in cash and HK$75 million by the issue of convertible notes. On 31 March 2004, the Group acquired the remaining 60.8% interest in the Property at a total consideration of HK$300 million, which was financed by the issue of mandatory convertible notes. As at the Latest Practicable Date, all of the convertible notes issued by the Company in relation to the acquisitions of the interests in the Property had been converted.

On 31 August 2002, the Group disposed of certain office premises at Chaoyang District, Beijing, the PRC at cost of approximately HK$25.7 million. In addition, the Group sold a single-storey factory in Shanghai, the PRC in April 2003 at a consideration of RMB4.5 million, and made a gain on disposal of approximately HK$0.5 million.

To further diversify the Group’s businesses, the Group acquired a 95.0% shareholding in each of Eagle Legend Securities Limited (“Eagle Legend Securities”), a securities dealing and brokerage company, and Eagle Legend Futures Limited (“Eagle Legend Futures”), a futures contracts dealing company, in May 2003. The aggregate consideration of approximately HK$22.7 million for such

— V-44 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

acquisitions was settled by cash in full. In addition, the Group’s shareholding interest in Eagle Legend Futures increased to 100% as a result of an increase in the share capital of Eagle Legend Futures in March 2004 by HK$10 million, the amount of which was fully paid by the Group in cash, and the acquisition of the remaining minority interest in Eagle Legend Futures by the Group in June 2004 for a total consideration of approximately HK$0.4 million in cash.

To better prepare the Group for an international environment and institutional investors, the Group adopted the International Financial Reporting Standards (“IFRS”) promulgated by the International Accounting Standards Board in the preparation of its financial statements for the year ended 31 March 2004. In previous years, the financial statements of the Group (as set out in Appendix V to this circular) were prepared in accordance with the applicable Hong Kong Financial Reporting Standards (“HKFRS”) issued by the Hong Kong Society of Accountants and accounting principles generally accepted in Hong Kong. The adoption of IFRS by the Group for the preparation of its financial statements for the year ended 31 March 2004 has not resulted in any significant changes in the accounting policies of the Company or in the quantification of the Company’s assets and liabilities.

As a result of the Acquisition, the Directors have decided that for the year ending 31 March 2005 and going forward, the Group’s resources will be focused on the PRC retail sector. They have also decided that no further commitments will be made in respect of the Property beyond those contractually committed or necessary to preserve value, namely the balance of the purchase price in the amount of RMB167 million (approximately HK$157.5 million). As at the Latest Practicable Date, no decision has been made by the Directors in relation to the development of the Property. With respect to the other businesses of the Group as discussed above, they will remain in the Group but will not form a material portion of the Enlarged Group. The Group’s securities broking operations are agency business in nature and have no proprietary trading activities or positions as at the Latest Practicable Date. The Group has been engaging in currency, securities and futures trading activities, which have been monitored and managed by professional managers, and the Directors have decided that such activities will cease upon completion of the Acquisition.

Results of operations

The summary of the consolidated profit and loss accounts of the Group for the three years ended 31 March 2004 is set out in the section headed “Summary of results for the three years ended 31 March 2004” in Appendix V to this circular.

Comparison of financial performance for the years ended 31 March 2003 and 2004

Revenue

The Group’s revenue represents the profit on trading of securities, foreign exchange and futures, commission on securities and futures broking, rental income and the sales value of goods supplied to customers. The Group’s revenue for the two years ended 31 March 2004 was approximately HK$4.1 million and HK$44.8 million, respectively. The increase in turnover, which was partially offset by a decrease of turnover in general trading of approximately HK$2.6 million, mainly resulted from the

— V-45 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

commencement of securities and futures activities through Eagle Legend Securities and Eagle Legend Futures since May 2003, which generated for the Group a turnover of approximately HK$7.2 million and the profit arising from the investment in securities, foreign exchange and futures of approximately HK$37.5 million.

Profit/(loss) attributable to shareholders

Mainly due to the increase in revenue from the trading of and investment in securities, foreign exchange and futures, commission on securities and commodity broking as discussed above, the profit from operations for the year ended 31 March 2004 increased to approximately HK$19.9 million, compared to a net loss of approximately HK$12.4 million for the year ended 31 March 2003.

Comparison of financial performance for the years ended 31 March 2002 and 2003

Revenue

The Group’s revenue for the two years ended 31 March 2003 was approximately HK$4.1 million and HK$4.1 million respectively. The Group reported an increase of turnover of approximately HK$2.6 million from general trading, which was offset by a decrease of approximately HK$1.8 million from the sale of computer-aided designs systems and machinery following the cessation of their respective production in 2000 and a decrease in rental income by approximately HK$0.8 million.

Loss attributable to shareholders

The Group incurred a loss attributable to shareholders of approximately HK$7.2 million for the year ended 31 March 2002, which increased to approximately HK$12.4 million for the year ended 31 March 2003. This increase was mainly due to the increase in cost of sales of approximately HK$4.1 million and administrative expenses of approximately HK$6.9 million due to the implementation of certain investment projects of the Group, which was offset by the waiver of a loan due to a former director of Artway Development Limited, a wholly-owned subsidiary of the Company, in the amount of approximately HK$7.3 million during 2003.

The summary of the consolidated balance sheet of the Group as at 31 March 2003 and 2004 is set out in the section headed “Consolidated balance sheet” in Appendix V to this circular.

Comparison of key balance sheet items as at 31 March 2003 and 2004

Non-current assets

The property under development of approximately HK$750.4 million as at 31 March 2004 represented the property acquisition cost, relocation and compensation fees, interest capitalised and other expenses in respect of the Property, in which the Group’s effective interest increased from 39.2% to 100% during the year ended 31 March 2004. The Group’s interest in the Property was included in investments in associates which had a book value of approximately HK$203.2 million as at 31 March 2003.

— V-46 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

The investment properties of approximately HK$4.4 million as at 31 March 2004 represented the fair value of an industrial property and a car park both located in Tsuen Wan, Hong Kong, that were leased to a related party and a third party respectively. Such amount was included in property, plant and equipment as at 31 March 2003.

The Group had negative intangible assets totalling approximately HK$13.5 million as at 31 March 2004, mainly arising from the negative goodwill of approximately HK$14.8 million as a result of the acquisition of the interests in the Property and a positive goodwill of approximately HK$2.2 million as a result of the acquisition of the securities and futures businesses as discussed above.

Current assets

The Group had a total of approximately HK$148.3 million of cash, cash equivalents and deposits with brokers and financial institutions as at 31 March 2004, compared to a total of approximately HK$19.9 million as at 31 March 2003. The increase was mainly due to the placing of 323 million Shares to independent third parties in July 2003 and the top-up placing and subscription of 473 million Shares by Shinning Crown Holdings Inc. in January 2004, which raised an aggregate net proceeds of approximately HK$93.5 million.

As at 31 March 2004, the deposits placed by the Group with brokers and financial institutions amounted to HK$64.3 million as compared to nil as at 31 March 2003 due to the commencement of securities and futures activities during the year. As a result of the acquisition of the securities and futures businesses, the trade receivables arising from the ordinary course of business dealing in securities and equity options transactions in respect of cash and margin clients and HKFE Clearing Corporation increased to approximately HK$58.2 million as at 31 March 2004 from nil as at 31 March 2003.

Current liabilities

The Group had a total of approximately HK$44.0 million of trade payables as at 31 March 2004 as compared to nil as at 31 March 2003. The increase was mainly due to the settlement terms arising from the ordinary course of business of dealing in securities and equity options transactions in respect of cash and margin clients and Hong Kong Securities Clearing Company Limited. Such amount also included the margin deposits received from clients for their trading of futures and options. The excess of the outstanding amounts over the required margin deposit stipulated are repayable to clients on demand.

The convertible notes of approximately HK$75.0 million as at 31 March 2003 decreased to approximately HK$24.0 million as at 31 March 2004 due to the partial conversion in July 2003 of HK$51.0 million out of the aggregate amount of HK$75.0 million of convertible notes issued in relation to the abovementioned acquisition of the Property.

Non-current liabilities

The long-term payables of approximately HK$157.5 million as at 31 March 2004 as compared to nil in the previous year represented the balance of consideration of RMB167.0 million payable in respect of the acquisition of the Property in February 2002.

— V-47 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

3. SHARE CAPITAL

The authorised and issued share capitals of the Company as at the Latest Practicable Date was as follows:

Authorised:

HK$

50,000,000,000 Shares

5,000,000,000.00

Issued and fully paid:

5,539,303,500 Shares

553,930,350.00

All the existing Shares rank pari passu in all respects including all rights as to dividends, voting and return of capital.

The share option scheme of the Company adopted on 27 March 1992 has expired at the close of business on the day preceding the tenth anniversary thereof. There were no outstanding options as at the Latest Practicable Date.

Save as disclosed in the paragraph above, the Company has no options, warrants and conversion rights convertible into Shares.

The Shares are listed on the Stock Exchange. No part of the securities of the Company is listed or dealt in, nor is listing or permission to deal in the securities of the Company being or proposed to be sought, on any other stock exchange.

Since 31 March 2004, being the last financial year end date of the Company, 2,839,303,500 Shares have been issued by the Company.

4. DIVIDEND POLICY

The amount of the Company’s dividend will be determined by the Directors at their full discretion taken into consideration of its working capital requirements, the progress and the funding requirement of its future business plans. The Directors currently anticipate that the total amount of annual dividend in each financial year will be not less than 30% of the Company’s distributable profit of the relevant financial year.

5. PROPERTY INTERESTS

The valuation report and valuation certificate for the property interests of the Group as at 31 May 2004 are set out in Appendix VIII to this circular.

— V-48 —

APPENDIX V FINANCIAL AND ADDITIONAL INFORMATION OF THE GROUP

6. MATERIAL CHANGE

Save for the information disclosed in the audited accounts of the Group for the year ended 31 March 2004, the Directors are not aware of any material adverse change in the financial position or trading position of the Group since 31 March 2004, the date to which the latest published audited consolidated accounts for the Group have been made up.

7. MISCELLANEOUS

Saved as disclosed in this circular:

• (a) as at the Latest Practicable Date, the Group did not have any material contingent liabilities; and

• (b) the Group has not entered into any arrangement and/or activities which may have a material adverse effect to the financial or trading position of the Group.

— V-49 —

APPENDIX VI PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

(A) Unaudited Pro Forma Financial Information of the Enlarged Group

The following is the text of a report, prepared for the sole purpose of inclusion in this circular, received from the independent reporting accountants, Ernst & Young, Certified Public Accountants, Hong Kong, in respect of the unaudited pro forma balance sheet, statement of operations and statement of cash flow of the Enlarged Group as set out in this Appendix.

15th Floor Hutchison House 10 Harcourt Road Central Hong Kong

5 July 2004

The Directors

China Eagle Group Company Limited

Dear Sirs,

We set out below our report on the unaudited pro forma financial information set out in Section A of Appendix VI to the shareholders’ circular of China Eagle Group Company Limited (the “Company”) dated 5 July 2004 (the “Pro Forma Financial Information”), 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 Financial Information, or may have affected the historical financial information presented therein. The basis of preparation for the Pro Forma Financial Information is set out in the accompanying introduction thereto.

Responsibilities

It is the responsibility solely of the directors of the Company to prepare the Pro Forma Financial Information 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 Financial Information 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 Financial Information beyond that owed to those to whom the reports were addressed by us at the dates of their issue.

— VI-1 —

APPENDIX VI PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

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 Financial Information with the directors of the Company.

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 Financial Information.

The Pro Forma Financial Information 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 March 2004 or at any future date, nor may it be indicative of the results of operations of the Company and its subsidiaries for the year ended 31 March 2004 had the acquisition of the Target Group actually been completed, 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 Financial Information 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 Financial Information as disclosed pursuant to Paragraph 29(1) of Chapter 4 of the Listing Rules.

Yours faithfully, Ernst & Young Certified Public Accountants Hong Kong

— VI-2 —

APPENDIX VI PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

INTRODUCTION TO UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

The accompanying unaudited pro forma financial information 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 this circular.

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 March 2004 gives effect to the Acquisition as if the Acquisition had been completed on 31 March 2004. The accompanying unaudited pro forma statement of operations and the cash flow statement of the Enlarged Group for the year ended 31 March 2004 gives effect to the Acquisition as if the Acquisition had been completed before the beginning of relevant period. Following the Acquisition, the Target Group and certain controlled entities of Mr. Wong (collectively the “Parent Group”) will enter into new contractual arrangements for a range of services to regulate the relationship between the Target Group and the Parent Group (the “New Arrangements”). The Acquisition, as well as the New Arrangements, will have an impact on the Target Group’s results of operations.

The accompanying unaudited pro forma financial information 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 notes. A narrative description of the pro forma adjustments of the Acquisition and the New Arrangements 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 notes.

— VI-3 —

APPENDIX VI PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

The accompanying unaudited pro forma financial information 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 information of the Enlarged Group does not purport to describe the actual financial position or results of the Enlarged Group’s operations that would have been attained had the Acquisition been completed, and the Reorganisation taken effect at the dates indicated herein. Further, the accompanying unaudited pro forma financial information of the Enlarged Group does not purport to predict the Enlarged Group’s future financial position or results of operations.

The unaudited pro forma financial information of the Enlarged Group should be read in conjunction with the audited financial information of the Target Group as set out in Appendix III, the audited financial information of the Listed Group as set out in Appendix V and other financial information included elsewhere in this circular.

UNAUDITED PRO FORMA BALANCE SHEET OF THE ENLARGED GROUP

NON-CURRENT ASSETS Fixed assets Intangible assets Property under development Investment properties Other investment Deferred income tax assets Total Non-Current Assets CURRENT ASSETS Other investment Inventories Margin deposits with brokers and financial institutions Bills receivable Trade and other receivables Amount due from related parties Pledged deposits Cash and cash equivalents Total Current Assets	Listed Group Historical As at 31 March 2004 HK$’000 4,748 (13,461) 750,441 4,438 124 —	Target Group Historical As at 31 March 2004 HK$’000 100,558 — — — — 1,162	Pro Forma Combined Pro Forma Adjustments Pro Forma Enlarged Group HK$’000 HK$’000 Notes HK$’000 105,306 105,306 (13,461) (13,461) 750,441 750,441 4,438 4,438 124 124 1,162 1,162 848,010 848,010 804 804 784,248 784,248 64,323 64,323 886 886 145,552 145,552 1,039,792 1,039,792 761,519 761,519 337,285 337,285 3,134,409 3,134,409	Pro Forma Combined Pro Forma Adjustments Pro Forma Enlarged Group HK$’000 HK$’000 Notes HK$’000 105,306 105,306 (13,461) (13,461) 750,441 750,441 4,438 4,438 124 124 1,162 1,162 848,010 848,010 804 804 784,248 784,248 64,323 64,323 886 886 145,552 145,552 1,039,792 1,039,792 761,519 761,519 337,285 337,285 3,134,409 3,134,409
	746,290 804 — 64,323 — 62,829 12,866 — 83,976 224,798	101,720	848,010 804 784,248 64,323 886 145,552 1,039,792 761,519 337,285 3,134,409	848,010
		— 784,248 — 886 82,723 1,026,926 761,519 253,309		804 784,248 64,323 886 145,552 1,039,792 761,519 337,285
		2,909,611		3,134,409

— VI-4 —

APPENDIX VI PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

UNAUDITED PRO FORMA BALANCE SHEET OF THE ENLARGED GROUP

Listed Group Historical As at 31 March 2004 HK$’000 CURRENT LIABILITIES Convertible notes 24,000 Interest-bearing bank loan — Trade payables, bills payable and other payables 44,001 Amounts due to related parties 87,044 Tax payable 5,500 Deferred income tax liabilities — Total Current Liabilities 160,545 NET CURRENT ASSETS 64,253 TOTAL ASSETS LESS CURRENT LIABILITIES 810,543 NON-CURRENT LIABILITIES Long term payable 157,547 MINORITY INTERESTS 1,547 NET ASSETS 651,449 EQUITY Share capital 283,930 Reserves 67,519 Mandatory convertible notes 300,000 651,449 Pro forma net assets per New Share	Listed Group Historical As at 31 March 2004 HK$’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 Pro forma net assets per New Share	Target Group Historical Pro Forma Combined Pro Forma Adjustments Pro Forma Enlarged Group As at 31 March 2004 HK$’000 HK$’000 HK$’000 Notes HK$’000 — 24,000 24,000 9,434 9,434 9,434 2,626,650 2,670,651 2,670,651 — 87,044 87,044 24,426 29,926 29,926 1,045 1,045 1,045	Target Group Historical Pro Forma Combined Pro Forma Adjustments Pro Forma Enlarged Group As at 31 March 2004 HK$’000 HK$’000 HK$’000 Notes HK$’000 — 24,000 24,000 9,434 9,434 9,434 2,626,650 2,670,651 2,670,651 — 87,044 87,044 24,426 29,926 29,926 1,045 1,045 1,045	Target Group Historical Pro Forma Combined Pro Forma Adjustments Pro Forma Enlarged Group As at 31 March 2004 HK$’000 HK$’000 HK$’000 Notes HK$’000 — 24,000 24,000 9,434 9,434 9,434 2,626,650 2,670,651 2,670,651 — 87,044 87,044 24,426 29,926 29,926 1,045 1,045 1,045
	160,545 64,253 810,543 157,547 1,547	2,661,555 248,056 349,776 — 122,421	2,822,100 312,309 1,160,319 157,547 123,968	2,822,100
				312,309
				1,160,319
				157,547 123,968
	651,449	227,355	878,804	878,804
	283,930 67,519 300,000	— 227,355 —	283,930 4,411 1 294,874 (227,355) 1 300,000 222,944 1	288,341 67,519 522,944
	651,449	227,355	878,804 4	878,804
				HK$0.56

— VI-5 —

APPENDIX VI PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

UNAUDITED PRO FORMA STATEMENT OF OPERATIONS OF THE ENLARGED GROUP

Revenue Cost of sales Gross profit Other operating income Selling and distribution costs Administrative expenses Other operating expenses Profit from operating activities Finance income/(costs) Interest expenses Interest income Share of losses of associate Profit from operating activities before income tax and minority interests Income tax Net profit from ordinary activities Minority interests Net profit Pro forma earnings per New Share Basic Diluted Pro forma weighted average number of New Shares Basic Diluted	Listed Group Historical Target Group Historical Year ended 31 March 2004 Year ended 31 December 2003 HK$’000 HK$’000 44,815 8,817,355 — (8,180,875)	Listed Group Historical Target Group Historical Year ended 31 March 2004 Year ended 31 December 2003 HK$’000 HK$’000 44,815 8,817,355 — (8,180,875)	Pro Forma Combined Pro Forma Adjustments HK$’000 HK$’000 Notes 8,862,170 (8,180,875)	Pro Forma Enlarged Group HK$’000 8,862,170 (8,180,875) 681,295 263,569 (462,227) (102,712) (34,545) 345,380 (687) 12,547 (1) 11,859 357,239 (78,210) 279,029 (90,779) 188,250 HK$1.88 HK$0.12 Number ’000 100,088 1,568,441
	44,815 907 (3,004) (16,659) (179) 25,880 (380) — (1) (381) 25,499 (5,500) 19,999 (118)	636,480 262,662 (459,223) (86,053) (34,366) 319,500 (307) 12,547 — 12,240 331,740 (72,710) 259,030 (90,661)	681,295 263,569 (462,227) (102,712) (34,545) 345,380 (687) 12,547 (1) 11,859 357,239 (78,210) 279,029 (90,779)	681,295 263,569 (462,227 (102,712 (34,545
				345,380 (687 12,547 (1
				11,859
				357,239 (78,210
				279,029 (90,779
	19,881	168,369	188,250 2 3 2 3

— VI-6 —

APPENDIX VI PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

UNAUDITED PRO FORMA CASH FLOW STATEMENT OF THE ENLARGED GROUP

CASH FLOWS FROM OPERATING ACTIVITIES Profit from operating activities before income tax and minority interests Adjustments for: Depreciation Amortization of goodwill Amortization of other intangible assets Share of losses of associate (Gain)/loss on disposal of fixed assets Interest income Finance costs Operating profit before working capital changes Increase in margin deposits with brokers and financial institutions Increase in other investments Decrease/(increase) in inventories Decrease in bills receivable Increase in trade and other receivables Increase/(decrease) in trade payables, bills payable and other payables	Listed Group Historical Target Group Historical Year ended 31 March 2004 Year ended 31 December 2003 HK$’000 HK$’000 25,499 331,740 977 15,861 92 — 87 — 1 — (510) 3 (401) (12,547) 780 307 26,525 335,364 (64,323) — (928) — 2,675 (400,750) — 5,805 (7,489) (19,725) (74,860) 1,837,279	Pro Forma Combined Pro Forma Adjustments HK$’000 HK$’000 357,239 16,838 92 87 1 (507) (12,948) 1,087 361,889 (64,323) (928) (398,075) 5,805 (27,214) 1,762,419	Pro Forma Enlarged Group HK$’000 357,239 16,838 92 87 1 (507) (12,948) 1,087 361,889 (64,323) (928) (398,075) 5,805 (27,214) 1,762,419

— VI-7 —

APPENDIX VI PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

CASH FLOWS FROM OPERATING ACTIVITIES — (continued) Decrease/(increase) in amounts due from related parties Increase in amounts due to related parties Cash generated from/(used in) operating activities Interest paid Tax paid Net cash inflow/(outflow) from operating activities CASH FLOWS FROM INVESTING ACTIVITIES Purchase of fixed assets Proceeds from disposal of fixed assets Increase in pledged time deposits Interest received Acquisitions of subsidiaries, net of cash acquired Net cash outflow from investing activities	Listed Group Historical Target Group Historical Year ended 31 March 2004 Year ended 31 December 2003 HK$’000 HK$’000 12,475 (166,425) 87,044 —	Listed Group Historical Target Group Historical Year ended 31 March 2004 Year ended 31 December 2003 HK$’000 HK$’000 12,475 (166,425) 87,044 —	Pro Forma Combined Pro Forma Adjustments HK$’000 HK$’000 (153,950) 87,044	Pro Forma Enlarged Group HK$’000 (153,950) 87,044 1,572,667 (1,502) (53,421) 1,517,744 (71,625) 4,075 (645,277) 12,948 (11,968) (711,847)
	(18,881) (1,195) — (20,076) (2,966) 4,075 — 401 (11,968) (10,458)	1,591,548 (307) (53,421) 1,537,820 (68,659) — (645,277) 12,547 — (701,389)	1,572,667 (1,502) (53,421) 1,517,744 (71,625) 4,075 (645,277) 12,948 (11,968) (711,847)	1,572,667 (1,502 (53,421
				1,517,744
				(71,625 4,075 (645,277 12,948 (11,968
				(711,847

— VI-8 —

APPENDIX VI PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

UNAUDITED PRO FORMA CASH FLOW STATEMENT OF THE ENLARGED GROUP

Listed Group Historical Target Group Historical Year ended 31 March 2004 Year ended 31 December 2003 HK$’000 HK$’000 CASH FLOWS FROM FINANCING ACTIVITIES Increase in amounts due from related parties — (1,062,495) New bank loan — 9,434 Cash contribution from the owner — 311,032 Issue of shares - share capital 79,600 — - share premium 15,008 — Net cash inflow/(outflow) from financing activities 94,608 (742,029) NET INCREASE IN CASH AND CASH EQUIVALENTS 64,074 94,402 Cash and cash equivalents at beginning of the year 19,902 245,465 CASH AND CASH EQUIVALENTS AT END OF YEAR 83,976 339,867	Listed Group Historical Target Group Historical Year ended 31 March 2004 Year ended 31 December 2003 HK$’000 HK$’000 CASH FLOWS FROM FINANCING ACTIVITIES Increase in amounts due from related parties — (1,062,495) New bank loan — 9,434 Cash contribution from the owner — 311,032 Issue of shares - share capital 79,600 — - share premium 15,008 — Net cash inflow/(outflow) from financing activities 94,608 (742,029) NET INCREASE IN CASH AND CASH EQUIVALENTS 64,074 94,402 Cash and cash equivalents at beginning of the year 19,902 245,465 CASH AND CASH EQUIVALENTS AT END OF YEAR 83,976 339,867	Listed Group Historical Target Group Historical Year ended 31 March 2004 Year ended 31 December 2003 HK$’000 HK$’000 CASH FLOWS FROM FINANCING ACTIVITIES Increase in amounts due from related parties — (1,062,495) New bank loan — 9,434 Cash contribution from the owner — 311,032 Issue of shares - share capital 79,600 — - share premium 15,008 — Net cash inflow/(outflow) from financing activities 94,608 (742,029) NET INCREASE IN CASH AND CASH EQUIVALENTS 64,074 94,402 Cash and cash equivalents at beginning of the year 19,902 245,465 CASH AND CASH EQUIVALENTS AT END OF YEAR 83,976 339,867	Pro Forma Combined Pro Forma Adjustments Pro Forma Enlarged Group HK$’000 HK$’000 HK$’000 (1,062,495) (1,062,495) 9,434 9,434 311,032 311,032 79,600 79,600 15,008 15,008 (647,421) (647,421) 158,476 158,476 265,367 265,367 423,843 423,843	Pro Forma Combined Pro Forma Adjustments Pro Forma Enlarged Group HK$’000 HK$’000 HK$’000 (1,062,495) (1,062,495) 9,434 9,434 311,032 311,032 79,600 79,600 15,008 15,008 (647,421) (647,421) 158,476 158,476 265,367 265,367 423,843 423,843
	94,608 64,074 19,902	(742,029) 94,402 245,465	(647,421) 158,476 265,367	(647,421
				158,476 265,367
	83,976	339,867	423,843

— VI-9 —

APPENDIX VI PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION 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 Financial Information 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$222,944,000 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$227,355,000 upon the combination as if the Acquisition had been completed on 31 March 2004.

• (2) The calculation of pro forma basic earnings per New Share at 31 March 2004 was based on the pro forma combined net profit of the Enlarged Group of HK$188,250,000 and a pro forma weighted average number of New Shares outstanding during the year ended 31 March 2004 of 100,088,000. The pro forma weighted average number of New Shares outstanding during the year ended 31 March 2004 of 100,088,000 was calculated based on the audited weighted average number of ordinary shares at 31 March 2004 of 2,239,509,000 per audited financial statements of the Company and was adjusted for i) the effect of the Share Consolidation; and ii) the issue of 44,110,000 Consideration Shares.

• (3) The calculation of pro forma diluted earnings per New Share at 31 March 2004 was based on the pro forma combined net profit of the Enlarged Group of HK$188,250,000 and a pro forma weighted average number (diluted) of New Shares outstanding during the year ended 31 March 2004 of 1,568,441,000. The pro forma weighted average number (diluted) of New Shares outstanding during the year ended 31 March 2004 of 1,568,441,000 was calculated based on the audited weighted average number (diluted) of ordinary shares at 31 March 2004 of 2,580,194,000 per audited financial statements of the Company and was adjusted for

• i) the effect of the Share Consolidation;

• ii) the issue of approximately 44,110,000 Consideration Shares;

— VI-10 —

APPENDIX VI PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

• iii) the conversion of the First Convertible Note of approximately 1,273,804,000 New Shares; and

• iv) the conversion of the Second Convertible Note of approximately 186,032,000 New Shares.

For the purpose of the calculation of pro forma diluted earnings per New Share at 31 March 2004, no adjustment to the pro forma combined net profit of the Enlarged Group has been made regarding the after-tax effect of interest on convertible notes incurred during the year ended 31 March 2004 of HK$675,000 per audited financial statements of the Company because such an interest saving have no material effect on the calculation of pro forma diluted earnings per New Share at 31 March 2004.

• (4) The calculation of pro forma net assets per New Share at 31 March 2004 was based on the pro forma combined net assets of the Enlarged Group of HK$878,804,000 and a pro forma number of New Shares of 1,574,919,000. The pro forma number of New Shares of 1,574,919,000 was calculated based on the number of ordinary shares outstanding at 31 March 2004 of 2,839,304,000 per audited financial statements of the Company and was adjusted for

• i) the effect of the Share Consolidation;

• ii) the issue of approximately 44,110,000 Consideration Shares;

• iii) the conversion of the First Convertible Note of approximately 1,273,804,000 New Shares; and

• iv) the conversion of the Second Convertible Note of approximately 186,032,000 New Shares.

(B) Indebtedness

At the close of business on 30 April 2004, the Enlarged Group had bills payable of approximately HK$2,094 million, bank loan of approximately HK$9 million, amount due to related parties of approximately HK$87 million, long-term payable of approximately HK$158 million and payable to Beijing Eagle Yi Fu Network Technologies Co., Ltd. of approximately HK$227 million. The bills payable are secured by pledge of certain of the Enlarged Group’s time deposits with an aggregate carrying value of approximately HK$794 million and corporate guarantees provided by the Parent Group of approximately HK$2,596 million.

Save as aforesaid, and apart from the intra-group liabilities, the Group did not have any outstanding mortgages, charges, debentures, loan capital or overdrafts, or other similar indebtedness, finance leases or hire-purchase commitments, liabilities under acceptances or acceptance credits or any guarantees or other contingent liabilities as at the close of business on 30 April 2004.

(C) Working Capital

The directors of the Company are of the opinion that the Enlarged Group will, following the completion of the Acquisition and taking into account the present internal financial resources and the present available credit facilities, have sufficient working capital for its present requirements.

— VI-11 —

APPENDIX VII

PROPERTY VALUATION OF THE TARGET GROUP

The following is the text of a letter, summary of values and valuation certificates prepared for the purpose of incorporation in this circular received from American Appraisal China Limited, an independent valuer, in connection with its valuation as at 15 June 2004 of the property interests of the Target Group.

5 July 2004

The Directors

China Eagle Group Company Limited Unit 6101 on 61st Floor

The Center

99 Queen’s Road Central

Hong Kong

Dear Sirs/Madams,

In accordance with your instructions to value the property interest owned by Gome Appliance Co., Ltd (the “Company”) and its subsidiaries (hereinafter together referred to as the “Target Group”) in the People’s Republic of China (the “PRC”), we confirm that we have carried out inspection, made relevant enquiries and obtained such further information as we consider necessary for the purpose of providing you with our opinion of the value of such property interests as at 15 June 2004 (the “valuation date”).

BASIS OF VALUATION

Our valuation of the property is our opinion of open market value which we would define as intended to mean “the best price at which the sale of an interest in a property might reasonably be expected to have been completed unconditionally for cash consideration on the date of valuation assuming:

• (i) a willing seller;

• (ii) that, prior to the date of valuation, there had been a reasonable period (having regard to the nature of the property and the state of the market) for the proper marketing of the interest, for the agreement of price and terms and for the completion of the sale;

• (iii) that the state of the market, level of values and other circumstances were, on any earlier assumed date of exchange of contracts, the same as on the valuation date;

— VII-1 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

• (iv) that no account is taken of any additional bid by a purchaser with a special interest; and

• (v) that both parties to the transaction had acted knowledgeably, prudently and without compulsion.”

VALUATION METHODOLOGY

The property interests are rented and occupied by the Target Group, they are considered to have no commercial value either because of their non-assignability in the open market or there are prohibitions against subletting and/or assignment contained in the respective lease and/or tenancy agreement or the lack of substantial profit rent.

ASSUMPTIONS

Our valuations have been made on the assumption that the owners sell the property interests on the open market without the benefit of any deferred term contracts, leasebacks, joint ventures, management agreements or any similar arrangements which could serve to increase the value of such property interests. In addition, no forced sale situation in any manner is assumed in our valuations.

No allowance has been made in our valuations for any charges, mortgages or amounts owing on any of the property interests valued nor for any expenses or taxation which may be incurred in effecting a sale. Unless otherwise stated, it is assumed that all the property interests are free from encumbrances, restrictions and outgoings of an onerous nature which could affect their rental values.

It is assumed that all applicable zoning, land use regulations and other restrictions have been complied with unless a non-conformity has been stated, defined and considered in the valuation certificate. Further, it is assumed that the utilization of the property and improvements are within the boundaries of the property interests described and that no encroachment or trespass exists unless noted in the valuation certificate.

TITLESHIP INVESTIGATION

We have been provided with extracts of documents in relation to the lease/tenancy agreement of the property interests situated in the PRC. However, we have not scrutinized the original documents to verify ownership or to verify any amendments which may not appear on the copies handed to us. We have relied to a considerable extent on the information provided by the Target Group.

All legal documents disclosed in this letter and valuation certificate are for reference only and no responsibility is assumed for any legal matters concerning the legal title to the property interests set out in this letter and valuation certificate.

We have relied upon the legal opinion (refer as the “PRC legal opinion”) as stated in the property title report given by Jingtian & Gongcheng Attorneys at Law in relation to the legal title to the property interests in the PRC.

— VII-2 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

LIMITING CONDITIONS

We have relied to a considerable extent on the information provided by the Target Group and have accepted advice given to us by the Target Group on such matters as statutory notices, easements, tenure, occupancy, site and floor areas and all other relevant matters. Dimensions and areas included in the valuation certificate are based on information contained in the documents provided to us and are only approximations.

We have no reason to doubt the truth and accuracy of the information as provided to us by the Target Group. We were also advised by the Target Group that no material facts have been omitted from the information so supplied. We consider we have been provided with sufficient information to reach an informed view.

We have inspected the exterior and, where possible, the interior of the property interests included in the attached valuation certificate. However, no structural survey has been made and we are therefore unable to report as to whether the property interests are or are not free of rot, infestation or any other structural defects. No tests were carried out on any of the services. In the course of our inspection, we did not notice any serious defects.

REMARKS

Terms used in the valuation certificate are as defined in the Circular.

We enclose herewith the summary of valuation and the valuation certificate.

Yours faithfully, For and on behalf of AMERICAN APPRAISAL CHINA LIMITED Calvin K. C. Chan MRICS MHKIS RPS (GP) Assistant Vice President

Note: Calvin K. C. Chan, who is a Chartered Valuation Surveyor, has over 10 years’ experience in valuation of properties in Hong Kong and the PRC .

— VII-3 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

SUMMARY OF VALUATION

Property Interests Rented and Occupied by the Target Group in the PRC

		Capital value in
		existing state as at
	Property	15 June 2004
1.	1st, 2nd and 3rd Floor	No commercial value
	Block 4 Zhengyang Market
	No. 43 Qianmen Xida Street
	Xuanwu District
	Beijing City
	The PRC
2.	1st and 2nd Floor	No commercial value
	Sailite Shopping Center
	No. 40 Beisanhuanzhong Road
	Haidian District
	Beijing City
	The PRC
3.	1st and 2nd Floor	No commercial value
	Zhongtiejian Market
	No. 40 Fuxing Road
	Haidian District
	Beijing City
	The PRC
4.	1st Floor and portion of Basement One	No commercial value
	No. 18 Fangguyuan District One
	Fangzhuang Residential Area
	Fengtai District
	Beijing City
	The PRC
5.	Portion of 1st Floor and Basement One	No commercial value
	Commercial Building
	No. 1 Chuiyangliu
	Guangqumen Wai Da Street
	Chaoyang District
	Beijing City
	The PRC

— VII-4 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Property

1. 1st and 2nd Floor Dingyuan Building No. 105 Xisanhuan North Road Haidian District Beijing City The PRC

2. 1st and 2nd Floor Shuangcheng Apartment & Commercial No. 9 Dong Muxuyuan Fengtai District Beijing City The PRC 8. No. 139 Bazhuangzi Fengtai District Beijing City The PRC 9. 1st and 2nd Floor No. 31 Beisanhuan West Road Haiding District Beijing City The PRC 10. 1st and 2nd Floor No. 39 Xinhua Da Street Tongzhou Beijing City The PRC 11. District A of 1st Floor Household and Building Material City Luliqiao No. 10 Xisanhuannan Road Fengtai District Beijing City The PRC 12. 1st and 2nd Floor No. 1 An Ding Road Chaoyang District Beijing City The PRC

Capital value in existing state as at 15 June 2004

No commercial value

No commercial value No commercial value No commercial value

No commercial value

No commercial value

No commercial value

— VII-5 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Property

1. Portions of 2nd and 3rd Floor of Fangyuan Building No. 56 Zhongguancun South Road Haidian District Beijing City The PRC

2. No. 5 Dongsanhuannan Road Chaoyang District Beijing City The PRC

3. Xingyongshe Building, Gulou South Road Changping District Beijing City The PRC

4. No. A7 Xibahebeile Chaoyang District Beijing City The PRC

5. Basement, 1st and 2nd Floor No. 42 Shijingshan Road Shijingshan District Beijing City The PRC 18. Nos. B01-09, 18th Floor Eagle Plaza No. 26 Xiaoyun Road Chaoyang District Beijing City The PRC 19. 1st Floor Commercial Building No. 117 Liuwei Road Hedong District Tianjin City The PRC

Capital value in existing state as at 15 June 2004

No commercial value

No commercial value

No commercial value

No commercial value

No commercial value

No commercial value

No commercial value

— VII-6 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Property

1. Portion of 1st, 2nd and 3rd Floor of Xingke Building No. 445 Anshan West Road Nankai District Tianjin City The PRC

2. 1st, 2nd and 3rd Floor of Keji Rencai Peixun Building Canglianzhuang Zhonghuan Line Hebei District Tianjin City The PRC 22. Tiantuo Assembly Hall Hongqi Road Nankai District Tianjin City The PRC 23. 1st and 2nd Floor Jinxing Building No.65 Xiqing Road Hongqiao District Tianjin City The PRC 24. 1st and 2nd Floor of Hepingyuan Building Fu’an Da Street Heping District Tianjin City The PRC 25. 1st Floor and Basement One Renfang Gongcheng Xincheng Building The interchange between Jiefangnan Road and Dagunan Road Hexi District Tianjin City The PRC

Capital value in existing state as at 15 June 2004

No commercial value

No commercial value No commercial value No commercial value

No commercial value No commercial value

— VII-7 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Property

Capital value in existing state as at 15 June 2004

1. 1st, 2nd and 3rd Floor of No commercial value Binhai Plaza No. 94 Shanghai Road Tanggu District Tianjin City The PRC 27. 1st and 2nd Floor of No. 02 Building No commercial value New Century Buxing Street 159 Xinhua Road Langfang City Hebei The PRC 28. 2nd Floor of No commercial value No. 473 Jiefang Nan Road Hexi District Tianjin City The PRC 29. 1st, 2nd and 3rd Floor of Meiri Yangguang, No commercial value The interchange between Jinwei Road and Shizilin Da Street Hebei District Tianjin City The PRC 30. No. 128 Heniu Cheng Road No commercial value Hexi District Tianjin City The PRC 31. No. 2 Weishan Road No commercial value Jinnan District Tianjin City The PRC 32 1st, 2nd and 3rd Floor No commercial value Jiulong Dianye Building No. 7 Yangjiaping Zheng Street Jiulongpo District Chongqing City Sichuan Province The PRC

— VII-8 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Property

1. 4th, 5th and 6th Floor Jiaxin Mansion No. 166 Xiaolongkan Zheng Street Shapingba District Chongqing City The PRC

2. A9 Floor and B1 Floor Qixing Furniture Market No. 320 Minsheng Road Yuzhong District Chongqing City The PRC 35. 1st and 2nd Floor Auxiliary Building and Advertisement Spaces Hefu Hotel No. 2 Hongmian Da Road Jiangbei District Chongqing City The PRC 36. 1st and 2nd Floor Jiangnan Mingzhu No.19 Nanping Nan Road Nanan District Chongqing City The PRC 37. 1st and 2nd Floor Xin Tian Di Shopping Mall No.18 Shengli Village Beibei Chongqing City The PRC 38. B1A2 and B2A1 Floor No.19 Guang Chang Road Fuling District Chongqing City The PRC

Capital value in existing state as at 15 June 2004

No commercial value

No commercial value No commercial value No commercial value No commercial value No commercial value

— VII-9 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Property

1. 1st, 2nd and 3rd Floor No.16 Minzu Road Yuzhong District Chongqing City The PRC

2. Xin Qiao Village Tanjiagang Town Shapingba District Chongqing City The PRC

3. 1st, 2nd and 3rd Floor Wan Feng Building No. 2 Xing Rong Xi Lane Nansi Section Yihuan Road Chengdu City Sichuan Province The PRC

4. 1st and 2nd Floor Jin Yu Building No. 191 Beisiduan Yihuan Road Chengdu City Sichuan Province The PRC

5. Portion of 1st and 2nd Floor Xing Long Building No. 67 Guangrongxi Road Chengdu City Sichuan Province The PRC

Capital value in existing state as at 15 June 2004

No commercial value

No commercial value

No commercial value

No commercial value

No commercial value

— VII-10 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Property

1. 1st, 2nd and 3rd Floor Yin He Commercial Plaza No. 40 Dongsanduan Er Huan Road Chengdu City Sichuan Province The PRC 45 1st and 2nd Floor Mei Mei Commercial Plaza Ancillary No.18, No.2 Jin Xiu Road Chengdu City Sichuan Province The PRC 46. 1st and 2nd Floor Huang Cheng Commercial Plaza No.97 Renmin Nan Road First Section Qing Yang District Chengdu City Sichuan Province The PRC 47. 1st and 2nd Floor South Tower of Wan Rong Commercial Building No.203 & 204 Jiefang Road Ziliujin District Zigong City Sichuan Province The PRC 48. Room Nos. 2 to 13 13th Floor Jin Yu Building No. 191 Beisiduan Yihuan Road Chengdu City Sichuan Province The PRC

Capital value in existing state as at 15 June 2004

No commercial value

No commercial value No commercial value

No commercial value

No commercial value

— VII-11 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Property

1. Group 8 Tie Fuo Cun Wuhou Dadao Chengdu City Sichuan Province The PRC

2. Group 3 Dongdan Village Yantu District Xian City Shaanxi Province The PRC 51. 1st and 2nd Floor Tongji Plaza No. 113 Beida Road Xian City Shaanxi Province The PRC 52. 1st, 2nd and 3rd Floor Jingye Modern Window No. 100 West Section Er Huan Nan Road Xian City Shaanxi Province The PRC 53. 1st and 2nd Changxing Zhiye Square No.64 Xingqing Road Xian City Shaanxi Province The PRC 54. 1st to 4th Floor Xian Zhuque Trading Building No.259 Xidi Street Xian City Shaanxi Province The PRC

Capital value in existing state as at 15 June 2004 No commercial value No commercial value No commercial value No commercial value No commercial value No commercial value

— VII-12 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Property

1. 1st and 2nd Floor No. 110 Fenggaoxi Road Lianhu District Xian City Shaanxi Province The PRC

2. 1st & 2nd Floor No. 165 Huigong Street Shenyang City Liaoning Province The PRC 57. 1st and 2nd Floor No. 59 Changjiang Street Huanggu District Shenyang City Liaoning Province The PRC 58. 1st and 2nd Floor No. 51 Xinghuanan Street Tiexi District Shenyang City Liaoning Province The PRC 59. 1st and 2nd Floor No. 2 Wanliutang Road Shenhe District Shenyang City Liaoning Province The PRC 60. 1st, 2nd and 3rd Floor 23 Fengyutan Street Shenghe District Shenyang City Liaoning Province The PRC

Capital value in existing state as at 15 June 2004

No commercial value No commercial value No commercial value No commercial value No commercial value No commercial value

— VII-13 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Property

1. Warehouse Area No. 8 Avenue 19 Beiyixi Road Tiexi District Shenyang City Liaoning Province The PRC

2. 1st and 2nd Floor & Basement One of No. 2 Weihai Road Shibei District Qingdao City Shandong Province The PRC 63. 1st to 5th Floor Sifang Commercial Center No. 26 Hangzhou Road Sifang District Qingdao City Shandong Province The PRC

3. Basement Level 1 Guomou Shopping Plaza No. 50 Xianyang Road Qingdao City Shandong Province The PRC 65. 1st and 2nd Floor of Block 2 No. 78 Nanjing Road Qingdao City Shandong Province The PRC 66. 1st Floor and Basement One of Nanxiahe Commercial Building No. 390 Dongfeng Dong Street Weifang City Shandong Province The PRC

Capital value in existing state as at 15 June 2004

No commercial value

No commercial value

No commercial value

No commercial value

No commercial value

No commercial value

— VII-14 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Property

1. No. 10 Warehouse of No. 3 Cangdong Road Weicheng District Weifang City Shandong Province The PRC

2. Nos. 2 and 3 Warehouse No. 27 Baozhang Road Shibei District Qingdao City Shandong Province The PRC

3. 1st, 2nd and 3rd Floor of Linhua Building No. 220 Huayuan Road Licheng District Jinan City Shandong Province The PRC

4. West Portion of 1st and 2nd Floor shopping area of Basement One and an office room with lift shaft in Basement One No.1 Jinshi Road Jinan City Shandong Province The PRC

5. Portion of 1st, 2nd and 3rd Floor and the whole of Basement One No.10 Yingxiong Road Jinan City Shandong Province The PRC

Capital value in existing state as at 15 June 2004

No commercial value

No commercial value

No commercial value

No commercial value

No commercial value

— VII-15 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Property

1. 1st and 2nd Floor and the whole of Basement No.159 Zhongxin Road Zhangdian District Zibo City Shandong Province The PRC

2. No. 180 Wei 12 Road Huaiyin District Jinan City Shandong Province The PRC

3. Basement One of Yingzuo Beiyuan Shopping Plaza No. 483 Beiyuan Da Street Tianqiao District Jinan City Shandong Province The PRC

4. Two warehouses and an office building in Banqiao Wood Wholesale Market South of Xiaoqinghe and West of Lishan Bei Road Jinan City Shandong Province The PRC

5. No. 5 Yanchangdong Road Zhangdian District Zibo City Shandong Province The PRC

6. Portion of 1st Floor and the whole of 2nd Floor No.151-153 Jiangnan Dadaozhong Road Guangzhou City Guangdong Province The PRC

Capital value in existing state as at 15 June 2004

No commercial value No commercial value No commercial value No commercial value

No commercial value No commercial value

— VII-16 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Property

Capital value in existing state as at 15 June 2004

No commercial value

1. West of 1st Floor No commercial value No.38/40/42 Huancheng Zhong Road and 2nd Floor East Plaza No. 8 East Street Panyu District Guangzhou City Guangdong Province The PRC

2. Portion of 1st and the whole of 2nd and 3rd Floor No commercial value West Block of Fuli Plaza No.16 Zhongshanba Road Liwan District Guangzhou City Guangdong Province The PRC

3. 1st, 2nd, 3rd Floor and underground level one No commercial value Hongrui Building Nos. 29-31 Zhongshaner Road Guangzhou City Guangdong Province The PRC

4. 1st and 2nd Floor No commercial value Fuhai Commercial Centre No.153 Tianhedong Road Guangzhou City Guangdong Province The PRC

5. Portion of 1st and 2nd Floor No commercial value No.583-1 Tianhebei Road Guangzhou City Guangdong Province The PRC

— VII-17 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Property

1. Portion of 1st and 2nd Floor Liyuan Commercial Plaza No. 1/26 Jumiaodian Road Foshan City Guangdong Province The PRC

2. No.6-10 Warehouse Logistics Fangchun Base of Guangzhou Post North Industrial District Longxi Da Road Fangchun District Guangzhou City Guangdong Province The PRC

3. Rooms A, B, C, D 4th Floor, Block C Electron and Technology Building No.2070 Shennanzhong Road Futian District Shenzhen City Guangdong Province The PRC 86. Portion of 1st and 2nd Floor Dilongyingtai Commercial Centre No.7 the Second Industrial Estate Longgang Town Longgang District Shenzhen City Guangdong Province The PRC 87. 1st and 2nd Floor Nanyue Pearl Houhai Road Nanshan District Shenzhen City Guangdong Province The PRC

Capital value in existing state as at 15 June 2004

No commercial value

No commercial value

No commercial value No commercial value

No commercial value

— VII-18 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Property

1. 1st, 2nd and 3rd Floor, Room No. 519 and the connecting corridor on 3rd Floor 101 Block Shangbu Industrial Estate Huaqiangbei Shenzhen City Guangdong Province The PRC 89. Portion of 1st Floor and half of 2nd Floor Huafeng Plaza No.213 Qianjinyi Road Baoan 25 District Shenzhen City Guangdong Province The PRC

2. Warehouse and ancillary office Niuzaichang Xili Town Nanshan District Shenzhen City Guangdong Province The PRC 91. 1st Floor and Underground Jufu Haoyuan No. 123 Dongcheng Da Road Dongguan City Guangdong Province The PRC 92. 3rd Floor Block C & F No. 64 Taisha Road Humen Town Dongguan City Guangdong Province The PRC

Capital value in existing state as at 15 June 2004

No commercial value

No commercial value

No commercial value

No commercial value

No commercial value

— VII-19 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Property

Capital value in existing state as at 15 June 2004

1. 1st Floor No commercial value No. 2 Daxinnan Road Shiqi District Zhongshan City Guangdong Province The PRC 94. 1st and 2nd Floor No commercial value Yutian Mingyuan Xinan Road Henanan Huizhou City Guangdong Province The PRC 95. Warehouse and ancillary structure located around No commercial value Wushi North Railway Station Jiangbei Huizhou City Guangdong Province The PRC 96. Portion of 1st Floor and whole of 2nd Floor No commercial value Yutingyuan Gintian Road Futian District Shenzhen City Guangdong Province The PRC 97. 1st and 2nd Floor No commercial value No. 319 Fa Zhang Da Road Hankou District Wuhan City Hubei Province The PRC 98. Warehouse No. 319 Fa Zhang Da Road No commercial value Hankou District Wuhan City Hubei Province The PRC

— VII-20 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Property

1. Nos. 264-282 Zhong Shan Da Road Qiaokou District Wuhan City Hubei Province The PRC

2. 2nd Floor No. 147 Zhongbei Road Wuchang District Wuhan City Hubei Province The PRC 101. 1st Floor Te No. 3 Longyang Da Road Hanyang District Wuhan City Hubei Province The PRC 102. 1st and 2nd Floor 35 Lin Jiang Da Road Wuchang District Wuhan City Hubei Province The PRC 103. 1st Floor No. 2 Yejinda Road Huanghedazhou Commercial Complex Qingshan District Wuhan City Hubei Province The PRC 104. Portion of 1st Floor, the whole of 2nd and 3rd Floor Wuzhou Square Interchange between Jiefang Road and Youyi Road Wuhan City Hubei Province The PRC

Capital value in existing state as at 15 June 2004

No commercial value No commercial value No commercial value No commercial value No commercial value No commercial value

— VII-21 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Property

Capital value in existing state as at 15 June 2004

1. 1st Floor No commercial value Xinshidai Plaza Nos. 168-178 Renmin Zhong Road Kunming City Yunnan Province The PRC 106. 1st, 2nd and 3rd Floor No commercial value Shunzhen Garden No. 18 Nantong Street Kunming City Yunnan Province The PRC 107. 1st Floor No commercial value Xinfu Garden No. 156 Huanzhen Nan Road Kunming City Yunnan Province The PRC 108. No. 1, Liangting Village No commercial value (adjacent to the main door of the Provincial Tobacco Storage Company) Kunming City Yunnan Province The PRC 109. Several storage buildings and ancillary office in No commercial value No.24 Yuanxi Hongshan Town Gulou District Fuzhou City Fujian Province The PRC 110. 1st, 2nd, 3rd and 4th Floor No commercial value No. 366 Huanlin Road Jinan District Fuzhou City Fujian Province The PRC

— VII-22 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Property

1. 5th and 6th Floor Lijiada Plaza No. 8 Yangqiao Dong Road Dongjiekou Fuzhou City Fujian Province The PRC

2. 1st and 2nd Floor Jiaheyuan West Zhongting Street Taijiang District Fuzhou City Fujian Province The PRC

3. 2nd and 3rd Floor Xinshiji Commercial Building No. 50 Yifu Road Fuqing City Fujian Province The PRC

4. Unit Nos. 32 and 33 on 1st Floor Jiahuiyuan Zhongting Street Fuzhou City Fujiang Province The PRC

5. Unit No.10 in Basement One Block 572 Ganghua Road Xinshancun Street Dadukou District Chongqing City The PRC

6. A unit in No.70 Taidong Yi Road Bei District Qingdao City Shandong Province The PRC

Capital value in existing state as at 15 June 2004

No commercial value

No commercial value

No commercial value

No commercial value

No commercial value

No commercial value

— VII-23 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Property

Capital value in existing state as at 15 June 2004

No commercial value

1. 1st Floor, 2nd Floor, 3rd Floor and No commercial value Basement One No.15 Dongsanhuanbei Road Beijing City The PRC 118. Unit Nos. 38 and 39 No commercial value Baorun Commercial Square Interchange between Qianhai Road and Taoyuan Road Nanshan District Shenzhen City Guangdong Province The PRC 119. Unit Nos. 6 and 7 on 1st Floor No commercial value Haidian Shuma Cheng Haidian Ju Nanyouda Road Nanshan District Shenzhen City Guangdong Province The PRC 120. Portion of 1st Floor and 2nd Floor No commercial value Xinkai Road Branch of Huarun Supermarket Interchange between Xinkai Road and Huachangda Street Tianjin City The PRC 121. 1st Floor and 2nd Floor No commercial value No.191 Hebei Road Heping District Tianjin City The PRC

— VII-24 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Property

1. Portion of 1st Floor and 2nd Floor

Capital value in existing state as at 15 June 2004

No commercial value

• No.88 Zhengyang Street

• Shenhe District

Shenyang City Liaoning Province The PRC

1. 1st Floor, 2nd Floor and 3rd Floor

No commercial value

• No.6 Meng Block 17 of No.33 Xiaobeiguan Street

Dadong District

Shenyang City Liaoning Province The PRC

1. Portion of 1st Floor and whole of 2nd Floor Block A2 and A4 Changan Shangmao Cheng Changan Town Dongguan City Guangdong Province The PRC

No commercial value

— VII-25 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

VALUATION CERTIFICATE

Property Interests Rented and Occupied by the Target Group in the PRC

Capital value in Particulars of existing state as at Property Description and Tenure Occupancy 15 June 2004 1. 1st, 2nd and 3rd Floor The property comprises three shopping A portion of the No commercial Block 4 levels of a commercial complex property is occupied value Zhengyang Market completed in or about 1987. by the Target Group as No. 43 Qianmen shop with an ancillary Xida Street The property contains a gross floor area office. Xuanwu District of approximately 2,320 square meters. Beijing City A portion of the The PRC The property is rented by Beijing Gome property is occupied from the landlord, an independent third by a member of the party, under the lease agreement dated 1 Parent Group as shop. February 2000 for a term of 10 years commencing from 1 January 2001 to 31 December 2010 at an annual rent of RMB2,480,000.

Pursuant to a tripartite agreement regarding the change of the tenant’s identity dated 1 January 2004 between the landlord, Beijing Gome and the Target Group, the Target Group became the tenant of the property.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 49 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB214,620 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The tripartite agreement regarding the change of the tenant’s identity in respect of the subject property is valid and enforceable.

5. c. The transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-26 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Property

1. 1st and 2nd Floor Sailite Shopping Center No. 40 Beisanhuanzhong Road Haidian District Beijing City The PRC

Description and Tenure

The property comprises two shopping levels of a commercial complex completed in or about 1995.

The property contains a total leased gross floor area of approximately 3,168 square meters.

1,500 square meters of the 1st Floor of the property is rented by Beijing Gome from the landlord, an independent third party, under the lease agreement dated 22 January 1998 for a term of 10 years commencing from 22 January 1998 to 21 January 2008 at an annual rent of RMB2,400,000.

Capital value in Particulars of existing state as at Occupancy 15 June 2004

A portion of the No commercial property is occupied value by the Target Group as shop with an ancillary office.

A portion of the property is occupied by a member of the Parent Group as shop.

500 square meters of 1st Floor of the property is rented by Beijing Gome from the landlord, an independent third party, under the lease agreement dated 22 January 2003 for a term commencing from 1 January 2003 to 21 January 2008. The annual rental payable for the property is RMB650,000 (including management expenses).

2nd Floor of the property is rented by Beijing Gome from the landlord, an independent third party, under the lease agreement dated 17 March 2001 for a term commencing from 1 March 2001 to 31 December 2007. The annual rental payable for the property from 1 March 2001 to 31 December 2003 is RMB1,200,000, from 1 January 2004 to 31 December 2006 is RMB1,212,000, and from 1 January 2007 to 31 December 2007 is RMB1,224,120.

Pursuant to a tripartite agreement regarding the change of the tenant’s identity dated 1 January 2004 between the landlord, Beijing Gome and the Target Group, the Target Group became the tenant of the property.

— VII-27 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 83 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB363,540 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The tripartite agreement regarding the change of the tenant’s identity in respect of the subject property is valid and enforceable.

5. c. The transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-28 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
3.	1st and 2nd Floor	The property comprises two shopping	A portion of the	No commercial
	Zhongtiejian Market	levels of a commercial complex	property is occupied	value
	No. 40 Fuxing Road	completed in or about 1995.	by the Target Group as
	Haidian District		shop with an ancillary
	Beijing City	The property contains a leased floor area	office.
	The PRC	of approximately 1,633 square meters.
			A portion of the
		The property is rented by Beijing Gome	property is occupied
		from the landlord, an independent third	by a member of the
		party, under the lease agreement dated 18	Parent Group as shop.
		February 2000 for a term commencing
		from 1 February 2000 to 15 June 2008 at
		an annual rent of RMB1,800,000.
		Pursuant to a tripartite agreement
		regarding the change of the tenant’s
		identity dated 1 January 2004 between the
		landlord, Beijing Gome and the Target
		Group, the Target Group became the
		tenant of the property.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 44 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB192,720 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. Since the landlord of the subject property cannot produce any proper legal title document of the subject property, the validity and legality of the subject lease agreement is uncertain. If the subject lease agreement is not valid, the tenant should return the subject property to the landlord. However, the invalidity of the subject lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject lease agreement and the tenant may claim against the landlord for compensation according to law.

4. b. The tripartite agreement regarding the change of the tenant’s identity in respect of the subject property is valid and enforceable.

5. c. If the lease agreement of the subject property is valid and enforceable, the transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-29 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Property Description and Tenure

1. 1st Floor and portion The property comprises two shopping of Basement One levels of a multi-storey commercial No. 18 Fangguyuan complex completed in or about 1995. District One Fangzhuang The property contains a total gross floor Residential Area area of approximately 1,734 square Fengtai District meters. Beijing City The PRC 1st Floor of the property is rented by Beijing Gome from the landlord, an independent third party, under the lease agreement dated 7 May 1998 for a term of 10 years commencing from 12 May 1998 to 11 May 2008. The monthly rental payable for the property from August 1998 to July 2001 is RMB50,901.76, from August 2001 to July 2004 is RMB59,007.13, and from August 2004 onwards is subject to review, inclusive of management fees.

Capital value in Particulars of existing state as at Occupancy 15 June 2004 A portion of the No commercial property is occupied value by the Target Group as shop with an ancillary office. A portion of the property is occupied by a member of the Parent Group as shop.

Basement One of the property is rented by Beijing Gome from the landlord, an independent third party, under the lease agreement dated 25 June 2001 and the tenancy has been revised on 25 August 2003 for a term commencing from 26 June 2001 to 25 July 2004 at a monthly rent of RMB36,428.33 including management fee.

Pursuant to a tripartite agreement regarding the change of the tenant’s identity dated 1 January 2004 between the landlord, Beijing Gome and the Target Group, the Target Group became the tenant of the property.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 60 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB262,800 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

— VII-30 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

1. The PRC legal opinion states, inter alia, that:

2. a. The lease agreement in respect of the subject property is valid and enforceable.

3. b. The tripartite agreement regarding the change of the tenant’s identity in respect of the subject property is valid and enforceable.

4. c. Since the Target Group cannot produce documents in relation to the landlord’s consent for the Target Group to assign part of the subject property, the validity and legality of the subject transfer lease agreement is uncertain. If the subject transfer lease agreement is not valid, the member of the Parent Group should return the subject part of the property to the Target Group. However, the invalidity of the subject transfer lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject transfer lease agreement and the member of the Parent Group may claim against the Target Group for compensation according to law. In addition, the landlord has the right to rescind the lease agreement according to the relevant provisions of the PRC Contract Law and require the Target Group to take up other responsibilities in relation to the breach of the lease agreement according to the relevant provisions of the lease agreement.

— VII-31 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Capital value in Particulars of existing state as at Property Description and Tenure Occupancy 15 June 2004 5. Portion of 1st Floor The property comprises two shopping A portion of the No commercial and Basement One levels of a commercial complex property is occupied value Commercial Building completed in or about 1998. by the Target Group as No. 1 Chuiyangliu shop with an ancillary Guangqumen Wai The property contains a gross floor area office. Da Street of approximately 3,384.7 square meters. Chaoyang District A portion of the Beijing City The property is rented by Beijing Gome property is occupied The PRC from the landlord, an independent third by a member of the party, under the lease agreement dated 27 Parent Group as shop. July 2001 for a term commencing from 28 July 2001 to 8 October 2011. The annual rental payable for the property from 1st to 5th year is RMB2,779,685.80, from 6th year onwards is subject to review. Pursuant to a tripartite agreement regarding the change of the tenant’s identity dated 1 January 2004 between the landlord, Beijing Gome and the Target Group, the Target Group became the tenant of the property.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 69 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB302,220 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The tripartite agreement regarding the change of the tenant’s identity in respect of the subject property is valid and enforceable.

5. c. Since the Target Group cannot produce documents in relation to the landlord’s consent for the Target Group to assign part of the subject property, the validity and legality of the subject transfer lease agreement is uncertain. If the subject transfer lease agreement is not valid, the member of the Parent Group should return the subject part of the property to the Target Group. However, the invalidity of the subject transfer lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject transfer lease agreement and the member of the Parent Group may claim against the Target Group for compensation according to law. In addition, the landlord has the right to rescind the lease agreement according to the relevant provisions of the PRC Contract Law and require the Target Group to take up other responsibilities in relation to the breach of the lease agreement according to the relevant provisions of the lease agreement.

— VII-32 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Capital value in Particulars of existing state as at Property Description and Tenure Occupancy 15 June 2004 6. 1st and 2nd Floor The property comprises two shopping A portion of the No commercial Dingyuan Building levels of a commercial complex property is occupied value No. 105 Xisanhuan completed in or about 1998. by the Target Group as North Road shop with an ancillary Haidian District The property contains a gross floor area office. Beijing City of approximately 2,098 square meters. The PRC A portion of the The property is rented by Beijing Gome property is occupied from the landlord, an independent third by a member of the party, under the lease agreement dated 6 Parent Group as shop. July 1999 for a term of 10 years commencing from 10 September 1999 to 9 September 2009. The annual rental payable for the property from 1st to 5th year is RMB2,200,000, and from 6th year onwards is subject to 1% annual increment.

Pursuant to a tripartite agreement regarding the change of the tenant’s identity dated 1 January 2004 between the landlord, Beijing Gome and the Target Group, the Target Group became the tenant of the property.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 55 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB240,900 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The tripartite agreement regarding the change of the tenant’s identity in respect of the subject property is valid and enforceable.

5. c. The transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-33 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Property

1. 1st and 2nd Floor Shuangcheng Apartment & Commercial No. 9 Dong Muxuyuan Fengtai District Beijing City The PRC

Description and Tenure

The property comprises two shopping levels of a commercial complex completed in or about 1999.

Portion of 1st floor with a leased floor area of 1765.75 square meters is rented by Beijing Gome from the landlord, an independent third party, under the lease agreement dated 29 July 1999 for a term of 8 years commencing from 16 August 1999 to 15 August 2007 at a monthly rent of RMB132,431.25.

Capital value in Particulars of existing state as at Occupancy 15 June 2004

A portion of the No commercial property is occupied value by the Target Group as shop with an ancillary office.

A portion of the property is occupied by a member of the Parent Group as shop.

Portion of 1st floor and 2nd floor of the property with a leased floor area of approximately 1,613.98 square meters is rented by Beijing Gome from the landlord, an independent third party, under the lease agreement dated 29 July 1999 for a term commencing from 18 July 2001 to 15 August 2007 at an annual rent of RMB1,210,346.

A room in 2nd floor with a leased floor area of 5 square meters is rented by Beijing Gome from the landlord, an independent third party, under the lease agreement dated 30 May 2002 for a term commencing from 1 June 2002 to 15 August 2007 at a monthly rent of RMB200.

The leases shall be renewable upon notice six months before the expiry date. Beijing Gome has the prior right to renew the lease for a further term.

Pursuant to a tripartite agreement regarding the change of the tenant’s identity dated 1 January 2004 between the landlord, Beijing Gome and the Target Group, the Target Group became the tenant of the property.

— VII-34 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 60 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB262,800 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The tripartite agreement regarding the change of the tenant’s identity in respect of the subject property is valid and enforceable.

5. c. Since the Target Group cannot produce documents in relation to the landlord’s consent for the Target Group to assign part of the subject property, the validity and legality of the subject transfer lease agreement is uncertain. If the subject transfer lease agreement is not valid, the member of the Parent Group should return the subject part of the property to the Target Group. However, the invalidity of the subject transfer lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject transfer lease agreement and the member of the Parent Group may claim against the Target Group for compensation according to law. In addition, the landlord has the right to rescind the lease agreement according to the relevant provisions of the PRC Contract Law and require the Target Group to take up other responsibilities in relation to the breach of the lease agreement according to the relevant provisions of the lease agreement.

— VII-35 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Description and Tenure

Property

1. No. 139 Bazhuangzi The property comprises several singleFengtai District story warehouses completed in or about Beijing City 1998. The PRC

The property contains a total gross floor area of approximately 11,551.5 square meters.

Capital value in Particulars of existing state as at Occupancy 15 June 2004 The property is No commercial occupied by the Target value Group as warehouse with an ancillary office and staff quarters.

958 square meters of the property is rented by Beijing Gome from the landlord, an independent third party, under the lease agreement dated 9 May 2001 for a term of 3 years commencing from 1 August 2001 to 31 July 2004 at an annual rent of RMB103,464.

2,219.5 square meters of the property is rented by Beijing Gome from the landlord, an independent third party, under the lease agreement dated 9 May 2001 for a term commencing from 1 May 2001 to 31 December 2004 at an annual rent of RMB239,706.

8,374 square meters of the property is rented by Beijing Gome from the landlord, an independent third party, under the lease agreement dated 20 August 1999 for a term of 10 years commencing from 1 January 2000 to 31 December 2009 at an annual rent of RMB854,148.

The leases shall be renewable upon notice six months before the expiry date. Beijing Gome has the prior right to renew the lease for a further term.

Pursuant to a tripartite agreement regarding the change of the tenant’s identity dated 1 January 2004 between the landlord, Beijing Gome and the Target Group, the Target Group became the tenant of the property.

Note:

1. The PRC legal opinion states, inter alia, that:

2. a. The lease agreement in respect of the subject property is valid and enforceable.

3. b. The tripartite agreement regarding the change of the tenant’s identity in respect of the subject property is valid and enforceable.

— VII-36 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Property Description and Tenure

1. 1st and 2nd Floor The property comprises two shopping No. 31 Beisanhuan levels in a multi-storey commercial West Road complex completed in or about 1989. Haiding District Beijing City The property contains a total leased floor The PRC area of approximately 2,600 square meters.

The property is rented by Beijing Gome from the landlord, an independent third party, under the lease agreement dated 7 April 2003 for a term of 1 year and 1 month commencing from 10 April 2003 to 9 May 2004 at an annual rent of RMB2,800,000.

Capital value in Particulars of existing state as at Occupancy 15 June 2004 A portion of the No commercial property is occupied value by the Target Group as shop with ancillary office and warehouse.

A portion of the property is occupied by a member of the Parent Group as shop.

Pursuant to a tripartite agreement regarding the change of the tenant’s identity dated 1 January 2004 between the landlord, Beijing Gome and the Target Group, the Target Group became the tenant of the property.

As informed by the Target Group, negotiation of the renewal of the lease agreement is in progress.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 65 square meters for a term commencing from 15 April 2004 to 9 May 2004 at an annual rent payable of RMB284,700 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume. As informed by the Target Group, negotiation of the renewal of the transfer lease agreement is in progress.

2. The PRC legal opinion states, inter alia, that:

3. a. Since the landlord of the subject property cannot produce any proper legal title document of the subject property, the validity and legality of the subject lease agreement is uncertain. If the subject lease agreement is not valid, the tenant should return the subject property to the landlord. However, the invalidity of the subject lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject lease agreement and the tenant may claim against the landlord for compensation according to law.

4. b. The tripartite agreement regarding the change of the tenant’s identity in respect of the subject property is valid and enforceable.

5. c. If the lease agreement of the subject property is valid and enforceable, the transfer lease agreement in respect of part of the subject property is valid and enforceable. If the renewal of the lease agreement of the subject property is valid and enforceable, and the landlord continues to agree to the Target Group transferring part of the subject property, the renewal of the transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-37 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
10.	1st and 2nd Floor	The property comprises two shopping	A portion of the	No commercial
	No. 39 Xinhua Da	levels of a multi-storey commercial	property is occupied	value
	Street	complex completed in 1990’s.	by the Target Group as
	Tongzhou		shop with an ancillary
	Beijing City	The property contains a total leased floor	office.
	The PRC	area of approximately 2,996 square
		meters.	A portion of the
			property is occupied
		The property is rented Beijing Gome from	by a member of the
		the landlord, an independent third party,	Parent Group as shop.
		under the lease agreement dated 18 April
		2003 for a term of 3 years commencing
		from 26 April 2003 to 25 April 2006 at an
		annual rent of RMB2,350,000. During the
		term of the tenancy, Beijing Gome has the
		prior right to purchase the property.
		Pursuant to a tripartite agreement
		regarding the change of the tenant’s
		identity dated 1 January 2004 between the
		landlord, Beijing Gome and the Target
		Group, the Target Group became the
		tenant of the property.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 67 square meters for a term commencing from 15 April 2004 to 25 April 2006 at an annual rent payable of RMB293,460 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The tripartite agreement regarding the change of the tenant’s identity in respect of the subject property is valid and enforceable.

5. c. The transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-38 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
11.	District A of 1st Floor	The property comprises a portion of a	A portion of the	No commercial
	Household and	shopping level of a multi-storey	property is occupied	value
	Building Material City	commercial complex completed in 1990s.	by the Target Group as
	Luliqiao		shop with an ancillary
	No. 10 Xisanhuannan	The property contains a leased floor area	office.
	Road	of approximately 3,840 square meters.
	Fengtai District		A portion of the
	Beijing City	The property is rented by Beijing Gome	property is occupied
	The PRC	from the landlord, an independent third	by a member of the
		party, under the lease agreement dated 4	Parent Group as shop.
		September 2000 for a term of 8 years
		commencing from 10 September 2002 to
		9 September 2010 at an annual rent of
		RMB3,000,000.
		Pursuant to a tripartite agreement
		regarding the change of the tenant’s
		identity dated 1 January 2004 between the
		landlord, Beijing Gome and the Target
		Group, the Target Group became the
		tenant of the property.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 45 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB197,100 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The tripartite agreement regarding the change of the tenant’s identity in respect of the subject property is valid and enforceable.

5. c. The transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-39 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Capital value in Particulars of existing state as at Property Description and Tenure Occupancy 15 June 2004 12. 1st and 2nd Floor The property comprises two shopping A portion of the No commercial No. 1 An Ding Road levels building completed in or about property is occupied value Chaoyang District 2002. by the Target Group as Beijing City shop with an ancillary The PRC The property contains a gross floor area office. of approximately 5,800 square meters. A portion of the The property is rented by Beijing Gome property is occupied from the landlord an independent third by a member of the party, under the lease agreements dated 5 Parent Group as shop. May 2003 and 10 May 2003 respectively for a term commencing from 1 July 2003 to 31 October 2007. The annual rent payable is equivalent to 20% of the profit of the shop. Beijing Gome has agreed that the annual rent for the first year is fixed at RMB4,000,000 and for the subsequent years the annual rent will increase by not less than RMB180,000 each year. Beijing Gome has the prior right to renew the lease for a further term.

Pursuant to a tripartite agreement regarding the change of the tenant’s identity dated 1 January 2004 between the landlord, Beijing Gome and the Target Group, the Target Group became the tenant of the property.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 100 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB438,000 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The tripartite agreement regarding the change of the tenant’s identity in respect of the subject property is valid and enforceable.

5. c. The transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-40 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Capital value in Particulars of existing state as at Property Description and Tenure Occupancy 15 June 2004 13. Portions of 2nd and The property comprises 2 shopping levels A portion of the No commercial 3rd Floor of of a multi-storey commercial building property is occupied value Fangyuan Building completed in or about 2000. by the Target Group as No. 56 Zhongguancun shop with an ancillary South Road The property contains a total gross floor office. Haidian District area of approximately 9,866.39 square Beijing City meters. A portion of the The PRC property is occupied The property is rented by Beijing Gome by a member of the from the landlord, an independent third Parent Group as shop. party, under the lease agreements dated 28 September 2003 and 28 October 2003 respectively for a term of 5 years commencing from 28 September 2003 to 27 September 2008. The annual rent for the first 3 years is RMB9,900,000, the annual rent for the last 2 years is RMB10,396,000. The lease shall be renewable upon notice six months before the expiry date. Pursuant to a tripartite agreement regarding the change of the tenant’s identity dated 1 January 2004 between the landlord, Beijing Gome and the Target Group, the Target Group became the tenant of the property.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 140 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB613,200 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The tripartite agreement regarding the change of the tenant’s identity in respect of the subject property is valid and enforceable.

5. c. The transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-41 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Capital value in Particulars of existing state as at Property Description and Tenure Occupancy 15 June 2004 No. 5 The property comprises a 4-storey A portion of the No commercial Dongsanhuannan Road commercial complex completed in 1970s. property is occupied value Chaoyang District by the Target Group as Beijing City The property contains a leased floor area shop with an ancillary The PRC of approximately 6,388.2 square meters. office. The property is rented by Beijing Gome A portion of the from the landlord, an independent third property is occupied party, under the lease agreement dated 23 by a member of the November 2003 for a term of 6 years Parent Group as shop. commencing from 20 November 2003 to 19 November 2009. The annual rental payable for the property is RMB5,500,000. The lease shall be renewable upon notice 120 days before the expiry date. Beijing Gome has the prior right to renew the lease for a further term. Pursuant to a tripartite agreement regarding the change of the tenant’s identity dated 1 January 2004 between the landlord, Beijing Gome and the Target Group, the Target Group became the tenant of the property.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 60 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB262,800 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. Since the landlord of the subject property cannot produce any proper legal title document of the subject property, the validity and legality of the subject lease agreement is uncertain. If the subject lease agreement is not valid, the tenant should return the subject property to the landlord. However, the invalidity of the subject lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject lease agreement and the tenant may claim against the landlord for compensation according to law.

4. b. The tripartite agreement regarding the change of the tenant’s identity in respect of the subject property is valid and enforceable.

5. c. If the lease agreement of the subject property is valid and enforceable, the transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-42 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
15.	Xingyongshe Building,	The property comprises 6 shopping levels	A portion of the	No commercial
	Gulou South Road	and an office level of a 7-storey	property is occupied	value
	Changping District	commercial building completed in or	by the Target Group as
	Beijing City	about 1996.	shop with an ancillary
	The PRC		office.
		The property contains a total net floor
		area of approximately 3,951 square	A portion of the
		meters.	property is occupied
			by a member of the
		The property is rented by Beijing Gome	Parent Group as shop.
		from the landlord, an independent third
		party, under the lease agreement dated 21
		November 2003 for a term of 5 years
		commencing from 21 November 2003 to
		20 November 2008 at an annual rent of
		RMB1,200,000. The lease shall be
		renewable upon notice six months before
		the expiry date. Beijing Gome has the
		prior right to renew the lease for a further
		term.
		Pursuant to a tripartite agreement
		regarding the change of the tenant’s
		identity dated 1 January 2004 between the
		landlord, Beijing Gome and the Target
		Group, the Target Group became the
		tenant of the property.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 75 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB328,500 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The tripartite agreement regarding the change of the tenant’s identity in respect of the subject property is valid and enforceable.

5. c. The transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-43 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
16.	No. A7 Xibahebeile	The property comprises a single-storey	The property is	No commercial
	Chaoyang District	workshop building completed in about	occupied by the Target	value
	Beijing City	1980s.	Group as shop with an
	The PRC		ancillary office.
		The property contains a total leased floor
		area of approximately 4,500 square
		meters.
		The property is rented by Beijing Gome
		from the landlord, an independent third
		party, under the lease agreement dated 21
		November 2002 for a term of 2 years
		commencing from 1 January 2003 to 31
		December 2004 at an annual rental of
		0.1% of the annual profit of the subject
		shop. The total rental payable will not
		exceed RMB200,000. The lease shall be
		renewable upon notice one month before
		the expiry date.
		Pursuant to a tripartite agreement
		regarding the change of the tenant’s
		identity dated 1 January 2004 between the
		landlord, Beijing Gome and the Target
		Group, the Target Group became the
		tenant of the property.

Note:

1. The PRC legal opinion states, inter alia, that:

2. a. The lease agreement in respect of the subject property is valid and enforceable.

3. b. The tripartite agreement regarding the change of the tenant’s identity in respect of the subject property is valid and enforceable.

— VII-44 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
17.	Basement, 1st and	The property comprises three shopping	A portion of the	No commercial
	2nd Floor	level of a multi-storey commercial	property is occupied	value
	No. 42 Shijingshan	building completed in or about 2001.	by the Target Group as
	Road		shop with an ancillary
	Shijingshan District	The property contains a total leased floor	office.
	Beijing City	area of approximately 1,600 square
	The PRC	meters.	A portion of the
			property is occupied
		The property is rented by the Target	by a member of the
		Group from an independent third party	Parent Group as shop.
		with the lease agreement dated 1 April
		2004 for a term of 5 years commencing
		from 1 April 2004 to 1 April 2009 at an
		annual rent of RMB1,400,000.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 43 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB188,340 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-45 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
18.	Nos. B01-09,	The property comprises one office level	The property is	No commercial
	18th Floor	of a multi-storey office building	occupied by the Target	value
	Eagle Plaza	completed in or about 2000.	Group as office.
	No. 26 Xiaoyun Road
	Chaoyang District	The property contains a gross floor area
	Beijing City	of approximately 3,634.91 square meters.
	The PRC
		The property is rented by the Target
		Group from a connected party of the
		Target Group with the lease agreement
		dated 20 December 2003 for a term of 2
		years commencing from 1 January 2004
		to 31 December 2005. The monthly rental
		payable for the property is USD43,618.92
		inclusive of management fee. The lease
		shall be renewable upon notice one month
		before the expiry date. The Target Group
		has the prior right to renew the lease for
		a further term.

Note:

1. According to the PRC legal opinion, the lease agreement in respect of the subject property is valid and enforceable.

19.	1st Floor Commercial	The property comprises one shopping	A portion of the	No commercial
	Building	level of a multi-storey commercial	property is occupied	value
	No. 117 Liuwei Road	complex completed in or about 1983.	by the Target Group as
	Hedong District		shop with an ancillary
	Tianjin City	The property contains a gross floor area	office.
	The PRC	of approximately 4,500 square meters.
			A portion of the
		The property is rented by the Target	property is occupied
		Group from an independent third party	by a member of the
		with the lease agreement dated 11 January	Parent Group as shop.
		2001 for a term of 8 years commencing
		from 1 September 2001 to 31 August
		2009 at an annual rent of RMB2,000,000.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 83 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB363,540 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-46 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
20.	Portion of 1st, 2nd	The property comprises 3 shopping levels	The property is	No commercial
	and 3rd Floor of	of a multi-storey commercial building	occupied by the Target	value
	Xingke Building	completed in or about 1989.	Group as shop with an
	No. 445 Anshan		ancillary office.
	West Road	The property contains a total gross floor
	Nankai District	area of approximately 4,560.26 square
	Tianjin City	meters.
	The PRC
		The property is rented by the Target
		Group from an independent third party
		with the lease agreement dated 29
		December 2003 for a term of 5 years
		commencing from 1 December 2003 to 30
		November 2008. The annual rent from 1st
		to 3rd year is RMB2,681,432.88, from 4th
		to 5th year is RMB2,842,318.85. The
		lease shall be renewable upon notice three
		months before the expiry date. The Target
		Group has the prior right to renew the
		lease for a further term.

Note:

1. According to the PRC legal opinion, the lease agreement in respect of the subject property is valid and enforceable.

— VII-47 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

	Property	Description and Tenure
21.	1st, 2nd and 3rd Floor	The property comprises three shopping
	of Keji Rencai	levels of a multi-storey commercial
	Peixun Building	complex completed in or about 1999.
	Canglianzhuang
	Zhonghuan Line	The property contains a total leased floor
	Hebei District	area of approximately 4,259.45 square
	Tianjin City	meters.
	The PRC
		The property is rented by the Target
		Group from an independent third party
		with the lease agreement dated 25 July
		2003 for a term of 5 years commencing
		from 31 August 2003 to 30 August 2008
		at an annual rent of RMB1,249,743.58.
		The lease shall be renewable upon notice
		three months before the expiry date. The
		Target Group has the prior right to renew
		the lease for a further term.

	Capital value in
Particulars of	existing state as at
Occupancy	15 June 2004
The property is	No commercial
occupied by the Target	value
Group as shop with an
ancillary office.

Note:

1. According to the PRC legal opinion, since the landlord of the subject property cannot produce any proper legal title document of the subject property, the validity and legality of the subject lease agreement is uncertain. If the subject lease agreement is not valid, the tenant should return the subject property to the landlord. However, the invalidity of the subject lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject lease agreement and the tenant may claim against the landlord for compensation according to law.

— VII-48 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
22.	Tiantuo Assembly Hall	The property was an assembly hall	The property is	No commercial
	Hongqi Road	completed in or about 2000.	occupied by the Target	value
	Nankai District		Group as shop with an
	Tianjin City	The property contains a total leased floor	ancillary office.
	The PRC	area of approximately 1,600 square
		meters.
		The property is rented by the Target
		Group from an independent third party
		with the lease agreement dated 11 January
		2000 for a term of 8 years commencing
		from 16 February 2000 to 15 February
		2008. The annual rental payable for the
		property from 1st to 2nd year is
		RMB380,000, and from 3rd year onwards
		is subject to 10% annual increment. The
		lease shall be renewable upon notice two
		months before the expiry date.

Note:

1. According to the PRC legal opinion, the lease agreement in respect of the subject property is valid and enforceable.

— VII-49 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
23.	1st and 2nd Floor	The property comprises two shopping	A portion of the	No commercial
	Jinxing Building	levels of a multi-storey commercial	property is occupied	value
	No.65 Xiqing Road	complex completed in or about 1999.	by the Target Group as
	Hongqiao District		shop with an ancillary
	Tianjin City	The property contains a total leased floor	office.
	The PRC	area of approximately 2,182 square
		meters.	A portion of the
			property is occupied
		The property is rented by the Target	by a member of the
		Group from an independent third party	Parent Group as shop.
		with the lease agreement dated 12 April
		2002 for a term of 6 years commencing
		from 1 September 2000 to 31 August
		2006 at an annual rent of RMB1,354,405.
		The annual administrative fee is
		RMB26,184.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 35 square meters for a term commencing from 15 April 2004 to 31 August 2006 at an annual rent payable of RMB153,300 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. Since the Target Group cannot produce documents in relation to the landlord’s consent for the Target Group to assign part of the subject property, the validity and legality of the subject transfer lease agreement is uncertain. If the subject transfer lease agreement is not valid, the member of the Parent Group should return the subject part of the property to the Target Group. However, the invalidity of the subject transfer lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject transfer lease agreement and the member of the Parent Group may claim against the Target Group for compensation according to law. In addition, the landlord has the right to rescind the lease agreement according to the relevant provisions of the PRC Contract Law and require the Target Group to take up other responsibilities in relation to the breach of the lease agreement according to the relevant provisions of the lease agreement.

— VII-50 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
24.	1st and 2nd Floor of	The property comprises two shopping	A portion of the	No commercial
	Hepingyuan Building	levels of a multi-storey commercial	property is occupied	value
	Fu’an Da Street	complex completed in or about 1999.	by the Target Group as
	Heping District		shop with an ancillary
	Tianjin City	The property contains a total leased floor	office.
	The PRC	area of approximately 2,704 square
		meters.	A portion of the
			property is occupied
		The property is rented by the Target	by a member of the
		Group from an independent third party	Parent Group as shop.
		with the lease agreement dated 2 August
		2002 for a term of 6 years commencing
		from 4 September 2002 to 3 September
		2008. The annual rent payable from 1st
		year to 3rd year is RMB1,350,000, from
		4th year to 6th year is RMB1,417,500.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 88 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB385,440 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. Since the landlord of the subject property cannot produce any proper legal title document of the subject property, the validity and legality of the subject lease agreement is uncertain. If the subject lease agreement is not valid, the tenant should return the subject property to the landlord. However, the invalidity of the subject lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject lease agreement and the tenant may claim against the landlord for compensation according to law.

4. b. If the lease agreement of the subject property is valid and enforceable, the transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-51 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Property Description and Tenure 25. 1st Floor and The property comprises two shopping Basement One levels of a multi-storey commercial Renfang Gongcheng complex completed in or about 1996. Xincheng Building The interchange The property contains a gross floor area between Jiefangnan of approximately 3,473.8 square meters. Road and Dagunan Road The property is rented by the Target Hexi District Group from an independent third party Tianjin City with the lease agreement dated 19 The PRC September 2000 for a term of 10 years commencing from 19 September 2000 to 18 September 2010. The annual rental payable for the property from 1st to 3rd year is RMB1,200,000, from 4th to 10th year is subject to 1% annual increment, the total rent for the whole lease term is RMB12,342,804. The Target Group has the prior right to renew the lease for a further term.

Capital value in Particulars of existing state as at Occupancy 15 June 2004 A portion of the No commercial property is occupied value by the Target Group as shop with an ancillary office. A portion of the property is occupied by a member of the Parent Group as shop.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 53.2 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB233,016 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. Since the Target Group cannot produce documents in relation to the landlord’s consent for the Target Group to assign part of the subject property, the validity and legality of the subject transfer lease agreement is uncertain. If the subject transfer lease agreement is not valid, the member of the Parent Group should return the subject part of the property to the Target Group. However, the invalidity of the subject transfer lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject transfer lease agreement and the member of the Parent Group may claim against the Target Group for compensation according to law. In addition, the landlord has the right to rescind the lease agreement according to the relevant provisions of the PRC Contract Law and require the Target Group to take up other responsibilities in relation to the breach of the lease agreement according to the relevant provisions of the lease agreement.

— VII-52 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
26.	1st, 2nd and	The property comprises two shopping	A portion of the	No commercial
	3rd Floor of	levels and one warehouse level of a	property is occupied	value
	Binhai Plaza	commercial complex completed in or	by the Target Group as
	No. 94 Shanghai Road	about 1995.	shop, ancillary office
	Tanggu District		and warehouse.
	Tianjin City	The property contains a gross floor area
	The PRC	of approximately 4,891.85 square meters.	A portion of the
			property is occupied
		The property is rented by the Target	by a member of the
		Group from an independent third party	Parent Group as shop.
		with the lease agreements dated 10
		December 2000, 1 April 2003 and 5
		August 2003 respectively for a term
		commencing from 10 December 2000 to
		12 January 2011. The annual rent for year
		2003 is RMB1,854,596. The rent will be
		adjusted according to the contracts
		respectively. The lease shall be renewable
		upon notice three months before the
		expiry date. The Target Group has the
		prior right to renew the lease for a further
		term.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 132.6 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB580,788 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. Since the Target Group cannot produce documents in relation to the landlord’s consent for the Target Group to assign part of the subject property, the validity and legality of the subject transfer lease agreement is uncertain. If the subject transfer lease agreement is not valid, the member of the Parent Group should return the subject part of the property to the Target Group. However, the invalidity of the subject transfer lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject transfer lease agreement and the member of the Parent Group may claim against the Target Group for compensation according to law. In addition, the landlord has the right to rescind the lease agreement according to the relevant provisions of the PRC Contract Law and require the Target Group to take up other responsibilities in relation to the breach of the lease agreement according to the relevant provisions of the lease agreement.

— VII-53 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
27.	1st and 2nd Floor of	The property comprises two shopping	The property is	No commercial
	No. 02 Building	levels of a multi-storey commercial	occupied by the Target	value
	New Century	complex completed in or about 2000.	Group as shop with an
	Buxing Street		ancillary office.
	159 Xinhua Road	The property contains a total gross floor
	Langfang City	area of approximately 3,504 square
	Hebei	meters.
	The PRC
		The property is rented by the Target
		Group from an independent third party
		with the lease agreement dated 14 May
		2003 for a term commencing from 20
		May 2003 to 31 December 2008. The
		annual rent from 1 January 2004 to 31
		December 2006 is RMB1,214,453.4, from
		1 January 2007 to 31 December 2008 is
		RMB1,274,943.4 respectively. The rent
		free period is from 20 May 2003 to 1
		January 2004 and subject to
		administration fee of RMB1,576.80 per
		month.

Note:

1. According to the PRC legal opinion, the lease agreement in respect of the subject property is valid and enforceable.

— VII-54 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
28.	2nd Floor of	The property comprises a shopping level	A portion of the	No commercial
	No. 473	of a 2-storey commercial complex	property is occupied	value
	Jiefang Nan Road	completed in or about 2003.	by the Target Group as
	Hexi District		shop with an ancillary
	Tianjin City	The property contains a total gross floor	office.
	The PRC	area of approximately 5,187 square
		meters.	A portion of the
			property is occupied
		The property is rented by the Target	by a member of the
		Group from an independent third party	Parent Group as shop.
		with the lease agreement dated 28
		September 2003 for a term of 5 years
		commencing from 1 October 2003 to 30
		September 2008. The annual rent payable
		is RMB3,133,543.98.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 104.4 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB457,272 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-55 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
29.	1st, 2nd and 3rd Floor	The property comprises 2 shopping levels	A portion of the	No commercial
	of Meiri Yangguang,	and an office level of a multi-storey	property is occupied	value
	The interchange	commercial complex completed in or	by the Target Group as
	between	about 2002.	shop and office.
	Jinwei Road and
	Shizilin Da Street	The property contains a total gross floor	A portion of the
	Hebei District	area of approximately 5,565.69 square	property is occupied
	Tianjin City	meters.	by a member of the
	The PRC		Parent Group as shop.
		The property is rented by the Target
		Group from an independent third party
		with the lease agreements dated 5
		September 2003 and 22 October 2003
		respectively for a term of 5 years
		commencing from 5 September 2003 to 4
		September 2008. The annual rent payable
		is RMB3,037,346.65.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 96.8 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB423,984 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-56 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Capital value in Particulars of existing state as at Property Description and Tenure Occupancy 15 June 2004 30. No. 128 Heniu The property comprises a 2-storey A portion of the No commercial Cheng Road commercial complex, a 2-storey property is occupied value Hexi District warehouse and a 2-storey office building by the Target Group as Tianjin City completed in or about 2002, 1982 and shop, office and The PRC 1973 respectively. warehouse. The property contains a gross floor area A portion of the of approximately 2,752 square meters property is occupied shopping level, 529 square meters office by a member of the and 756 square meters warehouse. Parent Group as shop. The property is rented by the Target Group from an independent third party with the lease agreement dated 28 September 2003 for a term of 10 years commencing from 1 November 2003 to 31 October 2013. The annual rent payable is RMB1,900,000. The lease shall be renewable upon notice one month before the expiry date. The Target Group has the prior right to renew the lease for a further term.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 52.4 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB229,512 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-57 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
31.	No. 2 Weishan Road	The property comprises several premises	The property is	No commercial
	Jinnan District	including warehouses, office and staff	occupied by the Target	value
	Tianjin City	quarters completed in or about 2001.	Group as warehouses
	The PRC		with an ancillary
		The property contains a total gross floor	office and staff
		area of approximately 28,600 square	quarters.
		meters.
		The property is rented by the Target
		Group from an independent third party
		with the lease agreement dated 3 August
		2001 for a term of 10 years commencing
		from 1 September 2001 to 31 August
		2010 at an annual rent of RMB1,480,000.
		The lease shall be renewable upon notice
		two months before the expiry date.

Note:

1. According to the PRC legal opinion, the lease agreement in respect of the subject property is valid and enforceable.

— VII-58 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
32.	1st, 2nd and 3rd Floor	The property comprises three shopping	A portion of the	No commercial
	Jiulong Dianye	levels of a multi-storey commercial	property is occupied	value
	Building	complex completed in or about 2000.	by the Target Group as
	No. 7 Yangjiaping		shop with an ancillary
	Zheng Street	The property contains a total leased floor	office.
	Jiulongpo District	area of approximately 3,351 square
	Chongqing City	meters.	A portion of the
	Sichuan Province		property is occupied
	The PRC	The property is rented by the Target	by a member of the
		Group from an independent third party	Parent Group as shop.
		with the lease agreement dated 12
		December 2000, 18 May 2002 and 31 July
		2003 respectively for a term of 8 years
		commencing from 12 February 2001 to 12
		February 2009 at an annual rent of
		RMB1,788,924. The lease shall be
		renewable upon notice three months
		before the expiry date. The Target Group
		has the prior right to renew the lease for
		a further term.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 65 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB284,700 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-59 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
33.	4th, 5th and 6th Floor	The property comprises three shopping	A portion of the	No commercial
	Jiaxin Mansion	levels of a commercial complex	property is occupied	value
	No. 166 Xiaolongkan	completed in or about 1997.	by the Target Group as
	Zheng Street		shop with an ancillary
	Shapingba District	The property contains a leased floor area	office.
	Chongqing City	of approximately 5,200 square meters.
	The PRC		A portion of the
		The property is rented by the Target	property is occupied
		Group from an independent third party	by a member of the
		with the lease agreement dated 29	Parent Group as shop.
		September 2000 for a term of 8 years
		commencing from 30 September 2000 to
		30 September 2008 at an annual rent of
		RMB1,780,000. The lease shall be
		renewable upon notice three months
		before the expiry date. The Target Group
		has the prior right to renew the lease for
		a further term.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 51 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB223,380 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-60 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
34.	A9 Floor and B1 Floor	The property comprises two shopping	The property is	No commercial
	Qixing Furniture	level of a multi-storey commercial	occupied by the Target	value
	Market	complex completed in or about 2002.	Group as shop with an
	No.320 Minsheng Road		ancillary office.
	Yuzhong District	The property contains a leased floor area
	Chongqing City	of approximately 3,387.48 square meters.
	The PRC
		The property is currently rented by the
		Target Group from an independent third
		party with the lease agreements dated 7
		November 2000, 20 March 2003 and 21
		July 2003 respectively for a term of 7
		years commencing from 15 January 2001
		to 14 January 2008 at a monthly rent of
		RMB237,123.6.

Note:

1. According to the PRC legal opinion, the lease agreement in respect of the subject property is valid and enforceable.

— VII-61 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Property Description and Tenure

1. 1st and 2nd Floor The property comprises two shopping Auxiliary Building and levels and an advertisement space of a Advertisement Spaces multi-storey commercial complex Hefu Hotel completed in or about 1993. No. 2 Hongmian Da Road The property contains a leased floor area Jiangbei District of approximately 3,270 square meters. Chongqing City The PRC The two levels of shopping levels of the property is rented by the Target Group from an independent third party with the lease agreements dated 19 September 2000 and 1 April 2002 respectively for a term of 5 years commencing from 15 June 2002 to 14 June 2007 at a monthly rent of RMB143,880.

Capital value in Particulars of existing state as at Occupancy 15 June 2004 A portion of the No commercial property is occupied value by the Target Group as shop with an ancillary office.

A portion of the property is occupied by a member of the Parent Group as shop.

The advertisement space of the property is rented by the Target Group from an independent third party with the lease agreement dated 6 November 2000 for a term of 10 years commencing from 6 November 2000 to 5 November 2010 at an annual rent of RMB58,380.

The lease of the two shopping levels of the property shall be renewable upon notice six months before the expiry date. The Target Group has the prior right to renew the lease for a further term.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 60 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB262,800 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. Since the landlord of the subject property cannot produce any proper legal title document of the subject property, the validity and legality of the subject lease agreement is uncertain. If the subject lease agreement is not valid, the tenant should return the subject property to the landlord. However, the invalidity of the subject lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject lease agreement and the tenant may claim against the landlord for compensation according to law.

4. b. If the lease agreement of the subject property is valid and enforceable, the transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-62 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
36.	1st and 2nd Floor	The property comprises two shopping	A portion of the	No commercial
	Jiangnan Mingzhu	levels of a multi-storey commercial	property is occupied	value
	No.19 Nanping	complex completed in or about 2000.	by the Target Group as
	Nan Road		shop with an ancillary
	Nanan District	The property contains a leased floor area	office.
	Chongqing City	of approximately 2,764 square meters.
	The PRC		A portion of the
		The property is rented by the Target	property is occupied
		Group from an independent third party	by a member of the
		with the lease agreements dated 30	Parent Group as shop.
		August 2002 and 30 June 2003
		respectively for a term of 8 years
		commencing from 2 September 2002 to 1
		September 2010 at an annual rent of
		RMB1,260,384. The lease shall be
		renewable upon notice three months
		before the expiry date. The Target Group
		has the prior right to renew the lease for
		a further term.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 55 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB240,900 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-63 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
37.	1st and 2nd Floor	The property comprises two shopping	A portion of the	No commercial
	Xin Tian Di	levels of a multi-storey commercial	property is occupied	value
	Shopping Mall	complex completed in or about 2001.	by the Target Group as
	No.18 Shengli Village		shop with an ancillary
	Beibei City	The property contains a leased floor area	office.
	Chongqing City	of approximately 3,240 square meters.
	The PRC		A portion of the
		The property is rented by the Target	property is occupied
		Group from an independent third party	by a member of the
		with the lease agreement dated 5	Parent Group as shop.
		November 2003 for a term of 5 years
		commencing from 1 December 2003 to 30
		November 2008 at an annual rent of
		RMB1,362,240. The lease shall be
		renewable upon notice one month before
		the expiry date. The Target Group has the
		prior right to renew the lease for a further
		term.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 40 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB175,200 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-64 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
38.	B1A2 and B2A1 Floor	The property comprises two shopping	A portion of the	No commercial
	No.19 Guang	levels of a multi-storey commercial	property is occupied	value
	Chang Road	complex completed in or about 2003.	by the Target Group as
	Fuling District		shop with an ancillary
	Chongqing City	The property contains a leased floor area	office.
	The PRC	of approximately 3,670 square meters.
			A portion of the
		The property is rented by the Target	property is occupied
		Group from an independent third party	by a member of the
		with the lease agreement dated 28	Parent Group as shop.
		November 2003 for a term of 8 years
		commencing from 28 November 2003 to
		27 November 2011 at an annual rent of
		RMB1,761,600. The lease shall be
		renewable upon notice one month before
		the expiry date. The Target Group has the
		prior right to renew the lease for a further
		term.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 65 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB284,700 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-65 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
39.	1st, 2nd and 3rd Floor	The property comprises three shopping	A portion of the	No commercial
	No.16 Minzu Road	levels of a multi-storey commercial	property is occupied	value
	Yuzhong District	complex completed in or about 2004.	by the Target Group as
	Chongqing City		shop with an ancillary
	The PRC	The property contains a leased floor area	office.
		of approximately 4,405.6 square meters.
			A portion of the
		The property is rented by the Target	property is occupied
		Group from an independent third party	by a member of the
		with the lease agreement dated 9 March	Parent Group as shop.
		2004 for a term of 5 years commencing
		from 9 March 2004 to 8 March 2009. The
		annual rental payable for the first and
		second years is RMB3,009,098. The
		annual rental payable from the third year
		is subject to current market rental. The
		lease shall be renewable upon notice six
		months before the expiry date. The Target
		Group has the prior right to renew the
		lease for a further term.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 64 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB280,320 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-66 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
40.	Xin Qiao Village	The property comprises several premises	The property is	No commercial
	Tanjiagang Town	including warehouses, office rooms and	occupied by the Target	value
	Shapingba District	dormitory. The property was completed in	Group as warehouse
	Chongqing City	or about 2002.	with an ancillary
	The PRC		office and staff
		The property contains a total leased floor	quarters.
		area of approximately 7,293 square
		meters.
		The property is rented by the Target
		Group from an independent third party
		with the lease agreements dated 30 July
		2002 and 21 November 2002 respectively
		for a term of 8 years commencing from
		28 October 2002 to 27 October 2010 at an
		annual rent of RMB713,952. The lease
		shall be renewable upon notice three
		months before the expiry date. The Target
		Group has the prior right to renew the
		lease for a further term.

Note:

1. According to the PRC legal opinion, the lease agreement in respect of the subject property is valid and enforceable.

— VII-67 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
41.	1st, 2nd and 3rd Floor	The property comprises three shopping	A portion of the	No commercial
	Wan Feng Building	levels of a multi-storey commercial	property is occupied	value
	No.2 Xing Rong	complex completed in or about 1990.	by the Target Group as
	Xi Lane		shop with an ancillary
	Nansi Section	The property contains a total leased floor	office.
	Yihuan Road	area of approximately 2,743.47 square
	Chengdu City	meters.	A portion of the
	Sichuan Province		property is occupied
	The PRC	1st and 2nd Floor of the property are	by a member of the
		rented by the Target Group from an	Parent Group as shop.
		independent third party with the lease
		agreements dated 26 October 2000 and 6
		April 2004 respectively for a term of 8
		years commencing from 26 October 2000
		to 25 October 2008 at an annual rent of
		RMB1,031,000.
		3rd Floor of the property is rented by the
		Target Group from an independent third
		party for a term of 5 years and 4 months
		commencing from 26 June 2003 to
		25 October, 2008 at an annual rent of
		RMB491,980.80. The lease shall be
		renewable upon notice three months
		before the expiry date. The Target Group
		has the prior right to renew the lease for
		a further term.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 62 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB271,560 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-68 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
42.	1st and 2nd Floor	The property comprises two shopping	A portion of the	No commercial
	Jin Yu Building	levels of a multi-storey commercial	property is occupied	value
	No. 191 Beisiduan	complex completed in or about 1985.	by the Target Group as
	Yihuan Road		shop with an ancillary
	Chengdu City	The property contains a leased floor area	office.
	Sichuan Province	of approximately 4,512 square meters.
	The PRC		A portion of the
		The property is rented by the Target	property is occupied
		Group from an independent third party	by a member of the
		with the lease agreement dated 1	Parent Group as shop.
		November 2000 for a term of 7 years
		commencing from 1 November 2000 to 31
		October 2007 at an annual rent of
		RMB800,000 for the first 5 years and
		RMB830,000 for the remaining 2 years.
		The lease shall be renewable upon notice
		twelve months before the expiry date. The
		Target Group has the prior right to renew
		the lease for a further term.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 62 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB271,560 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. Since the landlord of the subject property cannot produce any proper legal title document of the subject property, the validity and legality of the subject lease agreement is uncertain. If the subject lease agreement is not valid, the tenant should return the subject property to the landlord. However, the invalidity of the subject lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject lease agreement and the tenant may claim against the landlord for compensation according to law.

4. b. If the lease agreement of the subject property is valid and enforceable, the transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-69 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Capital value in Particulars of existing state as at Property Description and Tenure Occupancy 15 June 2004 43. Portion of 1st The property comprises two shopping A portion of the No commercial and 2nd Floor levels of a multi-storey commercial property is occupied value Xing Long Building complex completed in or about 1992. by the Target Group as No. 67 Guangrongxi shop with an ancillary Road The property contains a leased floor area office. Chengdu City of approximately 2,810 square meters. Sichuan Province A portion of the The PRC The property is rented by the Target property is occupied Group from an independent third party by a member of the with the lease agreement dated 10 Parent Group as shop. October 2000 for a term of 8 years commencing from 10 October 2000 to 9 October 2008. The annual rental payable for the property from 1st to 5th year is RMB1,180,200, and from 6th year onwards is subject to 4% annual increment. The lease shall be renewable upon notice three months before the expiry date. The Target Group has the prior right to renew the lease for a further term.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 54 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB236,520 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. Since the Target Group cannot produce documents in relation to the landlord’s consent for the Target Group to assign part of the subject property, the validity and legality of the subject transfer lease agreement is uncertain. If the subject transfer lease agreement is not valid, the member of the Parent Group should return the subject part of the property to the Target Group. However, the invalidity of the subject transfer lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject transfer lease agreement and the member of the Parent Group may claim against the Target Group for compensation according to law. In addition, the landlord has the right to rescind the lease agreement according to the relevant provisions of the PRC Contract Law and require the Target Group to take up other responsibilities in relation to the breach of the lease agreement according to the relevant provisions of the lease agreement.

— VII-70 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
44.	1st, 2nd and 3rd Floor	The property comprises three shopping	A portion of the	No commercial
	Yin He Commercial	levels of a commercial complex	property is occupied	value
	Plaza	completed in or about 2000.	by the Target Group as
	No. 40 Dongsanduan		shop with an ancillary
	Er Huan Road	The property contains a leased floor area	office.
	Chengdu City	of approximately 6,437 square meters.
	Sichuan Province		A portion of the
	The PRC	The property is rented by the Target	property is occupied
		Group from an independent third party	by a member of the
		with the lease agreement dated 16	Parent Group as shop.
		February 2001 and 6 April 2004
		respectively for a term commencing from
		8 April 2004 to 20 February 2009. The
		annual rental payable for the property is
		RMB2,680,000. The lease shall be
		renewable upon notice three months
		before the expiry date. The Target Group
		has the prior right to renew the lease for
		a further term.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 65 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB284,700 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-71 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

• Property Description and Tenure

• 1. 1st and 2nd Floor The property comprises two shopping Mei Mei levels of a multi-storey commercial Commercial Plaza complex completed in or about 1996. Ancillary No.18, No.2 Jin Xiu Road The property contains a leased floor area Chengdu City of approximately 4,296.54 square meters. Sichuan Province The PRC The property is rented by the Target Group from an independent third party with the lease agreement dated 18 July 2002 for a term of 5 years commencing from 5 August 2002 to 4 August 2007. The monthly rental payable for the property from 1st to 3rd year is RMB193,344.3, and from 4th to 5th year is RMB203,011.5 respectively. The lease shall be renewable upon notice three months before the expiry date. The Target Group has the prior right to renew the lease for a further term.

	Capital value in
Particulars of	existing state as at
Occupancy	15 June 2004
A portion of the	No commercial
property is occupied	value
by the Target Group as
shop with an ancillary
office.
A portion of the
property is occupied
by a member of the
Parent Group as shop.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 83 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB363,540 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. Since the landlord of the subject property cannot produce any proper legal title document of the subject property, the validity and legality of the subject lease agreement is uncertain. If the subject lease agreement is not valid, the tenant should return the subject property to the landlord. However, the invalidity of the subject lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject lease agreement and the tenant may claim against the landlord for compensation according to law.

4. b. If the lease agreement of the subject property is valid and enforceable, the transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-72 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Property Description and Tenure 46. 1st and 2nd Floor The property comprises two shopping Huang Cheng levels of a multi-storey commercial Commercial Plaza complex completed in or about 1997. No.97 Renmin Nan Road First Section The property contains a leased floor area Qing Yang District of approximately 3,836 square meters. Chengdu City Sichuan Province The property is rented by the Target The PRC Group from an independent third party with the lease agreement dated 8 July 2002 for a term of 5 years commencing from 1 August 2002 to 31 July 2007 at a monthly rent of RMB214,816 inclusive of management fee and ancillary cost. The lease shall be renewable upon notice three months before the expiry date. The Target Group has the prior right to renew the lease for a further term.

Capital value in Particulars of existing state as at Occupancy 15 June 2004 The property is No commercial occupied by the Target value Group as shop with an ancillary office.

Note:

1. According to the PRC legal opinion, since the landlord of the subject property cannot produce any proper legal title document of the subject property, the validity and legality of the subject lease agreement is uncertain. If the subject lease agreement is not valid, the tenant should return the subject property to the landlord. However, the invalidity of the subject lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject lease agreement and the tenant may claim against the landlord for compensation according to law.

— VII-73 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
47.	1st and 2nd Floor	The property comprises two shopping	The property is	No commercial
	South Tower of Wan	levels of a multi-storey commercial	occupied by the Target	value
	Rong Commercial	complex completed in or about 2002.	Group as shop with an
	Building		ancillary office.
	No.203 & 204	The property contains a leased floor area
	Jiefang Road	of approximately 4,880 square meters.
	Ziliujin District
	Zigong City	The property is rented by the Target
	Sichuan Province	Group from an independent third party
	The PRC	with the lease agreement dated 19
		September 2003 for a term of 5 years
		commencing from 1 October 2003 to 30
		September 2008. The annual rent payable
		of the property for the first 3 years is
		RMB1,120,000 subject to an annual
		increment of 3% from fourth year
		onwards. The lease shall be renewable
		upon notice one month before the expiry
		date. The Target Group has the prior right
		to renew the lease for a further term.

Note:

1. According to the PRC legal opinion, the lease agreement in respect of the subject property is valid and enforceable.

2. Room Nos. 2 to 13 The property comprises twelve office The property is No commercial 13th Floor units on 13th floor of a multi-storey occupied by the Target value Jin Yu Building commercial complex completed in or Group as office. No. 191 Beisiduan about 1985. Yihuan Road Chengdu City The property contains a leased floor area Sichuan Province of approximately 900 square meters. The PRC The property is rented by the Target Group from an independent third party with the lease agreement dated 9 June 2003 for a term of 3 years commencing from 16 July 2003 to 15 July 2006 at a monthly rent of RMB23,400. The lease shall be renewable upon notice three months before the expiry date. The Target Group has the prior right to renew the lease for a further term.

Note:

1. According to the PRC legal opinion, the lease agreement in respect of the subject property is valid and enforceable.

— VII-74 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Property

Description and Tenure

Capital value in Particulars of existing state as at Occupancy 15 June 2004

The property comprises several premises including warehouses, office and dormitory completed in or about 2000.

1. Group 8 The property comprises several premises Tie Fuo Cun including warehouses, office and Wuhou Da Road dormitory completed in or about 2000. Chengdu City Sichuan Province The property contains a total gross floor The PRC area of approximately 9,360 square meters.

The property is No commercial occupied by the Target value Group as warehouse and ancillary office.

The property is rented by the Target Group from an independent third party in 4 portions as follows:

Area			Monthly
(sq.m.)	Term		Rental
3,318	11/11/2000	to	19,908
	12/10/2010
4,264	01/01/2001	to	25,584
	31/12/2010
188	20/07/2002	to	1,128
	20/07/2010
1,590	01/07/2003	to	9,540
	30/06/2010
Total			56,160

The lease shall be renewable upon notice three months before the expiry date. The Target Group has the prior right to renew the lease for a further term.

Note:

1. According to the PRC legal opinion, since the landlord of the subject property cannot produce any proper legal title document of the subject property, the validity and legality of the subject lease agreement is uncertain. If the subject lease agreement is not valid, the tenant should return the subject property to the landlord. However, the invalidity of the subject lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject lease agreement and the tenant may claim against the landlord for compensation according to law.

— VII-75 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Capital value in Particulars of existing state as at Property Description and Tenure Occupancy 15 June 2004 50. Group 3 The property comprises several buildings The property is No commercial Dongdan Village within a warehouse development currently occupied by value Yantu District completed in or about 2003. the Target Group as Xian City warehouse. Shaanxi Province The property contains a leased floor area The PRC of approximately 18,230 square meters. The property is rented by the Target Group from an independent third party with the lease agreement dated 29 October 2003 for a term of 10 years commencing from 20 October 2003 to 20 October 2013 at an annual rent of RMB981,450. The lease shall be renewable upon notice one month before the expiry date. The Target Group has the prior right to renew the lease for a further term.

Note:

1. According to the PRC legal opinion, the lease agreement in respect of the subject property is valid and enforceable.

2. 1st and 2nd Floor The property comprises two shopping A portion of the No commercial Tongji Plaza levels of a multi-storey commercial property is occupied value No. 113 Beida Road building completed in or about 2000. by the Target Group as Xian City shop with an ancillary Shaanxi Province The property contains a leased floor area office. The PRC of approximately 3,010 square meters. A portion of the The property is rented by the Target property is occupied Group from an independent third party by a member of the with the lease agreement dated 13 March Parent Group as shop. 2001 for a term of 8 years commencing from 13 March 2001 to 12 March 2009 at an annual rent of RMB1,800,000. The lease shall be renewable upon notice three months before the expiry date. The Target Group has the prior right to renew the lease for a further term.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 53.58 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB234,700 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-76 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
52.	1st, 2nd and 3rd Floor	The property comprises three shopping	A portion of the	No commercial
	Jingye Modern Window	levels of a multi-storey commercial	property is occupied	value
	No. 100 West Section	building completed in or about 2001.	by the Target Group as
	Er Huan Nan Road		shop with an ancillary
	Xian City	The property contains a gross floor area	office.
	Shaanxi Province	of approximately 4,792 square meters.
	The PRC		A portion of the
		The property is rented by the Target	property is occupied
		Group from an independent third party	by a member of the
		with the lease agreements dated 9 August	Parent Group as shop.
		2001, 1 April 2002 and 15 August 2003
		respectively for a term of 10 years
		commencing from 10 August 2001 to 9
		August 2011. The monthly rent payable
		for first 5 years is RMB211,392 and will
		be adjusted at the sixth year with
		reference to the national CPI but not
		exceeding 5%.
		The lease shall be renewable upon notice
		three months before the expiry date. The
		Target Group has the prior right to renew
		the lease for a further term.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 60.12 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB263,300 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-77 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
53.	1st and 2nd	The property comprises two shopping	A portion of the	No commercial
	Changxing Zhiye	levels of a multi-storey commercial	property is occupied	value
	Square	building completed in or about 2002.	by the Target Group as
	No.64 Xingqing Road		shop with an ancillary
	Xian City	The property contains a leased floor area	office.
	Shaanxi Province	of approximately 4,180 square meters.
	The PRC		A portion of the
		The property is rented by the Target	property is occupied
		Group from an independent third party	by a member of the
		with the lease agreement dated 1 August	Parent Group as shop.
		2002 for a term of 10 years commencing
		from 1 August 2002 to 31 July 2012. The
		annual rent payable for first 5 years is
		RMB1,655,280 and will be adjusted at the
		sixth year with reference to the national
		CPI but not exceeding 5%.
		The lease shall be renewable upon notice
		three months before the expiry date. The
		Target Group has the prior right to renew
		the lease for a further term.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 87 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB381,100 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-78 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
54.	1st to 4th Floor	The property comprises four shopping	A portion of the	No commercial
	Xian Zhuque	levels of a multi-storey commercial	property is occupied	value
	Trading Building	building completed in or about 1984.	by the Target Group as
	No.259 Xidi Street		shop with an ancillary
	Xian City	The property contains a leased floor area	office.
	Shaanxi Province	of approximately 4,510 square meters.
	The PRC		A portion of the
		The property is rented by the Target	property is occupied
		Group from an independent third party	by a member of the
		with the lease agreement dated 7	Parent Group as shop.
		November 2003 for a term of 10 years
		commencing from 15 January 2004 to 15
		January 2014 at an annual rent of
		RMB2,000,000.
		The lease shall be renewable upon notice
		one month before the expiry date. The
		Target Group has the prior right to renew
		the lease for a further term.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 144 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB630,700 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-79 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
55.	1st and 2nd Floor	The property comprises two shopping	A portion the property	No commercial
	No. 110	levels of a commercial complex	is occupied by the	value
	Fenggaoxi Road	completed in 2000’s.	Target Group as shop
	Lianhu District		with an ancillary
	Xian City	The property contains a leased floor area	office.
	Shaanxi Province	of approximately 2,000 square meters.
	The PRC		A portion of the
		The property is rented by the Target	property is occupied
		Group from an independent third party	by a member of the
		with the lease agreement dated 5 April	Parent Group as shop.
		2004 for a term of 5 years commencing
		from 6 April 2004 to 6 April 2009. The
		annual rental payable for the property is
		RMB1,210,000. The lease shall be
		renewable upon notice one month before
		the expiry date. The Target Group has the
		prior right to renew the lease for a further
		term.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 40.39 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB177,000 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-80 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
56.	1st & 2nd Floor	The property comprises two shopping	A portion of the	No commercial
	No. 165	levels of a commercial complex	property is occupied	value
	Huigong Street	completed in or about 1985.	by the Target Group as
	Shenyang City		shop with an ancillary
	Liaoning Province	The property contains a total gross floor	office.
	The PRC	area of approximately 2,300 square
		meters.	A portion of the
			property is occupied
		The property is rented by the Target	by a member of the
		Group from an independent third party	Parent Group as shop.
		with the lease agreement dated 18 May
		2001 for a term of 10 years commencing
		from 1 June 2001 to 31 May 2011 at an
		annual rent of RMB1,050,000. The lease
		shall be renewable upon notice three
		months before the expiry date. The Target
		Group has the prior right to renew the
		lease for a further term.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 45 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB197,100 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-81 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
57.	1st and 2nd Floor	The property comprises two shopping	A portion of property	No commercial
	No. 59 Changjiang	levels of a commercial complex	is occupied by the	value
	Street	completed in or about 2001.	Target Group as shop
	Huanggu District		with an ancillary
	Shenyang City	The property contains a total gross floor	office.
	Liaoning Province	area of approximately 3,281.76 square
	The PRC	meters.	A portion of the
			property is occupied
		The property is rented by the Target	by a member of the
		Group from an independent third party	Parent Group as shop.
		with the lease agreement dated 14
		September 2001 for a term of 9 years
		commencing from 18 October 2001 to 17
		October 2010. The annual rental payable
		for the property from 1st to 3rd year is
		RMB1,200,000, from 4th to 6th year is
		RMB1,260,000, and from 7th to 9th year
		is RMB1,323,000 respectively. The lease
		shall be renewable upon notice three
		months before the expiry date. The Target
		Group has the prior right to renew the
		lease for a further term.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 63 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB270,000 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. Since the landlord of the subject property cannot produce any proper legal title document of the subject property, the validity and legality of the subject lease agreement is uncertain. If the subject lease agreement is not valid, the tenant should return the subject property to the landlord. However, the invalidity of the subject lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject lease agreement and the tenant may claim against the landlord for compensation according to law.

4. b. If the lease agreement of the subject property is valid and enforceable, the transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-82 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
58.	1st and 2nd Floor	The property comprises two shopping	A portion of the	No commercial
	No. 51	levels of a commercial complex	property is occupied	value
	Xinghuanan Street	completed in or about 2001.	by the Target Group as
	Tiexi District		shop with an ancillary
	Shenyang City	The property contains a total gross floor	office.
	Liaoning Province	area of approximately 3,616 square
	The PRC	meters.	A portion of the
			property is occupied
		The property is rented by the Target	by a member of the
		Group from an independent third party	Parent Group as shop.
		with the lease agreement dated 7
		September 2001 for a term of 10 years
		commencing from 10 September 2001 to
		9 September 2011. The annual rental
		payable for the property from 1st to 5th
		year is RMB1,100,000, and from 6th to
		10th year is RMB1,200,000 respectively.
		The lease shall be renewable upon notice
		three months before the expiry date. The
		Target Group has the prior right to renew
		the lease for a further term.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 66 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB289,000 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. Since the landlord of the subject property cannot produce any proper legal title document of the subject property, the validity and legality of the subject lease agreement is uncertain. If the subject lease agreement is not valid, the tenant should return the subject property to the landlord. However, the invalidity of the subject lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject lease agreement and the tenant may claim against the landlord for compensation according to law.

4. b. If the lease agreement of the subject property is valid and enforceable, the transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-83 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Capital value in Particulars of existing state as at Property Description and Tenure Occupancy 15 June 2004 59. 1st and 2nd Floor The property comprises two shopping A portion of the No commercial No. 2 Wanliutang Road levels of 4 adjoining buildings completed property is occupied value Shenhe District between 1981 and 1992. by the Target Group as Shenyang City shop with an ancillary Liaoning Province The property contains a total gross floor office. The PRC area of approximately 3,100 square meters. A portion of the property is occupied The property is rented by the Target by a member of the Group from an independent third party Parent Group as shop. with the lease agreement dated 16 November 2001 for a term commencing from 28 November 2001 to 27 December 2009. The annual rental payable for the property from 1st to 3rd year is RMB800,000, 4th to 6th year is RMB850,000, and 7th year onwards is RMB900,000 respectively. The lease shall be renewable upon notice three months before the expiry date. The Target Group has the prior right to renew the lease for a further term.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 47 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB206,000 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-84 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
60.	1st, 2nd and 3rd Floor	The property comprises three floors of a	The property is	No commercial
	23 Fengyutan Street	commercial building completed in or	occupied by the Target	value
	Shenghe District	about 1997.	Group as shop with an
	Shenyang City		ancillary office.
	Liaoning Province	The property contains a total gross floor
	The PRC	area of approximately 4,258 square
		meters.
		The property is rented by the Target
		Group from an independent third party
		with the lease agreement dated 25
		October 2002 for a term of 6 years
		commencing from 25 October 2002 to 24
		October 2008 at an annual rent of
		RMB1,320,000. The lease shall be
		renewable upon notice three months
		before the expiry date. The Target Group
		has the prior right to renew the lease for
		a further term.

Note:

1. According to the PRC legal opinion, the lease agreement in respect of the subject property is valid and enforceable.

— VII-85 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Capital value in Particulars of existing state as at Property Description and Tenure Occupancy 15 June 2004 61. Warehouse Area The property comprises eight singleThe property is No commercial No. 8 Avenue storey warehouses and a single storey occupied by the Target value 19 Beiyixi Road office building and an open space. Group as office, Tiexi District warehouse and garage. Shenyang City The property was completed in or about Liaoning Province 1972. The PRC The property contains a gross floor area of approximately 5,797 square meters of warehouse and 6,700 square meters of space yard. The property is rented by the Target Group from an independent third party with the lease agreements dated 13 June 2001 and 18 April 2002 respectively for a term of 10 years commencing from 13 June 2001 to 12 June 2011 at an annual rent of RMB940,000. From 1 May 2002 onwards the annual rent has been adjusted to RMB580,934. The lease shall be renewable upon notice three months before the expiry date. The Target Group has the prior right to renew the lease for a further term.

Note:

1. According to the PRC legal opinion, since the landlord of the subject property cannot produce any proper legal title document of the subject property, the validity and legality of the subject lease agreement is uncertain. If the subject lease agreement is not valid, the tenant should return the subject property to the landlord. However, the invalidity of the subject lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject lease agreement and the tenant may claim against the landlord for compensation according to law.

— VII-86 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Capital value in Particulars of existing state as at Property Description and Tenure Occupancy 15 June 2004 62. 1st and 2nd Floor & The property comprises three shopping A portion of the No commercial Basement One of levels of a multi-storey commercial property is occupied value No. 2 Weihai Road complex completed in or about 2000. by the Target Group as Shibei District shop with an ancillary Qingdao City Part of 1st Floor and Basement One of office. Shandong Province the property contains a total leased floor The PRC area of approximately 3,670.9 square A portion of the meters. property is occupied by a member of the Part of 1st Floor and the whole of 2nd Parent Group as shop. Floor of the property contains a total leased floor area of approximately 2,917.55 square meters.

Part of 1st Floor and Basement One of the property is rented by the Target Group from an independent third party with the lease agreement dated 13 September 2001 for a term of 10 years commencing from 10 September 2001 to 9 September 2010 at an annual rent of RMB1,160,000.

Part of 1st Floor and the whole of 2nd Floor of the property is rented by the Target Group from an independent third party with the lease agreement dated 15 April 2003 for a term of 10 years commencing from 15 May 2003 to 14 May 2013 at an annual rent of RMB1,299,185.02.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 97 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB419,040 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. Since the Target Group cannot produce documents in relation to the landlord’s consent for the Target Group to assign part of the subject property, the validity and legality of the subject transfer lease agreement is uncertain. If the subject transfer lease agreement is not valid, the member of the Parent Group should return the subject part of the property to the Target Group. However, the invalidity of the subject transfer lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject transfer lease agreement and the member of the Parent Group may claim against the Target Group for compensation according to law. In addition, the landlord has the right to rescind the lease agreement according to the relevant provisions of the PRC Contract Law and require the Target Group to take up other responsibilities in relation to the breach of the lease agreement according to the relevant provisions of the lease agreement.

— VII-87 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
63.	1st to 5th Floor	The property comprises two shopping	A portion of the	No commercial
	Sifang Commercial	levels and three office floors of a multi-	property is occupied	value
	Center	storey commercial complex completed in	by the Target Group as
	No. 26	or about 1995.	shop with an ancillary
	Hangzhou Road		office.
	Sifang District	The property contains a total leased floor
	Qingdao City	area of approximately 5,700 square	A portion of the
	Shandong Province	meters.	property is occupied
	The PRC		by a member of the
		The property is rented by the Target	Parent Group as shop.
		Group from an independent third party
		with the lease agreement dated 16 June
		2001 for a term of 10 years commencing
		from 16 June 2001 to 15 June 2011 at an
		annual rent of RMB1,300,000.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 70 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB302,400 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-88 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Property

Description and Tenure

Capital value in Particulars of existing state as at Occupancy 15 June 2004

1. Basement Level 1 The property comprises a basement level Guomou Shopping Plaza of a multi-storey commercial complex No. 50 Xianyang Road completed in or about 1986. Qingdao City Shandong Province The property contains a total gross floor The PRC area of approximately 3,100 square meters.

2,800 square meters of the property are rented by the Target Group from an independent third party with the lease agreement dated 20 September 2001 for a term commencing from 1 December 2001 to 31 December 2007. The annual rental payable for the property commencing from 1 January 2002 to 31 December 2003 is RMB1,000,000, from 1 January 2004 to 31 December 2005 is RMB1,050,000 and from 1 January 2006 to 31 December 2007 is RMB1,102,500 respectively.

A portion of the No commercial property is occupied value by the Target Group as shop with an ancillary office and storage.

A portion of the property is occupied by a member of the Parent Group as shop.

300 square meters of the property are rented by the Target Group from an independent third party with the lease agreement dated 20 September 2001 for a term commencing from 1 December 2001 to 31 December 2007 at an annual rent of RMB30,000.

According to a supplemental agreement dated 20 September 2001, the annual air conditioning fee payable by the Target Group will be fixed at RMB2,000 per month for eight months each year from June to September and from December to March.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 34 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB146,880 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-89 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
65.	1st and 2nd Floor of	The property comprises two shopping	A portion of the	No commercial
	Block 2	levels of a multi-storey building	property is occupied	value
	No. 78 Nanjing Road	completed in or about 1990.	by the Target Group as
	Qingdao City		shop with an ancillary
	Shandong Province	The property contains a total leased floor	office.
	The PRC	area of approximately 3,356 square
		meters.	A portion of the
			property is occupied
		The property is rented by the Target	by a member of the
		Group from an independent third party	Parent Group as shop.
		with the lease agreement dated 8
		September 2003 for a term of 9 years
		commencing from 1 September 2003 to
		31 August 2012 at an annual rent of
		RMB2,253,889.6 inclusive of the
		equipments.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 31 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB133,920 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-90 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Description and Tenure

Property

1. 1st Floor and The property comprises one shopping Basement One of level of a commercial complex completed Nanxiahe Commercial in or about 2000. Building No. 390 Dongfeng 1st Floor of the property contains a total Dong Street leased floor area of approximately Weifang City 3,764.61 square meters. Shandong Province The PRC 1st Floor of the property is rented by the Target Group from an independent third party with the lease agreement dated 6 April 2003 for a term of 8 years commencing from 31 March 2003 to 30 March 2011 at an annual rent of RMB700,000, which will be increased to RMB735,000 from 31 March 2007 onwards.

The property comprises one shopping level of a commercial complex completed in or about 2000.

Capital value in Particulars of existing state as at Occupancy 15 June 2004 The property is No commercial occupied by the Target value Group as shop and storage.

Basement of the property contains a total leased floor area of approximately 1,043.59 square meters.

Basement of the property is rented by the Target Group from an independent third party with the lease agreement dated 6 April 2003 for a term of 8 years commencing from 30 March 2003 to 31 March 2011. The annual rental payable for the property from 1st to 4th year is RMB99,036, and from 4th year onwards is subject to 5% annual increment. The lease shall be renewable upon notice one month before the expiry date. The Target Group has the prior right to renew the lease for a further term.

Note:

1. According to the PRC legal opinion, the lease agreement in respect of the subject property is valid and enforceable.

— VII-91 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
67.	No. 10 Warehouse	The property comprises the basement	The property is	No commercial
	No. 3 Cangdong Road	floor of a commercial building completed	occupied by the Target	value
	Weicheng District	in 1990’s.	Group as warehouse.
	Weifang City
	Shandong Province	The property contains a total leased floor
	The PRC	area of approximately 1,137 square
		meters.
		The property is rented by the Target
		Group from an independent third party
		with the lease agreement dated 25 June
		2003 for a term of 2 years commencing
		from 25 June 2003 to 24 June 2005 at an
		annual rent of RMB103,751.25.

Note:

	1. According to the	PRC legal opinion, the lease agreement in respect of the subject	PRC legal opinion, the lease agreement in respect of the subject	property is valid and
	enforceable.
68.	Nos. 2 and 3 Warehouse	The property comprises two single storey	The property is	No commercial
	No. 27 Baozhang Road	warehouses and a single storey office	occupied by the Target	value
	Shibei District	building and an open space. The property	Group as warehouse.
	Qingdao City	was completed in 1990s.
	Shandong Province
	The PRC	The property contains a total gross floor
		area of approximately 6,344.55 square
		meters of warehouse, 600 square meters
		of office space and 2,000 square meters
		of open area.
		The property is rented by the Target
		Group from an independent third party
		with the lease agreements dated 9 July
		2001 and 19 June 2002 respectively for a
		term of 10 years commencing from 9 July
		2001 to 8 July 2011 at an annual rent of
		RMB602,100.

Note:

1. According to the PRC legal opinion, the lease agreement in respect of the subject property is valid and enforceable.

— VII-92 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
69.	1st, 2nd and 3rd Floor	The property comprises the first	The property is	No commercial
	of Linhua Building	3 shopping levels of a multi-storey	occupied by the Target	value
	No. 220 Huayuan Road	complex completed in or about 2002.	Group as shop with an
	Licheng District		ancillary office.
	Jinan City	The property contains a total gross floor
	Shandong Province	area of approximately 4,866.4 square
	The PRC	meters.
		4,600 square meters of the property are
		rented by the Target Group from an
		independent third party with the lease
		agreement dated 1 August 2002 for a term
		of 6 years commencing from 1 October
		2002 to 30 September 2008. The annual
		rent for the first 3 years is
		RMB1,500,000, from 4th to 6th year is
		RMB1,560,000.
		266.4 square meters of the property are
		rented by the Target Group from an
		independent third party with the lease
		agreement dated 17 March 2003 for a
		term commencing from 1 May 2003 to 15
		June 2008, the annual rent is RMB90,000.
		The lease shall be renewable upon notice
		three months before the expiry date. The
		Target Group has the prior right to renew
		the lease for a further term.

Note:

1. According to the PRC legal opinion, the lease agreement in respect of the subject property is valid and enforceable.

— VII-93 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Capital value in Particulars of existing state as at Property Description and Tenure Occupancy 15 June 2004 70. West Portion of 1st The property comprises three shopping The property is No commercial and 2nd Floor, levels and an office room with lift shaft occupied by the Target value Shopping area of in Basement One of a multi-storey Group as shop with an Basement One and commercial complex completed in or ancillary office. an office room about 1997. with lift shaft in Basement One Three shopping levels of the property No. 1 Jinshi Road contain a total gross floor area of Jinan City approximately 4,101.54 square meters. Shandong Province The office room with the lift shaft in The PRC Basement One of the property contains gross floor area of 65.5 square meters. Three shopping levels of the property are rented by the Target Group from an independent third party with the lease agreement dated 20 September 2001 for a term of 8 years commencing from 20 September 2001 to 19 September 2009. The annual rental payable for the property from 1st to 3rd year is RMB1,333,000; from 4th to 6th year is RMB1,376,500 and from 7th to 8th year is RMB1,420,300 respectively. The lease shall be renewable upon notice three months before the expiry date. The Target Group has the prior right to renew the lease for a further term. The office room with lift shaft in Basement One is rented by the Target Group from an independent third party with the lease agreement dated 28 February 2002 for a term commencing from 28 February 2002 to 19 September 2009 at a monthly rent of RMB500.

Note:

1. According to the PRC legal opinion, the lease agreement in respect of the subject property is valid and enforceable.

— VII-94 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
71.	Portion of 1st, 2nd	The property comprises three shopping	The property is	No commercial
	and 3rd Floor and	levels and a basement level of a	occupied by the Target	value
	the whole of	commercial complex completed in or	Group as shop with an
	Basement One	about 2000.	ancillary office.
	No.10 Yingxiong Road
	Jinan City	The property contains a total gross floor
	Shandong Province	area of approximately 3,862 square
	The PRC	meters.
		The property is rented by the Target
		Group from an independent third party
		with the lease agreement dated 14
		November 2001 for a term of 10 years
		commencing from 14 November 2001 to
		13 November 2011. The annual rental
		payable for the property from 1st to 5th
		year is RMB1,500,000 and from 6th to
		10th year is RMB1,530,000 respectively.
		The lease shall be renewable upon notice
		three months before the expiry date. The
		Target Group has the prior right to renew
		the lease for a further term.

Note:

1. According to the PRC legal opinion, the lease agreement in respect of the subject property is valid and enforceable.

2. 1st and 2nd Floor and The property comprises two shopping the whole of Basement levels and a basement level of a 5-storey No.159 Zhongxin Road commercial complex completed in or Zhangdian District about 2001. Zibo City Shandong Province The property contains a total gross floor The PRC area of approximately 3,454 square meters. The property is rented by the Target Group from an independent third party with the lease agreement dated 1 May 2003 for a term of 5 years commencing from 10 June 2003 to 9 June 2008. The annual rental payable for the property from 1st to 2nd year is RMB1,100,000 and from 3rd to 5th year is RMB1,155,000 respectively. The lease shall be renewable upon notice one months before the expiry date. The Target Group has the prior right to renew the lease for a further term.

The property is No commercial occupied by the Target value Group as shop with an ancillary office.

Note:

1. According to the PRC legal opinion, the lease agreement in respect of the subject property is valid and enforceable.

— VII-95 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Capital value in Particulars of existing state as at Property Description and Tenure Occupancy 15 June 2004 73. No. 180 Wei 12 Road The property comprises 3-storey The property is No commercial Huaiyin District commercial complex and an ancillary occupied by the Target value Jinan City building completed in or about 2000. Group as shop with an Shandong Province ancillary office. The PRC The property contains a total gross floor area of approximately 4,117.19 square meters. The property is rented by the Target Group from an independent third party with the lease agreement dated 26 March 2003 for a term of 6 years commencing from 21 March 2003 to 20 March 2009. The annual rental payable for the property is RMB1,500,000. The lease shall be renewable upon notice one month before the expiry date. The Target Group has the prior right to renew the lease for a further term.

Note:

1. According to the PRC legal opinion, the lease agreement in respect of the subject property is valid and enforceable.

2. Basement One of The property comprises the basement Yingzuo Beiyuan shopping level of a 3-storey commercial Shopping Plaza complex completed in or about 2002. No. 483 Beiyuan Da Street, The property contains a total gross floor Tianqiao District area of approximately 5,450 square Jinan City meters. Shandong Province The PRC The property is rented by the Target Group from an independent third party with the lease agreements dated 28 June 2003 and 2 December 2003 respectively for a term of 5 years commencing from 16 July 2003 to 15 July 2008. The annual rental payable for the property from 1st to 3rd year is RMB1,855,000, from 4th to 5th year is RMB1,955,000. The lease shall be renewable upon notice one month before the expiry date. The Target Group has the prior right to renew the lease for a further term.

The property is No commercial occupied by the Target value Group as shop with an ancillary office.

Note:

1. According to the PRC legal opinion, since the landlord of the subject property cannot produce any proper legal title document of the subject property, the validity and legality of the subject lease agreement is uncertain. If the subject lease agreement is not valid, the tenant should return the subject property to the landlord. However, the invalidity of the subject lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject lease agreement and the tenant may claim against the landlord for compensation according to law.

— VII-96 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
75.	Two warehouses and	The property comprises 2 single storey	The property is	No commercial
	an office building in	warehouses and an office building	occupied by the Target	value
	Banqiao Wood	completed in or about 2002.	Group as warehouse
	Wholesale Market		and office.
	South of Xiaoqinghe	The property contains a leased floor area
	and West of	of approximately 8,366.74 square meters
	Lishan Bei Road	warehouse and 400 square meters office.
	Jinan City
	Shandong Province	The property is rented by the Target
	The PRC	Group from an independent third party
		with the lease agreement dated 28 March
		2002 for a term of 5 years commencing
		from 1 July 2002 to 1 July 2007, the
		annual rent payable for the property is
		RMB702,388. The lease shall be
		renewable upon notice three months
		before the expiry date. The Target Group
		has the prior right to renew the lease for
		a further term.

Note:

1. According to the PRC legal opinion, since the landlord of the subject property cannot produce any proper legal title document of the subject property, the validity and legality of the subject lease agreement is uncertain. If the subject lease agreement is not valid, the tenant should return the subject property to the landlord. However, the invalidity of the subject lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject lease agreement and the tenant may claim against the landlord for compensation according to law.

76.	No. 5	The property comprises a single-storey	The property is	No commercial
	Yanchangdong Road	industrial building completed in or about	occupied by the Target	value
	Zhangdian District	1993.	Group as warehouse
	Zibo City		with an ancillary
	Shandong Province	The property contains a total leased floor	office.
	The PRC	area of approximately 1,600 square
		meters.
		The property is rented by the Target
		Group from an independent third party
		with the lease agreement dated 14 August
		2003 for a term of 1 year commencing
		from 1 August 2003 to 31 July 2004 at an
		annual rent of RMB96,000.
		As informed by the Target Group, the
		tenancy will not be renewed when it
		expires.

Note:

1. According to the PRC legal opinion, the lease agreement in respect of the subject property is valid and enforceable.

— VII-97 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Property Description and Tenure 77. Portion of 1st Floor The property comprises two shopping and the whole of levels of a multi-storey commercial 2nd Floor complex completed in or about 2001. No.151-153 Jiangnan Dadaozhong Road The property contains a leased floor area Guangzhou City of approximately 2,848 square meters. Guangdong Province The PRC The property is rented by the Target Group from an independent third party for a term of 5 years commencing from 6 January 2003 to 5 January 2008 with a rent free period from 6 January 2003 to 20 February 2003. The monthly rent payable for the property from 21 February 2003 to 20 February 2006 is RMB 73.7 per square meter, at about RMB209,897.6 per month, inclusive of management fee and ancillary cost. The monthly rent payable for the property from 21 February, 2006 is RMB 77.4 per square meter, at about RMB 220,435.2 per month, inclusive of management fee and ancillary cost.

Capital value in Particulars of existing state as at Occupancy 15 June 2004 A portion of the No commercial property is occupied value by the Target Group as shop with an ancillary office. A portion of the property is occupied by a member of the Parent Group as shop.

The lease shall be renewable upon notice three months before the expiry date. The Target Group has the prior right to renew the lease for a further term.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 66.96 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB289,267.2 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. Since the Target Group cannot produce documents in relation to the landlord’s consent for the Target Group to assign part of the subject property, the validity and legality of the subject transfer lease agreement is uncertain. If the subject transfer lease agreement is not valid, the member of the Parent Group should return the subject part of the property to the Target Group. However, the invalidity of the subject transfer lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject transfer lease agreement and the member of the Parent Group may claim against the Target Group for compensation according to law. In addition, the landlord has the right to rescind the lease agreement according to the relevant provisions of the PRC Contract Law and require the Target Group to take up other responsibilities in relation to the breach of the lease agreement according to the relevant provisions of the lease agreement.

— VII-98 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Property Description and Tenure 78. West of 1st Floor The property comprises two shopping No.38/40/42 levels of a multi-storey commercial Huancheng Zhong complex completed in or about 1997. Road and 2nd Floor East Plaza The property contains a leased floor area No. 8 East Street of approximately 3,225.2 square meters. Panyu District The property is rented by the Target Guangzhou City Guangdong Province Group from an independent third party The PRC with the lease agreement dated 15 August 2002 for a term of 5 years commencing from 20 August 2003 to 19 August 2008. The annual rent of the property for the first 3 years is RMB1,416,504 inclusive of management fee and ancillary cost, with the rent payable subject to an annual increment of 5% from the fourth year.

Capital value in Particulars of existing state as at Occupancy 15 June 2004 A portion of the No commercial property is occupied value by the Target Group as shop with an ancillary office. A portion of the property is occupied by a member of the Parent Group as shop.

The lease shall be renewable upon notice 30 days before the expiry date. The Target Group has the prior right to renew the lease for a further term.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 60.95 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB263,304 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-99 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Capital value in Particulars of existing state as at Property Description and Tenure Occupancy 15 June 2004 79. Portion of 1st and The property comprises three shopping A portion of the No commercial the whole of 2nd levels of a multi-storey commercial property is occupied value and 3rd Floor complex completed in or about 2003. by the Target Group as West Block of shop and warehouse Fuli Plaza The property contains a leased floor area with an ancillary No.16 of approximately 3,665.07 square meters. office. Zhongshanba Road Liwan District The property is rented by the Target A portion of the Guangzhou City Group from an independent third party property is occupied Guangdong Province with the lease agreements dated 2 July by a member of the The PRC 2003 and 13 August 2003 respectively for Parent Group as shop. a term of 5 years commencing from 16 July 2003 to 15 July 2008. The monthly rent payable of the property is RMB 135,382.55 plus monthly management fee RMB3,665.07.

The lease shall be renewable upon notice one month before the expiry date. The Target Group has the prior right to renew the lease for a further term.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 63.36 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB273,715.2 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. Since the landlord of the subject property cannot produce any proper legal title document of the subject property, the validity and legality of the subject lease agreement is uncertain. If the subject lease agreement is not valid, the tenant should return the subject property to the landlord. However, the invalidity of the subject lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject lease agreement and the tenant may claim against the landlord for compensation according to law.

4. b. If the lease agreement of the subject property is valid and enforceable, the transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-100 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Description and Tenure

Property

1. 1st, 2nd, 3rd Floor The property comprises three shopping and underground levels plus one underground level of level one storage of a multi-storey commercial Hongrui Building complex completed in or about 2002. Nos.29-31 Zhongshaner Road Three shopping levels of the property Guangzhou City contain a leased floor area of Guangdong Province approximately 3,170 square meters. The PRC

The shopping levels of the property are rented by the Target Group from an independent third party with the lease agreement dated 14 August 2002 for a term of 10 years commencing from 15 September 2002 to 14 September 2012. The monthly rent payable for the first 3 years is RMB 317,599 inclusive of management fee and ancillary cost with the rent payable subject to an increment of 5% every three years.

Capital value in Particulars of existing state as at Occupancy 15 June 2004 A portion of the No commercial property is occupied value by the Target Group as shop and warehouse with an ancillary office.

A portion of the property is occupied by a member of the Parent Group as shop.

The storage space comprising 127.2 square meters is rented by the Target Group from an independent third party with the lease agreement dated 6 October 2002 for a term of 3 years commencing from 8 November 2002 to 7 November 2005 at a monthly rent of RMB 4,833.6.

The lease shall be renewable upon notice three months before the expiry date. The Target Group has the prior right to renew the lease for a further term.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 61.2 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB264,384 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-101 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Capital value in Particulars of existing state as at Property Description and Tenure Occupancy 15 June 2004 81. 1st and 2nd Floor The property comprises two shopping A portion of the No commercial Fuhai Commercial levels of a multi-storey commercial property is occupied value Centre complex completed in or about 2002. by the Target Group as No.153 shop with an ancillary Tianhedong Road The property contains a leased floor area office. Guangzhou City of approximately 3,860 square meters. Guangdong Province A portion of the The PRC The property is rented by the Target property is occupied Group from an independent third party by a member of the with the lease agreement dated 18 Parent Group as shop. February 2003 for a term of 8 years commencing from 15 March 2003 to 14 March 2011. The rent-free period is from 15 March 2003 to 15 June 2003. The monthly rent payable for the property from 15 June 2003 to 14 June 2006 is RMB 254,760 inclusive of management fee and ancillary cost and the monthly rent payable from 15 June 2006 to 14 June 2009 is RMB267,498 and the monthly rent payable from 15 June 2009 to 14 March 2011 is RMB280,236.

The lease shall be renewable upon notice three months before the expiry date. The Target Group has the prior right to renew the lease for a further term.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 67.8 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB292,896 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. Since the landlord of the subject property cannot produce any proper legal title document of the subject property, the validity and legality of the subject lease agreement is uncertain. If the subject lease agreement is not valid, the tenant should return the subject property to the landlord. However, the invalidity of the subject lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject lease agreement and the tenant may claim against the landlord for compensation according to law.

4. b. If the lease agreement of the subject property is valid and enforceable, the transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-102 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Property Description and Tenure 82. Portion of 1st and The property comprises two shopping 2nd Floor levels of a multi-storey commercial No.583-1 complex completed in or about 2003. Tianhebei Road Guangzhou City The property contains a leased floor area Guangdong Province of approximately 3509.4687 square The PRC meters. The property is rented by the Target Group from an independent third party with the lease agreement dated 30 March 2004 for a term of 5 years commencing from 1 April 2004 to 31 March 2009. The monthly rent payable for the property from 1 April 2004 to 31 March 2007 is RMB 263,210.15 inclusive of management fee and ancillary cost and the monthly rent payable from 1 April 2007 to 31 March 2009 is RMB 275,317.81 inclusive of management fee and ancillary cost.

Capital value in Particulars of existing state as at Occupancy 15 June 2004 A portion of the No commercial property is occupied value by the Target Group as shop with an ancillary office. A portion of the property is occupied by a member of the Parent Group as shop.

The lease shall be renewable upon notice two months before the expiry date. The Target Group has the prior right to renew the lease for a further term.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 58 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB250,560 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-103 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
83.	Portion of 1st and	The property comprises a portion of 1st	The property is	No commercial
	2nd Floor	Floor and the whole of 2nd Floor of a	occupied by the Target	value
	Liyuan Commercial	multi-storey commercial building	Group as shop with an
	Plaza	completed in or about 2001.	ancillary office.
	No. 1/26
	Jumiaodian Road	The property contains a total leased floor
	Foshan City	area of approximately 4,008 square
	Guangdong Province	meters.
	The PRC
		The property is rented by the Target
		Group from an independent third party
		with the lease agreement dated 6 October
		2003 for a term of 5 years commencing
		from 16 February 2004 to 15 February
		2009. The annual rental payable for the
		property from 1st to 3rd year is
		RMB4,243,325.52, and from 4th year
		onwards is subject to 5% annual
		increment. The lease shall be renewable
		upon notice two months before the expiry
		date. The Target Group has the prior right
		to renew the lease for a further term.

Note:

1. According to the PRC legal opinion, since the landlord of the subject property cannot produce any proper legal title document of the subject property, the validity and legality of the subject lease agreement is uncertain. If the subject lease agreement is not valid, the tenant should return the subject property to the landlord. However, the invalidity of the subject lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject lease agreement and the tenant may claim against the landlord for compensation according to law.

— VII-104 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Property Description and Tenure 84. Nos.6-10 Warehouse The property comprises several premises Logistics Fangchun including warehouses and office Base of Guangzhou completed in or about 2000. Post, North Industrial District The property contains a total gross floor Longxi Da Road area of approximately 9,140 square meters Fangchun District with rental payable area of about 9,084 Guangzhou City square meters. Guangdong Province The PRC The property is rented by the Target Group from an independent third party with the lease agreement dated 22 August 2002 for a term of 5 years commencing from 22 August 2002 to 21 August 2007. The monthly rent payable for the property for the first 3 years is RMB 9.5 per square meter, at about RMB86,298 per month, inclusive of management fee and ancillary cost with the rent payable subject to an increment of 5% every two years from the third year.

Capital value in Particulars of existing state as at Occupancy 15 June 2004 The property is No commercial occupied by the Target value Group as warehouse and ancillary office.

The lease shall be renewable upon notice three months before the expiry date. The Target Group has the prior right to renew the lease for a further term.

Note:

1. According to the PRC legal opinion, since the landlord of the subject property cannot produce any proper legal title document of the subject property, the validity and legality of the subject lease agreement is uncertain. If the subject lease agreement is not valid, the tenant should return the subject property to the landlord. However, the invalidity of the subject lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject lease agreement and the tenant may claim against the landlord for compensation according to law.

— VII-105 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Capital value in Particulars of existing state as at Property Description and Tenure Occupancy 15 June 2004 85. Rooms A, B, C ,D The property comprises two shopping The property is No commercial 4th Floor, Block C levels of a multi-storey commercial occupied by the Target value Electron and complex completed in or about 2000. Group as office. Technology Building No.2070 The property contains a total gross floor Shennanzhong Road area of approximately 1,268.2 square Futian District meters. Shenzhen City Guangdong Province Rooms B, C, D are rented by the Target The PRC Group from an independent third party with the lease agreement dated 20 September 2003 for a term of 5 years commencing from 1 November 2003 to 31 October 2008 at a monthly rent of RMB 608898.10. Room A is rented by the Target Group from an independent third party with the lease agreement dated 21 October 2003 from 1 November 2003 to 31 October 2008 at a monthly rent of RMB 6,310.50

The lease shall be renewable upon notice one month before the expiry date. The Target Group has the prior right to renew the lease for a further term.

Note:

1. According to the PRC legal opinion, since the landlord of the subject property cannot produce any proper legal title document of the subject property, the validity and legality of the subject lease agreement is uncertain. If the subject lease agreement is not valid, the tenant should return the subject property to the landlord. However, the invalidity of the subject lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject lease agreement and the tenant may claim against the landlord for compensation according to law.

— VII-106 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Property Description and Tenure 86. Portion of 1st and The property comprises two shopping 2nd Floor levels of a multi-storey commercial Dilongyingtai complex completed in or about 2003. Commercial Centre No.7 the Second The property contains a leased floor area Industrial Estate of approximately 3,153.4 square meters. Longgang Town Longgang District The property is rented by the Target Shenzhen City Group from an independent third party Guangdong Province with the lease agreement dated 14 The PRC November 2003 for a term of 5 years commencing from 30 November 2003 to 30 November 2008. The annual rent payable for the property for the first 3 years is RMB1,023,900 inclusive of management fee and ancillary cost, with rent payable subject to an annual increment of 4% from the fourth year. The lease shall be renewable upon notice one month before the expiry date.

Capital value in Particulars of existing state as at Occupancy 15 June 2004 The property is No commercial occupied by the Target value Group as shop with an ancillary office.

Note:

1. According to the PRC legal opinion, the lease agreement in respect of the subject property is valid and enforceable.

— VII-107 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Property Description and Tenure 87. 1st and 2nd Floor The property comprises two shopping Nanyue Pearl levels of a multi-storey commercial Houhai Road complex completed in or about 2002. Nanshan District Shenzhen City The property contains a leased floor area Guangdong Province of approximately 4,271.84 square meters. The PRC 4,222.84 square meters of the property are rented by the Target Group from an independent third party with the lease agreements dated 8 August 2002 and 8 January 2003 respectively for a term of 10 years commencing from 15 August 2002 to 14 August 2012. 49 square meters of the property are rented by the Target Group from an independent third party with the lease agreement dated 6 January 2003 from 16 December 2002 to 15 August 2012.

Capital value in Particulars of existing state as at Occupancy 15 June 2004 The property is No commercial occupied by the Target value Group as shop with an ancillary office.

The monthly rent payable for the property for the first 5 years is RMB239,223 inclusive of management fee and ancillary cost with the rent payable subject to an annual increment of 5% from the sixth year.

The lease shall be renewable upon notice three months before the expiry date. The Target Group has the prior right to renew the lease for a further term.

Note:

1. According to the PRC legal opinion, the lease agreement in respect of the subject property is valid and enforceable.

— VII-108 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Property

1. 1st, 2nd and 3rd Floor, Room No. 519 and the connecting corridor on 3rd Floor 101 Block Shangbu Industrial Estate Huaqiangbei Shenzhen City Guangdong Province The PRC

Description and Tenure

The property comprises three shopping levels, an office room and the connecting corridor in 3rd floor of a multi-storey commercial complex completed in or about 2001.

The three shopping levels of the property contain a leased floor area of approximately 3,624 square meters. The office room contains a gross floor area of approximately 52.5 square meters. The connecting corridor contains a gross floor area of approximately 218 square meters.

Capital value in Particulars of existing state as at Occupancy 15 June 2004 The property is No commercial occupied by the Target value Group as shop with an ancillary office.

The three shopping levels of the property are rented by the Target Group from an independent third party with the lease agreements dated 12 September 2002 for a term of 3 years commencing from 18 September 2002 to 17 September 2005 at a monthly rent of RMB 360,000 inclusive of the management fee and ancillary cost.

The office room of the property is rented by the Target Group from an independent third party with the lease agreement dated 20 December 2003 for a term commencing from 1 December 2003 to 17 September 2005 at a monthly rent of RMB2,200.

The connecting corridor in 3rd floor of the property is rented by the Target Group from an independent third party with the lease agreement dated 2 December 2003 for a term commencing from 18 December 2003 to 17 September 2005 at a monthly rent of RMB10,900.

The Target Group has the prior right to renew the lease for a further term.

Note:

1. According to the PRC legal opinion, since the landlord of the subject property cannot produce any proper legal title document of the subject property, the validity and legality of the subject lease agreement is uncertain. If the subject lease agreement is not valid, the tenant should return the subject property to the landlord. However, the invalidity of the subject lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject lease agreement and the tenant may claim against the landlord for compensation according to law.

— VII-109 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
89.	Portion of 1st Floor	The property comprises two shopping	The property is	No commercial
	and half of 2nd Floor	levels of a multi-storey commercial	occupied by the Target	value
	Huafeng Plaza	complex completed in or about 2002.	Group as shop with an
	No.213 Qianjinyi Road		ancillary office.
	Baoan 25 District	The property contains a total leased floor
	Shenzhen City	area of approximately 2,764.6 square
	Guangdong Province	meters.
	The PRC
		The property is rented by the Target
		Group from an independent third party
		with the lease agreements dated 21 July
		2003 and 6 December 2003 respectively
		for a term of 5 years from the date of
		signing of Leased Property Handover List
		on 15 September 2003, at a monthly rent
		of RMB53.8 per square meter.
		The lease shall be renewable upon notice
		three months before the expiry date. The
		Target Group has the prior right to renew
		the lease for a further term.

Note:

1. According to the PRC legal opinion, the lease agreement in respect of the subject property is valid and enforceable.

— VII-110 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Capital value in Particulars of existing state as at Property Description and Tenure Occupancy 15 June 2004 90. Warehouse and The property comprises several building The property is No commercial ancillary office and structures completed in or about occupied by the Target value Niuzaichang 2002. Group as warehouse Xili Town with ancillary office. Nanshan District Gross floor area of the property as Shenzhen City follows: Guangdong Province Area The PRC

	Area
Usage	(sq.m.)
Warehouse	12,371.33
Platform	481.17
Open storage	2,480
Office and dormitory	590
Guard house	26

The property is rented by the Target Group from an independent third party with the lease agreement dated 27 August 2003 for a term of 10 years from the date of signing of Warehouse Handover List on 16 January 2004. The monthly rent payable for the property is RMB13.5 per square meter, excluding open storage, at a monthly rent of RMB181,473.75.

The lease shall be renewable upon notice three months before the expiry date.

Note:

1. According to the PRC legal opinion, since the landlord of the subject property cannot produce any proper legal title document of the subject property, the validity and legality of the subject lease agreement is uncertain. If the subject lease agreement is not valid, the tenant should return the subject property to the landlord. However, the invalidity of the subject lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject lease agreement and the tenant may claim against the landlord for compensation according to law.

— VII-111 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Property Description and Tenure 91. 1st Floor and The property comprises two shopping Underground levels of a multi-storey commercial Jufu Haoyuan complex completed in or about 2002. No. 123 Dongcheng Da Road The property contains a total gross floor Dongguan City area of approximately 6,258 square Guangdong Province meters. The PRC The property is rented by the Target Group from an independent third party with the lease agreement dated 12 September 2003 for a term of 8 years commencing from 1 December 2003 to 30 November 2011 at an annual rent of RMB 2,427,000 inclusive of management fee and ancillary cost, with the rent payable subject to an annual increment of 5% from the fourth year. The lease shall be renewable upon notice one month before the expiry date. The Target Group has the prior right to renew the lease for a further term.

Capital value in Particulars of existing state as at Occupancy 15 June 2004 The property is No commercial occupied by the Target value Group as shop with an ancillary office.

Note:

1. According to the PRC legal opinion, since the landlord of the subject property cannot produce any proper legal title document of the subject property, the validity and legality of the subject lease agreement is uncertain. If the subject lease agreement is not valid, the tenant should return the subject property to the landlord. However, the invalidity of the subject lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject lease agreement and the tenant may claim against the landlord for compensation according to law.

— VII-112 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Property Description and Tenure 92. 3rd Floor The property comprises a shopping level Block C & F of a multi-storey commercial complex No. 64 Taisha Road completed in or about 2002. Humen Town Dongguan City The property contains a total gross floor Guangdong Province area of approximately 3,420 square The PRC meters.

Capital value in Particulars of existing state as at Occupancy 15 June 2004 The property is No commercial occupied by the Target value Group as shop with an ancillary office.

The property is rented by the Target Group from an independent third party with the lease agreement dated 16 December 2003 for a term of 5 years commencing from 18 December 2003 to 17 December 2008 at an annual rent of RMB 615,600 inclusive of management fee and ancillary cost. From the fourth year, the annual rent of the property is RMB 1,846,800 inclusive of management fee and ancillary cost.

The lease shall be renewable upon notice one month before the expiry date. The Target Group has the prior right to renew the lease for a further term.

Note:

1. According to the PRC legal opinion, since the landlord of the subject property cannot produce any proper legal title document of the subject property, the validity and legality of the subject lease agreement is uncertain. If the subject lease agreement is not valid, the tenant should return the subject property to the landlord. However, the invalidity of the subject lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject lease agreement and the tenant may claim against the landlord for compensation according to law.

— VII-113 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Capital value in Particulars of existing state as at Property Description and Tenure Occupancy 15 June 2004 1st Floor The property comprises one shopping The property is No commercial No. 2 Daxinnan Road level of a multi-storey commercial occupied by the Target value Shiqi District building completed in or about 2003. Group as shop with an Zhongshan City ancillary office. Guangdong Province The property contains a total leased floor The PRC area of approximately 3,000 square meters. The property is rented by the Target Group from an independent third party with the lease agreement dated 15 April 2004 for a term of 5 years commencing from 15 April 2004 to 15 April 2009. The monthly rental payable for the property is RMB180,000. The lease shall be renewable upon notice one month before the expiry date. The Target Group has the prior right to renew the lease for a further term.

Note:

1. According to the PRC legal opinion, since the landlord of the subject property cannot produce any proper legal title document of the subject property, the validity and legality of the subject lease agreement is uncertain. If the subject lease agreement is not valid, the tenant should return the subject property to the landlord. However, the invalidity of the subject lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject lease agreement and the tenant may claim against the landlord for compensation according to law.

2. 1st and 2nd Floor The property comprises two shopping Yutian Mingyuan levels of a multi-storey composite Xinan Road building completed in or about 2002. Henanan Huizhou City The property contains a leased floor area Guangdong Province of approximately 3,735.93 square meters. The PRC The property is rented by the Target Group from an independent third party with the lease agreement dated 29 April 2003 for a term of 5 years commencing from 25 April 2003 to 24 April 2008 at a monthly rent of RMB108,341.97. The lease shall be renewable upon notice one month before the expiry date. The Target Group has the prior right to renew the lease for a further term.

The property is No commercial occupied by the Target value Group as shop with an ancillary office.

Note:

1. According to the PRC legal opinion, the lease agreement in respect of the subject property is valid and enforceable.

— VII-114 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Capital value in Particulars of existing state as at Property Description and Tenure Occupancy 15 June 2004 95. Warehouse and The property comprises several of The property is No commercial ancillary structure warehouses, three office rooms and two occupied by the Target value located around staff quarter units. The property was Group as a warehouse Wushi North completed in or about 1994. and ancillary Railway Station facilities. Jiangbei The property contains a total leased floor Huizhou City area of approximately 1,935 square meters Guangdong Province of warehouse space. The PRC The property is rented by the Target Group from an independent third party with the lease agreement dated 19 May 2003 for a term of 3 years commencing from 20 May 2003 to 20 May 2006 at an annual rent of RMB190,128. The Target Group has the prior right to renew the lease for a further term.

Note:

1. According to the PRC legal opinion, the lease agreement in respect of the subject property is valid and enforceable.

2. Portion of 1st Floor The property comprises two shopping The property is No commercial and whole of levels of a multi-storey composite occupied by the Target value 2nd Floor building completed in or about 2002. Group as shop with an Yutingyuan ancillary office. Gintian Road The property contains a gross floor area Futian District of approximately 2,840 square meters. Shenzhen City Guangdong Province The property is rented by the Target The PRC Group from an independent third party with the lease agreements dated 5 September 2002 and 9 January 2003 respectively for a term commencing from 15 September 2002 to 14 January 2011. The monthly rent payable for the property is RMB85 per month per square meter subject to review at an increment of 3% every three years. The first rental review will be at 2006. The current monthly rent is RMB241,400 inclusive of management fees.

Note:

1. According to the PRC legal opinion, since the landlord of the subject property cannot produce any proper legal title document of the subject property, the validity and legality of the subject lease agreement is uncertain. If the subject lease agreement is not valid, the tenant should return the subject property to the landlord. However, the invalidity of the subject lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject lease agreement and the tenant may claim against the landlord for compensation according to law.

— VII-115 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
97.	1st and 2nd Floor	The property comprises two shopping	A portion of the	No commercial
	No. 319	levels of a commercial complex	property is occupied	value
	Fa Zhang Da Road	completed in or about 1986.	by the Target Group as
	Hankou District		shop with an ancillary
	Wuhan City	The property contains a total gross floor	office.
	Hubei Province	area of 3,500 square meters shop and 830
	The PRC	square meters of office.	A portion of the
			property is occupied
		The property is rented by the Target	by a member of the
		Group from an independent third party	Parent Group as shop.
		with the lease agreement dated 28
		October 2003 for a term of 5 years
		commencing from 28 October 2002 to 27
		October 2007 at an annual rent of
		RMB1,147,296. The lease shall be
		renewable upon notice three months
		before the expiry date. The Target Group
		has the prior right to renew the lease for
		a further term.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 25 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB109,500 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-116 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
98.	Warehouse No. 319	The property comprises several	The property is	No commercial
	Fa Zhang Da Road	warehouses completed in or about 1986.	occupied by the Target	value
	Hankou District		Group as warehouse.
	Wuhan City	The property contains a total gross floor
	Hubei Province	area of approximately 5,449 square meters
	The PRC	of warehouse and 60 square meters mess
		hall.
		The property is rented by the Target
		Group from an independent third party
		with the lease agreement dated 28
		October 2002 for a term of 5 years
		commencing from 28 October 2002 to 27
		October 2007 at an annual rent of
		RMB523,104. The lease shall be
		renewable upon notice three months
		before the expiry date. The Target Group
		has the prior right to renew the lease for
		a further term.

Note:

1. According to the PRC legal opinion, the lease agreement in respect of the subject property is valid and enforceable.

— VII-117 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Capital value in Particulars of existing state as at Property Description and Tenure Occupancy 15 June 2004 99. Nos. 264-282 Zhong The property comprises a two-storey The property is No commercial Shan Da Road commercial complex completed in 1980’s. occupied by the Target value Qiaokou District Group as shop with an Wuhan City The property contains a total gross floor ancillary office. Hubei Province area of approximately 4,612 square The PRC meters. The property is rented by the Target Group from an independent third party with the lease agreement dated 4 April 2003 for a term of 5 years commencing from 10 April 2003 to 9 April 2008. The annual rent for the property is RMB1,320,000. The lease shall be renewable upon notice one month before the expiry date. The Target Group has the prior right to renew the lease for a further term.

Note:

1. According to the PRC legal opinion, since the landlord of the subject property cannot produce any proper legal title document of the subject property, the validity and legality of the subject lease agreement is uncertain. If the subject lease agreement is not valid, the tenant should return the subject property to the landlord. However, the invalidity of the subject lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject lease agreement and the tenant may claim against the landlord for compensation according to law.

— VII-118 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
100.	2nd Floor	The property comprises a shopping level	A portion of the	No commercial
	No. 147 Zhongbei Road	of 2-storey commercial buildings	property is occupied	value
	Wuchang District	completed in 2003.	by the Target Group as
	Wuhan City		shop with an ancillary
	Hubei Province	The property contains a total gross floor	office.
	The PRC	area of approximately 6,513 square
		meters.	A portion of the
			property is occupied
		The property is rented by the Target	by a member of the
		Group from an independent third party	Parent Group as shop.
		with the lease agreement dated 27 August
		2003 for a term of 5 years commencing
		from 1 November 2003 to 30 October
		2008. The annual rent for the property is
		RMB2,813,616. The lease shall be
		renewable upon notice four months before
		the expiry date. The Target Group has the
		prior right to renew the lease for a further
		term.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 107 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB468,660 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-119 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
101.	1st Floor	The property comprises the first shopping	A portion of the	No commercial
	Te No. 3	level of a multi-storey commercial	property is occupied	value
	Longyang Da Road	complex completed in or about 2002.	by the Target Group as
	Hanyang District		shop with an ancillary
	Wuhan City	The property contains a total gross floor	office.
	Hubei Province	area of approximately 3,187.5 square
	The PRC	meters.	A portion of the
			property is occupied
		The property is rented by the Target	by a member of the
		Group from an independent third party	Parent Group as shop.
		with the lease agreements dated 13
		November 2002 and 2 March 2003
		respectively for a term of 5 years
		commencing from 22 November 2002 to
		22 November 2007 at an annual rent of
		RMB1,174,272. The lease shall be
		renewable upon notice three months
		before the expiry date. The Target Group
		has the prior right to renew the lease for
		a further term.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 71 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB310,980 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-120 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
102.	1st and 2nd Floor	The property comprises 2 shopping levels	A portion of the	No commercial
	35 Lin Jiang Da Road	of a multi-storey commercial complex	property is occupied	value
	Wuchang District	completed in or about 2002.	by the Target Group as
	Wuhan City		shop with an ancillary
	Hubei Province	The property contains a total gross floor	office.
	The PRC	area of approximately 3,100 square
		meters.	A portion of the
			property is occupied
		The property is rented by the Target	by a member of the
		Group from an independent third party	Parent Group as shop.
		with the lease agreement dated 22
		November 2003 for a term of 5 years
		commencing from 26 November 2003 to
		25 November 2008 at an annual rent of
		RMB820,000.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 55 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB240,900 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-121 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
103.	1st Floor	The property comprises a shopping level	The property is	No commercial
	No. 2 Yejinda Road	of a multi-storey commercial building	occupied by the Target	value
	Huanghedazhou	completed in or about 2000.	Group as shop with an
	Commercial Complex		ancillary office.
	Qingshan District	The property contains a total leased floor
	Wuhan City	area of approximately 2,749 square
	Hubei Province	meters.
	The PRC
		The property is rented by the Target
		Group from an independent third party
		with the lease agreement dated 29
		December 2003 for a term of 5 years
		commencing from 13 February 2004 to 12
		February 2009 at an annual rent of
		RMB980,000. The lease shall be
		renewable upon notice one month before
		the expiry date. The Target Group has the
		prior right to renew the lease for a further
		term.

Note:

1. According to the PRC legal opinion, the lease agreement in respect of the subject property is valid and enforceable.

— VII-122 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

• Capital value in

• Particulars of existing state as at

• Property Description and Tenure Occupancy 15 June 2004

• 1. Portion of 1st Floor, The property comprises three shopping The property is No commercial the whole of levels of a multi-storey commercial occupied by the Target value 2nd and 3rd Floor building completed in or about 2004. Group as shop with an Wuzhou Square ancillary office. Interchange between The property contains a total leased floor Jiefang Road and area of approximately 4,950 square Youyi Road meters. Wuhan City Hubei Province The property is rented by the Target The PRC Group from an independent third party with the lease agreement dated 16 February 2004 for a term of 3 years commencing from 1 March 2004 to 28 February 2007. The annual rental payable for the property is RMB3,850,000. The Target Group has the prior right to purchase the property.

Note:

1. According to the PRC legal opinion, since the landlord of the subject property cannot produce any proper legal title document of the subject property, the validity and legality of the subject lease agreement is uncertain. If the subject lease agreement is not valid, the tenant should return the subject property to the landlord. However, the invalidity of the subject lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject lease agreement and the tenant may claim against the landlord for compensation according to law.

— VII-123 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
105.	1st Floor	The property comprises a major portion of	A portion of the	No commercial
	Xinshidai Plaza	Level 1 of a multi-storey building	property is occupied	value
	Nos. 168-178	completed in or about 2000.	by the Target Group as
	Renmin Zhong Road		shop with an ancillary
	Kunming City	The property contains a leased floor area	office.
	Yunnan Province	of approximately 3,851.65 square meters.
	The PRC		A portion of the
		The property is rented by the Target	property is occupied
		Group from an independent third party	by a member of the
		with the lease agreement dated 30 January	Parent Group as shop.
		2003 for a term of 10 years commencing
		from 15 February 2003 to 14 February
		2013 at a monthly rent of RMB96,291.25,
		which will be revised to RMB101,105.81
		per month commencing from 15 February
		2008 to 14 February 2013.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 67 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB293,460 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-124 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
106.	1st, 2nd and 3rd Floor	The property comprises a major portion of	A portion of the	No commercial
	Shunzhen Garden	Level 1, and whole of Levels 2 & 3 of a	property is occupied	value
	No. 18 Nantong Street	multi-storey composite building	by the Target Group as
	Kunming City	completed in or about 2002.	shop with an ancillary
	Yunnan Province		office.
	The PRC	The property contains a leased floor area
		of approximately 4,468 square meters.	A portion of the
			property is occupied
		The property is rented by the Target	by a member of the
		Group from an independent third party	Parent Group as shop.
		with the lease agreement dated 29 July
		2003 for a term of 5 years commencing
		from 18 August 2003 to 17 August 2008
		at a monthly rent of RMB156,380 payable
		once every quarter. The Target Group has
		the prior right to renew the lease for a
		further term.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 73 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB319,740 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-125 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
107.	1st Floor	The property comprises a shopping level	A portion of the	No commercial
	Xinfu Garden	of a multi-storey composite building	property is occupied	value
	No. 156	completed in or about 2003.	by the Target Group as
	Huanzhen Nan Road		shop with an ancillary
	Kunming City	The property contains a leased floor area	office.
	Yunnan Province	of approximately 3,603.64 square meters.
	The PRC		A portion of the
		The property is rented by the Target	property is occupied
		Group from an independent third party	by a member of the
		with the lease agreement dated 6 May	Parent Group as shop.
		2003 for a term of 5 years commencing
		from 1 July 2003 to 30 June 2008 at a
		monthly rent of RMB79,280.08 payable
		once every quarter. The Target Group has
		the right to use five car parking spaces
		for guest parking during the leased
		period.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 108 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB473,040 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-126 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Property Description and Tenure 108. No. 1, Liangting Village The property comprises several of (adjacent to the main warehouses and a single-storey office door of the Provincial building. The property was completed in Tobacco Storage or about 1990’s. Company) Kunming City The property contains a total gross floor Yunnan Province area of approximately 6,157.58 square The PRC meters of warehouse space. The property is rented by the Target Group from an independent third party with the lease agreements dated 2 April 2003 and 14 April 2004 respectively for a term commencing from 2 April 2003 to 2 October 2004. The monthly rent is RMB33,866.69 payable once every half year. The lease shall be renewable upon notice one month before the expiry date.

Capital value in Particulars of existing state as at Occupancy 15 June 2004 The property is No commercial occupied by the Target value Group as a warehouse.

Note:

1. According to the PRC legal opinion, the lease agreement in respect of the subject property is valid and enforceable.

— VII-127 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Property Description and Tenure 109. Several storage The property comprises several storage buildings and buildings and ancillary office completed ancillary office in in or about 1990. No.24 Yuanxi Hongshan Town The property contains a total leased floor Gulou District area of approximately 5,644 square Fuzhou City meters. Fujian Province The PRC 3,470 square meters of the property are rented by the Target Group from an independent third party with the lease agreement dated 24 July 2003 for a term of 1 year commencing from 1 August 2003 to 31 July 2004 at an annual rent of RMB328,800.

Capital value in Particulars of existing state as at Occupancy 15 June 2004 The property is No commercial occupied by the Target value Group as warehouse and office.

1,200 square meters of the property are rented by the Target Group from an independent third party for a term commencing from 1 January 2004 to 31 July 2004 at a monthly rent of RMB 9,600.

24 square meters of property are rented by the Target Group from an independent third party with the lease agreement dated 28 October 2003 from 15 September 2003 to 31 July 2004 at a monthly rent of RMB180.

950 square meters of the property are rented by the Target Group from an independent third party with the lease agreement dated 29 March 2004 for a term commencing from 31 March 2004 to 31 July 2004 at a monthly rent of RMB7,600.

As informed by the Target Group, the tenancies will not be renewed when they expire.

Note:

1. According to the PRC legal opinion, the lease agreement in respect of the subject property is valid and enforceable.

— VII-128 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Capital value in Particulars of existing state as at Property Description and Tenure Occupancy 15 June 2004 110. 1st, 2nd, 3rd and The property comprises four shopping The property is No commercial 4th Floor levels of a multi-storey commercial occupied by the Target value No. 366 Huanlin Road complex completed in or about 2002. Group as shop with an Jinan District ancillary office. Fuzhou City The property contains a leased floor area Fujian Province of approximately 3,900 square meters. The PRC The property is rented by the Target Group from an independent third party with the lease agreements dated 10 June 2003 and 20 February 2004 respectively for a term commencing from 15 June 2003 to 31 August 2008 at an annual rent of RMB1,778,400. The lease shall be renewable upon notice one month before the expiry date. The Target Group has the prior right to renew the lease for a further term.

Note:

1. According to the PRC legal opinion, the lease agreement in respect of the subject property is valid and enforceable.

2. 5th and 6th Floor The property comprises two shopping The property is No commercial Lijiada Plaza levels of a multi-storey commercial occupied by the Target value No. 8 complex completed in or about 2000. Group as shop with an Yangqiao Dong Road ancillary office. Dongjiekou The property contains a leased floor area Fuzhou City of approximately 6,089.58 square meters. Fujian Province The PRC The property is rented by the Target Group from an independent third party with the lease agreement dated 6 December 2003 for a term commencing from 15 December 2003 to 14 February 2009 at an annual rent of RMB2,922,998.40 The lease shall be renewable upon notice two months before the expiry date. The Target Group has the prior right to renew the lease for a further term.

Note:

1. According to the PRC legal opinion, since the landlord of the subject property cannot produce any proper legal title document of the subject property, the validity and legality of the subject lease agreement is uncertain. If the subject lease agreement is not valid, the tenant should return the subject property to the landlord. However, the invalidity of the subject lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject lease agreement and the tenant may claim against the landlord for compensation according to law.

— VII-129 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
112.	1st and 2nd Floor	The property comprises two shopping	The property is	No commercial
	Jiaheyuan	levels of a multi-storey commercial	occupied by the Target	value
	West Zhongting Street	complex completed in or about 2001	Group as shop with an
	Taijiang District		ancillary office.
	Fuzhou City	The property contains a leased floor area
	Fujian Province	of approximately 6,787.05 square meters.
	The PRC
		The property is rented by the Target
		Group from an independent third party
		with the lease agreement dated 31
		October 2003 for a term commencing
		from 10 November 2003 to 9 January
		2009 at an annual rent of
		RMB4,182,626.40.
		The lease shall be renewable upon notice
		two months before the expiry date. The
		Target Group has the prior right to renew
		the lease for a further term.

Note:

1. According to the PRC legal opinion, since the landlord of the subject property cannot produce any proper legal title document of the subject property, the validity and legality of the subject lease agreement is uncertain. If the subject lease agreement is not valid, the tenant should return the subject property to the landlord. However, the invalidity of the subject lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject lease agreement and the tenant may claim against the landlord for compensation according to law.

— VII-130 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
113.	2nd and 3rd Floor	The property comprises two shopping	The property is	No commercial
	Xinshiji Commercial	level of a multi-storey commercial	occupied by the Target	value
	Building	building completed in 2000’s.	Group as shop with an
	No. 50 Yifu Road		ancillary office.
	Fuqing City	The property contains a total leased floor
	Fujian Province	area of approximately 5,564 square
	The PRC	meters.
		2nd Floor of the property is rented by the
		Target Group from an independent third
		party with the lease agreement dated 2
		April 2004 for a term commencing from
		20 May 2004 to 31 March 2008. 3rd
		Floor of the property is rented by the
		Target Group from an independent third
		party with the lease agreement dated 2
		April 2004 for a term commencing from 5
		April 2004 to 31 March 2008. The total
		monthly rental payable for the property is
		RMB132,415.35. The lease shall be
		renewable upon notice one month before
		the expiry date. The Target Group has the
		prior right to renew the lease for a further
		term.

Note:

1. According to the PRC legal opinion, the lease agreement in respect of the subject property is valid and enforceable.

— VII-131 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
114.	Unit Nos. 32 and	The property comprises two commercial	The property is	No commercial
	33 on 1st Floor	units of a multi-storey commercial	occupied by the Target	value
	Jiahuiyuan	complex completed in or about 2003.	Group as shop.
	Zhongting Street
	Fuzhou City	The property contains a leased floor area
	Fujiang Province	of approximately 167.7 square meters.
	The PRC
		The property is rented by the Target
		Group from an independent third party
		with the lease agreement dated 31 May
		2004 for a term of 5 years commencing
		from 1 June 2004 to 31 May 2009 at an
		annual rent of RMB540,328.
		The lease shall be renewable upon notice
		three months before the expiry date. The
		Target Group has the prior right to renew
		the lease for a further term.

Note:

1. According to the PRC legal opinion, since the landlord of the subject property cannot produce any proper legal title document of the subject property, the validity and legality of the subject lease agreement is uncertain. If the subject lease agreement is not valid, the tenant should return the subject property to the landlord. However, the invalidity of the subject lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject lease agreement and the tenant may claim against the landlord for compensation according to law.

2. Unit No.10 in The property comprises a commercial unit Basement One in a multi-storey commercial complex Block 572 completed in or about 2004. Ganghua Road Xinshancun Street The property contains a leased floor area Dadukou District of approximately 36 square meters. Chongqing City The PRC The property is rented by the Target Group from an independent third party with the lease agreement for a term of 3 years commencing from 1 June 2004 to 31 May 2007 at an annual rent of RMB60,000.

The property is No commercial occupied by the Target value Group as shop.

The lease shall be renewable upon notice three months before the expiry date. The Target Group has the prior right to renew the lease for a further term.

Note:

1. According to the PRC legal opinion, the lease agreement in respect of the subject property is valid and enforceable.

— VII-132 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
116.	A unit in No.70	The property comprises a commercial	The property is	No commercial
	Taidong Yi Road	units of a multi-storey commercial	occupied by the Target	value
	Bei District	complex completed in or about 1998.	Group as shop.
	Qingdao City
	Shandong Province	The property contains a leased floor area
	The PRC	of approximately 192 square meters.
		The property is rented by the Target
		Group from an independent third party
		with the lease agreement dated 4 June
		2004 for a term commencing from 7 June
		2004 to 20 June 2006 at an annual rent of
		RMB580,000.
		The lease shall be renewable upon notice
		one month before the expiry date. The
		Target Group has the prior right to renew
		the lease for a further term.

Note:

1. According to the PRC legal opinion, the lease agreement in respect of the subject property is valid and enforceable.

— VII-133 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
117.	1st Floor, 2nd Floor,	The property comprises four shopping	A portion of the	No commercial
	3rd Floor and	levels of two commercial units of a multi-	property is occupied	value
	Basement One	storey commercial complex completed in	by the Target Group as
	No.15	or about 2003.	shop and ancillary
	Dongsanhuanbei Road		office.
	Beijing City	The property contains a gross floor area
	The PRC	of approximately 4,402.85 square meters.	A portion of the
			property is occupied
		The property is rented by the Target	by a member of the
		Group from an independent third party	Parent Group as shop.
		with the lease agreement dated 15 April
		2004 for a term of 5 years and 3 months
		commencing from 15 April 2004 to 14
		July 2009 at an annual rent of
		RMB4,900,000 with a rent free period of
		90 days from the commencement of the
		lease agreement.

The lease shall be renewable upon notice three months before the expiry date. The Target Group has the prior right to renew the lease for a further term.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 40 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB175,200 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. Since the landlord of the subject property cannot produce any proper legal title document of the subject property, the validity and legality of the subject lease agreement is uncertain. If the subject lease agreement is not valid, the tenant should return the subject property to the landlord. However, the invalidity of the subject lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject lease agreement and the tenant may claim against the landlord for compensation according to law.

4. b. If the lease agreement of the subject property is valid and enforceable, the transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-134 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
118.	Unit Nos. 38 and	The property comprises two commercial	The property is	No commercial
	39 Baorun	units of a multi-storey commercial	occupied by the Target	value
	Commercial Square	complex completed in or about 1992.	Group as shop.
	Interchange between
	Qianhai Road and	The property contains a leased floor area
	Taoyuan Road	of approximately 324.93 square meters.
	Nanshan District
	Shenzhen City	The property is rented by the Target
	Guangdong Province	Group from an independent third party
	The PRC	with the lease agreement dated 28 May
		2004 for a term commencing from 1 June
		2004 to 1 June 2007 at an annual rent of
		RMB526,380.
		The lease shall be renewable upon notice
		two months before the expiry date. The
		Target Group has the prior right to renew
		the lease for a further term.

Note:

1. According to the PRC legal opinion, since the landlord of the subject property cannot produce any proper legal title document of the subject property, the validity and legality of the subject lease agreement is uncertain. If the subject lease agreement is not valid, the tenant should return the subject property to the landlord. However, the invalidity of the subject lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject lease agreement and the tenant may claim against the landlord for compensation according to law.

2. Unit Nos. 6 and 7 The property comprises two commercial on 1st Floor units of a multi-storey commercial Haidian Shuma complex completed in or about 1999. Cheng Haidian Ju Nanyouda Road The property contains a leased floor area Nanshan District of approximately 397.2 square meters. Shenzhen City Guangdong Province The property is rented by the Target The PRC Group from an independent third party with the lease agreement dated 19 May 2004 for a term of 3 years commencing from 1 June 2004 to 31 May 2007 at an annual rent of RMB781,689.6.

The property is No commercial occupied by the Target value Group as shop.

The lease shall be renewable upon notice one month before the expiry date. The Target Group has the prior right to renew the lease for a further term.

Note:

1. According to the PRC legal opinion, the lease agreement in respect of the subject property is valid and enforceable.

— VII-135 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
120.	Portion of 1st Floor	The property comprises two shopping	The property is	No commercial
	and 2nd Floor	levels of a multi-storey commercial	occupied by the Target	value
	Xinkai Road	complex completed in or about 2002.	Group as shop.
	Branch of Huarun
	Supermarket	The property contains a leased floor area
	Interchange	of approximately 2,323 square meters.
	between Xinkai Road
	and Huachangda Street	The property is rented by the Target
	Tianjin City	Group from an independent third party
	The PRC	with the lease agreement dated 10 May
		2004 for a term commencing from 10
		May 2004 to 30 September 2008 at an
		annual rent of RMB1,550,000 inclusive of
		management fee and open space parking
		fee.
		The lease shall be renewable upon notice
		three months before the expiry date. The
		Target Group has the prior right to renew
		the lease for a further term.

Note:

1. According to the PRC legal opinion, since the landlord of the subject property cannot produce any proper legal title document of the subject property, the validity and legality of the subject lease agreement is uncertain. If the subject lease agreement is not valid, the tenant should return the subject property to the landlord. However, the invalidity of the subject lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject lease agreement and the tenant may claim against the landlord for compensation according to law.

— VII-136 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Property Description and Tenure 121. 1st Floor and The property comprises two shopping 2nd Floor No.191 levels of a multi-storey commercial Hebei Road complex completed in or about 1945. Heping District Tianjin City The property contains a leased floor area The PRC of approximately 223.24 square meters. The property is rented by the Target Group from an independent third party with the lease agreement dated 28 May 2004 for a term commencing from 28 May 2004 to 31 May 2007 at an annual rent of RMB420,000. The lease shall be renewable upon notice one month before the expiry date. The Target Group has the prior right to renew the lease for a further term.

Capital value in Particulars of existing state as at Occupancy 15 June 2004 The property is No commercial occupied by the Target value Group as shop.

Note:

1. According to the PRC legal opinion, since the landlord of the subject property cannot produce any proper legal title document of the subject property, the validity and legality of the subject lease agreement is uncertain. If the subject lease agreement is not valid, the tenant should return the subject property to the landlord. However, the invalidity of the subject lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject lease agreement and the tenant may claim against the landlord for compensation according to law.

— VII-137 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

				Capital value in
			Particulars of	existing state as at
	Property	Description and Tenure	Occupancy	15 June 2004
122.	Portion of 1st Floor	The property comprises two shopping	A portion of the	No commercial
	and 2nd Floor	levels of a multi-storey commercial	property is occupied	value
	No.88	complex completed in or about 2001.	by the Target Group as
	Zhengyang Street		shop and ancillary
	Shenhe District	The property contains a leased floor area	office.
	Shenyang City	of approximately 5,464.78 square meters.
	Liaoning Province		A portion of the
	The PRC	The property is rented by the Target	property is occupied
		Group from an independent third party	by a member of the
		with the lease agreement dated 10 April	Parent Group as shop.
		2004 for a term of 5 years commencing
		from 10 April 2004 to 9 April 2009 with
		a rent free period from 10 April 2004 to 9
		July 2004. The annual rent payable for
		the first three years is RMB5,500,000 and
		for the remaining two years is subject to
		an annual increment of 1.5% per annum.
		The lease shall be renewable upon notice
		90 days before the expiry date. The
		Target Group has the prior right to renew
		the lease for a further term.

Notes:

1. Pursuant to a transfer lease agreement dated 15 April 2004 between the Target Group and a member of the Parent Group, the Target Group assigned part of the leased property to the member of the Parent Group in respect of a portion of the subject property with a leased floor area of 147 square meters for a term commencing from 15 April 2004 to 31 December 2006 at an annual rent payable of RMB644,000 plus a monthly shopping area usage fee equivalent to 5% of previous month’s sale volume.

2. The PRC legal opinion states, inter alia, that:

3. a. The lease agreement in respect of the subject property is valid and enforceable.

4. b. The transfer lease agreement in respect of part of the subject property is valid and enforceable.

— VII-138 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Capital value in Particulars of existing state as at Property Description and Tenure Occupancy 15 June 2004 123. 1st Floor, 2nd Floor The property comprises three shopping The property is No commercial and 3rd Floor levels of a multi-storey commercial occupied by the Target value No.6 Meng complex completed in or about 1998. Group as shop and Block17 of ancillary office. No.33 The property contains a leased floor area Xiaobeiguan Street of approximately 265.19 square meters. Dadong District The property is rented by the Target Shenyang City Liaoning Province Group from an independent third party The PRC with the lease agreement dated 1 June 2004 for a term of 5 years commencing from 1 June 2004 to 31 May 2009 with a rent free period from 1 June 2004 to 30 June 2004. The annual rent payable for the property is RMB250,000. The lease shall be renewable upon notice one month before the expiry date. The Target Group has the prior right to renew the lease for a further term.

Note:

1. According to the PRC legal opinion, the lease agreement in respect of the subject property is valid and enforceable.

— VII-139 —

PROPERTY VALUATION OF THE TARGET GROUP

APPENDIX VII

Property Description and Tenure 124. Portion of 1st Floor The property comprises two shopping and whole of levels of a multi-storey commercial 2nd Floor complex completed in or about 1999. Block A2 and A4 Changan Shangmao The property contains a leased floor area Cheng Changan Town of approximately 3,853 square meters. Dongguan City Guangdong Province The property is rented by the Target The PRC Group from an independent third party with the lease agreement dated 8 June 2004 for a term of 6 years commencing from 15 June 2004 to 15 June 2010 with a rent free period from 15 June 2004 to 15 September 2004. The annual rent payable in respect of the property for the first two years is RMB1,701,408, for the third year is RMB1,871,628 and for the fourth to sixth years is RMB2,021,628 respectively.

Capital value in Particulars of existing state as at Occupancy 15 June 2004 The property is No commercial occupied by the Target value Group as shop and ancillary office.

The lease shall be renewable upon notice one month before the expiry date. The Target Group has the prior right to renew the lease for a further term.

Note:

1. According to the PRC legal opinion, since the landlord of the subject property cannot produce any proper legal title document of the subject property, the validity and legality of the subject lease agreement is uncertain. If the subject lease agreement is not valid, the tenant should return the subject property to the landlord. However, the invalidity of the subject lease agreement does not affect the validity of the relevant clauses on dispute resolution and breach of contract contained in the subject lease agreement and the tenant may claim against the landlord for compensation according to law.

— VII-140 —

APPENDIX VIII

PROPERTY VALUATION OF THE GROUP

The following is the text of a letter, summary of values and valuation certificates prepared for the purpose of incorporation in this circular received from B.I. Appraisals Limited, an independent valuer, in connection with its valuation as at 31 May 2004 of the property interests of the Group.

==> picture [65 x 48] intentionally omitted <==

==> picture [203 x 72] intentionally omitted <==

5 July 2004

The Directors

China Eagle Group Company Limited Unit 6101 on 61st Floor

The Center 99 Queen’s Road Central

Hong Kong

Dear Sirs,

• Re: The portfolio of properties held by China Eagle Group Company Limited and/or its subsidiaries in the Hong Kong Special Administrative Region (“Hong Kong”) and in the People’s Republic of China (the “PRC”)

In accordance with your instructions for us to value the property interests in the properties (hereinafter referred to as the “Properties”), in which China Eagle Group Company Limited (hereinafter referred to as the “Company”) and/or its subsidiaries (hereinafter together referred to as the “Group”) have interests, we confirm that we have carried out inspection, made relevant enquiries and obtained such further information as we consider necessary for the purpose of providing you with our opinion of the open market values of the property interests in the Properties as at 31 May 2004 (hereinafter referred to as the “date of valuation”).

This letter, forming part of our valuation report, identifies the properties being valued, explains the basis and methodology of our valuation, and lists out the assumptions and the title investigation we have made in the course of our valuation, as well as the limiting conditions.

— VIII-1 —

PROPERTY VALUATION OF THE GROUP

APPENDIX VIII

BASIS OF VALUATION

Our valuation of the property interest in each of the Properties is our opinion of its open market value which we would define as intended to mean “the best price at which the sale of an interest in the property would have been completed unconditionally for cash consideration on the date of valuation, assuming:

• (a) a willing seller;

• (b) that, prior to the date of valuation, there had been a reasonable period (having regard to the nature of the property and the state of the market) for the proper marketing of the interest, for the agreement of price and terms and for the completion of the sale;

• (c) that the state of the market, level of values and other circumstances were, on any earlier assumed date of exchange of contracts, the same as on the date of valuation;

• (d) that no account is taken of any additional bid by a prospective purchaser with a special interest; and

• (e) that both parties to the transaction had acted knowledgeably, prudently and without compulsion.”

We have valued the Properties on the basis that each of them is considered individually and have not allowed for any discount for the Properties to be sold to a single party nor taken into account any effect on the values if the Properties are to be offered for sale at the same time as a portfolio.

In arriving at the value of the property interest in Group III, which is held for future development, we have valued on the basis that such property will be developed and completed in accordance with the latest development proposal provided to us by the Company.

Our valuations have been prepared in accordance with the Guidance Notes on the Valuation of Property Assets (2nd Edition) published by the Hong Kong Institute of Surveyors in March 2000 and under generally accepted valuation procedures and practices, which are in compliance with the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and Practice Note 12 issued by The Stock Exchange of Hong Kong Limited.

VALUATION METHODOLOGY

In valuing the property interests in Groups I and II, which are held for investment by the Group in Hong Kong and in the PRC respectively, we have adopted the Investment Approach by taking into account the current rents passing and the reversionary income potential of the tenancies. For portion of the subject units in Property No. 1, which is currently occupied by the Group for storage purpose, we have valued on the basis of capitalization of hypothetical and reasonable rent assuming a typical lease term and the reversionary potential of the hypothetical tenancy.

— VIII-2 —

APPENDIX VIII

PROPERTY VALUATION OF THE GROUP

In valuing the property interest in Group III, which is held for future development by the Group in the PRC, we have adopted the Direct Comparison Approach assuming such property interest is capable of being sold in its existing state with the benefit of vacant possession and by making reference to comparable sales evidence or offerings as available in the relevant market and by taking into account the permitted development and/or development proposal provided to us. In addition, we have also taken into consideration the construction costs that will be expended to complete the proposed development to reflect the development potential of the property and the quality of the completed development. In forming our opinion of value of such property, we have also made reference to comparable site transactions and land prices as available in the relevant market. The “capital value when completed” represents our opinion of the aggregate selling prices of the proposed development assuming that it would have been completed at the date of valuation.

Based on the open market approach, the property interests in Group IV, which are leased by the Group, have no commercial value due mainly to the short-term nature or the prohibition against assignment or sub-letting or otherwise due to the lack of substantial profit rents.

VALUATION ASSUMPTIONS

Our valuations have been made on the assumption that the property interest in each of the Properties is sold in the open market without the benefit of a deferred term contract, leaseback, joint venture, or any similar arrangement that would serve to affect its value. No account has been taken of any option or right of pre-emption concerning or affecting the sale of the property interests in the Properties and no forced sale situation in any manner is assumed in our valuation.

No allowance has been made in our valuations for any charges, mortgages or amount owing on the Properties nor for any expenses or taxation that may be incurred in effecting a sale. Unless otherwise stated, it is assumed that the Properties are free from encumbrances, restrictions, and outgoings of an onerous nature that could affect their values.

In the course of our valuation of the property interest in Group III, we have neither verified nor taken into account any PRC tax liability. As advised by the Company, the types of potential tax liability include business tax ( ), additional town and city construction and maintenance fee ( ), education fee ( ) and land appreciation tax ( ). Therefore, until completion of the disposal of such property, the amount of PRC tax liability would not be quantifiable nor crystallized.

TITLE INVESTIGATION

We have caused searches to be made at Tsuen Wan New Territories Land Registry for the property held for investment by the Group in Hong Kong. However, we have not scrutinized the original documents to verify ownership or to ascertain the existence of any amendments that may not appear on the copies available to us. All documents and leases have been used for reference only.

For the properties leased by the Group in Hong Kong, we have relied on the Reports on Tenancy issued by Sidley Austin Brown & Wood on 30 June 2004.

— VIII-3 —

APPENDIX VIII

PROPERTY VALUATION OF THE GROUP

For the properties located in the PRC, due to the nature of the land registration system in the PRC, we are not able to investigate the title to or any liabilities against the property interests in the properties. However, we have been provided by the Company with extract copies of title documents relating to the property interests in the properties located in the PRC. We have not examined the original documents to verify ownership or to ascertain the existence of any amendments which may not appear on the copies handed to us.

We have been provided with copies of the legal opinions issued on 4 February 2004 and 5 July 2004 and the supplementary opinion issued on 5 July 2004 by Jingtian & Gongcheng Attorneys at Law, the Group’s legal adviser as to PRC law (hereinafter referred to as the “PRC Legal Adviser”) regarding the title to and the Group’s interests in the properties located in the PRC. In the course of our valuations, we have relied on the advice given by the Group and the PRC Legal Adviser regarding the title to the interests in the properties located in the PRC.

LIMITING CONDITIONS

We have inspected the exterior, and where possible, the interior of the Properties. However, no structural survey has been made nor have any tests been carried out on any of the services provided in the Properties. We are, therefore, not able to report that the Properties are free from rot, infestation or any other structural defects. Yet, in the course of our inspection, we did not note any serious defects.

No on-site measurement has been made. Dimensions, measurements and areas included in the valuation certificates attached are based on information contained in the documents provided to us and are therefore approximations only.

Moreover, we have not carried out any site investigations to determine the suitability or otherwise of the ground conditions, the presence or otherwise of contamination and the provision or otherwise for services etc. for any future development. Our valuations are prepared on the assumption that these aspects are satisfactory and that no extraordinary expenses or delays will be incurred during any construction period.

We have relied to a considerable extent on the information provided by the Company and have accepted advice given to us on such matters as planning approvals, statutory notices, easements, tenure, occupancy, latest development proposal, site and floor areas and all other relevant matters in the identification of the Properties. We have not seen original planning consents and have assumed that the Properties have been/will have been erected and are/will be occupied and used in accordance with such consents.

We have had no reason to doubt the truth and accuracy of the information provided to us by the Company. We were also advised by the Company that no material facts have been omitted from the information supplied. We consider that we have been provided with sufficient information to reach an informed view and have no reason to suspect that any information has been withheld.

— VIII-4 —

PROPERTY VALUATION OF THE GROUP

APPENDIX VIII

REMARKS

Unless otherwise stated, all monetary amounts stated in our valuation certificate are in Hong Kong Dollars (HK$). The exchange rates adopted in our valuations are approximately HK$1.00 = RMB1.06 and USD1.00 = HK$7.80, which are approximately the prevailing exchange rates as at the date of valuation.

We hereby certify that we have neither present nor prospective interests in the Group, the Properties or the values reported herein.

We attach herewith our summary of values and valuation certificates.

Yours faithfully,

For and on behalf of

B.I. APPRAISALS LIMITED William C. K. Sham MRICS, MHKIS, RPS (G.P.)

Executive Director

Note: Mr. William C. K. Sham is a Chartered Surveyor who has over 22 years’ and 10 years’ experience in the valuation of properties in Hong Kong and in the PRC respectively.

— VIII-5 —

PROPERTY VALUATION OF THE GROUP

APPENDIX VIII

SUMMARY OF VALUES

Property

Capital value in existing state as at 31 May 2004

Group I — Property interest held for investment by the Group in Hong Kong

1. Factory Units A and B on HK$4,800,000 23rd Floor and Car Parking Space Nos. S1, S4 and L5 on Ground Floor, Ming Wah Industrial Building, Nos. 13-33 Wang Lung Street, Tsuen Wan, New Territories Hong Kong

Group II — Property interest held for investment by the Group in the PRC 2. Unit No. A704, Block A, HK$650,000 Yinhai Building, No. 250 Caoxi Road, Xuhui District, Shanghai, the PRC

Group II — Property interest held for investment by the Group in the PRC

Group III — Property interest held for future development by the Group in the PRC

1. A parcel of land located at HK$510,000,000 No. 7 Xi Ba He Bei Lane (i.e. No. A7 Beisanhuan East Road), Chaoyang District, Beijing, the PRC

Group IV — Property interest leased and occupied by the Group in Hong Kong

1. Office No. 3211 on 32nd Floor, The Center, No commercial value No. 99 Queen’s Road Central, Hong Kong

2. Offices Nos. 3212 to 3213 on 32nd Floor, The Center, No commercial value No. 99 Queen’s Road Central, Hong Kong

3. Flat A on 33rd Floor of , No commercial value No. 62B Robinson Road, Hong Kong

Total: HK$515,450,000

— VIII-6 —

PROPERTY VALUATION OF THE GROUP

APPENDIX VIII

VALUATION CERTIFICATE

Group I — Property interest held for investment by the Group in Hong Kong

Description and Tenure

Property

Ming Wah Industrial Building is a 24-storey industrial building completed in about 1979.

1. Factory Units A Ming Wah Industrial Building is a and B on 23rd 24-storey industrial building Floor and Car completed in about 1979. Parking Space Nos. S1, S4 and L5 on The property comprises all two Ground Floor, units on the 23rd Floor and one Ming Wah lorry parking space and two private Industrial Building, car parking spaces on Ground Floor Nos. 13-33 Wang of the subject building. Lung Street, Tsuen Wan, The total gross floor area of the New Territories, property (excluding the car parking spaces) is approximately 1,323.76 Hong Kong sq.m. (or 14,249 sq.ft.).

An aggregate Tsuen Wan Town Lot No. 134 is 33/1024th held from the Government under undivided parts or New Grant No. 4740 for a term of shares of and in Tsuen Wan Town 99 years commenced from 1 July Lot No. 134 1898, less the last three days thereof, and is statutorily extended to be expired on 30 June 2047.

Capital value in existing state as at Particulars of Occupancy 31 May 2004 Portion of the factory units $4,800,000 in the property with a gross floor area of approximately (100% equity 394.74 sq.m. (or 4,249 sq.ft.) interest attributable is currently occupied by the to the Group: Group for storage purpose. $4,800,000)

Particulars of Occupancy

The remaining portion of the factory units together with the two private car parking spaces are leased to Gome Home Appliances (H.K.) Limited on monthly basis at a monthly rent of $18,000 inclusive of Government rent, rates and management fees.

The subject lorry parking space is licensed to a third party on a monthly basis at a licence fee of $3,300 per month.

Note:

The registered owner of the property is Hong Kong Punching Centre Limited, which is a wholly owned subsidiary of the Company.

— VIII-7 —

PROPERTY VALUATION OF THE GROUP

APPENDIX VIII

Group II — Property interest held for investment by the Group in the PRC

				Capital value in
				existing state as at
	Property	Description and Tenure	Particulars of Occupancy	31 May 2004
2.	Unit No. A704,	Yinhai Building comprises two	The property is currently	$650,000
	Block A, Yinhai	adjoining blocks of 12-storey (plus	vacant.
	Building, No. 250	basement car park) office building		(100% equity
	Caoxi Road, Xuhui	completed in about 1993.		interest attributable
	District, Shanghai,			to the Group:
	the PRC	The property comprises one of the		$650,000)
		office units on Level 7 of Block A.
		The gross floor area of the property
		is approximately 80.30 sq.m. (or
		864 sq.ft.).
		The land use rights of the property
		have been granted for office use
		for a term from 3 December 2001
		to 13 October 2043.

Notes:

• 1) Pursuant to the Certificate of Real Estate Ownership (Hu Fang Di Shi Zi (2002) No. 000149) dated 8 January 2002 issued by Shanghai Housing and Land Administration Bureau, the ownership of the property, having a gross floor area of 80.30 sq.m., is vested in (Capital Realty Development Company Limited).

• 2) Capital Realty Development Company Limited is a wholly owned subsidiary of the Company.

• 3) The opinion of the PRC Legal Adviser is summarized as follows:

• a) Capital Realty Development Company Limited is the legal owner of the property and is entitled to transfer, let, mortgage or dispose of the property to both local and overseas entities.

• b) The property is free from mortgage or other third party encumbrance.

• c) It is confirmed by Capital Realty Development Company Limited that the purchase consideration has been settled in full.

• 4) We have relied on the information provided and the aforesaid legal opinion and prepared our valuation based on the assumption that the design and construction of the property are in compliance with the local planning regulations and have been approved by the relevant authorities.

• 5) The status of the title and grant of major approvals and licences in accordance with the information provided by the Company and the opinion of the PRC Legal Adviser are as follows:

Certificate of Real Estate Ownership

Yes

— VIII-8 —

PROPERTY VALUATION OF THE GROUP

APPENDIX VIII

Group III — Property interest held for future development by the Group in the PRC

				Capital value in
				existing state as at
	Property	Description and tenure	Particulars of occupancy	31 May 2004
3.	A parcel of land	The property comprises a parcel of	The property is vacant.	$510,000,000
	located at No. 7 Xi	land with a site area of
	Ba He Bei Lane	approximately 35,300 sq. m. (or		(100% equity
	(i.e. No. A7	379,969 sq.ft.).		interest attributable
	Beisanhuan East			to the Group:
	Road), Chaoyang	The property will be developed into		$510,000,000)
	District, Beijing,	a mixed commercial and residential
	the PRC	development with a total gross
		floor area of approximately
		350,000 sq.m. (or 3,767,400 sq.ft.).
		Details of land usage and gross
		floor areas of the proposed
		development are as follows:
		Approximate
		Usage Gross Floor Area
		(sq.m.) (sq.ft.)
		Residential 50,000 538,200
		Retail 40,000 430,560
		Office 220,000 2,368,080
		Car park 40,000 430,560
		Total: 350,000 3,767,400

Notes:

• 1) Pursuant to the Certificate for State-owned Land Use 000224 (Jing Chao Guo Yong (Di) Zi No. 000224) issued by (Beijing Municipal Chaoyang District Housing and Land Administration Bureau) on 4 July 1997, the land use rights of a site having a site area of approximately 50,063.956 have been granted to (hereinafter referred to as “Beijing Bus”) by way of administrative appropriation for industrial use.

• 2) Pursuant to the Agreement for Transfer of Land Use Rights (hereinafter referred to as the “Transfer Agreement”) entered into between Beijing Bus and (Beijing Jin Zun Property Development Limited, hereinafter referred to as “Beijing Jin Zun Property”) on 1 February 2002, Beijing Bus agreed to sell and Beijing Jin Zun Property agreed to purchase the subject site having a site area of approximately 35,300 sq.m. for a relocation and compensation fee of RMB250,000,000.

• 3) Beijing Jin Zun Property is a wholly owned subsidiary of the Company.

— VIII-9 —

APPENDIX VIII

PROPERTY VALUATION OF THE GROUP

• 4) We have been advised by Beijing Jin Zun Property that the development proposal (which is equivalent to the feasibility study) of the property has been submitted to (Beijing Municipal Development Reform Commission) and (Beijing Municipal Planning Commission) on 31 January 2003 for approval.

• 5) In accordance with the progress of the proposed development of the property, all necessary applications have been made awaiting approvals from the relevant authorities as at the date of valuation.

• 6) In the course of our valuation, we have taken into account and excluded the estimated cost of development of approximately RMB3,825,000,000, the relocation and compensation fee of RMB250,000,000 payable by Beijing Jin Zun Property to Beijing Bus and the estimated land premium of approximately RMB470,000,000.

• 7) Regarding the estimated land premium as described in Note 6 above, we have considered in our valuation the change of land use as well as the latest development proposal provided to us by the Group.

• 8) The capital value when completed of the proposed development is approximately RMB5,085,000,000.

• 9) According to the latest development proposal provided by the Company, construction of the proposed development is expected to take 42 months to complete.

• 10) The opinion of the PRC Legal Adviser is summarized as follows:

• a) Beijing Bus is the legal owner of the land use rights of the property and its land use rights are protected under law. Beijing Bus is entitled to develop the property and to transfer the state-owned land use rights and development right of the property to third parties. However Beijing Bus and Beijing Jin Zun Property will have to be in compliance with the relevant regulations in town planning and transfer of state-owned land of Beijing Municipal Government.

• b) It is confirmed by Beijing Jin Zun Property that the pertinent procedures for planning and land use rights of the land are being processed.

• c) Beijing Jin Zun Property is duly incorporated in the PRC and has a right to develop real estate and a right to sign the Transfer Agreement with Beijing Bus. Beijing Jin Zun Property shall have the right to engage in real estate development of the subject site upon obtaining approvals from the relevant government authorities and settling the land premium in full.

• d) The Transfer Agreement is legally valid and legally binding on both parties. Upon fulfillment of its obligations stated in the Transfer Agreement, Beijing Jin Zun Property shall obtain the right to develop the subject site and the legal status as a project developer in applying to the relevant government authorities for project recognition, planning, use of land, etc.

• e) Upon completion of the necessary application procedures for project recognition, planning and land use and having been granted with the relevant approvals from the relevant government authorities, Beijing Jin Zun Property will have the right to engage in the development and the sale of the property and to obtain the relevant interest thereof.

• f) There is no legal impediment in obtaining the approvals from the relevant government authorities in respect of application for project recognition, (including the change from administrative appropriation to by way of grant in obtaining the land and the modification of the permitted land use from factory to commercial development purpose), planning, use of land, sale and etc. Upon obtaining approvals from the relevant government authorities, Beijing Jin Zun Property will have the legal right to develop the property.

— VIII-10 —

APPENDIX VIII

PROPERTY VALUATION OF THE GROUP

• g) It is confirmed by Beijing Jin Zun Property that there are no substantial changes in the conditions stated in the Transfer Agreement and in the legal title to the property; and that both Beijing Jin Zun Property and Beijing Bus have performed their respective obligations stated in the Transfer Agreement. It is further confirmed by Beijing Jin Zun Property that there is no dispute arising from the performance of the Transfer Agreement and that both parties consider that no breach of contract has been committed by the counterpart.

• h) According to (Provisional Regulations for Grant and Transfer of State-owned Land Use Rights in Cities and Towns in the PRC), the permitted land use rights term of the property is 70 years for residential use, 40 years for commercial/entertainment uses and 50 years for composite use.

• i) According to the existing laws and regulations of the PRC, Beijing Jin Zun Property shall obtain and shall be entitled to transfer the land use rights of the property upon settling the land premium.

• j) The planned total gross floor area of 350,000 sq.m. (comprising 50,000 sq.m. for apartment, 40,000 sq.m. for retail, 220,000 sq.m. for office and 40,000 sq.m. for car park) for the proposed development is formulated in accordance with various regulating documents issued by (National Technical Supervision Bureau) and (Construction Bureau).

• 11) We have relied on the information provided and the aforesaid legal opinion and prepared our valuation based on the following assumptions:

• a) Upon settling in full all requisite land premium (which is estimated to be approximately RMB470,000,000) and the relocation and compensation fee, Beijing Jin Zun Property will be in possession of a proper legal title to the property and will be entitled to transfer the property with the residual term of its land use rights at no extra land premium or other onerous payment payable to the government.

• b) The land use rights of the property will be granted for commercial, residential and composite uses for terms of 40 years, 70 years and 50 years from the issuance date of the Certificate for State-owned Land Use Rights respectively.

• c) The property will be developed in accordance with the latest development proposal provided to us, i.e. a mixed commercial and residential complex with a proposed total gross floor area of approximately 350,000 sq.m. (or 3,767,400 sq.ft.) comprising 50,000 sq.m. (or 538,200 sq.ft.) for residential use, 40,000 sq.m. (or 430,560 sq.ft.) for retail use, 220,000 sq.m. (or 2,368,080 sq.ft.) for office use and 40,000 sq.m. (or 430,560 sq.ft.) for car park use.

• d) The development proposal of the property will be approved by the relevant government authorities.

• e) The design and construction of the property will be in compliance with the local planning regulations and will have been approved by the relevant government authorities.

• f) All consents, approvals and licences from the relevant government authorities for the development of the property will be granted without any onerous conditions or undue delay.

• g) The proposed development, whether as a whole or on a strata-titled basis, may be disposed of to both local and overseas purchasers.

• 12) The status of the title and grant of major approvals and licences in accordance with the information provided by the Company and the opinion of the PRC Legal Adviser are as follows:

• Contract for Transfer of State-owned Land Use Rights Yes Certificate for State-owned Land Use Rights No

— VIII-11 —

PROPERTY VALUATION OF THE GROUP

APPENDIX VIII

Group IV — Property interests leased and occupied by the Group in Hong Kong

			Capital value in
			existing state as at
	Property	Description and tenancy particulars	31 May 2004
4.	Office No. 3211	The property comprises an office unit on 32nd Floor of	No commercial value
	on 32nd Floor,	a high-rise office/commercial complex completed in
	The Center,	about 1998.
	No. 99 Queen’s Road Central,
	Hong Kong	The property is currently occupied by the Group as
		office.
		The gross floor area the property is approximately
		178.37 sq.m. (or 1,920 sq.ft.).
		The property is leased to the Group under a Tenancy
		Agreement dated 25 March 2004 at a rent of $28,800
		per month, exclusive of rates, Government rent, air-
		conditioning and management charges, for a term of 31
		months and 20 days commencing on 8 March 2004 and
		expiring on 27 October 2006 (both days inclusive).

Note:

The registered owner of the property is Land Development Corporation (the “Registered Owner”), which is an independent third party from the Group. Under an Agreement for Sale and Purchase dated 27 November 1998 and made between the Registered Owner as vendor and The Center (32) Limited (the “Landlord”), which is also an independent third party from the Group, as purchaser and registered at the Urban Land Registry by Memorial No. 7639440, inter alia, the property was agreed to be sold by the Registered Owner to the Landlord.

— VIII-12 —

PROPERTY VALUATION OF THE GROUP

APPENDIX VIII

Capital value in existing state as at Property Description and tenancy particulars 31 May 2004 5. Offices Nos. 3212 to 3213 The property comprises two adjoining office units on No commercial value on 32nd Floor, 32nd Floor of a high-rise office/commercial complex The Center, completed in about 1998. No. 99 Queen’s Road Central, Hong Kong The property is currently occupied by the Group as office. The total gross floor area the property is approximately 408.49 sq.m. (or 4,397 sq.ft.). The property is leased to the Group under a Tenancy Agreement dated 15 November 2003 at a rent of $52,764 per month, exclusive of rates, Government rent, air-conditioning and management charges, for a term of three years commencing on 28 October 2003 and expiring on 27 October 2006 (both days inclusive).

Note:

The registered owner of the property is Land Development Corporation (the “Registered Owner”), which is an independent third party from the Group. Under an Agreement for Sale and Purchase dated 27 November 1998 and made between the Registered Owner as vendor and The Center (32) Limited (the “Landlord”), which is also an independent third party from the Group, as purchaser and registered at the Urban Land Registry by Memorial No. 7639440, inter alia, the property was agreed to be sold by the Registered Owner to the Landlord.

— VIII-13 —

PROPERTY VALUATION OF THE GROUP

APPENDIX VIII

Capital value in existing state as at Property Description and tenancy particulars 31 May 2004 6. Flat A on 33rd Floor of The property comprises one of the two serviced No commercial value , apartment units on 33rd Floor of a 35-storey No. 62B Robinson Road, residential building completed in about 2000. Hong Kong

The property is currently occupied by the Group as director’s residence.

The gross floor area of the property is approximately 130.06 sq.m. (or 1,400 sq.ft.).

The property is leased to the Group under a Tenancy Agreement dated 20 February 2004 at a rent of $30,000 per calendar month (inclusive of Government rent, rates and maintenance charges) for a term of one calendar year commencing on 11 March 2004 and expiring on 10 March 2005 (both days inclusive).

Notes:

1. The registered owner of the property is Rightmark Investment Limited (the “Landlord”), which is an independent third party from the Group.

2. The property is subject to the following encumbrances:

3. a) All-Moneys’ Mortgage/Charge registered at the Urban Land Registry by Memorial No. 8454483 dated 7 July 2001 in favour of Hang Seng Bank Limited (the “Mortgagee”) for consideration of all moneys; and

4. b) Assignment of Rental and Sale Proceeds registered at the Urban Land Registry by Memorial No. 8454484 dated 7 July 2001 in favour of the Mortgagee.

5. The requisite consent of the Mortgagee for the grant of the tenancy by the Landlord in favour of the Group has not been provided.

— VIII-14 —

OTHER INFORMATION ON THE TARGET GROUP

APPENDIX IX

1. Particulars of bank facilities of the Target Group

As at 31 May 2004, the brief details of bank facilities extended to the Target Group for which guarantee has been given by certain members of the Parent Group and/or Mr. Wong and/or Beijing Eagle and which will be subject to the Bank Guarantees Deed are set out below:

==> picture [432 x 540] intentionally omitted <==

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

|||||||||
|---|---|---|---|---|---|---|---|
|Name|of|the|member|Amount|of|
|of|the|Target|Group|Name|of|Bank|facilities|
|(RMB’000)|
|Tianjin|Gome|120,000.00|
|(CITIC|Industrial|Bank,|Tianjin|branch)|
|Tianjin|Gome|120,000.00|
|(China|Construction|Bank,|Tianjin|branch,|
|Hongqiao|sub-branch)|
|Tianjin|Gome|40,000.00|
|(China|Everbright|Bank,|Tianjin|branch,|Hedong|
|sub-branch)|
|Tianjin|Gome|60,000.00|
|(Agricultural|Bank|of|China,|Tianjin|branch|Jinxin|
|sub-branch)|
|Tianjin|Gome|40,000.00|
|(China|Merchants|Bank,|Tianjin|branch)|
|Chongqing|Gome|120,000.00|
|(China|Merchants|Bank,|Chongqing|branch,|
|business|division)|
|Chongqing|Gome|28,570.00|
|(CITIC|Industrial|Bank,|Chongqing|branch,|
|Shapingba|sub-branch)|
|Chongqing|Gome|20,000.00|
|(China|Minsheng|Banking|Corporation,|Ltd.,|
|Chongqing|branch,|Shapingba|sub-branch)|
|Chongqing|Gome|(Bank|of|Communications,|20,000.00|
|Chongqing|branch|Shapingba|sub-branch)|
|Chengdu|Gome|73,330.00|
|(CITIC|Industrial|Bank,|Chengdu|branch)|
|Chengdu|Gome|50,000.00|
|(China|Merchants|Bank,|Chengdu|branch|
|Shuangnan|sub-branch)|
|Xian|Gome|(China|Merchants|Bank,|50,000.00|
|Xian|branch|Chengbei|sub-branch)|

----- End of picture text -----

— IX-1 —

OTHER INFORMATION ON THE TARGET GROUP

APPENDIX IX

==> picture [432 x 618] intentionally omitted <==

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

|||||||||
|---|---|---|---|---|---|---|---|
|Name|of|the|member|Amount|of|
|of|the|Target|Group|Name|of|Bank|facilities|
|(RMB’000)|
|Xian|Gome|(China|Everbright|Bank,|33,000.00|
|Xian|branch,|business|division)|
|Xian|Gome|(Hua|Xia|Bank,|Xian|branch)|20,000.00|
|Xian|Gome|(Shanghai|Pudong|42,000.00|
|Development|Bank,|Xian|branch)|
|Xian|Gome|(Bank|of|Communications,|Xian|50,000.00|
|branch)|
|Shenyang|Gome|(CITIC|Industrial|Bank,|65,000.00|
|Shenyang|branch)|
|Shenyang|Gome|(China|Everbright|7,140.00|
|Bank,|Shenyang|Technology|Development|Zone|
|sub-branch)|
|Shenyang|Gome|(China|Everbright|20,000.00|
|Bank,|Shenyang|Technology|Development|Zone|
|sub-branch)|
|Shenyang|Gome|(China|Construction|Bank,|40,000.00|
|Shenyang|Huanggu|sub-branch)|
|Shenyang|Gome|(Shanghai|Pudong|40,000.00|
|Development|Bank,|Shenyang|branch)|
|Shenyang|Gome|(Bank|of|Communications,|100,000.00|
|Shenyang|branch)|
|Qingdao|Gome|(CITIC|Industrial|Bank,|25,000.00|
|Qingdao|Licang|sub-branch)|
|Qingdao|Gome|(Shanghai|Pudong|100,000.00|
|Development|Bank,|Qingdao|branch)|
|Qingdao|Gome|(Shenzhen|Development|Bank,|28,570.00|
|Qingdao|branch)|
|Jinan|Gome|(Jinan|City|Commercial|50,000.00|
|Bank,|Wuyingshan|sub-branch)|
|Jinan|Gome|(Jinan|City|Commercial|30,000.00|
|Bank,|Wuyingshan|sub-branch)|
|Jinan|Gome|(Shenzhen|Development|Bank,|40,000.00|
|Jinan|branch)|
|Jinan|Gome|(CITIC|Industrial|Bank,|33,330.00|
|Jinan|Lixia|sub-branch)|

----- End of picture text -----

— IX-2 —

OTHER INFORMATION ON THE TARGET GROUP

APPENDIX IX

==> picture [432 x 609] intentionally omitted <==

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

|||||||||
|---|---|---|---|---|---|---|---|
|Name|of|the|member|Amount|of|
|of|the|Target|Group|Name|of|Bank|facilities|
|(RMB’000)|
|Fuzhou|Gome|(Fuzhou|City|Commercial|80,000.00|
|Bank,|Dong|Da|sub-branch)|
|Fuzhou|Gome|6,670.00|
|(CITIC|Industrial|Bank,|Fuzhou|branch)|
|Fuzhou|Gome|(Bank|of|Communications,|60,000.00|
|Fuzhou|branch|Yeshan|sub-branch)|
|Fuzhou|Gome|20,000.00|
|(China|Merchants|Bank,|Fuzhou|branch)|
|Guangzhou|Gome|100,000.00|
|(Agricultural|Bank|of|China,|Guangzhou|Yangcheng|
|sub-branch)|
|Guangzhou|Gome|50,000.00|
|(Agricultural|Bank|of|China,|Guangzhou|Yangcheng|
|sub-branch)|
|Guangzhou|Gome|50,000.00|
|(Guangdong|Development|Bank,|Guangzhou|branch)|
|Guangzhou|Gome|40,000.00|
|(Industrial|Bank|Co.,|Ltd.,|Guangzhou|branch)|
|Shenzhen|Gome|60,000.00|
|(China|Merchants|Bank,|Shenzhen|Yayuan|
|sub-branch)|
|Shenzhen|Gome|(Guangdong|50,000.00|
|Development|Bank,|Shenzhen|branch,|Hongling|
|sub-branch)|
|Shenzhen|Gome|(Agricultural|Bank|of|60,000.00|
|China,|Shenzhen|branch|Shangbu|sub-branch)|
|Shenzhen|Gome|80,000.00|
|(Bank|of|Communications,|Shenzhen|branch,|
|Nanyou|sub-branch)|
|Shenzhen|Gome|50,000.00|
|(Industrial|Bank|Co.,|Ltd.,|Shenzhen|branch)|
|Shenzhen|Gome|(Shenzhen|City|Commercial|150,000.00|
|Bank,|Caiwuwei|sub-branch)|
|Wuhan|Gome|(China|Merchants|Bank,|30,000.00|
|Wuhan|branch|Huaqiao|sub-branch)|

----- End of picture text -----

— IX-3 —

OTHER INFORMATION ON THE TARGET GROUP

APPENDIX IX

==> picture [434 x 426] intentionally omitted <==

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

|||||||||
|---|---|---|---|---|---|---|---|
|Name|of|the|member|Amount|of|
|of|the|Target|Group|Name|of|Bank|facilities|
|(RMB’000)|
|Wuhan|Gome|(China|Merchants|Bank,|20,000.00|
|Wuhan|branch|Huaqiao|sub-branch)|
|Wuhan|Gome|(Wuhan|Urban|Commercial|30,000.00|
|Bank,|Development|Main|Lu|sub-branch)|
|Wuhan|Gome|(Wuhan|Urban|Commercial|10,000.00|[(Note)]|
|Bank,|Development|Main|Lu|sub-branch)|
|Wuhan|Gome|(CITIC|Industrial|Bank,|Wuhan|40,000.00|
|branch)|
|Wuhan|Gome|(Guangdong|Development|Bank|20,000.00|
|Wuhan|branch)|
|Kunming|Gome|(Hua|Xia|Bank,|Kunming|45,000.00|
|branch,|Dong|Feng|sub-branch)|
|Kunming|Gome|20,000.00|
|(China|Merchants|Bank,|Kunming|branch)|
|Kunming|Gome|28,570.00|
|(China|Merchants|Bank,|Kunming|branch)|
|Kunming|Gome|10,000.00|
|(China|Merchants|Bank,|Kunming|branch)|
|Kunming|Gome|(Kunming|City|Commercial|30,000.00|
|Bank,|Wucheng|road|sub-branch)|
|Kunming|Gome|(CITIC|Industrial|Bank,|20,000.00|
|Kunming|branch)|
|Total:|2,626,180.00|

----- End of picture text -----

Note: Short-term bank loan

2. Particulars of a lease agreement

After the date of valuation of the property interests held by Target Group as set out in Appendix VII of this circular, Chengdu Gome has entered into a lease agreement on 18 June 2004 with (Sichuan Province Tang Jiu Company) as landlord for the lease of the premises situated at Unit 5, Annex, 1st Floor, Jing Jue Building, 142-144 Yusha Road, Chengdu, the PRC at a monthly rental of RMB13,750.

The term of the lease agreement commenced on 21 June 2004 and will expire on 5 July 2007. The said premises has a gross floor area of 150 square metres.

— IX-4 —

OTHER INFORMATION ON THE TARGET GROUP

APPENDIX IX

1. Other particulars required under the Listing Rules

The Directors confirm that, save as disclosed in this circular:

• (a) the Target Group has no funding and treasury policies and objectives in terms of the manner in which treasury activities are controlled;

• (b) the Target Group has no borrowings which are at fixed interest rates;

• (c) the Target Group has not used financing instruments for hedging purpose;

• (d) the Target Group has not undertaken any hedging activities;

• (e) there are no significant investments held by the Target Group;

• (f) the Target Group does not have any material acquisitions or disposals of subsidiaries and associated companies in the course of the financial year; and

• (g) there is no exposure to fluctuations in exchange rates as the Target Group operates its business in Renminbi.

— IX-5 —

GENERAL INFORMATION

APPENDIX X

RESPONSIBILITY STATEMENTS

This 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 circular and confirm, having made all reasonable enquiries, that to the best of their knowledge, opinions expressed in this circular have been arrived at after due and careful consideration and there are no other facts not contained in this circular the omission of which would make any such statement contained in this circular misleading.

The directors of Gome Appliance collectively and individually accept full responsibility for the accuracy of the information contained in this circular relating to the Target Group and confirm, having made all reasonable enquiries, that to the best of their knowledge, opinions expressed in this 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 circular the omission of which would make any such statement contained in this circular misleading.

DISCLOSURE OF INTERESTS

As at the Latest Practicable Date, the interests and short position of the Directors and chief executive of the Company in the Shares, underlying Shares and debentures of the Company and its associated corporations (within the meaning of Part XV of the SFO) which (a) were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they are taken or deemed to have under such provisions of the SFO); or (b) were required, pursuant to Section 352 of the SFO, to be entered in the register referred to therein; or (c) were required, pursuant to the Model Code for Securities Transactions by Directors of Listed Companies of the Listing Rules, to be notified to the Company and the Stock Exchange were as follows:

(a) Interests in the Shares

				Approximate
				percentage of
		**Number **	of Shares	existing issued
		Long	Short	share capital
Directors	Nature of interest	position	position	of the Company
Mr. Wong	Personal	36,003,500	Nil	0.65%
	Corporate (Note 1)	3,670,000,000	Nil	66.25%
Ms. Du Juan	Family (Note 2)	3,706,003,500	Nil	66.90%

• Note 1: The interest was held by Shinning Crown Holdings Inc., a company incorporated in the British Virgin Islands and wholly-owned by Mr. Wong.

Note 2: Ms. Du Juan is the spouse of Mr. Wong. Accordingly, she has a family interest under the SFO in the Shares which Mr. Wong is interested.

— X-1 —

GENERAL INFORMATION

APPENDIX X

(b) Directors’ interests in competing businesses

As at the Latest Practicable Date, the interests of the Directors in businesses (other than those businesses where the Directors were appointed as directors to represent the interests of the Company and/or any member of the Group) which are considered to compete or are likely to compete, either directly or indirectly, with the businesses of the Group were as follows:

Nature of interest of Name of Nature of business the Director in the Directors competing entity of the competing entity competing entity Mr. Wong Beijing Gome Retailing of electrical Beneficial owner appliances and consumer electronic products

As at the Latest Practicable Date:

• (i) save as disclosed above, none of the Directors and chief executive of the Company hold any interest or short position in the Shares, underlying Shares and debentures of the Company or any of its associated corporation (within the meaning of the SFO) notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they are taken or deemed to have under such provisions of the SFO) or which are required, pursuant to Section 352 of the SFO, to be entered in the register referred to therein, or which are required, pursuant to the Model Code for Securities Transactions by Directors of Listed Companies of the Listing Rules, to be notified to the Company and the Stock Exchange;

• (ii) save for the transactions contemplated under the Acquisition Agreement, none of the Directors had any direct or indirect interest in any assets which have been, since the date to which the latest published audited accounts of the Group were made up, acquired or disposed of by, or leased to any member of the Group, or are proposed to be acquired or disposed of by, or leased to, any member of the Group;

• (iii) save for the transactions contemplated under the Acquisition Agreement, none of the Directors is materially interested in any contract or arrangement entered into by any member of the Group which contract or arrangement is subsisting at the date of this circular and which is significant in relation to the business of the Group; and

• (iv) none of the Directors has entered or is proposing to enter into a service contract with any member of the Group (excluding contracts expiring or determinable within one year without payment of compensation other than statutory compensation).

— X-2 —

GENERAL INFORMATION

APPENDIX X

SUBSTANTIAL SHAREHOLDERS

As at the Latest Practicable Date, according to the register of interest kept by the Company under Section 336 of the SFO and so far as was known to the Directors, the following are details of the persons (other than a Director or chief executive of the Company) who had an interest or short position in the Shares and underlying Shares which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO, or who were, directly or indirectly, interested in 5% or more of the nominal value of any class of share capital (including any options in respect of such capital) carrying rights to vote in all circumstances at general meeting of any other member of the Group:

				Approximate
				percentage of
				existing issued
		Number of Shares		share capital
	Nature of	Long	Short	of the
Name of Shareholder	interest	position	position	Company
Shinning Crown Holdings Inc.	Corporate	3,670,000,000	Nil	66.25
(Note 1)
Link Zone International Limited	Corporate	548,308,000	Nil	9.90
(Note 2)

Note 1: Shinning Crown Holdings Inc. is wholly-owned by Mr. Wong. In addition, Mr. Wong directly owns 36,003,500 Shares.

Note 2: Link Zone International Limited is wholly-owned by Mr. Han Yue Jun.

Save as disclosed above, so far as was known to the Directors, there was no other person (other than the Directors or chief executive of the Company) who, as at the Latest Practicable Date, had an interest or short position in the Shares and underlying Shares which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO, or, who was, directly or indirectly, beneficially interested in 5% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meeting of any member of the Group or in any options in respect of such capital.

— X-3 —

GENERAL INFORMATION

APPENDIX X

MATERIAL CONTRACTS

The following contracts, not being contracts in the ordinary course of business, have been entered into by members of the Group, within the two years preceding the Latest Practicable Date and are or may be material:

• (1) The Acquisition Agreement.

• (2) A conditional agreement dated 6 February 2004 and a supplemental agreement thereto dated 24 February 2004 entered into between Mr. Han Yue Jun as the vendor and the Company as the purchaser for the sale and purchase of the entire issued share capital of Bestly Legend Limited at a consideration of HK$300 million.

• (3) A conditional agreement dated 6 February 2004 entered into between the Company as the issuer and Shinning Crown Holdings Inc. as the subscriber for the subscription of convertible notes in the principal amount of HK$300 million.

• (4) A conditional agreement dated 7 January 2004 entered into between the Company as the issuer and Shinning Crown Holding Inc. as the subscriber relating to the subscription of 473,000,000 new Shares at an aggregate subscription price of HK$56,760,000.

• (5) A conditional agreement dated 26 June 2003 entered into between the Company as the issuer and Ricofull Securities Limited as the placing agent relating to the placing of 323,000,000 new Shares at a placing price of HK$0.120 per Share at a commission fee of HK$775,200.

• (6) A conditional agreement dated 3 September 2002 entered into between, inter alia, China Eagle Capital Co. Limited, an indirect subsidiary of the Company, as one of the purchasers, and independent third parties as the vendors relating to the acquisition of 95% of the issued share capital of Eagle Legend Securities Limited (then known as Gold City Securities Limited at a consideration of HK$14,516,418, being 95% of the net tangible asset of Eagle Legend Securities Limited) and a premium of HK$2,000,000.

• (7) A conditional agreement dated 3 September 2002 entered into between, inter alia, China Eagle Capital Co. Limited as one of the purchasers, and independent third parties as the vendors relating to the acquisition of 95% of the issued share capital of Eagle Legend Futures Limited (then known as Gold City Futures Limited) at a consideration of HK$8,210,965 being 95% of the net tangible asset of Eagle Legend Futures Limited and a premium of HK$800,000.

LITIGATION

Neither the Company nor any of its subsidiaries is engaged in any litigation, arbitration of material importance and no litigation, claim or government proceedings of material importance is known to the Directors to be pending or threatened by or against the Company or any of its subsidiaries.

— X-4 —

GENERAL INFORMATION

APPENDIX X

EXPERTS AND CONSENTS

The followings are the qualifications of the experts who have been named in this circular or have given opinions, letters or advice contained in this 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 American Appraisal registered professional surveyors, valuer & property advisers China Limited B.I. Appraisals Limited registered professional surveyors, valuer & property advisers

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

Each of Somerley, Ernst & Young and American Appraisal China Limited and B.I. Appraisals Limited is not beneficially interested in the share capital of any member of the Group nor has any right, whether legally enforceable or not, to subscribe for or to nominate persons to subscribe for securities in any member of the Group.

MISCELLANEOUS

• (a) The registered office of the Company is at Canon’s Court, 22 Victoria Street, Hamilton HM 12, Bermuda.

• (b) The head office and principal place of business of the Company in Hong Kong is at Unit 6101, 61/F., The Center, 99 Queen’s Road Central, Hong Kong.

• (c) The company secretary and the qualified accountant of the Company is Cecilia Tang. Miss Cecilia Tang is a fellow member of the Association of Chartered Certified Accountants and an associate member of the Hong Kong Society of Accountants. She is also an associate member of the Institute of Chartered Secretaries and Administrators and the Hong Kong Institute of Company Secretaries.

• (d) The branch share registrars of the Company in Hong Kong is Abacus Share Registrars Limited at G/F, Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong.

• (e) The English text of this circular shall prevail over the Chinese text in the case of any inconsistency.

— X-5 —

GENERAL INFORMATION

APPENDIX X

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 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 form of the Transitional Purchasing Service Agreement, the Purchasing Service Agreement, the Management Agreement and the Audio Visual Products Counters Sub-lease Agreements and the Beijing Gome Debt;

• (e) the letter from the Independent Board Committee, the text of which is set out on pages 64 to 65 of this circular;

• (f) the letter from Somerley, the text of which is set out on pages 66 to 113 of this circular;

• (g) the accountants’ report of the Target Group for each of the three years ended 31 December 2003 and the three months ended 31 March 2004, the text of which is set out in Appendix III to this circular;

• (h) the financial information of the Group for the year ended 31 March 2004, the text of which is set out in Appendix V to this circular;

• (i) the property valuation report from American Appraisal China Limited, the text of which is set out in Appendix VII to this circular;

• (j) the property valuation report from B.I. Appraisals Limited, the text of which is set out in Appendix VIII to this circular;

• (k) the material contracts referred to in the paragraph headed “Material contracts” to this Appendix; and

• (l) the written consents referred to in the paragraph headed “Experts and consents” to this Appendix.

— X-6 —

NOTICE OF THE SPECIAL GENERAL MEETING

CHINA EAGLE GROUP COMPANY LIMITED

*

(incorporated in Bermuda with limited liability)

Stock code: 493

NOTICE IS HEREBY GIVEN that a special general meeting of CHINA EAGLE GROUP COMPANY LIMITED (the “ Company ”) will 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. for the purpose of considering and, if thought fit, passing the following resolutions as special resolutions and ordinary resolutions of the Company:

SPECIAL RESOLUTIONS

1. “ THAT with effect from 9:30 a.m. (Hong Kong time) on the business day (as defined in the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “ Stock Exchange ”)) immediately after the passing of this resolution and conditional upon (i) the Listing Committee of the Stock Exchange granting the listing of, and permission to deal in, the shares of the Company in issue resulting from the Share Consolidation and the Capital Reduction (both as defined below); and (ii) compliance with section 46 of the Companies Act 1981 of Bermuda (as amended):

2. (a) every 40 shares of HK$0.10 each in the issued share capital of the Company be consolidated into one share of HK$4.00 each (“ Consolidated Share ”) and every 40 shares of HK$0.10 each in the authorised but unissued share capital of the Company be consolidated into one Consolidated Share (“ Share Consolidation ”);

3. (b) immediately following the Share Consolidation, the par value of each of the Consolidated Shares in issue be reduced from HK$4.00 to HK$0.10 by cancelling the paid-up capital to the extent of HK$3.90 per Consolidated Share in issue (“ Capital Reduction ”);

4. (c) the credit arising from the Capital Reduction be transferred to the contributed surplus account of the Company;

5. (d) immediately following the Capital Reduction, each of the authorised but unissued Consolidated Shares be subdivided into 40 shares of HK$0.10 each; and

6. (e) any director of the Company be and is hereby authorised to do all acts and things which in his/her opinion are appropriate, desirable or necessary to give effect to and implement any of the foregoing.”

7. For identification purpose only

— N-1 —

NOTICE OF THE SPECIAL GENERAL MEETING

1. “ THAT subject to the passing of Resolution No. 3 as set out in the notice convening this meeting of which this resolution forms part and the grant of approval by the Registrar of Companies in Bermuda in relation to (a) below,

2. (a) the name of the Company be and is hereby changed to “GOME Electrical Appliances Holding Limited”; and

3. (b) upon the change of the Company’s English name as referred herein becoming effective, “ ” be adopted as the Chinese translation of the name of the Company for the purpose of the Company’s registration at the Companies Registry in Hong Kong.”

ORDINARY RESOLUTIONS

1. “ THAT:

2. (a) the acquisition agreement (the “ Acquisition Agreement ”) dated 3 June 2004 (a copy of which is tabled at the meeting and marked “A” and initialled by the chairman of the meeting for identification purpose) entered into between Eagle Decade Investments Limited (“ Eagle Decade ”), Gome Holdings Limited and Mr. Wong Kwong Yu in respect of the acquisition by Eagle Decade of the entire issued share capital of Ocean Town Int’l Inc. and the transactions contemplated thereunder be and are hereby approved;

3. (b) the extension of the repayment of a loan in the amount of RMB1,089 million (the “ Extension ”) as owed by (Beijing Gome Appliance Co., Ltd.) to (Gome Appliance Co., Ltd) which will be a subsidiary of the Company upon

4. completion of the Acquisition Agreement (as defined in (a) above) on terms as set out in the section headed “Relationship between the Target Group and the Parent Group” in the circular of the Company dated 5 July 2004 (the “ Circular ”) be and is hereby approved;

5. (c) subject to the giving of the counter-indemnity by each of Mr. Wong Kwong Yu and Gome Holdings Limited in favour of the Company against any costs, claims, losses and liabilities incurred or suffered by the Company due to or in connection with the provision of the Assistance (as defined in the Circular) in the form accepted by the Company, the provision of the Assistance by the Company be and is hereby approved; and

6. (d) any one director, or any two directors of the Company if the affixation of the common seal is necessary, be and is/are hereby authorised for and on behalf of the Company to execute all such other documents, instruments and agreements and to do all such acts or things deemed by him/her/them to be incidental to, ancillary to or in connection with the matters contemplated in or relating to the Acquisition Agreement and completion thereof, the Extension and the Assistance as he/she/they may consider necessary, desirable or expedient.”

— N-2 —

NOTICE OF THE SPECIAL GENERAL MEETING

1. “ THAT subject to the passing of Resolution No. 3 as set out in the notice convening this meeting of which this resolution forms part:

2. (a) an agreement (“ Transitional Purchasing Service Agreement ”) (a copy of which is tabled at the meeting and marked “B” and initialled by the chairman of the meeting for identification purpose) to be entered into between (Beijing Gome Appliance Co., Ltd.) and (Gome Appliance Co., Ltd) which will be a subsidiary of the Company upon completion of the Acquisition Agreement (as defined in Resolution No. 3 as set out in the notice convening this meeting, of which this resolution forms part) and the transactions contemplated thereunder be and are hereby approved;

3. (b) the proposed cap amounts of the purchases by the Target Group (as defined in the circular of the Company dated 5 July 2004 (the “ Circular ”)) from the Parent Group (as defined in the Circular) under the Transitional Purchasing Agreement will not exceed RMB2.0 billion (approximately HK$1.9 billion) for the year ending 31 December 2004; and

4. (c) any one director, or any two directors of the Company if the affixation of the common seal is necessary, be and is/are hereby authorised for and on behalf of the Company to execute all such other documents, instruments and agreements and to do all such acts or things deemed by him/her/them to be incidental to, ancillary to or in connection with the matters contemplated in or relating to the Transitional Purchasing Service Agreement and the implementation thereof as he/she/they may consider necessary, desirable or expedient.”

5. “ THAT subject to the passing of Resolution No. 3 as set out in the notice convening this meeting of which this resolution forms part:

6. (a) an agreement (“ Purchasing Service Agreement ”) (a copy of which is tabled at the meeting and marked “C” and initialled by the chairman of the meeting for identification purpose) to be entered into between (Tianjin Gome Logistics Company Limited) which will be a subsidiary of the Company upon completion of the Acquisition Agreement (as defined in Resolution No. 3 as set out in the notice convening this meeting, of which this resolution forms part) and (Beijing Gome Appliance Co., Ltd.) and the transactions contemplated thereunder be and are hereby approved;

7. (b) the proposed cap amounts of the fees to be received by the Target Group (as defined in the circular of the Company dated 5 July 2004 (the “ Circular ”)) from the Parent Group (as defined in the Circular) under the Purchasing Services Agreement for each of the three years ending 31 December 2006 will not exceed RMB55.0 million (approximately HK$51.9 million), RMB85.0 million (approximately HK$80.2 million) and RMB125.0 million (approximately HK$117.9 million) respectively; and

8. (c) any one director, or any two directors of the Company if the affixation of the common seal is necessary, be and is/are hereby authorised for and on behalf of the Company to execute all such other documents, instruments and agreements and to do all such acts or things deemed by him/her/them to be incidental to, ancillary to or in connection with the matters contemplated in or relating to the Purchasing Service Agreement and the implementation thereof as he/she/they may consider necessary, desirable or expedient.”

— N-3 —

NOTICE OF THE SPECIAL GENERAL MEETING

1. “ THAT subject to the passing of Resolution No. 3 as set out in the notice convening this meeting of which this resolution forms part:

2. (a) an agreement (the “ Management Agreement ”) (a copy of which is tabled at the meeting and marked “D” and initialled by the chairman of the meeting for identification purpose) to be entered into between (Tianjin Gome Commercial Consultancy Company Limited) which will be a subsidiary of the Company upon completion of the Acquisition Agreement (as defined in Resolution No. 3 as set out in the notice convening this meeting, of which this resolution forms part) and (Beijing Gome Electrical Appliance Co., Ltd) and the transactions contemplated thereunder be and are hereby approved;

3. (b) the proposed cap amounts of the fees to be received by the Target Group (as defined in the circular of the Company dated 5 July 2004 (the “ Circular ”)) from the Parent Group (as defined in the Circular) under the Management Agreement for each of the three years ending 31 December 2006 will not exceed RMB43.0 million (approximately HK$40.6 million), RMB65.0 million (approximately HK$61.3 million) and RMB101.0 million (approximately HK$95.3 million) respectively; and

4. (c) any one director, or any two directors of the Company if the affixation of the common seal is necessary, be and is/are hereby authorised for and on behalf of the Company to execute all such other documents, instruments and agreements and to do all such acts or things deemed by him/her/them to be incidental to, ancillary to or in connection with the matters contemplated in or relating to the Management Agreement and the implementation thereof as he/she/they may consider necessary, desirable or expedient.”

5. “ THAT subject to the passing of Resolution No. 3 as set out in the notice convening this meeting of which this resolution forms part:

6. (a) the agreements (the “ Audio Visual Products Counters Sub-lease Agreements ”) (copies of which are tabled at the meeting and marked “E” and initialled by the chairman of the meeting for identification purpose) entered or to be entered into between certain members of the Target Group (as defined in the Circular) which will be a subsidiary of the Company upon completion of the Acquisition Agreement (as defined in Resolution No. 3 as set out in the notice convening this meeting, of which this resolution forms part) and certain members of the Parent Group (as defined in the Circular) and the transactions contemplated thereunder be and are hereby approved;

7. (b) the proposed cap amounts of the fees to be received by the Target Group from the Parent Group under the Audio Visual Products Counters Sub-lease Agreements for each of the three years ending 31 December 2006 will not exceed RMB50.0 million (approximately HK$47.2 million), RMB115.0 million (approximately HK$108.5 million) and RMB140.0 million (approximately HK$132.1 million) respectively; and

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NOTICE OF THE SPECIAL GENERAL MEETING

• (c) any one director, or any two directors of the Company if the affixation of the common seal is necessary, be and is/are hereby authorised for and on behalf of the Company to execute all such other documents, instruments and agreements and to do all such acts or things deemed by him/her/them to be incidental to, ancillary to or in connection with the matters contemplated in or relating to the Audio Visual Products Counters Sub-lease Agreements and the implementation thereof as he/she/they may consider necessary, desirable or expedient.”

By Order of the Board China Eagle Group Company Limited NG KIN WAH Executive Director

Hong Kong, 5 July 2004

Registered office:

Canon’s Court 22 Victoria Street Hamilton HM12

Bermuda

Principal place of business in Hong Kong:

Unit 6101, 61/F.,

The Center 99 Queen’s Road Central Hong Kong

Notes:

1. Any member of the Company entitled to attend and vote at the meeting is entitled to appoint one or more proxies to attend and vote instead of him. A proxy need not be a member of the Company.

2. A form of proxy for use at the meeting is enclosed. To be valid, the proxy form, together with any power of attorney or other authority (if any) under which it is signed, or a notarially certified copy of that power of attorney or authority, must be deposited at the principal place of business of the Company in Hong Kong at Unit 6101, 61/F., 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 of the meeting or any adjournment of it.

3. Where there are joint holders of any share, any one of such holders may vote at the meeting, either in person or by proxy, in respect of such share as if he were solely entitled to vote, but if more than one of such joint holders are present at the meeting in person or by proxy, the person so present whose name stands first in the register of member of the Company in respect of such share shall alone be entitled to vote in respect of it.

4. Completion and return of the form of proxy will not preclude a member from attending the meeting and voting in person at the meeting or any adjourned meeting if he so desires. If a member attends the meeting after having deposited the form of proxy, his form of proxy will be deemed to have been revoked.

5. As at the date hereof, the executive directors of the Company are Mr Wong Kwong Yu, Ms Du Juan, Mr Lam Pang, Mr Ng Kin Wah and the independent non-executive directors of the Company are Messrs Sze Tsai Ping, Michael, Chan Yuk Sang and Chen Huai.

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