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.

This circular is for information purposes only and does not constitute an invitation or offer to acquire, purchase or subscribe for any securities of the Company nor is it calculated to invite any such offer.

If you have sold or transferred all your shares in GOME Electrical Appliances Holding Limited , you should at once hand this circular, together with the enclosed form of proxy, to the purchaser or transferee 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.

Hong Kong Exchange and Clearing Limited and The Stock Exchange of Hong Kong 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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GOME ELECTRICAL APPLIANCES HOLDING LIMITED 國美電器控股有限公司[*]

(Incorporated in Bermuda with limited liability)

(Stock Code: 493)

MAJOR AND CONNECTED TRANSACTION IN RELATION TO THE ACQUISITION OF ARTWAY DEVELOPMENT LIMITED AND WHITEWASH WAIVER

Financial Adviser to the Company

==> picture [16 x 17] intentionally omitted <==

Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders

A letter from the Board is set out on pages 6 to 64 of this circular and a letter from the Independent Board Committee containing its recommendations to the Independent Shareholders is set out on pages 65 to 66 of this circular. A letter from Platinum Securities Company Limited, the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders, containing its advice to the Independent Board Committee and the Independent Shareholders is set out on pages 67 to 120 of this circular.

A notice convening the SGM of the Company to be held at Gloucester Room II, 3/F, The Excelsior, 281 Gloucester Road, Causeway Bay, Hong Kong on Friday, 22 January 2016 at 2:30 p.m. is set out on pages SGM-1 to SGM-2 of this circular. A form of proxy for use at the SGM is also enclosed. Such form of proxy is also published on the websites of Hong Kong Exchanges and Clearing Limited (www.hkexnews.hk) and the Company (www.gome.com.hk). Whether or not you are able to attend the SGM, please complete and sign the enclosed form of proxy in accordance with the instructions printed thereon and return it to the Company’s branch share registrar in Hong Kong, Tricor Abacus Limited, at Level 22, Hopewell Centre, 183 Queen’s Road East, Hong Kong, as soon as possible but in any event not less than 48 hours before the time appointed for the holding of the SGM or any adjournment thereof. Completion and return of the form of proxy will not preclude shareholders from attending and voting in person at the SGM or any adjournment if they so wish.

* For identification purpose only

Hong Kong, 24 December 2015

Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
Letter from the Independent Board Committee. . . . . . . . . . . . . . . . . . . . . . . . . . .	65
Letter from Platinum Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	67
Appendix I – Financial Information of the Group . . . . . . . . . . . . . . . . . .	I-1
Appendix II – Financial Information of the Target Group . . . . . . . . . . . .	II-1
Appendix III – Pro forma Financial Information of the Enlarged Group .	III-1
Appendix IV – Warrant Valuation Report. . . . . . . . . . . . . . . . . . . . . . . . . .	IV-1
Appendix V – Letter on the Warrant Valuation Report . . . . . . . . . . . . . .	V-1
Appendix VI – General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	VI-1
Notice of SGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	SGM-1

– i –

DEFINITIONS

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

“Acquisition”
the acquisition by the Company of the Sale Shares
“Acquisition Agreement”
the agreement dated 17 July 2015 and entered into between the Company, the Vendor, and Shinning Crown Holdings Inc. in respect of the Acquisition as amended by supplemental agreements between the parties dated 24 July 2015, 28 October 2015 and 17 December 2015
“Announcements”
the July Announcement, August Announcement, October Announcements and December Announcements
“associate”
has the meaning given that term in the Listing Rules
“August Announcement”
the announcement of the Company dated 17 August 2015 in relation to the application of the Company to the Executive for its consent under Rule 8.2 of the Takeovers Code
“Barclays Capital”

Barclays Capital Asia Limited, a corporation licensed to carry out Type 1 (dealing in securities), Type 2 (dealing in futures contracts), Type 4 (advising on securities) and Type 6 (advising on corporate finance) regulated activities under the SFO, and the financial adviser appointed to advise the Company on the Acquisition

“Board”
the board of Directors
“Company”

GOME Electrical Appliances Holding Limited, a company incorporated with limited liability in Bermuda, the shares of which are listed on 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

“Consideration Shares” not more than 5,500,000,000 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

– 1 –

DEFINITIONS

“Controlling shareholder”

has the meaning given that term in the Listing Rules

“December Announcements”
the December 1 Announcement and December 17 Announcement
“December 1 Announcement” the announcement of the Company dated 1 December 2015 in relation to further delay in despatch of this circular
“December 17 Announcement”
the announcement of the Company dated 17 December 2015 in relation to the December Supplemental Agreement
“December Supplemental Agreement”
the supplemental agreement dated 17 December 2015 entered into between the Company, the Vendor and Shinning Crown Holdings Inc.
“Director(s)”
the director(s) of the Company
“Enlarged Group”
the Group as enlarged by the Target Group upon Completion
“Executive”
the Executive Director of the Corporate Finance Division of the Securities and Futures Commission or any delegate of the Executive Director
“Exercise Price”
HK$2.15, at which the registered holder of such Warrant is entitled to subscribe for each Underlying Share upon the exercise of the subscription rights represented thereby, subject to adjustment
“GOME-on-line”
GOME-on-line e-Commerce Co., Ltd.
“Group”
the Company and its subsidiaries (other than the Target Group)
“Guarantor”
Shinning Crown Holdings Inc., a company wholly-owned by Mr. Wong
“HK$” Hong Kong dollar, the lawful currency of Hong Kong
“Hong Kong”
the Hong Kong Special Administrative Region of the People’s Republic of China

– 2 –

DEFINITIONS

“Independent Board Committee” the independent committee of the Board; comprising Mr. Lee Kong Wai, Conway, Mr. Ng Wai Hung, Ms. Liu Hong Yu and Mr. Wang Gao and including, for the purpose of considering the Whitewash Waiver only, Mr. Zhang Da Zhong
“Independent Financial Adviser” Platinum Securities Company Limited, a corporation or “Platinum Securities” licensed to carry on Type 1 (dealing in securities) and Type 6 (advising on corporate finance) regulated activity under the SFO, and the independent financial adviser appointed to advise the Independent Board Committee and the Independent Shareholders on the Acquisition and the Whitewash Waiver
“Independent Shareholders”
Shareholders other than (a) the Vendor, Mr. Wong and their respective concert parties and associates, and (b) those who are involved in or interested in the Acquisition and/or the Whitewash Waiver
“Instrument” the instrument to be executed by the Company by way of a deed poll constituting the Warrants
“Issue Price”
the issue price of HK$1.39 per Consideration Share
“July Announcement”
the announcement of the Company dated 26 July 2015 in relation to, among other things, the Acquisition and Whitewash Waiver
“Kuba”
Kuba Technology (Beijing) Co., Ltd.
“Last Trading Day”
17 July 2015, being the last trading day before the suspension of trading in the Shares prior to the date of the July Announcement
“Latest Practicable Date”
21 December 2015, being the latest practicable date prior to the printing of this circular for the purpose of ascertaining certain information contained herein
“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
“Mr. Wong”
Mr. Wong Kwong Yu (黃光裕)

– 3 –

DEFINITIONS

“October Announcements”

the October 12 Announcement, October 15 Announcement and October 28 Announcement

“October 12 Announcement”
the announcement of the Company dated 12 October 2015 in relation to the Target Group financial information
“October 15 Announcement” the announcement of the Company dated 15 October 2015 in relation to further delay in despatch of this circular
“October 28 Announcement” the announcement of the Company dated 28 October 2015 in relation to the October Supplemental Agreement
“October Supplemental Agreement”
supplemental agreement dated 28 October 2015 entered into between the Company, the Vendor, and Shinning Crown Holdings Inc.
“PRC” the People’s Republic of China excluding, for the purposes of this circular, Hong Kong, the Macau Special Administrative Region and Taiwan
“Relevant Period” the period beginning 6 months immediately prior to the date of the Acquisition Agreement and ending on the Latest Practicable Date
“RMB” Renminbi, the lawful currency of the PRC
“Sale Shares” all of the issued shares of the Target at Completion
“SFC” the Securities and Futures Commission of Hong Kong
“SFO” the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong)
“Share(s)” ordinary share(s) of par value HK$0.025 each in the share capital of the Company

“Share Option Scheme” the share option scheme of the Company adopted by the Company on 15 April 2005

“Shareholder(s)” holder(s) of the Shares

“Special General Meeting” or the special general meeting of the Company to be “SGM” convened for the purpose of considering and, if thought fit, approving, among other things, the Acquisition and the Whitewash Waiver

– 4 –

DEFINITIONS

“Stock Exchange”

The Stock Exchange of Hong Kong Limited

“subsidiary”

has the meaning given that term in the Listing Rules

“Takeovers Code”
The Code on Takeovers and Mergers (as amended and supplemented from time to time)
“Target”
Artway Development Limited, a company incorporated in the British Virgin Islands
“Target Group”

the Target and its subsidiaries

“Underlying Shares”
the new Shares to be issued by the Company pursuant to the exercise of the Warrants
“Vendor”
GOME Management Ltd., a company incorporated with limited liability under the laws of Hong Kong and ultimately wholly-owned by Mr. Wong
“Warrantholders”
registered holders of the Warrants
“Warrants”
the warrants exercisable into not more than 2,500,000,000 new Shares to be issued by the Company to satisfy part of the consideration for the Sale Shares in accordance with the Acquisition Agreement
“Whitewash Waiver”
the waiver from the Executive pursuant to Note 1 on Dispensations from Rule 26 of the Takeovers Code in respect of any obligation of the Vendor or Mr. Wong to make a mandatory general offer for all of the Shares not already owned or agreed to be acquired by them or parties acting in concert with them which would otherwise arise as a result of the issue of the Consideration Shares and the Underlying Shares
“%” per cent.

Unless otherwise stated, amount in RMB has been translated into HK$ at exchange rate of HK$1.00 to RMB0.78924 for illustration purposes only. No representation is made that any amount in RMB or HK$ can be or could have been converted at the relevant dates at the above rates or any other rates at all.

For identification purpose only

– 5 –

LETTER FROM THE BOARD

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GOME ELECTRICAL APPLIANCES HOLDING LIMITED 國美電器控股有限公司[*]

(Incorporated in Bermuda with limited liability)

(Stock Code: 493)

Executive Director:

ZOU Xiao Chun

Non-executive Directors:

ZHANG Da Zhong (Chairman) HUANG Xiu Hong YU Sing Wong

Independent non-executive Directors:

LEE Kong Wai, Conway NG Wai Hung LIU Hong Yu WANG Gao

Registered Office:

Canon’s Court 22 Victoria Street Hamilton HM12 Bermuda

Principal Place of Business in Hong Kong:

Suite 2915, 29th Floor Two International Finance Centre 8 Finance Street, Central Hong Kong

24 December 2015

To: the Shareholders

Dear Sir or Madam,

MAJOR AND CONNECTED TRANSACTION IN RELATION TO THE ACQUISITION OF ARTWAY DEVELOPMENT LIMITED AND WHITEWASH WAIVER

1. INTRODUCTION

Reference is made to the Announcements. The purpose of this circular is to provide you with, among other things, (i) further information on the Acquisition and Whitewash Waiver; (ii) a letter of recommendation from the Independent Board Committee to the Independent Shareholders; (iii) a letter of advice from Platinum Securities to the Independent Board Committee and the Independent Shareholders about whether the Acquisition and Whitewash Waiver are fair and reasonable and as to voting; and (iv) a notice of the Special General Meeting.

For identification purpose only

– 6 –

LETTER FROM THE BOARD

Since the July Announcement, the Company and the Vendor have received valuable feedback from a number of Independent Shareholders regarding the Acquisition, and after discussion and thorough consideration of such comments and various related factors, including the challenging macroeconomic and equity market environment and strategic importance of the Acquisition in terms of enhancing the Group’s market positioning in light of the current industry and competitive landscape, have agreed to revise the terms of the Acquisition to enhance the attractiveness of the transaction terms to Shareholders and entered into the October Supplemental Agreement.

The weakening macroeconomic growth in China contributed to the volatility and decline in the Hang Seng Index between 17 July 2015 (Last Trading Day) and 28 October 2015 (the date of the October 28 Announcement). During this period, the Hang Seng Index dropped 9.7% and the Company’s share price also dropped 9.6%. To combat against deflationary pressure and a slowing economy, on 23 October 2015, the People’s Bank of China (“ PBOC ”) announced an interest rate cut for the sixth time in less than a year to support economic growth (PBOC announced interest rate cut twice during the period from the Last Trading Day to the date of the October 28 Announcement). Negative sentiment in the equities market may lead to pessimistic valuation expectation by Shareholders or potential investors. In relation to the industry landscape, the home appliance retail and the e-commerce markets in the PRC have become increasingly competitive, particularly in the first-tier market, in recent years. Price competition has also intensified. For example, one of GOME’s largest competitors, JD.com, has regularly advertised about price reductions and promotions, creating price wars among industry participants in recent years. In addition, in August 2015, Alibaba entered into strategic alliance with Suning and announced the acquisition of approximately 20% stake in Suning. The strategic alliance is expected to further intensify competition in the home appliance retail market. According to a recent Euromonitor report on China retail, China retail is highly fragmented and leading players will continue to consolidate within the market. As a result of the intense competition in China’s retail industry, it is strategically important for the Company to further strengthen its market position through consolidating the Target Group’s retail and supply chain platform to further enhance its scale and cost efficiency.

Pursuant to the October Supplemental Agreement, the cash component of the consideration has been reduced from HK$2,200,000,000 to HK$1,000,000,000, and the number of Consideration Shares has been reduced from 6,200,000,000 Consideration Shares to 5,500,000,000 Consideration Shares. For the avoidance of doubt, the 5,500,000,000 number of Consideration Shares is fixed and will not be subject to adjustment as a result of any movement in the market price of the Shares after the October 28 Announcement. There is no change in the issue price of the Consideration Shares, and the value of the Consideration Shares implied by the Issue Price is HK$7,645,000,000. The total implied consideration for the Acquisition has been reduced from HK$11,268,000,000 to HK$9,095,000,000 (representing a 19.3% discount to the previously announced consideration amount), which is made up of: (1) HK$1,000,000,000 in cash; (2) HK$7,645,000,000, the implied value of the Consideration Shares; and (3) HK$450,000,000, from the issue of Warrants.

– 7 –

LETTER FROM THE BOARD

The October Supplemental Agreement sought to address concerns from certain Independent Shareholders by lowering price-to-earnings ratio implied by consideration for Sale Shares and enhancing potential EPS accretion through reduction of total consideration by 19.3% and reduction in the number of Consideration Shares from 6,200,000,000 to 5,500,000,000.

In addition, the Group proposed to optimize corporate governance by reorganizing the Nomination Committee upon Completion by changing the composition of the Nomination Committee so that its members will consist only of non-executive Directors not nominated by Mr. Wong or his associates and independent non-executive Directors. Please refer to section 12 of this letter for further information.

2. THE ACQUISITION AGREEMENT

Date:

17 July 2015 (as amended by supplemental agreements dated 24 July 2015, 28 October 2015 and 17 December 2015)

Parties:

(1) The Company (as the purchaser);
(2) GOME Management Ltd., a company incorporated in Hong Kong (as the Vendor); and
(3) Shinning Crown Holdings Inc. (as the Guarantor of the Vendor’s obligations under the Acquisition Agreement).

The Vendor is ultimately wholly-owned by Mr. Wong, who is a 32.43% Controlling shareholder of the Company. The Vendor carries on the business of investment. The Guarantor is holder of 4,619,779,938 Shares and 100% beneficially owned by Mr. Wong.

Subject matter:

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

Consideration

The consideration will be satisfied at Completion by the allotment and issue, at the Issue Price, of Consideration Shares credited as fully paid, and HK$1,000,000,000 in cash and the issue of Warrants at HK$0.18 per Warrant credited as fully paid, which are exercisable into Underlying Shares at the initial exercise price of HK$2.15 per Underlying Share. Pursuant to the above, 5,500,000,000 Consideration Shares will be allotted and issued and 2,500,000,000 Warrants exercisable into 2,500,000,000 Underlying Shares will be issued. Based on the Issue

– 8 –

LETTER FROM THE BOARD

Price which was determined with reference to Company’s average share prices prior to the publication of the July Announcement, implied consideration for the Sale Shares is HK$9,095,000,000. The Exercise price of Warrants is set at HK$2.15, which is at 47% premium to the closing price of the Shares on the Last Trading Day and at 63% premium to the closing price of Shares on the Last Practicable Date. Issuance of Warrants at a high exercise price would facilitate further alignment of interests among the Company and Mr. Wong, and Mr. Wong is expected to be incentivized to support the Group’s development, given his net worth is closely tied to his underlying shares in the Company. In addition, on the expiry date, if the Company’s share price is lower than the Warrant’s exercise price, the Warrant will become out-of-the-money and worthless. A valuation report by Jones Lang LaSalle Corporate Appraisal and Advisory Limited in relation to the Warrants is set out in Appendix IV of this circular. The Directors (excluding members of the Independent Board Committee) consider the assumptions used in the valuation of the Warrants fair and reasonable.

Based on the audited consolidated net assets as shown in the audited consolidated statement of financial position of the Target Group as at 30 June 2015 as contained in Appendix II, the audited consolidated net assets as shown in such statement is RMB617,840,000 and not less than RMB570,000,000, therefore the consideration is not subject to any adjustment pursuant to the original terms of the Acquisition Agreement. Accordingly, in the October Supplemental Agreement, such consideration adjustment provisions were removed from the Acquisition Agreement.

The consideration has been determined after arm’s length negotiations between the parties with reference to the prevailing market conditions, including the PRC macroeconomic conditions and industry landscape as discussed in the Introduction section of this letter; historical retail store network, particularly the relatively strong presence in the second-tier market; and relative financial contribution and the implied relative valuation of the Target Group and the Group.

The Company has considered a combination of factors when negotiating with the Vendor, regarding the composition and weighting of cash, Consideration Shares and Warrants consideration, including capital structure of the Group, alignment of Mr. Wong’s interests with shareholders of the Enlarged Group and pro forma financial impact to the Enlarged Group. In particular, the number of Consideration Shares was considered in light of the potential impact to prospective earnings per share of the Enlarged Group and relative profit contribution by comparing profits of the Group with the Target Group, and was determined by comparing with Company’s total issued share capital as at the Last Trading Day. The Issue Price was determined with reference to the average closing prices of the shares of the Company prior to the July Announcement in order to calculate an implied value of the Consideration Shares.

The cash portion of the consideration will be funded from internal resources of the Group.

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 Consideration Shares and the Underlying Shares, when issued, will rank pari passu in all respects with the Shares in issue at the date of issue including in respect of all dividends and distributions declared, made or paid on or after such date of issue.

– 9 –

LETTER FROM THE BOARD

When considering the relative profit contribution and the implied relative valuation of the Target Group and the Group, the Group noted that the profits of the Target Group represent profits after taking into account the management fee and purchasing service fee which have already been paid to the Group under the current management and purchasing service agreements.

In particular, the Target Group is managed by the same management team of the Group for purposes of unified brand building, market information exchange and resources sharing. The Group charged the Target Group a management fee, subject to a cap of RMB100 million for each of the financial year ending 31 December 2013, 2014 and 2015.

The Group also provided purchasing service to the Target Group and charged the Target Group a fee, subject to a cap of RMB150 million for each of the financial year ending 31 December 2013, 2014 and 2015. The Target Group and the Group first entered into a purchasing service agreement in 2004, pursuant to which the Group charged the Target Group a fee at the rate of 0.9% of the revenue generated from the sales of electrical appliances and consumer electronics products of the Target Group to allow the Target Group to leverage the Group’s procurement scale during negotiation with suppliers to secure more favorable terms, given the Target Group was at an earlier stage of development and was relatively subscale compared with the Group. The purchasing service fee paid by the Target Group was intended to compensate the Group in relation to negotiation on behalf of the Target Group, the cost nature of which is fixed, and is distinct from procurement costs.

The Target Group has grown in size and now has a much larger procurement size as compared to when the purchasing service agreement was first agreed upon. The procurement size of the Target Group was approximately RMB15 billion each year since 2012 (only the Group, Suning and JD.com have a similar procurement scale in home appliance and consumer electronic products in the China market). It is of the Group’s view that, the Target Group, when considered on a standalone basis, has become one of the largest consumer electronics retailers in China with a large procurement need. Procurement of the Target Group can be categorized into centralized procurement and local procurement. For centralized procurement (approximately 30%-40% of the total procurement value in the past three years), the procurement teams from both the Target Group and the Group negotiate as one single entity with the relevant suppliers, most of which are large consumer electronic groups such as Haier, Gree, Apple, Midea and Samsung. The purchasing terms offered by these sizeable consumer electronics groups are usually predefined and standard for all distributors that qualified, in terms of nationwide purchasing size, on a given market.

For local procurement (60%-70% of total procurement value in the past three years), the procurement team of the Target Group has been independently conducting most of the negotiation with the local suppliers. As such, the Target Group would have secured the same terms with local suppliers had the purchasing service agreement with the Group not been implemented.

– 10 –

LETTER FROM THE BOARD

The costs in relation to procurement mainly include salary expenses for the procurement staff and travelling expenses when procurement staffs travel to negotiate with suppliers. Furthermore, there will be minimal additional costs for the Target Group had the purchasing service agreement with the Group not been implemented because: (i) the administrative work in relation to the Target Group’s purchasing is already handled by the procurement staff of the Target Group with no contribution from the Group, therefore the Target Group does not need to hire additional procurement staffs; and (ii) the procurement staffs of the Target Group have been travelling with the procurement team of the Group to negotiate with suppliers and hence no additional expenses will be incurred even if the purchasing service agreement with the Group had not been implemented.

Moreover, the Target Group’s procurement team has been growing in size over the years and as at 30 June 2015, the Target Group employed 661 staff in the procurement division, who are responsible for most of the administrative work for both local and centralized procurement of the Target Group, hence minimal additional administrative cost would have been incurred in relation to the purchasing process had the purchasing service agreement with the Group not been implemented. As a reference, the Group employs approximately 1,120 staff in its procurement division. After taking into account the respective purchasing amount of the Target Group and the Group, the relative size of the procurement team of the Target Group is comparable to the size of the procurement team of the Group.

Based on reasons mentioned in the foregoing, the Target Group has established its procurement capability and is capable of procuring on an individual and independent basis. The Group believes that, based on the Target Group’s current procurement size and capability, the Target Group would have secured substantially similar terms with suppliers without the purchasing service agreement in the most recent financial periods without incurring additional administrative costs. In addition, the procurement team of the Target Group is sizeable enough to support the Target Group purchasing activities on a stand-alone basis, with no additional administrative cost to be incurred had the purchasing service agreement with the Group not been implemented. Accordingly, the purchasing service agreement will not be renewed after its expiry on 31 December 2015.

The Group has been providing management services to the Target Group since 2004 which ensures unified brand building market information exchange and resources sharing. The Directors (excluding members of the Independent Board Committee) consider management fee to be an essential expense for the Target Group which would be incurred irrespective of whether any such management fee arrangements exists or not and considers it inappropriate to assume for any hypothetical management costs in lieu of the current fee arrangement.

In light of the above, the Group analyzed the underlying financial performance and profitability of the Target Group by excluding after-tax purchasing service fee, without taking into consideration replacement costs, if any. Upon completion of the Acquisition, the Group is of the view that the Enlarged Group will also be able to benefit from enlarged procurement size to achieve economies of scale and stronger bargaining power.

– 11 –

LETTER FROM THE BOARD

Assuming a 25% tax rate on the purchasing service fee, the profits attributable to owner(s) of the parent contribution for the Target Group and the Group excluding the after-tax purchasing service fees, without taking into consideration replacement costs, if any, (the “ Adjusted Profit ”) for the years ended 31 December 2013 and 2014 and for the 12 months and 6 months ended 30 June 2015 is illustrated below:

			6 months	12 months	6 months
	Year	ended	ended	ended	ended
	31 December		30 June	30 June	30 June
Adjusted Profit(1)	2013	2014	2014	2015	2015
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
		(A)	(B)	(A)-(B)+(C)	(C)
Target Group Profit(2)	366,908	293,922	145,817	403,991	255,886
Pretax purchasing service fee	150,000	150,000	93,862	152,676	96,538
Add after-tax purchasing
service fee	112,500	112,500	70,397	114,507	72,404
Adjusted Target Group Profit	479,408	406,422	216,214	518,498	328,290
Group Profit(3)	892,475	1,279,770	692,611	1,274,082	686,923
Pretax purchasing service fee	150,000	150,000	93,862	152,676	96,538
Subtract after-tax purchasing
service fee	112,500	112,500	70,397	114,507	72,404
Adjusted Group Profit	779,975	1,167,270	622,214	1,159,575	614,519
% Target Group
Contribution(4)(5)	38.1%	25.8%		30.9%	34.8%
% Group Contribution(4)(5)	61.9%	74.2%		69.1%	65.2%

(1) Figures for year ended 31 December 2012 were intentionally omitted as both the Target Group and the Group recorded losses during the period.
(2) Profits for the years ended 31 December 2013 and 2014, and the 6 months ended 30 June 2015 have been audited and published in the October 12 Announcement; profit for the 6 months ended 30 June 2014 is unaudited and has been published in the October 12 Announcement; profit for the 12 months ended 30 June 2015 is unaudited and has been calculated by subtracting (B) profit for the 6 months ended 30 June 2014 from (A) profit for the year ended 31 December 2014, and then adding (C) profit for the 6 months ended 30 June 2015.
(3) Profits attributable to owners of the parent of the Group for the years ended 31 December 2013 and 2014 have been audited and published in the Group’s 2013 and 2014 annual reports, respectively; profits attributable to owners of the parent of the Group for the 6 months ended 30 June 2014 and 2015 are unaudited and have been published in the Group’s 2014 and 2015 interim reports, respectively; profit attributable to owners of the parent of the Group for the 12 months ended 30 June 2015 is unaudited and has been calculated by subtracting (B) profit for the 6 months ended 30 June 2014 from (A) profit for the year ended 31 December 2014, and then adding (C) profit for the 6 months ended 30 June 2015.
(4) Profit contribution is calculated by profits of the Target Group or that of the Group divided by (profit of the Target Group + profit of the Group).
(5) Figures for the 6 months ended 30 June 2014 were intentionally omitted as the Group deemed the most recent 6 months and the most recent three 12 month periods, namely the 12 months ended 30 June 2015, and the years ended 31 December 2014 and 2013 as relevant periods for contribution analysis.

Referring to the above, for the years ended 31 December 2013 and 2014 and the 12 months and 6 months ended 30 June 2015, the average Target Group’s Adjusted Profit as a ratio to the Group’s average Adjusted Profit in the same periods is 32.4:67.6.

– 12 –

LETTER FROM THE BOARD

Notwithstanding the foregoing and to reiterate, Directors (excluding members of the Independent Board Committee) have also taken into consideration numerous other factors in addition to relative profit contribution and that the consideration of Sale Shares has been determined as a result of arms-length negotiations and commercial decisions. Pursuant to that, the consideration for Sale Shares of HK$9,095,000,000, as a ratio to implied market capitalization of the Company of HK$23,576,587,000, based on the Issue Price and the company’s total issued share capital as at 17 July 2015, being the Last Trading Day is 27.8:72.2.

Given market capitalization of the Company is an observable value (i.e. calculated by reference to the trading price of the Shares), it is difficult to predict any hypothetical impact if the after-tax purchasing service fee were excluded.

The Directors (excluding members of the Independent Board Committee) believe that relative contribution is a common way of valuing mergers of similar businesses in similar markets and under common management and hence, relative profit contribution and implied relative valuation of the Target Group and the Group would serve as one of the primary valuation methods for Sale Shares for the following reasons:

Substantially similar business : The Target Group is engaged in the retail sale of electrical appliances and consumer electronic products under the trademark “GOME Electrical Appliances” and related operations mainly in cities other than the designated cities of the PRC in which the Group already operates. The Target Group is managed by the same management team of the Group for purposes of unified brand building, market information exchange and resources sharing. The Target Group and the Group share substantially the same business model and operate by the same management team and under the same brand.
Scale of profit as a primary driver of value : given the similarity in business, operating model and geographic market, differences in valuation of the Target Group and the Group would be primarily determined by respective scale of historical average profits rather than other exogenous factors, including but not limited to, business prospects and macroeconomic environments, premised on the view that exogenous factors faced by the Target Group would be similar to those faced by the Group.
Relevance of profit : given both the Target Group and the Group operate on an asset-light business model with 8 and 31 self-owned stores out of a total of 590 and 1,213 stores, respectively, valuation of the Target Group and market capitalization of the Group have been primarily driven by profit instead of net asset value. Net asset value is not deemed to be a relevant metric given the value of Target Group’s business is determined primarily by profit generation capability. This view is substantiated by the broker community’s research analysts who cover the Group as profit-based metrics are one of the primary valuation methods used.

Notwithstanding the above, based on the review of the Target Group’s audited financials as at 30 June 2015, it was also noted that the Target Group does not have any material contingent liability or capital commitments.

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LETTER FROM THE BOARD

Applicability of other valuation methods : In addition to relative profit contribution, Directors (excluding members of the Independent Board Committee) have also considered other customary valuation methods, including comparable public companies analysis and precedent transactions analysis, but recognize that the reference value of these valuation methods could be limited by several factors, including availability of directly comparable companies, specific market and competitive dynamics that are specific to various precedent transactions which might not be applicable to the Acquisition.

In addition, it has been observed that precedent transactions generally include a control premium which is ordinarily paid in transactions where one company acquires control of the other. Given Mr. Wong is already a common Controlling shareholder of the Target Group and the Group, control premium should not be applied to the Acquisition. Relative contribution is based on profit contribution and does not imply any control premium, and hence support the view that it is of Company’s interests to value Sale Shares by relative profit contribution as one of the primary methods.

Given the history of the Target Group as set out below, the Target Group has developed its retail network over the years primarily through organic expansion, the Directors (excluding members of the Independent Board Committee) do not deem the original acquisition costs of Mr. Wong for the Target Group applicable and relevant.

GOME was founded by Mr. Wong, when he opened the first electrical appliance retail outlet in Beijing in 1987. GOME began to expand beyond Beijing in 1999 and further opened retail outlets in other major cities in the PRC. During 2003 and 2004, GOME’s business underwent internal restructuring and the operation was separated into the Group (started to trade as a public company in 2004) and the Target Group (remained to be wholly owned by Mr. Wong). As at 30 June 2015, the Target Group had 590 stores located across 184 cities in the PRC, amongst which 8 stores are self-owned. The Target Group’s business and operations have reached the current state and scale through multiple years of development and its current retail network has been a result of largely organic expansion.

Scope of the Transaction

Under different agreements as disclosed in page 48 to 50 of the Circular, the Target Group provides logistics services, after-sales services, and supply of general merchandise to GOME-on-line. Mr. Wong owns 100% of the Target Group and 40% of GOME-on-line. The Company indirectly owns remaining 60% of GOME-on-line.

The Group noted that, when negotiating with the Vendor regarding the scope of the Acquisition and particularly on whether to include GOME-on-line as part of the Acquisition, GOME-on-line is currently loss-making and market capitalization of the Company is primarily driven by profit.

The Directors (excluding members of the Independent Board Committee) are of the view that it may not be in the interests of the existing Shareholders to dilute the Group’s existing earnings by injecting the remaining interests of GOME-on-line currently not held by the Group.

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LETTER FROM THE BOARD

Upon Completion and issuance of Consideration Shares, Mr. Wong and his associates will become interested in 49.0% of the issued share capital of the Company (which in turn indirectly owns 60% of GOME-on-line) as compared with 32.4% prior to the Acquisition and continue to remain as a 40% shareholder of GOME-on-line. The economic interests of Mr. Wong and associates are increasingly tied with their shareholdings in the Company and GOME-on-line, value of which the Directors (excluding members of the Independent Board Committee) believe can be maximized by the execution of the “Total Retail” strategy which emphasizes on integration of online and offline platforms to serve customers’ needs, therefore Mr. Wong and associates are incentivized to facilitate growth of the Group and GOME-on-line. Also, as the Company is a 60% shareholder of GOME-on-line, interests are also aligned to facilitate mutual growth of both the Company and GOME-on-line.

The Directors (excluding members of the Independent Board Committee) also noted that, Mr. Wong and his associates have been substantial shareholders of both the Company and GOME-on-line prior to the Acquisition, and did not observe any negative impact to the Group resulting from Mr. Wong and associates’ interests in GOME-on-line. The Directors (excluding members of the Independent Board Committee) are of the view that any potential risk arising from potential competition by Mr. Wong and associates through GOME-on-line is not material.

Upon Completion, there will be no limitations and restrictions on the Enlarged Group due to the lack of 100% interest in GOME-on-line other than the annual caps under the continuing connected transactions as disclosed in page 49 of the Circular.

As the China e-commerce market continues to evolve rapidly, the Group will continue to monitor the industry environment and evaluate the strategic options relating to GOME-on-line regularly. The Group currently does not have a time table for next steps regarding GOME-on-line.

The Issue Price:

The Issue Price of the Consideration Shares represents:

a) a discount of approximately 4.79% from HK$1.46, the closing price of the Shares on the Stock Exchange on the Last Trading Day;
b) a premium of approximately 1.46% from HK$1.37, the average closing price of Shares on the Stock Exchange for the last 10 full trading days up to and including the Last Trading Day;
c) a premium of approximately 5.30% from HK$1.32, the closing price of the Shares on the Stock Exchange on the Latest Practicable Date;
d) a premium of approximately 9.45% from HK$1.27, the average closing price of Shares on the Stock Exchange for the last 10 full trading days up to and including the Latest Practicable Date;
e) a premium of approximately 11.20% to the unaudited net asset value* of the Group of approximately RMB0.99 (equivalent to approximately HK$1.25) per Share as at 30 June 2015; and

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LETTER FROM THE BOARD

f) a premium of approximately 15.83% to the audited net asset value* of the Group of approximately RMB0.95 (equivalent to approximately HK$1.20) per Share as at 31 December 2014.
Net asset value = Total assets minus total liabilities

The Warrants will be exercisable into Underlying Shares at HK$2.15 per Underlying Share, subject to adjustment in accordance with the terms and conditions of the Warrants, which initial exercise price represents:

a) a premium of approximately 47.26% from HK$1.46, the closing price of the Shares on the Stock Exchange on the Last Trading Day;
b) a premium of approximately 56.93% from HK$1.37, the average closing price of Shares on the Stock Exchange for the last 10 full trading days up to and including the Last Trading Day;
c) a premium of approximately 62.88% from HK$1.32, the closing price of the Shares on the Stock Exchange on the Latest Practicable Date;
d) a premium of approximately 69.29% from HK$1.27, the average closing price of Shares on the Stock Exchange for the last 10 full trading days up to and including the Latest Practicable Date;
e) a premium of approximately 72.00% to the unaudited net asset value* of the Group of approximately RMB0.99 (equivalent to approximately HK$1.25) per Share as at 30 June 2015; and
f) a premium of approximately 79.17% to the audited net asset value* of the Group of approximately RMB0.95 (equivalent to approximately HK$1.20) per Share as at 31 December 2014.
Net asset value = Total assets minus total liabilities

Conditions precedent:

Completion is subject to the fulfillment of the following conditions:

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 Warrants by the Company; (c) the Whitewash Waiver; and (d) all other transactions contemplated under the Acquisition Agreement;
the Listing Committee of the Stock Exchange granting the listing of and permission to deal in the Consideration Shares and the Underlying Shares;
(where required) the Bermuda Monetary Authority granting its permission to the allotment and issue of the Consideration Shares and the Underlying Shares;

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LETTER FROM THE BOARD

the Vendor and Mr. Wong being granted the Whitewash Waiver and the Whitewash Waiver not being revoked or withdrawn;
the Anti-Monopoly Bureau of the Ministry of Commerce of the PRC approving the transactions contemplated under the Acquisition Agreement unconditionally or on conditions which do not have any material effect on the business of the Target Group and/or the Group, or failing to reach a decision or indicating that it will not carry out a review within the time limits prescribed by the Anti-monopoly Law of the PRC;
the legal and financial due diligence on the Target Group having been completed to the satisfaction of the Company and the Company having received a PRC legal opinion the contents and format of which are satisfactory to the Company;
as at the Completion Date, the warranties provided by the Vendor and the Guarantor under the Acquisition Agreement remaining accurate and correct in all material respects, and as if made on, such date and the Vendor and the Guarantor having each performed all of its obligations under the Acquisition Agreement expressed to be performed on or before such date in all material respects; and
there has been no material adverse change to the financial position and operation of the Target Group since 31 December 2014.

All the conditions precedent set out above (except items 1, 2, 3, 4 and 5 which are non-waivable) can be waived.

In the event that the conditions precedent set out above are not satisfied (or as the case may be waived) by 30 June 2016 or such later date as the parties to the Acquisition Agreement may agree in writing, the parties will not be bound to proceed with the Acquisition and the Acquisition Agreement will be terminated and cease to be of any effect save in respect of claims arising out of antecedent breaches if any.

As at the Latest Practicable Date, none of the above conditions had been fulfilled.

Completion

Completion will take place on the fifth business day after all the conditions precedent in items 1 to 6 above have either been fulfilled or waived or such other business day the Vendor and the Company may agree, subject to all conditions precedent including those in items 7 and 8 above being satisfied as at Completion Date.

The parties have agreed for the purposes of such Completion that all the distributable profits of the Target as shown in its audited consolidated accounts as at 30 June 2015 will be distributed by the Target to the Vendor as a dividend provided that the amount of such dividend shall not exceed RMB560,000,000. Any distributable profits exceeding such amount shall not be distributed and shall be retained by the Target. The Group has considered the net asset value and amount of cash and cash equivalent of the Target Group as at 30 June 2015 and profits for the years ended 31 December 2012, 2013 and 2014 and the 6 months ended 30 June 2015 of the Target Group when determining the maximum amount of RMB560,000,000.

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LETTER FROM THE BOARD

As disclosed in page 6 of Appendix II of this circular, the retained earnings of the Target Group as shown in its audited consolidated accounts as at 30 June 2015 was RMB561,614,000. Accordingly, the dividend to be distributed will be RMB560,000,000.

The Directors (excluding members of the Independent Board Committee) are of the view that the dividend arrangement does not impact the quality of the retail network, profit generating capability of the Target Group and the Group’s ability to fund its expansion plan in light of the Group’s strong cash position, and hence does not carry negative impact when assessing the fairness and reasonableness of the Acquisition. In addition, Mr. Wong is the 100% owner of the Target Group prior to Completion with full entitlement to the Target Group’s distributable earnings and the Target Group has not declared any dividend since the financial year ended 2012.

A moratorium on sale will be applied on all Consideration Shares during the period from Completion Date until the expiration of 180 days from Completion Date. During such period, the Vendor will not be allowed to transfer or deal in the Consideration Shares allotted to it in any manner. The Warrants are similarly only transferable after the expiration of 90 days from their issue on Completion Date. The Underlying Shares will be subject to a moratorium on sale until the expiration of 90 days from the date of issue of the Warrants.

As at the Latest Practicable Date, 國美電器零售有限公司 (GOME Electrical Appliances Retail Co. Ltd.) (“GOME Retail”), which is a member of the Target Group is owed the following amounts (the “ Entrusted Loans ”) from the following companies which are not members of the Target Group and belong ultimately to Mr. Wong. The Entrusted Loans are unsecured unsubordinated entrusted bank loans provided by GOME Retail, as lender, to the relevant borrower company (as set out in the table below), as borrower, via various commercial banks. Repayment of the Entrusted Loans are obligations of the relevant borrower company to GOME Retail. The role of the commercial banks, as entrusted lenders, is limited to acting on the instruction of the lender and to release to the relevant borrower company the borrowing amount as instructed. Such arrangements were made in accordance with the General Rules on Loans which were promulgated by the People’s Bank of China in 1996, which provides that, an entrusted loan is a loan provided by a lender who funds the loan and determines the amount, term, interest rate, and terms of the loan, to a borrower through an entrusted lender, being a financial institution established in the PRC. Entrusted lenders only charge the relevant handling fees for releasing the loans and assume no other risks in relation to the loans.

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LETTER FROM THE BOARD

Borrower Entrusted Lender GOME Property Co., Ltd. China Bohai Bank GOME Property Co., Ltd. China Bohai Bank Changsha Xiandao Zhendi Property Development Co., Ltd. China Bohai Bank GOME Property Co., Ltd. China Merchants Bank GOME Property Co., Ltd. China Merchants Bank Total	Outstanding Amount Interest Rate per Annum Borrowing Date Repayment Date RMB million 400 7.2% 23 January 2015 22 January 2016 400 7.2% 28 January 2015 27 January 2016 240 6.4% 7 April 2015 6 April 2016 250 8% 14 May 2015 13 May 2016 250 8% 14 May 2015 13 May 2016 1,540

Apart from the interest rates (as set out in the table above) which are at a premium to the basic lending rate in the PRC during their tenor, the Entrusted Loans have been made on normal commercial terms after arm’s length negotiation between GOME Retail and the relevant borrower company.

As disclosed in the December 17 Announcement, pursuant to the December Supplemental Agreement,

(i) Shinning Crown Holdings Inc. and the Vendor undertook that they will procure that:
a. any amount of the Entrusted Loans that will expire on or before the Completion Date will not be renewed and will be fully repaid in accordance with their respective terms and conditions; and
b. the remaining amount of the Entrusted Loans that will expire after the Completion Date will be repaid in advance prior to the Completion Date irrespective of their relevant expiry dates.

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LETTER FROM THE BOARD

(ii) for any amount (including principal and accrued interests) of the Entrusted Loans that have not been repaid prior to Completion:
a. the Company has the right to set off the outstanding amount (including principal and accrued interests) with the cash component of the consideration for the Acquisition (i.e. HK$1,000,000,000); and
b. for any remaining amount (including principal and accrued interests) that exceeds the cash component of the consideration for the Acquisition, will be settled by the Vendor in cash on the Completion Date.

Having considered that (i) the repayment of the Entrusted Loans will improve the cash position of the Target Group as well as the Enlarged Group while reducing the net debt owed to them; (ii) the full amount of the Entrusted Loans are owed by companies ultimately owned by Mr. Wong, who ultimately owns the Vendor; and (iii) since Mr. Wong is currently and will, upon Completion, remain as a Controlling shareholder of the Company, in the event that Completion takes place before full repayment of the Entrusted Loans, the Entrusted Loans will become connected transactions of the Company and hence subject to the disclosure (and, if required by the Listing Rules, approval of the Independent Shareholders) and annual review by the Company’s auditor and the independent non-executive Directors in accordance with the Listing Rules, which may be administratively burdensome to the Company, the Director, Mr. Zhang Da Zhong, considers that the terms and conditions of the December Supplemental Agreement and the Acquisition Agreement (as amended by the October Supplemental Agreement and December Supplemental Agreement) to be fair and reasonable and on normal commercial terms and that the entering into the December Supplemental Agreement is in the interest of the Company and Shareholders as a whole.

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LETTER FROM THE BOARD

SUMMARY OF THE PRINCIPAL TERMS OF THE WARRANTS

The following are the principal terms of the Warrants:

Maximum number of Warrants: 2,500,000,000.

Subscription price: HK$0.18** credited as fully paid.

Exercise Price:

HK$2.15** per Underlying Share as at the time of issue of the Warrants, subject to adjustment in accordance with the terms and conditions of the Warrants upon the occurrence of certain events including, among other things, subdivision or consolidation of Shares, the making of a free distribution of Shares, bonus issue, the declaration of a dividend in Shares, capital distribution, issuance of options, rights or warrants, and other dilutive events such as issue of new Shares.

Exercise period:

Any time prior to the second anniversary of the issue (the “ Expiration Date ”) of the Warrants.

After the close of business on the Expiration Date, the exercise right shall lapse and each Warrant shall cease to be valid for any purpose.

Maximum number of Underlying Shares:
If the maximum number of Warrants are issued and they are exercised in full at the initial exercise price of HK$2.15** per Underlying Share, a maximum of 2,500,000,000 Underlying Shares will be allotted and issued.

Status of Underlying Shares:

The Underlying Shares will rank pari passu in all respects with the Shares in issue on the date they are allotted and issued upon the exercise of Warrants.

Moratorium on sale: Underlying Shares will be subject to a moratorium on sale until the expiration of 90 days from the date of issue of the Warrants.

Transferability:

The Warrants are transferable, subject to certain restrictions imposed pursuant to the terms of the Warrants after the expiration of 90 days from their issue on Completion Date.

Voting:

A holder of Warrants will not be entitled to vote at any general meetings of the Company by reason only of it being a holder of Warrants.

Listing:

No application will be made for the listing of the Warrants on the Stock Exchange or any other exchange.

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LETTER FROM THE BOARD

Adjustments to Exercise Price:

Provided that the Exercise Price may not be reduced so that, on exercise of Warrants, Shares would fall to be issued at a discount to their nominal value or would require Shares to be issued in any other circumstances not permitted by applicable law, the Exercise Price will be subject to adjustment in the following events:

(a) Consolidation, subdivision or reclassification : If and whenever there shall be an alteration to the nominal value of the Shares as a result of consolidation, subdivision or reclassification, the Exercise Price shall be adjusted by multiplying the Exercise Price in force immediately before such alteration by the following fraction:

A B

where:

A is the nominal amount of one Share immediately after such alteration; and
B is the nominal amount of one Share immediately before such alteration.

Such adjustment shall become effective on the date the alteration takes effect.

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LETTER FROM THE BOARD

(b) Capitalisation of profits or reserves :
(i) If and whenever the Company shall issue any Shares credited as fully paid to the Shareholders by way of capitalisation of profits or reserves (including any share premium account) including Shares paid up out of distributable profits or reserves and/or share premium account issued, save where Shares are issued in lieu of the whole or any part of a specifically declared cash dividend (the “ Relevant Cash Dividend ”), being a Dividend which the Shareholders concerned would or could otherwise have received and which would not have constituted a capital distribution (a “ Scrip Dividend ”), the Exercise Price shall be adjusted by multiplying the Exercise Price in force immediately before such issue by the following fraction:

==> picture [25 x 23] intentionally omitted <==

where:

A is the aggregate nominal amount of the issued Shares immediately before such issue; and
B is the aggregate nominal amount of the issued Shares immediately after such issue.

Such adjustment shall become effective on the date of issue of such Shares or if a record date is fixed therefor, immediately after such record date.

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LETTER FROM THE BOARD

(ii) In the case of an issue of Shares by way of a Scrip Dividend where the current market price of such Shares on the date of the first public announcement of the terms of such Scrip Dividend exceeds the amount of the Relevant Cash Dividend or the relevant part thereof and which would not have constituted a capital distribution, the Exercise Price shall be adjusted by multiplying the Exercise Price in force immediately before the issue of such Shares by the following fraction:

A + B A + C

where:

A is the aggregate nominal amount of the issued Shares immediately before such issue;
B is the aggregate nominal amount of Shares issued by way of such Scrip Dividend multiplied by a fraction of which: (i) the numerator is the amount of the whole, or the relevant part, of the Relevant Cash Dividend; and (ii) the denominator is the current market price of the Shares issued by way of Scrip Dividend in respect of each existing Share in lieu of the whole, or the relevant part, of the Relevant Cash Dividend; and
C is the aggregate nominal amount of Shares issued by way of such Scrip Dividend;

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LETTER FROM THE BOARD

or by making such other adjustment as one leading independent investment bank of international repute (acting as an expert), selected by the Company and approved by an ordinary resolution of the Warrantholders shall certify to the Warrantholders is fair and reasonable.

Such adjustment shall become effective on the date of issue of such Shares or if a record date is fixed therefor, immediately after such record date.

(c) Capital distribution : If and whenever the Company shall pay or make any capital distribution to the Shareholders (except where the Exercise Price falls to be adjusted under (b) above), the Exercise Price shall be adjusted by multiplying the Exercise Price in force immediately before such capital distribution by the following fraction:

A - B A

where:

A is the current market price of one Share on the last trading day preceding the date on which the capital distribution is publicly announced; and
B is the fair market value on the date of such announcement, as determined in good faith by one leading investment bank of international repute (acting as an expert), selected by the Company and approved by an ordinary resolution of the Warrantholders, of the portion of the Capital Distribution attributable to one Share.

Such adjustment shall become effective on the date that such capital distribution is made.

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LETTER FROM THE BOARD

(d) Rights issues of Shares or options over Shares : If and whenever the Company shall issue Shares to all or substantially all Shareholders as a class by way of rights, or issue or grant to all or substantially all Shareholders as a class, by way of rights, of options, warrants or other rights to subscribe for or purchase any Shares, in each case at less than the current market price per Share on the last trading day preceding the date of the announcement of the terms of such issue or grant, the Exercise Price shall be adjusted by multiplying the Exercise Price in force immediately before such issue or grant by the following fraction:

==> picture [49 x 23] intentionally omitted <==

where:

A is the number of Shares in issue immediately before such announcement;
B is the number of Shares which the aggregate amount (if any) payable for the Shares issued by way of rights or for the options or warrants or other rights issued or granted by way of rights and for the total number of Shares comprised therein would purchase at such current market price per Share; and
C is the aggregate number of Shares issued or, as the case may be, comprised in the issue or grant.

Such adjustment shall become effective on the date of issue of such Shares or issue or grant of such options, warrants or other rights (as the case may be).

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LETTER FROM THE BOARD

(e) Rights issues of other securities : If and whenever the Company shall issue any securities (other than Shares or options, warrants or other rights to subscribe for or purchase Shares) to all or substantially all Shareholders as a class, by way of rights, or the issue or grant to all or substantially all Shareholders as a class by way of rights, of any options, warrants or other rights to subscribe for or purchase or otherwise acquire, any securities (other than Shares or options, warrants or other rights to subscribe for or purchase Shares), the Exercise Price shall be adjusted by multiplying the Exercise Price in force immediately before such issue or grant by the following fraction:

==> picture [49 x 23] intentionally omitted <==

where:

A is the current market price of one Share on the last trading day preceding the date on which such issue or grant is publicly announced; and
B is the fair market value on the date of such announcement, as determined in good faith by one leading investment bank of international repute (acting as an expert), selected by the Company and approved by an ordinary resolution of the Warrantholders, of the portion of the rights attributable to one Share.

Such adjustment shall become effective on the date of issue of the securities or grant of such rights, options or warrants (as the case may be).

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LETTER FROM THE BOARD

(f) Issues at less than the current market price : If and whenever the Company shall issue (otherwise than as mentioned in (d) above any Shares (other than Shares issued on the exercise of Exercise Rights or on the exercise of any other rights of conversion into, or exchange or subscription for, Shares) or the issue or grant of (otherwise than as mentioned in (d) above) options, warrants or other rights to subscribe or purchase Shares in each case at a price per Share which is less than the current market price on the last trading day preceding the date of announcement of the terms of such issue, the Exercise Price shall be adjusted by multiplying the Exercise Price in force immediately before such issue or grant by the following fraction:

==> picture [49 x 23] intentionally omitted <==

where:

A is the number of Shares in issue immediately before the issue of such additional Shares or the grant of such options, warrants or other rights to subscribe for or purchase any Shares;
B is the number of Shares which the aggregate consideration (if any) receivable by the Company for such additional Shares to be issued or otherwise made available or, as the case may be, for such additional Shares to be issued or otherwise made available upon the exercise of any such options, warrants or rights, would purchase at such current market price per Share; and
C is the maximum number of additional Shares issued or the maximum number of Shares that may be issued upon exercise of such options, warrants or rights.

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LETTER FROM THE BOARD

References to additional Shares in the above formula shall, in the case of an issue or grant by the Company of options, warrants or other rights to subscribe for or purchase Shares, mean such Shares to be issued, or otherwise made available, assuming that such options, warrants or other rights are exercised in full at the initial exercise price (if applicable) on the date of issue or grant of such options, warrants or other rights.

Such adjustment shall become effective on the date of issue of such additional Shares or, as the case may be, the grant of such options, warrants or other rights.

(g) Other issues at less than the current market price : Save in the case of an issue of securities arising from a conversion or exchange of other existing securities in accordance with the terms applicable to such existing securities themselves falling within the provisions of this (g), if and whenever the Company or any subsidiaries of the Company (otherwise than as mentioned in (d), (e) or (f) above) or (at the direction or request of or pursuant to any arrangements with the Company or any subsidiaries) any other company, person or entity (otherwise than as mentioned in (d), (e) or (f) above) shall issue any securities (other than the Warrants) which by their terms of issue carry (directly or indirectly) rights of exercise into, or exchange or subscription for or purchase of, or to otherwise acquire, Shares issued or to be issued by the Company or securities which by their terms may be redesignated Shares receivable upon conversion, exchange, subscription or re-designation at a consideration per Share which is less than the current market price on the last trading day preceding the date of announcement of the terms of issue of such securities, the Exercise Price shall be adjusted by multiplying the Exercise Price in force immediately before such issue by the following fraction:

A + B

A + C

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LETTER FROM THE BOARD

where:

A is the number of Shares in issue immediately before such issue or grant (but where the relevant securities carry rights of conversion into, or rights of exchange or subscription for, or purchase or acquisition of, Shares which have been issued by the Company for the purposes of, or in connection with, such issue, less the number of Shares so issued);
B is the number of Shares which the aggregate consideration (if any) receivable by the Company for the Shares to be issued or otherwise made available upon exercise or exchange or on exercise of the right of subscription or purchase or acquisition attached to such securities or, as the case may be, the Shares would purchase at such current market price per Share; and
C is the maximum number of Shares to be issued or otherwise made available upon exercise or exchange of such securities or on the exercise of such rights of subscription or purchase or acquisition attached thereto at the initial exercise, exchange or subscription price or rate or, as the case may be, the maximum number of Shares to be issued or to arise or to be made available from any such redesignation.

Such adjustment shall become effective on the date of issue of such securities.

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LETTER FROM THE BOARD

(h) Modification of rights of exercise etc : If and whenever there is any modification of the rights of exercise, exchange, subscription, purchase or acquisition attaching to any such securities as are mentioned in (g) above (other than in accordance with the existing terms applicable to such securities) so that the consideration per Share (for the number of Shares available on exercise, exchange or subscription following the modification) is less than the current market price on the last trading day preceding the date of announcement of the proposals for such modification, the Exercise Price shall be adjusted by multiplying the Exercise Price in force immediately before such modification by the following fraction:

==> picture [49 x 23] intentionally omitted <==

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

A + B
A + C
----- End of picture text -----

where:

A is the number of Shares in issue immediately before such modification (but where the relevant securities carry rights of conversion into, or rights of exchange or subscription for, or purchase or acquisition of, Shares which have been issued by the Company for the purposes of, or in connection with, such issue, less the number of Shares so issued);
B is the number of Shares which the aggregate consideration (if any) receivable by the Company for the Shares to be issued, or otherwise made available, on exercise or exchange or on exercise of the right of subscription, purchase or acquisition attached to the securities so modified would purchase at such current market price per Share or, if lower, the existing exercise, exchange, subscription or purchase price of such securities; and

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LETTER FROM THE BOARD

C is the maximum number of Shares to be issued, or otherwise made available, on exercise or exchange of such securities or on the exercise of such rights of subscription, purchase or acquisition attached thereto at the modified exercise, exchange, subscription or purchase price or rate but giving credit in such manner as one leading investment bank of international repute (acting as an expert), selected by the Company and approved by an ordinary resolution of the Warrantholders, consider appropriate (if at all) for any previous adjustment under (h) or (g) above.

In relation to the adjustment event triggered by the distribution of cash dividends in item (b)(i) above, cash dividends reduce the net asset backing of shares and the adjustment is intended to restore the holder of the warrant to the same asset value it would have obtained had the dividend not been paid out.

Such adjustment shall become effective on the date of modification of the rights of exercise, exchange, subscription, purchase or acquisition attaching to such securities.

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LETTER FROM THE BOARD

(i) Other offers to Shareholders : If and whenever there is an issue, sale or distribution by or on behalf of the Company or any subsidiaries or (at the direction or request of or pursuant to any arrangements with the Company or any subsidiaries) any other company, person or entity of any securities in connection with an offer by or on behalf of the Company or any subsidiaries or such other company, person or entity pursuant to which offer the Shareholders generally (meaning for these purposes the holders of at least 60 per cent. of the Shares outstanding at the time such offer is made) are entitled to participate in arrangements whereby such securities may be acquired by them (except where the Exercise Price falls to be adjusted under (d), (e), (f) or (g) above), the Exercise Price shall be adjusted by multiplying the Exercise Price in force immediately before such issue, sale or distribution by the following fraction:

A - B A

where:

A is the current market price of one Share on the last trading day preceding the date on which such issue is publicly announced; and
B is the fair market value on the date of such announcement, as determined in good faith by one leading investment bank of international repute (acting as an expert), selected by the Company and approved by an ordinary resolution of the Warrantholders, of the portion of the rights attributable to one Share.

Such adjustment shall become effective on the date of issue, sale or distribution of the securities.

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LETTER FROM THE BOARD

(j) Other Events : If either: (i) the rights of conversion, exchange, purchase or subscription attaching to any options, rights or warrants to subscribe for or purchase Shares or any securities convertible into or exchangeable for Shares or the rights carried by such securities to subscribe for or purchase Shares are modified (other than pursuant to, and as provided in, the existing terms and conditions of such options, rights, warrants or securities); or (ii) the Company determines that an adjustment should be made to the Exercise Price as a result of one or more events or circumstances not referred to in any other provisions in (a) to (i) which in either case have or would have an effect on the position of the Warrantholders as a class compared with the position of the holders of all the securities (and options, rights and warrants relating thereto) of the Company, taken as a class, which is analogous to any of the events referred to in (a) to (i) (including any demerger, spin-off or similar arrangement in respect of any business of the Company and its subsidiaries), then, in any such case, the Company shall at its own expense request one leading investment bank of international repute (acting as an expert), selected by the Company and approved by an ordinary resolution of the Warrantholders, to determine as soon as practicable what adjustment (if any) to the Exercise Price is fair and reasonable to take account thereof, if the adjustment would result in a reduction in the Exercise Price, and the date on which such adjustment should take effect and upon such determination such adjustment (if any) shall be made and shall take effect in accordance with such determination provided that where the circumstances giving rise to any adjustment pursuant to (a) to (i) have already resulted or will result in an adjustment to the Exercise Price or where the circumstances giving rise to any adjustment arise by virtue of circumstances which have already given rise or will give rise to an adjustment to the Exercise Price, such modification (if any) shall be made to the operation of the provisions in (a) to (i) as may be advised by one leading investment bank of international repute (acting as an expert), selected by the Company and approved by an ordinary resolution of the

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LETTER FROM THE BOARD

Warrantholders, to be in their opinion appropriate to give the intended result, which is the original intended result of the adjustment clauses in paragraphs (a) to (j). The modification required is to ensure that notwithstanding the additional circumstances, such original result is still made available to the holder of the Warrants. The responsibility of the expenses incurred is not related to who is the holder of the Warrants. As it is a company level event that is triggering the adverse effect to the holder of the Warrants, it should be the Company bearing the related expenses to adjust the holder of the Warrants back to its original position.

The Directors (excluding members of the Independent Board Committee) considered the above formulae for adjustment are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

Form and title:

The Warrants are issued in registered form. A warrant certificate (the “ Warrant Certificate ”) will be issued to the Warrantholder in respect of its registered holding of Warrants.

The Company will cause a register of Warrantholders (the “ Register of Warrantholders ”) to be kept at its principal place of business in Hong Kong onto which shall be entered the names and addresses of the Warrantholders, the particulars of the Warrants held by them and the particulars of all transfers of the Warrants.

Title to the Warrants passes only by transfer and registration in the Register of Warrantholders. The holder of any Warrant will (except as otherwise required by law) be treated as its absolute owner for all purposes (whether or not it is overdue and regardless of any notice of ownership, trust or any interest in it or any writing on, or the theft or loss of, the Warrant Certificate issued in respect of it (other than the endorsed form of transfer)) and no person will be liable for so treating the holder.

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LETTER FROM THE BOARD

Arrangements for transfer or transmission of the Warrants:

a Warrant may be transferred at any time by delivery of the Warrant Certificate issued in respect of that Warrant, with the endorsed form of transfer (in the form set out in the Warrant)duly completed and signed by the registered Warrantholder or his attorney duly authorised in writing, to the Company at the Company’s principal place of business in Hong Kong together with such evidence as the Company may reasonably require to prove the authority of the individuals who have executed the form of transfer, Provided that, if necessary, the prior approval of the Stock Exchange shall be required for any transfer to a connected person of the Company other than the Vendor. No transfer of title to a Warrant will be valid unless and until entered on the Register of Warrantholders.

Further issues:

The Warrantholders will not be entitled to participate in any distribution and/or offers of further securities made by the Company by reason only of being the holders of the Warrants. The Company may from time to time, without the consent of the Warrantholders, create and issue further warrants having the same terms and conditions as the Warrants in all respects (other than the date of issue) and so that such further issue shall be consolidated and form a single series with the Warrants.
** For the purpose of the Warrants, one HK$ shall be taken as being equivalent to RMB0.78924

The Warrant does not contain any terms restricting a conversion that may result in the public float of the Company becoming less than 25% (or such lower percentage as may be allowed under the Listing Rules) of the Company’s issued share capital immediately after such conversion.

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LETTER FROM THE BOARD

3. SHAREHOLDING STRUCTURE BEFORE AND AFTER COMPLETION

Assuming that there are no other changes in the issued share capital of the Company after the Latest Practicable Date, the following table shows the simplified holding structure of the Company as at the Latest Practicable Date, immediately upon Completion, and immediately after all the Warrants are exercised on Completion into Underlying Shares:

Name of Shareholders Mr. Wong and concert parties Shinning Crown Holdings Inc. (100% beneficially owned by Mr. Wong) Shine Group Limited (100% beneficially owned by Mr. Wong) Smart Captain Holdings Limited (100% beneficially owned by Ms. Du Juan, spouse of Mr. Wong) Wan Sheng Yuan Asset Management Company Limited (100% beneficially owned by Ms. Du Juan, spouse of Mr. Wong) Consideration Shares to be held by Vendor(1) Underlying Shares to be held by Vendor(2) SUBTOTAL Public shareholders Total	As at the Latest Practicable Date Number of Shares Approximate percentage of total issued Shares(3) 4,619,779,938 27.24 634,016,736 3.74 240,955,927 1.42 5,750,737 0.03 – – – – 5,500,503,338 32.43 11,461,070,084 67.57 16,961,573,422 100.00	Immediately upon Completion before conversion of any Warrants Number of Shares Approximate percentage of total issued Shares(3) 4,619,779,938 20.57 634,016,736 2.82 240,955,927 1.07 5,750,737 0.02 5,500,000,000 24.49 – – 11,000,503,338 48.97 11,461,070,084 51.03 22,461,573,422 100.00	Immediately upon Completion and assuming all Warrants have been converted Number of Shares Approximate percentage of total issued Shares(3) 4,619,779,938 18.51 634,016,736 2.54 240,955,927 0.97 5,750,737 0.02 5,500,000,000 22.03 2,500,000,000 10.02 13,500,503,338 54.09 11,461,070,084 45.91 24,961,573,422 100.00	Immediately upon Completion and assuming all Warrants have been converted Number of Shares Approximate percentage of total issued Shares(3) 4,619,779,938 18.51 634,016,736 2.54 240,955,927 0.97 5,750,737 0.02 5,500,000,000 22.03 2,500,000,000 10.02 13,500,503,338 54.09 11,461,070,084 45.91 24,961,573,422 100.00
				100.00

Notes:

(1) On the assumption that 5,500,000,000 Consideration Shares will be allotted and issued. Such Consideration Shares will represent 32.43% of the existing issued share capital of the Company as at the Latest Practicable Date.
(2) On the assumption that 2,500,000,000 Warrants exercisable into 2,500,000,000 Underlying Shares will be issued and they are all exercised for Underlying Shares at the initial exercise price. Such Underlying Shares will represent 14.74% of the existing issued share capital of the Company as at the Latest Practicable Date and 12.85% of the issued share capital of the Company after the allotment and issue of such Underlying Shares before accounting for any Consideration Shares.
(3) Assuming no other Shares are issued than the Consideration Shares and (as applicable) the Underlying Shares.

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LETTER FROM THE BOARD

If the Whitewash Waiver is approved by the Independent Shareholders, the shareholding of Mr. Wong and his concert parties in the Company will exceed 50% upon Completion and full conversion of the Warrants. Mr. Wong and his concert parties may further increase its shareholdings in the Company without incurring any further obligations under Rule 26 of the Takeovers Code to make a general offer. Notwithstanding the above, given individual members of the concert group hold less than 30% each, further purchase of Shares by individual members may result in them individually triggering obligations under Rule 26 of the Takeover Code, unless a waiver from the Executive is obtained, especially where there is any change in the make-up of the concert group that effectively results in the formation of a new concert group or in the balance of the group being changed significantly.

4. FUNDS RAISED BY ISSUING EQUITY IN LAST 12 MONTHS

Shares were issued by the Company upon the exercise of share options previously granted by the Company, in April 2015 (39,000 Shares), and in May 2015 (2,306,000 Shares). The exercise monies received amount to HK$4,455,500 and were used for general working capital. Save as aforesaid, the Company has not undertaken any equity fund-raising exercise in the 12 months immediately preceding the Latest Practicable Date.

5. FUTURE INTENTIONS OF THE CONTROLLING SHAREHOLDER REGARDING THE GROUP

It is the intention of the Controlling Shareholder that the Group will continue its current business and its employment of the employees of the Group upon Completion. The Controlling Shareholder has no intention to make any major changes to the business or employment of employees of the Group or to redeploy the fixed assets of the Group upon Completion.

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LETTER FROM THE BOARD

6. THE TARGET GROUP

Structure of the Target Group

The following chart shows the simplified corporate structure of the Target Group as at 30 June 2015.

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Artway Development Limited (BVI)
Beijing Jinzun Technology Development Co., Ltd. (PRC)
100% 100%
GOME Electrical Appliances Retail Co., Ltd. Beijing GOME Logistics Co., Ltd.
(PRC) (PRC)
GOME Electrical Appliances Retail Co., Ltd.
(PRC)
100%
Tianjin Shengyuan Pengda Logistics Co., Ltd. (PRC) GOME Inner Mongolia Electrical Appliances Co., Ltd. (PRC) Beijing GOME Baotou Electrical Appliances Co., Ltd. (PRC) Shanghai GOME Electrical Appliances Co., Ltd. (PRC) Jiangxi Pengrun GOME Electrical Appliances Co., Ltd. (PRC) Xianyang GOME Electrical Appliances Co., Ltd. (PRC) Anshan GOME Electrical Appliances Co., Ltd. (PRC) Tianjin GOME Hengxin Logistics Co., Ltd. (PRC) Luohe GOME Electrical Appliances Co., Ltd. (PRC) Daqing GOME Electrical Appliances Co., Ltd. (PRC) Wuxi GOME Electrical Appliances Co., Ltd. (PRC) Jiangyin GOME Electrical Appliances Co., Ltd. (PRC) Ningbo Zhe GOME Electrical Appliances Co., Ltd. (PRC) Hebei GOME Electrical Appliances Co., Ltd. (PRC) Nanchang GOME Electrical Appliances Co., Ltd. (PRC) Wuhai GOME Electrical Appliances Co., Ltd. (PRC) Beijing GOME Communication Equipment Co., Ltd. (PRC) Zhejiang GOME Electrical Appliances Co., Ltd. (PRC) Nanning GOME Electrical Appliances Co., Ltd. (PRC) Nanning GOME Logistics Co., Ltd. (PRC) Henan GOME Electrical Appliances Co., Ltd. (PRC) Guizhou GOME Electrical Appliances Co., Ltd. (PRC)
Xiamen GOME Electrical Appliances Co., Ltd. (PRC) Hunan GOME Electrical Appliances Co., Ltd. (PRC) Xinjiang Karamay GOME Electrical Appliances Co., Ltd. (PRC) Handan GOME Electrical Appliances Co., Ltd. (PRC) Beijing Hengxin Damei Trading Co., Ltd. (PRC) Jilin GOME Electrical Appliances Co., Ltd. (PRC) Nantong GOME Electrical Appliances Co., Ltd. (PRC) Xinjiang Kuitun GOME Electrical Appliances Co., Ltd. (PRC) Xinjiang GOME Electrical Appliances Co., Ltd. (PRC) Shanxi GOME Electrical Appliances Co., Ltd. (PRC) Dalian GOME Electrical Appliances Co., Ltd. (PRC) Heilongjiang Black Swan Home Appliances Co., Ltd. (PRC) Erlian Haote GOME Electrical Appliances Co., Ltd. (PRC) Hangzhou Pengtou Electrical Appliances Co., Ltd. (PRC) Beihai GOME Electrical Appliances Co., Ltd. (PRC) Baoding GOME Electrical Appliances Co., Ltd. (PRC) Shaoxing Pengrun GOME Electrical Appliances Co., Ltd. (PRC) Dalian Xinxundian Trading Co., Ltd. (PRC) Services Co., Ltd. (PRC)Heilongjiang Black Swan Home Appliances Aftersales Tianjin GOME Zhansheng Logistics Co., Ltd. (PRC) Beijing Dingrui Property Co., Ltd. (PRC) Chongqing Shengan Tonglue Trading Co., Ltd. (PRC)
100% 100% 100% 100%
Tibet Yongtai Logistics (PRC) Datong Century North Electrical Appliances Co., Ltd. (PRC) Yingkou GOME Sanxing Electrical Appliances Co., Ltd. (PRC) Co., Ltd. (PRC)Heilongjiang Fengxing Communication Equipment
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LETTER FROM THE BOARD

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Beijing GOME Logistics Co., Ltd.
(PRC)
100%
Jiangxi GOME Aftersales Services (PRC) Hangzhou Pengrun GOME Electrical Appliances Aftersales Services Co., Ltd. (PRC) Dalian GOME Electrical Appliances Aftersales Services Co., Ltd. (PRC) Anshan GOME Aftersales Services Co., Ltd. (PRC) Heilongjiang Black Swan Home Appliances Maintenance Service Co., Ltd. (PRC) Shijiazhuang GOME Electrical Appliances Aftersales Services Co., Ltd. (PRC) Nanning GOME Electrical Appliances Aftersales Services Co., Ltd. (PRC) Henan GOME Electrical Appliances Aftersales Services Co., Ltd. (PRC) Datong City Hengyuan Aftersales Services Co., Ltd. (PRC) Guizhou GOME Aftersales Services Co., Ltd. (PRC) Ningbo Haishu GOME Electrical Appliances Aftersales Services Co., Ltd. (PRC) Changsha GOME Electrical Appliances Aftersales Services Co., Ltd. (PRC) Xinjiang GOME Electrical Appliances Aftersales Services Co., Ltd. (PRC) Taiyuan GOME Electrical Appliances Aftersales Services Co., Ltd. (PRC) Jilan GOME Electrical Appliances Aftersales Services Co., Ltd. (PRC) Inner Mongolia GOME Aftersales Services Co., Ltd. (PRC) Nantong GOME Aftersales Services Co., Ltd. (PRC) Jilin City GOME Aftersales Services Co., Ltd. (PRC) Wuxi GOME Electrical Appliances Aftersales Services Co., Ltd. (PRC) Pengrun Electrical Appliances (Yingkou) Aftersales Services Co., Ltd. (PRC)
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Business

The Target Group is engaged in the retail sale of electrical appliances and consumer electronic products under the trademark “GOME Electrical Appliances” and related operations mainly in cities other than the designated cities of the PRC in which the Group already operates. Such business is currently already operated by the Group under management arrangements in the manner described in the Company’s announcement dated 17 December 2012, subject to payment of management fees to the Group.

As at 30 June 2015, the Target Group had 590 stores located across 184 cities in the PRC, primarily located in regions distinct from the Group, which are highly complementing to the Group’s existing retail store network. As at 30 June 2015, the Target Group had 1,090,000 square meter of warehouse area, 107 municipal distribution centers, and 6 regional distribution centers, altogether covering 1,100 villages and 200 counties. In addition, the Target Group operated 795 after-sales service centers in 176 cities nationwide.

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LETTER FROM THE BOARD

List of stores of the Target Group and the Group as at 30 June 2015 is as follows[(1)] :

Target Group	Target Group	Total 6 33 43 16 33 66 36 41 15 21 13 21 26 12 36 52 6 5 30 15 64 590	Group	Group
Region Flagship stores Anshan 2 Dalian 7 Guangxi 4 Guizhou 2 Hebei 5 Henan 6 Heilongjiang 11 Hunan 4 Jilin 3 Jiangxi 3 Nantong – Inner Mongolia 4 Ningbo 3 Xiamen 1 Shanxi 7 Shanghai 23 Wuxi 4 Xi’an 1 Xinjiang 6 Changchun 1 Zhejiang 10 Total 107	Standard stores Specialized stores 2 2 12 14 6 33 6 8 8 20 23 37 6 19 11 26 1 11 4 14 2 11 3 14 5 18 8 3 14 15 18 11 2 – 2 2 12 12 2 12 9 45 156 327		Region Flagship stores Beijing 48 Shanghai 27 Tianjin 16 Chengdu 17 Chongqing 13 Xi’an 17 Shenyang 12 Qingdao 12 Jinan 6 Shenzhen 19 Dongguan – Guangzhou 16 Foshan 6 Wuhan 7 Kunming 5 Fuzhou 6 Xiamen 3 Henan 6 Nanjing 3 Wuxi 1 Changzhou 2 Suzhou 4 Hefei 2 Xuzhou 1 Tangshan 3 Lanzhou 5 Wenzhou – Jiangxi 1 Total 258	Standard stores Specialized stores 30 14 17 19 16 9 27 26 21 19 20 63 8 9 13 14 9 16 23 34 13 10 31 65 12 19 20 33 5 23 14 25 9 28 15 27 15 21 2 10 5 5 4 16 7 8 5 13 – 6 4 12 1 8 6 51 352 603	Total 92 63 41 70 53 100 29 39 31 76 23 112 37 60 33 45 40 48 39 13 12 24 17 19 9 21 9 58
					1,213

(1) Flagship stores: store area above 5,000 sq.m., with the widest product selection

Standard stores: store area between 3,000 sq.m. and 5,000 sq.m., with a comprehensive product selection

Specialized stores: store area below 3,000 sq.m., with a focus on 3C products, including computer, digital products, telecommunication products and others categories

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LETTER FROM THE BOARD

The following table sets out the number of stores operated by the Target Group and the Group, with breakdown of stores located in the first and second tier markets, as at 31 December 2012, 2013 and 2014 and 30 June 2015.

Development of retail network of the Target Group and the Group is as follows[(1)] :

Number of stores First-tier market Second-tier market Number of stores opened First-tier market Second-tier market Number of cities accessed Total usable area (sq.m.)	Target Group 31 December 2012 31 December 2013 31 December 2014 30 June 2015 561 510 556 590 315 262 272 281 246 248 284 309 30 50 95 56 13 21 39 20 17 29 56 36 169 183 183 184 1,702,000 1,578,000 1,695,000 1,808,000	Group
		31 December 2012 31 December 2013 31 December 2014 30 June 2015 1,049 1,075 1,132 1,213 662 683 693 698 387 392 439 515 107 93 145 117 57 47 67 33 50 46 78 84 247 260 273 310 3,865,000 3,592,000 3,732,000 3,934,000

(1) First-tier market refers to the first-tier and second-tier cities;

Second-tier market refers to the third-tier and fourth-tier cities.

As at 30 June 2015, the total usable area of stores operated by the Target Group was approximately 1,808,000 square meters. As at 30 June 2015, the Target Group had 8 self-owned stores with a total area of approximately 78,000 square meters, accounting for approximately 4.31% of its total usable area, and the rest were leased. As at 30 June 2015, the Target Group employed a total of 18,081 employees.

The Target Group’s first-tier market year-on-year sales revenue growth from comparable stores was 2.68%, as compared to second-tier market year-on-year sales revenue growth from comparable stores of 5.93%, for the 6 months ended 30 June 2015. For the years ended 31 December 2013 and 2014, the Target Group’s first-tier market year-on-year sales revenue growth from comparable stores was 12.81% and 3.57%, respectively, as compared to the second-tier market year-on-year sales revenue growth from comparable stores of 19.88% and 9.42%, respectively.

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LETTER FROM THE BOARD

The Target Group’s historical sales performance

				6 months ended	6 months ended
	Year ended 31 December			30 June
	2012	2013	2014	2014	2015
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
				(unaudited)
The Target Group sales	17,487,767	19,610,950	20,992,171	10,068,204	10,858,393
Growth %	n.a	12.14%	7.04%	n.a	7.85%
First-tier market	12,613,709	14,043,950	14,778,914	7,104,066	7,413,328
Growth %	n.a	11.34%	5.23%	n.a	4.35%
Second-tier market	4,874,058	5,567,000	6,213,257	2,964,138	3,445,065
Growth %	n.a	14.22%	11.61%	n.a	16.22%
The Target Group’s comparable store sales growth
First-tier market	n.a	12.81%	3.57%	n.a	2.68%
Second-tier market	n.a	19.88%	9.42%	n.a	5.93%

For 6 months ended 30 June 2015, sales in the second-tier market accounted for 31.73% of Target Group’s total sales, as compared to 21.84% of that of the Group. For the years ended 31 December 2013 and 2014, sales in the second-tier market accounted for 28.39% and 29.60% of the Target Group’s total sales, respectively, as compared to 19.10% and 20.53% of that of the Group, respectively. The higher proportion of sales in the second-tier market for Target Group has contributed to higher overall comparable store sales growth of the Target Group as compared with the Group’s. The Target Group’s year-on-year growth rates for sales were roughly in-line with or higher than the offline sales of the Group (excluding sales contribution from GOME-on-line; in order to provide comparison on the same basis with Target Group, which does not operate e-commerce business) for the years ended 31 December 2013 and 2014 and 30 June 2015. Under different agreements as disclosed in page 49 and 50 of the Circular, the Target Group provides logistics services, after-sales services, and supply of general merchandise to GOME-on-line. Mr. Wong owns 100% of the Target Group and 40% of GOME-on-line.

While the overall sales growth rate in 2014 decreased, the overall sales growth rate in 2013 and the first half of 2015 demonstrated strong sales growth rates of 12.14% and 7.85%, respectively. The Group encountered the same trend with decelerated sales growth rate in 2014, demonstrating that it is not an issue specific to the Target Group.

As a retail operator in the same business sector which currently also manages the Target Group’s operations, the Group is well aware of the industry and competitive dynamics faced by the Target Group and itself. The Group believes that Target Group’s network in the second-tier market is highly complementary to the Group’s network and has consistently demonstrated comparable or stronger offline sales growth than that of the Group.

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LETTER FROM THE BOARD

Selected historical sales performance comparison of the Target Group and the Group

				6 months ended	6 months ended
	Year	ended 31 December		30 June
	2012	2013	2014	2014	2015(2)
				(unaudited)
Second-tier market(1) sales contribution
Target Group	27.87%	28.39%	29.60%	29.44%	31.73%
Group	18.76%	19.10%	20.53%	20.15%	21.84%
Overall comparable store sales	growth
Target Group	n.a.	14.70%	5.26%	n.a.	3.66%
Group	n.a.	13.69%	4.82%	n.a.	2.26%
Overall offline sales growth
Target Group	n.a.	12.14%	7.04%	n.a.	7.85%
Group	n.a.	12.90%	5.71%	n.a.	4.86%

(1) Second-tier market refers to the third-tier and fourth-tier cities

(2) Figures for the 6 months ended 30 June 2015 for the Target Group were calculated based on the audited financial information while figures for the 6 months ended 30 June 2015 for the Group were calculated based on the unaudited financial information.

According to the management, as price competition is less intense in the second-tier market, the Target Group was able to achieve higher gross margin than the Group across all product categories as listed out in the table below. The higher gross margin is also attributable to differences in product mix and regional demand. For example, revenue generated from telecommunication devices for the Group increased from 14.59% for the 6 months ended 30 June 2014 to 16.01% for the 6 months ended 30 June 2015, yet telecommunication devices had historically been sold at a lower margin relative to other product categories. Also, the Target Group leveraged its procurement scale to procure for more differentiated products, which contributed to increase in gross profit margins.

As illustrated below, given lower household penetration of home appliances in the second-tier market in which the Target Group has stronger presence as compared with the Group, the Target Group recorded higher aggregate sales contribution from AV, Airconditioner, Refrigerator and washing machine and Small white appliances[(1)] (altogether “ Home Appliances ”) than the Group for 6 months ended 30 June 2014 and 2015. It can be noted that Home Appliances recorded higher gross profit margins than Telecommunication, IT, Digital and Others (altogether “ Telecommunication/Others ”), in which various product categories within Home Appliances recorded gross profit margins in the range of approximately 15% to 22% while various product categories within Telecommunication/Others recorded gross profit margins in the range of approximately 9% to 15%. As a result of higher sales proportion in Home Appliances, coupled with generally higher gross profit margins across all product categories, the Target Group’s overall gross profit margins were also higher than that of the Group during the periods of 6 months ended 30 June 2014 and 2015. Please refer to below on product mix breakdown and gross profit margins comparisons between the Target Group and the Group.

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LETTER FROM THE BOARD

Product Mix Breakdown by Each Product Category

AV Air-conditioner Refrigerator and washing machine Small white appliances(1) Subtotal: Home Appliances Telecommunication IT Digital and others Subtotal: Telecommunication/Others Grand Total	Target Group (6 months ended 30 June) 2014 2015 21.88% 21.82% 17.86% 18.21% 19.68% 20.22% 13.51% 14.07% *72.93%* *74.32%* 14.16% 14.85% 8.52% 8.02% 4.39% 2.81% *27.07%* *25.68%* *100.00%* *100.00%*	Group
		(6 months ended 30 June) 2014 2015 21.63% 20.34% 17.88% 17.94% 19.82% 20.31% 13.05% 13.43% *72.38%* *72.02%* 14.59% 16.01% 9.01% 8.59% 4.02% 3.38% *27.62%* *27.98%* *100.00%* *100.00%*

Gross Profit Margin Breakdown by Each Product Category

AV Air-conditioner Refrigerator and washing machine Small white appliances(1) Combined: Home Appliances Telecommunication IT Digital and others Combined: Telecommunication/Others Overall	Target Group (6 months ended 30 June) 2014 2015 18.65% 18.45% 17.87% 19.36% 18.75% 19.94% 21.87% 22.31% *19.08%* *19.81%* 12.94% 14.53% 10.96% 12.18% 11.81% 12.82% *12.13%* *13.61%* *17.20%* *18.22%*	Group
		(6 months ended 30 June) 2014 2015 16.31% 15.07% 16.21% 16.55% 16.79% 16.44% 18.80% 18.39% *16.86%* *16.44%* 11.72% 11.90% 9.38% 8.80% 11.09% 10.83% *10.88%* *10.82%* *15.21%* *14.87%*

(1) Small white appliances refer to kitchen and bathroom supplies, and other home appliances (including rice cookers, fans, heaters, water heaters, air purifiers, and etc.)

Selected Analysis on Historical Financial Performance of the Target Group

Below serves as a summary of analysis on historical financial performance of the Target Group, please refer to Appendix II for further details.

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LETTER FROM THE BOARD

Profits and Losses

The Target Group has grown through store expansion prior to 2012 which resulted in a relatively high costs base as reflected in the high operating expenses, of 21.19% of the revenue in 2012. In the first half of 2012, there were unfavorable external factors such as policy tightening, a sluggish property sector and the macro-economic slowdown, as well as the challenging situation faced by the entire home appliance industry (in 2012, the home appliance industry saw the first negative sales growth since 2007). The relatively high costs base coupled with a sluggish sales growth have led to Target Group’s loss of RMB319 million in 2012.

In light of the challenging operating environment, since the second half of 2012, the Target Group adjusted its growth strategy and shut down unprofitable stores and successfully trimmed down costs base.

In 2013, as overall industry and operating environment improved, the Target Group demonstrated sales growth of 12.14%, and sales growth from comparable stores of 14.70%. With improved sales performance and a leaner costs structure, the Target Group reported a much lower operating expenses as a percentage of revenue, which was 17.59%. Coupled with stronger gross margins performance in 2013 of 17.74% as compared with 16.51% in 2012, driven by shifting in product mix to focus more on differentiated products (percentage of differentiated product sales to total sales reached approximately 30% in 2013 as compared with 20% in 2012), the Target Group’s profit has improved substantially to RMB367 million in 2013.

In 2014, the Target Group demonstrated sales growth of 7.04%, and sales growth from comparable stores of 5.26%. The Target Group adopted lower prices to gain market shares and hence resulted in drop in gross margins, from 17.74% in 2013 to 16.38% in 2014. The Target Group has continued to control operating expenses and reported a lower operating expenses as a percentage of revenue, which was 17.00%. Target Group reported profit of RMB294 million in 2014.

For the 6 months ended 30 June 2015, the Target Group demonstrated sales growth of 7.85%, and sales growth from comparable stores of 3.66% as compared with the corresponding period in 2014. The Target Group recorded improved gross margins, from 17.20% for the 6 months ended 30 June 2014 to 18.22% for the corresponding period in 2015 through increasing revenue contribution from the second-tier market and higher sales proportion from differentiated products (increased from 32% for the 6 months ended 30 June 2014 to 35% for the corresponding period in 2015). The Target Group has continued to control operating expenses and reported a lower operating expenses as a percentage of revenue, which was 16.87% as compared with 17.56% for the corresponding period in 2014. For the 6 months ended 30 June 2015, the Target Group recorded profit of RMB256 million.

Upon Completion, the management will tightly manage the costs base of the Target Group and continue to execute the “Total Retail” strategy focusing on the optimization of supply chain to further drive up differentiated product ratio. Pursuant to the foregoing, the Directors (excluding members of the Independent Board Committee) expect the financial performance of the Target Group to remain sustainable.

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Balance Sheet

Target Group’s trade receivables increased from RMB43 million as at 31 December 2014 to RMB63 million as at 30 June 2015, representing an increase of approximately 46.51%. Receivables with terms of repayment from 3 to 6 months increased from RMB33,000 as at 31 December 2014 to RMB1.55 million as at 30 June 2015. It has been noted that during the Target Group’s daily operations, other than certain large transactions that required credit, majority of transactions are cash transactions. Trade receivables as at 30 June 2015 as a percentage of sales during the same time period is 0.58%. The term of repayment of trade receivables is slightly prolonged because the number of large transactions in the same period slightly increased. The Target Group imposed strict controls on unrecovered receivables and overdue receivables are regularly reviewed by senior management. The Target Group and the Group operate very similar businesses, and from the Group’s prior experiences, it is expected that Target Group’s trade receivables will not impose significant credit risk to the Enlarged Group.

The Target Group’s customers’ deposits, other payables and accruals increased from RMB792 million as at 31 December 2014 to RMB1,709 million as at 30 June 2015. The growth was mainly attributed to the Target Group’s acquisition of Beijing Dingrui Property Co., Ltd. (including the company’s store properties) in the same period, which the Target Group still has RMB990 million in payables as at 30 June 2015.

Cash and cash equivalents of the Target Group decreased from RMB1,082 million as at 31 December 2014 to RMB959 million as at 30 June 2015, representing a 11.37% decrease.

Judging from the Target Group’s overall operational conditions, profitability, inventory turnover days, trade and bills payables turnover days as well as partnerships with suppliers and various banks, the Directors (excluding members of the Independent Board Committee) consider the above changes in the financial metrics as normal and part of the Target Group’s daily business operations.

Cash Flow

The Group has analyzed the Target Group’s cash flow from operating activities as contained in page 8 and 9 of Appendix II, and noted that, in order to accurately review the Target Group’s operating situations, the effects by changes in “due to” and “due from” related companies (except those with GOME Listed Group, which are incurred for customary business operations purposes) on the cash flows from operating activities should be excluded as they are non-operational in nature and will not be incurred on a going-forward basis upon Completion. The Group also noted that, as at the Latest Practicable Date, most of these related companies balances had been settled.

After excluding the effects of changes in “due to” and “due from” related companies (except those with GOME Listed Group, which are incurred for customary business operations purposes) the Target Group recorded positive net cash flows from operating activities. The Group is of the view that the operating cash flow positions of the Target Group remained healthy as differences in such cash flows across the years have been caused by working capital positions change, which are typical for companies in the retail industries, and have been faced by the Group as well.

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Connected Transactions

a) The Management Agreement and Purchasing Service Agreement

As at the Latest Practicable Date, the Group provides management services to the Target Group in respect of the retailing of electrical appliances and consumer electronic products pursuant to a management agreement for a period of three years from 1 January 2013 to 31 December 2015. The Group charges the Target Group a management fee at the rate of 0.75% of the total revenue of the Target Group if the revenue is equal to or less than RMB5,000,000,000 or at the rate of 0.6% if the revenue exceeds RMB5,000,000,000, which is determined with reference to the expected expenses to be allocated to the Target Group by the head office of the Company and the expected revenue to be generated from the Target Group.

The Group also negotiates with various suppliers for both the Target Group and the Group on a centralized basis pursuant to a purchasing service agreement which is also for a term of three years from 1 January 2013 to 31 December 2015. For providing such purchasing services to the Target Group, the Group charges a fee at the rate of 0.9% of the revenue generated from the sales of electrical appliances and consumer electronics products of the Target Group which is determined with reference to the fixed cost nature of the expenses to be incurred by the Group in rendering the purchasing services to the Target Group and the expected revenue to be generated by the Target Group.

The annual caps of the management service fee and the purchasing service fee are RMB100,000,000 and RMB150,000,000, respectively.

The profit attributable to owner of the parent stated in the table of financial information on page 12 represents profits remaining after management fee and purchasing service fee have already been paid to the Group. The following table sets out the management fee and purchasing service fee paid by the Target Group for the years ended 31 December 2012, 2013 and 2014 and the 6 months ended 30 June 2014 and 2015 under the arrangements described above.

Management fee Purchasing service fee Total	Year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 100,000 100,000 100,000 150,000 150,000 150,000 250,000 250,000 250,000	6 months ended 30 June 2014 2015 RMB’000 RMB’000 (unaudited) 62,575 64,359 93,862 96,538 156,437 160,897	6 months ended 30 June 2014 2015 RMB’000 RMB’000 (unaudited) 62,575 64,359 93,862 96,538 156,437 160,897
			160,897

As the Target Group will become a wholly-owned subsidiary of the Company upon Completion, the Group does not deem it necessary to continue charging the Target Group for the management services and purchasing services provided after Completion Date. As such, the management service and purchasing service arrangements will be terminated with immediate effect upon Completion Date. In the event that Completion Date will only occur after expiration of such agreements, the parties will consider entering into transitional connected transaction arrangements to cover the remainder period before Completion, which will be subject to shareholder approval (if applicable).

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b) The 2013 Agreements

In order to cater for the operational needs of the Group, and to optimise resources sharing while regulating transactions between the Target Group and the Group, the Group entered into the following agreements on 5 March 2013:

Capitalized terms used herein take the same meanings ascribed to them in the 2014 Annual Report of the Company:

(i) Logistics services agreements (the “ First Logistics Services Agreement ”) and (the “ Second Logistics Services Agreement ”) for the provision of logistics services (including warehousing and delivery of general merchandise to end customers) by the Group, GOME Ruidong and the Target Group to Kuba and GOME-on-line for a period of three years from 1 January 2013 to 31 December 2015, subject to the annual caps of the transaction amounts (excluding value added tax) for the three years ending 31 December 2013, 2014 and 2015 not exceeding RMB150 million, respectively.
(ii) After-sales services agreements (the “ First After-Sales Services Agreement ”) and (the “ Second After-Sales Services Agreement ”) for the provision of after-sales services (including repairs, maintenance and customer service of general merchandise to end customers) by the Group, GOME Ruidong and the Target Group to Kuba and GOME-on-line for a period of three years from 1 January 2013 to 31 December 2015, subject to the annual caps of the transaction amounts (excluding value added tax) for the three years ending 31 December 2013, 2014 and 2015 not exceeding RMB150 million, respectively.
(iii) The master merchandise purchase agreement (the “ Master Merchandise Purchase Agreement ”) for the supply of general merchandise (including electrical appliances and consumer electronics products) by GOME Ruidong and the Target Group to the Group (including Kuba and GOME-on-line) for a period of three years from 1 January 2013 to 31 December 2015, subject to the annual caps of the transaction amounts (excluding value added tax) for the three years ending 31 December 2013, 2014 and 2015 not exceeding RMB5 billion, RMB6.5 billion and RMB8 billion, respectively.
(iv) The master merchandise supply agreement (the “ Master Merchandise Supply Agreement ”) for the supply of general merchandise (including electrical appliances and consumer electronics products) by the Group to Kuba, GOME-on-line and the Target Group for a period of three years from 1 January 2013 to 31 December 2015, subject to the annual caps of the transaction amounts (excluding value added tax) for the three years ending 31 December 2013, 2014 and 2015 not exceeding RMB5 billion, RMB6.5 billion and RMB8 billion, respectively.

Pursuant to the above, the First Logistics Services Agreement, First After-Sales Services Agreement, Master Merchandise Purchase Agreement and Master Merchandise Supply Agreement are applicable to, including but not limited to, the Group, the Target Group and GOME-on-line. Given the relative scale of sales and purchases of the Group and Target Group as compared with the stipulated annual caps, the management has to proactively manage

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connected transactions to ensure relevant annual caps are being observed, for example, for locations where both the Target Group and the Group operate in, sharing inventory positions between stores has not been allowed internally as a means to control the amount of connected transactions, and hence constrain the management from reaping the full benefits of unified procurement, logistics and after-sales platform. Also, as the Target Group grows in scale, the restrictive effect which connected transactions have imposed have become more significant.

For the avoidance of doubt, after the expiration of the current connected transaction arrangements by the end of 2015, to facilitate the operations of the Target Group and the Group before Completion takes place, the terms of the continuing connected transactions (except that the purchasing service agreement will not be renewed), namely the management agreement, the logistics services agreements, after-sales services agreements, master merchandise purchase agreement and master merchandise supply agreement, between the relevant parties, including but not limited to the Enlarged Group and GOME-on-line, will be renegotiated with annual caps under respective agreements to be agreed upon, and these potential continuing connected transactions, if required pursuant to the Listing Rules, will be subject to shareholder’s approvals (if applicable). After Completion, transactions between the Target Group and the Group under these agreements will cease to be connected transactions. Given the elimination of connected transactions between the Target Group and the Group, the annual caps for the potential continuing connected transactions will be fully dedicated for the transactions between Enlarged Group and GOME-on-line, which will allow GOME-on-line to further leverage the Enlarged Group’s procurement capability, without sharing the annual cap with transactions between the Target Group and the Group, to support its rapid growth, in addition to improving corporate governance of the Enlarged Group.

The Target Group and the Group are in the final year of management service and purchasing service agreements, which were both renewed in 2012. Both agreements will expire on 31 December 2015. Over the years, the Target Group, partially due to the limitations imposed by annual caps of various abovementioned connected transaction arrangements which restrained the Target Group from full reliance on the Group for various operational support, has gradually established its own operational capabilities, including but not limited to, retail, procurement, logistics, warehousing and after-sales networks which have all reached a more developed stage as compared with three years ago when the current connected transaction arrangements were renewed. Management expects that, upon renegotiation of the expiring transactions, the existing arrangements will likely change given Target Group’s enhanced ability to operate on a standalone basis and the reduced reliance on the Group.

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Due to and due from related parties

As per Note 21 as contained in Appendix II, the Target Group recorded approximately RMB3,184 million due from related companies as at 30 June 2015, with breakdown as follows:

Receivables from: Beijing GOME Beijing Eagle Investment GOME Listed Group Heilongjiang GOME GOME Sports Investment Anxun Logistics GOME Holding Group Total	At 30 June 2015 RMB’000 1,096,422 1,427,925 644,735 3,500 9,900 1,138 78
	3,183,698

Regarding the settlement with all related companies other than the GOME Listed Group, subsequent to 30 June 2015, the Target Group collected all amounts due from the respective related companies as disclosed above. Amounts due from GOME Listed Group represents inter-company loans incurred for customary business operations purposes including supply and purchase of merchandise, and do not bear any interests and have no terms of repayment.

As per Note 27 as contained in Appendix II, the Target Group recorded approximately RMB1,573 million due to related companies as at 30 June 2015, with breakdown as follows:

Payables to: GOME Listed Group Beijing GOME Shinning Crown Holdings Inc. Beijing Eagle Investment Kashmac International Ltd. Qingdao Logistics Heilongjiang GOME Anxun Logistics GOME Records GOME Sports Investment Others Total	At 30 June 2015 RMB’000 220,587 1,196,089 74,272 7,897 5,730 44,150 8,691 5,222 500 10,000 30
	1,573,168

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To the knowledge of the Group, subsequent to 30 June 2015, except for amounts due to GOME Listed Group and Shinning Crown Holdings Inc., the Target Group paid all amounts due to the respective related companies as disclosed above. Amounts due to GOME Listed Group represents inter-company loans (incurred for customary business operations purposes including supply and purchase of merchandise, and does not bear any interests and has no terms of repayment), management fees, and purchasing services fees. Upon Completion, while inter-company loans are still incurred in the Enlarged Group (and deemed as intra-group transactions), management fees and purchasing services fees will no longer be incurred.

Amounts due to Shinning Crown Holdings Inc., which is 100% beneficially owned by Mr. Wong, are interest-free loans, with no terms of repayment. These loans are incurred for intra-group capital arrangement purposes. It is expected that this type of loan to Shinning Crown will not be incurred again.

7. THE GROUP

The Group is an omni-channel retailer of home appliances and consumer electronic products that booked RMB60,359,843,000 in sales for 2014. The Group sells its products through physical stores, O2M micro shops, as well as through mobile terminals and e-commerce channels, that together constitute a seamless retail continuum. As at 30 June 2015, its network includes a total of 1,213 flagship, standard and specialized stores in 310 cities.

8. REASONS FOR AND BENEFITS OF THE ACQUISITION

Mr. Wong and the Company entered into a Right of First Refusal Deed in 2004, pursuant to which Mr. Wong will inform the Company and the Company will have the first opportunity to acquire such interests if he intends to sell or procure the sale of any member of the Target Group or its business. Only when the Company decides not to acquire such interest could Mr. Wong sell or procure the sale of such interests to other party. Mr. Wong is fulfilling an obligation that was previously agreed on with the Company.

The Acquisition is an important milestone for the Group and in line with the Group’s “Total Retail” strategy. Upon Completion, the 40% interest in GOME-on-line will remain with Mr. Wong and his associates, which will be the only business that carries on retail business of electrical appliances and consumer electronics products under the brand name “GOME” held by Mr. Wong and his associates. GOME has been executing the “Total Retail” strategy since 2014 in order to address the rapidly evolving consumer behaviors and Chinese consumers’ need for enhanced shopping experiences across offline and online channels. In light of recent consolidation and integration of offline retailers with e-commerce operators in 2015, for example the equity investments by Alibaba into Sunning and in order to capture consumer demand and sustain GOME’s position as one of the leading retailers in home appliances and consumer electronic products industry in China, the need for a seamless, integrated platform to execute “Total Retail” strategy, drive sales across online and offline channels, and improve cost structure through removing connected transactions and rationalization of resources with the Target is paramount in light of the current industry environment. Given the Target Group has been under common management with the Group, the management believes that it is in the best interests of the Group to pursue the Acquisition given its familiarity of Target Group’s business and operational model and the benefits of a smoother and swifter integration.

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The Group also believes that the Target Group is now at a relatively mature stage, as a result of a historically consistent network, sales and margin growth, and can play a meaningful role in terms of facilitating the formation of a unified offline retail network aimed at serving customers on a nationwide basis in an efficient manner via eliminating limitations by connected transactions, and at the same time support the GOME-on-line through nationwide unified procurement, logistics and after-sales services platforms.

As of 30 June 2015, the Target Group’s 590 stores are primarily located in regions distinct from the Group, which are highly complementary to the Group’s existing retail store network and support the expansion into lower-tiered cities. The Acquisition represents an attractive opportunity for the Group to consolidate its position as the market leader in the electrical appliances and consumer electronic products retail market in the PRC, further capitalize on the growth potential emerging from the industry, and create value for investors. Specifically, the Directors (excluding members of the Independent Board Committee) expect to realize the following key benefits through the Acquisition:

Transformation from a regional to one of the leading national retail, logistics and after-sales platforms, which is expected to further drive revenue growth and improve market share:

a) Store network expansion and economies of scale: Upon completion of the Acquisition, the Group will be able to significantly extend its retail store network from 310 cities to 448 cities in the PRC and number of retail stores in the first-tier and second-tier markets will increase from 698 to 979 and from 515 to 824, respectively. On a pro forma combined basis and based on information as of 30 June 2015, upon Completion, the Group will own one of the largest electrical appliances and consumer electronic products retail store networks in the PRC. The number of retail stores of the Group will increase from 1,213 before the Acquisition to at least 1,803 upon Completion. The total usable area of the Group will increase from 3,934,000 sq.m. before the Acquisition to at least 5,742,000 sq.m. upon Completion. It is also expected that the combination will enhance economies of scale and enable the Group to provide better value and services to its existing and future customers.
b) Enhanced logistics network coverage: number of county-level locations will increase from over 400 to over 600, number of village-level locations to increase from over 1400 to over 2,500, and number of town-level locations to increase to over 45,000.
c) Improved national warehouse coverage: number of regional distribution centers will increase from 15 to 21, number of municipal distribution centers will increase from 300 to 407, with total warehouse area reaching 3,020,000 sq.m.
d) Comprehensive after-sales service platform: the number of cities accessed will increase from current 234 to 410; the number of after-sales service centers will increase substantially from 1,327 to 2,122.

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With the integration of logistics, warehousing and after-sales platforms, it is expected that an integrated platform would support development of “Total Retail” strategy, accelerate expansion and growth of e-commerce, and further enhance third party revenue streams.

Deeper penetration into higher growth and more profitable markets : The Target Group’s distribution network spans across regions that are poised to benefit from favorable government policies, such as “One Belt and One Road Initiative” and “Western China Development Strategy”, as well as regions with high growth potential, such as Beijing-TianjinHebei region, the Bohai Bay, the Yangtze River Basin Economic Zone, Beibu Gulf Economic Zone and the third-tier and fourth-tier cities.

As at 30 June 2015, the Target Group has 281 and 309 stores in the first-tier and second-tier markets, respectively. Benefitting from less intense competition and lower household penetration of home appliances and electronic products, retail stores in the second-tier market have historically demonstrated stronger sales growth than those in the first-tier market.

Compared with the Group’s overall sales for the years ended 31 December 2013 and 2014, and the 6 months ended 30 June 2015, the Target Group recorded higher sales contribution from the second-tier market. Supported by higher sales contribution from the second-tier market, the Target Group has demonstrated stronger overall sales revenue growth from comparable stores when compared with the Group.

As illustrated in the chart below, given stronger presence in the second-tier market and more favorable product mix, the Target Group has outperformed the Group in terms of gross profit margins historically.

Gross profit margins for the Target Group and the Group as follows:

==> picture [403 x 193] intentionally omitted <==

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

17.74% 18.22%
16.51% 16.38% 17.20%
15.07% 14.90% 15.21% 14.87%
13.35%
6 months ended 6 months ended
2012 2013 2014 30 June 2014 30 June 2015
Target Group Group
----- End of picture text -----

As a retail operator in the same sector which currently also manages Target Group’s operations, the Group is well aware of the industry and competitive dynamics faced by the Target Group and itself. The Group believes that Target Group’s network in the second-tier market, aside from being highly complementary to the Group’s network, has consistently demonstrated higher gross margins than those of the Group.

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Due to weaker market environment in 2014, both the Target Group and the Group suffered drop in gross margins but the strong rebound in the first half of 2015 has demonstrated Target Group’s resilience and strengths of its retail network in the second-tier market, which the Group believes is the key driver underpinning the strong gross margins performance.

Upon Completion, the Target Group’s relatively higher gross margins will immediately benefit the Group.

Elimination of connected transaction restrictions which is expected to improve supply chain efficiency: To date, although the Target Group is managed by the Group through management and purchasing service agreements, annual caps in connected transactions have constrained both the Target Group and the Group from reaping full benefits of a nationwide network.

Transfers of inventory between the Target Group and the Group to more efficiently fulfill customer orders and replenish warehouse and in-store inventory are deemed as connected transactions. Restrictive effects from annual caps are particularly apparent for regions separately operated by the Target Group and the Group but are located in close proximity, for example, Shanghai (in which both the Target Group and the Group operate), Beijing (in which the Group operates) and Hebei (in which the Target Group operates) and Zhejiang regions (in which both the Target Group and the Group operates). The elimination of connected transactions involving sales and procurement between the Target Group and the Group would allow the Enlarged Group to transfer inventories across the nation according to business needs, further driving cost efficiency from operating a nationwide network.

A nationwide network without restrictions from connected party sale and purchases transactions is also expected to drive the expansion in e-commerce. According to the management, certain e-commerce vendors only supply products to regions operated by the Group but not the Target Group and hence constrain the diversity of products for online shoppers in regions managed by the Target Group, or vice versa. In addition, prior to the Completion of the Acquisition, orders placed by online shoppers located in regions operated by the Group, when requiring products to be delivered to regions operated by the Target Group or vice versa, are also deemed connected transactions as products are delivered from the logistics centre distinct from the entity with which the orders have been placed. Management expects that this type of transaction will become more common, as the e-commerce business ramps up and when customers purchase on behalf of friends and families in different regions.

Upon Completion, corporate governance is expected to improve via the elimination of existing continuing connected transactions between the Target Group and the Group which will result in a more simplified connected transaction structure involving only the Enlarged Group and GOME-on-line as opposed to previous transactions involving the Target Group, the Group and GOME-on-line.

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Areas of Potential Cost savings through integration of resources :

a) Enhance bargaining power in procurement : given the larger procurement need of the Enlarged Group, GOME’s bargaining power with suppliers will potentially improve, leading to gross margin and cash flow improvement. Currently, although the Target Group and the Group negotiate with suppliers on a collective basis but contracts are executed with separate legal entities, and hence suppliers evaluate terms separately. Upon Completion, the Enlarged Group is expected to enter into a single contract with respective suppliers, thereby immediately increase scale of procurement and enhance bargaining power.

Currently, the Target Group and the Group are requested to hold respective minimum inventory, which is typically lower when procurement scale is larger due to enhanced scale and bargaining power, therefore suppliers may also consider reducing minimum inventory requirement given the enlarged procurement size of the Enlarged Group which will improve inventory turnover and the cash flow position of the Enlarged Group.

Upon Completion, while certain procurements of the Enlarged Group will be conducted on a national level and represent opportunities for potential rationalization a considerable proportion of procurements are conducted regionally and hence would require on-the-ground staffs to cover respective regions’ procurement needs. The management will conduct a thorough review of the procurement division of the Enlarged Group and determine potential areas of rationalization.

b) Optimize warehouse network rationalization: the combination of the Target Group and the Group would result in rationalization of duplicative warehouses in certain areas, thereby improving utilization rates and overall efficiency of the logistics network. In addition, potential rental expenses savings can be achieved through negotiation for better terms with landlords as a result of consolidation and rationalization of warehouses.

Shanghai Henan Beijing & Tianjin Zhejiang Xiamen Total	Target Group Number of warehouses Total usable area (sq.m.) 3 51,462 16 38,204 7 22,164 7 47,352 1 25,887 34 185,069	Group	Group
	Number of warehouses 3 16 7 7 1 34	Number of warehouses 2 12 6 14 3 37	Total usable area (sq.m.) 20,337 29,170 160,070 59,211 13,551
			282,339

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The above table illustrates the locations at which both the Target Group and the Group operates warehouses which are potentially subject to rationalization upon Completion.

c) Increase distribution efficiency: to date, the Target Group and the Group operate their respective regional distribution networks. The combination of the two networks is expected to enhance utilization level of delivery vehicles and allow planning of delivery routes based on proximity while not constrained by barriers imposed by connected transaction, thereby achieving potential cost savings.
d) Enhance after-sales services centers: The combination of the Target Group and the Group would result in rationalization of duplicative after-sales service centers in certain areas.
e) Strengthen capital structure improvement: As at 30 June 2015, the Target Group has RMB959 million cash and cash equivalents and RMB3,090 million interest-bearing bank loans which are denominated in RMB and bear fixed interest rates ranging from 4.45% to 7.28% and RMB99 million bond payable which are denominated in RMB. As at 30 June 2015, the Group has RMB10,716 million cash and cash equivalents and RMB1,523 million interest-bearing bank loans which are denominated in USD and bear interest at the 3-month London Interbank Offered Rate plus 1.8% to 2.0%. Interest-bearing bank loans of the Target Group and the Group are all secured.

It is expected that the Enlarged Group will benefit from potential interest expenses savings in the future through more favourable financing terms and optimization of capital structure, for example through repayment or refinancing of the Target Group’s borrowings by leveraging the Group’s relative financial strengths.

9. FINANCIAL EFFECTS OF THE PROPOSED ACQUISITION

Earnings

Upon Completion, the Target Group will be accounted for as a wholly owned subsidiary of the Company and its results will be consolidated into the consolidated financial statements of the Group. As set out in the accountant’s report on the Target Group in Appendix II to this circular, the revenue and profit reached approximately RMB20,992 million and RMB294 million for the year ended 31 December 2014, respectively. After Completion, the revenue and profits of the Target Group will be consolidated in the Group’s consolidated financial statements.

Assets and liabilities

As extracted from the interim report of the Group for the six months ended 30 June 2015, the unaudited consolidated total assets and total liabilities of the Group were approximately RMB42,912 million and RMB26,073 million, respectively; and the unaudited consolidated net

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assets of the Group as at 30 June 2015 were approximately RMB16,839 million. As set out in Appendix III to this circular, the unaudited pro forma total assets and total liabilities of the Enlarged Group would increase to approximately RMB62,922 million and RMB39,342 million, respectively; and the unaudited pro forma net asset value of the Enlarged Group would be RMB23,580 million, assuming Completion had taken place on 30 June 2015. For further information, please refer to the unaudited pro forma financial information of the Enlarged Group set out in Appendix III to this circular.

10. RISK RELATING TO THE GROUP IF APPROVAL FOR THE ACQUISITION WERE NOT OBTAINED FROM THE INDEPENDENT SHAREHOLDERS AT THE SPECIAL GENERAL MEETING

Under the right of first refusal deed between Mr. Wong and the Company (then called China Eagle Group Company Limited) dated 29 July 2004, the Company has a right of first refusal in respect of the sale of the Target Group. If the right of first refusal is not exercised by the Company, Mr. Wong would then be entitled to sell the Target Group to a third party buyer on the same terms and based on the same information provided to the Company. The management and purchasing services agreements both dated 17 December 2012 relating to the Target Group will expire on 31 December 2015.

In addition, as provided under the non-compete deed between Mr. Wong and the Company (then called China Eagle Group Company Limited) dated 29 July 2004 (the “2004 NonCompete Deed”, details of which are set out in the section headed “1. Non-Competition Undertaking” in the Company’s circular dated 5 July 2004), the deed of undertaking of Mr. Wong dated 28 February 2006 (the “2006 Undertaking”, details of which are set out in the Company’s announcement dated 2 February 2006) and the waiver deed dated 21 July 2006 executed by Mr. Wong (the “2006 Waiver”, details of which are set out in the section headed “13. Waiver of Non-competition Undertaking” in the Company’s circular dated 29 August 2006), the Company is not permitted to compete with the Target Group in its territories, whether or not using the GOME trademarks, for so long as Mr. Wong remains the Controlling Shareholder of the Company, except for those stores that already exempted by Mr. Wong. Under current arrangements, the GOME trademarks are licensed to GOME Appliance Company Limited (國美電器有限公司) by Beijing GOME Electrical Appliance Co., Ltd. (北京國美電器有限公司), owner of the GOME trademarks and a company ultimately owned by family members of Mr. Wong, without any time period limitations nor costs. The 2006 Undertaking and 2006 Waiver were given by Mr. Wong and binds him, not a third party buyer.

If the Target Group were sold to a third party buyer, then: (1) the Group will no longer be involved in the operation of the Target Group and the fees currently payable to the Group under the management and purchasing services agreements will be discontinued, and the revenue from the Group’s business operations may decrease; (2) the Target Group as controlled by the third party buyer may develop business operations in territories where the Group already operates, in direct competition with the Group; (3) the Group may continue to be restricted from carrying out operations or set up further sales channels in the territories where the Target Group currently operates, if a waiver is not granted by Mr. Wong or the third party buyer requires the current restrictions shall in future strictly be enforced against the Group and cannot be waived by Mr. Wong.

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As a result of the sale of the Target Group to a third party and that the third party buyer is not party to any non-compete arrangements with the Company, the Company’s business operations in its own territories as well as in the territories operated by the Target Group will face more limitations and fiercer competition.

11. WHITEWASH WAIVER

As at the Latest Practicable Date, Mr. Wong and his concert parties are interested in 5,500,503,338 Shares, representing approximately 32.43% of the issued share capital of the Company, in the following manner:

(1) Shinning Crown Holdings Inc., a company which is 100% beneficially owned by Mr. Wong, holds 4,619,779,938 Shares, representing 27.24% of the issued share capital of the Company;
(2) Shine Group Limited, a company which is 100% beneficially owned by Mr. Wong, holds another 634,016,736 Shares, representing 3.74% of the issued share capital of the Company;
(3) Smart Captain Holdings Limited, a company which is 100% beneficially owned by Ms. Du Juan, the spouse of Mr. Wong, holds 240,955,927 Shares, representing 1.42% of the issued share capital of the Company; and
(4) Wan Sheng Yuan Asset Management Company Limited, a company which is 100% beneficially owned by Ms. Du Juan, the spouse of Mr. Wong holds another 5,750,737 Shares, representing 0.03% of the issued share capital of the Company.

For settlement of part of the consideration under the Acquisition, the Vendor, which is ultimately 100% beneficially owned by Mr. Wong will be issued up to 5,500,000,000 new Shares which will result in the percentage of Shares in which Mr. Wong and his concert parties are interested as set out above, amounting in aggregate to 32.43%, increasing to 48.97% of the issued share capital of Company as enlarged by the issue of such Consideration Shares, on the assumption that 5,500,000,000 new Shares will be issued.

Upon Completion and full exercise of the Warrants, as a result of the allotment and issue of the 2,500,000,000 Underlying Shares, (i) the Vendor will become interested in 8,000,000,000 Shares arising from such the exercise of the Warrants; and (ii) the Vendor concert group will in aggregate be interested in 13,500,503,338 Shares, representing 54.09% of the issued Shares as enlarged by the allotment and issue of the Consideration Shares and the Underlying Shares.

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LETTER FROM THE BOARD

An application has been made to the Executive for the Whitewash Waiver. The Executive has indicated that it intends to grant the Whitewash Waiver, subject to, among other things, the approval of the Independent Shareholders at the Special General Meeting by way of poll.

The Acquisition is conditional on the Vendor and Mr. Wong being granted the Whitewash Waiver and the Independent Shareholders approving the Whitewash Waiver at the Special General Meeting on a vote taken by way of a poll.

The Executive may or may not grant the Whitewash Waiver and the Independent Shareholders may or may not approve the Whitewash Waiver. The Acquisition will not proceed if the Whitewash Waiver is not so granted or approved.

If the Whitewash Waiver is granted by the Executive and approved by the Independent Shareholders and the Acquisition becomes unconditional, the aggregate shareholding in the Company of the Vendor, Mr. Wong and their respective concert parties will exceed 50% upon Completion. The Vendor, Mr. Wong or their respective concert parties may further increase their shareholding in the Company without incurring any further obligations under Rule 26 of the Takeovers Code to make a general offer. Notwithstanding the above, given individual members of the concert group hold less than 30% each, further purchase of Shares by individual members may result in them individually triggering obligations under Rule 26 of the Takeover Code, unless a waiver from the Executive is obtained, especially where there is any change in the make-up of the concert group that effectively results in the formation of a new concert group or in the balance of the group being changed significantly.

Under the terms of the Warrants, a Warrant would only be deemed exercised on the trading day immediately following the first business day on which all the documents and remittance amount required pursuant to the terms and conditions of the Warrants have been deposited with the Company, after which the Company would have five trading days within which to allot and issue the relevant Underlying Shares. Accordingly, no Underlying Shares will be allotted and issued prior to the allotment and issue of the Consideration Shares.

Save for the entering into of the Acquisition Agreement, none of the Vendor, Mr. Wong or their respective concert parties has acquired or disposed of or entered into any agreement or arrangement to acquire or dispose of any voting rights in the Company during the Relevant Period (save as to the agreement disclosed in the Company’s announcement dated 26 May 2015 and circular dated 9 June 2015, which was terminated without completion as disclosed in the Company’s announcement dated 24 June 2015, which agreement related to a proposed 10 year lease of certain office premises in Beijing the rental for which was to have been paid for in part by the issue of consideration shares by the Company to the lessor, a company owned by Mr. Wong and his associates) and are interested in any issued Shares or other relevant securities (as defined in Note 4 to Rule 22 of the Takeovers Code) of the Company otherwise than as disclosed in the shareholding table set out under the above paragraph headed “SHAREHOLDING STRUCTURE BEFORE AND AFTER COMPLETION”.

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LETTER FROM THE BOARD

As at the Latest Practicable Date, none of the Vendor, Mr. Wong or their respective concert parties:

(i) hold, control or have direction over any outstanding options, warrants, or any securities that are convertible into Shares or any derivatives in respect of securities in the Company, or hold any relevant securities (as defined in Note 4 to Rule 22 of the Takeovers Code) in the Company save as disclosed in the shareholding table set out in page 37 above;
(ii) have borrowed or lent any relevant securities (as defined in Note 4 to Rule 22 of the Takeovers Code) in the Company;
(iii) have made any arrangement referred to in Note 8 to Rule 22 of the Takeovers Code (whether by way of option, indemnity or otherwise) in relation to the relevant securities (as defined in Note 4 to Rule 22 of the Takeovers Code) of the Company or the Vendor which might be material to the Acquisition and/or the Whitewash Waiver, with any other persons;
(iv) have made any agreement or arrangement which relates to circumstances in which they may or may not invoke or seek to invoke a precondition or a condition to the Acquisition and/or the Whitewash Waiver, other than the conditions precedent to the Acquisition as set out in this circular; or
(v) has received any irrevocable commitment to vote for or against the Acquisition and/or the Whitewash Waiver.

12. PROPOSED REORGANISATION OF THE NOMINATION COMMITTEE OF THE BOARD

As at the Latest Practicable Date, the nomination committee of the Board (the “ Nomination Committee ”) comprises five members, Mr. Wang Gao, an independent nonexecutive Director, who is also the chairman of the Nomination Committee, Mr. Zou Xiao Chun, an executive Director, Ms. Huang Xiu Hong, a non-executive director, Mr. Ng Wai Hung and Ms. Liu Hong Yu, both independent non-executive Directors.

In order to enhance the corporate governance of the Company, the Board proposes to reorganise the Nomination Committee upon Completion by changing the composition of the Nomination Committee so that its members will consist only of non-executive Directors not nominated by Mr. Wong or his associates and independent non-executive Directors. The proposed reorganisation will further ensure the selection of independent and quality nominees to the Board. After the proposed reorganisation, the Nomination Committee will comprise of five members, Mr. Zhang Da Zhong, a non-executive Director, Mr. Wang Gao, an independent non-executive Director, who will also be the chairman of the Nomination Committee, Mr. Lee Kong Wai, Conway, Mr. Ng Wai Hung and Ms. Liu Hong Yu, all are independent non-executive Directors.

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LETTER FROM THE BOARD

13. LISTING RULE IMPLICATIONS

The Vendor is an associate of Mr. Wong. Mr. Wong is the Controlling shareholder of the Company and hence a connected person of the Company under the Listing Rules. The Acquisition constitutes a major and connected transaction for the Company which requires the approval of the Independent Shareholders by poll at the Special General Meeting.

Each of Mr. Zou Xiao Chun, Ms. Huang Xiu Hong and Mr. Yu Sing Wong, who was nominated by the Controlling shareholder, as a Director, is considered to be interested in the transactions contemplated under the Acquisition Agreement and have abstained from voting in respect of the resolutions to approve the Acquisition Agreement. The remaining director Mr. Zhang Da Zhong considers the terms and conditions of the Acquisition including the Issue Price to be fair and reasonable and on normal commercial terms and that the entering into of the Acquisition Agreement is in the interest of the Company and the Shareholders as a whole.

The Independent Board Committee has been established to advise the Independent Shareholders on the Acquisition and the Whitewash Waiver. Platinum Securities has been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders on the Acquisition and the Whitewash Waiver. Barclays Capital has been appointed as the financial adviser to advise the Company in relation to the Acquisition.

14. MAINTENANCE OF THE LISTING OF THE COMPANY

The Company intends to maintain its listing on the Stock Exchange after Completion.

As disclosed under the paragraph headed “3. SHAREHOLDING STRUCTURE BEFORE AND AFTER COMPLETION” in the “Letter from the Board”, the holding of the public shareholder is 67.57% as at the Latest Practicable Date, which may drop to 45.91% immediately upon Completion and assuming all Warrants have been converted. As such, the Company does not anticipate that the public float will be insufficient after Completion.

Mr. Wong and the Company will use their reasonable endeavors 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.

If less than 25% (or such lower percentage as may be allowed under the Listing Rules) of the 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 Shares; or

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LETTER FROM THE BOARD

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

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

15. SGM AND PROXY ARRANGEMENT

The notice of the SGM is set out on pages SGM-1 to SGM-2 of this circular.

Pursuant to the Listing Rules, any vote of shareholders at a general meeting must be taken by poll. An announcement on the poll vote results will be published by the Company after the SGM in the manner prescribed under Rule 13.39(5) of the Listing Rules.

The voting in respect of the Acquisition and the Whitewash Waiver at the SGM will be conducted by way of a poll. The Vendor, Mr. Wong and their respective associates and concert parties and those who are involved in or interested in the Acquisition and the Whitewash Waiver, which together hold 5,500,503,338 Shares, representing approximately 32.43% of the issued share capital of the Company as at the Latest Practicable Date, shall abstain from voting on the resolution approving the Acquisition and the Whitewash Waiver at the SGM.

As at the Latest Practicable Date, to the best of the Directors’ knowledge, information and belief, after having made reasonable enquiries, save for the 5,500,503,338 Shares, representing approximately 32.43% of the issued share capital of the Company that Mr. Wong and his concert parties are interested in as set out under the above paragraph headed “SHAREHOLDING STRUCTURE BEFORE AND AFTER COMPLETION”, no other Shareholder will be required to abstain from voting at the SGM in respect of the resolutions to approve, among other things, the Acquisition and Whitewash Waiver.

A form of proxy for use at the SGM is enclosed with this circular and such form of proxy is also published on the websites of the Stock Exchange (www.hkexnews.hk) and the Company (www.gome.com.hk). Whether or not you are able to attend the SGM, please complete and sign the enclosed form of proxy in accordance with the instructions printed thereon and deposited, together with the 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 at the Company’s branch share registrar in Hong Kong, Tricor Abacus Limited, at Level 22, Hopewell Centre, 183 Queen’s Road East, Hong Kong, as soon as possible but in any event not less than 48 hours before the time appointed for holding the SGM or any adjournment thereof. Completion and delivery of the form of proxy will not preclude you from attending and voting at the SGM if you so wish.

Please refer to the website of the Company (www.gome.com.hk) for, among other things, published announcements, circulars, financial reports, press releases, information on corporate governance and other information of the Company.

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LETTER FROM THE BOARD

Shareholders may also send general enquiries to the Company by post to Suite 2915, 29th Floor, Two International Finance Centre, 8 Finance Street, Central, Hong Kong or by email to [email protected]. For specific enquiries relating to procedures for attending and voting at general meetings of the Company, please contact Ms. Zhang at (86 10) 5928 8178 or Mr. Cheung at (852) 3150 6310 or by e-mail to [email protected], or [email protected].

16. ADDITIONAL GENERAL INFORMATION

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

17. RECOMMENDATIONS

Your attention is drawn to (i) the letter from the Independent Board Committee set out on pages 65 to 66 of this circular which contains the recommendations of the Independent Board Committee to the Independent Shareholders regarding the proposed resolutions to approve, among other things, the Acquisition and Whitewash Waiver; and (ii) the letter from Platinum Securities set out on pages 67 to 120 of this circular which contains its advice to the Independent Board Committee and the Independent Shareholders in respect of the Acquisition and Whitewash Waiver.

Yours faithfully,

By order of the Board of

GOME ELECTRICAL APPLIANCES HOLDING LIMITED

Zhang Da Zhong

Chairman

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

The following is the text of the letter of recommendation, prepared for the purpose of incorporation in the circular, from the Independent Board Committee to the Independent Shareholders regarding the Acquisition and Whitewash Waiver.

==> picture [140 x 58] intentionally omitted <==

GOME ELECTRICAL APPLIANCES HOLDING LIMITED 國美電器控股有限公司[*]

(Incorporated in Bermuda with limited liability)

(Stock Code: 493)

24 December 2015

To the Independent Shareholders

Dear Sir or Madam,

MAJOR AND CONNECTED TRANSACTION IN RELATION TO THE ACQUISITION OF ARTWAY DEVELOPMENT LIMITED AND WHITEWASH WAIVER

We refer to the circular of the Company to the Shareholders dated 24 December 2015 (the “ Circular ”), in which this letter forms part. Capitalized terms used in this letter will have the same meanings as defined in the Circular unless the context otherwise requires.

We have been appointed by the Board as the Independent Board Committee to advise the Independent Shareholders on whether the (i) terms of the Acquisition Agreement are fair and reasonable so far as the Independent Shareholders are concerned and in the interests of the Company and the Shareholders as a whole; and (ii) Acquisition and the Whitewash Waiver are in the interests of the Company and the Shareholders as a whole.

We wish to draw your attention to the letter of advice from Platinum Securities, the Independent Financial Advisor, as set out on pages 67 to 120 of the Circular and the letter from the Board as set out on pages 6 to 64 of the Circular.

* For identification purpose only

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

Having considered the terms of Acquisition Agreement and the advice of Platinum Securities as stated in its letter of advice, we consider that the (i) terms of the Acquisition Agreement are fair and reasonable so far as the Independent Shareholders are concerned and in the interests of the Company and the Shareholders as a whole; and (ii) Acquisition and the Whitewash Waiver are in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend the Independent Shareholders to vote in favour of the ordinary resolutions to be proposed to approve the Acquisition and Whitewash Waiver.

Yours faithfully,

For and on behalf of the Independent Board Committee

Mr. Lee Kong Wai, Conway Independent Non-executive Director

Mr. Zhang Da Zhong * Mr. Lee Kong Wai, Conway Non-executive Director Independent Non-executive Director Mr. Ng Wai Hung Ms. Liu Hong Yu Independent Non-executive Director Independent Non-executive Director

Mr. Wang Gao

Independent Non-executive Director

Mr. Zhang Da Zhong is a member of the Independent Board Committee for providing a view and his recommendation regarding the Whitewash Waiver only.

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LETTER FROM PLATINUM SECURITIES

The following is the text of the letter of advice from the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders in respect of the Acquisition and the Whitewash Waiver for the purpose of incorporation into this circular.

==> picture [68 x 65] intentionally omitted <==

24 December 2015

To the Independent Board Committee and the Independent Shareholders

Dear Sir or Madam,

MAJOR AND CONNECTED TRANSACTION IN RELATION TO THE ACQUISITION OF ARTWAY DEVELOPMENT LIMITED AND WHITEWASH WAIVER

INTRODUCTION

We refer to our appointment as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders in respect of the Acquisition and the Whitewash Waiver (collectively, the “ Transaction ”) contemplated under the Acquisition Agreement. Details of the Transaction are contained in the Letter from the Board as set out in the circular of the Company dated 24 December 2015 (the “ Circular ”). Terms used in this letter shall have the same meanings as defined in the Circular unless the context requires otherwise.

The Board announced that on 17 July 2015 and as amended by supplemental agreements dated 24 July 2015, 28 October 2015 and 17 December 2015, the Company and the Vendor, entered into the Acquisition Agreement, pursuant to which the Company has conditionally agreed to purchase the Sale Shares, representing the entire issued capital of the Target, from the Vendor for HK$9,095,000,000.

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LETTER FROM PLATINUM SECURITIES

concert parties are interested being increased to 48.97% of the issued share capital of Company as enlarged by the issue of such Shares, on the assumption that 5,500,000,000 new Shares will be issued), as well as unlisted warrants exercisable within two years into new Shares (which if exercised in full will result in the percentage of Shares in which Mr. Wong and his concert parties are interested being further increased to 54.09% of the issued share capital of Company as enlarged by the issue of such Shares upon exercise, on the assumption that 2,500,000,000 Warrants exercisable into 2,500,000,000 new Shares will be issued).

In the absence of the Whitewash Waiver, the Vendor and Mr. Wong would be obligated to make a mandatory general offer under Rule 26 of the Takeovers Code for all the securities of the Company not already owned or agreed to be acquired by them or parties acting in concert with them as a result of the issue of the Consideration Shares and the Underlying Shares. An application has been made to the Executive for the Whitewash Waiver. The Whitewash Waiver, if granted by the Executive, would be subject to the approval of the Independent Shareholders at the Special General Meeting by way of poll.

BASIS OF OUR OPINION

In our capacity as the Independent Financial Adviser, our role is to advise the Independent Board Committee and the Independent Shareholders as to whether the Transaction is in the ordinary and usual course of business of the Company, the terms of the Transaction were agreed on normal commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned, and in the interests of the Company and the Shareholders as a whole; and to give independent advice to the Independent Board Committee.

In formulating our opinion, we have relied on the information and facts supplied to us by the Directors and/or management of the Company. We have reviewed, among other things: (i) the Acquisition Agreement; (ii) the audited annual report of the Group and the Target Group for the financial year ended 31 December 2013 (the “ 2013 Annual Report of the Group ” and “ 2013 Annual Report of the Target Group ”); (iii) the audited annual report of the Group and the Target Group for the financial year ended 31 December 2014 (the “ 2014 Annual Report of the Group ” and “ 2014 Annual Report of the Target Group ”); (iv) the unaudited report of the Group for the 6 months ended 30 June 2015 (the “ 2015 Interim Report of the Group ”) and the audited report of the Target Group for the 6 months ended 30 June 2015 (the “ 2015 Interim Report of the Target Group ”); and (v) the valuation report of the Warrants as prepared by Jones Lang LaSalle (the “ Warrant Valuation Report ”).

We have assumed that all information, facts, opinions and representations contained in the Circular and all information, statements and representations provided to us by the Directors and/or the management of the Company, on which we have relied, are true, complete and accurate in all material respects as of the date hereof and that the Independent Shareholders will be notified of any material changes by the Directors and/or the management of the Company as soon as possible. The Directors have confirmed that they take full responsibility for the contents of the Circular and have made all reasonable inquiries that no material facts have been omitted from the information supplied to us.

The Circular, for which the Directors collectively and individually accept full responsibility, 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, having

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LETTER FROM PLATINUM SECURITIES

made all reasonable enquiries, confirm that to the best of their knowledge and belief the information contained in the Circular is accurate and complete in all material respects and not misleading or deceptive, and there are no other matters the omission of which would make any statement in the Circular or the Circular misleading.

We have no reason to suspect that any material facts or information have been withheld or to doubt the truth, accuracy or completeness of the information of all facts as set out in the Circular and of the information and representations provided to us by the Directors and/or management of the Company. Furthermore, we have no reason to suspect the reasonableness of the opinions and representations expressed by the Directors and/or management of the Company, which have been provided to us. In line with normal practice, we have not, however, conducted a verification process of the information supplied to us, nor have we conducted any independent in-depth investigation into the business and affairs of the Group and the Target Group. We consider that we have been provided with sufficient information to reach an informed view and to provide a reasonable basis for our opinion, and we consider that we have taken sufficient and necessary steps on which to form a reasonable basis and an informed view for our opinion in compliance with Rule 13.80 of the Listing Rules.

During the past two years, Mr. Li Lan, for and on behalf of Platinum Securities Company Limited, signed the opinion letter from the independent financial adviser contained in the Company’s circulars dated 9 June 2015 in respect of continuing connected transactions. The past engagement was limited to providing independent advisory services to the independent board committee and the independent shareholders of the Company pursuant to the Listing Rules. Under the past engagement, Platinum Securities Company Limited received normal professional fees from the Company. Notwithstanding the past engagement, as at the Latest Practicable Date, we were independent from, and were not associated with the Company or any other party to the Transaction, or their respective substantial shareholder(s) or connected person(s), as defined under the Listing Rules and accordingly, are considered eligible to give independent advice on the Transaction. We will receive a fee from the Company for our role as the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders in relation to the Transaction. Apart from this normal professional fee payable to us in connection with this appointment, no arrangements exist whereby we will receive any fees or benefits from the Company or any other party to the Transaction or their respective substantial shareholder(s) or connected person(s), as defined under the Listing Rules.

As at the Latest Practicable Date, certain non-discretionary client accounts of Platinum Broking Company Limited, a broking company which is under the same control as Platinum Securities Company Limited, held in aggregate 35,000 Shares, which represent approximately 0.00021% of the Company’s total outstanding issued Shares. We do not consider these shareholding interests mentioned above would affect the objectivity of our advice, given the fact that (i) the interests so held are immaterial; (ii) neither our group nor our relevant employees directly or indirectly hold any shares, option, warrants or other equity related interests in any party related to the Transaction. Accordingly, we consider ourselves suitable to give independent financial advice to the Independent Board Committee and Independent Shareholders in respect of the Acquisition and the Whitewash Waiver.

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LETTER FROM PLATINUM SECURITIES

The Independent Board Committee, comprising Mr. Lee Kong Wai, Conway, Mr. Ng Wai Hung, Ms. Liu Hong Yu and Mr. Wang Gao and including, for the purpose of considering the Whitewash Waiver only, Mr. Zhang Da Zhong, has been established to advise the Independent Shareholders as to whether the terms of the Transaction were agreed on normal commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned and that the entering into the Transaction is in the interests of the Company and the Shareholders as a whole. In relation to the Whitewash Waiver, Mr. Zhang Da Zhong will sit as a member of the Independent Board Committee and will provide his view on the Whitewash Waiver together with other members of the Independent Board Committee.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In formulating and giving our independent financial advice to the Independent Board Committee and the Independent Shareholders, we have taken into account the following principal factors:

A. The Acquisition Agreement

1. Background of the Acquisition Agreement

1.1 Information on the Group

The Group is an omni-channel retailer of home appliances and consumer electronic products that booked approximately RMB60,359,843,000 in sales for 2014. The Group sells its products through physical stores, O2M micro shops, as well as through mobile terminals and e-commerce channels, that together constitute a seamless retail continuum. As at 30 June 2015, its network include a total of 1,213 flagship, standard and specialized stores in 310 cities.

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LETTER FROM PLATINUM SECURITIES

Set out below is the financial highlight of the Group’s consolidated financial statements in accordance with the International Financial Reporting Standards:

Table 1: Financial highlights of the Group

	As at			As at	As at
	31 December	31 December			30 June
	2013			2014	2015
	(RMB million)	_(RMB _	million)		(RMB million)
					(Unaudited)
Cash and cash equivalents	9,016			8,794	10,716
Total assets	39,324		44,077		42,912
Total shareholders’ equity	15,317		16,035		16,839
	For the year ended				For the 6
	31 December				months ended
	2013			2014	30 June 2015
	(RMB million)	_(RMB _	million)		(RMB million)
					(Unaudited)
Revenue	56,401		60,360		31,692
Profit for the year/period	677			1,018	525
Profit attributable to owners
of the parent	892			1,280	687

Source: 2013 Annual Report of the Group, 2014 Annual Report of the Group and 2015 Interim Report of the Group

According to the Group’s consolidated financial statements prepared in accordance with the International Financial Reporting Standards, the Group’s profit before tax and profit for the year for the financial year ended 31 December 2014 were approximately RMB1,580 million and RMB1,018 million, respectively; and the Group’s profit before tax and profit for the year for the financial year ended 31 December 2013 were approximately RMB1,195 million and RMB677 million, respectively. The Group’s net asset was approximately RMB16,839 million as at 30 June 2015.

1.2 Information on the Target Group

The Target Group is engaged in the retail sale of electrical appliances and consumer electronic products under the trademark “GOME Electrical Appliances” and related operations mainly in cities other than the designated cities of the PRC in which the Group already operates. Such business is currently already operated by the Group under management and purchasing arrangements in the manner described in the Company’s announcement dated 17 December 2012, subject to payment of management and purchasing fees to the Group.

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LETTER FROM PLATINUM SECURITIES

Table 2: Financial highlights of the Target Group

	As at			As at	As at
	31 December	31	December		30 June
	2013			2014	2015
	(RMB million)	_(RMB _		million)	(RMB million)
Cash and cash equivalents	1,513			1,082	959
Total assets	11,342			12,394	14,192
Total shareholders’ equity	68			362	618
	For the year ended				For the 6 months
	31 December				ended 30 June
	2013			2014	2015
	(RMB million)	_(RMB _	million)		(RMB million)
Revenue	19,611		20,992		10,858
Profit for the year/period	367			294	256

Source: 2013 Annual Report of the Target Group, 2014 Annual Report of the Target Group and 2015 Interim Report of the Target Group

According to the Target Group’s consolidated financial statements prepared in accordance with the International Financial Reporting Standards, the Target Group’s profit before tax and profit for the year for the financial year ended 31 December 2014 were approximately RMB400 million and RMB294 million, respectively; and the Target Group’s profit before tax and profit for the year for the financial year ended 31 December 2013 were approximately RMB468 million and RMB367 million, respectively. The Target Group’s net asset was approximately RMB618 million as at 30 June 2015 and after the dividend distribution by the Target Group to the Vendor of RMB560,000,000, the Target Group’s net asset value will be reduced by approximately 91% to approximately RMB58 million.

2. Industry Overview

2.1 Overview of the retail sales of electrical appliances and consumer electronic products market in China

In 2015, China has demonstrated a slowdown in economic growth to approximately 7%, along with a recent drop in inflation rate to 1.6% in July. In terms of macro policies, the PRC government has implemented various stimulus measures in recent years to maintain GDP growth above 7%, such as lowering the interest rate and reserve requirement ratio, which supported domestic consumption. As a result, the economy growth was stabilised. Exhibit 1 below depicts the total retail sales of consumer goods and the year-on-year (“YoY”) growth rate. In spite of increasing competition and slowing market growth, total retail sales of consumer goods continue to achieve new heights despite the challenges imposed to the industry.

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LETTER FROM PLATINUM SECURITIES

Exhibit 1: Total retail sales of consumer goods, 2010 – 2014

==> picture [340 x 180] intentionally omitted <==

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

30 20.00%
18.00%
25
16.00%
14.00%
20
12.00%
15 10.00%
8.00%
10
6.00%
4.00%
5
2.00%
-
0.00%
2010 2011 2012 2013 2014
Total retail sale of consumer goods (RMB trillion) YoY Growth (%)
----- End of picture text -----

Source: National Bureau of Statistics

Whilst the PRC government has targeted to maintain a stable GDP growth rate, it also aims to transform the PRC economy from a manufacture based economy to a consumption driven economy. In order to strengthen residents’ purchasing power, the government has implemented different policies to raise the urban employment rate, transform shanty towns, as well as land reforms in the third and fourth tier markets. Meanwhile, the government’s Internet Plus action plan promotes the integration between mobile Internet, cloud computing, big data and modern manufacturing industry, and drives the development of e-commerce, Industrial Internet Applications and Internet finance.

In our opinion, although the comparable store sales growth and total sales growth of the Target Group and the total retail sales in the PRC have slowed down, the overall outlook of both the PRC retail market and the Target Group remain positive, with growth rates well in excess of GDP growth rates. As one of the key PRC government economic policy goals is to transform the economic growth drivers by shifting from an export/investment oriented model towards a consumption/service oriented model, we consider the Target Group can benefit from the continuous growth of the home appliance and consumer electronics sector in the near future.

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LETTER FROM PLATINUM SECURITIES

2.2 Strong Retail Sales in Rural Area

Despite first and second tier markets still represent the main part of the PRC nationwide consumption, rural area’s consumption has been increasingly significantly over the past 5 years and the rural market’s prospect continues to improve. As most of the Target Group sales, support and logistic network is focused on the rural markets, the Group will benefit from greater exposure to this fast growing segment within the overall consumer electronics and household appliance retail business.

For 2014, the retail sales of consumer goods in urban areas was RMB22,637 billion, up by 11.8% YoY; while that in rural areas was RMB3,603 billion, up by 12.9% YoY. Exhibit 2 below illustrates the sharp increase in rural population’s income, which is potentially a major driver for increase in demand for household appliances and electronics equipments in the rural market. The per capita disposable income of rural households has experienced a high growth rate since 2010, reaching RMB10,489 in 2014 while the per capita disposable income of urban households increased to RMB28,844 in the same year. Exhibit 2 also shows that the rural households’ income have been increasing at a faster rate than the urban households’ income. In light of such strong growth, the retail industry has begun to devote a higher portion of their resources and efforts into this new market segment and continue to expand the retail sales network in rural areas.

Exhibit 2: Urban and rural population income, 2010 – 2014

==> picture [350 x 188] intentionally omitted <==

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

35,000 25.00%
30,000
20.00%
25,000
20,000 15.00%
15,000 10.00%
10,000
5.00%
5,000
- 0.00%
2010 2011 2012 2013 2014
Per Capita Disposable Income of Urban Households (RMB Yuan)
Per Capita Disposable Income of Rural Households (RMB Yuan)
Per Capita Disposable Income of Urban Households – YoY Growth (%)
Per Capita Disposable Income of Rural Households – YoY Growth (%)
----- End of picture text -----

Source: National Bureau of Statistics

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3. Reasons for and benefits of entering into of the Acquisition Agreement

3.1 Expanding store network

As noted from the letter from the Board in the Circular, the Acquisition will benefit the Group as it will widen the Group’s regional coverage. The Target Group’s retail stores’ coverage does not overlap with the Group’s current sales network except in Henan, Shanghai, Xiamen, Wuxi, Jiangxi and Xi’an. In particular, the Target Group’s sales network covers many markets such as Guangxi, Inner Mongolia and Anshan, providing the Group with immediate access to provinces with lower product penetration (with a much shorter timeframe organically into such areas).

As discussed with management of the Company, we understand that the Acquisition will enable the Group to have the optimal sales and distribution network, allowing the Company to cover almost the entire PRC market. In addition, the Group will optimise its physical stores location in the first-tier market, accelerate store expansion in the second-tier market, and improve channel penetration in the third and fourth tier markets.

Upon Completion, the Group network coverage will increase from 310 cities to 448 cities in the PRC and the number of retail stores in the first and second tier markets will increase from 698 to 979 and from 515 to 824, respectively. As disclosed in the Letter from the Board, the Group will own one of the largest electrical appliances and consumer electronic products retail store networks in the PRC with at least 1,803 stores up from 1,213 stores upon completion and the total usable area of the Group will increase from 3,934,000 sq.m. before the Acquisition to at least 5,742,000 sq.m. upon Completion. Exhibit 3 below depicts the impact on the Group’s retail sales network coverage upon Completion:

Exhibit 3: Network Coverage

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Target Group
Group
Overlapping Area
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LETTER FROM PLATINUM SECURITIES

We are of the view that the Acquisition will benefit the Group as it will provide a wider sales and distribution network coverage with increased exposure to the government’s support policies for rural areas and therefore lead to a better growth outlook.

3.2 Achieving economies of scale

The management of the Company believes that the Acquisition will enhance economies of scale and bargaining power in various aspects, such as procurement and logistics, enabling the Group to provide better value and services to its existing and future customers. Prior to the Acquisition, the Target Group and the Group co-operated in the procurement area as per the purchasing service agreement entered into in December 2012. However the Target Group has since then developed its own procurement function, as illustrated in the October 28 Announcement, without duplication with the Group’s procurement team since the administrative work and local procurement are already handled by the Target Group’s procurement team.

Therefore, after discussion with management of the Company, we consider that upon completion of the Acquisition, the Enlarged Group will have a larger procurement and logistics network which may lead to a more efficient management of its procurement process and logistic network. In addition, the Enlarged Group would be able to provide a wider range of products since currently certain products sold at the stores of the Target Group may not be available at the stores of the Group.

3.3 Realizing synergies

As discussed with the management of the Company, we expect the Group to realise the below synergies from the Acquisition:

(1) Strengthening its information system – By consolidating the Target Group’s store and having a larger coverage of different cities, the Group will be able to conduct more accurate market analysis for better corporate strategic decision making. In particular, the improved analytical tools will assist the Group in areas such as inventory management and positioning of logistic warehouses.
(2) Enhancing supply chain efficiency – the Acquisition will expand the Group’s distribution and logistics network and provide a better operation planning environment with the wider implementation of Enterprise Cooperation Platform (“ECP”), a system that connects the Group with its suppliers by automatically exchanging information on ordering, delivery, reconciliation and settlement.

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LETTER FROM PLATINUM SECURITIES

(3) Improving logistics and delivery services – by having a wider geographical presence, the Group will be able to set up more in-store pick up points for internet orders as well as enhancing logistic warehouse network coverage. The integration will allow the Group to expand its logistic network coverage to more than 600 counties, 2,500 villages and 45,000 towns with storage area reaching 3.02 million sq.m. As a result, the Group will be able to reduce constraints on logistics for deliveries to remote areas where it might not have been covered by its retail stores.

Furthermore, as discussed in the section 2.2 headed “ Strong Retail Sales in Rural Area”, it is understood that the rural markets are experiencing high income growth, making them the fastest growing segment in the retail market for consumer electronics and home appliances.

(4) Optimising after-sales services – the Target Group operates 795 after-sales service centers in 176 cities nationwide. Upon Completion, the Group will consolidate and restructure the after sales service team by standardising the quality of service and lowering the cost of after sales service. As noted from our discussion with the management of the Company, the Group targets to build communities network within a 5km radius of each physical store. This will enable the Group to optimise its sales service with full coverage in each market, building a stable customer relationship and enhancing the customers’ brand loyalty.
(5) Human resources – As mentioned above and upon Completion, the Group will have a more efficient after-sales service integration system, improved information system and enhanced logistics system. As a result the Group will benefit greatly from a higher level of automation, across functions and hence, improving the flexibility and deployment of human resources.

3.4 Reducing continuing connected transactions

Prior to the Acquisition, the Target Group has negotiated with the Group a) the management service agreement; and b) the purchasing service agreement, with annual caps. The Target Group and the Group also entered into certain logistics services agreements, after-sales services agreements, master merchandise purchase agreement and master merchandise supply agreements. As the Target Group will become a wholly-owned subsidiary of the Group upon Completion, the aforementioned services arrangements will no longer be required. As a result, connected transactions with Mr. Wong and his associates are expected to be significantly reduced and corporate governance of the Enlarged Group will also be improved as a consequence.

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LETTER FROM PLATINUM SECURITIES

In light of the above, we are of the view that the Acquisition is in line with the Group’s business strategy and in the interests of and beneficial to the Group.

We also note that on 29 July 2004 and 28 February 2006, Mr. Wong and the Company entered into non-competition undertakings to govern competition between the Group and the Non-listed GOME Group. Pursuant to the terms of the non-competition undertakings (i) the Group is restricted from carrying on retail business of electrical appliances and consumer electronics products by whatever means (whether through conventional retail stores or non-conventional modes of business (including online sales)) in areas where the Non-listed GOME Group operated the retail business of electrical appliances and consumer electronics products under the “GOME” brand name as at 3 June 2004; and (ii) reciprocally, the Non-listed GOME Group is restricted from carrying on the retail business of electrical appliances and consumer electronics products by whatever means (whether through conventional retail stores or non-conventional modes of business (including online sales)) in areas where the Group operated the retail business of electrical appliances and consumer electronics products under the “GOME” brand name as at 3 June 2004. In May 2012, pursuant to the subscription of a 40% interest in GOME-on-line by Mr. Wong and his associates, Mr. Wong has granted to the Group a waiver from compliance with the restriction set out in (i) above (excluding conventional mode of business). The effect was that the Group was able to operate its non-conventional modes of business via GOME-on-line with no geographical restriction.

Upon Completion, we consider that there will no longer be any competition issues between the Group and Mr. Wong and his associates in the retail business of electrical appliances and consumer electronics products under the “GOME” brand name.

Moreover, as Mr. Wong has already granted to the Group the waiver in relation to the competition in the non-conventional modes, the Enlarged Group will be able to operate its non-conventional modes of business via GOME-on-line with no geographical restriction. Therefore the interests of the Company, GOME-on-line and Mr. Wong are aligned and there will be minimal competing interest between the Company’s 60% interest in GOME-on-line and Mr. Wong’s 40% interest in GOME-on-line.

We note that GOME-on-line is currently a loss-making business and the Directors and the management team consider that the acquisition of the remaining 40% interest in GOME-on-line will reduce the Group’s profit, which is not in the interest of the Company and the Shareholders as a whole. The Target Group makes its sales through its offline channel. The remaining 40% interest in GOME-on-line is not owned by the Target Group but Mr. Wong and his associates.

4. Principal terms of the Acquisition Agreement

Date

: 17 July 2015

(as amended by supplemental agreements dated 24 July 2015, 28 October 2015 and 17 December 2015)

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LETTER FROM PLATINUM SECURITIES

Parties

: (a) The Company (as the purchaser);
(b) GOME Management Ltd., a company incorporated in Hong Kong (as the Vendor); and
(c) Shinning Crown Holdings Inc. (as the Guarantor of the Vendor’s obligations under the Acquisition Agreement).

Consideration

: The consideration will be satisfied at Completion by the allotment and issue, at the Issue Price, of Consideration Shares credited as fully paid, and HK$1,000,000,000 in cash and the issue of Warrants at HK$0.18 per Warrant credited as fully paid, which are exercisable into Underlying Shares at the initial exercise price of HK$2.15 per Underlying Share. Pursuant to the above, 5,500,000,000 Consideration Shares will be allotted and issued and 2,500,000,000 Warrants exercisable into 2,500,000,000 Underlying Shares will be issued. Based on the Company’s share price prior to the publication of the July Announcement, implied consideration for the Sale Shares is HK$9,095,000,000. Based on the audited consolidated net assets as shown in the audited consolidated statement of financial position of the Target Group as at 30 June 2015 as contained in Appendix II, the audited consolidated net assets as shown in such statement is RMB617,840,000 and not less than RMB570,000,000, therefore the consideration is not subject to any adjustment pursuant to the July Announcement.

As at the Latest Practicable Date, 國美電器零售有限公司 (GOME Electrical Appliances Retail Co. Ltd.) (“ GOME Retail ”), which is a member of the Target Group, is owed the following amounts (the “ Entrusted Loans ”) from the following companies which are not members of the Target Group and belong ultimately to Mr. Wong. The Entrusted Loans are unsecured unsubordinated entrusted bank loans provided by GOME Retail, as lender, to the relevant borrower company (as set out in the table below), as borrower, via various commercial banks. Repayment of the Entrusted Loans are obligations of the relevant borrower company to GOME Retail. The role of the commercial banks, as entrusted lenders, is limited to acting on the instruction of the lender and to release to the relevant borrower company the borrowing amount as instructed. Such arrangements were made in accordance with the General Rules on Loans which were promulgated by the People’s Bank of China in 1996, which provides that, an entrusted loan is a loan provided by a lender who funds the loan and determines the amount, term, interest rate, and terms of the loan, to a borrower through an entrusted lender, being a financial institution established in the PRC. Entrusted lenders only charge the relevant handling fees for releasing the loans and assume no other risks in relation to the loans.

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LETTER FROM PLATINUM SECURITIES

Borrower Entrusted Lender GOME Property Co., Ltd. China Bohai Bank GOME Property Co., Ltd. China Bohai Bank Changsha Xiandao Zhendi Property Development Co., Ltd. China Bohai Bank GOME Property Co., Ltd. China Merchants Bank GOME Property Co., Ltd. China Merchants Bank Total	Outstanding Amount Interest Rate Borrowing Date Repayment Date RMB million per Annum 400 7.2% 23 January 2015 22 January 2016 400 7.2% 28 January 2015 27 January 2016 240 6.4% 7 April 2015 6 April 2016 250 8% 14 May 2015 13 May 2016 250 8% 14 May 2015 13 May 2016 1,540

We have obtained and reviewed the terms of the agreements of the Entrusted Loans and noted that the interest rates of the Entrusted Loans range from 6.4% per annum to 8% per annum, with a weight average of 7.34%, and there is no security involved. Since the borrowers are engaged in the real estate business, we have looked at the borrowing costs from independent financial institutions of a few other real estate companies listed on the Main Board of Stock Exchange (such as Guangzhou R&F Properties Co., Ltd., Evergrande Real Estate Group Limited, Shimao Property Holdings Limited, SOHO China Limited, Dalian Wanda Commercial Properties Co., Ltd., China Resources Land Limited and China Vanke Co., Ltd.), which range from approximately 5.35% per annum to approximately 8.24% per annum with an average of 6.98% for their latest financial year with loan facilities including both secured and unsecured borrowings. Although, based on the reviewed sample of real estate companies, the majority of commercial loans granted to real estate companies are guaranteed by a collateral security, we consider that the Entrusted Loans terms are fair and reasonable as the related interest rates are on average higher than those of the reviewed sample and in line with the interest rate charged for unsecured borrowings to real estate companies in the same sample. Moreover, with reference to the announcement of the Company dated 17 December 2015 and the Third Supplemental Agreement, Shinning Crown Holdings Inc. and the Vendor undertook that they will procure that (i) any amount of the Entrusted Loans that will expire on or before the Completion Date will not be renewed and will be fully repaid in accordance with their respective terms and conditions; and (ii) the remaining amount of the Entrusted Loans that will expire after the Completion Date will be repaid in advance prior to the Completion Date irrespective of their relevant expiry dates and for any amount (including principal and accrued interests) of the Entrusted Loans that have not been repaid prior to Completion: (i) the Company has the right to set off the outstanding amount (including principal and accrued interests) with the cash component of the consideration for the Acquisition (i.e. HK$1,000,000,000); and (ii) for any remaining amount (including principal and accrued interests) that exceeds the cash component of the consideration for the Acquisition, will be settled by the Vendor in cash on the Completion Date. We are of the view that the Entrusted Loans terms and the unsecured nature of the Entrusted Loans are acceptable so far as the Independent Shareholders are concerned.

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LETTER FROM PLATINUM SECURITIES

Besides, we note that the Target Group net debt (approximately RMB2,230 million as of 30 June 2015) will have decreased by RMB1,261 million as of Completion, due to the repayment of the amounts due to and from related companies for approximately RMB1,261 million which occured before the Latest Practicable Date. Assuming repayment of the Entrusted Loans, the Target Group net debt will further be reduced by RMB1,540 million, with the Target Group financial position, assuming no other impact on its cash balance beside the two loan reimbursement mentioned above, exhibiting a net cash balance of approximately RMB571 million. On the other hand, the Target Group will generate lower interest income for approximately RMB112.96 million per annum, if the cash collected from the repayment of the Entrusted Loans is not used to repay any borrowings or does not generate any income. Based on the pro forma financial information of the Enlarged Group as set out in Appendix III to the Circular, the Enlarged Group has a net cash position of approximately RMB6,144 million as at 30 June 2015. After repayment of the Entrusted Loans, the net cash position of the Enlarged Group would improve to RMB7,684 million.

5. The Consideration

5.1 Basis of the Consideration

Pursuant to the Acquisition Agreement, the Company has conditionally agreed to purchase the Sale Shares, representing the entire issued capital of the Target, from the Vendor for HK$9,095,000,000 (the “Consideration”). The Consideration was determined after arm’s length negotiations between the Company and the Vendors with factors as set out under the section headed “Consideration” in the letter from the Board in the Circular.

The management of the Company did not consider engaging an independent valuer to value the Target Group because (i) management of the Company has a deep understanding of the business of the Target Groups as both the Group and the Target Group operate in the same industry and they are managed by the same management team under the management agreement; and (ii) comprehensive financial due diligence and legal due diligence have been conducted by professional parties. Therefore, we concur with the management of the Company that an independent valuation of the Target Group is not necessary to assess the fairness and reasonableness of the Transaction.

5.2 Analysis of the Consideration

We have assessed the fairness of the Consideration by performing three separate analysis: (i) contribution analysis; (ii) comparable companies analysis; and (iii) comparable transactions analysis.

(i) Contribution analysis

We have considered the relative financial contribution and implied relative valuation of the Target Group and the Group, making the appropriate adjustments to reflect their respective economic contribution into the Enlarged Group.

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LETTER FROM PLATINUM SECURITIES

Table 3: Analysis on the profit of the Target Group and the Group on an unadjusted basis

			6 months	12 months	6 months
	Year	ended	ended	ended	ended
	31 December		30 June	30 June	30 June
	2013	2014	2014	2015	2015
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
		(A)	(B)	(A)-(B)+(C)	(C)
Target Group Profit	366,908	293,922	145,817	403,991	255,886
Group Profit (Note)	892,475	1,279,770	692,611	1,274,082	686,923
Target Group Profit/
Group Profit	41.1%	23.0%		31.7%	37.3%

Note: The Group profit represents the Group’s profit for the year/period attributive to owners of the parent.

As illustrated in Table 3 above, for the years ended 31 December 2013 and 2014 and the 12 months and 6 months ended 30 June 2015, profit of Target Group as a ratio to profit of the Group ranges from 23.0% to 41.1% (the “Contribution Ratio Range”) with a contribution ratio of 31.7% for the 12 months ended 30 June 2015 (the “LTM Contribution Ratio”). The Consideration (HK$9,095,000,000) as a ratio to the implied market capitalization of the Group (HK$22,389,277,000, based on the closing price of the Shares and the number of the issued Shares as at the Latest Practicable Date) (the “Consideration/Market Capitalization Ratio”) is approximately 40.6%. We note that the Consideration/Market Capitalization Ratio is higher than the LTM Contribution Ratio but within the Contribution Ratio Range.

However, we consider that the contribution analysis above on an unadjusted basis may not reflect the underlying performance of the Target Group and the Group. We intend to adjust the profit of the Target Group and the Group on the following basis and base such adjustments on the rationale presented below.

Adjustments for the profit of the Target Group and the Group and the underlying rationale

We noted that the profit attributable to owner of the parent of the Target Group represents profits after management fee and purchasing service fee have already been paid to the Group under the current management and purchasing service agreements. In particular, the Target Group is managed by the same management team of the Group for purpose of unified brand building, market information exchange and resources sharing. For these services the Group charged the Target Group a management fee, subject to a cap on the management fee of RMB100 million for each of the financial year ending 31 December 2013, 2014 and 2015. The Group also provided purchasing services to the Target Group and charged the Target Group a fee, subject to a cap on the purchasing service fee of RMB150 million for each of the financial year ending 31 December 2013, 2014 and 2015. The Target

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Group and the Group first entered into the purchasing service agreement in 2004, pursuant to which the Group charged the Target Group a fee at the rate of 0.9% of the revenue generated from the sales of electrical appliances and consumer electronics products of the Target Group to allow the Target Group to leverage the Group’s procurement scale during negotiation to secure more favorable terms given that, the Target Group was still at an earlier stage of development and was relatively subscale when compared with the Group.

We noted that the Target Group’s revenue amounted to more than one-third of the revenue of the Group in each of the two years ended 31 December 2014 and the 6 months ended 30 June 2015, and hence the Target Group now commands a much larger procurement scale as compared to when the purchasing service agreement was first agreed. Therefore, we concur with the management of the Company that the Target Group has now achieved critical procurement size even when considered on a standalone basis. Moreover, we understand from the management of the Company that the Target Group has established its own procurement capability and is capable to procure on an individual and independent basis without any reliance on the Group especially for regional procurement in areas in which it operates. As at 30 June 2015, the Target Group employed 661 staff in the procurement division. The Group believes that, based on the current procurement scale and the capability of the Target Group, the Target Group would have secured substantially similar terms with suppliers in lieu of the purchasing service agreement in the most recent financial periods without incurring additional administrative costs.

We have discussed with the management of the Company in relation to the purchasing service fee and understand that procurement can be categorized into centralized procurement and local procurement.

For centralized procurement (approximately 30%-40% of the total procurement value), the procurement teams from both the Group and the Target Group negotiate as one single entity with the relevant suppliers, most of which are large consumer electronic groups such as Haier, Gree, Apple, Midea and Samsung. The purchasing terms offered by these sizeable consumer electronics groups are usually predefined and standard for all distributors that qualified, in terms of nationwide purchasing size, on a given market. Therefore, given the procurement size of the Target Group of approximately RMB15 billion each year since year 2012 (only the Group, Suning and JD.com have a similar procurement scale in home appliance and consumer electronic products in the China market), the Target Group would have secured substantially similar terms with these suppliers in lieu of the purchasing service agreement in the past 3 years.

For the local procurement (60%-70% of total procurement value), the procurement team of the Target Group has been independently conducting most of the negotiation with the local suppliers. As such, the Target Group would have secured the same terms with local suppliers had the purchasing service agreement with the Group not been implemented.

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For the costs in relation to procurement, we understand from the management of the Company that it mainly includes salary expenses for the procurement staff and travelling expenses when procurement staffs travel to negotiate with suppliers. We concur with the management of the Company that there will be minimal additional costs for the Target Group had the purchasing service agreement with the Group not been implemented because: (i) the administrative work in relation to the Target Group’s purchasing is already handled by the procurement staff of the Target Group with no contribution from the Group, therefore the Target Group does not need to hire extra procurement staffs to do the administrative work as compared to the current situation; and (ii) the procurement staffs of the Target Group have been travelling with the procurement team of the Group to negotiate with suppliers and if the purchasing service agreement with the Group had not been implemented, the Target Group would still incur the travelling expenses.

Moreover, the Target Group’s procurement team has been growing over the years and as at 30 June 2015, the Target Group employed 661 staff in the procurement division, who are responsible for most of the administrative work for both local and centralized procurement of the Target Group, hence minimal additional administrative cost would have been incurred in relation to the purchasing process had the purchasing service agreement with the Group not been implemented. As a reference, we also note that the Group employs approximately 1,120 staff in its procurement division. We consider that, after taking into account the respective purchasing amount of the Target Group and the Group, the relative size of the procurement team of the Target Group is comparable to the size of the procurement team of the Group. As such, we also concur with the management of the Company that the procurement team of the Target Group is sizeable enough to support the Target Group purchasing activities on a stand-alone basis, with no additional administrative cost to be incurred had the purchasing service agreement with the Group not been implemented.

With reference to the announcement of the Company dated 10 November 2010, the Company’s controlling Shareholder announced the intention not to terminate the then existing intra-group agreements between certain members of the Group and certain members of the unlisted group which trades under the GOME brand and is ultimately owned and controlled by Mr. Wong.

In 2012, consistently with the announcement made on 10 November 2010, the Company and the Target Group proceeded with the renewal of the intra-group agreement (including the Purchasing Service agreement) for the following reasons: (i) the intention not to terminate any of the intra-group agreements had already been announced on 10 November 2010 by the Company’s controlling shareholder; and (ii) the retail market was in a downturn in 2012 and the resulting uncertainty would not give the Target Group the visibility to re-negotiate the purchasing service arrangement.

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Consistently with the previous purchasing service agreements, the Group charged the Target Group a purchasing service fee of 0.9% of the revenue generated from the sales of electrical appliances and consumer electronics products (excluding value added tax) of the Target Group, subject to a cap on the purchasing service fee of RMB150 million for each financial year in the renewed purchasing service agreement entered into in December 2012. At the time of renewing the purchasing service agreement in December 2012, the Target Group did not take adequately into account the factors that the procurement team of the Target Group had already achieved a procurement scale sizeable enough to obtain similar terms with supplier without the purchasing service from the Group and the procurement team of the Target Group had become sizeable enough to support the Target Group’s purchasing activities on a stand-alone basis.

However, as there was no contractual mechanism in place to adjust for the actual utilization of such purchasing arrangement, the Target Group had to continue to pay the purchasing service fee to the Group at the annual cap of RMB150 million for the period 2013-2015, irrespective of the Target Group having reached independence from a procurement perspective during the same period.

As per our discussion with the management of the Company and the Target Group, both parties have reached a preliminary agreement to renew the intra-group agreements with the exception of the purchasing service agreement, which will be terminated at the end of 2015.

As such, we have analyzed the underlying financial performance and earning capability of the Target Group by excluding the after-tax purchasing service fee, without taking into consideration replacement costs and we do not consider it necessary to adjust for any additional expense that would have been incurred if the Target Group had undertaken the procurement services directly and not through the Group. The Table 4 below illustrates the profits contribution for the Target Group and the Group excluding the after-tax purchasing service fee, without taking into consideration replacement costs, (the “Adjusted Profit”) for the years ended 31 December 2013 and 2014 and for the 12 months and 6 months ended 30 June 2015, assuming a 25% tax rate on the purchasing service fee.

We also note that the parties have agreed for the purpose of the Completion that all the distributable profit of the Target as shown in its audited consolidated accounts as at 30 June 2015 will be distributed by the Target Group to the Vendor as a dividend provided that such dividend shall not exceed RMB560,000,000 (the “Dividend”). Any distributable profits exceeding such amount shall not be distributed and shall be retained by the Target.

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Given that the distribution of the Dividend will alter the capital structure of the Target Group but not its underlying operational structure (the only impact on the Target Group financials being a lower net value of the shareholder equity, the additional debt incurred to pay out the Dividend and the additional interest expense of such debt), we have adjusted our contribution analysis and comparable companies analysis below and accordingly reduced the profit of the Target Group by the after tax impact of such additional interest expense. In our analysis we have increased the Target Group bank borrowings by RMB560,000,000 from 1 January 2013 to reflect the higher borrowings that the Target Group would have recorded in its financial statements had the payment of the Dividend occurred at the beginning of the review period (this assumption is more conservative than assuming that the Dividend would be paid out using existing cash reserves). As such, we are retroactively adjusting the Target Group earnings for the two years ended 31 December 2014 and 6 months ended 30 June 2015, to reflect the Target Group earnings as if the Dividend was paid on 1 January 2013 and therefore this adjustment makes the timing of the Dividend irrelevant.

We have then taken into account the additional finance costs (after tax) that the Target Group would have incurred in the same scenario, to reflect the more levered capital structure of the Target Group after Completion. For the purpose of this adjustment, we have assumed a 7% interest rate which is based on the Target Group’s historical borrowing costs.

Lastly, we note that both the Target Group and the Group recorded net losses in the year ended 31 December 2012 when the home appliance industry saw the first negative sales growth since 2007. As 2012 was a challenging year for the whole home appliance industry and both the Group and the Target Group recorded a loss in that year, a profit contribution analysis for 2012 would not be meaningful. Therefore we have compared the earnings of the Target Group and the Group since 2013, i.e. 2013, 2014 and the first half of 2015.

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Table 4: Analysis on the Adjusted Profit of the Target Group and the Group

			6 months	12 months	6 months
	Year	ended	ended	ended	ended
	31 December		30 June	30 June	30 June
Adjusted Profit	2013	2014	2014	2015	2015
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
		(A)	(B)	(A)-(B)+(C)	(C)
Target Group Profit	366,908	293,922	145,817	403,991	255,886
Pre-tax purchasing service fee	150,000	150,000	93,862	152,676	96,538
Add after-tax purchasing
service fee	112,500	112,500	70,397	114,507	72,404
Dividend related pre-tax
interest expense(1)	39,200	39,200	19,600	39,200	19,600
Subtract Dividend related
after-tax interest expense(1)	29,400	29,400	14,700	29,400	14,700
Adjusted Target Group Profit	450,008	377,022	201,514	489,098	313,590
Group Profit	892,475	1,279,770	692,611	1,274,082	686,923
Pre-tax purchasing service fee	150,000	150,000	93,862	152,676	96,538
Subtract after-tax purchasing
service fee	112,500	112,500	70,397	114,507	72,404
Adjusted Group Profit	779,975	1,167,270	622,214	1,159,575	614,519
Adjusted Target Group Profit/
Adjusted Group Profit	57.7%	32.3%		42.2%	51.0%

Note 1: Dividend related pre-tax interest expense is calculated by multiplying the amount of the Dividend of RMB560,000,000 by the assumed interest rate of 7%. Dividend related after-tax interest expense is derived after subtracting the 25% tax impact on Dividend related pre-tax interest expense.

As shown in Table 4 above, for the years ended 31 December 2013 and 2014 and the 12 months and 6 months ended 30 June 2015, the Adjusted Profit of Target Group as a ratio to the Adjusted Profit of the Group ranges from 32.3% to 57.7% (the “Adjusted Contribution Ratio Range”) with a contribution ratio of 42.2% for the 12 months ended 30 June 2015 (the “Adjusted LTM Contribution Ratio”). The Consideration (HK$9,095,000,000) as a ratio to the adjusted market capitalization of the Group (HK$22,538,291,000 – based on the closing price of the Shares and the number of the issued Shares as at the Last Trading Day adjusted by the after-tax purchasing service fee multiplied by the P/E of the Group as at the Last Trading Day) (the “Adjusted Consideration/Market Capitalization Ratio”) is approximately 40.4%. We note that the Adjusted Consideration/Market Capitalization Ratio is below the Adjusted LTM Contribution Ratio and within the Adjusted Contribution Ratio Range, which is favourable to the Group so far as the Independent Shareholders are concerned.

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Finally, we note that the profit contribution analysis illustrated above does not adjust the Target Group contribution for any liquidity discount that might have been applied when considering the unlisted status of the Target Group assets in comparison with the listed nature of the Shares being received as consideration by the Vendor. However, we are of the view that the difference between the Adjusted LTM Contribution Ratio (42.2%) and the Adjusted Consideration/Market Capitalization Ratio (40.4%) is enough to compensate for any liquidity discount applicable to the Target Group contribution.

In light of the above, we consider that, as indicated by the contribution analysis, the Consideration fairly reflects the economic contribution of the Target Group and is therefore fair and reasonable to the Company and the Shareholders as a whole.

(ii) Comparable companies analysis

As stated in the section headed “Industry Overview”, China is experiencing a slowdown in economic growth in 2015. However, we consider that the Target Group, together with other companies in the home appliance and electronic consumer products industry, may still benefit from the PRC government’s stimulus policies which aim to transform the economy toward consumption-oriented model. In the following analysis, we will compare the valuation of the Target Group with other companies in the same industry, all of which are exposed to the same marketdynamics.

In assessing the fairness and reasonableness of the Consideration, we have first looked at the Target Group against a number of comparable companies by examining a number of metrics which are commonly used to assess the financial valuation of a company engaged in retailing of home appliances and consumer electronic products:

(a) price-to-earnings ratio (“P/E”);
(b) price-to-sales ratio (“P/S”); and
(c) price-to-book ratio (“P/B”).

Our selection criteria for each of the comparable companies are as follows:

(a) listed on the main board of the Stock Exchange;
(b) principally engaged in the retail distribution of home appliances and consumer electronics products in the PRC; and
(c) market capitalisation above HK$50 million, taking into account the NAV of the Target Group of RMB58 million after distribution of the Dividend.

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LETTER FROM PLATINUM SECURITIES

As such, in accordance with our selection criteria above, we have reviewed the following two comparable companies (the “Comparable Companies”), namely Huiyin Smart Community Co., Ltd. (“Huiyin”) and Haier Electronics Group Co., Ltd. (“Haier”) . To the best of our endeavours in selecting the comparables, the list of Comparable Companies below is an exhaustive list of companies selected based on our above-mentioned selection criteria.

We note that Huiyin is engaged in both retailing and bulk-distribution of home appliances and consumer electronic products while the Group and the Target Group are positioned as omni-channel retailer of home appliances and consumer electronic products. We consider that both the Target and Huiyin are active in the downstream distribution of home appliances and consumer electronic products industry, which includes retailing and bulk-distribution. Being exposed to the same market dynamics of the Target Group, we therefore consider that the valuation of Huiyin provides a reasonable reference in determining the fairness of the Consideration.

Despite the fact that only two Comparable Companies meet our selection criteria, we are of the view that since the two Comparable Companies are the most comparable companies to the Target Group, they are sufficient to provide a benchmark in valuing the Target Group.

Table 5 – Comparable Companies analysis on an unadjusted basis

Company		Market
Name	Stock Code	capitalisation	P/E	P/S	P/B
		(HK$ billion)	(times)	(times)	(times)
		(Note 1)	(Note 2)	(Note 3)	(Note 4)
Huiyin	1280 HK	1.40	17.24	0.40	1.05
Haier	1169 HK	40.78	12.54	0.49	2.27
*Average*			14.89	0.45	1.66
*Maximum*			17.24	0.49	2.27
*Minimum*			12.54	0.40	1.05
The Target
Group			17.77	0.33	124.10

Source: the Circular, the respective companies’ latest annual report and interim report

Exchange rates of HK$1.00 = RMB0.78924 is applied in the analysis.

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LETTER FROM PLATINUM SECURITIES

Notes:

(1) The market capitalisation information is based on the share price and number of issued shares of the respective companies as at the Latest Practicable Date. The above reported Bloomberg ratio were calculated on a last 12 months (“LTM”) basis.
(2) P/E of the Comparable Companies is calculated by dividing the market capitalisation of the Comparable Companies by the LTM profit attributable to shareholders of the Comparable Companies. P/E of the Target Group is calculated by dividing the Consideration by the profit of the Target Group for the 12 months ended 30 June 2015.
(3) P/S of the Comparable Companies is calculated by dividing the market capitalisation of the Comparable Companies by the LTM revenue of the Comparable Companies. P/S of the Target Group is calculated by dividing the Consideration by the LTM revenue of the Target Group.
(4) P/B of the Comparable Companies is calculated by dividing the market capitalisation of the Comparable Companies by the total equity of the Comparable Companies as at 30 June 2015. P/B of the Target Group is calculated by dividing the Consideration by the total equity of the Target Group as at 30 June 2015 net of the Dividend.

As shown in Table 5, (i) the P/E multiple of the Comparable Companies ranged from approximately 12.54 times to 17.24 times (the “Comparable Companies P/E Range”) with an average of approximately 14.89 times (the “Comparable Companies P/E Average”); and (ii) the P/S multiple of the Comparable Companies ranged from approximately 0.40 times to approximately 0.49 times (the “Comparable Companies P/S Range”) with an average of approximately 0.45 times (the “Comparable Companies P/S Average”).

As implied by the Consideration, we note that: (i) the P/E of Target Group of approximately 17.77 times is above the Comparable Companies P/E Average and out of the Comparable Companies P/E Range; but (ii) the P/S of the Target Group of approximately 0.33 times is below the Comparable Companies P/S Average and below the lower end of the Comparable Companies P/S Range.

We note from Table 5 above that the P/B multiple of the Comparable Companies ranged from approximately 1.05 times to 2.27 times (the “Comparable Companies P/B Range”) with an average of approximately 1.66 times (the “Comparable Companies P/B Average”) and the implied P/B of the Target Group of 124.10 times is substantially higher than the Comparable Companies P/B Range. Also, the Consideration represents a premium of approximately 10.62 times over the net asset value (“NAV”) of the Target Group as at 30 June 2015 and a premium of approximately 123.10 times over the NAV of the Target Group after distribution of a dividend to the Vendor, which shall not exceed RMB560,000,000. However, we consider it neither appropriate nor common to use P/B or NAV to value a company which is principally engaged in retailing of home appliances and consumer electronic products as discussed in the below paragraph.

We also note that as the Dividend will be distributed to the Vendor before Completion, the total equity of the Target Group will be further reduced to RMB58 million. However, we consider that it is fairly common in the retailing industry to have companies with very limited investment capital requirements for the following

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LETTER FROM PLATINUM SECURITIES

reasons: (i) companies in the retailing sector usually operate through an asset-light model which leads to minimal fixed assets investments; and (ii) the supplier payable balance is usually larger than the required investment in current assets. As such, the net asset value is normally not a good indicator of earnings potential and shareholder value for a company active in the retailing industry and it is therefore neither appropriate nor common to use P/B to value a company which is principally engaged in retailing of home appliances and consumer electronic products.

(iii) Comparable transactions

Although, as stated in the Letter from the Board in the Circular, no control premium should be applied to the Transaction, as an additional check, we have also attempted to benchmark the terms of Transaction with transactions which are comparable to the Acquisition (the “Comparable Transaction”) as a supplement to the Comparable Companies analysis. As such, we have set the following criteria for selecting comparable transactions:

(a) Transaction target principally in the retail distribution of home appliances and consumer electronics products in the PRC;
(b) Transaction value above HK$50 million; and
(c) Transaction completed in the three years preceding the Latest Practicable Date which is commonly used for comparable transactions analysis purpose.

To the best of our endeavours in selecting the comparables, the list of Comparable Transaction is an exhaustive list of transactions selected based on our above-mentioned selection criteria.

Adopting the above mentioned selection criteria, we have only identified one Comparable Transaction, i.e. Alibaba Group Holdings Ltd. (“Alibaba Group”) Acquisition of a 19.9% equity interest in Suning Commerce Group Co., Ltd. (“Suning”) at a consideration of RMB28.3 billion, as announced in August 2015. The P/E of the Comparable Transaction (calculated by dividing the subscription price for the shares of Suning by the earnings per share of Suning for the year ended 31 December 2014) is 129.71 times and the P/S of the Comparable Transaction (calculated by dividing the subscription price for the shares of Suning by the revenue per share of Suning for the year ended 31 December 2014) is 1.03 times.

We note that the P/E and P/S of the Comparable Transaction is substantially higher than the implied P/E and P/S of the Target Group as implied by the Consideration since Suning is listed in Shanghai stock market which has different market conditions as compared to the Hong Kong market. However, despite the Suning transaction involve a direct competitor of the Target Group, we note that the transaction might not be fully comparable to the Transaction as it relates to the acquisition of shares not traded on the Hong Kong market and such premium paid by Alibaba Group may also represent (i) the value for strategic alliance between Suning and Alibaba; and (ii) premium for listing status of Suning.

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LETTER FROM PLATINUM SECURITIES

As such, the Comparable Transaction selection cannot be used as the basis for assessing the fairness and reasonableness of the Consideration.

In light of (i) the Adjusted Consideration/Market Capitalization Ratio 40.4% being lower than the Adjusted LTM Contribution Ratio 42.2% and such difference being enough to compensate for any liquidity discount applicable to the Target Group contribution; and (ii) although the implied P/E of the Target Group being higher than the Comparable Companies P/E Average, the implied P/S of the Target Group is lower than the Comparable Companies P/S Average and below the lower end of the Comparable Companies P/S Range, and taking also into account other factors such as general market condition of the electrical appliances and consumer electronic products market in China and benefits of entering into of the Acquisition Agreement, we are of the view that the Consideration is fair and reasonable to the Company and Shareholders as a whole despite that (i) the Consideration is at a premium of approximately 123.10 times over the NAV of the Target Group after distribution of the Dividend; and (ii) without adjustment to the profit of the Group and the Target Group, the Consideration/Market Capitalization Ratio is higher than the LTM Profit Contribution Ratio which indicates the Consideration is higher than what would be expected based on the Target Group’s profit contribution to the Group.

For illustration purpose only, the consideration would be valued at (i) approximately HK$122 million by multiplying the NAV of the Target Group of approximately RMB58 million after distribution of the Dividend by the Comparable Companies P/B Average; (ii) approximately HK$7,622 million by multiplying the unadjusted profit of the Target Group for the 12 months ended 30 June 2015 by the Comparable Companies P/E Average; (iii) approximately HK$7,099 million by multiplying the LTM Contribution Ratio by the market capitalization of the Group as at the Latest Practicable Date; or (iv) approximately HK$9,506 million by multiplying the Adjusted LTM Contribution Ratio by the adjusted market capitalization of the Group as at the Last Trading Day.

6. The Issue Price

The Issue Price of HK$1.39 for each Consideration was determined after arm’s length negotiations between the Company and the Vendors, and represents:

(a) a discount of approximately 4.79% from HK$1.46, the closing price of the Shares on the Stock Exchange on the Last Trading Day;
(b) a premium of approximately 1.46% from HK$1.37, the average closing price of the Shares on the Stock Exchange for the last 10 full trading days up to and including Last Trading Day;
(c) a premium of approximately 0.72% from HK$1.38, the closing price of the Shares on the Stock Exchange on the Last Practicable Date;
(d) a discount of approximately 0.36% from HK$1.40, the average closing price of Shares on the Stock Exchange for the last 10 full trading days up to and including the Last Practicable Date;

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LETTER FROM PLATINUM SECURITIES

(e) a premium of approximately 11.20% to the unaudited net asset value of the Group of approximately RMB0.99 (equivalent to approximately HK$1.25) per Share as at 30 June 2015; and
(f) a premium of approximately 15.83% to the audited net asset value of the Group of approximately RMB0.95 (equivalent to approximately HK$1.20) per Share as at 31 December 2014.

We have enquired the management of the Company and noted that the Issue Price was determined after arm’s length negotiations between the parties to the Acquisition Agreement with reference to, among other things, (i) prevailing market prices of the Shares; (ii) the financial performance of the Group; and (iii) the current market conditions.

(i) Analysis of the Share price

The Board announced on 26 July 2015, that the Company and the Vendor entered into the Acquisition Agreement on 17 July 2015 in relation to the Acquisition of the entire issued capital of the Target Group. The following share price chart depicts the share price movement for the 12 months before the Last Trading Day up to and including the Latest Practicable Date (the “Review Period”):

Exhibit 4 – Historical Share price

==> picture [374 x 228] intentionally omitted <==

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

3
Last Trading Day before the suspension
of the trading in the Shares prior to the
date of the Acquisition Agreement
2.5
2
1.5 Issue Price of
HK$1.39
1
0.5
0
01/07/201401/08/201401/09/201401/10/201401/11/201401/12/201401/01/201501/02/201501/03/201501/04/201501/05/201501/06/201501/07/201501/08/201501/09/201501/10/201501/11/201501/12/2015
Share Price (HK$)
----- End of picture text -----

Source: Bloomberg

The chart above depicts the closing prices of the Company from 17 July 2014 up to the Latest Practicable Date. During the Review Period, the Company’s share price has traded at an average of approximately HK$1.37. In particular, the Company’s share price has greatly benefited from the strong stock market sentiment during April to June as a result of PRC Government’s various stimulus policies. Subsequent to the surge, the stock market experienced a significant downturn and the Company’s share price has dropped to HK$1.17.

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LETTER FROM PLATINUM SECURITIES

After the announcement of the Acquisition by the Company dated 26 July 2015, the Shares were traded between HK$1.10 to HK$1.50 towards the end of the Review Period. We believe that such fluctuation of the Share price was mainly in line with stock market performance.

(ii) Issuance Comparables

In order to assess the reasonableness of the Issue Price, we have reviewed the transactions announced by companies listed on the Stock Exchange in which the underlying acquisitions involved the issuance of consideration shares but excluding transactions involving the issuance of shares which cannot be ordinarily traded on the Stock Exchange and transactions involving reverse takeover cases (the “Issuance Comparables”). We consider these selection criteria as reasonable since the Acquisition involves the issuance of ordinary Shares as part of the Consideration and the Acquisition is not a reverse takeover case.

The Issuance Comparables have been selected exhaustively based on the above criteria, and have been identified, to the best of our endeavours, in our research through public information.

As the Issuance Comparables involve the issuance of the consideration shares as part of the consideration, we believe these Issuance Comparables would provide a benchmarking comparison for our analysis as factors taken into account in determining the issue price of the consideration shares issued under such transactions provide an indication of the premium over/discount to the market price of the relevant shares. The six months period provides relevant samples of Issuance Comparables for the purpose of our analysis because these transactions were announced close to the date of the Acquisition Agreement, under similar market conditions.

We note that the companies involved in the Issuance Comparables are not engaged in the same principal business of the Company and they are of different market capitalizations, the targets involved are of different nature and size, and the terms of issuance of the consideration shares of each of the transactions may be subject to their respective circumstances such as different financial standing or business performance. However, since the Issuance Comparables were transacted at a time close to the date of the Acquisition Agreement under similar market conditions, we are of the view that the Issuance Comparables, although not to be used in isolation in determining the fairness and reasonableness of the Issue Price, nevertheless can provide a general reference basis to the Independent Shareholders as they can reflect recent market trends of the terms used in issuing shares as full or partial settlement of consideration. As such we consider that the Issuance Comparables are fair and representative samples.

As the Issue Price could be determined at either a premium or a discount to the relevant benchmark prices, we think it is meaningful to average both premium and discount data to determine whether the consideration shares related to the above mentioned transactions were issued, on average, at a level below or above the relevant benchmark price.

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LETTER FROM PLATINUM SECURITIES

Table 6 – Issuance Comparables analysis on issue price

			Premium/(discount) of	Premium/(discount) of
			the issue price over/(to)
			the average closing price		of
				Last 5	Last 10
			Last trading	consecutive	consecutive
			day prior	trading days	trading days
			to/on	prior to/on	prior to/on
			the date of	the date of	the date of
Date of			the relevant	the relevant	the relevant
Announcement	Company Name	Stock Code	announcement	announcement	announcement
16-Feb-15	Enterprise Development	1808 HK	(15.03%)	(13.56%)	(11.38%)
	Holdings Limited
27-Feb-15	China Fire Safety	445 HK	(40.30%)	(39.39%)	(38.46%)
	Enterprise Group
	Limited
10-Mar-15	Madex International	231 HK	(9.91%)	(9.50%)	(9.50%)
	(Holdings) Limited
24-Mar-15	China Overseas Land &	688 HK	10.80%	14.50%	15.20%
	Investment Ltd.
01-Apr-15	China Precious Metal	1194 HK	26.67%	24.59%	35.71%
	Resources Holdings Co.,
	Ltd.
10-Apr-15	Heritage International	412 HK	(46.34%)	(18.52%)	1.54%
	Holdings Limited
15-Apr-15	Shougang Concord Grand	730 HK	(7.87%)	(6.18%)	(3.07%)
	(Group) Limited
15-Apr-15	Greater China Holdings	431 HK	(20.15%)	(21.31%)	(8.96%)
	Limited
24-Apr-15	PetroAsian Energy	850 HK	29.60%	25.58%	25.58%
	Holdings Limited
28-Apr-15	Tongda Group Holdings	698 HK	(5.29%)	0.00%	1.42%
	Limited
08-May-15	HC International, Inc.	2280 HK	(23.70%)	(26.34%)	(29.75%)
11-May-15	Mission Capital Holdings	1141 HK	(19.35%)	(18.30%)	(17.76%)
	Limited
15-May-15	Sinoref Holdings Limited	1020 HK	(31.91%)	(23.99%)	(27.27%)
20-May-15	Shunfeng International	1165 HK	4.42%	2.56%	2.36%
	Clean Energy Limited
23-May-15	CNQC International	1240 HK	(19.60%)	(20.50%)	(19.10%)
	Holdings Limited
09-Jun-15	Renhe Commercial	1387 HK	(50.00%)	(44.14%)	(32.40%)
	Holdings Company
	Limited (Note 1)
17-Jun-15	Huajun Holdings Limited	377 HK	30.84%	47.68%	53.17%
24-Jun-15	Fullshare Holdings Limited	607 HK	(11.18%)	(0.44%)	2.66%

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LETTER FROM PLATINUM SECURITIES

			Premium/(discount) of	Premium/(discount) of
			the issue price over/(to)
			the average closing price		of
				Last 5	Last 10
			Last trading	consecutive	consecutive
			day prior	trading days	trading days
			to/on	prior to/on	prior to/on
			the date of	the date of	the date of
Date of			the relevant	the relevant	the relevant
Announcement	Company Name	Stock Code	announcement	announcement	announcement
25-Jun-15	Feiyu Technology	1022 HK	0.00%	(2.70%)	(5.00%)
	International Company
	Ltd.
10-Jul-15	Genvon Group Limited	2389 HK	(2.44%)	14.29%	(6.65%)
16-Jul-15	Blue Sky Power Holdings	6828 HK	0.00%	(1.27%)	0.78%
	Limited
		Maximum	30.84%	47.68%	53.17%
		Minimum	(50.00%)	(44.14%)	(38.46%)
		Average	(9.56%)	(5.57%)	(3.38%)
		Issue Price	(4.79%)	(3.47%)	1.46%

Source: Stock Exchange and respective announcements

As noted in Table 6 above, the issue prices of the Issuance Comparables ranged from: (i) a discount of 50.00% to a premium of 30.84% to the respective closing prices of their shares on the last trading days (the “Market Range I”) with an average discount of 9.56% (the “Market Average I”); (ii) a discount of 44.14% to a premium of 47.68% to the respective average closing prices of their shares on the last 5 consecutive trading days (the “Market Range II”) with an average discount of 5.57% (the “Market Average II”); and (iii) a discount of 38.46% to a premium of 53.17% to the average closing prices of their shares on the last 10 consecutive trading days (the “Market Range III”), with an average discount of 3.38% (the “Market Average III”), respectively.

We note that the Issue Price represents a discount of 4.79% to the closing price of the Shares on the Last Trading Date (the “Issue Price Discount I”), a discount of 1.46% to the average closing price of the Shares on last 5 consecutive trading days (the “Issue Price Discount II”) and a premium of 1.46% to the average closing price of the Shares on last 10 consecutive trading days (the “Issue Price Premium III”).

The Issue Price Discount I, the Issue Price Discount II and the Issue Price Premium III are more favorable than the Market Average I, the Market Average II and the Market Average III, respectively, and are within the Market Range I, the Market Range II and the Market Range III, respectively. We note that the Issue Price is generally at a lower discount to the price of the Shares as compared to the Issuance Comparables and we consider this is to be of the Shareholders’ benefit as the actual monetary value received is higher.

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LETTER FROM PLATINUM SECURITIES

Based on the above and having considered, (i) the recent movements of the Share price during the Reviewed Period; and (ii) the recent Issuance Comparables which demonstrate a steeper discount for similar transactions, we concur with the Directors that the Issue Price is fair and reasonable and the Consideration Shares are to be issued on normal commercial terms so far as the Independent Shareholders are concerned and in the interests of the Company and the Shareholders as a whole.

7. Principal terms of the Warrants

Maximum number of 2,500,000,000

Warrants:

Subscription price: HK$0.18 credited as fully paid Exercise Price: HK$2.15 Share

HK$2.15 per Underlying Share as at the time of issue of the Warrants, subject to adjustment in accordance with the terms and conditions of the Warrants upon the occurrence of certain events including, among other things, subdivision or consolidation of Shares, the making of a free distribution of Shares, bonus issue, the declaration of a dividend in Shares, capital distribution, issuance of options, rights or warrants, and other dilutive events such as issue of new Shares.

Exercise period:

Any time prior to the second anniversary of the issue (the “ Expiration Date ”) of the Warrants.

After the close of business on the Expiration Date, the exercise right shall lapse and each Warrant shall cease to be valid for any purpose.

Maximum number of Underlying Shares:
If the maximum number of Warrants are issued and they are exercised in full at the initial exercise price of HK$2.15 per Underlying Share, a maximum of 2,500,000,000 Underlying Shares will be allotted and issued.
Status of Underlying Shares:

The Underlying Shares will rank pari passu in all respects with the Shares in issue on the date they are allotted and issued upon the exercise of Warrants.

Moratorium on sale:

Underlying Shares will be subject to a moratorium on sale until the expiration of 90 days from the date of issue of the Warrants.

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LETTER FROM PLATINUM SECURITIES

Transferability:

Voting:

Listing:

Adjustments to Exercise Price:

The Warrants are transferable, subject to certain restrictions imposed pursuant to the terms of the Warrants after the expiration of 90 days from their issue on Completion Date.

A holder of Warrants will not be entitled to vote at any general meetings of the Company by reason only of it being a holder of Warrants.

No application will be made for the listing of the Warrants on the Stock Exchange or any other exchange.

(a) Consolidation, subdivision or reclassification : If and whenever there shall be an alteration to the nominal value of the Shares as a result of consolidation, subdivision or reclassification, the Exercise Price shall be adjusted by multiplying the Exercise Price in force immediately before such alteration by the following fraction:

A B

where:

A is the nominal amount of one Share immediately after such alteration; and
B is the nominal amount of one Share immediately before such alteration.

Such adjustment shall become effective on the date the alteration takes effect.

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LETTER FROM PLATINUM SECURITIES

(b) Capitalisation of profits or reserves :

(i) If and whenever the Company shall issue any Shares credited as fully paid to the Shareholders by way of capitalisation of profits or reserves (including any share premium account) including Shares paid up out of distributable profits or reserves and/or share premium account issued, save where Shares are issued in lieu of the whole or any part of a specifically declared cash dividend (the “ Relevant Cash Dividend ”), being a Dividend which the Shareholders concerned would or could otherwise have received and which would not have constituted a capital distribution (a “ Scrip Dividend ”), the Exercise Price shall be adjusted by multiplying the Exercise Price in force immediately before such issue by the following fraction:

==> picture [21 x 25] intentionally omitted <==

where:

A is the aggregate nominal amount of the issued Shares immediately before such issue; and
B is the aggregate nominal amount of the issued Shares immediately after such issue.

Such adjustment shall become effective on the date of issue of such Shares or if a record date is fixed therefor, immediately after such record date.

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LETTER FROM PLATINUM SECURITIES

(ii) In the case of an issue of Shares by way of a Scrip Dividend where the current market price of such Shares on the date of the first public announcement of the terms of such Scrip Dividend exceeds the amount of the Relevant Cash Dividend or the relevant part thereof and which would not have constituted a capital distribution, the Exercise Price shall be adjusted by multiplying the Exercise Price in force immediately before the issue of such Shares by the following fraction:

A+B A+C

where:

A is the aggregate nominal amount of the issued Shares immediately before such issue;
B is the aggregate nominal amount of Shares issued by way of such Scrip Dividend multiplied by a fraction of which: (i) the numerator is the amount of the whole, or the relevant part, of the Relevant Cash Dividend; and (ii) the denominator is the current market price of the Shares issued by way of Scrip Dividend in respect of each existing Share in lieu of the whole, or the relevant part, of the Relevant Cash Dividend; and
C is the aggregate nominal amount of Shares issued by way of such Scrip Dividend;

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LETTER FROM PLATINUM SECURITIES

Such adjustment shall become effective on the date of issue of such Shares or if a record date is fixed therefor, immediately after such record date.

(c) Capital distribution : If and whenever the Company shall pay or make any capital distribution to the Shareholders (except where the Exercise Price falls to be adjusted under (b) above), the Exercise Price shall be adjusted by multiplying the Exercise Price in force immediately before such capital distribution by the following fraction:

==> picture [20 x 8] intentionally omitted <==

where:

A is the current market price of one Share on the last trading day preceding the date on which the capital distribution is publicly announced; and
B is the fair market value on the date of such announcement, as determined in good faith by one leading investment bank of international repute (acting as an expert), selected by the Company and approved by an ordinary resolution of the Warrantholders, of the portion of the Capital Distribution attributable to one Share.

Such adjustment shall become effective on the date that such capital distribution is made.

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LETTER FROM PLATINUM SECURITIES

(d) Rights issues of Shares or options over Shares : If and whenever the Company shall issue Shares to all or substantially all Shareholders as a class by way of rights, or issue or grant to all or substantially all Shareholders as a class, by way of rights, of options, warrants or other rights to subscribe for or purchase any Shares, in each case at less than the current market price per Share on the last trading day preceding the date of the announcement of the terms of such issue or grant, the Exercise Price shall be adjusted by multiplying the Exercise Price in force immediately before such issue or grant by the following fraction:

A+B

==> picture [22 x 9] intentionally omitted <==

where:

A is the number of Shares in issue immediately before such announcement;
B is the number of Shares which the aggregate amount (if any) payable for the Shares issued by way of rights or for the options or warrants or other rights issued or granted by way of rights and for the total number of Shares comprised therein would purchase at such current market price per Share; and
C is the aggregate number of Shares issued or, as the case may be, comprised in the issue or grant.

Such adjustment shall become effective on the date of issue of such Shares or issue or grant of such options, warrants or other rights (as the case may be).

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LETTER FROM PLATINUM SECURITIES

(e) Rights issues of other securities : If and whenever the Company shall issue any securities (other than Shares or options, warrants or other rights to subscribe for or purchase Shares) to all or substantially all Shareholders as a class, by way of rights, or the issue or grant to all or substantially all Shareholders as a class by way of rights, of any options, warrants or other rights to subscribe for or purchase or otherwise acquire, any securities (other than Shares or options, warrants or other rights to subscribe for or purchase Shares), the Exercise Price shall be adjusted by multiplying the Exercise Price in force immediately before such issue or grant by the following fraction:

==> picture [31 x 25] intentionally omitted <==

where:

A is the current market price of one Share on the last trading day preceding the date on which such issue or grant is publicly announced; and
B is the fair market value on the date of such announcement, as determined in good faith by one leading investment bank of international repute (acting as an expert), selected by the Company and approved by an ordinary resolution of the Warrantholders, of the portion of the rights attributable to one Share.

Such adjustment shall become effective on the date of issue of the securities or grant of such rights, options or warrants (as the case may be).

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LETTER FROM PLATINUM SECURITIES

(f) Issues at less than the current market price : If and whenever the Company shall issue (otherwise than as mentioned in (d) above any Shares (other than Shares issued on the exercise of Exercise Rights or on the exercise of any other rights of conversion into, or exchange or subscription for, Shares) or the issue or grant of (otherwise than as mentioned in (d) above) options, warrants or other rights to subscribe or purchase Shares in each case at a price per Share which is less than the current market price on the last trading day preceding the date of announcement of the terms of such issue, the Exercise Price shall be adjusted by multiplying the Exercise Price in force immediately before such issue or grant by the following fraction:

A+B A+C

where:

A is the number of Shares in issue immediately before the issue of such additional Shares or the grant of such options, warrants or other rights to subscribe for or purchase any Shares;
B is the number of Shares which the aggregate consideration (if any) receivable by the Company for such additional Shares to be issued or otherwise made available or, as the case may be, for such additional Shares to be issued or otherwise made available upon the exercise of any such options, warrants or rights, would purchase at such current market price per Share; and
C is the maximum number of additional Shares issued or the maximum number of Shares that may be issued upon exercise of such options, warrants or rights.

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LETTER FROM PLATINUM SECURITIES

Such adjustment shall become effective on the date of issue of such additional Shares or, as the case may be, the grant of such options, warrants or other rights.

(g) Other issues at less than the current market price : Save in the case of an issue of securities arising from a conversion or exchange of other existing securities in accordance with the terms applicable to such existing securities themselves falling within the provisions of this (g), if and whenever the Company or any subsidiaries of the Company (otherwise than as mentioned in (d), (e) or (f) above) or (at the direction or request of or pursuant to any arrangements with the Company or any subsidiaries) any other company, person or entity (otherwise than as mentioned in (d), (e) or (f) above) shall issue any securities (other than the Warrants) which by their terms of issue carry (directly or indirectly) rights of exercise into, or exchange or subscription for or purchase of, or to otherwise acquire, Shares issued or to be issued by the Company or securities which by their terms may be re-designated Shares receivable upon conversion, exchange, subscription or redesignation at a consideration per Share which is less than the current market price on the last trading day preceding the date of announcement of the terms of issue of such securities, the Exercise Price shall be adjusted by multiplying the Exercise Price in force immediately before such issue by the following fraction:

A+B

A+C

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where:

A is the number of Shares in issue immediately before such issue or grant (but where the relevant securities carry rights of conversion into, or rights of exchange or subscription for, or purchase or acquisition of, Shares which have been issued by the Company for the purposes of, or in connection with, such issue, less the number of Shares so issued);
B is the number of Shares which the aggregate consideration (if any) receivable by the Company for the Shares to be issued or otherwise made available upon exercise or exchange or on exercise of the right of subscription or purchase or acquisition attached to such securities or, as the case may be, the Shares would purchase at such current market price per Share; and
C is the maximum number of Shares to be issued or otherwise made available upon exercise or exchange of such securities or on the exercise of such rights of subscription or purchase or acquisition attached thereto at the initial exercise, exchange or subscription price or rate or, as the case may be, the maximum number of Shares to be issued or to arise or to be made available from any such re-designation.

Such adjustment shall become effective on the date of issue of such securities.

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(h) Modification of rights of exercise etc : If and whenever there is any modification of the rights of exercise, exchange, subscription, purchase or acquisition attaching to any such securities as are mentioned in (g) above (other than in accordance with the existing terms applicable to such securities) so that the consideration per Share (for the number of Shares available on exercise, exchange or subscription following the modification) is less than the current market price on the last trading day preceding the date of announcement of the proposals for such modification, the Exercise Price shall be adjusted by multiplying the Exercise Price in force immediately before such modification by the following fraction:

A+B A+C

where:

A is the number of Shares in issue immediately before such modification (but where the relevant securities carry rights of conversion into, or rights of exchange or subscription for, or purchase or acquisition of, Shares which have been issued by the Company for the purposes of, or in connection with, such issue, less the number of Shares so issued);
B is the number of Shares which the aggregate consideration (if any) receivable by the Company for the Shares to be issued, or otherwise made available, on exercise or exchange or on exercise of the right of subscription, purchase or acquisition attached to the securities so modified would purchase at such current market price per Share or, if lower, the existing exercise, exchange, subscription or purchase price of such securities; and

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C is the maximum number of Shares to be issued, or otherwise made available, on exercise or exchange of such securities or on the exercise of such rights of subscription, purchase or acquisition attached thereto at the modified exercise, exchange, subscription or purchase price or rate but giving credit in such manner as one leading investment bank of international repute (acting as an expert), selected by the Company and approved by an ordinary resolution of the Warrantholders, consider appropriate (if at all) for any previous adjustment under (h) or (g) above.

In relation to the adjustment event triggered by the distribution of cash dividends in item (b) (i) above, cash dividends reduce the net asset backing of shares and the adjustment is intended to restore the holder of the warrant to the same asset value it would have obtained had the dividend not been paid out.

Such adjustment shall become effective on the date of modification of the rights of exercise, exchange, subscription, purchase or acquisition attaching to such securities.

(i) Other offers to Shareholders : If and whenever there is an issue, sale or distribution by or on behalf of the Company or any subsidiaries or (at the direction or request of or pursuant to any arrangements with the Company or any subsidiaries) any other company, person or entity of any securities in connection with an offer by or on behalf of the Company or any subsidiaries or such other company, person or entity pursuant to which offer the Shareholders generally (meaning for these purposes the holders of at least 60 per cent. of the Shares outstanding at the time such offer is made) are entitled to participate in arrangements whereby such securities may be acquired by them (except where the Exercise Price falls to be adjusted under (d), (e), (f) or (g) above), the Exercise Price shall be adjusted by multiplying the Exercise Price in force immediately before such issue, sale or distribution by the following fraction:

A-B

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where:

A is the current market price of one Share on the last trading day preceding the date on which such issue is publicly announced; and
B is the fair market value on the date of such announcement, as determined in good faith by one leading investment bank of international repute (acting as an expert), selected by the Company and approved by an ordinary resolution of the Warrantholders, of the portion of the rights attributable to one Share.

Such adjustment shall become effective on the date of issue, sale or distribution of the securities.

(j) Other Events : If either: (i) the rights of conversion, exchange, purchase or subscription attaching to any options, rights or warrants to subscribe for or purchase Shares or any securities convertible into or exchangeable for Shares or the rights carried by such securities to subscribe for or purchase Shares are modified (other than pursuant to, and as provided in, the existing terms and conditions of such options, rights, warrants or securities); or (ii) the Company determines that an adjustment should be made to the Exercise Price as a result of one or more events or circumstances not referred to in any other provisions in (a) to (i) which in either case have or would have an effect on the position of the Warrantholders as a class compared with the position of the holders of all the securities (and options, rights and warrants relating thereto) of the Company, taken as a class,

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which is analogous to any of the events referred to in (a) to (i) (including any demerger, spin-off or similar arrangement in respect of any business of the Company and its subsidiaries), then, in any such case, the Company shall at its own expense request one leading investment bank of international repute (acting as an expert), selected by the Company and approved by an ordinary resolution of the Warrantholders, to determine as soon as practicable what adjustment (if any) to the Exercise Price is fair and reasonable to take account thereof, if the adjustment would result in a reduction in the Exercise Price, and the date on which such adjustment should take effect and upon such determination such adjustment (if any) shall be made and shall take effect in accordance with such determination provided that where the circumstances giving rise to any adjustment pursuant to (a) to (i) have already resulted or will result in an adjustment to the Exercise Price or where the circumstances giving rise to any adjustment arise by virtue of circumstances which have already given rise or will give rise to an adjustment to the Exercise Price, such modification (if any) shall be made to the operation of the provisions in (a) to (i) as may be advised by one leading investment bank of international repute (acting as an expert), selected by the Company and approved by an ordinary resolution of the Warrantholders, to be in their opinion appropriate to give the intended result, which is the original intended result of the adjustment clauses in paragraphs (a) to (j). The modification required is to ensure that notwithstanding the additional circumstances, such original result is still made available to the holder of the Warrants. The responsibility of the expenses incurred is not related to who is the holder of the Warrants. As it is a company level event that is triggering the adverse effect to the holder of the Warrants, it should be the Company bearing the related expenses to adjust the holder of the Warrants back to its original position.

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Form and title:

The Warrants are issued in registered form. A warrant certificate (the “ Warrant Certificate ”) will be issued to the Warrantholder in respect of its registered holding of Warrants.

Arrangements for transfer or transmission of the Warrants:

a Warrant may be transferred at any time by delivery of the Warrant Certificate issued in respect of that Warrant, with the endorsed form of transfer (in the form set out in the Warrant)duly completed and signed by the registered Warrantholder or his attorney duly authorised in writing, to the Company at the at the Company’s principal place of business in Hong Kong together with such evidence as the Company may reasonably require to prove the authority of the individuals who have executed the form of transfer, Provided that, if necessary, the prior approval of the Stock Exchange shall be required for any transfer to a connected person of the Company other than the Vendor. No transfer of title to a Warrant will be valid unless and until entered on the Register of Warrantholders.

Further issues:

The Warrantholders will not be entitled to participate in any distribution and/or offers of further securities made by the Company by reason only of being the holders of the Warrants.

The Company may from time to time, without the consent of the Warrantholders, create and issue further warrants having the same terms and conditions as the Warrants in all respects (other than the date of issue) and so that such further issue shall be consolidated and form a single series with the Warrants.

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Value of the Warrants

As stated in the letter from the Board in the Circular, Consideration will be partly settled by issuing 2,500,000,000 Warrants exercisable into 2,500,000,000 Underlying Shares. In order to assess the basis in determining the value of the Warrants, the Company has relied on the valuation report prepared by Jones Lang LaSalle (the “Independent Valuer”). In relying on the Independent Valuer’s report, we have reviewed the fairness, reasonableness and completeness of any assumptions or projections made by the Independent Valuer in the valuation report. Without limiting the generality of the aforesaid, in relation to the Independent Valuer providing an opinion or valuation relevant to the Warrants and Share Options, we (i) have reviewed the assumptions and valuation methodology adopted by the Independent Valuer; and (ii) have discussed with the Independent Valuer in relation to its expertise and any current or prior relationships with the Company.

In our discussion with the Independent Valuer, we understand that the value of the Warrants was determined with reference to the binomial model, a pricing model commonly used to determine the prices of warrant and options. The binomial model is based on the simplification that over a single period of a very short duration, the underlying asset can only move from its original price to an upper and lower level with defined probability. Based on the aforesaid report, the value of the Warrants is expected to be HK$0.18 per Warrant. The Independent Valuer has used the parameters such as term to maturity of 2 years, spot price of HK$1.41 and exercise price of HK$2.15. The Independent Valuer has also assumed 1) the risk free rate of 0.346% with reference to the risk free rate of Hong Kong; 2) the expected volatility of 50.01% based on the historical weekly volatility of the Shares over 2 years; 3) the dividend yield of 2.6653% with reference to the Company’s historical dividend yield. We also have discussed with the Valuer in relation to the reasonableness of these assumptions and cross-checked (i) the two-year rate of Hong Kong exchange fund bills and notes as announced by the Hong Kong Monetary Authority; (ii) the average two year volatility of the Shares from the Bloomberg; and (iii) the dividend payment history of the Company from the past annual reports of the Company. Therefore, we are of the view that these assumptions are fair and reasonable.

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Besides, we have discussed with the Independent Valuer in relation to their experiences and understood that Mr. Simon M.K. Chan, the regional director of the Independent Valuer, has more than 10 years of experience in providing wide range of valuation services to numerous listed and private companies in Mainland China and Hong Kong. Given Mr. Simon M.K. Chan has plenty of practical experience as stated above, we are of the view that he is qualified to provide a reliable valuation for assessing the valuation of Warrants of the Acquisition. The Independent Valuer confirmed that it is an independent third party to the parties to the Acquisition Agreement and their respective connected persons. Lastly, we have reviewed the terms of engagement (having particular regard to the scope of work, and whether there are any limitations on the scope of work which might adversely impact on the degree of assurance given by the Independent Valuer’s report, opinion or statement) and we are of the view that such terms of engagement is consistent with market practice and appropriate to give the opinion.

Adjustment clauses

As stated above, the Exercise Price will be subject to adjustment in events such as consolidation, subdivision or reclassification, capitalization of profits or reserves, capital distribution, rights issue of Shares or options over Shares, rights issue of other securities, issues at less than the current market price, other issues at less than the current market price, modification of rights of exercise etc, other offers to Shareholders and other events (in particular (i) the rights of conversion, exchange, purchase or subscription attaching to any options, rights or warrants to subscribe for or purchase Shares or any securities convertible into or exchangeable for Shares or the rights carried by such securities to subscribe for or purchase Shares are modified; or (ii) the Company determines that an adjustment should be made to the Exercise Price as a result of one or more events or circumstances not referred to in any other provisions above which in either case have or would have an effect on the position of the Warrantholders as a class compared with the position of the holders of all the securities (and options, rights and warrants relating thereto) of the Company, taken as a class, which is analogous to any of the events referred above). We consider that these adjustment mechanisms are consistent with normal market practice and are fair and reasonable so far as the Independent Shareholders are concerned.

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LETTER FROM PLATINUM SECURITIES

8. Dilution effect on the shareholding interests of the existing public Shareholders

The following table illustrates the shareholding structure of the Company as at the Latest Practicable Date, immediately upon Completion, and immediately after all the Warrants are exercised on Completion into Underlying Shares (assuming that there are no other changes in the issued share capital of the Company after the Latest Practicable Date):

Name of Shareholders Mr. Wong and concert parties Shinning Crown Holdings Inc. (100% beneficially owned by Mr. Wong) Shine Group Limited (100% beneficially owned by Mr. Wong) Smart Captain Holdings Limited (100% beneficially owned by Ms. Du Juan, spouse of Mr. Wong) Wan Sheng Yuan Asset Management Company Limited (100% beneficially owned by Ms. Du Juan, spouse of Mr. Wong) Consideration Shares to be held by Vendor(1) Underlying Shares to be held by Vendor(2) SUBTOTAL Public shareholders Total	As at the Latest Practicable Date Number of Shares Approximate percentage of total issued Shares(3) 4,619,779,938 27.24 634,016,736 3.74 240,955,927 1.42 5,750,737 0.03 – – – – 5,500,503,338 32.43 11,461,070,084 67.57 16,961,573,422 100.00	Immediately upon Completion before conversion of any Warrants Number of Shares Approximate percentage of total issued Shares(3) 4,619,779,938 20.57 634,016,736 2.82 240,955,927 1.07 5,750,737 0.02 5,500,000,000 24.49 – – 11,000,503,338 48.97 11,461,070,084 51.03 22,461,573,422 100.00	Immediately upon Completion and assuming all Warrants have been converted Number of Shares Approximate percentage of total issued Shares(3) 4,619,779,938 18.51 634,016,736 2.54 240,955,927 0.97 5,750,737 0.02 5,500,000,000 22.03 2,500,000,000 10.02 13,500,503,338 54.09 11,461,070,084 45.91 24,961,573,422 100.00	Immediately upon Completion and assuming all Warrants have been converted Number of Shares Approximate percentage of total issued Shares(3) 4,619,779,938 18.51 634,016,736 2.54 240,955,927 0.97 5,750,737 0.02 5,500,000,000 22.03 2,500,000,000 10.02 13,500,503,338 54.09 11,461,070,084 45.91 24,961,573,422 100.00
				100.00

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Notes:

(1) On the assumption that 5,500,000,000 Consideration Shares will be allotted and issued. Such Consideration Shares will represent 32.43% of the existing issued share capital of the Company as at the Latest Practicable Date.
(2) On the assumption that 2,500,000,000 Warrants exercisable into 2,500,000,000 Underlying Shares will be issued and they are all exercised for Underlying Shares at the initial exercise price. Such Underlying Shares will represent 14.74% of the existing issued share capital of the Company as at the Latest Practicable Date and 12.85% of the issued share capital of the Company after the allotment and issue of such Underlying Shares before accounting for any Consideration Shares.
(3) Assuming no other Shares are issued than the Consideration Shares and (as applicable) the Underlying Shares.

We note that the shareholding interest of the existing public Shareholders is subject to dilution of the aforementioned extents as a result of the Acquisition. However, with considerations of (i) reasons for and benefit of entering into the Acquisition Agreement; (ii) the Consideration being fair and reasonable to the Company and the Shareholders; (iii) the Issue Price being fair and reasonable as far as the Independent Shareholders are concerned; and (iv) the terms of the Warrant being fair and reasonable so far as the Independent Shareholders are concerned, we consider the possible dilution effect on the shareholding interests of the existing public Shareholders to be justifiable.

9. Financial effects of the Acquisition

9.1 Effect on net asset value (“NAV”) and NAV per Share

As disclosed in the 2015 Interim Report of the Group, the NAV attributable to the Shareholders as at 30 June 2015 was approximately RMB17,872 million and NAV per Share was approximately RMB1.05. The Issue Price of HK$1.39 per Share represents a premium of approximately 4.5% to the NAV per Share of approximately HK$1.33 as at 30 June 2015.

Based on the unaudited pro forma financial information in Appendix III to the Circular, the NAV attributable to shareholders of the Enlarged Group would increase to approximately RMB24,485 million as of 30 June 2015 and the NAV per Share would increase to approximately RMB1.09, assuming Completion with the Consideration Shares allotted and issued by the Company.

We understand that both NAV and NAV per Share attributable to the Shareholders of the Company will increase. Therefore, we are of the view that the increase in NAV and NAV per Share after the Acquisition Completion to be of the Shareholders’ interest as a whole.

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9.2 Effect on earnings

As disclosed in the 2015 Interim Report of the Group, for the 6 months ended 30 June 2015, profit attributable to owners of the parent was RMB687 million. According to the Appendix II to the Circular, the Target Group recorded a profit of RMB256 million for the six months ended 30 June 2015. We consider that assuming the Acquisition had been completed on 1 January 2015, the Transaction would have had a positive impact on the earning of Group for the six months ended 30 June 2015.

As a result, we are of the view that the Acquisition would have had a positive impact on the earnings of the Group for the 6 months ended 30 June 2015.

9.3 Effect on gearing

The gearing level of the Group (calculated by total borrowings divided by total equity) was approximately 9% as at 30 June 2015, down from 21% as at 31 December 2014.

According to the Appendix III to the Circular, the gearing level of the Enlarged Group would be approximately 20% mainly due to higher debt level of the Target Group. The gearing level of the Enlarged Group would still be lower than the gearing level of the Group as at 31 December 2014.

Despite the foregoing, we consider the increase in gearing ratio to be acceptable as the Acquisition would have had a positive impact on the earnings of the Group as discussed above.

9.4 Effect on cash/working capital

As disclosed in the 2015 Interim Report of the Group, the Group had current assets of approximately RMB29,654 million including cash and cash equivalents and pledged deposits of approximately RMB14,799 million and current liabilities of approximately RMB25,914 million. Given the Acquisition Consideration will be partly settled in cash with HK$1 billion, whereby, the balance will be settled by allotting and issuing the Consideration Shares and the Warrants to the Vendor, we consider that there will be no significant impact on the cash/working capital of the Group.

We note that the Target Group’s cash flows from operating activities was approximately RMB360 million in the year ended 31 December 2012 while the cash flows used in operating activities was approximately RMB636 million, approximately RMB817 million and RMB269 million for the year ended 31 December 2013 and 31 December 2014 and the six months ended 30 June 2015 respectively. We consider that the negative operating cash flows in the recent two and a half years were mainly due to the increase in amount due from related companies. Excluding advances to related companies (which have been refunded as at the Latest Practicable Date or will be either refunded before

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Completion or subject to the regulation of Continuing Connected Transactions), the overall operating cash flows of the Target Group was positive for the three years ended 31 December 2014 and the six months ended 30 June 2015. In this regard, we are of the view that the current negative operating cash flow of the Target Group will not have a material adverse impact on the cash/working capital of the Enlarged Group.

In view of (i) overall positive impact on the NAV of the Group; (ii) potential positive impact on the earnings to the Group for the 6 months ended 30 June 2015; (iii) an acceptable degree of increase in the gearing ratio; and (iv) no significant impact on cash/working capital, we are of the view that the Transaction will have an overall positive financial effect on the Group in the long run and be in the interest of the Group and its Shareholders as a whole.

B. The Whitewash Waiver

Mr. Wong and his concert parties are interested in 5,500,503,338 Shares, representing approximately 32.43% of the issued share capital of the Company, through Shinning Crown Holdings Inc. and Shine Group Limited (100% beneficially owned companies of Mr. Wong) and through Smart Captain Holdings Limited and Wan Sheng Yuan Asset Management Company Limited (the 100% beneficially owned companies of Ms. Du Juan, the spouse of Mr. Wong). For settlement of the part of the consideration under the Acquisition, the Vendor will be issued new Shares (which will result in the percentage of Shares in which Mr. Wong and his concert parties are interested being increased to 48.97% of the issued share capital of Company as enlarged by the issue of Consideration Shares, on the assumption that 5,500,000,000 new Shares will be issued), as well as unlisted warrants exercisable within two years into new Shares (which if exercised in full will result in the percentage of Shares in which Mr. Wong and his concert parties are interested being further increased to 54.09% of the issued share capital of Company as enlarged by the issue of Underlying Shares upon exercise, on the assumption that 2,500,000,000 Warrants exercisable into 2,500,000,000 new Shares will be issued).

If the Whitewash Waiver is approved by the Independent Shareholders, the shareholding of Mr. Wong and his concert parties in the Company will exceed 50%. Mr. Wong and his concert parties may further increase its shareholdings in the Company without incurring any further obligations under Rule 26 of the Takeovers Code to make a general offer. Notwithstanding the above, given individual members of the concert group hold less than 30% each, further purchase of Shares by individual members may result in them individually triggering obligations under Rule 26 of the Takeover Code, unless a waiver from the Executive is obtained, especially where there is any change in the make-up of the concert group that effectively results in the formation of a new concert group or in the balance of the group being changed significantly.

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Save for entering into the Acquisition Agreement, none of the Vendor, Mr. Wong or their respective concert parties has acquired or disposed of or entered into any agreement or arrangement to acquire or dispose of any voting rights in the Company during the Relevant Period (save as to the agreement disclosed in the Company’s announcement dated 26 May 2015 and circular dated 9 June 2015, which was terminated without completion as disclosed in the Company’s announcement dated 24 June 2015, which agreement related to a proposed 10 year lease of certain office premises in Beijing the rental for which was to have been paid for in part by the issue of consideration shares by the Company to the lessor, a company owned by Mr. Wong and his associates) nor interested in any issued Shares or other relevant securities (as defined in Note 4 to Rule 22 of the Takeovers Code) of the Company otherwise than as disclosed in the shareholding table set out in the section head “Dilution effect on the shareholding interests of the existing public Shareholders”.

As at the Latest Practicable Date, none of the Vendor, Mr. Wong or their respective concert parties:

(i) hold, control or have direction over any outstanding options, warrants, or any securities that are convertible into Shares or any derivatives in respect of securities in the Company, or hold any relevant securities (as defined in Note 4 to Rule 22 of the Takeovers Code) in the Company save as disclosed in the shareholding table set out in the section headed “Dilution effect on the shareholding interests of the existing public Shareholders”;
(ii) have borrowed or lent any relevant securities (as defined in Note 4 to Rule 22 of the Takeovers Code) in the Company;
(iii) have made any arrangement referred to in Note 8 to Rule 22 of the Takeovers Code (whether by way of option, indemnity or otherwise) in relation to the relevant securities (as defined in Note 4 to Rule 22 of the Takeovers Code) of the Company or the Vendor which might be material to the Acquisition and/or the Whitewash Waiver, with any other persons;
(iv) have made any agreement or arrangement which relates to circumstances in which they may or may not invoke or seek to invoke a precondition or a condition to the Acquisition and/or the Whitewash Waiver, other than the conditions precedent to the Acquisition as set out in the Circular; or
(v) has received any irrevocable commitment to vote for or against the Acquisition and/or the Whitewash Waiver.

Given the possible benefits of the Acquisition Agreement and the transactions contemplated thereunder to the Company mentioned in section A and the terms of the Acquisition Agreement being fair and reasonable so far as the Independent Shareholders are concerned, we are of the opinion that the approval of the Whitewash Waiver, which is a prerequisite for Completion, is in the interests of the Company and the Independent Shareholders as a whole and is fair and reasonable for the purpose of proceeding with the Acquisition Agreement and the transactions contemplated thereunder.

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Independent Shareholders should note that upon issue of the Consideration Shares and the Underlying Shares, Mr. Wong and his concert parties will hold more than 50% of the enlarged issued share capital of the Company. In the event that Mr. Wong and his concert parties’ shareholding interests in the Company exceed 50% upon Completion, and the Whitewash Waiver is granted, Mr. Wong and parties acting in concert with any of them may increase their shareholdings in the Company without incurring any further obligations under Rule 26 of the Takeovers Code to make a general offer.

RECOMMENDATION

Having taken into account the above principal factors and reasons, in particular,

(i) it is in the interest of the Company and the Shareholders to enter into the Acquisition Agreement, as the Transaction will enable the enlarged Group to expand its store network, achieve economies of scale, realize synergies and reduce continuing connected transactions;
(ii) the limited amount of invested capital required by the Target Group (RMB58 million after distribution of the Dividend), as a result of the asset light nature of the business, explains the large difference between Consideration and NAV to be accounted for as goodwill in the Group consolidated statement of financial position – for clarity, this amount of goodwill will not be attributable to intangible assets such as brand, trademark or company name as the Target Group has already been operated under the GOME brand since its inception, but may only be attributable to other intangible assets such as the Target Group’s established relationships with its customers and its suppliers;
(iii) the profit contribution analysis – adjusted for 1) the impact of the potential termination of the purchase service fee arrangement (as the Target Group has developed a substantially independent procurement function since the completion of the purchase service agreement) and 2) the higher borrowing costs that the Target Group might have incurred had the Dividend being paid at the beginning of the period being the subject of the contribution analysis (instead of at Completion, as per the Letter from the Board in the Circular) – shows that the Consideration fairly reflects the economic contribution of the Target Group assets into the enlarged group and is therefore fair and reasonable to the Company and the Shareholders as a whole – however, on an unadjusted basis we note that the profit contribution analysis shows that the Consideration/Market Capitalization ratio is higher than the Profit Contribution ratio, which is not favorable to the Independent Shareholders;
(iv) although the P/E of the Target Group as implied by the Consideration is higher than the Comparable Companies P/E Average, the P/S of the Target Group as implied by the Consideration is lower than the Comparable Companies P/S Average and below the lower end of the Comparable Companies P/S Range;
(v) the Issue Price of the Consideration Shares is fair and reasonable and the Consideration Shares are to be issued on normal commercial terms;

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(vi) the terms of the Warrant are fair and reasonable so far as the Independent Shareholders are concerned;
(vii) the Transaction will have an overall positive financial effect on the Group in the long run; and
(viii) the Whitewash Waiver which is a prerequisite for Completion is in the interest of the Independent Shareholders;

we are of the view that the Transaction, the terms of the respective agreements for the Transaction and the Whitewash Waiver are entered into on normal commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned and in the interests of the Company and the Shareholders as a whole.

Accordingly, we advise the Independent Board Committee to recommend, and we ourselves recommend the Independent Shareholders to vote in favour of the resolutions in relation to the Transaction to be proposed at the SGM.

Yours faithfully, For and on behalf of

Platinum Securities Company Limited Li Lan

Director and Co-Head of Corporate Finance

Mr. Li Lan is a licensed person registered with the Securities and Futures Commission and as a responsible officer of Platinum Securities Company Limited to carry out Type 1 (dealing in securities) and Type 6 (advising on corporate finance) regulated activities under the SFO and has over nine years of experience in corporate finance industry.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

1. FINANCIAL INFORMATION OF THE GROUP

Financial information on the Group for each of the three financial years ended 31 December 2012, 2013 and 2014 and the 6 months ended 30 June 2015 are disclosed in the following documents which have been published on the websites of the Stock Exchange (http://www.hkexnews.hk) and the Company (http://www.gome.com.hk):

annual report of the Company for the year ended 31 December 2012 published on 18 April 2013 (pages 83 to 195);
annual report of the Company for the year ended 31 December 2013 published on 23 April 2014 (pages 83 to 199);
annual report of the Company for the year ended 31 December 2014 published on 20 April 2015 (pages 79 to 187); and
interim report of the Company for the 6 months ended 30 June 2015 published on 11 September 2015 (pages 23 to 61).

The following is a summary of the consolidated financial information of the Group for the three years ended 31 December 2012, 2013, 2014 and the 6 months ended 30 June 2014 and 2015, as extracted from the annual reports of the Company for the years ended 31 December 2013 and 2014 and interim report of the Company for the 6 months ended 30 June 2015.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

CONSOLIDATED STATEMENTS OF PROFIT OR LOSS

Revenue Consolidated gross profit margin# (Loss)/profit from operating activities (Loss)/profit before tax Income tax expense (Loss)/profit for the year/period Attributable to: Owners of the parent Non-controlling interests Dividend (Loss)/earnings per share attributable to ordinary equity holders of the parent – Basic – Diluted Dividend per ordinary share	For the year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 (Restated) 51,097,100 56,400,662 60,359,843 16.66% 18.36% 18.48% (811,800) 1,014,519 1,324,229 (759,015) 1,194,675 1,580,144 (182,860) (517,230) (561,976) (941,875) 677,445 1,018,168 (728,498) 892,475 1,279,770 (213,377) (215,030) (261,602) (941,875) 677,445 1,018,168 – 535,485 511,908 (RMB4.3 fen) RMB5.3 fen RMB7.6 fen (RMB4.4 fen) RMB5.3 fen RMB7.6 fen – HK4.0 cents HK3.9 cents	6 months ended 30 June 2014 2015 RMB’000 RMB’000 (Unaudited) (Unaudited) 29,124,153 31,692,485 18.83% 17.70% 738,196 694,330 846,112 800,622 (247,598) (275,614) 598,514 525,008 692,611 686,923 (94,097) (161,915) 598,514 525,008 277,044 274,769 RMB4.1 fen RMB4.1 fen RMB4.1 fen RMB4.1 fen HK2.1 cents HK2.1 cents

Consolidated gross profit margin = (gross profit + other income and gains)/revenue

– I-2 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

Total assets Total liabilities Net assets	31 December 2012 RMB’000 (Restated) 37,712,723 (23,043,141) 14,669,582	31 December 2013 RMB’000 39,323,985 (24,006,527) 15,317,458	31 December 2014 RMB’000 44,076,673 (28,042,155) 16,034,518	30 June 2015 RMB’000 (Unaudited) 42,912,290 (26,073,249) 16,839,041

The auditor of the Company for the three years ended 31 December 2012, 2013 and 2014 was Ernst & Young.

There were no audit qualifications issued by the auditors of the Company for each of the three years ended 31 December 2012, 2013 and 2014 and for the 6 months ended 30 June 2015. There were no exceptional or extraordinary items for each of the three years ended 31 December 2012, 2013 and 2014 and for the 6 months ended 30 June 2015. The Company did not declare any dividend for the year ended 31 December 2012. The Board recommended a final dividend of HK1.3 cents and a special dividend (in the form of cash and/or Shares at the choice of shareholders) of HK2.0 cents per Share for the year ended 31 December 2013. The Board proposed a final dividend of HK1.80 cents per Share for the year ended 31 December 2014. The Board declared an interim of HK2.10 cents per Share for the 6 months ended 30 June 2015.

2. AUDITED FINANCIAL STATEMENTS

The following is the full text of the audited financial statements of the Group for the year ended 31 December 2014 as extracted from the annual report of the Company for the year ended 31 December 2014:

– I-3 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated Statement of Profit or Loss

Year ended 31 December 2014

Notes REVENUE 5 Cost of sales 6 Gross profit Other income and gains 5 Selling and distribution expenses Administrative expenses Other expenses Profit from operating activities Finance costs 7 Finance income 7 PROFIT BEFORE TAX 6 Income tax expense 10 PROFIT FOR THE YEAR Attributable to: Owners of the parent 31b(i) Non-controlling interests EARNINGS PER SHARE ATTRIBUTABLE TO ORDINARY EQUITY HOLDERS OF THE PARENT 11 – Basic – Diluted	2014 RMB’000 60,359,843 (51,365,601) 8,994,242 2,162,584 (7,526,591) (1,701,039) (604,967) 1,324,229 (46,111) 302,026 1,580,144 (561,976) 1,018,168 1,279,770 (261,602) 1,018,168 RMB7.6 fen RMB7.6 fen	2013 RMB’000 56,400,662 (47,898,540) 8,502,122 1,851,971 (7,152,640) (1,564,270) (622,664) 1,014,519 (60,569) 240,725 1,194,675 (517,230) 677,445 892,475 (215,030) 677,445 RMB5.3 fen RMB5.3 fen

– I-4 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated Statement of Comprehensive Income

Year ended 31 December 2014

Notes PROFIT FOR THE YEAR OTHER COMPREHENSIVE INCOME Other comprehensive income to be reclassified to profit or loss in subsequent periods: Changes in fair value of other investments 16 Exchange differences on translation of foreign operations Net other comprehensive income to be reclassified to profit or loss in subsequent periods OTHER COMPREHENSIVE INCOME FOR THE YEAR, NET OF TAX TOTAL COMPREHENSIVE INCOME FOR THE YEAR Attributable to: Owners of the parent Non-controlling interests 19	2014 RMB’000 1,018,168 82,350 12,987 95,337 95,337 1,113,505 1,375,107 (261,602) 1,113,505	2013 RMB’000 677,445 10,800 60,487 71,287 71,287 748,732 963,762 (215,030) 748,732

– I-5 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated Statement of Financial Position

31 December 2014

Notes NON-CURRENT ASSETS Property and equipment 12 Investment properties 13 Goodwill 14 Other intangible assets 15 Other investments 16 Lease prepayments and deposits 17 Deferred tax assets 18 Total non-current assets CURRENT ASSETS Inventories 20 Trade and bills receivables 21 Prepayments, deposits and other receivables 22 Due from related companies 23 Pledged deposits 24 Cash and cash equivalents 24 Total current assets CURRENT LIABILITIES Trade and bills payables 25 Customers’ deposits, other payables and accruals 26 Interest-bearing bank loans 27 Due to related companies 23 Tax payable Total current liabilities NET CURRENT ASSETS TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Deferred tax liabilities 18 Total non-current liabilities Net assets EQUITY Equity attributable to owners of the parent Issued capital 29 Reserves 31(a) Proposed dividends 32 Non-controlling interests 19 Total equity	31 December 2014 RMB’000 4,417,234 601,224 7,145,117 265,801 217,350 311,128 31,795 12,989,649 10,926,399 267,694 4,797,960 227,964 6,072,895 8,794,112 31,087,024 20,880,430 2,425,413 3,425,950 521,213 626,151 27,879,157 3,207,867 16,197,516 162,998 162,998 16,034,518 423,221 16,247,831 234,864 16,905,916 (871,398) 16,034,518	31 December 2013 RMB’000 4,094,770 948,805 7,145,117 289,239 135,000 314,977 50,588 12,978,496 8,220,734 245,492 2,333,481 123,174 6,406,795 9,015,813 26,345,489 18,077,489 2,046,809 2,683,171 464,142 562,620 23,834,231 2,511,258 15,489,754 172,296 172,296 15,317,458 421,551 15,064,311 441,392 15,927,254 (609,796) 15,317,458

– I-6 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

		Non-	controlling Total	interests equity	RMB’000 RMB’000		(609,796) 15,317,458	(261,602) 1,018,168		– 82,350		– 12,987	(261,602) 1,113,505	– –	– (103,219)	– (81,005)	– 5,083	– –	– (173,649)	– (277,044)	– –	– 233,389	– –	(871,398) 16,034,518
				Total	RMB’000		15,927,254	1,279,770		82,350		12,987	1,375,107	–	(103,219)	(81,005)	5,083	–	(173,649)	(277,044)	–	233,389	–	16,905,916
			Proposed	dividends	RMB’000		441,392	–		–		–	–	(164,524)	(103,219)	–	–	–	(173,649)	–	234,864	–	–	234,864
		Exchange	fluctuation Retained	reserve earnings	RMB’000 RMB’000		(163,859) 4,859,397	– 1,279,770		– –		12,987 –	12,987 1,279,770	– –	– –	– –	– –	– (69,292)	– –	– (277,044)	– (234,864)	– –	– 5,672	(150,872) 5,563,639
Attributable to owners of the parent	Other	Share Asset investment	option revaluation revaluation Statutory	reserve reserve# reserve reserves	RMB’000 RMB’000 RMB’000 RMB’000	Note 31(a)	157,953 117,468 41,040 1,441,972	– – – –		– – 82,350 –		– – – –	– – 82,350 –	– – – –	– – – –	– – – –	5,083 – – –	– – – 69,292	– – – –	– – – –	– – – –	– – – –	– – – (5,672)	163,036 117,468 123,390 1,505,592
			Capital	reserve	RMB’000		(851,561)	–		–		–	–	–	–	–	–	–	–	–	–	233,389	–	(618,172)*
			Contributed	surplus	RMB’000		657	–		–		–	–	–	–	–	–	–	–	–	–	–	–	657*
			Share	premium	RMB’000		9,461,244	–		–		–	–	161,375	–	(79,526)	–	–	–	–	–	–	–	9,543,093*
			Issued	capital	RMB’000	Note 29	421,551	–		–		–	–	3,149	–	(1,479)	–	–	–	–	–	–	–	423,221
					Notes					16				29	32	29	30		32	32	32	35
							Balance at 1 January 2014	Profit for the year	Other comprehensive income for the year:	Changes in fair value of other investments	Exchange differences on translation of foreign	operations	Total comprehensive income for the year	2013 scrip dividend paid in shares	2013 scrip dividend paid in cash	Repurchase of shares	Equity-settled share option arrangements	Transfer to statutory reserves	2013 cash dividend paid	2014 interim dividends paid	2014 proposed final dividends	Compensation received	Wind-up of subsidiaries	At 31 December 2014

– I-7 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Attributable to owners of the parent	Other	Share Asset investment Exchange Non-	Issued Share Contributed Capital option revaluation revaluation Statutory fluctuation Retained Proposed controlling Total	capital premium surplus reserve reserve reserve# reserve reserves reserve earnings dividends Total interests equity	Notes RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000	Note 29 Note 31(a)	Balance at 1 January 2013 421,551 9,461,244 657 (851,561) 164,716 117,468 30,240 1,468,698 (224,346) 4,475,681 – 15,064,348 (394,766) 14,669,582	Profit for the year – – – – – – – – – 892,475 – 892,475 (215,030) 677,445	Other comprehensive income for the year:	Changes in fair value of other investments 16 – – – – – – 10,800 – – – – 10,800 – 10,800	Exchange differences on translation of foreign	operations – – – – – – – – 60,487 – – 60,487 – 60,487	Total comprehensive income for the year – – – – – – 10,800 – 60,487 892,475 – 963,762 (215,030) 748,732	Equity-settled share option arrangements 30 – – – – (6,763) – – – – – – (6,763) – (6,763)	Transfer to statutory reserves – – – – – – – 28,145 – (28,145) – – – –	2013 interim dividends paid 32 – – – – – – – – – (94,093) – (94,093) – (94,093)	Proposed dividends 32 – – – – – – – – – (441,392) 441,392 – – –	Wind-up of subsidiaries – – – – – – – (54,871) – 54,871 – – – –	At 31 December 2013 421,551 9,461,244 657 (851,561) 157,953 117,468 41,040 1,441,972 (163,859) 4,859,397* 441,392 15,927,254 (609,796) 15,317,458		# The asset revaluation reserve arose from changes in use from owner-occupied properties to investment properties carried at fair value.	* These reserve accounts comprise the consolidated reserves of RMB16,247,831,000 (2013: RMB15,064,311,000) in the consolidated statement of financial position.

– I-8 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated Statement of Cash Flows

Year ended 31 December 2014

Notes CASH FLOWS FROM OPERATING ACTIVITIES Profit before tax Adjustments for: Finance income 7 Finance costs 7 Gain on settlement of a cross currency swap 28 Impairment provision for items of property and equipment 6 Net fair value loss/(gain) on investment properties 6 Loss on disposal of items of property and equipment 6 Impairment of goodwill 6 Depreciation 6 Amortisation of intangible assets 6 Equity-settled share option expense 30 Gain on compensation received from shareholders 35 Decrease in lease prepayments and deposits Increase in inventories Increase in trade and bills receivables (Increase)/decrease in prepayments, deposits and other receivables (Increase)/decrease in amounts due from related companies Increase in pledged deposits Increase in trade and bills payables Increase in customers’ deposits, other payables and accruals Increase in amounts due to related companies Cash generated from operations Interest received Income tax paid Net cash flows from operating activities	2014 RMB’000 1,580,144 (302,026) 46,111 – 10,464 3,738 9,216 – 555,868 23,438 5,083 (100,102) 1,831,934 3,849 (2,705,665) (22,202) (1,074,621) (104,790) (153,565) 2,802,941 391,177 57,071 1,026,129 324,141 (488,950) 861,320	2013 RMB’000 1,194,675 (240,725) 60,569 (11,002) – (30,333) 53,785 15,790 552,703 23,438 (6,763) – 1,612,137 41,641 (441,570) (42,422) 502,100 67,768 (202,966) 60,743 340,755 229,447 2,167,633 247,925 (326,413) 2,089,145

– I-9 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Notes Net cash flows from operating activities CASH FLOWS FROM INVESTING ACTIVITIES Purchases of items of property and equipment Proceeds from disposal of items of property and equipment Prepayment for shares subscription 39 Net cash flows used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Repurchase of shares 29 Compensation from shareholders received 35 New bank loans 27 Decrease in pledged deposits for bank loans 24 Repayment of bank loans 27 Dividends paid Interest paid Net cash flows from financing activities NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at beginning of year Effect of foreign exchange rate changes, net CASH AND CASH EQUIVALENTS AT END OF YEAR ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS Cash and bank balances 24 Non-pledged time deposits with original maturity of less than three months when acquired 24	2014 RMB’000 861,320 (629,604) 71,490 (1,411,973) (1,970,087) (81,005) 333,491 3,435,526 487,465 (2,698,635) (553,912) (40,687) 882,243 (226,524) 9,015,813 4,823 8,794,112 8,468,197 325,915 8,794,112	2013 RMB’000 2,089,145 (435,924) 108,016 – (327,908) – – 2,729,636 36,415 (2,408,034) (94,093) (63,583) 200,341 1,961,578 7,067,349 (13,114) 9,015,813 8,699,676 316,137 9,015,813

– I-10 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Statement of Financial Position

31 December 2014

Notes NON-CURRENT ASSETS Investments in subsidiaries 19 Total non-current assets CURRENT ASSETS Amounts due from subsidiaries 19 Prepayments and other receivables 22 Cash and cash equivalents 24 Total current assets CURRENT LIABILITIES Interest-bearing bank loans 27 Other payables and accruals 26 Amounts due to subsidiaries 19 Total current liabilities NET CURRENT ASSETS TOTAL ASSETS LESS CURRENT LIABILITIES Net assets EQUITY Issued capital 29 Reserves 31(b) Proposed dividends 32 Total equity	2014 RMB’000 5,389,943 5,389,943 5,996,694 1,412,215 964,068 8,372,977 3,425,950 14,218 762,589 4,202,757 4,170,220 9,560,163 9,560,163 423,221 8,902,078 234,864 9,560,163	2013 RMB’000 5,389,635
		5,389,635
		6,718,389 1,060 705,137
		7,424,586
		2,683,171 7,601 659,178
		3,349,950
		4,074,636
		9,464,271
		9,464,271

		421,551 8,601,328 441,392

		9,464,271

– I-11 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

31 December 2014

1. CORPORATE INFORMATION

GOME Electrical Appliances Holding Limited (the “Company”) is a limited liability company incorporated in Bermuda. Its shares are listed on the Stock Exchange of Hong Kong Limited. The address of its registered office is Canon’s Court, 22 Victoria Street, Hamilton HM12, Bermuda.

The principal activities of the Company and its subsidiaries (the “Group”) are the operation and management of networks of electrical appliances, consumer electronic products retail stores and electronic products on-line sales in the People’s Republic of China (the “PRC”).

2.1 BASIS OF PREPARATION

These financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSs”) promulgated by the International Accounting Standards Board (the “IASB”). These financial statements also comply with the applicable requirements of the Hong Kong Companies Ordinance relating to the preparation of financial statements, which for this financial year and the comparative period continue to be those of the predecessor Companies Ordinance (Cap. 32), in accordance with transitional and saving arrangements for Part 9 of the Hong Kong Companies Ordinance (Cap. 622), “Accounts and Audit”, which are set out in sections 76 to 87 of Schedule 11 to that ordinance. The financial statements have been prepared under the historical cost convention, except for investment properties and other investments which are classified as available-for-sale financial assets, which have been measured at fair value. These financial statements are presented in Renminbi (“RMB”) and all values are rounded to the nearest thousand except when otherwise indicated.

Basis of consolidation

The consolidated financial statements include the financial statements of the Group for the year ended 31 December 2014. The financial statements of the subsidiaries are prepared for the same reporting period as the Company, using consistent accounting policies. The results of subsidiaries are consolidated from the date on which the Group obtains control, and continue to be consolidated until the date that such control ceases.

Profit or loss and each component of other comprehensive income are attributed to the owners of the parent of the Group and to the non-controlling interests, even if this results in the non-controlling interests having a deficit balance. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation.

The Group reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of three elements of control described in the accounting policy for subsidiaries below. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction.

If the Group loses control over a subsidiary, it derecognises (i) the assets (including goodwill) and liabilities of the subsidiary, (ii) the carrying amount of any non-controlling interest and (iii) the cumulative translation differences recorded in equity; and recognises (i) the fair value of the consideration received, (ii) the fair value of any investment retained and (iii) any resulting surplus or deficit in profit or loss. The Group’s share of components previously recognised in other comprehensive income is reclassified to profit or loss or retained earnings, as appropriate, on the same basis as would be required if the Group had directly disposed of the related assets or liabilities.

– I-12 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

2.2 CHANGES IN ACCOUNTING POLICIES AND DISCLOSURES

The Group has adopted the following standards and new interpretation for the first time for the current year’s financial statements.

Amendments to IFRS 10, IFRS 12 and Investment Entities IAS 27 (2011) Amendments to IAS 32 Offsetting Financial Assets and Financial Liabilities Amendments to IAS 36 Recoverable Amount Disclosures for Non-Financial Assets Amendments to IAS 39 Novation of Derivatives and Continuation of Hedge Accounting IFRIC-Int 21 Levies Amendment to IFRS 2 Included in Annual Definition of Vesting Condition[1] Improvements 2010-2012 Cycle Amendment to IFRS 3 included in Annual Accounting for Contingent Consideration in a Business Improvements 2010-2012 Cycle Combination[1] Amendment to IFRS 13 included in Annual Short-term Receivables and Payables Improvements 2010-2012 Cycle Amendment to IFRS 1 included in Annual Meaning of Effective IFRSs Improvements 2011-2013 Cycle

1 Effective from 1 July 2014

Except for the amendment to IFRS 1 which is only relevant to an entity’s first IFRS financial statements, the nature and the impact of each amendment and interpretation is described below:

(a) Amendments to IFRS 10 include a definition of an investment entity and provide an exception to the consolidation requirement for entities that meet the definition of an investment entity. Investment entities are required to account for subsidiaries at fair value through profit or loss rather than consolidate them. Consequential amendments were made to IFRS 12 and IAS 27 (2011). The amendments to IFRS 12 also set out the disclosure requirements for investment entities. The amendments have had no impact on the Group as the Company does not qualify as an investment entity as defined in IFRS 10.
(b) The IAS 32 Amendments clarify the meaning of “currently has a legally enforceable right to set off” for offsetting financial assets and financial liabilities. The amendments also clarify the application of the offsetting criteria in IAS 32 to settlement systems (such as central clearing house systems) which apply gross settlement mechanisms that are not simultaneous. The amendments have had no significant impact on the Group.
(c) The IAS 39 Amendments provide an exception to the requirement of discontinuing hedge accounting in situations where over-the-counter derivatives designated in hedging relationships are directly or indirectly, novated to a central counterparty as a consequence of laws or regulations, or the introduction of laws or regulations. For continuance of hedge accounting under this exception, all of the following criteria must be met: (i) the novations must arise as a consequence of laws or regulations, or the introduction of laws or regulations; (ii) the parties to the hedging instrument agree that one or more clearing counterparties replace their original counterparty to become the new counterparty to each of the parties; and (iii) the novations do not result in changes to the terms of the original derivative other than changes directly attributable to the change in counterparty to achieve clearing. The amendments have had no impact on the Group as the Group has not novated any derivatives during the current and prior years.
(d) IFRIC-Int 21 clarifies that an entity recognises a liability for a levy when the activity that triggers payment, as identified by the relevant legislation, occurs. The interpretation also clarifies that a levy liability is accrued progressively only if the activity that triggers payment occurs over a period of time, in accordance with the relevant legislation. For a levy that is triggered upon reaching a minimum threshold, the interpretation clarifies that no liability should be recognised before the specified minimum threshold is reached. The interpretation has had no impact on the Group as the Group applied, in prior years, the recognition principles under IAS 37 Provisions, Contingent Liabilities and Contingent Assets which for the levies incurred by the Group are consistent with the requirements of IFRIC-Int 21.

– I-13 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(e) The IFRS 2 Amendment clarifies various issues relating to the definitions of performance and service conditions which are vesting conditions, including (i) a performance condition must contain a service condition; (ii) a performance target must be met while the counterparty is rendering service; (iii) a performance target may relate to the operations or activities of an entity, or to those of another entity in the same group; (iv) a performance condition may be a market or non-market condition; and (v) if the counterparty, regardless of the reason, ceases to provide service during the vesting period, the service condition is not satisfied. The amendment has had no impact on the Group.
(f) The IFRS 3 Amendment clarifies that contingent consideration arrangements arising from a business combination that are not classified as equity should be subsequently measured at fair value through profit or loss whether or not they fall within the scope of IFRS 9 or IAS 39. The amendment has had no impact on the Group.
(g) The IFRS 13 Amendment clarifies that short-term receivables and payables with no stated interest rates can be measured at invoice amounts when the effect of discounting is immaterial. The amendment has had no impact on the Group.
(h) The IAS 36 Amendments remove the unintended disclosure requirement made by IFRS 13 on the recoverable amount of a cash-generating unit which is not impaired. In addition, the amendments require the disclosure of the recoverable amounts for the assets or cash-generating units for which an impairment loss has been recognised or reversed during the reporting period, and expand the disclosure requirements regarding the fair value measurement for these assets or units if their recoverable amounts are based on fair value less costs of disposal. The amendments have had no significant impact on the Group.

2.3 NEW AND REVISED IFRSs AND NEW DISCLOSURE REQUIREMENTS UNDER THE HONG KONG COMPANIES ORDINANCE NOT YET ADOPTED

The Group has not applied the following new and revised IFRSs, that have been issued but are not yet effective, in these financial statements.

IFRS 9	_Financial Instruments_4
Amendments to IFRS 10, and IAS 28 (2011)	Sale or Contribution of Assets between an Investor and
	_its Associate or Joint Venture_2
Amendments to IFRS 11	Accounting for Acquisitions of Interests in Joint
	_Operations_2
IFRS 14	_Regulatory Deferral Accounts_5
IFRS 15	_Revenue from Contracts with Customers_3
Amendments to IAS 16 and IAS 38	Clarification of Acceptable Methods of Depreciation and
	_Amortisation_2
Amendments to IAS 16 and IAS 41	_Agriculture: Bearer Plants_2
Amendments to IAS 19	_Defined Benefit Plans: Employee Contributions_1
Amendments to IAS 27 (2011)	_Equity method in Separate Financial Statements_2
Annual Improvements 2010-2012 Cycle	Amendments to a number of IFRSs1
Annual Improvements 2011-2013 Cycle	Amendments to a number of IFRSs1
Annual Improvements 2012-2014 Cycle	Amendments to a number of IFRSs2

1 Effective for annual periods beginning on or after 1 July 2014
2 Effective for annual periods beginning on or after 1 January 2016
3 Effective for annual periods beginning on or after 1 January 2017
4 Effective for annual periods beginning on or after 1 January 2018
5 Effective for an entity that first adopts IFRSs for its annual financial statements beginning on or after 1 January 2016 and therefore is not applicable to the Group

– I-14 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

In addition, the Hong Kong Companies Ordinance (Cap. 622) will affect the presentation and disclosure of certain information in the consolidated financial statements for the year ending 31 December 2015. The Group is in the process of making an assessment of the impact of these changes.

Further information about those IFRSs that are expected to be applicable to the Group is as follows:

In July 2014, the IASB issued the final version of IFRS 9, bringing together all phases of the financial instruments project to replace IAS 39 and all previous versions of IFRS 9. The standard introduces new requirements for classification and measurement, impairment and hedge accounting. The Group expects to adopt IFRS 9 from 1 January 2018. The Group expects that the adoption of IFRS 9 will have an impact on the classification and measurement of the Group’s financial assets. Further information about the impact will be available nearer the implementation date of the standard.

The amendments to IFRS 10 and IAS 28 (2011) address an inconsistency between the requirements in IFRS 10 and in IAS 28 (2011) in dealing with the sale or contribution of assets between an investor and its associate or joint venture. The amendments require a full recognition of a gain or loss when the sale or contribution of assets between an investor and its associate or joint venture constitutes a business. For a transaction involving assets that do not constitute a business, a gain or loss resulting from the transaction is recognised in the investor’s profit or loss only to the extent of the unrelated investor’s interest in that associate or joint venture. The amendments are to be applied prospectively. The Group expects to adopt the amendments from 1 January 2016.

The amendments to IFRS 11 require that an acquirer of an interest in a joint operation in which the activity of the joint operation constitutes a business must apply the relevant principles for business combinations in IFRS 3. The amendments also clarify that a previously held interest in a joint operation is not remeasured on the acquisition of an additional interest in the same joint operation while joint control is retained. In addition, a scope exclusion has been added to IFRS 11 to specify that the amendments do not apply when the parties sharing joint control, including the reporting entity, are under common control of the same ultimate controlling party. The amendments apply to both the acquisition of the initial interest in a joint operation and the acquisition of any additional interests in the same joint operation. The amendments are not expected to have any impact on the financial position or performance of the Group upon adoption on 1 January 2016.

IFRS 15 establishes a new five-step model that will apply to revenue arising from contracts with customers. Under IFRS 15, revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The principles in IFRS 15 provide a more structured approach for measuring and recognising revenue. The standard also introduces extensive qualitative and quantitative disclosure requirements, including disaggregation of total revenue, information about performance obligations, changes in contract asset and liability account balances between periods and key judgements and estimates. The standard will supersede all current revenue recognition requirements under IFRSs. The Group expects to adopt IFRS 15 on 1 January 2017 and is currently assessing the impact of IFRS 15 upon adoption.

Amendments to IAS 16 and IAS 38 clarify the principle in IAS 16 and IAS 38 that revenue reflects a pattern of economic benefits that are generated from operating business (of which the asset is part) rather than the economic benefits that are consumed through the use of the asset. As a result, a revenue-based method cannot be used to depreciate property, plant and equipment and may only be used in very limited circumstances to amortise intangible assets. The amendments are to be applied prospectively. The amendments are not expected to have any impact on the financial position or performance of the Group upon adoption on 1 January 2016 as the Group has not used a revenue-based method for the calculation of depreciation of its non-current assets.

The Annual Improvements to IFRSs 2010-2012 Cycle issued in January 2014 sets out amendments to a number of IFRSs. Except for those described in note 2.2, the Group expects to adopt the amendments from 1 January 2015. None of the amendments are expected to have a significant financial impact on the Group. Details of the amendment most applicable to the Group are as follows:

IFRS 8 Operating Segments: Clarifies that an entity must disclose the judgements made by management in applying the aggregation criteria in IFRS 8, including a brief description of operating segments that have been aggregated and the economic characteristics used to assess whether the segments are similar. The amendments also clarify that a reconciliation of segment assets to total assets is only required to be disclosed if the reconciliation is reported to the chief operating decision maker.

– I-15 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Subsidiaries

A subsidiary is an entity (including a structured entity), directly or indirectly, controlled by the Company. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee (i.e., existing rights that give the Group the current ability to direct the relevant activities of the investee).

When the Company has, directly or indirectly, less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including:

(a) the contractual arrangement with the other vote holders of the investee;
(b) rights arising from other contractual arrangements; and
(c) the Group’s voting rights and potential voting rights.

The results of subsidiaries are included in the Company’s statement of profit or loss to the extent of dividends received and receivable. The Company’s investments in subsidiaries that are not classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations are stated at cost less any impairment losses.

Business combinations and goodwill

Business combinations are accounted for using the acquisition method. The consideration transferred is measured at the acquisition date fair value which is the sum of the acquisition date fair values of assets transferred by the Group, liabilities assumed by the Group to the former owners of the acquiree and the equity interests issued by the Group in exchange for control of the acquiree. For each business combination, the Group elects whether to measure the non-controlling interests in the acquiree that are present ownership interests and entitle their holders to a proportionate share of net assets in the event of liquidation at fair value or at the proportionate share of the acquiree’s identifiable net assets. All other components of non-controlling interests are measured at fair value. Acquisition-related costs are expensed as incurred.

When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts of the acquiree.

If the business combination is achieved in stages, the previously held equity interest is remeasured at its acquisition date fair value and any resulting gain or loss is recognised in profit or loss.

Any contingent consideration to be transferred by the acquirer is recognised at fair value at the acquisition date. Contingent consideration classified as an asset or liability that is a financial instrument and within the scope of IAS 39 is measured at fair value with changes in fair value either recognised in profit or loss or as a change to other comprehensive income. If the contingent consideration is not within the scope of IAS 39, it is measured in accordance with the appropriate IFRS. Contingent consideration that is classified as equity is not remeasured and subsequent settlement is accounted for within equity.

Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred, the amount recognised for non-controlling interests and any fair value of the Group’s previously held equity interests in the acquiree over the identifiable net assets acquired and liabilities assumed. If the sum of this consideration and other items is lower than the fair value of the net assets acquired, the difference is, after reassessment, recognised in profit or loss as a gain on bargain purchase.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. The Group performs its annual impairment test of goodwill as at 31 December. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the Group are assigned to those units or groups of units.

– I-16 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Impairment is determined by assessing the recoverable amount of the cash-generating unit (group of cash-generating units) to which the goodwill relates. Where the recoverable amount of the cash-generating unit (group of cash-generating units) is less than the carrying amount, an impairment loss is recognised. An impairment loss recognised for goodwill is not reversed in a subsequent period.

Where goodwill has been allocated to a cash-generating unit (or group of cash-generating units) and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on the disposal. Goodwill disposed of in these circumstances is measured based on the relative value of the operation disposed of and the portion of the cash-generating unit retained.

Fair value measurement

The Group measures its investment properties and equity investments at fair value at the end of each reporting period. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either in the principal market for the asset or liability, or in the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible by the Group. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.

A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.

The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.

All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

Level 1 – based on quoted prices (unadjusted) in active markets for identical assets or liabilities Level 2 – based on valuation techniques for which the lowest level input that is significant to the fair value measurement is observable, either directly or indirectly Level 3 – based on valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable

For assets and liabilities that are recognised in the financial statements on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by reassessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.

Impairment of non-financial assets

Where an indication of impairment exists, or when annual impairment testing for an asset is required (other than inventories, deferred tax assets, financial assets and investment properties), the asset’s recoverable amount is estimated. An asset’s recoverable amount is the higher of the asset’s or cash-generating unit’s value in use and its fair value less costs of disposal, and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case the recoverable amount is determined for the cash-generating unit to which the asset belongs.

An impairment loss is recognised only if the carrying amount of an asset exceeds its recoverable amount. 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. An impairment loss is charged to the statement of profit or loss in the period in which it arises in those expense categories consistent with the function of the impaired asset.

– I-17 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

An assessment is made at the end of each reporting period as to whether there is an indication that previously recognised impairment losses may no longer exist or may have decreased. If such an indication exists, the recoverable amount is estimated. A previously recognised impairment loss of an asset other than goodwill is reversed only if there has been a change in the estimates used to determine the recoverable amount of that asset, but not to an amount higher than the carrying amount that would have been determined (net of any depreciation/amortisation) had no impairment loss been recognised for the asset in prior years. A reversal of such an impairment loss is credited to the statement of profit or loss in the period in which it arises, unless the asset is carried at a revalued amount, in which case the reversal of the impairment loss is accounted for in accordance with the relevant accounting policy for that revalued asset.

Related parties

A party is considered to be related to the Group if:

(a) the party is a person or a close member of that person’s family and that person,
(i) has control or joint control over the Group;
(ii) has significant influence over the Group; or
(iii) is a member of the key management personnel of the Group or of a parent company of the Group;

(b) the party is an entity where any of the following conditions applies:
(i) the entity and the Group are members of the same group;
(ii) one entity is an associate or joint venture of the other entity (or of a parent, subsidiary or fellow subsidiary of the other entity);
(iii) the entity and the Group are joint ventures of the same third party;
(iv) one entity is a joint venture of a third entity and the other entity is an associate of the third entity;
(v) the entity is a post-employment benefit plan for the benefit of employees of either the Group or an entity related to the Group;
(vi) the entity is controlled or jointly controlled by a person identified in (a); and
(vii) a person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity).

Property and equipment and depreciation

Property and equipment, other than construction in progress, are stated at cost less accumulated depreciation and any impairment losses. The cost of an item of property and equipment comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use.

Expenditure incurred after items of property and equipment have been put into operation, such as repairs and maintenance, is normally charged to the statement of profit or loss in the period in which it is incurred. In situations where the recognition criteria are satisfied, the expenditure for a major inspection is capitalised in the carrying amount of the asset as a replacement. Where significant parts of property and equipment are required to be replaced at intervals, the Group recognises such parts as individual assets with specific useful lives and depreciates them accordingly.

– I-18 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Depreciation is calculated on the straight-line basis to write off the cost of each item of property and equipment to its residual value over its estimated useful life as follows:

Buildings 20 to 40 years Leasehold improvements The shorter of the remaining lease terms and five years, whichever is shorter Equipment and fixtures 4 to 15 years Motor vehicles 5 years

Where parts of an item of property and equipment have different useful lives, the cost of that item is allocated on a reasonable basis among the parts and each part is depreciated separately. Useful lives and the depreciation method are reviewed, and adjusted if appropriate, at least at each financial year end.

An item of property and equipment including any significant part initially recognised is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss on disposal or retirement recognised in the statement of profit or loss in the year the asset is derecognised is the difference between the net sales proceeds and the carrying amount of the relevant asset.

Construction in progress represents the Group’s enterprise operating systems under construction, which is stated at cost less any impairment loss, and is not depreciated. Cost comprises the direct costs of construction during the period of construction. Construction in progress is reclassified to the appropriate category of property and equipment when completed and ready for use.

Investment properties

Investment properties are interests in land and buildings (including the leasehold interest under an operating lease for a property which would otherwise meet the definition of an investment property) held to earn rental income and/or for capital appreciation, rather than for use in the production or supply of goods or services or for administrative purposes; or for sale in the ordinary course of business. Such properties are measured initially at cost, including transaction costs. Subsequent to initial recognition, investment properties are stated at fair value, which reflects market conditions at the end of the reporting period.

Gains or losses arising from changes in the fair values of investment properties are included in the statement of profit or loss in the year in which they arise.

Any gains or losses on the retirement or disposal of an investment property are recognised in the statement of profit or loss in the year of the retirement or disposal.

Intangible assets (other than goodwill)

Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is the fair value as at the date of acquisition. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are subsequently amortised over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at each financial year end.

Operating leases

Leases where substantially all the rewards and risks of ownership of assets remain with the lessor are accounted for as operating leases. Where the Group is the lessor, assets leased by the Group under operating leases are included in non-current assets, and rentals receivable under the operating leases are credited to the statement of profit or loss on the straight-line basis over the lease terms. Where the Group is the lessee, rentals payable under operating leases are charged to the statement of profit or loss on the straight-line basis over the lease terms.

– I-19 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Prepaid land lease payments under operating leases are initially stated at cost and subsequently recognised on the straight-line basis over the lease terms. When the lease payments cannot be allocated reliably between the land and buildings elements, the entire lease payments are included in the cost of the land and buildings as a finance lease in property and equipment.

Investments and other financial assets

Initial recognition and measurement

Financial assets are classified, at initial recognition, as loans and receivables and available-for-sale financial investments, as appropriate. When financial assets are recognised initially, they are measured at fair value plus transaction costs that are attributable to the acquisition of the financial assets, except in the case of financial assets recorded at fair value through profit or loss.

All regular way purchases and sales of financial assets are recognised on the trade date, that is, the date that the Group commits to purchase or sell the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace.

Subsequent measurement

The subsequent measurement of financial assets depends on their classification as follows:

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, such assets are subsequently measured at amortised cost using the effective interest rate method less any allowance for impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and includes fees or costs that are an integral part of the effective interest rate. The effective interest rate amortisation is included in other income and gains in the statement of profit or loss. The loss arising from impairment is recognised in the statement of profit or loss in other expenses.

Available-for-sale financial investments

Available-for-sale financial investments are non-derivative financial assets in listed and unlisted equity investments and debt securities. Equity investments classified as available for sale are those which are neither classified as held for trading nor designated as at fair value through profit or loss. Debt securities in this category are those which are intended to be held for an indefinite period of time and which may be sold in response to needs for liquidity or in response to changes in market conditions.

After initial recognition, available-for-sale financial investments are subsequently measured at fair value, with unrealised gains or losses recognised as other comprehensive income in the other investment revaluation reserve until the investment is derecognised, at which time the cumulative gain or loss is recognised in the statement of profit or loss in other income, or until the investment is determined to be impaired, when the cumulative gain or loss is reclassified from the other investment revaluation reserve to the statement of profit or loss in other gains or losses. Interest and dividends earned whilst holding the available-for-sale financial investments are reported as interest income and dividend income, respectively, and are recognised in the statement of profit or loss as other income in accordance with the policies set out for “Revenue recognition” below.

When the fair value of unlisted equity investments cannot be reliably measured because (a) the variability in the range of reasonable fair value estimates is significant for that investment or (b) the probabilities of the various estimates within the range cannot be reasonably assessed and used in estimating fair value, such investments are stated at cost less any impairment losses.

The Group evaluates whether the ability and intention to sell its available-for-sale financial assets in the near term are still appropriate. When, in rare circumstances, the Group is unable to trade these financial assets due to inactive markets, the Group may elect to reclassify these financial assets if management has the ability and intention to hold the assets for the foreseeable future or until maturity.

– I-20 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

For a financial asset reclassified from the available-for-sale category, the fair value carrying amount at the date of reclassification becomes its new amortised cost and any previous gain or loss on that asset that has been recognised in equity is amortised to profit or loss over the remaining life of the investment using the effective interest rate. Any difference between the new amortised cost and the maturity amount is also amortised over the remaining life of the asset using the effective interest rate. If the asset is subsequently determined to be impaired, then the amount recorded in equity is reclassified to the statement of profit or loss.

Derecognition of financial assets

A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognised (i.e., removed from the Group’s consolidated statement of financial position) when:

the rights to receive cash flows from the asset have expired; or
the Group has transferred its rights to receive cash flows from the asset, or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a “pass-through” arrangement; and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, it evaluates if and to what extent it has retained the risk and rewards of ownership of the asset. When it has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the Group continues to recognise the transferred asset to the extent of the Group’s continuing involvement. In that case, the Group also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Group has retained.

Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.

Impairment of financial assets

The Group assesses at the end of each reporting period whether there is any objective evidence that a financial asset or group of financial assets is impaired. An impairment exists if one or more events that occurred after the initial recognition of the asset have an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that a debtor or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation and observable data indicating that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

Financial assets carried at amortised cost

For financial assets carried at amortised cost, the Group first assesses whether impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment.

The amount of any impairment loss identified is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not yet been incurred). The present value of the estimated future cash flows is discounted at the financial assets’ original effective interest rate (i.e., the effective interest rate computed at initial recognition).

The carrying amount of the asset is reduced through the use of an allowance account and the loss is recognised in the statement of profit or loss. Interest income continues to be accrued on the reduced carrying amount and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. Loans and receivables together with any associated allowance are written off when there is no realistic prospect of future recovery or has been transferred to the Group.

– I-21 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

If, in a subsequent period, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a write-off is later recovered, the recovery is credited to the statement of profit or loss.

Assets carried at cost

If there is objective evidence that an impairment loss has been incurred on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, or on a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. Impairment losses on these assets are not reversed.

Available-for-sale financial investments

For available-for-sale financial investments, the Group assesses at the end of each reporting period whether there is objective evidence that an investment or a group of investments is impaired.

If an available-for-sale investment is impaired, an amount comprising the difference between its cost (net of any principal payment and amortisation) and its current fair value, less any impairment loss previously recognised in the statement of profit or loss, is removed from other comprehensive income and recognised in the statement of profit or loss.

In the case of equity investments classified as available for sale, objective evidence would include a significant or prolonged decline in the fair value of an investment below its cost. “Significant” is evaluated against the original cost of the investment and “prolonged” against the period in which the fair value has been below its original cost. Where there is evidence of impairment, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that investment previously recognised in the statement of profit or loss – is removed from other comprehensive income and recognised in the statement of profit or loss. Impairment losses on equity instruments classified as available for sale are not reversed through the statement of profit or loss. Increases in their fair value after impairment are recognised directly in other comprehensive income.

The determination of what is “significant” or “prolonged” requires judgement. In making this judgement, the Group evaluates, among other factors, the duration or extent to which the fair value of an investment is less than its cost.

Financial liabilities

Initial recognition and measurement

Financial liabilities are classified, at initial recognition, as loans and borrowings. The Group determines the classification of its financial liabilities at initial recognition.

All financial liabilities are recognised initially at fair value and, in the case of loans and borrowings, net of directly attributable transaction costs.

The Group’s financial liabilities include trade and bills payables, financial liabilities included in customers’ deposits, other payables and accruals, amounts due to related companies and interest-bearing bank loans.

Subsequent measurement

The subsequent measurement of financial liability depends on the classification as follows:

Loans and borrowings

After initial recognition, interest-bearing loans are subsequently measured at amortised cost, using the effective interest rate method unless the effect of discounting would be immaterial, in which case they are stated at cost. Gains and losses are recognised in the statement of profit or loss when the liabilities are derecognised as well as through the effective interest rate amortisation process.

Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the effective interest rate. The effective interest rate amortisation is included in finance costs in the statement of profit or loss.

– I-22 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Derecognition of financial liabilities

A financial liability is derecognised when the obligation under the liability is discharged or cancelled, or expires.

When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and a recognition of a new liability, and the difference between the respective carrying amounts is recognised in the statement of profit or loss.

Offsetting of financial instruments

Financial assets and financial liabilities are offset and the net amount is reported in the statement of financial position if, there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liabilities simultaneously.

Inventories

Inventories comprise merchandise purchased for resale and consumables 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.

Cash and cash equivalents

For the purpose of the statement of cash flows, cash and cash equivalents comprise cash on hand and demand deposits, and short term highly liquid investments that are readily convertible into known amounts of cash, are subject to an insignificant risk of changes in value, and have a short maturity of generally within three months when acquired, less bank overdrafts which are repayable on demand and form an integral part of the Group’s cash management.

For the purpose of the statement of financial position, cash and cash equivalents comprise cash on hand and at banks, including term deposits, which are not restricted as to use.

Provisions

A provision is recognised when a present obligation (legal or constructive) has arisen as a result of a past event and it is probable that a future outflow of resources will be required to settle the obligation, provided that a reliable estimate can be made of the amount of the obligation.

When the effect of discounting is material, the amount recognised for a provision is the present value at the end of the reporting period of the future expenditures expected to be required to settle the obligation. The increase in the discounted present value amount arising from the passage of time is included in finance costs in the statement of profit or loss.

Income tax

Income tax comprises current and deferred tax. Income tax relating to items recognised outside profit or loss is recognised outside profit or loss, either in other comprehensive income or directly in equity.

Current tax assets and liabilities are measured at the amounts expected to be recovered from or paid to the taxation authorities, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period, taking into consideration interpretations and practices prevailing in the countries in which the Group operates.

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

– I-23 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Deferred tax liabilities are recognised for all taxable temporary differences, except:

when the deferred tax liability arises from the initial recognition of goodwill or 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
in respect of taxable temporary differences associated with investments in subsidiaries, when 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 tax assets are recognised for all deductible temporary differences, the carryforward of unused tax credits and any unused tax losses. Deferred tax assets are recognised to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, the carryforward of unused tax credits and unused tax losses can be utilised, except:

when the deferred tax asset relating to the deductible temporary differences 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
in respect of deductible temporary differences associated with investments in subsidiaries, deferred 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 tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are reassessed at the end of each reporting period and are recognised to the extent that it has become probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be recovered.

Deferred 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 by the end of the reporting period.

Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.

Government grants

Government grants are recognised at their fair value when there is reasonable assurance that the grant will be received and all attaching conditions will be complied with. When the grant relates to an expense item, it is recognised as income on a systematic basis over the periods that the costs, which it is intended to compensate, are expensed.

Revenue recognition

Revenue is recognised when it is probable that the economic benefits will flow to the Group and when the revenue can be measured reliably, on the following bases:

Income from the sale of goods is recognised when the significant risks and rewards of ownership have been transferred to the buyer, provided that the Group maintains neither managerial involvement to the degree usually associated with ownership, nor effective control over the goods sold;
Income from suppliers comprising promotion income, management fee income, display space leasing fees and product listing fees is recognised according to the underlying contract terms when these services have been rendered in accordance therewith;
Management and purchasing service fee income, management fee income for air-conditioner installation and other service fee income are recognised when such services have been rendered;

– I-24 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Rental income is recognised on a time proportion basis over the lease terms;
Interest income is recognised on an accrual basis using the effective interest method by applying the rate that discounts the estimated future cash receipts over the expected life of the financial instrument or a shorter period, when appropriate, to the net carrying amount of the financial asset; and
Dividend income is recognised when the shareholders’ right to receive payment has been established.

Share-based payments

The Company operates a share option scheme for the purpose of providing incentives and rewards to eligible participants who contribute to the success of the Group’s operations. Employees (including directors) of the Group receive remuneration in the form of share-based payments, whereby employees render services as consideration for equity instruments (“equity-settled transactions”).

The cost of equity-settled transactions with employees for grants after 7 November 2002 is measured by reference to the fair value at the date on which they are granted. The fair value is determined by an external valuer using a binomial model, further details of which are given in note 30 to the financial statements.

The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled in employee benefit expense. The cumulative expense recognised for equity-settled transactions at the end of each reporting period until the vesting date reflects the extent to which the vesting period has expired and the Group’s best estimate of the number of equity instruments that will ultimately vest. The charge or credit to the statement of profit or loss for a period represents the movement in cumulative expense recognised as at the beginning and end of that period.

No expense is recognised for awards that do not ultimately vest, except for equity-settled transactions where vesting is conditional upon a market condition or non-vesting condition, which are treated as vesting irrespective of whether or not the market or non-vesting condition is satisfied, provided that all other performance or service conditions are satisfied.

Where the terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms had not been modified, if the original terms of the award are met. In addition, an expense is recognised for any modification that increases the total fair value of the share-based payments, or is otherwise beneficial to the employee as measured at the date of modification.

Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. This includes any award where non-vesting conditions within the control of either the Group or the employee are not met. However, if a new award is substituted for the cancelled award, and is designated as a replacement award on the date that it is granted, the cancelled and new awards are treated as if they were a modification of the original award, as described in the previous paragraph.

The dilutive effect of outstanding options is reflected as additional share dilution in the computation of earnings per share.

Other employee benefits

Salaries, bonuses, paid annual leave 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.

Contributions to defined contribution retirement plans are recognised as an expense in the statement of profit or loss as incurred.

Pursuant to the relevant PRC laws and regulations, the employees of the Group’s PRC subsidiaries are required to participate in a central pension scheme operated by the local municipal government. These subsidiaries are required to contribute a certain percentage of the salaries of their employees to the central pension scheme. The only obligation of these subsidiaries with respect to the central pension scheme is the ongoing required contributions. Contributions made to the retirement benefit scheme are charged to the statement of profit or loss as they become payable in accordance with the rules of the central pension scheme.

– I-25 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The Group also operates a defined contribution Mandatory Provident Fund retirement benefit scheme (the “MPF Scheme”) under the Mandatory Provident Fund Schemes Ordinance for its employees in Hong Kong. Contributions are made based on a percentage of the employees’ basic salaries and are charged to the statement of profit or loss as they become payable in accordance with the rules of the MPF Scheme. The assets of the MPF Scheme are held separately from those of the Group in an independently administered fund. The Group’s employer contributions vest fully with the employees when contributed into the MPF Scheme.

Termination benefits

Termination benefits are recognised at the earlier of when the Group can no longer withdraw the offer of those benefits and when the Group recognises restructuring costs involving the payment of termination benefits.

Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, i.e., assets that necessarily take a substantial period of time to get ready for their intended use or sale, are capitalised as part of the cost of those assets. The capitalisation of such borrowing costs ceases when the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs capitalised. All other borrowing costs are expensed in the period in which they are incurred. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds.

Dividends

Final dividends proposed by the directors are classified as a separate allocation of retained profits within the equity section of the statement of financial position, 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.

Foreign currencies

These financial statements are presented in Renminbi (“RMB”), which is the Company’s functional and presentation currency. Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Foreign currency transactions recorded by the entities in the Group are initially recorded using their respective functional currency exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency rates of exchange ruling at the end of the reporting period. Differences arising on settlement or translation of monetary items are recognised in the statement of profit or loss.

Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates ruling at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was measured. The gain or loss arising on retranslation of a non-monetary item measured at fair value is treated in line with the recognition of the gain or loss on change in fair value of the item (i.e., translation difference on the item whose fair value gain or loss is recognised in other comprehensive income or profit or loss are also recognised in other comprehensive income or profit or loss, respectively).

The functional currencies of certain overseas subsidiaries are currencies other than RMB. As at the end of the reporting period, the assets and liabilities of these entities are translated into the presentation currency of the Company at the exchange rates prevailing at the end of the reporting period and their statements of profit or loss are translated into RMB at the weighted average exchange rates for the year. The resulting exchange differences are recognised in other comprehensive income and accumulated in a separate component of equity. On disposal of a foreign operation, the component of other comprehensive income relating to that particular foreign operation is recognised in the statement of profit or loss.

– I-26 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

For the purpose of the consolidated statement of cash flows, the cash flows of overseas subsidiaries are translated into Renminbi at the exchange rates ruling at the dates of the cash flows. Frequently recurring cash flows of overseas subsidiaries which arise throughout the year are translated into Renminbi at the weighted average exchange rates for the year.

3. SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES

The preparation of the Group’s financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of revenue, expenses, assets and liabilities, and their accompanying disclosures, and the disclosure of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amounts of the assets or liabilities affected in the future.

Judgements

In the process of applying the Group’s accounting policies, management has made the following judgements, apart from those involving estimations, which have the most significant effect on the amounts recognised in the financial statements:

Inventories

The Group does not have a general provisioning policy on inventories based on ageing given the nature of inventories and the purchase return or exchange protections from suppliers. However, operational procedures are in place to monitor this risk as the majority of the Group’s working capital is devoted to inventories. The Company reviews its inventory ageing on a periodical basis and compares the carrying values of the aged inventories with the respective net realisable values. The purpose is to ascertain whether allowance is required to be made in the financial statements for any obsolete and slow-moving inventories. In addition, physical counts are carried out on a periodical basis in order to determine whether allowance is needed in respect of any missing, obsolete or defective inventories identified.

Operating lease commitments – Group as lessee

The Group has entered into commercial property leases for its retail business. The Group has determined that the lessor retains all the significant risks and rewards of relevant properties and so accounts for them as operating leases.

Classification between investment properties and owner-occupied properties

The Group determines whether a property qualifies as an investment property, and has developed criteria in making that judgement. Investment property is a property held to earn rentals or for capital appreciation or both. Therefore, the Group considers whether a property generates cash flows largely independently of the other assets held by the Group. Some properties comprise a portion that is held to earn rentals or for capital appreciation and another portion that is held for use in the production or supply of goods or services or for administrative purposes. If these portions could be sold separately or leased out separately under a finance lease, the Group accounts for the portions separately. If the portions could not be sold separately, the property is an investment property only if an insignificant portion is held for use in the production or supply of goods or services or for administrative purposes. Judgement is made on an individual property basis to determine whether ancillary services are so significant that a property does not qualify as an investment property.

Tax provisions

Determining tax provisions involves judgement on the future tax treatment of certain transactions. The Group carefully evaluates tax implications of transactions, and tax provisions are set up accordingly. The tax treatment of such transactions is assessed periodically to take into account all the changes in the tax legislation and practices.

Consolidation of Beijing Dazhong Home Appliances Retail Co., Ltd. (“Dazhong Appliances”), of which the Group is not the legal owner

The Group considers that it controls Dazhong Appliances even though it does not own any equity interest or voting rights. Pursuant to a series of agreements entered into between the Group (“the investor”) and Beijing Zhansheng Investment Co., Ltd., the legal owner of Dazhong Appliances, the investor is responsible for the management and operation of Dazhong Appliances and has the rights to direct the relevant activities of it. In addition, the investor is exposed to variable returns from its involvement with Dazhong Appliances and has the ability to use its power over Dazhong Appliance to affect the amount of the investor’s returns.

– I-27 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Estimation uncertainty

The key assumptions concerning the future and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below.

Impairment of financial assets

The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (an incurred “loss event”) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated.

Impairment of goodwill

The Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use of the cash-generating units to which the goodwill is allocated. Estimating the value in use requires the Group to make an estimate of the expected future cash flows from the cash-generating units and also to choose a suitable discount rate in order to calculate the present value of those cash flows. The carrying amount of goodwill at 31 December 2014 was RMB7,145,117,000 (2013: RMB7,145,117,000). Further details are given in note 14.

Estimation of fair value of investment properties

In the absence of current prices in an active market for similar properties, the Group considers information from a variety of sources, including:

(a) current prices in an active market for properties of a different nature, condition or location, adjusted to reflect those differences;
(b) recent prices of similar properties on less active markets, with adjustments to reflect any changes in economic conditions since the date of the transactions that occurred at those prices; and
(c) discounted cash flow projections based on reliable estimates of future cash flows, supported by the terms of any existing lease and other contracts and (when possible) by external evidence such as current market rents for similar properties in the same location and condition, and using discount rates that reflect current market assessments of the uncertainty in the amount and timing of the cash flows.

The carrying amount of investment properties as at 31 December 2014 was RMB601,224,000 (2013: RMB948,805,000). Further details, including the key assumptions used for fair value measurement and a sensitivity analysis, are given in note 13 to the financial statements.

Impairment of non-financial assets (other than goodwill)

The Group assesses whether there are any indicators of impairment of all non-financial assets at the end of each reporting period. Indefinite life intangible assets are tested for impairment annually and at other times when such indicators exist. Other non-financial assets are tested for impairment when there are indicators that the carrying amounts may not be recoverable. An impairment exists when the carrying value of an asset or a cash-generating unit exceeds its recoverable amount, which is the higher of its fair value less costs of disposal and its value in use. The calculation of the fair value less costs of disposal is based on available data from binding sales transactions in an arm’s length transaction of similar assets or observable market prices less incremental costs for disposing of the asset. When value in use calculations are undertaken, management must estimate the expected future cash flows from the asset or cash-generating unit and choose a suitable discount rate in order to calculate the present value of those cash flows.

Deferred tax assets

Deferred tax assets are recognised for all unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Significant management judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and level of future taxable profits together with future tax planning strategies. The carrying value of deferred tax assets relating to tax losses at 31 December 2014 was RMB5,467,000 (2013: RMB23,703,000). The amount of unrecognised tax losses at 31 December 2014 amounted to RMB4,360,400,000 (2013: RMB3,624,900,000). Further details are given in note 18 to the financial statements.

– I-28 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Impairment of available-for-sale financial assets

The Group classifies certain assets as available for sale and recognises movements of their fair values in equity. When the fair value declines, management makes assumptions about the decline in value to determine whether there is an impairment that should be recognised in the statement of profit or loss. As at 31 December 2014, the carrying amount of available-for-sale assets was RMB217,350,000 (2013: RMB135,000,000). Further details are given in note 16 to the financial statements.

Assessment of useful lives of property and equipment

The Group has estimated the useful lives of the property and equipment of 4 to 40 years. Depreciation of items of property and equipment is calculated on the straight-line basis over their expected useful lives. The carrying amount of items of property and equipment as at 31 December 2014 was RMB4,417,234,000 (2013: RMB4,094,770,000). Further details are given in note 12 to the financial statements.

4. OPERATING SEGMENT INFORMATION

For management purposes, the Group is organised into business units based on their products and services and has one reportable operating segment which is the operation and management of networks of electrical appliances, consumer electronic products retail stores and electronic products on-line sales in the PRC. The corporate office in Hong Kong does not earn revenues and is not classified as an operating segment.

Management monitors the results of the Group’s operating segment for the purpose of making decisions about resources allocation and performance assessment. Segment performance is evaluated based on reportable segment profit or loss, which is a measure of adjusted profit or loss before tax. The adjusted profit or loss before tax is measured consistently with the Group’s profit or loss before tax except that bank interest income, unallocated income, gain on settlement of a cross currency swap, finance costs and corporate and other unallocated expenses are excluded from this measurement.

Segment assets exclude other investments, deferred tax assets, pledged deposits and cash and cash equivalents as these assets are managed on a group basis.

Segment liabilities exclude interest-bearing bank loans, tax payable and deferred tax liabilities as these liabilities are managed on a group basis.

Segment revenue Sales to external customers Segment results Reconciliation: Bank interest income Unallocated income Gain on settlement of a cross currency swap Finance costs Corporate and other unallocated expenses Profit before tax Segment assets Reconciliation: Corporate and other unallocated assets Total assets	2014 RMB’000 60,359,843 1,309,488 302,026 102,568 – (46,111) (87,827) 1,580,144 28,960,521 15,116,152 44,076,673	2013 RMB’000 56,400,662 1,014,292 240,725 37,906 11,002 (60,569) (48,681) 1,194,675 23,715,789 15,608,196 39,323,985

– I-29 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Segment liabilities Reconciliation: Corporate and other unallocated liabilities Total liabilities Other segment information Depreciation and amortisation Capital expenditure*	2014 RMB’000 23,827,056 4,215,099 28,042,155 579,306 625,659	2013 RMB’000 20,588,440 3,418,087
		24,006,527

		576,141 429,827

Capital expenditure consists of additions to property and equipment.

Geographical information

(a) Revenue from external customers

		2014	2013
		RMB’000	RMB’000
Mainland	China	60,359,843	56,400,662

The revenue information above is based on the location of the customers.

(b) Non-current assets

Mainland China Hong Kong	2014 RMB’000 12,713,520 26,984 12,740,504	2013 RMB’000 12,768,409 24,499
		12,792,908

The non-current asset information above is based on the locations of the assets and excludes deferred tax assets and other investments.

– I-30 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

5. REVENUE, OTHER INCOME AND GAINS

Revenue, which is also the Group’s turnover, represents the net invoiced value of goods sold, after allowances for returns and trade discounts.

An analysis of revenue, other income and gains is as follows:

Notes Revenue Sale of electrical appliances and consumer electronic products Other income Income from suppliers, net Management and purchasing service fees from the Non-listed GOME Group (i) Income from air-conditioner installation Gross rental income Government grants (ii) Other service fee income Income from compensation Other income from telecommunication service providers Commission income from services provision of online platform Others Gains Fair value gain on investment properties 13 Foreign exchange difference, net Gain on settlement of a cross currency swap Compensation received 35	2014 RMB’000 60,359,843 473,323 250,000 148,074 307,684 114,944 233,352 41,429 249,551 98,685 145,440 2,062,482 – – – 100,102 100,102 2,162,584	2013 RMB’000 56,400,662

		496,695 250,000 107,279 282,691 143,744 137,701 48,892 162,383 30,786 112,559
		1,772,730
		30,333 37,906 11,002 –
		79,241
		1,851,971

Notes:

(i) The Non-listed GOME Group is defined in note 34(a) to the financial statements.
(ii) Various local government grants were received to reward the Group’s contributions to the local economy. There was no unfulfilled condition or contingency attaching to these government grants.

– I-31 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

6. PROFIT BEFORE TAX

The Group’s profit before tax is arrived at after charging/(crediting):

Notes Cost of inventories sold Depreciation 12 Amortisation of intangible assets 15, (i) Loss on disposal of items of property and equipment Minimum lease payments under operating leases in respect of land and buildings Impairment of goodwill Impairment provision for items of property and equipment 12 Gross rental income 5 Net fair value loss/(gain) on investment properties 5, 13 Gain on settlement of a cross currency swap 28 Foreign exchange differences, net loss/(gain) Auditors’ remuneration – audit services – non-audit services Staff costs excluding directors’ and chief executive’s remuneration (note 8): Wages, salaries and bonuses Pension scheme contributions* Social welfare and other costs Equity-settled share option expense	2014 RMB’000 51,365,601 555,868 23,438 9,216 3,303,420 – 10,464 (307,684) 3,738 – 37,396 6,692 540 2,155,715 443,481 54,036 5,075 2,658,307	2013 RMB’000 47,898,540 552,703 23,438 53,785 3,171,486 15,790 – (282,691) (30,333) (11,002) (37,906) 7,437 611 1,990,954 418,136 38,186 (5,867) 2,441,409

Notes:

(i) The amortisation of other intangible assets for the year is included in “Administrative expenses” in the consolidated statement of profit or loss.
At 31 December 2014, the Group had no forfeited contribution available to reduce its contributions to the pension schemes in future years (2013: Nil).

7. FINANCE (COSTS)/INCOME

An analysis of finance costs and finance income is as follows:

Finance costs: Interest on bank loans wholly repayable within five years Finance income: Bank interest income	2014 RMB’000 (46,111) 302,026	2013 RMB’000 (60,569) 240,725

– I-32 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

8. DIRECTORS’ AND CHIEF EXECUTIVE’S REMUNERATION

Directors’ and chief executive’s remuneration for the year, disclosed pursuant to the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (the “Listing Rules”) and section 78 of Schedule 11 to the Hong Kong Companies Ordinance (Cap. 622), with reference to section 161 of the predecessor Hong Kong Companies Ordinance (Cap. 32), is as follows:

Fees Other emoluments: Salaries, allowances and other expense Equity-settled share option expense Pension scheme contributions	2014 RMB’000 3,967 2,483 8 39 2,530	2013 RMB’000 4,099

		4,019 (896) 46
		3,169

During the year 2009, certain directors and the chief executive were granted share options in respect of their services to the Group under the share option scheme of the Company, further details of which are set out in note 30 to the financial statements. The fair value of these options, which has been recognised in the consolidated statement of profit or loss over the vesting period, was determined as at the date of grant and the amount included in the financial statements for the current year is included in the above directors’ and chief executive’s remuneration disclosures.

(a) Independent non-executive directors

The fees paid to independent non-executive directors during the year were as follows:

Note Mr. Sze Tsai Ping, Michael Mr. Chan Yuk Sang Mr. Lee Kong Wai, Conway Mr. Ng Wai Hung Ms. Liu Hong Yu (ii)	2014 RMB’000 475 475 475 475 475 2,375	2013 RMB’000 479 479 479 479 267
		2,183

Notes:

(i) There was no other emolument payable to the independent non-executive directors during the year (2013: Nil).
(ii) Ms. Liu Hong Yu was appointed as an independent non-executive director of the Company on 10 June 2013.

– I-33 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(b) Executive directors, non-executive directors and the chief executive

2014 Notes Executive directors: Mr. Zou Xiao Chun Non-executive directors: Mr. Zhang Da Zhong Mr. Zhu Jia (ii) Ms. Wang Li Hong (ii) Mr. Cheung Leong (i) Chief executive: Mr. Wang Jun Zhou	Fees RMB’000 – – 475 475 475 167 1,592 – 1,592	Salaries, allowances and other expense RMB’000 886 886 – – – – – 1,597 2,483	Equity-settled share option expense RMB’000 – – – – – – – 8 8	Pension scheme contributions RMB’000 – – – – – – – 39 39	Total RMB’000 886
					886
					475 475 475 167
					1,592
					1,644
					4,122

Notes:

(i) Mr. Cheung Leong resigned as a non-executive director with effect from 8 May 2014.
(ii) Mr. Zhu Jia and Ms. Wang Li Hong resigned as non-executive directors of the Company with effect from 28 January 2015.

2013 Note Executive directors: Mr. Zou Xiao Chun Mr. Ng Kin Wah (i) Non-executive directors: Mr. Zhang Da Zhong Mr. Zhu Jia Ms. Wang Li Hong Mr. Cheung Leong Chief executive: Mr. Wang Jun Zhou	Fees RMB’000 – – – 479 479 479 479 1,916 – 1,916	Salaries, allowances and other expense RMB’000 1,878 945 2,823 – – – – – 1,196 4,019	Equity-settled share option expense RMB’000 – (370) (370) – – – – – (526) (896)	Pension scheme contributions RMB’000 – 10 10 – – – – – 36 46	Total RMB’000 1,878 585
					2,463
					479 479 479 479
					1,916
					706
					5,085

Note:

(i) Mr. Ng Kin Wah passed away on 13 October 2013.

– I-34 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(c) Five highest paid individuals

The five highest paid individuals during the year included the chief executive (2013: one director and the chief executive). Details of the director and the chief executive’s remuneration are set out above. Details of the remuneration for the year of the remaining four (2013: three) highest paid individuals who are neither a director nor the chief executive of the Group are as follows:

Salaries, allowances and other expense Pension scheme contributions Equity-settled share option expense	2014 RMB’000 5,392 140 22 5,554	2013 RMB’000 3,500 92 (1,211)
		2,381

The number of non-director and non-chief-executive highest paid individuals whose remuneration fell within the following bands is as follows:

HK$1,000,001 to HK$1,500,000 (equivalent to RMB792,401 to RMB1,188,600) HK$1,500,001 to HK$2,000,000 (equivalent to RMB1,188,601 to RMB1,584,800)	Number of individuals 2014 2013 – 1 4 2 4 3	Number of individuals 2014 2013 – 1 4 2 4 3
		3

9. PENSION SCHEMES

All the PRC subsidiaries of the Group are required to participate in the employee retirement benefit 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 is required to make contributions for those employees who are registered as permanent residents in the PRC and are within the scope of the relevant PRC regulations at rates ranging from 20% to 22.5% of the employees’ salaries for the years ended 31 December 2014 and 2013.

All the Hong Kong subsidiaries of the Group are required to participate in the MPF scheme under the Mandatory Provident Fund Schemes Ordinance in Hong Kong. The Group’s employer contributions vest fully with the employees when contributed into the MPF Scheme. The Group is required to make contributions for those employees who are registered as permanent residents in Hong Kong and are within the scope of the relevant Hong Kong regulations at the lesser of HK$1,250 and 5% of the employees’ salaries for the years ended 31 December 2014 and 2013.

The Group’s contributions to pension schemes for the year ended 31 December 2014 amounted to approximately RMB443,520,000 (2013: RMB418,182,000).

10. INCOME TAX EXPENSE

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

Current income tax Deferred income tax (note 18) Total tax charge for the year	2014 RMB’000 552,481 9,495 561,976	2013 RMB’000 429,273 87,957
		517,230

The Group is subject to income tax on an entity basis on the profit arising in or derived from the tax jurisdictions in which members of the Group are domiciled and operate. The determination of current and deferred income taxes was based on the enacted tax rates.

– I-35 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Pursuant to the rules and regulations of the Cayman Islands and the British Virgin Islands, the Group is not subject to any income tax in the Cayman Islands and the British Virgin Islands.

Under the relevant PRC income tax law, except for certain preferential treatments available to the Group, the PRC subsidiaries of the Group are subject to income tax at a rate of 25% (2013: 25%) on their respective taxable income. During the year, 24 entities (2013: 22 entities) of the Group obtained approval from the relevant PRC tax authorities and were entitled to preferential corporate income tax rates or corporate income tax exemptions.

The Group realised tax benefits during the year through applying the preferential corporate income tax rates and the corporate income tax exemptions. These preferential tax treatments were available to the Group pursuant to the enacted PRC tax rules and regulations and are subject to assessment by the relevant PRC tax authorities.

As the Group had assessable profits arising in Hong Kong for 2014, RMB1,000 for provision of Hong Kong profits tax has been made for the year ended 31 December 2014 (2013: Nil).

A reconciliation of the tax expense applicable to profit or loss before tax at the statutory rates for the jurisdictions in which the Company and the majority of its subsidiaries are domiciled to the tax expense at the Group’s effective tax rate, is as follows:

(Loss)/profit before tax Income tax at the statutory tax rate Tax effect of preferential tax rates Effect of withholding tax at 10% on the distributable profits of the Group’s subsidiaries in Mainland China Income not subject to tax Expense not deductible for tax Tax losses utilised from previous years Tax losses not recognized Tax charge at the Group’s effective rate (Loss)/profit before tax Income tax at the statutory tax rate Tax effect of preferential tax rates Effect of withholding tax at 10% on the distributable profits of the Group’s subsidiaries in Mainland China Income not subject to tax Expense not deductible for tax Tax losses utilised from previous years Tax losses not recognized Tax charge at the Group’s effective rate	Hong Kong RMB’000 % (42,569) (7,024) 16.5 – – (17,383) 9,908 (106) 14,606 1 Hong Kong RMB’000 % (54,056) (8,919) 16.5 – – (6,809) 13,537 – 2,191 –	2014 Mainland China RMB’000 % 1,622,713 405,679 25.0 (60,806) 51,193 (28,479) 70,224 (82,327) 206,491 561,975 2013 Mainland China RMB’000 % 1,248,731 312,183 25.0 (54,387) 100,968 (28,479) 82,083 (111,320) 216,182 517,230	Total RMB’000 1,580,144 398,655 (60,806) 51,193 (45,862) 80,132 (82,433) 221,097 561,976 Total RMB’000 1,194,675 303,264 (54,387) 100,968 (35,288) 95,620 (111,320) 218,373 517,230

– I-36 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Pursuant to the PRC Corporate Income Tax Law, a 10% withholding tax is levied on dividends declared to foreign investors from the foreign investment enterprises established in Mainland China. The requirement is effective from 1 January 2008 and applies to earnings after 31 December 2007. A lower withholding tax rate may be applied if there is a tax treaty between Mainland China and the jurisdiction of the foreign investors. At 31 December 2014, no deferred tax liabilities have been recognised for withholding taxes that would be payable on the unremitted earnings that are subject to withholding taxes of the Group’s subsidiaries established in Mainland China (2013: Nil). In the opinion of the directors, it is not probable that these subsidiaries will distribute such earnings in the foreseeable future.

11. EARNINGS PER SHARE ATTRIBUTABLE TO ORDINARY EQUITY HOLDERS OF THE PARENT

The calculation of the basic earnings per share is based on the profit for the year attributable to ordinary equity holders of the parent and the weighted average number of ordinary shares of 16,923,994,000 (2013: 16,875,056,000) in issue during the year.

The calculation of the diluted earnings per share is based on the profit for the year attributable to ordinary equity holders of the parent. The weighted average number of ordinary shares used in the calculation of diluted earnings per share is the weighted average number of ordinary shares in issue during the year, as used in the basic earnings per share calculation, and the weighted average number of ordinary shares assumed to have been issued at no consideration on the deemed exercise or conversion of all dilutive potential ordinary shares into ordinary shares.

For the year ended 31 December 2014 and year ended 31 December 2013, no potential ordinary shares had any dilutive effect on the earnings per share.

The calculations of the basic and diluted earnings per share are based on:

Earnings Profit attributable to ordinary equity holders of the parent used in the basic and diluted earnings per share calculation Shares Weighted average number of ordinary shares in issue during the year used in the basic and diluted earnings per share calculation	2014 2013 RMB’000 RMB’000 1,279,770 892,475 Number of shares 2014 2013 ’000 ’000 16,923,994 16,875,056	2013 RMB’000 892,475

– I-37 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

12. PROPERTY AND EQUIPMENT

Group

31 December 2014 At 31 December 2013 and 1 January 2014: Cost Accumulated depreciation and impairment Net carrying amount At 1 January 2014, net of accumulated depreciation and impairment: Additions Disposals Impairment Depreciation provided during the year Reclassification from investment properties Transfers from construction in progress At 31 December 2014, net of accumulated depreciation and impairment At 31 December 2014: Cost Accumulated depreciation and impairment Net carrying amount 31 December 2013 At 31 December 2012 and 1 January 2013: Cost Accumulated depreciation and impairment Net carrying amount	Buildings RMB’000 3,346,349 (576,742) 2,769,607 2,769,607 – – – (97,891) 343,843 – 3,015,559 3,690,192 (674,633) 3,015,559 3,346,349 (489,567) 2,856,782	Leasehold improvements RMB’000 1,758,651 (1,150,275) 608,376 608,376 344,429 (58,970) (10,464) (214,259) – – 669,112 1,927,122 (1,258,010) 669,112 1,628,274 (968,310) 659,964	Equipment and fixtures RMB’000 1,542,349 (845,398) 696,951 696,951 79,300 (21,321) – (235,751) – 103,734 622,913 1,521,006 (898,093) 622,913 1,402,522 (572,919) 829,603	Motor vehicles RMB’000 96,771 (77,365) 19,406 19,406 5,371 (415) – (7,967) – – 16,395 90,050 (73,655) 16,395 92,779 (66,281) 26,498	Construction in progress RMB’000 430 – 430 430 196,559 – – – – (103,734) 93,255 93,255 – 93,255 6,600 – 6,600	Total RMB’000 6,744,550 (2,649,780)
						4,094,770

						4,094,770 625,659 (80,706) (10,464) (555,868) 343,843 –
						4,417,234

						7,321,625 (2,904,391)
						4,417,234

						6,476,524 (2,097,077)
						4,379,447

– I-38 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

At 1 January 2013, net of accumulated depreciation and impairment: Additions Disposals Depreciation provided during the year Transfers from construction in progress At 31 December 2013, net of accumulated depreciation and impairment At 31 December 2013: Cost Accumulated depreciation and impairment Net carrying amount	Buildings RMB’000 2,856,782 – – (87,175) – 2,769,607 3,346,349 (576,742) 2,769,607	Leasehold improvements RMB’000 659,964 221,916 (91,539) (181,965) – 608,376 1,758,651 (1,150,275) 608,376	Equipment and fixtures RMB’000 829,603 106,643 (69,341) (272,479) 102,525 696,951 1,542,349 (845,398) 696,951	Motor vehicles RMB’000 26,498 4,913 (921) (11,084) – 19,406 96,771 (77,365) 19,406	Construction in progress RMB’000 6,600 96,355 – – (102,525) 430 430 – 430	Total RMB’000 4,379,447 429,827 (161,801) (552,703) –
						4,094,770

						6,744,550 (2,649,780)
						4,094,770

Certain of the buildings of the Group in Mainland China were pledged as security for bills payable (note 25) and interest-bearing bank loans (note 27) of the Group as at 31 December 2014. The aggregate carrying value of the pledged buildings attributable to the Group as at 31 December 2014 amounted to RMB1,027,907,000 (31 December 2013: RMB283,348,000).

The recoverable amount was nil for those impaired assets as at 31 December 2014.

13. INVESTMENT PROPERTIES

Group

Carrying amount at 1 January Net (loss)/gain from a fair value adjustment Transfer to owner-occupied properties (note 12) Carrying amount at 31 December	2014 RMB’000 948,805 (3,738) (343,843) 601,224	2013 RMB’000 918,472 30,333 –
		948,805

Investment properties comprised commercial properties in Mainland China that are leased to third parties and an industrial property and a car park in Hong Kong that are leased to a related company (notes 33(a), 34(a)(v)) and a third party, respectively.

Investment properties are stated at fair value, which has been determined with reference to the valuations performed by Jones Lang LaSalle Corporate Appraisal and Advisory Limited (“Jones Lang LaSalle”) and B.I. Appraisals Limited, independent firms of professionally qualified valuers, on the income approach and direct comparison approach, as at 31 December 2014. The fair value represents the amount of market value at which the assets could be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing seller in an arm’s length transaction at the date of valuation. The Group’s management has discussions with the valuer on the valuation assumptions and valuation results once a year when the valuation is performed for annual financial reporting.

– I-39 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

As at 31 December 2014, investment properties of approximately RMB26,034,000 (31 December 2013: RMB23,586,000) are located in Hong Kong under medium term leases and investment properties of approximately RMB575,190,000 (31 December 2013: RMB925,219,000) are located in Mainland China under medium term leases.

Certain of the investment properties of the Group in Mainland China were pledged as security for bills payable (note 25) and interest-bearing bank loans (note 27) of the Group as at 31 December 2014. The aggregate fair value of the pledged investment properties attributable to the Group as at 31 December 2014 amounted to RMB433,096,000 (31 December 2013: RMB105,476,000).

Fair value hierarchy

The following table illustrates the fair value measurement hierarchy of the Group’s investment properties:

Recurring fair value measurement for: Commercial properties Industrial property and a car park Recurring fair value measurement for: Commercial properties Industrial property and a car park	Fair value measurement as Quoted price in active markets Significant observable inputs (Level 1) (Level 2) RMB’000 RMB’000 – – – – – – Fair value measurement as Quoted price in active markets Significant observable inputs (Level 1) (Level 2) RMB’000 RMB’000 – – – – – –	at 31 December 2014 using Significant unobservable inputs (Level 3) Total RMB’000 RMB’000 575,190 575,190 26,034 26,034 601,224 601,224 at 31 December 2013 using Significant unobservable inputs (Level 3) Total RMB’000 RMB’000 925,219 925,219 23,586 23,586 948,805 948,805	at 31 December 2014 using Significant unobservable inputs (Level 3) Total RMB’000 RMB’000 575,190 575,190 26,034 26,034 601,224 601,224 at 31 December 2013 using Significant unobservable inputs (Level 3) Total RMB’000 RMB’000 925,219 925,219 23,586 23,586 948,805 948,805
			948,805

During the year, there were no transfers of fair value measurements between Level 1 and Level 2 and no transfers into or out of Level 3 (2013: Nil).

Reconciliation of fair value measurements categorised within Level 3 of the fair value hierarchy:

Carrying amount at 1 January 2013 Net gain/(loss) from a fair value adjustment recognised in other income and gains in profit or loss Carrying amount at 31 December 2013 and 1 January 2014 Net (loss)/gain from a fair value adjustment recognised in other income and gains in profit or loss Transfer to owner-occupied properties Carrying amount at 31 December 2014	Commercial properties RMB’000 894,145 31,074 925,219 (6,186) (343,843) 575,190	Industrial property and a car park RMB’000 24,327 (741)
		23,586 2,448 –
		26,034

– I-40 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Below is a summary of the valuation techniques used and the key inputs to the valuation of investment properties:

			Range
	Valuation technique	Significant unobservable inputs	2014	2013
Commercial properties	Income approach	Estimated rental value (RMB per	35.0-161.3	26.3-477.3
		square meter and per month)
		Rental growth (per annum)	1%-2%	-1%-3%
		Long term vacancy rate	5%-10%	5%-15%
		Discount rate	5%-7%	5%-8%
			Unit price
	Valuation technique	Significant unobservable inputs	2014	2013
Industrial property and	Direct comparison	Market value	19,667	18,123
a car park	approach	(RMB per square meter)

Under the income approach, fair value is estimated using assumptions regarding the benefits and liabilities of ownership over the asset’s life including an exit or terminal value. This method involves the projection of a series of cash flows on a property interest. A market-derived discount rate is applied to the projected cash flow in order to establish the present value of the income stream associated with the asset. The exit yield is normally separately determined and differs from the discount rate.

The duration of the cash flows and the specific timing of inflows and outflows are determined by events such as rent reviews, lease renewal and related reletting, redevelopment or refurbishment. The appropriate duration is driven by market behaviour that is a characteristic of the class of property. The periodic cash flow is estimated as gross income less vacancy, non-recoverable expenses, collection losses, lease incentives, maintenance costs, agent and commission costs and other operating and management expenses. The series of periodic net operating income, along with an estimate of the terminal value anticipated at the end of the projection period, is then discounted.

A significant increase or decrease in the estimated rental value and the market rent growth rate per annum in isolation would result in a significant increase or decrease in the fair value of the investment properties. A significant increase or decrease in the long term vacancy rate and the discount rate in isolation would result in a significant decrease or increase in the fair value of the investment properties. Generally, a change in the assumption made for the estimated rental value is accompanied by a directionally similar change in the rent growth per annum and the discount rate and an opposite change in the long term vacancy rate.

Under the direct comparison approach, fair value is estimated by making reference to comparable sale evidence as available in the relevant market by taking into account the current rent and license fee passing and the reversionary income potential of the property. A significant increase or decrease in the market value would result in a significant increase or decrease in the fair value of the investment properties.

14. GOODWILL

Group

Note At 1 January: Cost Accumulated impairment Net carrying amount	2014 RMB’000 7,170,907 (25,790) 7,145,117	2013 RMB’000 7,170,907 (10,000) 7,160,907

– I-41 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Note Cost at 1 January, net of accumulated impairment Impairment during the year (i) At 31 December At 31 December: Cost Accumulated impairment Net carrying amount	2014 RMB’000 7,145,117 – 7,145,117 7,170,907 (25,790) 7,145,117	2013 RMB’000 7,160,907 (15,790) 7,145,117 7,170,907 (25,790) 7,145,117

(i) After considering the restructuring of the business within the Group, an impairment loss for the goodwill arising from the acquisition of Huihai (defined below) was fully made during year ended 31 December 2013, amounting to RMB15,790,000. The long-term assets of Huihai were merged into another cash-generating unit of which the recoverable amount was over its carrying value.

Impairment testing of goodwill

The carrying amount of goodwill allocated to each of the cash-generating units is as follows:

China Paradise Electronics Retail Limited (“China Paradise”) 永樂(中國)電器銷售有限公司 Beijing Dazhong Home Appliances Retail Company Limited 北京市大中家用電器連鎖銷售有限公司 Shaanxi Cellstar Telecommunication Retail Chain Company Limited 陝西蜂星電訊零售連鎖有限責任公司 Shenzhen Gome Electrical Appliances Company Limited and Guangzhou Gome Electrical Appliances Company Limited 深圳國美電器有限公司和廣州市國美電器有限公司 Shandong Longji Island Construction Company Limited 山東龍脊島建設有限公司 Wuhan Gome Electrical Appliances Company Limited 武漢國美電器有限公司 Jiangsu Pengrun Gome Electrical Appliance Company Limited and Nanjing Pengze Investment Company Limited 江蘇鵬潤國美電器有限公司和南京鵬澤投資有限公司 Beijing Huihai Tianyun Commercial Consultancy Co., Ltd. (“Huihai”) 北京匯海天韻商務諮詢有限公司 Impairment	2014 RMB’000 3,920,393 3,130,136 60,428 22,986 8,000 7,300 5,874 15,790 7,170,907 (25,790) 7,145,117	2013 RMB’000 3,920,393 3,130,136 60,428 22,986 8,000 7,300 5,874 15,790 7,170,907 (25,790) 7,145,117

The recoverable amount of each cash-generating unit has been determined based on a value in use calculation. To calculate this, cash flow projections are prepared based on financial budgets as approved by management which cover a period of five years. The pre-tax discount rates applied to the cash flow projections range from 16.19% to 18.10% (2013: range from 16.95% to 17.42%).

– I-42 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The growth rate used to extrapolate the cash flows of the cash-generating units beyond the five-year period is 3% (2013: 3%). Management believes that this growth rate is conservative and reliable for the purpose of this impairment testing.

Key assumptions used in the value in use calculations

The following describes the key assumptions of the cash flow projections.

Store revenue: the bases used to determine the future earnings potential are historical sales and average and expected growth rates of the retail market in the PRC. Gross margins: the gross margins are based on the average gross margin achieved in the past five years. Expenses: the value assigned to the key assumptions reflects past experience and management’s commitment to maintain the Group’s operating expenses to an acceptable level.

Discount rates: the discount rates used are before tax and reflect management’s estimate of the risks specific to each unit. In determining appropriate discount rates for each unit, regard has been given to the applicable borrowing rate of the Group in the current year.

Sensitivity to changes in assumptions

With regards to the assessment of the values in use of the respective cash-generating units, management believes that no reasonably possible change in any of the above key assumptions would cause the respective carrying values, including goodwill, of the cash-generating units to exceed the respective recoverable amounts.

15. OTHER INTANGIBLE ASSETS

Group

31 December 2014 At 31 December 2013 and 1 January 2014: Cost Accumulated amortisation Net carrying amount Cost at 1 January 2014, net of accumulated amortisation Amortisation provided during the year At 31 December 2014 At 31 December 2014: Cost Accumulated amortization Net carrying amount	Trademarks RMB’000 440,959 (151,720) 289,239 289,239 (23,438) 265,801 440,959 (175,158) 265,801

– I-43 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

31 December 2013 At 1 January 2013: Cost Accumulated amortization Net carrying amount Cost at 1 January 2013, net of accumulated amortization Amortisation provided during the year At 31 December 2013 At 31 December 2013 and at 1 January 2014: Cost Accumulated amortization Net carrying amount	Trademarks RMB’000 440,959 (128,282) 312,677 312,677 (23,438) 289,239 440,959 (151,720) 289,239

Note: The cost mainly represents the fair value of the trademark arising from the acquisition of 常州金太陽至尊電器有限公司 (“Changzhou Jintaiyang Zhizun Home Appliance Co., Ltd.”) of RMB25,915,000 in 2005, the fair value of the trademark arising from the acquisition of China Paradise of RMB129,000,000 in 2006 and the fair value of the trademark arising from the acquisition of the retailing business of Beijing Dazhong Home Appliances Retail Company Limited of RMB284,319,000, which are amortised on the straight-line basis over management’s estimate of their useful lives of 10 years, 20 years and 20 years, respectively.

16. OTHER INVESTMENTS

								2014	2013
								RMB’000	RMB’000
Equity	investments	in	Mainland	China,	at	fair	value	217,350	135,000

The balance as at 31 December 2014 represented the fair value of the Group’s investments in 27,000,000 shares, representing approximately 10.7% of the outstanding issued shares, of 三聯商社股份有限公司 (“Sanlian Commercial Co., Ltd.” or “Sanlian”). Sanlian is a company established in the PRC and listed on the Shanghai Stock Exchange. The Group classified these investments as available-for-sale financial assets at 31 December 2014 and 2013. After initial recognition, available-for-sale financial assets are measured at fair value, with gains or losses recognised as a separate component of equity until the investment is derecognised or until the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is included in the statement of profit or loss.

Of the seven directors of Sanlian, two were nominated by the Group as at 31 December 2014 (31 December 2013: three). With reference to Sanlian’s memorandum and articles of association and by taking into account the current shareholding structure of Sanlian, the directors of the Company consider that the Group has no absolute right to determine the composition of the board of directors of Sanlian or appoint directors to it and thus the Group does not have control or significant influence over Sanlian.

As at 31 December 2014, the fair value of these investments was based on the quoted market price of the listed shares, which was RMB8.05 per share (31 December 2013: RMB5.0 per share).

– I-44 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

During the year, the gain in respect of the Group’s other investments recognised in other comprehensive income amounted to RMB82,350,000 (2013: RMB10,800,000).

During the year ended 31 December 2014, the Group sold electrical appliances and consumer electronic products to Sanlian amounting to RMB30,224,371 (2013: Nil). The sales to Sanlian were made according to the published prices and conditions offered to other customers of the Group.

17. LEASE PREPAYMENTS AND DEPOSITS

Group

Notes Prepaid land lease payments (i) Rental prepayments and deposits (ii)	2014 RMB’000 35,753 275,375 311,128	2013 RMB’000 36,930 278,047
		314,977

Notes:

(i) Prepaid land lease payments

Group

Note Carrying amount at 1 January Recognised during the year Carrying amount at 31 December Current portion included in prepayment, deposits and other receivables. 22 Non-current portion	2014 RMB’000 38,107 (1,177) 36,930 (1,177) 35,753	2013 RMB’000 39,284 (1,177)
		38,107 (1,177)
		36,930

The leasehold land is held under a medium term lease and is situated in Mainland China.

(ii) The balances at 31 December 2014 and 2013 represented the non-current portion of rental prepayments and deposits.

18. DEFERRED TAX

Group

Note Deferred tax assets: Tax losses (i) Fair value adjustment on investment properties Fair value adjustment on transfer of owner-occupied properties to investment properties	Balance at 1 January 2014 RMB’000 23,703 4,072 22,813 50,588	Recognised in the consolidated statement of profit or loss RMB’000 (18,236) (557) – (18,793)	Balance at 31 December 2014 RMB’000 5,467 3,515 22,813
			31,795

– I-45 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Note Deferred tax liabilities: Fair value adjustment on acquisition Fair value adjustment on investment properties Fair value adjustment on transfer of owner-occupied properties to investment properties Note Deferred tax assets: Tax losses (i) Fair value adjustment on investment properties Fair value adjustment on transfer of owner-occupied properties to investment properties Deferred tax liabilities: Fair value adjustment on acquisition Fair value adjustment on investment properties Fair value adjustment on transfer of owner-occupied properties to investment properties	Balance at 1 January 2014 RMB’000 113,762 19,379 39,155 172,296 Balance at 1 January 2013 RMB’000 111,086 2,953 22,813 136,852 120,956 10,492 39,155 170,603	Recognised in the consolidated statement of profit or loss RMB’000 (7,194) (2,104) – (9,298) Recognised in the consolidated statement of profit or loss RMB’000 (87,383) 1,119 – (86,264) (7,194) 8,887 – 1,693	Balance at 31 December 2014 RMB’000 106,568 17,275 39,155
			162,998

			Balance at 31 December 2013 RMB’000 23,703 4,072 22,813
			50,588

			113,762 19,379 39,155
			172,296

Note:

(i) The Group has not recognised deferred tax assets in respect of tax losses arising in Hong Kong of RMB509.0 million (2013: RMB421.1 million), that are available indefinitely, and in the PRC of RMB3,851.4 million (2013: RMB3,203.8 million), that will expire in one to five years, as they have arisen in subsidiaries that have been loss-making for some time and it is not considered probable that taxable profits will be available against which the tax losses can be utilised.

At 31 December 2014, no deferred tax has been recognised for withholding taxes that would be payable on the unremitted earnings that are subject to withholding taxes of the Group’s subsidiaries established in Mainland China. In the opinion of the directors, it is not probable that these subsidiaries will distribute such earnings in the foreseeable future.

There are no income tax consequences attaching to the payments of dividends by the Company to its shareholders.

– I-46 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

19. INVESTMENTS IN SUBSIDIARIES

Company

				2014	2013
				RMB’000	RMB’000
Unlisted	shares,	at	cost	5,389,943	5,389,635

The amounts due from/to subsidiaries included in the Company’s current assets and current liabilities are unsecured, interest-free and repayable on demand or within one year.

Particulars of the principal subsidiaries are as follows:

	Place of	Nominal value of	Percentage	of equity	of equity	of equity
	incorporation/	issued ordinary/	attributable to		the
	registration and	registered share	Company				Principal
Company name	place of operations	capital	Direct	Indirect			activities
Capital Automation (BVI) Limited	British Virgin Islands/	US$50,000	100			–	Investment
	Hong Kong						holding
Grand Hope Investment Limited	British Virgin Islands/	US$1 million	100			–	Investment
	Hong Kong						holding
China Paradise Electronics Retail Limited	Cayman Islands	HK$235,662,979	100			–	Investment
							holding
China Eagle Management Limited	Hong Kong	HK$10,000	–		100		Management
							services
Hong Kong Punching Centre Limited	Hong Kong	HK$100,000	–		100		Property
							holding
Ocean Town Int’l Inc.	British Virgin Islands/	US$50,000	–		100		Investment
	Hong Kong						holding
Designline Group Inc.	United States	US$50,000	–		100		Management
							services
Gome Appliance Company Limited (viii)	PRC	RMB300 million	–		100		Note (vi)
國美電器有限公司
Tianjin Gome Electrical Appliance	PRC	RMB40 million	–		100		Note (iii)
Company Limited (i)
天津國美電器有限公司
Chongqing Gome Electrical Appliance	PRC	RMB20 million	–		100		Note (iii)
Company Limited (i)
重慶國美電器有限公司
Chengdu Gome Electrical Appliance	PRC	RMB20 million	–		100		Note (iii)
Company Limited (i)
成都國美電器有限公司
Xi’an Gome Electrical Appliance Company	PRC	RMB10 million	–		100		Note (iii)
Limited (i)
西安國美電器有限公司
Kunming Gome Electrical Appliance	PRC	RMB10 million	–		100		Note (iii)
Company Limited (i)
昆明國美電器有限公司
Shenzhen Gome Electrical Appliance	PRC	RMB10 million	–		100		Note (iii)
Company Limited (i)
深圳國美電器有限公司
Fuzhou Gome Electrical Appliance	PRC	RMB10 million	–		100		Note (iii)
Company Limited (i)
福州國美電器有限公司
Guangzhou Gome Electrical Appliance	PRC	RMB10 million	–		100		Note (iii)
Company Limited (i)
廣州市國美電器有限公司

– I-47 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

	Place of	Nominal value of	Percentage	of equity	of equity
	incorporation/	issued ordinary/	attributable to		the
	registration and	registered share	Company			Principal
Company name	place of operations	capital	Direct	Indirect		activities
Wuhan Gome Electrical Appliance	PRC	RMB10 million	–		100	Note (iii)
Company Limited (i)
武漢國美電器有限公司
Shenyang Gome Electrical Appliance	PRC	RMB10 million	–		100	Note (iii)
Company Limited (i)
瀋陽國美電器有限公司
Jinan Gome Electrical Appliance Company	PRC	RMB10 million	–		100	Note (iii)
Limited (i)
濟南國美電器有限公司
Qingdao Gome Electrical Appliance	PRC	RMB10 million	–		100	Note (iii)
Company Limited (i)
青島國美電器有限公司
Tianjin Gome Commercial Consultancy	PRC	RMB3 million	–		100	Note (v)
Company Limited (i)
天津國美商業管理諮詢有限公司
Kunming Gome Logistics Company	PRC	RMB8 million	–		100	Note (iv)
Limited (i)
昆明國美物流有限公司
Quanzhou Pengrun Gome Electrical	PRC	RMB5 million	–		100	Note (iii)
Appliance Company Limited (i)
泉州鵬潤國美電器有限公司
Changzhou Jintaiyang Zhizun Electrical	PRC	RMB50 million	–		100	Note (iii)
Appliance Company Limited (i)
常州金太陽至尊電器有限公司
Gansu Gome Electrical Appliance	PRC	RMB5 million	–		100	Note (iii)
Company Limited (i)
甘肅國美電器有限公司
Beijing Pengze Real Estate Company	PRC	RMB10 million	–		100	Property
Limited (i)						holding
北京鵬澤置業有限公司
Shenyang Pengrun Gome Electrical	PRC	RMB10 million	–		100	Note (iii)
Appliance Company Limited (i)
瀋陽鵬潤國美電器有限公司
Kunming Qin’an Commercial Management	PRC	RMB6 million	–		100	Note (v)
Consultancy Company Limited (i)
昆明勤安商業管理諮詢有限公司
Jiangsu Pengrun Gome Electrical	PRC	RMB20 million	–		100	Note (iii)
Appliance Company Limited (i)
江蘇鵬潤國美電器有限公司
Eagle Electrical Appliance Company	PRC	RMB100 million	–		100	Investment
Limited (i)						holding
鵬潤電器有限公司
Shenzhen eHome Commercial Chain	PRC	RMB20 million	–		100	Note (iii)
Company Limited (i)
深圳易好家商業連鎖有限公司
Gansu Gome Logistics Company	PRC	RMB10 million	–		100	Note (iv)
Limited (i)
甘肅國美物流有限公司
Nanjing Pengze Investment Company	PRC	RMB156 million	–		100	Property
Limited (i)						holding
南京鵬澤投資有限公司
Yongle (China) Electronics Retail	PRC	RMB220 million	–		100	Note (iii)
Company Limited (ii)
永樂(中國)電器銷售有限公司

– I-48 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

	Place of	Nominal value of	Percentage	of equity	of equity
	incorporation/	issued ordinary/	attributable to		the
	registration and	registered share	Company			Principal
Company name	place of operations	capital	Direct	Indirect		activities
Guangdong Yongle Electronics	PRC	RMB30 million	–		100	Note (iii)
Retail Company Limited (i)
廣東永樂家用電器有限公司
Henan Yongle Electronics Retail	PRC	RMB20 million	–		100	Note (iii)
Company Limited (i)
河南永樂生活電器有限公司
Jiangsu Yongle Electronics Retail	PRC	RMB10 million	–		100	Note (iii)
Company Limited (i)
江蘇永樂家用電器有限公司
Shanghai Yongle Communication	PRC	RMB10 million	–		100	Note (iii)
Equipment Company Limited (i)
上海永樂通訊設備有限公司
Sichuan Yongle Electronics Retail	PRC	RMB20 million	–		100	Note (iii)
Company Limited (i)
四川永樂家用電器有限公司
Xiamen Yongle Siwen Electronics Retail	PRC	RMB10 million	–		100	Note (iii)
Company Limited (i)
廈門永樂思文家電有限公司
Zhejiang Yongle Electronics Retail	PRC	RMB15 million	–		100	Note (iii)
Company Limited (i)
浙江永樂家用電器有限公司
Shaanxi Cellstar Telecommunication Retail	PRC	RMB10 million	–		100	Note (vii)
Chain Company Limited (i)
陝西蜂星電訊零售連鎖有限責任公司
Shandong Longji Island Construction	PRC	RMB10 million	–		100	Investment
Company Limited (i)						holding
山東龍脊島建設有限公司
Suzhou Jiayue Trading Company	PRC	US$49.9 million	–		100	Note (iv)
Limited (viii)
蘇州嘉悅商貿有限公司
Tianjin Pengze Logistics	PRC	US$50 million	–		100	Note (iv)
Company Limited (i) (viii)
天津鵬澤物流有限公司
Xining Gome Electrical Appliance	PRC	RMB5 million	–		100	Notes (iii)
Company Limited (i)						(iv)
西寧國美電器有限公司
Beijing Dazhong Henxin Ruida	PRC	RMB200 million	–		100	Note (iv)
Logistics Company Limited (i)
北京市大中恒信瑞達商貿有限公司
Tianjin Henxin Ruida Logistics	PRC	RMB20 million	–		100	Note (iv)
Company Limited (i)
天津恒信瑞達物流有限公司
Kuba Technology (Beijing) Co., Ltd.	PRC	RMB83 million	–		60	Note (ix)
(“Kuba”) (i)
庫巴科技(北京)有限公司
GOME-on-line e-Commerce Co., Ltd.	PRC	RMB83 million	–		60	Note (ix)
(“GOME-on-line”) (i)
國美在線電子商務有限公司
Beijing Dazhong Home Appliances Retail	PRC	RMB200 million	–		100	Note (iii)
Co., Ltd. (i)
北京市大中家用電器連鎖銷售有限公司

– I-49 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Notes:

(i) Registered as private companies with limited liability under PRC law
(ii) Registered as a Sino-foreign equity joint venture under PRC law
(iii) Retailing of electrical appliances and consumer electronic products
(iv) Provision of logistics services
(v) Provision of business management services
(vi) Investment holding and retailing of electrical appliances and consumer electronic products
(vii) Retailing of mobile phones and accessories
(viii) Registered as wholly-foreign-owned enterprises under PRC law. The respective registered capital of these subsidiaries has been fully paid up
(ix) Online retailing of electrical appliances and consumer electronic products

The above table lists the subsidiaries of the Company which, in the opinion of the directors, principally affected the results for the year or formed a substantial portion of the net assets of the Group. To give details of other subsidiaries would, in the opinion of the directors, result in particulars of excessive length.

Details of the Group’s subsidiary that has material non-controlling interests are set out below:

Percentage of equity interest held by non-controlling interests: GOME-on-line Loss for the year allocated to non-controlling interests: GOME-on-line Accumulated balances of non-controlling interests at the reporting dates: GOME-on-line	2014 40% 2014 RMB’000 (254,596) (646,252)	2013 40% 2013 RMB’000 (193,731) (391,656)

– I-50 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

The following tables illustrate the summarised financial information of the above subsidiary. The amounts disclosed are before any inter-company eliminations:

2014 Revenue Loss for the year Total assets Total liabilities Net cash flows from operating activities Net cash flows used in investing activities Net increase in cash and cash equivalents 2013 Revenue Loss for the year Total assets Total liabilities Net cash flows from operating activities Net cash flows used in investing activities Net increase in cash and cash equivalents	GOME-on-line RMB’000 3,947,877 (636,491)

	968,935 (2,584,564)

	143,827 (99,146) 44,681

	GOME-on-line RMB’000 2,805,977 (484,328)

	636,078 (1,615,217)

	90,058 (42,115) 47,943

20. INVENTORIES

Group

Merchandise for resale Consumables	2014 RMB’000 10,792,532 133,867 10,926,399	2013 RMB’000 8,053,461 167,273
		8,220,734

As at 31 December 2014, the Group’s inventories amounting to RMB521 million (31 December 2013: RMB573 million) were pledged as security for the Group’s bills payable (note 25).

21. TRADE AND BILLS RECEIVABLES

All of the Group’s sales are on a cash basis except for certain bulk sales of merchandise which are credit sales. The credit term offered to customers is generally one month. The Group seeks to maintain strict control over its outstanding receivables and overdue balances are reviewed regularly by senior management. Management considers that there is no significant concentration of credit risk.

– I-51 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

An aged analysis of the trade and bills receivables as at the end of the reporting period, based on the invoice date of the trade and bills receivables, is as follows:

Group

Outstanding balances, aged: Within 3 months 3 to 6 months 6 months to 1 year	2014 RMB’000 215,817 34,021 17,856 267,694	2013 RMB’000 208,500 25,099 11,893
		245,492

The aged analysis of trade and bills receivables that are not considered to be impaired is as follows:

Group

Neither past due nor impaired Less than 3 months past due Over 3 months past due	2014 RMB’000 107,909 124,919 34,866 267,694	2013 RMB’000 104,250 116,800 24,442
		245,492

Receivables that were neither past due nor impaired relate to a large number of diversified customers for whom there was no recent history of default.

Receivables that were past due but not impaired relate to mainly corporate customers which have long business relationship with the Group. Management is of the opinion that no provision for impairment is necessary at this stage because there has not been a significant change in credit quality of the individual debtors and the balances are considered fully recoverable. The Group does not hold any collateral or other credit enhancements over these balances.

The balances are unsecured and non-interest-bearing.

22. PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES

Group

Notes Prepayments Advances to suppliers Other deposits and receivables Receivables from Wuhan Yinhe (i) Prepayment for share subscription 39 Current portion of prepaid land lease payments 17	2014 RMB’000 740,279 1,722,515 755,430 166,586 1,411,973 1,177 4,797,960	2013 RMB’000 645,365 856,717 663,636 166,586 – 1,177
		2,333,481

– I-52 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Company

Note Prepayments Prepayment for share subscription 39	2014 RMB’000 242 1,411,973 1,412,215	2013 RMB’000 1,060 –
		1,060

Note:

(i) On 13 July 2008, the Group entered into a sale and purchase agreement with 武漢銀鶴置業有限公司 (“Wuhan Yinhe Property Co., Ltd.” or “Wuhan Yinhe”), an independent third party vendor, to acquire the first to the fourth floors of a commercial property located in Wuhan, Mainland China, at a total cash consideration of RMB214,629,000. Pursuant to the agreement, the Group paid an amount of RMB107,315,000, representing 50% of the total purchase consideration, to the vendor in 2008 and the remaining balance was payable upon the completion and handover of the property.

Due to the default of the vendor to fulfil its obligation under the sale and purchase agreement, on 6 July 2009, the Group applied to the Hubei Provincial People’s High Court (the “Hubei Court”) to freeze the assets of Wuhan Yinhe up to an amount of RMB135,808,000. On 21 July 2009, the court granted an injunction and froze the first, the second and the fourth floors of the property. In July 2010, the Group applied to the Hubei Court to freeze the third floor of the property and the Hubei Court granted an injunction on 23 July 2010.

On 30 July 2009, the Group filed a civil complaint against Wuhan Yinhe with the Hubei Court. On 25 November 2009, the Intermediate People’s Court of Huanggang City, Hubei Province, issued the civil judgment and ordered: (i) the sale and purchase agreement and its supplementary agreement are void; (ii) Wuhan Yinhe shall refund the consideration paid by the Group of RMB107,315,000 to the Group; (iii) Wuhan Yinhe shall pay interest of RMB5,638,000 and damages of RMB38,633,000 to the Group; and (iv) Wuhan Yinhe shall pay other damages to the Group in the amount of RMB15,000,000. Wuhan Yinhe did not raise any appeal within the time limit. The management of the Company has consulted the Group’s PRC legal advisers and considers that the decision is final and binding. The aggregate amount of the compensation in items (iii) and (iv) above of approximately RMB59,271,000 has been recognised as income in the Group’s statement of profit or loss for the year ended 31 December 2009.

In February 2010, the Group applied for enforcement of the court decision and the frozen properties are in the process of auction. In 2012, Wuhan Yinhe applied for the retrial of case in order to postpone the auction of the properties but this retrial application was rejected in February 2013 and the original sentence continues to serve effect.

As at 31 December 2014, in the opinion of management, the Group is able to recover the receivables because the Group’s legal rights were secured by the court decision and the market value of the property is higher than the receivable of the Group.

On 14 January 2015, the Court announced that the first auction of the property was scheduled for 30 January 2015. The proceeds of the auction are intended to cover the Group’s receivables. On 30 January 2015, the first auction aborted because no one participates in bidding. In accordance with the law of the People’s Republic of China, the second auction will take place within 60 days after the first auction.

– I-53 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

23. DUE FROM/TO RELATED COMPANIES

Due from Related Companies

Management fee receivables from the Non-listed GOME Group Other receivables from the Non-listed GOME Group*	2014 RMB’000 71,410 156,554 227,964	2013 RMB’000 64,437 58,737
		123,174

The balance mainly represented the management and purchasing service fees due from the Non-listed GOME Group (note 34(a)(ii)). The aforesaid balance was interest-free, unsecured and has no fixed terms of repayment.

Due to Related Companies

						2014	2013
						RMB’000	RMB’000
Payables	to	the	Non-listed	GOME	Group**	521,213	464,142

** The balances mainly arose from the transactions with the Non-listed GOME Group (note 34(a)(i)). The aforesaid balances were interest-free, unsecured and have no fixed terms of repayment.

24. CASH AND CASH EQUIVALENTS AND PLEDGED DEPOSITS

Group

Cash and bank balances Time deposits Less: Pledged time deposits for bills payable Pledged time deposits for interest-bearing bank loans Cash and cash equivalents	2014 RMB’000 8,468,197 6,398,810 14,867,007 (4,128,768) (1,944,127) (6,072,895) 8,794,112	2013 RMB’000 8,699,676 6,722,932
		15,422,608 (3,975,203 (2,431,592
		(6,406,795
		9,015,813

Company

Cash and bank balances Time deposits Cash and cash equivalents	2014 RMB’000 841,154 122,914 964,068	2013 RMB’000 389,000 316,137
		705,137

– I-54 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

For the purpose of the statement of cash flows, cash and cash equivalents comprise the following at 31 December:

Group Cash and bank balances Short term deposits, non-pledged Cash and cash equivalents	2014 RMB’000 8,468,197 325,915 8,794,112	2013 RMB’000 8,699,676 316,137
		9,015,813

At the end of the reporting period, the cash and bank balances and the time deposits of the Group denominated in RMB amounted to RMB13,896,497,000 (31 December 2013: RMB14,700,915,000). The RMB is not freely convertible into other currencies; however, under Mainland China’s Foreign Exchange Control Regulations and Administration of Settlement, Sale and Payment of Foreign Exchange Regulations, the Group is permitted to exchange RMB for other currencies through banks authorised to conduct foreign exchange business.

The bank balances of the Group and the Company earn interest at floating rates based on daily bank deposit rates. Short term deposits of the Group and the Company are made for varying periods of between one day and one year, and earn interest at the respective short term deposit rates. The bank balances and pledged time deposits are deposited with creditworthy banks with no recent history of default.

25. TRADE AND BILLS PAYABLES

Group

Trade payables Bills payable	2014 RMB’000 7,220,716 13,659,714 20,880,430	2013 RMB’000 5,992,325 12,085,164
		18,077,489

An aged analysis of the trade and bills payables as at the end of the reporting period, based on the goods receipt date, is as below:

Within 3 months 3 to 6 months Over 6 months	2014 RMB’000 12,475,119 7,443,568 961,743 20,880,430	2013 RMB’000 11,908,864 5,565,819 602,806
		18,077,489

The Group’s bills payable is secured by:

(i) the pledge of the Group’s time deposits (note 24);

(ii) the pledge of certain of the Group’s inventories (note 20);

(iii) the pledge of certain of the Group’s buildings (note 12); and

(iv) the pledge of certain of the Group’s investment properties (note 13).

The trade and bills payables are non-interest-bearing and are normally settled on terms of one to six months.

– I-55 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

26. CUSTOMERS’ DEPOSITS, OTHER PAYABLES AND ACCRUALS

Group

Customers’ deposits Deferred revenue (note) Other payables and accruals	2014 RMB’000 515,845 78,172 1,831,396 2,425,413	2013 RMB’000 415,398 70,128 1,561,283
		2,046,809

Note:

Deferred revenue refers to the accrual and release of the points in respect of a loyalty points programme operated by the Group. A reconciliation of the deferred revenue is as follows:

At 1 January Arising during the year Revenue recognised on utilised points Revenue recognised on expired points At 31 December Company Other payables and accruals 27. INTEREST-BEARING BANK LOANS Group and Company Bank loans – secured	2014 RMB’000 70,128 954,566 (902,194) (44,328) 78,172 2014 RMB’000 14,218 2014 RMB’000 3,425,950	2013 RMB’000 61,157 819,376 (741,649) (68,756)
		70,128

		2013 RMB’000 7,601

		2013 RMB’000 2,683,171

The bank loans as at 31 December 2014 are denominated in United States dollars (“USD”). The bank loans bear interest at 3 month LIBOR plus 1.7% to 2.5%.

The bank loans are secured by the Group’s buildings (note 12), investment properties (note 13) and pledged time deposits (note 24).

The carrying amounts of the bank loans approximate to their fair values.

– I-56 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

28. CROSS CURRENCY SWAP

On 5 March 2012, the Company entered into an offshore USD/RMB cross currency swap contract (the “Swap Contract”) with Deutsche Bank AG, London Branch (the “Bank”). The contract was effective from 14 March 2012 to 14 March 2014.

By entering into the contract, the Company paid a notional amount of RMB500,000,000 to the Bank and the Bank paid a notional amount of USD79,340,000 to the Company on 14 March 2012. During the effective period of the Swap Contract, the Company and the Bank exchanged interest generated from the notional amounts at rates agreed in the Swap Contract semi-annually on 14 September and 14 March in each year.

The Group recorded the Swap Contract at fair value with any changes in value reported in profit or loss. On 8 August 2013, the Company and the Bank settled the contract before the date of expiration and the Group recognized a gain of RMB11,002,000 in the consolidated statement of profit or loss.

29. ISSUED CAPITAL

Authorised: Ordinary shares of HK$0.025 each at 1 January 2013, 31 December 2013, 1 January 2014 and 31 December 2014 Issued and fully paid: Ordinary shares of HK$0.025 each at 1 January 2013, 31 December 2013 and 1 January 2014 2013 scrip dividend declared (note (i)) Shares repurchased (note (ii)) Ordinary shares of HK$0.025 each at 31 December 2014 Notes:	Number of shares ’000 200,000,000 16,875,056 158,699 (74,527) 16,959,228	HK$’000 5,000,000 421,877 3,967 (1,863) 423,981	Equivalent to RMB’000 5,300,000 421,551 3,149 (1,479) 423,221

(i) On 20 March 2014, the board of directors recommended the payment of a special dividend which is payable in cash with a scrip dividend option (note 32). A total of 158,699,192 ordinary shares were allotted to the shareholders who have elected to exercise the scrip dividend option while the rest is paid in cash. The difference of RMB161,375,000 between the par value of the Company’s shares and the then average market price of RMB164,524,000 has been credited to the share premium account.
(ii) On 7 April 2014, 11 April 2014, 15 April 2014, 26 May 2014 and 29 May 2014, the Company repurchased a total of 74,527,000 ordinary shares of the Company of HK$0.025 each at a total consideration of HK$102,049,000 (equivalent to RMB81,005,000). The repurchased shares were cancelled on 30 April 2014 and 12 June 2014, respectively. The consideration paid in excess of the par value of these repurchased shares of approximately RMB79,526,000 was debited to the share premium.

30. SHARE OPTION SCHEME

The Company operates a share option scheme (the “Scheme”) which was adopted on 15 April 2005 (the “Adoption Date”) for the purpose of providing incentives and rewards to eligible participants who contribute to the success of the Group’s operations. Eligible participants of the Scheme include employees, executives and officers of the Company (including executive and non-executive directors of the Company) or any of the subsidiaries and business consultants, business partners, suppliers, customers, agents, financial or legal advisers, debtors and creditors who the board of directors of the Company considers, in its sole discretion, will contribute or have contributed to the Company or any of the subsidiaries.

– I-57 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The Scheme shall be valid and effective for the period (the “Scheme Period”) commencing on the Adoption Date and ending on the day immediately preceding the tenth anniversary of the Adoption Date (both dates inclusive). The options granted prior to the end of the Scheme Period but not yet exercised shall continue to be valid and exercisable in accordance with the Scheme.

The maximum number of shares in respect of which options may be granted under the Scheme to any eligible participant shall not, in any 12-month period up to the offer date, exceed 1% of the number of shares of the Company in issue on the offer date. Any further grant of share options in excess of this limit is subject to shareholders’ approval in a general meeting.

Share options granted to a director, chief executive or substantial shareholder of the Company, or to any of their associates, are subject to approval in advance by the independent non-executive directors (excluding any independent non-executive director of the Company who is the relevant eligible participant). In addition, any share options granted to a substantial shareholder or an independent non-executive director of the Company, or to any of their associates, in excess of 0.1% of the shares of the Company in issue at any time or with an aggregate value (based on the price of the Company’s shares at the date of grant) in excess of HK$5 million, within any 12-month period, are subject to shareholders’ approval in advance in a general meeting.

The offer of a grant of share options may be accepted within 30 days from the date of offer, upon payment of a nominal consideration of HK$1 in total by the grantee. The exercise period of the share options granted is determinable by the directors, and in any event such period of time shall not exceed a period of ten years commencing on the commencement date, being the date upon which the option is deemed to be granted and accepted.

The exercise price in relation to each option offered shall be determined by the board of directors of the Company in its absolute discretion but in any event must not be less than the highest of: (a) the official closing price of the shares as stated in the daily quotation sheet of the Stock Exchange on the offer date; (b) the average of the official closing prices of the shares as stated in the daily quotation sheets of the Stock Exchange for the five business days immediately preceding the offer date; and (c) the nominal value of a share of the Company.

Share options do not confer right on the holders to dividends or to vote at shareholders’ meetings.

According to the board resolution on 31 August 2012, changes were made to the Scheme including the exercise period of the share options and performance targets to vest the share options.

Upon the modification, the total increase in fair value of the then outstanding share options was approximately RMB6 million. This additional cost would be spread over the period from the date of modification until the vesting date of the modified award, which might not be the same as that of the original award.

The following share options were outstanding under the Scheme during the year:

	2014		2013
	Weighted		Weighted
	average	Number of	average	Number of
	exercise price	options	exercise price	options
	HK$ per share	’000	HK$ per share	’000
At 1 January	1.90	97,952	1.90	133,268
Forfeited during the year	1.90	(1,360)	1.90	(18,817)
Expired during the year	1.90	(501)	1.90	(16,499)
At 31 December	1.90	96,091	1.90	97,952

– I-58 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The exercise prices and exercise periods of the share options outstanding as at the end of the reporting period are as follows:

		2014
Number	of	options	Exercise price*	Exercise period
		’000	HK$ per share
		88,351	1.90	On or before 15 November 2015
		7,740	1.90	Between 15 May 2015 and 15 November 2015
		96,091

		2013
Number	of	options	Exercise price*	Exercise period
		’000	HK$ per share
		73,940	1.90	On or before 15 November 2015
		16,008	1.90	Between 15 May 2014 and 15 November 2015
		8,004	1.90	Between 15 May 2015 and 15 November 2015
		97,952

The exercise price of the share options is subject to adjustment in the case of rights or bonus issues, or other similar changes in the Company’s share capital.

The share options granted to certain employees were forfeited because of unfulfilled vesting condition. Share option expense of RMB5,083,000 was recognised during the year ended 31 December 2014 (2013 reversed: RMB6,763,000).

No (2013: Nil) share options were exercised during the year.

At the end of the reporting period, the Company had 96,091,000 share options outstanding under the Scheme. The exercise in full of the outstanding share options would, under the present capital structure of the Company, result in the issue of 96,091,000 additional ordinary shares of the Company and additional share capital of HK$2,402,000 (equivalent to approximately RMB1,895,000) and share premium of HK$180,171,000 (equivalent to approximately RMB142,137,000) (before issue expenses).

At the date of approval of these consolidated financial statements, the Company had 94,163,000 share options outstanding under the Scheme, which represented approximately 0.56% of the Company’s shares in issue as at that date.

31. RESERVES

(a) Group

The movements in the reserves of the Group are set out in the consolidated statement of changes in equity of the financial statements.

Statutory reserves

Pursuant to the relevant PRC laws and regulations, Sino-foreign equity joint ventures registered in the PRC are required to transfer a certain percentage, as approved by the board of directors, of their profits after income tax, as determined in accordance with the PRC accounting rules and regulations, to the reserve funds, the enterprise expansion fund and the employee bonus and welfare fund. These funds are restricted as to use.

In accordance with the relevant PRC laws and regulations, each of Mainland China domestic companies is required to transfer 10% of the profit after income tax, as determined in accordance with the PRC accounting regulations, to the statutory common reserve fund, until the balance of the fund reaches 50% of its registered capital of these companies. Subject to certain restrictions as set out in the relevant PRC laws and regulations, the statutory common reserve fund may be used to offset against accumulated losses, if any.

– I-59 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(b) Company

Notes At 1 January 2013 Profit for the year and total comprehensive income for the year 2013 interim dividend paid Equity-settled share option arrangements Proposed dividend At 31 December 2013 and 1 January 2014 Profit for the year and total comprehensive income for the year 2013 scrip dividend paid Repurchase of shares 2014 interim dividend paid 32 Equity-settled share option arrangements Compensation received 35 2014 proposed final dividend 32 At 31 December 2014	Share premium RMB’000 9,461,244 – – – – 9,461,244 – 161,375 (79,526) – – – – 9,543,093	Contributed surplus RMB’000 Note (ii) 42,849 – – – – 42,849 – – – – – – – 42,849	Capital reserve RMB’000 (1,063,814) – – – – (1,063,814) – – – – – 233,389 – (830,425)	Share option reserve Exchange fluctuation reserve RMB’000 RMB’000 Note (iii) 164,716 (49,695) – – – – (6,763) – – – 157,953 (49,695) – – – – – – – – 5,083 – – – – – 163,036 (49,695)	(Accumulated losses)/ retained earnings RMB’000 Note (i) (395,556) 983,832 (94,093) – (441,392) 52,791 492,337 – – (277,044) – – (234,864) 33,220	Total RMB’000 8,159,744 983,832 (94,093) (6,763) (441,392)
						8,601,328 492,337 161,375 (79,526) (277,044) 5,083 233,389 (234,864)
						8,902,078

Notes:

(i) The profit attributable to owners of the parent for the year ended 31 December 2014 dealt with in the financial statements of the Company was approximately RMB492,337,000 (2013: RMB983,832,000).
(ii) 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 various components of reserves of the underlying subsidiaries.

Under the Bermuda Companies Act 1981 (as amended), the contributed surplus of the Company is available for distribution. However, the Company cannot declare or pay a dividend, or make a distribution out of the contributed surplus, if:

(a) it is, or after the payment would 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 capital and share premium.
(iii) The share option reserve represents the fair value of share options granted which are yet to be exercised, as further explained in the accounting policy for share-based payment transactions in note 2.4 to the financial statements. The amount may either be transferred to the share premium account when the related options are exercised, or be transferred to the retained earnings should the related options expire or be forfeited after the vesting date.

– I-60 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

32. DIVIDENDS

Interim: Cash dividend of HK$2.10 cents (equivalent to RMB1.63 fen) (2013: HK$0.70 cents (equivalent to RMB0.56 fen)) per ordinary share Proposed final: Cash dividend of HK$1.80 cents (equivalent to RMB1.38 fen) (2013: Cash dividend of HK$1.30 cents (equivalent to RMB1.0 fen)) per ordinary share Special: Nil (2013: Scrip dividend of HK$337,501,000 (equivalent to RMB267,743,000))	2014 RMB’000 277,044 234,864 – 511,908	2013 RMB’000 94,093 173,649 267,743
		535,485

The proposed final dividend is subject to the approval from the Company’s shareholders at the forthcoming annual general meeting.

33. OPERATING LEASE ARRANGEMENTS AND COMMITMENTS

(a) Operating lease arrangements

As lessee

The Group leases certain of its properties under operating lease arrangements. These leases have an average life ranging from 1 to 20 years and there are no restrictions placed upon the Group by entering into these lease agreements.

As at the end of the reporting period, the Group had the following minimum lease payments under non-cancellable operating leases falling due as follows:

Within one year In the second to fifth years, inclusive After five years	2014 RMB’000 2,919,815 8,056,776 3,206,863 14,183,454	2013 RMB’000 2,775,770 7,597,182 2,833,618
		13,206,570

As defined under IAS 17, a non-cancellable lease is a lease that is cancellable only (a) upon the occurrence of some remote contingencies; (b) with the permission of the lessor; (c) if the lessee enters into a new lease for the same or an equivalent asset with the same lessor; or (d) upon payment by the lessee of such an additional amount that, at inception of the lease, continuation of the lease is reasonably certain.

Pursuant to the relevant lease agreements, upon the payment of early termination compensation rental which in general ranges from one month to one year, the Group is entitled to terminate the underlying lease agreement if a store will not be in a position to continue its business because of the losses or other circumstances as specified under the rental agreements.

As lessor

The Group has leased its investment properties (note 13) and entered into commercial property sub-leases on its leased properties under operating lease arrangements. These non-cancellable leases have remaining terms ranging from 1 to 11 years. A majority of the Group’s leases include a clause to enable upward revision of the rental charge on a regular basis according to prevailing market conditions. The terms of the leases generally also require the tenants to pay security deposits and provide for periodic rent adjustments according to the then prevailing market conditions.

– I-61 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The Group had the following future minimum rentals receivable under non-cancellable operating leases:

Within one year In the second to fifth years, inclusive After five years	2014 RMB’000 206,838 536,495 151,681 895,014	2013 RMB’000 261,987 689,211 272,589
		1,223,787

(b) Capital commitments

In addition to the operating lease commitments above, the Group had the following capital commitments at the end of the reporting period:

	2014	2013
	RMB’000	RMB’000
Contracted, but not provided for:
Construction of property and equipment	74,385	106,660

34. RELATED PARTY TRANSACTIONS

In addition to the transactions and balances which are disclosed elsewhere in the financial statements, the Group had the following significant transactions with the related parties.

(a) The Group had the following ongoing transactions with related parties during the year:

		2014	2013
	Notes	RMB’000	RMB’000
Sales to the Non-listed GOME Group*	(i)	1,523,642	417,797
Purchases from the Non-listed GOME Group	(i)	809,386	733,098
Provision of management and purchasing services to
the Non-listed GOME Group	(ii), 5	250,000	250,000
Rental expenses and other expenses to Beijing
Xinhengji** and the Non-listed GOME Group	(iii)	99,992	89,415
Service fee to GOME Ruidong (defined in (i) below)	(iv)	9,025	3,693
Rental income from a related party	(v)	–	68

北京鵬潤投資有限公司 (“Beijing Eagle Investment Co., Ltd.”), 北京鵬潤地產控股有限公司 (“Beijing Pengrun Property Co., Ltd.” or “Beijing Pengrun Property”), 北京國美電器有限公司 (“Beijing GOME Electrical Appliance Co., Ltd.” or “Beijing GOME”), 國美電器零售有限公司 (“GOME Electrical Appliance Retail Co., Ltd.”) and their respective subsidiaries of the forgoing companies and 北京國美投資有限公司 are collectively referred to as the “Non-listed GOME Group”. GOME Electrical Appliance Retail Co., Ltd. and its subsidiaries are engaged in the retail sale and related operations of electrical appliances and consumer electronic products under the trademark of “GOME Electrical Appliances” in cities other than the designated cities of the PRC in which the Group operates. The companies comprising the Non-listed GOME Group are owned by Mr. Wong Kwong Yu (“Mr. Wong”), a substantial shareholder of the Company.
** 北京新恒基房地產有限公司 (“Beijing Xinhengji Property Co., Ltd.” or “Beijing Xinhengji”) is owned by a close member of the family of Mr. Wong. In 2007, Beijing Xinhengji assigned ownership of a certain building area to Beijing Pengrun Property and also authorised Beijing Pengrun Property to manage and operate the building area, including receiving and collecting the rentals for this building area. Completion of registration of ownership assignment with the relevant PRC authorities is still pending.

– I-62 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Notes:

(i) The sales and purchase transactions and the joint purchase transactions entered into between the Group and the Non-listed GOME Group in respect of the electrical appliances and consumer electronic products were conducted based on the actual purchase cost from the Group’s third party suppliers.

On 5 March 2013, the Group terminated the master purchase agreement and the master supply agreement with the Non-listed GOME Group. On the same date, the Group entered into (1) the master merchandise purchase agreement for the supply of general merchandise (including electrical appliances and consumer electronic products) by 北京國美銳動電子商務有限公司 (“Beijing GOME Ruidong e-Commerce Co., Ltd.” or “GOME Ruidong”), of which Mr. Wong has beneficial interest as an equity holder, and the Non-listed GOME Group to the Company’s subsidiaries (including Kuba and GOME-on-line) for a period of three years from 1 January 2013 to 31 December 2015, subject to the annual caps of the transaction amounts (excluding value added tax) for the three years ending 31 December 2013, 2014 and 2015 not exceeding RMB5 billion, RMB6.5 billion and RMB8 billion, respectively, and (2) the master merchandise supply agreement for the supply of general merchandise (including electrical appliances and consumer electronics products) by the Group to the Non-listed GOME Group for a period of three years from 1 January 2013 to 31 December 2015, subject to the annual caps of the transaction amounts (excluding value added tax) for the three years ending 31 December 2013, 2014 and 2015 not exceeding RMB5 billion, RMB6.5 billion and RMB8 billion (including the transactions with Kuba and GOME-on-line which are defined as connected persons under the Listing Rules), respectively.

The transactions constitute continuing connected transactions under the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (the “Listing Rules”).

(ii) The Group provides management services to the Non-listed GOME Group in respect of the retailing of electrical appliances and consumer electronic products. In addition, the Group negotiates with various suppliers for both the Group and the Non-listed GOME Group on a centralised basis.

On 17 December 2012, (1) the Group entered into a management agreement with the Non-listed GOME Group, pursuant to which the Group agreed to provide and to procure other members of the Group to provide management services for the business of retailing electrical appliances and consumer electronic products to the Non-listed GOME Group for a period of three years from 1 January 2013 to 31 December 2015; and (2) the Group entered into purchasing service agreement with the Non-listed GOME Group that the Group agreed to provide and to procure other members of the Group to provide purchasing services for the business of retailing electrical appliances and consumer electronic products to the Non-listed GOME Group for a period of three years from 1 January 2013 to 31 December 2015. The annual caps of the management service fee and the purchasing service fee are RMB100 million and RMB150 million, respectively.

The transactions constitute continuing connected transactions under the Listing Rules.

(iii) On 17 November 2014, the Group renewed the lease agreements and supplemental agreements with Beijing Pengrun Property and Beijing GOME with respect to the continuous use of the properties. On 25 August 2014, GOME-Online entered into a lease agreement with respect to its use of additional properties with Beijing Pengrun Property. During the year ended 31 December 2014, the rental expenses incurred by the Group payable to Beijing Pengrun Property and Beijing GOME amounted to RMB84,224,000 (2013: RMB74,961,000) and RMB15,768,000 (2013: RMB14,454,000), respectively.

The transactions constitute continuing connected transactions under the Listing Rules.

(iv) On 5 March 2013, the Group terminated the master agreement with GOME Ruidong. On the same date, the Group entered into (1) logistics services agreements for which GOME Ruidong and the Non-listed GOME Group will provide the logistics services (including warehousing and delivery of general merchandise to end customers) to Kuba and GOME-Online for a period of three years from 1 January 2013 to 31 December 2015, subject to the annual caps of the transaction amounts (excluding value added tax) for the three years ending 31 December 2013, 2014 and 2015 not exceeding RMB150 million, RMB150 million and RMB150 million, respectively, and (2) the after-sales services agreements for which GOME Ruidong and the Non-listed GOME Group will provide the after-sales services to Kuba and GOME-Online for a period of three years from 1 January 2013 to 31 December 2015, subject to the annual caps of the transaction amounts (excluding value added tax) for the three years ending 31 December 2013, 2014 and 2015 not exceeding RMB150 million, RMB150 million and RMB150 million, respectively.

The transactions constitute continuing connected transactions under the Listing Rules.

– I-63 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(v) The Group received operating lease rentals from GOME Home Appliances (Hong Kong) Limited, a company owned by Mr. Wong. The contract was terminated on March 2013.

The transactions constitute continuing connected transactions but is exempted from all reporting announcement and independent shareholders’ approve requirements under Listing Rules.

All above related party transactions were determined by mutual agreements between the involved parties after taking into account prevailing market prices. The directors of the Company confirmed that the Company has complied with the disclosure requirements in accordance with Chapter 14A of the Listing Rules.

(b) Commitments with related parties

As disclosed in note 34(a)(iii), the Group had rental commitments with Beijing Pengrun Property and Beijing GOME of RMB116,993,000 (31 December 2013: RMB74,442,000) and RMB15,768,000 (31 December 2013: RMB15,768,000) under non-cancellable operating leases falling due within one year.

(c) Compensation of key management personnel of the Group:

Fees Other emoluments: Salaries, allowances and other expense Pension scheme contributions Equity-settled share option expense	2014 RMB’000 3,967 8,884 210 (483) 12,578	2013 RMB’000 4,099 9,531 200 (2,740) 11,090

Further details of directors’ and the chief executive’s emoluments are included in note 8 to the financial statements.

35. CONTINGENCIES

Enforcement action by the Securities and Futures Commission

Court grants injunction to freeze assets of Mr. Wong and his spouse

On 7 August 2009, the Securities and Futures Commission (the “SFC”) of the Hong Kong Special Administrative Region announced that the High Court had granted an interim injunction to freeze assets of up to HK$1,655,167,000 in relation to the former director and chairman of the Company, Mr. Wong, his spouse Ms. Du Juan and two companies, Shinning Crown Holdings Inc. (“Shinning Crown”) and Shine Group Limited (“Shine Group”) (together, “the Defendants”).

Mr. Wong and Ms. Du Juan were alleged to have organised a share repurchase (the “Share Repurchase”) by the Company in January and February 2008 in order to use the Company’s funds to buy shares originally held by Mr. Wong so that Mr. Wong could use the proceeds of those shares to repay a HK$2.4 billion personal loan due from Mr. Wong to a financial institution (the “Allegation”).

The SFC alleged that the Share Repurchase had a negative impact on the Company’s financial position and was not in the best interest of the Company and its shareholders. The SFC alleged that the Share Repurchase by the Company provided the demand for the Company’s shares and stabilised its share price when Mr. Wong disposed of his shares, thereby enabling him to earn profit from his shares sold. The SFC also alleged that this transaction was a fraud or deception in a transaction involving securities and caused a loss of approximately HK$1.6 billion to the Company and its shareholders.

– I-64 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The SFC sought orders that Mr. Wong, Ms. Du Juan and the two companies owned and controlled by them in order to:

restore the parties to any transaction, in particular the Company, to the position in which they were before the transaction was entered into; and/or
pay damages to the Company.

The interim injunction served to prevent the dissipation of assets pending the conclusion of the SFC’s investigation and to ensure that there are sufficient assets to satisfy any restoration or compensation orders, if orders are made against Mr. Wong, Ms. Du Juan and the two companies.

Resolution of the Allegations by Mr. Wong, Ms. Du Juan, Shinning Crown, Shine Group and the SFC

The Company has been informed that, as a result of the mediation between the SFC and the Defendants, the SFC and the Defendants have reached an agreement to resolve the legal proceedings commenced by the SFC involving the Allegations subject to certain conditions being fulfilled by the Defendants, including: (i) requisitioning by Shinning Crown and Shine Group of a shareholders’ meeting and the ratification by independent shareholders (other than Mr. Wong, Ms. Du Juan, Shining Crown, Shine Group and their respective associates) of the Share Repurchases conducted by the Company between 22 January 2008 and 5 February 2008 involving approximately 129.8 million shares of the Company (of which approximately 70% were originally held by or for Mr. Wong); and (ii) certain breaches of duties to the Company by Mr. Wong and Ms. Du Juan (the “Breaches of Duties”); and (iii) the payment of compensation in the amount of approximately HK$420,609,000 in aggregate by Mr. Wong and Ms. Du Juan to the Company in order for Mr. Wong, Ms. Du Juan, Shinning Crown, Shine Group and any other persons to be released from all liabilities and claims in relation to the Share Repurchases and the Breaches of Duties (the “Payment”).

In addition, Mr. Wong and Ms. Du Juan have also agreed to pay (i) all costs involved in convening and holding the special general meeting and (ii) the SFC’s legal costs.

On 17 March 2014, the Company received a requisition letter from Shinning Crown and Shine Group requesting the board to convene a special general meeting for the purposes of considering the requisitioned resolution to approve, confirm and ratify the Share Repurchases and the Breaches of Duties and to confirm and approve the acceptance of the Payment by Mr. Wong and Ms. Du Juan to the Company. In response to the requisition, the board convened a special general meeting of the Company on 17 April 2014. The requisitioned resolution was passed, and the SFC together with the Defendants applied to the High Court for a joint order for the discharge of the injunction against Mr. Wong, release of all undertakings of Shinning Crown and Shine Group and release of the Defendants’ shares in the Company held in the High Court. The High Court granted orders sought by the SFC on 5 May 2014.

The Payment of HK$420,609,000 represented the gains of Mr. Wong of HK$294,015,000 (equivalent to RMB233,389,000), which was recorded in equity, and the interest accrued thereon of HK$126,594,000 (equivalent to RMB100,102,000), which was recorded in the consolidated statement of profit or loss for the year ended 31 December 2014.

Other than the above, the Group did not have any significant contingencies at the end of the reporting period.

– I-65 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

36. FINANCIAL INSTRUMENTS BY CATEGORY

The carrying amounts of each of the categories of financial instruments as at the end of the year are as follows:

Group

2014

Financial assets

Other investments Trade and bills receivables Financial assets included in prepayments, deposits and other receivables Due from related companies Pledged deposits Cash and cash equivalents	Loans and receivables RMB’000 – 267,694 922,016 227,964 6,072,895 8,794,112 16,284,681	Available- for-sale financial assets RMB’000 217,350 – – – – – 217,350	Total RMB’000 217,350 267,694 922,016 227,964 6,072,895 8,794,112
			16,502,031

Financial liabilities

Interest-bearing bank loans Trade and bills payables Financial liabilities included in customers’ deposits, other payables and accruals Due to related companies	Financial liabilities at amortised cost RMB’000 3,425,950 20,880,430 715,005 521,213
	25,542,598

2013

Financial assets

Other investments Trade and bills receivables Financial assets included in prepayments, deposits and other receivables Due from related companies Pledged deposits Cash and cash equivalents	Loans and receivables RMB’000 – 245,492 830,222 123,174 6,406,795 9,015,813 16,621,496	Available- for-sale financial assets RMB’000 135,000 – – – – – 135,000	Total RMB’000 135,000 245,492 830,222 123,174 6,406,795 9,015,813
			16,756,496

– I-66 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Financial liabilities

Interest-bearing bank loans Trade and bills payables Financial liabilities included in customers’ deposits, other payables and accruals Due to related companies	Financial liabilities at amortised cost RMB’000 2,683,171 18,077,489 549,634 464,142
	21,774,436

Company *Financial assets* Amounts due from subsidiaries Cash and cash equivalents *Financial liabilities* 2014	2014 Loans and receivables RMB’000 5,996,694 964,068 6,960,762	2013 Loans and receivables RMB’000 6,718,389 705,137
		7,423,526

Interest-bearing bank loans Amounts due to subsidiaries Financial liabilities included in other payables and accruals 2013 Interest-bearing bank loans Amounts due to subsidiaries Financial liabilities included in other payables and accruals	Financial liabilities at amortised cost RMB’000 3,425,950 762,589 9,691
	4,198,230

	Financial liabilities at amortised cost RMB’000 2,683,171 659,178 4,267
	3,346,616

– I-67 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

37. FAIR VALUE AND FAIR VALUE HIERARCHY OF FINANCIAL INSTRUMENTS

The carrying amounts and fair values of the Group’s financial instruments, other than those with carrying amounts that reasonably approximate to fair values, are as follows:

Group

	Carrying	amounts	Fair values
	2014	2013	2014	2013
	RMB’000	RMB’000	RMB’000	RMB’000
Financial assets
Other investments	217,350	135,000	217,350	135,000

The Company’s financial instruments are all with carrying amounts that reasonably approximate to fair values.

Management has assessed that the fair values of cash and cash equivalents, pledged deposits, trade and bills receivables, trade and bills payables, financial assets included in prepayments, deposits and other receivables, financial liabilities included in other payables and accruals, amounts due from/to related companies and interest-bearing bank loans approximate to their carrying amounts largely due to the short term maturities of these instruments.

The Group’s management is responsible for determining the policies and procedures for the fair value measurement of financial instruments. At each reporting date, management analyses the movements in the values of financial instruments and determines the major inputs applied in the valuation. The valuation process and results are discussed with the audit committee twice a year for interim and annual financial reporting.

The fair values of listed equity investments are based on quoted market prices.

Fair value hierarchy

The following tables illustrate the fair value measurement hierarchy of the Group’s financial instruments:

Assets measured at fair value:

Group

As at 31 December 2014

		Fair value measurement using	Fair value measurement using
	Quoted prices	Significant	Significant
	in active	observable	unobservable
	market	inputs	inputs
	(Level 1)	(Level 2)	(Level 3)	Total
	RMB’000	RMB’000	RMB’000	RMB’000
Other investments:
Equity investments	217,350	–	–	217,350

– I-68 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

As at 31 December 2013

		Fair value measurement using	Fair value measurement using
	Quoted prices	Significant	Significant
	in active	observable	unobservable
	market	inputs	inputs
	(Level 1)	(Level 2)	(Level 3)	Total
	RMB’000	RMB’000	RMB’000	RMB’000
Other investments:
Equity investments	135,000	–	–	135,000

During the year ended 31 December 2014, there were no transfers into or out of Level 1 and Level 2, and no transfers into or out of Level 3.

The Company did not have any financial assets measured at fair value as at 31 December 2014.

Liabilities measured at fair value:

The Group and the Company did not have any financial liabilities measured at fair value as at 31 December 2014 and 31 December 2013.

38. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

The Group’s principal financial instruments, other than other investments, comprise cash and cash equivalents, pledged deposits and interest-bearing bank loans. The main purpose of these financial instruments is to raise finance for the Group’s operations. The Group has various other financial assets and liabilities such as trade and bills receivables and trade and bills payables, other receivables and payables and amounts due from/to related companies, which arise directly from its operations.

The main risks arising from the Group’s financial instruments are interest rate risk, foreign currency risk, credit risk, liquidity risk and equity price risk. The board of directors reviews and agrees policies for managing each of these risks and they are summarised below.

Interest rate risk

The Group’s exposure to the risk of changes in market interest rates relates primarily to the debt obligations with floating interest rates.

The Group’s policy is to manage its interest cost using a mix of fixed and variable rate debts. As at 31 December 2014, the Group had bank borrowings of RMB3,425,950,000 with floating interest rates (2013: RMB2,683,171,000).

The following table demonstrates the sensitivity to a reasonably possible change in the interest rate with all other variables held constant, of the Group’s profit before tax (due to changes in finance costs).

	Increase/	(Decrease)/
	(decrease) in	increase in
	interest rate	profit before tax
		RMB’000
2014
If interest rate increases by	5%	(2,306)
If interest rate decreases by	(5%)	2,306

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

	Increase/	(Decrease)/
	(decrease) in	increase in
	interest rate	profit before tax
		RMB’000
2013
If interest rate increases by	5%	(3,028)
If interest rate decreases by	(5%)	3,028

Foreign currency risk

As at 31 December 2014, the Group had cash and bank deposits of RMB970,510,000 (2013: RMB721,693,000) and interest-bearing bank loans of RMB3,425,950,000 (2013: RMB2,683,171,000), which were denominated in foreign currencies including USD and the Hong Kong dollar.

The following table demonstrates the sensitivity to a reasonably possible change in the exchange rate of USD and the Hong Kong dollar with all other variables held constant, of the Group’s profit before tax (due to changes in the fair values of monetary assets and liabilities). Other components of equity would not change.

	Increase/
	(decrease)	Increase/
	in foreign	(decrease) in
	currency rate	profit before tax
		RMB’000
2014
If RMB weakens against USD	5%	(128,441)
If RMB strengthens against USD	(5%)	128,441
If RMB weakens against the Hong Kong dollar	5%	5,669
If RMB strengthens against the Hong Kong dollar	(5%)	(5,669)
	Increase/
	(decrease)	Increase/
	in foreign	(decrease) in
	currency rate	profit before tax
		RMB’000
2013
If RMB weakens against USD	5%	(100,514)
If RMB strengthens against USD	(5%)	100,514
If RMB weakens against the Hong Kong dollar	5%	2,440
If RMB strengthens against the Hong Kong dollar	(5%)	(2,440)

Credit risk

The Group trades on credit only with third parties who have an established trading history with the Group and who have no history of default. It is the Group’s policy that new customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an ongoing basis with the result that the Group’s exposure to bad debts is not significant. The maximum exposure is the carrying amount as disclosed in note 21 to the financial statements.

With respect to credit risk arising from the other financial assets of the Group, which comprise cash and cash equivalents, pledged deposits, other receivables and amounts due from related companies, the Group’s exposure to credit risk arises from default of the counterparty, with a maximum exposure equal to the carrying amounts of these financial instruments. Since the Group trades only with recognised and creditworthy third parties, there is no requirement for collateral. Concentrations of credit risk are managed by customer/counterparty and by geographical region. There are no significant concentrations of credit risk within the Group as the customer bases of the Group’s trade receivables are widely dispersed in different geographical regions.

– I-70 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Liquidity risk

The Group monitors its risk to a shortage of funds based on the maturity of its financial instruments, financial assets and liabilities and projected cash flows from operations.

The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of trade and bills payables and interest-bearing bank loans. As at 31 December 2014, the Group had trade and bills payables amounting to RMB20,880,430,000 (31 December 2013: RMB18,077,489,000). In addition, as at 31 December 2014, the Group had interest-bearing bank loans amounting to RMB3,425,950,000 (31 December 2013: RMB2,683,171,000) which will mature within 12 months. Management has reviewed the Group’s working capital and capital expenditure requirements and determined that the Group has no significant liquidity risk.

The table below summarises the maturity profile of the Group’s financial liabilities at the end of the reporting period, based on contractual undiscounted payments.

Group

2014 Interest-bearing bank loans and interest payables Trade and bills payables Financial liabilities included in customers’ deposits and other payables Due to related companies 2013 Interest-bearing bank loans and interest payables Trade and bills payables Financial liabilities included in customers’ deposits and other payables Due to related companies	Within 1 year RMB’000 3,435,641 20,880,430 705,314 521,213
	25,542,598

	Within 1 year RMB’000 2,687,438 18,077,489 545,367 464,142
	21,774,436

Company

2014 Interest-bearing bank loans and interest payables Amounts due to subsidiaries 2013 Interest-bearing bank loans and interest payables Amounts due to subsidiaries	Within 1 year RMB’000 3,435,641 762,589
	4,198,230

	Within 1 year RMB’000 2,687,438 659,178
	3,346,616

– I-71 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Equity price risk

Equity price risk is the risk that the fair values of equity securities decrease as a result of changes in the levels of equity indices and the value of individual securities. The Group is exposed to equity price risk arising from other investments (note 16) as at 31 December 2014. The Group’s listed investments are valued at market price as at 31 December 2014 and 31 December 2013.

The market equity index for the following stock exchange, at the close of business of the nearest trading day in the year to the end of the reporting period, and its highest and lowest points during the year were as follows:

					December	High/low	December	High/low
					2014	2014	2013	2013
Shanghai	–	A	Share	Index	3,389	3,389/	2,116	2,434/
						2,084		1,950

The following table demonstrates the sensitivity to every 10% change in the fair values of the equity investments, with all other variables held constant and before any impact on tax, based on their carrying amounts at the end of the reporting period. For the purpose of this analysis, for the other equity investments, the impact is deemed to be on the other investment revaluation reserve and no account is given for factors such as impairment which might impact on the statement of profit or loss.

		Carrying	Increase/
		amount of	decrease in	Increase/
		equity	profit	decrease in
		investments	before tax	equity*
		RMB’000	RMB’000	RMB’000
2014
Investments	listed in:
Shanghai	– Available-for-sale	217,350	–	21,735
2013
Investments	listed in:
Shanghai	– Available-for-sale	135,000	–	13,500

Excluding retained earnings

Capital management

The primary objective of the Group’s capital management is to ensure that the Group has healthy capital structure in order to support the Group’s stability and growth.

The Group regularly reviews and manages its capital structure and makes adjustments to it, taking into consideration changes in economic conditions, future capital requirements of the Group, prevailing and projected profitability and operating cash flows, projected capital expenditures and projected strategic investment opportunities.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The Group monitors capital using a gearing ratio, which is net debt divided by the total capital plus net debt. Net debt includes interest-bearing bank loans, amounts due to related companies, trade and bills payables and customers’ deposits, other payables and accruals, less cash and cash equivalents and pledged deposits. Capital includes the equity attributable to owners of the parent. The gearing ratios as at the end of the reporting periods were as follows:

Interest-bearing bank loans Due to related companies Trade and bills payables Customers’ deposits, other payables and accruals Less: Cash and cash equivalents Pledged deposits Net debt Equity attributable to owners of the parent Total capital Capital and net debt Gearing ratio	2014 RMB’000 3,425,950 521,213 20,880,430 2,425,413 (8,794,112) (6,072,895) 12,385,999 16,905,916 16,905,916 29,291,915 42%	2013 RMB’000 2,683,171 464,142 18,077,489 2,046,809 (9,015,813) (6,406,795) 7,849,003 15,927,254 15,927,254 23,776,257 33%

39. EVENTS AFTER THE REPORTING PERIOD

Save as disclosed elsewhere in the consolidated financial statements, the Group had the following events after the reporting period.

On 11 November 2014, the Group agreed to acquire a 5.41% stake, or 633 million new ordinary shares in the enlarged capital of Huishang Bank Corporation Limited (“Huishang”), for HK$3.8 (equivalent to RMB3.0) per share in cash, or at a total consideration of HK$2,404 million (equivalent to RMB1,897 million), in a privately negotiated capital enlargement transaction.

On 26 November 2014, as agreed with Huishang, the Group changed the acquisition plan from 5.41% to 4.09% stake, or from 633 million to 471 million new ordinary shares. The total consideration changed from HK$2,404 million (equivalent to RMB1,897 million) to HK$1,790 million (equivalent to RMB1,412 million) which was paid by the Group on 31 December 2014.

On 1 February 2015, the Group announced that as certain conditions precedent in relation to the subscription of Huishang shares have not been satisfied, and the Group and Huishang have not reached agreement on the continuous implementation of the transaction, the Group’s proposed subscription of Huishang shares was terminated on 31 January 2015. The total amount of HK$1,790 million (equivalent to RMB1,412 million) including interest thereon was refunded to the Group on 16 January 2015.

40. APPROVAL OF THE FINANCIAL STATEMENTS

The financial statements were approved and authorised for issue by the board of directors of the Company on 23 March 2015.

– I-73 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

3. UNAUDITED INTERIM FINANCIAL INFORMATION

The following is the full text of the unaudited interim financial information of the Group for the 6 months ended 30 June 2015 as extracted from the interim report of the Company for the 6 months ended 30 June 2015:

Interim Condensed Consolidated Statement of Profit or Loss

For the six-month period ended 30 June 2015

Notes
REVENUE
5
Cost of sales
Gross profit
Other income and gain
5
Selling and distribution expenses
Administrative expenses
Other expenses
Profit from operating activities
Finance costs
7
Finance income
7
PROFIT BEFORE TAX
6
Income tax expense
8
PROFIT FOR THE PERIOD
Attributable to:
Owners of the parent
Non-controlling interests
EARNINGS PER SHARE ATTRIBUTABLE TO
ORDINARY EQUITY HOLDERS OF THE
PARENT
9
– Basic and diluted

For the six-month period
ended 30 June
2015
2014
RMB’000
RMB’000
(Unaudited)
(Unaudited)
31,692,485
29,124,153
(26,980,149)
(24,693,808)
4,712,336
4,430,345
899,059
1,053,366
(3,810,460)
(3,569,970)
(791,665)
(840,187)
(314,940)
(335,358)
694,330
738,196
(26,628)
(21,470)
132,920
129,386
800,622
846,112
(275,614)
(247,598)
525,008
598,514
686,923
692,611
(161,915)
(94,097)
525,008
598,514
RMB4.1 fen
RMB4.1 fen

– I-74 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Interim Condensed Consolidated Statement of Comprehensive Income

For the six-month period ended 30 June 2015

Notes
PROFIT FOR THE PERIOD
OTHER COMPREHENSIVE INCOME
Other comprehensive income to be reclassified to
profit or loss in subsequent periods:
Changes in fair value of other investments
11
Exchange differences on translation of foreign
operations
Net other comprehensive income to be reclassified
to profit or loss in subsequent periods
OTHER COMPREHENSIVE INCOME FOR
THE PERIOD, NET OF TAX
TOTAL COMPREHENSIVE INCOME FOR
THE PERIOD
Attributable to:
Owners of the parent
Non-controlling interests

For the six-month period
ended 30 June
2015
2014
RMB’000
RMB’000
(Unaudited)
(Unaudited)
525,008
598,514
259,470
14,040
14,627
9,900
274,097
23,940
274,097
23,940
799,105
622,454
961,020
716,551
(161,915)
(94,097)
799,105
622,454

– I-75 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Interim Condensed Consolidated Statement of Financial Position

As at 30 June 2015

Notes NON-CURRENT ASSETS Property and equipment 10 Investment properties Goodwill Other intangible assets Other investments 11 Lease prepayments and deposits Deferred tax assets Total non-current assets CURRENT ASSETS Inventories 12 Trade and bills receivables 13 Prepayments, deposits and other receivables 14 Due from related companies 15 Equity investments at fair value through profit or loss 16 Pledged deposits 17 Cash and cash equivalents 17 Total current assets CURRENT LIABILITIES Interest-bearing bank loans 18 Trade and bills payables 19 Customers’ deposits, other payables and accruals Due to related companies 15 Tax payable Total current liabilities NET CURRENT ASSETS TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Deferred tax liabilities Total non-current liabilities Net assets EQUITY Equity attributable to owners of the parent Issued capital 20 Proposed dividends Reserves Non-controlling interests Total equity	30 June 2015 RMB’000 (Unaudited) 4,384,014 601,224 7,145,117 254,082 476,820 368,940 28,217 13,258,414 9,785,346 417,241 3,416,568 258,939 976,309 4,083,495 10,715,978 29,653,876 1,523,494 20,375,192 2,575,996 767,316 671,850 25,913,848 3,740,028 16,998,442 159,401 159,401 16,839,041 423,268 234,864 17,214,222 17,872,354 (1,033,313) 16,839,041	31 December 2014 RMB’000 (Audited) 4,417,234 601,224 7,145,117 265,801 217,350 311,128 31,795 12,989,649 10,926,399 267,694 4,797,960 227,964 – 6,072,895 8,794,112 31,087,024 3,425,950 20,880,430 2,425,413 521,213 626,151 27,879,157 3,207,867 16,197,516 162,998 162,998 16,034,518 423,221 234,864 16,247,831 16,905,916 (871,398) 16,034,518

– I-76 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Attributable to owners of the parent	Other	Share Asset investment Exchange Non-	Issued Share Contributed Capital option revaluation revaluation Statutory fluctuation Retained Proposed controlling Total	capital premium surplus reserve reserve reserve# reserve reserves reserve earnings dividends Total interests equity	Notes RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000	Balance at 1 January 2015 423,221 9,543,093 657 (618,172) 163,036 117,468 123,390 1,505,592 (150,872) 5,563,639 234,864 16,905,916 (871,398) 16,034,518	Profit for the period – – – – – – – – – 686,923 – 686,923 (161,915) 525,008	Other comprehensive income for the period:	Changes in fair value of other investments 11 – – – – – – 259,470 – – – – 259,470 – 259,470	Exchange differences on translation of	foreign operations – – – – – – – – 14,627 – – 14,627 – 14,627	Total comprehensive income for the period – – – – – – 259,470 – 14,627 686,923 – 961,020 (161,915) 799,105	Exercise of share options 20 47 5,024 – – (1,555) – – – – – – 3,516 – 3,516	Equity-settled share option arrangements 21 – – – – 1,902 – – – – – – 1,902 – 1,902	Wind-up of subsidiaries – – – – – – – (2,316) – 2,316 – – – –	At 30 June 2015 (unaudited) 423,268 9,548,117 657 (618,172) 163,383 117,468 382,860 1,503,276 (136,245) 6,252,878* 234,864 17,872,354 (1,033,313) 16,839,041		* As at 30 June 2015, these reserve accounts comprised the consolidated reserves of RMB17,214,222,000 (31 December 2014: RMB16,247,831,000) in the interim condensed	consolidated statement of financial position.	# The asset revaluation reserve arose from changes in use from owner-occupied properties to investment properties carried at fair value.

– I-77 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

		Non-	controlling Total	interests equity	RMB’000 RMB’000	(609,796) 15,317,458	(94,097) 598,514		– 14,040		– 9,900	(94,097) 622,454	– –	– (81,005)	– 5,083	– (276,868)	– 233,389	– –	(703,893) 15,820,511
				Total	RMB’000	15,927,254	692,611		14,040		9,900	716,551	–	(81,005)	5,083	(276,868)	233,389	–	16,524,404
			Proposed	dividends	RMB’000	441,392	–		–		–	–	(164,524)	–	–	(276,868)	–	–	–
			Retained	earnings	RMB’000	4,859,397	692,611		–		–	692,611	–	–	–	–	–	3,732	5,555,740
		Exchange	fluctuation	reserve	RMB’000	(163,859)	–		–		9,900	9,900	–	–	–	–	–	–	(153,959)
Attributable to owners of the parent	Other	Share Asset investment	option revaluation revaluation Statutory	reserve reserve# reserve reserves	RMB’000 RMB’000 RMB’000 RMB’000	157,953 117,468 41,040 1,441,972	– – – –		– – 14,040 –		– – – –	– – 14,040 –	– – – –	– – – –	5,083 – – –	– – – –	– – – –	– – – (3,732)	163,036 117,468 55,080 1,438,240
			Capital	reserve	RMB’000	(851,561)	–		–		–	–	–	–	–	–	233,389	–	(618,172)
			Contributed	surplus	RMB’000	657	–		–		–	–	–	–	–	–	–	–	657
			Share	premium	RMB’000	9,461,244	–		–		–	–	161,375	(79,526)	–	–	–	–	9,543,093
			Issued	capital	RMB’000	421,551	–		–		–	–	3,149	(1,479)	–	–	–	–	423,221
					Notes				11						21
						Balance at 1 January 2014	Profit for the period	Other comprehensive income for the period:	Changes in fair value of other investments	Exchange differences on translation of	foreign operations	Total comprehensive income for the period	Scrip dividend	Repurchase of shares	Equity-settled share option arrangements	Dividend declared	Compensation received	Wind-up of subsidiaries	At 30 June 2014 (unaudited)

– I-78 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Interim Condensed Consolidated Statement of Cash Flows

For the six-month period ended 30 June 2015

Notes
CASH FLOWS FROM OPERATING
ACTIVITIES
Profit before tax
Adjustments for:
Finance income
7
Finance costs
7
Loss on equity investments at fair value through
profit or loss
6
Loss on disposal of items of property and
equipment
6
Reversal of impairment provision for items of
property and equipment
6
Depreciation
6
Amortisation of intangible assets
6
Equity-settled share option expense
21
Compensation received
5
Decrease/(increase) in inventories
Increase in trade and bills receivables
Increase in lease prepayments and deposits
(Increase)/decrease in prepayments, deposits and
other receivables
Increase in amounts due from related companies
Decrease/(increase) in pledged deposits for
bills payable
17
(Decrease)/increase in trade and bills payables
Increase in customers’ deposits, other payables
and accruals
Increase in amounts due to related companies
Cash generated from operations
Interest received
Income tax paid
Net cash flows from operating activities

For the six-month period
ended 30 June
2015
2014
RMB’000
RMB’000
(Unaudited)
(Unaudited)
800,622
846,112
(132,920)
(129,386)
26,628
21,470
23,691
–
7,958
14,815
(3,052)
–
287,545
284,434
11,719
11,719
1,902
5,083
–
(100,102)
1,024,093
954,145
1,141,053
(1,014,313)
(149,547)
(48,255)
(57,812)
(37,710)
(31,218)
107,010
(30,975)
(48,108)
45,273
(103,767)
(505,238)
3,397,470
156,671
58,681
246,103
53,576
1,838,403
3,318,729
152,730
169,194
(229,934)
(211,057)
1,761,199
3,276,866

– I-79 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Notes
Net cash flows from operating activities
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchases of items of property and equipment
Purchases of equity investment
Return of prepayment from Huishang share
subscription
Proceeds from disposal of items of property and
equipment
Net cash flows from/(used in) in investing
activities
CASH FLOWS FROM FINANCING
ACTIVITIES
Repurchase of shares
Compensation received
New bank loans
Decrease in pledged deposits for bank loans
17
Repayment of bank loans
Exercise of share options
Dividend paid
Interest paid
Net cash flows from financing activities
NET INCREASE IN CASH AND CASH
EQUIVALENTS
Cash and cash equivalents at 1 January
Effect of foreign exchange rate changes, net
CASH AND CASH EQUIVALENTS AT
30 JUNE
ANALYSIS OF BALANCES OF CASH AND
CASH EQUIVALENTS
Cash and bank balances
17
Non-pledged time deposits with original maturity
of less than three months when acquired

For the six-month period
ended 30 June
2015
2014
RMB’000
RMB’000
(Unaudited)
(Unaudited)
1,761,199
3,276,866
(290,720)
(371,261)
(1,000,000)
–
1,411,973
–
31,490
71,742
152,743
(299,519)
–
(81,005)
–
333,491
–
1,410,917
1,944,127
2,101,592
(1,906,356)
(2,392,661)
3,516
–
–
(276,868)
(32,716)
(18,688)
8,571
1,076,778
1,922,513
4,054,125
8,794,112
9,015,813
(647)
3,575
10,715,978
13,073,513
9,109,474
12,474,099
1,606,504
599,414
10,715,978
13,073,513

– I-80 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

NOTES TO THE INTERIM FINANCIAL INFORMATION

30 June 2015

1. CORPORATE INFORMATION

GOME Electrical Appliances Holding Limited (the “Company”) is a limited liability company incorporated in Bermuda. Its shares are listed on The Stock Exchange of Hong Kong Limited. The address of its registered office is Canon’s Court, 22 Victoria Street, Hamilton HM12, Bermuda.

The principal activities of the Company and its subsidiaries (the “Group”) are the operations and management of networks of electrical appliances, consumer electronic products retail stores and electronic products on-line sales in the People’s Republic of China (the “PRC”).

2. BASIS OF PREPARATION

The unaudited interim financial information for the six-month period ended 30 June 2015 (the “Interim Financial Information”) has been prepared in accordance with International Accounting Standard (“IAS”) 34 Interim Financial Reporting issued by the International Accounting Standards Board (“IASB”).

The Interim Financial Information does not include all the information and disclosures required in the annual financial statements, and should be read in conjunction with the Group’s audited financial statements for the year ended 31 December 2014.

3. CHANGES TO THE GROUP’S ACCOUNTING POLICIES

The accounting policies adopted in the preparation of the Interim Financial Information are consistent with those followed in the preparation of the Group’s financial statements for the year ended 31 December 2014, except for the adoption of new amendments effective as of 1 January 2015.

The Group applied the following new amendments for the first time in 2015. However, they do not impact the interim condensed consolidated financial statements of the Group.

The nature and the impact of each new amendment are described below:

Employee Contributions (Amendments to IAS 19)

IAS 19 requires an entity to consider contributions from employees or third parties when accounting for defined benefit plans. Where the contributions are linked to service, they should be attributed to periods of service as a negative benefit. These amendments clarify that, if the amount of the contributions is independent of the number of years of service, an entity is permitted to recognise such contributions as a reduction in the service cost in the period in which the service is rendered, instead of allocating the contributions to the periods of service. This amendment is effective for annual periods beginning on or after 1 July 2014. This amendment is not relevant to the Group, since none of the entities within the Group has defined benefit plans with contributions from employees or third parties.

Annual Improvements 2010-2012 Cycle

These improvements are effective from 1 July 2014 and the Group has applied these amendments for the first time in these interim condensed consolidated financial statements. They include:

IFRS 2 Share-based Payment

This improvement is applied prospectively and clarifies various issues relating to the definitions of performance and service conditions which are vesting conditions, including:

A performance condition must contain a service condition;
A performance target must be met while the counterparty is rendering service;

– I-81 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

A performance target may relate to the operations or activities of an entity, or to those of another entity in the same group;
A performance condition may be a market or non-market condition;
If the counterparty, regardless of the reason, ceases to provide service during the vesting period, the service condition is not satisfied.

The above definitions are consistent with how the Group has identified any performance and service conditions which are vesting conditions in previous periods, and thus these amendments do not impact the Group’s accounting policies.

IFRS 3 Business Combinations

The amendment is applied prospectively and clarifies that all contingent consideration arrangements classified as liabilities (or assets) arising from a business combination should be subsequently measured at fair value through profit or loss whether or not they fall within the scope of IFRS 9 (or IAS 39, as applicable). This is consistent with the Group’s current accounting policy, and thus this amendment does not impact the Group’s accounting policy.

IFRS 8 Operating Segments

The amendments are applied retrospectively and clarify that:

An entity must disclose the judgements made by management in applying the aggregation criteria in paragraph 12 of IFRS 8, including a brief description of operating segments that have been aggregated and the economic characteristics (e.g., sales and gross margins) used to assess whether the segments are ‘similar’;
The reconciliation of segment assets to total assets is only required to be disclosed if the reconciliation is reported to the chief operating decision maker, similar to the required disclosure for segment liabilities.

The Group has not applied the aggregation criteria in IFRS 8.12. The Group has presented the reconciliation of segment assets to total assets in previous periods and continues to disclose the same in note 4 to this Interim Financial Information as the reconciliation is reported to the chief operating decision maker for the purpose of decision making.

IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets

The amendment is applied retrospectively and clarifies in IAS 16 and IAS 38 that the asset may be revalued by reference to observable data by either adjusting the gross carrying amount of the asset to market value or by determining the market value of the carrying value and adjusting the gross carrying amount proportionately so that the resulting carrying amount equals the market value. In addition, the accumulated depreciation or amortisation is the difference between the gross and carrying amounts of the asset. The Group did not record any revaluation adjustments during the current interim period.

IAS 24 Related Party Disclosures

The amendment is applied retrospectively and clarifies that a management entity (an entity that provides key management personnel services) is a related party subject to the related party disclosures. In addition, an entity that uses a management entity is required to disclose the expenses incurred for management services. This amendment is not relevant to the Group as it does not receive any management services from other entities.

– I-82 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Annual Improvements 2011-2013 Cycle

These improvements are effective from 1 July 2014 and the Group has applied these amendments for the first time in these interim condensed consolidated financial statements. They include:

IFRS 3 Business Combinations

The amendment is applied prospectively and clarifies for the scope exceptions within IFRS 3 that:

Joint arrangements, not just joint ventures, are outside the scope of IFRS 3;
This scope exception applies only to the accounting in the financial statements of the joint arrangement itself.

The Company is not a joint arrangement, and thus this amendment is not relevant for the Company and its subsidiaries.

IFRS 13 Fair Value Measurement

The amendment is applied prospectively and clarifies that the portfolio exception in IFRS 13 can be applied not only to financial assets and financial liabilities, but also to other contracts within the scope of IFRS 9 (or IAS 39, as applicable). The Group does not apply the portfolio exception in IFRS 13.

IAS 40 Investment Property

The description of ancillary services in IAS 40 differentiates between investment proper ty and owner-occupied property (i.e. property, plant and equipment). The amendment is applied prospectively and clarifies that IFRS 3, and not the description of ancillary services in IAS 40, is used to determine if the transaction is the purchase of an asset or a business combination. In previous periods, the Group has relied on IFRS 3, not IAS 40, in determining whether an acquisition is of an asset or is a business acquisition. Thus, this amendment does not impact the accounting policy of the Group.

The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.

4. OPERATING SEGMENT INFORMATION

For management purposes, the Group is organised into business units based on their products and services and has one reportable operating segment which is the operations and management of networks of electrical appliances, consumer electronic products retail stores and electronic products on-line sales in the PRC. The corporate office in Hong Kong does not earn revenues and is not classified as an operating segment.

Management monitors the results of the Group’s operating segment for the purpose of making decisions about resources allocation and performance assessment. Segment performance is evaluated based on reportable segment profit or loss, which is a measure of adjusted profit or loss before tax. The adjusted profit or loss before tax is measured consistently with the Group’s profit or loss before tax except that bank interest income, unallocated income, loss on equity investments at fair value through profit or loss, finance costs and corporate and other unallocated expenses are excluded from such measurement.

Segment assets exclude deferred tax assets, pledged deposits, cash and cash equivalents, equity investments at fair value through profit or loss and other investments as these assets are managed on a group basis.

– I-83 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Segment liabilities exclude interest-bearing bank loans, tax payable and deferred tax liabilities as these liabilities are managed on a group basis.

Segment revenue
Sales to external customers
Segment results
Reconciliation
Bank interest income
Unallocated income
Loss on equity investments at fair value through profit
or loss
Finance costs
Corporate and other unallocated expenses
Profit before tax
Segment assets
Reconciliation
Corporate and other unallocated assets
Total assets
Segment liabilities
Reconciliation
Corporate and other unallocated liabilities
Total liabilities
Other segment information
Depreciation and amortisation
Capital expenditure*

For the six-month period
ended 30 June
2015
2014
RMB’000
RMB’000
(Unaudited)
(Unaudited)
31,692,485
29,124,153
771,679
685,428
132,920
129,386
344
100,514
(23,691)
–
(26,628)
(21,470)
(54,002)
(47,746)
800,622
846,112
30 June 2015
31 December 2014
RMB’000
RMB’000
(Unaudited)
(Audited)
26,631,471
28,960,521
16,280,819
15,116,152
42,912,290
44,076,673
23,718,504
23,827,056
2,354,745
4,215,099
26,073,249
28,042,155
For the six-month period
ended 30 June
2015
2014
RMB’000
RMB’000
(Unaudited)
(Unaudited)
299,264
296,153
290,720
372,194

Capital expenditure consists of additions to property and equipment.

– I-84 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

5. REVENUE, OTHER INCOME AND GAIN

Revenue, which is also the Group’s turnover, represents the net invoiced value of goods sold, after allowances for returns and trade discounts.

An analysis of revenue, other income and gain is as follows:

Notes Revenue Sale of electrical appliances and consumer electronic products Other income Income from suppliers, net Management and purchasing service fees from the Non-listed GOME Group (i) Income from products installation Gross rental income Government grants (ii) Other service fee income Other income from telecommunication service providers Commission income earned through online platform Others Gain Compensation received	For the six-month period ended 30 June 2015 2014 RMB’000 RMB’000 (Unaudited) (Unaudited) 31,692,485 29,124,153 184,092 172,797 160,897 156,437 75,640 64,969 145,419 140,249 26,677 41,806 127,658 100,097 95,396 141,230 36,589 18,416 46,691 117,263 899,059 953,264 – 100,102 899,059 1,053,366	For the six-month period ended 30 June 2015 2014 RMB’000 RMB’000 (Unaudited) (Unaudited) 31,692,485 29,124,153 184,092 172,797 160,897 156,437 75,640 64,969 145,419 140,249 26,677 41,806 127,658 100,097 95,396 141,230 36,589 18,416 46,691 117,263 899,059 953,264 – 100,102 899,059 1,053,366

		172,797 156,437 64,969 140,249 41,806 100,097 141,230 18,416 117,263
		953,264
		100,102
		1,053,366

Notes:

(i) The Non-listed GOME Group is defined in note 24(a) to the Interim Financial Information.
(ii) Various local government grants were received to reward the Group’s contributions to the local economy. There was no unfulfilled condition or contingency attaching to these government grants.

– I-85 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

6. PROFIT BEFORE TAX

The Group’s profit before tax is arrived at after charging/(crediting):

Notes
Cost of inventories sold
Depreciation
Amortisation of intangible assets
(i)
Loss on disposal of items of property and equipment
Loss on equity investments at fair value through profit
or loss
Minimum lease payments under operating leases in
respect of land and buildings
Gross rental income
5
Foreign exchange differences, net
Reversal of impairment provision for items of property
and equipment
Staff costs excluding directors’ and chief executive’s
remuneration:
Wages, salaries and bonuses
Pension scheme contributions*
Social welfare and other costs
Equity-settled share option expense

For the six-month period
ended 30 June
2015
2014
RMB’000
RMB’000
(Unaudited)
(Unaudited)
26,980,149
24,693,808
287,545
284,434
11,719
11,719
7,958
14,815
23,691
–
1,781,137
1,585,807
(145,419)
(140,249)
32,028
17,570
(3,052)
–
995,957
1,043,531
235,123
215,713
37,165
42,417
1,690
5,065
1,269,935
1,306,726

Notes:

(i) The amortisation of intangible assets for the period is included in “Administrative expenses” on the face of the interim condensed consolidated statement of profit or loss.
At 30 June 2015, the Group had no forfeited contribution available to reduce its contributions to the pension schemes in future years (2014: Nil).

7. FINANCE (COSTS)/INCOME

An analysis of finance costs and finance income is as follows:

Finance costs: Interest expenses on bank loans wholly repayable within five years Finance income: Bank interest income	For the six-month period ended 30 June 2015 2014 RMB’000 RMB’000 (Unaudited) (Unaudited) (26,628) (21,470) 132,920 129,386

– I-86 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

8. INCOME TAX EXPENSE

An analysis of the provision for tax is as follows:

Current income tax – PRC Deferred income tax Total tax charge for the period	For the six-month period ended 30 June 2015 2014 RMB’000 RMB’000 (Unaudited) (Unaudited) 275,633 234,488 (19) 13,110 275,614 247,598	For the six-month period ended 30 June 2015 2014 RMB’000 RMB’000 (Unaudited) (Unaudited) 275,633 234,488 (19) 13,110 275,614 247,598
		247,598

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

Pursuant to the rules and regulations of Bermuda, the Cayman Islands and the British Virgin Islands, the Group is not subject to any income tax in Bermuda, the Cayman Islands and the British Virgin Islands.

Under the relevant PRC income tax law, except for certain preferential treatments available to the Group, the PRC subsidiaries of the Group are subject to income tax at a rate of 25% (six-month period ended 30 June 2014: 25%) on their respective taxable income. During the current period, 25 entities (six-month period ended 30 June 2014: 25 entities) of the Group obtained approvals from the relevant PRC tax authorities and were entitled to preferential corporate income tax rates.

The Group realised tax benefits during the period through applying the preferential corporate income tax rates. These preferential tax treatments were available to the Group pursuant to the enacted PRC tax rules and regulations and are subject to assessment by the relevant PRC tax authorities.

No provision for Hong Kong profits tax has been made for the six-month periods ended 30 June 2015 and 2014, as the Group had no assessable profits arising in Hong Kong for each of the periods.

9. EARNINGS PER SHARE ATTRIBUTABLE TO ORDINARY EQUITY HOLDERS OF THE PARENT

The calculation of basic earnings per share is based on the profit for the period attributable to ordinary equity holders of the parent, and the weighted average number of ordinary shares of 16,959,826,000 in issue during the period (six-month period ended 30 June 2014: 16,888,176,000 shares).

For the six-month periods ended 30 June 2015 and 30 June 2014, there are no potentially dilutive ordinary shares.

The calculations of basic and diluted earnings per share are based on:

	For the six-month period	For the six-month period
	ended 30 June
	2015	2014
	RMB’000	RMB’000
	(Unaudited)	(Unaudited)
Earnings
Profit attributable to ordinary equity holders of the parent
used in the basic and diluted earnings per share calculation	686,923	692,611

– I-87 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

	Number of shares for the	Number of shares for the	Number of shares for the
	six-month period ended 30 June
	2015		2014
	’000		’000
	(Unaudited)	(Unaudited)
Shares
Weighted average number of ordinary shares in issue during
the period used in the basic and diluted earnings per share
calculation	16,959,826		16,888,176

10. PROPERTY AND EQUIPMENT

During the six-month period ended 30 June 2015, the Group acquired items of property and equipment at a total cost of RMB290.7 million (six-month period ended 30 June 2014: RMB372.2 million). Items of property and equipment with a net carrying amount of RMB39.4 million (six-month period ended 30 June 2014: RMB86.6 million) were disposed of during the six-month period ended 30 June 2015.

Certain of the buildings of the Group in the PRC were pledged as security for bills payable (note 19) and interest-bearing bank loans (note 18) of the Group as at 30 June 2015. The aggregate carrying value of the pledged buildings of the Group as at 30 June 2015 amounted to RMB1,492,999,000 (31 December 2014: RMB1,027,907,000).

11. OTHER INVESTMENTS

					30 June 2015	31 December 2014
					RMB’000	RMB’000
					(Unaudited)	(Audited)
Listed	investment,	at	fair	value	476,820	217,350

The balance as at 30 June 2015 represented the fair value of the Group’s investments in 27,000,000 shares, representing approximately 10.7% of the outstanding issued shares, of 三聯商社股份有限公司 (“Sanlian Commercial Co., Ltd.” or “Sanlian”). Sanlian is a company established in the PRC and listed on the Shanghai Stock Exchange. The Group classified these investments as available-for-sale financial assets at 30 June 2015 and 31 December 2014. After initial recognition, the available-for-sale financial assets are measured at fair value, with gains or losses recognised as a separate component of equity until the investments are derecognised or until the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is included in the statement of profit or loss.

Of the seven directors of Sanlian, two were nominated by the Group during the current period. With reference to Sanlian’s memorandum and articles of association and by taking into account the current shareholding structure of Sanlian, the directors of the Company consider that the Group has no absolute right to determine the composition of the board of directors of Sanlian or appoint directors to Sanlian and thus the Group does not have control or significant influence over Sanlian.

As at 30 June 2015, the fair value of these investments was based on the quoted market price of the listed shares, which was RMB17.66 (31 December 2014: RMB8.05) per share.

During the six-month period ended 30 June 2015, the gain in respect of the Group’s other investments recognised in other comprehensive income amounted to RMB259,470,000 (six-month period ended 30 June 2014: gain of RMB14,040,000).

The Group further purchased 4,000,000 shares of Sanlian from 13 July 2015 to 28 July 2015, after which the Group’s shareholding in Sanlian was increased from 10.7% to 12.3%. The directors of the Company consider that the Group does not have control or significant influence over Sanlian after this increase in shareholding.

– I-88 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

12. INVENTORIES

Merchandise for resale Consumables	30 June 2015 RMB’000 (Unaudited) 9,657,362 127,984 9,785,346	31 December 2014 RMB’000 (Audited) 10,792,532 133,867
		10,926,399

As at 30 June 2015, the Group did not have any inventories (31 December 2014: inventories amounting to RMB521 million) pledged as security for the Group’s bills payable (note 19).

13. TRADE AND BILLS RECEIVABLES

An aging analysis of the trade and bills receivables as at the end of the reporting period, based on the invoice date of the trade and bills receivables, is as follows:

Outstanding balances, aged: Within 3 months 3 to 6 months 6 months to 1 year	30 June 2015 RMB’000 (Unaudited) 334,785 78,131 4,325 417,241	31 December 2014 RMB’000 (Audited) 215,817 34,021 17,856
		267,694

14. PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES

Note Prepayments Advances to suppliers Receivables from Wuhan Yinhe (i) Prepayment for share subscription (ii) Deposit for a land use right (iii) Other deposits and receivables Current portion of prepaid land lease payments	30 June 2015 RMB’000 (Unaudited) 982,732 1,608,795 166,586 – 213,000 444,278 1,177 3,416,568	31 December 2014 RMB’000 (Audited) 740,279 1,722,515 166,586 1,411,973 – 755,430 1,177
		4,797,960

Notes:

(i) On 13 July 2008, the Group entered into a sale and purchase agreement with 武漢銀鶴置業有限公司 (“Wuhan Yinhe Property Co., Ltd.” or “Wuhan Yinhe”), an independent third party vendor, to acquire the first to the fourth floors of a commercial property located in Wuhan, the PRC, at a total cash consideration of RMB214,629,000. Pursuant to the agreement, the Group paid an amount of RMB107,315,000, representing 50% of the total purchase consideration, to the vendor in 2008 and the remaining balance was payable upon the completion and handover of the property.

– I-89 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Due to the default of the vendor to fulfil its obligation under the sale and purchase agreement, on 6 July 2009, the Group applied to the Hubei Provincial People’s High Court (the “Hubei Court”) to freeze the assets of Wuhan Yinhe up to an amount of RMB135,808,000. On 21 July 2009, the court granted an injunction and froze the first, the second and the fourth floor of the property, respectively. In July 2010, the Group applied to the Hubei Court to freeze the third floor of the property and the Hubei Court granted an injunction on 23 July 2010.

On 30 July 2009, the Group filed a civil complaint against Wuhan Yinhe with the Hubei Court. On 25 November 2009, the Intermediate People’s Court of Huanggang City, Hubei Province, issued the civil judgement and ordered that: (i) the sale and purchase agreement and its supplementary agreement are void; (ii) Wuhan Yinhe shall refund the consideration paid by the Group of RMB107,315,000 to the Group; (iii) Wuhan Yinhe shall pay interest of RMB5,638,000 and damages of RMB38,633,000 to the Group; and (iv) Wuhan Yinhe shall pay other damages to the Group in the amount of RMB15,000,000. Wuhan Yinhe did not raise any appeal within the time limit. The Company’s management has consulted the Group’s PRC legal advisers and consider that the decision is final and binding. The aggregate amount of the compensation in items (iii) and (iv) above of approximately RMB59,271,000 has been recognised as income in the Group’s statement of profit or loss for the year ended 31 December 2009.

In February 2010, the Group applied for enforcement of the court decision and the frozen property was in the process of auction. In 2012, Wuhan Yinhe applied for the retrial of case in order to postpone the auction of the properties but such retrial application was rejected in February 2013 and the original sentence continued to serve effect.

According to related rules and regulations in Mainland China, the Group cannot directly take ownership of the properties for its receivables but need to go through a certain auction processes related to the properties, as arranged by the court. By 30 June 2015, three auctions had been aborted because no one participated in the bidding and the Group did not bid either. Under the relevant laws, if the auction is not successful for three times, the Group is entitled to take ownership of the properties as settlement of such receivables. As at 30 June 2015, the court was in process of assessing if the Group was entitled to further compensation before settlement by transfer of ownership of the properties.

(ii) On 11 November 2014, the Group agreed to acquire a 5.41% stake, or 633 million new ordinary shares in the enlarged capital of Huishang Bank Corporation Limited (“Huishang”), at HK$3.8 (equivalent to RMB3.0) per share in cash, or at a total consideration of HK$2,404 million (equivalent to RMB1,897 million), in a privately negotiated capital enlargement transaction.

(iii) On 30 June 2015, the Group entered into a contract to purchase the land use right of a piece of state-owned land of 10,258 square meters with the Bureau of Land Resources and Housing Management of Guangzhou Municipality, at a total consideration of RMB1,063,370,000. Pursuant to the contract, the Group paid an amount of RMB213,000,000 as a deposit and the total consideration should be paid by two equal instalments with deadlines on 30 July 2015 and 20 December 2015, respectively. As at the date of approval of the Interim Financial Information, the registration of the land use right with the relevant PRC authorities is still pending.

– I-90 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

15. DUE FROM/DUE TO RELATED COMPANIES

Due from related companies

Management and purchasing service fee receivables from the Non-listed GOME Group Other receivables from the Non-listed GOME Group*	30 June 2015 RMB’000 (Unaudited) 83,520 175,419 258,939	31 December 2014 RMB’000 (Audited) 71,410 156,554
		227,964

The balance mainly represented the management and purchasing service fees due from the Non-listed GOME Group (note 24(a)(ii)). The aforesaid balance was interest-free, unsecured and has no fixed terms of repayment.

Due to related companies

						30 June 2015	31 December 2014
						RMB’000	RMB’000
						(Unaudited)	(Audited)
Payables	to	the	Non-listed	GOME	Group**	767,316	521,213

** The balances mainly arose from the transactions with the Non-listed GOME Group (note 24(a)(i)). The aforesaid balances were interest-free, unsecured and have no fixed terms of repayment.

16. EQUITY INVESTMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS

						30 June 2015	31 December 2014
						RMB’000	RMB’000
						(Unaudited)	(Audited)
Listed	equity	investments,	at	market	value	976,309	–

The Group invested RMB1 billion in the Mainland China’s stock market via CITIC Securities CO., Ltd. during the current period and such equity investments were classified as held for trading by the Group. As at 30 June 2015, the market value of the Group’s purchased stocks was RMB976 million while a loss of RMB24 million was recorded in the Group’s consolidated statement of profit or loss. Subsequent to 30 June 2015, as at 24 August 2015, due to fluctuations in Mainland China’s stock market, the market value of the Group’s purchased stocks was RMB742 million.

– I-91 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

17. CASH AND CASH EQUIVALENTS AND PLEDGED DEPOSITS

Cash and bank balances Time deposits Less: Pledged time deposits for bills payable Pledged time deposits for interest-bearing bank loans Cash and cash equivalents	30 June 2015 RMB’000 (Unaudited) 9,109,474 5,689,999 14,799,473 (4,083,495) – (4,083,495) 10,715,978	31 December 2014 RMB’000 (Audited) 8,468,197 6,398,810
		14,867,007
		(4,128,768) (1,944,127)
		(6,072,895)
		8,794,112

At the end of the reporting period, the cash and bank balances and the time deposits of the Group denominated in RMB amounted to RMB13,685,294,000 (31 December 2014: RMB13,896,497,000). The RMB is not freely convertible into other currencies; however, under Mainland China’s Foreign Exchange Control Regulations and Administration of Settlement, Sale and Payment of Foreign Exchange Regulations, the Group is permitted to exchange RMB for other currencies through banks authorised to conduct foreign exchange business.

The bank balances of the Group earn interest at floating rates based on daily bank deposit rates. Short term deposits of the Group are made for varying periods of between one day and one year, and earn interest at the respective short term deposit rates. The bank balances and pledged time deposits are deposited with creditworthy banks with no recent history of default.

18. INTEREST-BEARING BANK LOANS

		30 June 2015	31 December 2014
		RMB’000	RMB’000
		(Unaudited)	(Audited)
Bank	loans	1,523,494	3,425,950

The bank loans as at 30 June 2015 are denominated in United States dollars (“USD”) and bear interest at the 3-month London Interbank Offered Rate (“LIBOR”) plus 1.8% to 2.0%.

The Group’s bank loans are secured by the Group’s buildings (note 10) and investment properties as at 30 June 2015.

The carrying amount of the bank loans approximates to their fair value.

19. TRADE AND BILLS PAYABLES

Trade payables Bills payable	30 June 2015 RMB’000 (Unaudited) 7,679,837 12,695,355 20,375,192	31 December 2014 RMB’000 (Audited) 7,220,716 13,659,714
		20,880,430

– I-92 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

An aging analysis of the trade and bills payables as at the end of the reporting period, based on the goods receipt date, is as follows:

Within 3 months 3 to 6 months Over 6 months	30 June 2015 RMB’000 (Unaudited) 12,281,078 6,849,594 1,244,520 20,375,192	31 December 2014 RMB’000 (Audited) 12,475,119 7,443,568 961,743
		20,880,430

The Group’s bills payable above are secured by:

(i) the pledge of certain of the Group’s time deposits (note 17);
(ii) the pledge of certain of the Group’s inventories (note 12);
(iii) the pledge of certain of the Group’s buildings (note 10); and
(iv) the pledge of certain of the Group’s investment properties with an aggregate fair value of RMB367,938,000 (31 December 2014: RMB433,096,000).

The trade and bills payables are non-interest-bearing and are normally settled on terms of one to six months.

20. ISSUED CAPITAL

Authorised: Ordinary shares of HK$0.025 each at 1 January 2015 and 30 June 2015 Issued and fully paid: Ordinary shares of HK$0.025 each at 1 January 2015 Share option exercised (note 21) Ordinary shares of HK$0.025 each at 30 June 2015	Number of shares ’000 200,000,000 16,959,228 2,345 16,961,573	HK$’000 5,000,000 423,981 59 424,040	Equivalent to RMB’000 5,300,000

			423,221 47
			423,268

– I-93 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

21. SHARE OPTION SCHEME

The following share options were outstanding under the share option scheme during the period:

	Six-month period ended	Six-month period ended	Six-month period ended	Six-month period ended
	30 June 2015		30 June 2014
	Weighted		Weighted
	average	Number of	average	Number of
	exercise price	options	exercise price	options
	HK$ per share	’000	HK$ per share	’000
At 1 January	1.90	96,091	1.90	97,952
Exercised during the period	1.90	(2,345)	1.90	–
Forfeited during the year	1.90	–	1.90	(1,255)
Expired during the period	1.90	(2,372)	1.90	(501)
At 30 June (unaudited)
(note (i))	1.90	91,374	1.90	96,196

Note:

(i) According to the board resolution on 23 June 2015, the end of exercise period of the share options was amended from 15 November 2015 to 15 November 2016. Upon the modification, the total increase in fair value of the outstanding share options of approximately RMB1.9 million was recognised in the share option reserve.

The exercise price and exercise periods of the share options outstanding as at the end of the reporting period are as follows:

30 June 2015 Number of options Exercise price* Exercise period ’000 HK$ per share 91,374 1.90 On or before 15 November 2016 30 June 2014 Number of options Exercise price* Exercise period ’000 HK$ per share 88,351 1.90 On or before 15 November 2015 7,845 1.90 Between 15 May 2015 and 15 November 2015 96,196

The exercise price of the share options is subject to adjustment in the case of rights or bonus issues, or other similar changes in the Company’s share capital.

The Group recognised a share option expense of RMB1,902,000 during the six-month period ended 30 June 2015 (six-month period ended 30 June 2014: RMB5,083,000). The weighted average share price at the date of exercise for share options exercised during the six-month period ended 30 June 2015 was HK$2.25 per share.

At the end of the reporting period, the Company had 91,374,000 share options outstanding under the share option scheme. The exercise in full of the outstanding share options would, under the present capital structure of the Company, result in the issue of 91,374,000 additional ordinary shares of the Company and additional share capital of HK$2,284,000 (equivalent to approximately RMB1,801,000) and share premium of HK$171,326,000 (equivalent to approximately RMB135,108,000) (before issue expenses and the amount transferred from the related share option reserve).

– I-94 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

At the date of approval of the Interim Financial information, the Company had 91,374,000 share options outstanding under the share option scheme, which represented approximately 0.54% of the Company’s shares in issue as at that date.

22. DIVIDENDS

Interim dividend: HK2.10 cents (equivalent to RMB1.62 fen) (2014: HK2.10 cents (equivalent to RMB1.63 fen)) per ordinary share Proposed final dividend: Nil (2014: cash dividend of HK1.80 cents (equivalent to RMB1.38 fen) per ordinary share)	For the six-month period ended 30 June 2015 2014 RMB’000 RMB’000 (Unaudited) (Unaudited) 274,769 277,044 – 234,864 274,769 511,908	For the six-month period ended 30 June 2015 2014 RMB’000 RMB’000 (Unaudited) (Unaudited) 274,769 277,044 – 234,864 274,769 511,908
		511,908

Subsequent to 30 June 2015, 2014 final dividend was paid on 16 July 2015.

Pursuant to the board of directors’ resolution dated 24 August 2015, an interim dividend of HK2.10 cents per ordinary share was declared. On 25 August 2014, the board of directors declared 2014 interim dividend of HK2.10 cents per ordinary share.

23. OPERATING LEASE ARRANGEMENTS AND COMMITMENTS

(a) Operating lease arrangements

As lessee

The Group leases certain of its properties under operating lease arrangements. These leases have an average life of 1 to 20 years and there are no restrictions placed upon the Group by entering into these lease agreements.

As at the end of the reporting period, the Group had the following future minimum lease payments under non-cancellable operating leases falling due as follows:

Within one year In the second to fifth years, inclusive After five years	30 June 2015 RMB’000 (Unaudited) 2,772,562 7,205,306 2,665,994 12,643,862	31 December 2014 RMB’000 (Audited) 2,919,815 8,056,776 3,206,863
		14,183,454

As defined under IAS 17, a non-cancellable lease is a lease that is cancellable only (a) upon the occurrence of some remote contingency; (b) with the permission of the lessor; (c) if the lessee enters into a new lease for the same or an equivalent asset with the same lessor; or (d) upon payment by the lessee of such an additional amount that, at inception of the lease, continuation of the lease is reasonably certain.

Pursuant to the relevant lease agreements, upon the payment of an early termination compensation rental which in general ranges from one month to one year, the Group is entitled to terminate the underlying lease agreement if a store will not be in a position to continue its business because of the losses or other circumstances as specified under the rental agreements.

– I-95 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

As lessor

The Group has leased its investment properties and entered into commercial property sub-leases on its leased properties under operating lease arrangements. These non-cancellable leases have remaining terms ranging from 1 to 10 years. The majority of the Group’s leases include a clause to enable an upward revision of the rental charge on a regular basis according to prevailing market conditions. The terms of the leases generally also require the tenants to pay security deposits and provide for periodic rent adjustments according to the then prevailing market conditions.

The Group had the following future minimum rentals receivable under non-cancellable operating leases:

Within one year In the second to fifth years, inclusive After five years	30 June 2015 RMB’000 (Unaudited) 201,784 481,571 146,269 829,624	31 December 2014 RMB’000 (Audited) 206,838 536,495 151,681
		895,014

(b) Capital commitments

In addition to the operating lease commitments above, the Group had the following capital commitments at the end of the reporting period:

	30 June 2015	31 December 2014
	RMB’000	RMB’000
	(Unaudited)	(Audited)
Contracted, but not provided for:
Construction of property and equipment	69,454	74,385

24. RELATED PARTY TRANSACTIONS

In addition to the transactions and balances which are disclosed elsewhere in the Interim Financial Information, the Group had the following significant transactions with related parties during the period.

(a) The Group had the following ongoing transactions with related parties during the period:

		For the six-month period	For the six-month period
		ended 30 June
		2015	2014
	Notes	RMB’000	RMB’000
		(Unaudited)	(Unaudited)
Sales to the Non-listed GOME Group*	(i)	1,572,469	298,686
Purchases from the Non-listed GOME Group	(i)	458,778	462,088
Provision of management and purchasing services to
the Non-listed GOME Group	(ii), 5	160,897	156,437
Rental expenses and other expenses to GOME Property
and the Non-listed GOME Group**	(iii)	66,380	45,105
Service fee to GOME Ruidong (defined in (i) below)	(iv)	2,548	2,832

– I-96 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

北京鵬潤投資有限公司 (”Beijing Eagle Investment Co., Ltd.”), 國美地產控股有限公司 (“GOME Property Co., Ltd.” or “GOME Property”) (formerly known as 北京鵬潤地產控股有限公司 (“Beijing Pengrun Property Co., Ltd.”)), 北京國美電器有限公司 (“Beijing GOME Electrical Appliance Co., Ltd.” or “Beijing GOME”), 國美電器零售有限公司 (“GOME Electrical Appliance Retail Co., Ltd.” or “GOME Retail”) and the respective subsidiaries of the foregoing companies and 北京國美投資有限公司 (“Beijing GOME Investment Co., Ltd.”) are collectively referred to as the “Non-listed GOME Group”. GOME Retail and its subsidiaries are engaged in the retail sale of electrical appliances and consumer electronic products under the trademark of “GOME Electrical Appliances” and related operations, mainly in cities other than the designated cities of the PRC in which the Group already operates. The companies comprising the Non-listed GOME Group are owned by Mr. Wong Kwong Yu (“Mr. Wong”), a substantial shareholder of the Company.
** 北京新恒基房地產有限公司 (“Beijing Xinhengji Property Co., Ltd.” or “Beijing Xinhengji”) is owned by a close member of the family of Mr. Wong. In 2007, Beijing Xinhengji assigned ownership of a certain building area to GOME Property and also authorised GOME Property to manage and operate the building area, including receiving and collecting the rentals for this building area. Completion of registration of ownership assignment with the relevant PRC authorities is still pending.

Notes:

(i) The sales and purchase transactions and the joint purchase transactions entered into between the Group and the Non-listed GOME Group in respect of the electrical appliances and consumer electronic products were conducted based on the actual purchase cost from the Group’s third party suppliers.

On 5 March 2013, the Group terminated the master purchase agreement and the master supply agreement with the Non-listed GOME Group. On the same day, the Group entered into (1) the master merchandise purchase agreement for the supply of general merchandise (including electrical appliances and consumer electronic products) by 北京國美銳動電子商務有限公司 (“Beijing GOME Ruidong e-Commerce Co., Ltd.” or “GOME Ruidong”), of which Mr. Wong has beneficial interest as an equity holder, and the Non-listed GOME Group to the Company’s subsidiaries (including 庫巴科技(北京)有限公司 (“Kuba”) and 國美在線電子商務有限公司 (“GOME-on-line”)) for a period of three years from 1 January 2013 to 31 December 2015, subject to the annual caps of the transaction amounts (excluding value added tax) for the three years ending 31 December 2013, 2014 and 2015 not exceeding RMB5 billion, RMB6.5 billion and RMB8 billion, respectively, and (2) the master merchandise supply agreement for the supply of general merchandise (including electrical appliances and consumer electronic products) by the Group to the Non-listed GOME Group for a period of three years from 1 January 2013 to 31 December 2015, subject to the annual caps of the transaction amounts (excluding value added tax) for the three years ending 31 December 2013, 2014 and 2015 not exceeding RMB5 billion, RMB6.5 billion and RMB8 billion (including the transactions with Kuba and GOME-on-line, which are defined as connected persons under the Listing Rules), respectively.

The transactions constitute continuing connected transactions under the Main Board Listing Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (the “Listing Rules”).

(ii) The Group provides management services to the Non-listed GOME Group in respect of the retailing of electrical appliances and consumer electronic products. In addition, the Group negotiates with various suppliers for both the Group and the Non-listed GOME Group on a centralised basis.

On 17 December 2012, (1) the Group entered into a management agreement with the Non-listed GOME Group, pursuant to which the Group agreed to provide and to procure other members of the Group to provide management services for the business of retailing electrical appliances and consumer electronics products to the Non-listed GOME Group for a period of three years from 1 January 2013 to 31 December 2015; and (2) the Group entered into a purchasing service agreement with the Non-listed GOME Group, pursuant to which the Group agreed to provide and to procure other members of the Group to provide purchasing services for the business of retailing electrical appliances and consumer electronic products to the Non-listed GOME Group for a period of three years from 1 January 2013 to 31 December 2015. The annual caps of the management service fee and the purchasing service fee are RMB100 million and RMB150 million, respectively.

The transactions constitute continuing connected transactions under the Listing Rules.

– I-97 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(iii) On 17 November 2014, the Group renewed the lease agreements and supplemental agreements with GOME Property and Beijing GOME with respect to the continuous use of the certain properties. On 25 August 2014, GOME-Online entered into a lease agreement with respect to its use of additional properties with GOME Property. During the six-month period ended 30 June 2015, the rental expenses incurred by the Group payable to GOME Property and Beijing GOME amounted to RMB58,496,000 (six-month period ended 30 June 2014: RMB37,221,000) and RMB7,884,000 (six-month period ended 30 June 2014: RMB7,884,000), respectively.

The transactions constitute continuing connected transactions under the Listing Rules.

(iv) On 5 March 2013, the Group terminated the master agreement with GOME Ruidong. On the same day, the Group entered into (1) logistics services agreements pursuant to which GOME Ruidong and the Non-listed GOME Group will provide the logistics services (including warehousing and delivery of general merchandise to end customers) to Kuba and GOME-on-line for a period of three years from 1 January 2013 to 31 December 2015, subject to the annual caps of the transaction amounts (excluding value added tax) for the three years ending 31 December 2013, 2014 and 2015 not exceeding RMB150 million, RMB150 million and RMB150 million, respectively, and (2) the after-sales services agreements pursuant to which GOME Ruidong and the Non-listed GOME Group will provide the after-sales services to Kuba and GOME-on-line for a period of three years from 1 January 2013 to 31 December 2015, subject to the annual caps of the transaction amounts (excluding value added tax) for the three years ending 31 December 2013, 2014 and 2015 not exceeding RMB150 million, RMB150 million and RMB150 million, respectively.

The transactions constitute continuing connected transactions under the Listing Rules.

All the above related party transactions were determined by mutual agreements between the involved parties after taking into account prevailing market prices. The board of directors of the Company confirmed that the Company has complied with the disclosure requirements in accordance with Chapter 14A of the Listing Rules.

(b) Commitments with related companies

As disclosed in note 24(a)(iii), the Group had rental commitments with GOME Property and Beijing GOME of RMB58,496,000 (31 December 2014: RMB116,993,000) and RMB7,884,000 (31 December 2014: RMB15,768,000) under non-cancellable operating leases falling due within one year.

(c) Compensation of key management of the Group:

Fees Other emoluments: Salaries, allowances and other expenses Pension scheme contributions Equity-settled share option expense	For the six-month period ended 30 June 2015 2014 RMB’000 RMB’000 (Unaudited) (Unaudited) 1,651 2,069 5,019 5,945 111 101 825 (482) 7,606 7,633

– I-98 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

25. FAIR VALUE AND FAIR VALUE HIERARCHY OF FINANCIAL INSTRUMENTS

The carrying amounts and fair values of the Group’s financial instruments, other than those with carrying amounts that reasonably approximate to fair values, are as follows:

Financial assets Equity investments at fair value through profit or loss Other investments	Carrying amounts 30 June 2015 31 December 2014 RMB’000 RMB’000 (Unaudited) (Audited) 976,309 – 476,820 217,350 1,453,129 217,350	Fair values 30 June 2015 31 December 2014 RMB’000 RMB’000 (Unaudited) (Audited) 976,309 – 476,820 217,350 1,453,129 217,350	Fair values 30 June 2015 31 December 2014 RMB’000 RMB’000 (Unaudited) (Audited) 976,309 – 476,820 217,350 1,453,129 217,350
			217,350

Management has assessed that the fair values of cash and cash equivalents, pledged deposits, trade and bills receivables, trade and bills payables, financial assets included in prepayments, deposits and other receivables, financial liabilities included in customers’ deposits, other payables and accruals, amounts due from/to related companies and interest-bearing bank loans approximate to their carrying amounts largely due to the short term maturities of these instruments.

The fair values of listed equity investments are based on quoted market prices.

Fair value hierarchy

The following tables illustrate the fair value measurement hierarchy of the Group’s financial instruments:

Assets measured at fair value:

As at 30 June 2015

Equity investments at fair value through profit or loss Other investments: Equity investments	Fair value measurement using Quoted prices in active markets (Level 1) Significant observable inputs (Level 2) Significant unobservable inputs (Level 3) RMB’000 RMB’000 RMB’000 976,309 – – 476,820 – – 1,453,129 – –	Total RMB’000 976,309 476,820
		1,453,129

– I-99 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

As at 31 December 2014

		Fair value measurement using	Fair value measurement using
	Quoted prices	Significant	Significant
	in active	observable	unobservable
	markets	inputs	inputs
	(Level 1)	(Level 2)	(Level 3)	Total
	RMB’000	RMB’000	RMB’000	RMB’000
Other investments:
Equity investments	217,350	–	–	217,350

During the six-month period ended 30 June 2015, there were no transfers into or out of Level 1 and Level 2, and no transfers into or out of Level 3.

26. EVENTS AFTER THE REPORTING PERIOD

On 23 June 2015, the Group announced that the Group entered into an agreement with 北京戰聖投資有限公司 (Beijing Zhansheng Investment Co., Ltd.) (“Beijing Zhansheng”) on 23 June 2015, under which the Group agreed to acquire from Beijing Zhansheng the sales shares at the consideration of approximately RMB3.83 billion subject to adjustments based on the adjusting clauses of the agreement. The sales shares represent 100% of the registered capital of 北京市大中家用電器連鎖銷售有限公司 (“Beijing Dazhong Home Appliances Retail Co., Ltd.”). The completion of acquisition is conditional upon the Ministry of Commerce of the PRC having approved the acquisition in respect of any anti-trust arrangement or a waiver granted to such effect. Up to the date of approval of the Interim Financial Information, the acquisition is not yet approved by the Ministry of Commerce.

On 26 July 2015, the Group announced that the Group and GOME Management Ltd. (the “Vendor”), entered into the acquisition agreement on 17 July 2015, pursuant to which the Group has conditionally agreed to purchase the sale shares, representing the entire issued capital of Artway Development Limited (the “Target”), from the Vendor for HK$11,268,000,000, subject to adjustment based on the audited consolidated statement of financial position of the Target as at 30 June 2015. The Vendor is an associate of Mr. Wong, the controlling shareholder of the Group, and hence a connected person of the Group under the Listing Rules. The acquisition constitutes a major and connected transaction for the Company under the Listing Rules which requires the approval of the independent shareholders by poll, which is not yet completed by the date of approval of the Interim Financial Information.

27. APPROVAL OF THE UNAUDITED INTERIM FINANCIAL INFORMATION

The unaudited Interim Financial Information was approved and authorised for issue by the board of directors of the Company on 24 August 2015.

4. INDEBTEDNESS STATEMENT

The statement of indebtedness and contingent liabilities of the Enlarged Group as at 31 October 2015

As at 31 October 2015, the latest practicable date for the purpose of determining indebtedness, the Enlarged Group had bank loans of RMB5,336 million and a corporate bond of RMB99 million.

As at 31 October 2015, the Enlarged Group’s bills payable and interest-bearing bank loans were secured by the Enlarged Group’s time deposits amounting to RMB5,453 million, and the Enlarged Group’s certain buildings and investment properties with carrying values of RMB1,001 million and RMB506 million, respectively. As at 31 October 2015, the Enlarged Group had outstanding pending litigations mainly related to rental disputes with the Enlarged Group’s tenants of approximately RMB26 million. Except for above, the Enlarged Group had no material contingent liabilities.

– I-100 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The Company’s directors confirm that, as of 31 October 2015, the latest practicable date for the purpose of determining indebtedness, save as aforesaid, the Enlarged Group did not have any bank overdrafts or other similar indebtedness, hire purchase commitments, guarantees or other material contingent liabilities or authorized debentures.

The statement of indebtedness and contingent liabilities of the Group as at 31 October 2015

As at 31 October 2015, the latest practicable date for the purpose of determining indebtedness, the Group had bank loans of RMB1,582 million.

As at 31 October 2015, the Group’s bills payable and interest-bearing bank loans were secured by the Group’s time deposits amounting to RMB4,174 million, and the Group’s certain buildings and investment properties with carrying values of RMB790 million and RMB459 million, respectively. As at 31 October 2015, the Group had outstanding pending litigations mainly related to rental disputes with the Group’s tenants of approximately RMB26 million. Except for above, the Group had no material contingent liabilities.

The Company’s directors confirm that, as of 31 October 2015, the latest practicable date for the purpose of determining indebtedness, save as aforesaid, the Group did not have any bank overdrafts or other similar indebtedness, hire purchase commitments, guarantees or other material contingent liabilities or authorized debentures.

5. WORKING CAPITAL

The Directors, after due and careful consideration, are of the opinion that, taking into account the internal resources, the existing available credit facilities of the Group and the net proceeds from the Acquisition, the Group has sufficient working capital for its present requirements for at least 12 months from the date of publication of this circular in the absence of unforeseen circumstances.

6. MATERIAL CHANGE

The Directors confirm that there is no material change in the financial or trading position or outlook of the Group since 31 December 2014, the date to which the latest published audited financial statement of the Group were made up.

– I-101 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

7. FINANCIAL AND TRADING PROSPECTS OF THE GROUP

Financial and Trading Prospects of the Group and the Enlarged Group

Results

Revenue Profit attributable to owner(s) of the parent Net (decrease)/increase in cash and cash equivalents	Group Year ended 31 December 2014 6 months ended 30 June 2015 (audited) (unaudited) RMB’ million RMB’ million 60,360 31,692 1,280 687 (227) 1,923	Target Group Year ended 31 December 2014 6 months ended 30 June 2015 (audited) (audited) RMB’ million RMB’ million 20,992 10,858 294 256 (432) (123)

The Group recorded total revenue of RMB60,360 million and RMB31,692 million for the year ended 31 December 2014 and the 6 months ended 30 June 2015, respectively. The Group’s profit attributable to owners of the parent achieved RMB1,280 million and RMB687 million, respectively for the periods. The Group’s net cash flows were negative RMB227 million and positive RMB1,923 million, respectively for the periods. The total number of stores reached 1,213 with total sales area of 3,934,000 sq.m. as at 30 June 2015.

The Target Group recorded total revenue of RMB20,992 million and RMB10,858 million for the year ended 31 December 2014 and the 6 months ended 30 June 2015, respectively. The Target Group’s net profit achieved RMB294 million and RMB256 million, respectively for the periods. The Target Group’s net cash flows were negative RMB432 million and negative RMB123 million, respectively for the periods. The total number of stores reached 590 with total sales area of 1,808,000 sq.m. as at 30 June 2015.

The aggregated revenue of the Group and the Target Group for the year ended 31 December 2014 and the 6 months ended 30 June 2015 were RMB81,352 million and RMB42,550 million, respectively. The aggregated net profit of the Group and the Target Group for the year ended 31 December 2014 and the 6 months ended 30 June 2015 were RMB1,574 million and RMB943 million, respectively. The aggregated net cash flows of the Group and the Target Group for the year ended 31 December 2014 and the 6 months ended 30 June 2015 were negative RMB659 million and positive RMB1,800 million, respectively. This is before considering certain factors including any synergistic benefits to be realized upon Completion and intercompany transactions between the Group and the Target Group which will be eliminated in the accounts of the Enlarged Group.

– I-102 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The retail network of the Target Group has great potential and is highly complementary to the Group. The Target Group’s distribution network spans across regions that are poised to benefit from favorable government policies, such as “One Belt and One Road Initiative” and “Western China Development Strategy”, as well as regions with high growth potential, such as Beijing-Tianjin-Hebei region, the Bohai Bay, the Yangtze River Basin Economic Zone, Beibu Gulf Economic Zone and the third-tier and fourth-tier cities.

Upon Completion, the Group expects to upgrade from a regional network to a nationwide Total Retail network.

a) Store network expansion and economies of scale: upon completion of the Acquisition, the Group will be able to significantly extend its retail store network from 310 cities to 448 cities in the PRC and number of retail stores in the first-tier and second-tier markets will increase from 698 to 979 and from 515 to 824, respectively. On a pro forma combined basis and based on information as of 30 June 2015, upon Completion, the Group will own one of the largest electrical appliances and consumer electronic products retail store networks in the PRC. The number of retail stores of the Group will increase from 1,213 before the Acquisition to at least 1,803 upon Completion. The total usable area of the Group will increase from 3,934,000 sq.m. before the Acquisition to at least 5,742,000 sq.m. upon Completion. The Directors also believe that the combination will enhance economies of scale and enable the Group to provide better value and services to its existing and future customers.
b) Enhanced logistics network coverage: number of county-level locations will increase from over 400 to over 600, number of village-level locations to increase from over 1400 to over 2,500, and number of town-level locations to increase to over 45,000.
c) Improved national warehouse coverage: number of regional distribution centers will increase from 15 to 21, number of municipal distribution centers will increase from 300 to 407, with total warehouse area reaching 3.02 million sq.m.
d) Comprehensive after-sales service platform: the number of cities accessed will increase from current 234 to 410; the number of after-sales service centers will increase substantially from 1,327 to 2,122.

With the integration of logistics, warehousing and after-sales platforms, the Directors believe that an integrated platform would support development of “Total Retail” strategy, accelerate expansion and growth of e-commerce, and further enhance third party revenue streams.

– I-103 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Upon Completion, 590 stores of the Target Group will be added to the Group’s existing stores, enabling the Group to expand store network in the second-tier market and consolidate local retail companies through integrating the retail network and supply chain assets of the Target Group, as well as enabling deeper e-commerce market penetration through eliminating connected transactions between the Target Group and the Group and hence facilitating the formation of unified procurement, logistics and after-sales services platforms to support e-commerce development.

Please refer to Section 8 of Letter from the Board for further details regarding reasons for and benefits of the Acquisition.

– I-104 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

1. ACCOUNTANT’S REPORT ON THE TARGET GROUP

24 December 2015

The Board of Directors

GOME Electrical Appliances Holding Limited

Dear Sirs,

We set out below our report on the financial information of Artway Development Limited (the “Target Company”) and its subsidiaries (hereinafter collectively referred to as the “Target Group”) comprising the consolidated statements of profit or loss, statements of comprehensive income, statements of changes in equity and statements of cash flows of the Target Group for each of the years ended 31 December 2012, 2013 and 2014, and the 6 months ended 30 June 2015 (the “Relevant Periods”) and the consolidated statements of financial position of the Target Group and the statements of financial position of the Target Company as at 31 December 2012, 2013 and 2014 and 30 June 2015, together with the notes thereto (the “Financial Information”), and the consolidated statement of profit or loss, statement of comprehensive income, statement of changes in equity and statement of cash flows of the Target Group for the 6 months ended 30 June 2014 (the “Interim Comparative Information”), for inclusion in the circular of GOME Electrical Appliances Holding Limited (the “Company”) dated 24 December 2015 (the “Circular”) in connection with the Company’s proposed acquisition of a 100% equity interest of the Target Company (the “Acquisition”).

The Target Company was established as a limited liability company on 8 January 2002 in the British Virgin Islands.

As at the date of this report, the Target Company has a 100% direct or indirect interest in the subsidiaries as set out in note 1 of Section II below. All companies now comprising the Target Group have adopted 31 December as their financial year end date. The statutory financial statements of the companies now comprising the Target Group were prepared in accordance with PRC generally accepted accounting principles. Details of their statutory auditors during the Relevant Periods are set out in note 1 of Section II below.

For the purpose of this report, the directors of the Target Company (the “Directors”) have prepared the consolidated financial statements of the Target Group (the “Underlying Financial Statements”) in accordance with International Financial Reporting Standards (“IFRSs”) issued by the International Accounting Standards Board (the “IASB”). The Underlying Financial Statements for each of the years ended 31 December 2012, 2013 and 2014, and the 6 months ended 30 June 2015 were audited by us in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”).

The Financial Information set out in this report has been prepared from the Underlying Financial Statements with no adjustments made thereon.

– II-1 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Directors’ responsibility

The Directors are responsible for the preparation of the Underlying Financial Statements and the Financial Information that give a true and fair view in accordance with IFRSs, and for such internal control as the Directors determine is necessary to enable the preparation of the Underlying Financial Statements for each of the three years ended 31 December 2012, 2013 and 2014, and the 6 months ended 30 June 2015 that are free from material misstatement, whether due to fraud or error.

The directors of the Company are responsible for the contents of the Circular in which this report is included.

Reporting accountants’ responsibility

It is our responsibility to form an independent opinion and a review conclusion on the Financial Information and the Interim Comparative Information, respectively, and to report our opinion and review conclusion thereon to you.

For the purpose of this report, we have carried out procedures on the Financial Information in accordance with Auditing Guideline 3.340 Prospectuses and the Reporting Accountant issued by the HKICPA.

We have also performed a review of the Interim Comparative Information in accordance with Hong Kong Standard on Review Engagements 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the HKICPA. A review consists principally of making enquiries of management and applying analytical procedures to the financial information and, based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review excludes audit procedures such as tests of controls and verification of assets and liabilities and transactions. It is substantially less in scope than an audit and therefore provides a lower level of assurance than an audit. Accordingly, we do not express an opinion on the Interim Comparative Information.

Opinion in respect of the Financial Information

In our opinion, for the purpose of this report, the Financial Information gives a true and fair view of the state of affairs of the Target Group and the Target Company as at 31 December 2012, 2013 and 2014 and 30 June 2015 and of the consolidated results and cash flows of the Target Group for each of the Relevant Periods.

Review conclusion in respect of the Interim Comparative Information

Based on our review which does not constitute an audit, for the purpose of this report, nothing has come to our attention that causes us to believe that the Interim Comparative Information is not prepared, in all material respects, in accordance with the same basis adopted in respect of the Financial Information.

– II-2 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

I. FINANCIAL INFORMATION

Consolidated Statements of Profit or Loss

Notes
REVENUE
4
Cost of sales
Gross profit
Other income and gains
4
Selling and distribution costs
Administrative expenses
Other expenses
(Loss)/profit from
operating activities
Finance costs
6
Finance income
6
(LOSS)/PROFIT BEFORE TAX
5
Income tax expense
9
(LOSS)/PROFIT FOR THE
YEAR/PERIOD

Year ended 31 December
6 months ended
30 June
2012
2013
2014
2014
2015
RMB’000
RMB’000
RMB’000
RMB’000
RMB’000
(Unaudited)
17,487,767
19,610,950
20,992,171
10,068,204
10,858,393
(14,599,783) (16,131,701) (17,554,180)
(8,336,525)
(8,880,363)
2,887,984
3,479,249
3,437,991
1,731,679
1,978,030
515,126
409,871
519,793
224,732
224,275
(2,839,533)
(2,625,442)
(2,717,801)
(1,313,527)
(1,391,993)
(653,863)
(623,084)
(659,271)
(367,877)
(346,767)
(212,931)
(200,269)
(192,410)
(86,962)
(93,375)
(303,217)
440,325
388,302
188,045
370,170
(10,237)
(38,191)
(133,128)
(62,049)
(79,388)
60,235
65,777
144,611
61,901
73,143
(253,219)
467,911
399,785
187,897
363,925
(66,246)
(101,003)
(105,863)
(42,080)
(108,039)
(319,465)
366,908
293,922
145,817
255,886

– II-3 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Consolidated Statements of Comprehensive Income

Note (LOSS)/PROFIT FOR THE YEAR/PERIOD OTHER COMPREHENSIVE INCOME Other comprehensive income not to be reclassified to profit or loss in subsequent periods: Gain on property revaluation 12 Income tax effect Net other comprehensive income not to be reclassified to profit or loss in subsequent periods OTHER COMPREHENSIVE INCOME FOR THE YEAR/PERIOD, NET OF TAX TOTAL COMPREHENSIVE (LOSS)/INCOME FOR THE YEAR/PERIOD, NET OF TAX Attributable to: Owner of the parent	Year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 (319,465) 366,908 293,922 3,240 – – (810) – – 2,430 – – 2,430 – – (317,035) 366,908 293,922 (317,035) 366,908 293,922	6 months ended 30 June 2014 2015 RMB’000 RMB’000 (Unaudited) 145,817 255,886 – – – – – – – – 145,817 255,886 145,817 255,886	6 months ended 30 June 2014 2015 RMB’000 RMB’000 (Unaudited) 145,817 255,886 – – – – – – – – 145,817 255,886 145,817 255,886
			– –
			–
			–
			255,886

			255,886

– II-4 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Consolidated Statements of Financial Position

Notes NON-CURRENT ASSETS Property and equipment 12 Investment properties 13 Goodwill 14 Other intangible assets 15 Lease prepayments and rental deposits Deferred tax assets 16 Total non-current assets CURRENT ASSETS Inventories 18 Trade receivables 19 Prepayments, deposits and other receivables 20 Due from related companies 21 Entrusted loans 22 Pledged deposits 23 Cash and cash equivalents 23 Total current assets CURRENT LIABILITIES Trade and bills payables 24 Customers’ deposits, other payables and accruals 25 Interest-bearing bank loans 26 Due to related companies 27 Taxes payable Total current liabilities NET CURRENT LIABILITIES TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Bond payable 28 Deferred tax liabilities 16 Total non-current liabilities Net (liabilities)/assets EQUITY Equity attributable to owner of the parent Paid-up capital 29 Reserves 30(a) Total equity	31 December 2012 RMB’000 713,261 48,467 963,044 500 44,838 7,750 1,777,860 2,909,954 56,693 808,861 1,529,755 – 1,674,919 1,635,695 8,615,877 7,957,410 709,350 200,000 1,707,776 68,559 10,643,095 (2,027,218) (249,358) – 49,404 49,404 (298,762) – (298,762) (298,762)	31 December 2013 RMB’000 589,063 46,646 963,044 400 46,563 359 1,646,075 3,438,634 50,018 738,010 1,591,260 800,000 1,564,995 1,513,241 9,696,158 8,048,322 702,901 1,500,000 763,291 113,508 11,128,022 (1,431,864) 214,211 98,434 47,631 146,065 68,146 – 68,146 68,146	31 December 2014 RMB’000 602,396 47,044 963,044 300 52,709 – 1,665,493 3,395,921 42,597 777,966 3,123,860 740,000 1,566,290 1,081,698 10,728,332 7,665,042 791,535 2,040,000 1,275,026 115,090 11,886,693 (1,158,361) 507,132 98,653 46,411 145,064 362,068 – 362,068 362,068	30 June 2015 RMB’000 2,050,697 47,044 1,206,502 251,142 51,171 –
				3,606,556
				2,827,247 62,558 746,859 3,183,698 1,540,000 1,265,999 958,830
				10,585,191
				6,621,141 1,708,823 3,090,000 1,573,168 189,929
				13,183,061
				(2,597,870)
				1,008,686
				99,006 291,840
				390,846
				617,840

				– 617,840
				617,840

– II-5 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Consolidated Statements of Changes in Equity

At 1 January 2012 Loss for the year Other comprehensive income for the year: Gain on property revaluation, net of tax Total comprehensive income for the year Transfer to statutory reserves At 31 December 2012 and 1 January 2013 Profit for the year and total comprehensive income for the year Transfer to statutory reserves Wind-up of a subsidiary At 31 December 2013 and 1 January 2014 Profit for the year and total comprehensive income for the year Transfer to statutory reserves At 31 December 2014 and 1 January 2015 Profit for the period and total comprehensive income for the period Deemed distribution to the owner (note 31(i)) At 30 June 2015	Attributable to the owner of the parent Paid-up capital Asset revaluation reserve# Statutory reserves (Accumulated losses)/ Retained earnings RMB’000 RMB’000 RMB’000 RMB’000 (note 29) (note 30(a)) – – 32,448 (14,175) – – – (319,465) – 2,430 – – – 2,430 – (319,465) – – 1,462 (1,462) – 2,430 33,910 (335,102) – – – 366,908 – – 9,346 (9,346) – – (32,448) 32,448 – 2,430 10,808 54,908 – – – 293,922 – – 42,988 (42,988) – 2,430 53,796 305,842 – – – 255,886 – – – (114) – 2,430 53,796 561,614	Total equity RMB’000 18,273 (319,465) 2,430
		(317,035) –
		(298,762) 366,908 – –
		68,146 293,922 –
		362,068 255,886 (114)
		617,840

– II-6 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

For the 6 months ended 30 June 2014 (unaudited):

Attributable to the owner of the parent

At 1 January 2014 Profit for the period and total comprehensive income for the period (unaudited) At 30 June 2014 (unaudited)	Paid-up capital RMB’000 (note 29) – – –	Asset revaluation reserve# RMB’000 2,430 – 2,430	Statutory reserves RMB’000 (note 30(a)) 10,808 – 10,808	(Accumulated losses)/ Retained earnings RMB’000 54,908 145,817 200,725	Total equity RMB’000 68,146 145,817
					213,963

The asset revaluation reserve arose from changes in use from owner-occupied properties to investment properties.

These reserve accounts comprise the consolidated debit reserves of RMB298,762,000, consolidated credit reserves of RMB68,146,000, RMB362,068,000 and RMB617,840,000 in the consolidated statements of financial position as at 31 December 2012, 2013 and 2014 and 30 June 2015, respectively.

– II-7 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Consolidated Statements of Cash Flows

Notes
CASH FLOWS FROM
OPERATING ACTIVITIES
(Loss)/profit before tax
Adjustments for:
Finance income
6
Finance costs
6
Impairment
provided/(reversed) for
items of property
and equipment
5
Fair value (gain)/loss on
investment properties
5
Loss on disposal of items of
property and equipment
5
Depreciation
5
Amortisation of other
intangible assets
5
Decrease/(increase)
in lease prepayments and
rental deposits
Decrease/(increase) in
inventories
(Increase)/decrease in
trade receivables
Decrease/(increase) in
prepayments, deposits and
other receivables
Increase in amounts due from
related companies
Decrease/(increase) in
pledged deposits
(Decrease)/increase in trade
and bills payables
Increase/(decrease) in
customers’ deposits, other
payables and accruals
Increase/(decrease) in amounts
due to related companies
Cash generated from/(used in)
operations
Interest received
Income tax paid
Net cash flows from/(used in)
operating activities

Year ended 31 December
6 months ended
30 June
2012
2013
2014
2014
2015
RMB’000
RMB’000
RMB’000
RMB’000
RMB’000
(Unaudited)
(253,219)
467,911
399,785
187,897
363,925
(60,235)
(65,777)
(144,611)
(61,901)
(73,143)
10,237
38,191
133,128
62,049
79,388
28,184
(6,842)
(9,344)
(5,210)
3,464
(6,760)
1,821
(398)
–
–
2,487
19,669
59
1,769
1,125
171,740
163,450
167,059
79,096
77,971
100
100
100
50
2,158
(107,466)
618,523
545,778
263,750
454,888
11,323
(1,725)
(6,146)
29,081
1,538
1,012,462
(528,680)
42,713
241,067
568,674
(7,228)
6,675
7,421
(8,837)
(19,961)
363,195
71,098
(41,736)
(113,685)
28,772
(741,417)
(61,505)
(1,532,600)
(730,186)
(49,938)
761,284
109,924
(1,295)
(65,403)
300,291
(949,866)
90,912
(383,280)
183,434
(1,043,901)
14,504
(6,449)
88,634
25,787
(73,919)
17,895
(944,485)
511,735
639,117
(427,213)
374,686
(645,712)
(768,776)
464,125
(260,769)
64,813
60,170
57,124
27,964
26,052
(79,850)
(50,436)
(105,142)
(46,449)
(33,859)
359,649
(635,978)
(816,794)
445,640
(268,576)

– II-8 –

APPENDIX II

FINANCIAL INFORMATION OF THE TARGET GROUP

Notes
Net cash flows from/(used in)
operating activities
CASH FLOWS FROM
INVESTING ACTIVITIES
Purchases of items of property,
and equipment
Proceeds from disposal of
items of property and
equipment
Acquisition of a
subsidiary (note 31(ii))
Advances of entrusted loans
Repayments of
entrusted loans
Interest received on
entrusted loans
Net cash flows used in
investing activities
CASH FLOWS FROM
FINANCING ACTIVITIES
New bank loans
Repayment of bank loans
Proceeds from a bond issued
Interest paid
Net cash flows from
financing activities
NET INCREASE/(DECREASE)
IN CASH AND CASH
EQUIVALENTS
Cash and cash equivalents at
beginning of year/period
CASH AND CASH
EQUIVALENTS AT END OF
YEAR/PERIOD
ANALYSIS OF BALANCES
OF CASH AND CASH
EQUIVALENTS
Cash and bank balances
(note 23)

Year ended 31 December
6 months ended
30 June
2012
2013
2014
2014
2015
RMB’000
RMB’000
RMB’000
RMB’000
RMB’000
(Unaudited)
359,649
(635,978)
(816,794)
445,640
(268,576)
(213,676)
(113,123)
(194,763)
(94,857)
(85,031)
33,213
61,044
23,656
–
2,605
–
–
–
–
7,715
–
(800,000)
(740,000)
(180,000)
(1,480,000)
–
–
800,000
–
680,000
–
5,360
89,267
34,317
49,454
(180,463)
(846,719)
(21,840)
(240,540)
(825,257)
260,000
1,560,000
2,820,000
2,770,000
2,160,000
(60,000)
(260,000)
(2,280,000)
(2,280,000)
(1,110,000)
–
98,434
–
–
–
(10,237)
(38,191)
(132,909)
(56,833)
(79,035)
189,763
1,360,243
407,091
433,167
970,965
368,949
(122,454)
(431,543)
638,267
(122,868)
1,266,746
1,635,695
1,513,241
1,513,241
1,081,698
1,635,695
1,513,241
1,081,698
2,151,508
958,830
1,635,695
1,513,241
1,081,698
2,151,508
958,830

– II-9 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Statements of Financial Position

Notes NON-CURRENT ASSET Investment in a subsidiary 17 Total non-current asset CURRENT ASSETS Amounts due from a subsidiary 17 Cash and cash equivalents 23 Total current assets CURRENT LIABILITIES Due to related companies 27 Total current liabilities NET CURRENT (LIABILITIES)/ASSETS TOTAL ASSETS LESS CURRENT LIABILITIES Net assets EQUITY Equity attributable to owner of the parent Paid-up capital 29 Reserve 30(b) Total equity	31 December 2012 RMB’000 108,800 108,800 – 3 3 90,396 90,396 (90,393) 18,407 18,407 – 18,407 18,407	31 December 2013 RMB’000 108,800 108,800 33,759 3 33,762 87,657 87,657 (53,895) 54,905 54,905 – 54,905 54,905	31 December 2014 RMB’000 108,800 108,800 284,993 – 284,993 87,954 87,954 197,039 305,839 305,839 – 305,839 305,839	30 June 2015 RMB’000 108,800
				108,800
				540,856 –
				540,856
				87,929
				87,929
				452,927
				561,727
				561,727

				– 561,727
				561,727

– II-10 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

II. NOTES TO FINANCIAL INFORMATION

1. CORPORATE INFORMATION

The Target Company is a limited liability company incorporated in the British Virgin Islands on 8 January 2002. The registered office of the Target Company is located at TrustNet Chambers, P.O. Box 3444 Road Town,Tortola, British Virgin Islands.

During the Relevant Periods, the Target Group was principally engaged in the retailing of electrical appliances and consumer electronic products in designated cities in Mainland China.

As at the date of this report, the Target Company had a 100% direct or indirect interest in its subsidiaries (the “Subsidiaries”), which are limited liability companies established in the People’s Republic of China (the “PRC”). Further details of the Subsidiaries are set out in note 17 of this section.

The financial year end date of the entities comprising the Target Group is 31 December.

The statutory financial statements of the entities comprising the Target Group for each of the three years ended 31 December 2012, 2013 and 2014, or since the respective dates of their establishment, where this is a shorter period, were prepared in accordance with the relevant accounting principles and regulations in the PRC and were audited by certified public accountants registered in the PRC as follows:

		Name of statutory auditor	Name of statutory auditor
Name of company		for the financial year ended 31 December
	2012	2013	2014
Artway Development Limited	NA	NA	NA
鞍山國美電器有限公司(Anshan GOME	NA	NA	NA
Electrical Appliances Co., Ltd.)
鞍山國美售後服務有限公司(Anshan	NA	NA	NA
GOME Aftersales Services Co., Ltd.)
保定國美電器有限公司(Baoding GOME	NA	NA	NA
Electrical Appliances Co., Ltd.)
北海國美電器有限公司(Beihai GOME	NA	NA	NA
Electrical Appliances Co., Ltd.)
北京鼎銳置業有限公司(Beijing Dingrui	NA	NA	NA
Property Co., Ltd. or “Beijing
Dingrui”)
北京國美包頭電器有限公司(Beijing	NA	NA	NA
GOME Baotou Electrical Appliance
Co., Ltd.)
北京國美通訊設備有限公司(Beijing	NA	NA	NA
GOME Communication Equipment
Co., Ltd.)
北京國美物流有限公司(Beijing GOME	NA	NA	NA
Logistics Co., Ltd. or “Beijing
Logistics”)
北京恒信達美商貿有限公司(Beijing	NA	NA	NA
Hengxin Damei Trading Co., Ltd.)
北京金尊科技發展有限公司(Beijing	NA	NA	NA
Jinzun Technology Development
Co., Ltd.)
重慶盛安通略商貿有限公司(Chongqing	NA	NA	NA
Shengan Tonglue Trading Co., Ltd.)
大連國美電器售後服務有限公司(Dalian	NA	NA	NA
GOME Electrical Appliances
Aftersales Services Co., Ltd.)
大連國美電器有限公司(Dalian GOME	NA	NA	NA
Electrical Appliances Co., Ltd.)
大連新訊點貿易有限公司(Dalian	NA	NA	NA
Xinxundian Trading Co., Ltd. or
“Dalian Xinxundian”)
大慶國美電器有限公司(Daqing GOME	NA	NA	NA
Electrical Appliances Co., Ltd.)

– II-11 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

			Name of statutory auditor	Name of statutory auditor	Name of statutory auditor
Name of company		for the	financial year ended 31		December
	2012			2013	2014
大同世紀北方電器有限公司(Datong	NA			NA	NA
Century North Electrical Appliances
Co., Ltd. or “Datong Century”)
大同市恒遠售後服務有限責任公司	NA			NA	NA
(Datong City Hengyuan Aftersales
Services Co., Ltd.)
二連浩特國美電器有限公司(Erlian	NA			NA	NA
Haote GOME Electrical Appliances
Co., Ltd.)
貴州國美電器有限公司(Guizhou GOME	NA			NA	NA
Electrical Appliances Co., Ltd.)
貴州國美售後服務有限公司(Guizhou	NA			NA	NA
GOME Aftersales Services Co., Ltd.)
國美電器零售有限公司(GOME	NA			NA	NA
Electrical Appliances Retail Co., Ltd.
or “GOME Retail”)
國美電器內蒙古有限公司(GOME Inner	聖達鑫稅務師事務			德慧稅務師事務所	德慧稅務師事務所
Mongolia Electrical Appliances	所(Shengdaxin			(Dehui tax	(Dehui tax
Co., Ltd.)	tax agent			agent Office)	agent Office)
	Office)
邯鄲國美電器有限公司(Handan GOME	NA			NA	NA
Electrical Appliances Co., Ltd.)
杭州鵬潤國美電器售後服務有限公司	NA			NA	NA
(Hangzhou Pengrun GOME Aftersales
Services Co., Ltd.)
杭州鵬投電器有限公司(Hangzhou	NA			NA	NA
Pengtou Electrical Appliances Co.,
Ltd.)
河北國美電器有限公司(Hebei GOME	石家莊永信稅務師			石家莊永信稅務師	石家莊永信稅務
Electrical Appliances Co., Ltd.)	事務所			事務所	師事務所
	(Shijiazhuang			(Shijiazhuang	(Shijiazhuang
	Yongxin tax			Yongxin tax	Yongxin tax
	agent Office)			agent Office)	agent Office)
河南省國美電器售後服務有限公司	河南中鵬稅務師事			河南中鵬稅務師事	河南中鵬稅務
(Henan GOME Electrical Appliances	務所(Henan			務所(Henan	師事務所
Aftersales Services Co., Ltd.)	Zongpeng tax			Zongpeng tax	(Henan
	agent Office)			agent Office)	Zongpeng tax
					agent Office)
河南省國美電器有限公司(Henan GOME	河南中鵬稅務			河南中鵬稅務	河南中鵬稅
Electrical Appliances Co., Ltd.)	師事務所			師事務所	務師事務所
	(Henan			(Henan	(Henan
	Zongpeng tax			Zongpeng tax	Zongpeng tax
	agent Office)			agent Office)	agent Office)
黑龍江蜂星通訊器材有限公司	NA			NA	NA
(Heilongjiang Fengxing
Communication Equipment Co., Ltd.)
黑龍江黑天鵝家電售後服務電器有限公司	NA			NA	NA
(Heilongjiang Black Swan Home
Appliances Aftersales Services
Co., Ltd.)
黑龍江黑天鵝家電維修有限公司	NA			NA	NA
(Heilongjiang Black Swan Home
Appliances Maintenance Services
Co., Ltd.)
黑龍江黑天鵝家電有限公司	NA			NA	NA
(Heilongjiang Black Swan Home
Appliances Co., Ltd.)
湖南國美電器有限公司(Hunan GOME	NA			NA	NA
Electrical Appliances Co., Ltd.)

– II-12 –

APPENDIX II

FINANCIAL INFORMATION OF THE TARGET GROUP

		Name of statutory auditor	Name of statutory auditor	Name of statutory auditor
Name of company	for the	financial year ended 31		December
	2012		2013	2014
吉林國美電器售後服務有限公司(Jilin	NA		NA	NA
GOME Electrical Appliances
Aftersales Services Co., Ltd.)
吉林國美電器有限公司(Jilin GOME	NA		NA	NA
Electrical Appliances Co., Ltd.)
吉林市國美售後服務有限公司(Jilin City	NA		NA	NA
GOME Aftersales Services Co., Ltd.)
江西國美售後服務有限公司(Jiangxi	NA		NA	NA
GOME Aftersales Services Co., Ltd.)
江西鵬潤國美電器有限公司(Jiangxi	NA		NA	NA
Pengrun GOME Electrical Appliances
Co., Ltd.)
江陰國美電器有限公司(Jiangyin GOME	NA		NA	NA
Electrical Appliances Co., Ltd.)
漯河國美電器有限公司(Luohe GOME	NA		NA	漯河天勤德信稅務
Electrical Appliances Co., Ltd.)				師事務所
				(Luohe Tianqin
				Dexin tax agent
				Office)
南昌國美電器有限公司(Nanchang	NA		NA	NA
GOME Electrical Appliances
Co., Ltd.)
南寧國美電器售後服務有限責任公司	NA		NA	NA
(Nanning GOME Electrical Appliances
Aftersales Services Co., Ltd.)
南寧國美電器有限公司(Nanning GOME	NA		NA	NA
Electrical Appliances Co., Ltd.)
南寧國美物流有限公司(Nanning GOME	NA		NA	NA
Logistics Co., Ltd.)
南通國美電器有限公司(Nantong GOME	南通天業稅務師事		南通天業稅務師事	南通天業稅務師事
Electrical Appliances Co., Ltd.)	務所(Nantong		務所(Nantong	務所(Nantong
	Tianye tax		Tianye tax	Tianye tax
	agent Office)		agent Office)	agent Office)
南通國美售後服務有限公司(Nantong	南通天業稅務師事		南通天業稅務師事	南通天業稅務師事
GOME Aftersales Services Co., Ltd.)	務所(Nantong		務所(Nantong	務所(Nantong
	Tianye tax		Tianye tax	Tianye tax
	agent Office)		agent Office)	agent Office)
內蒙古國美售後服務有限公司(Inner	聖達鑫稅務師事務		德慧稅務師事務所	德慧稅務師事務所
Mongolia GOME Aftersales Services	所(Shengdaxin		(Dehui tax	(Dehui tax
Co., Ltd.)	tax agent		agent Office)	agent Office)
	Office)
寧波海曙國美電器售後服務有限公司	寧波海曙天宏稅		寧波海曙天宏稅	寧波海曙天宏稅
(Ningbo Haishu GOME Electrical	務師事務所		務師事務所	務師事務所
Appliances Aftersales Services	(Ningbo Haishu		(Ningbo Haishu	(Ningbo Haishu
Co., Ltd.)	Tianhong tax		Tianhong tax	Tianhong tax
	agent Office)		agent Office)	agent Office)
寧波浙國美電器有限公司(Ningbo Zhe	寧波海曙天宏稅		寧波海曙天宏稅	寧波海曙天宏稅
GOME Electrical Appliances	務師事務所		務師事務所	務師事務所
Co., Ltd.)	(Ningbo Haishu		(Ningbo Haishu	(Ningbo Haishu
	Tianhong tax		Tianhong tax	Tianhong tax
	agent Office)		agent Office)	agent Office)
鵬潤電器(營口)售後服務有限公司	NA		NA	NA
(Pengrun Electrical Appliances
(Yingkou) Aftersales Services
Co., Ltd.)
廈門國美電器有限公司(Xiamen GOME	廈門中勤稅務師事		廈門中勤稅務師事	廈門潤元稅務師事
Electrical Appliances Co., Ltd.)	務所(Xiamen		務所(Xiamen	務所(Xiamen
	Zhongqin tax		Zhongqin tax	Zhongqin tax
	agent Office)		agent Office)	agent Office)
山西國美電器有限公司(Shanxi GOME	NA		NA	NA
Electrical Appliances Co., Ltd.)

– II-13 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

			Name of statutory auditor	Name of statutory auditor	Name of statutory auditor
Name of company		for the	financial year ended 31		December
	2012			2013	2014
上海國美電器有限公司(Shanghai GOME	NA			NA	NA
Electrical Appliances Co., Ltd.)
紹興鵬潤國美電器有限公司(Shaoxing	NA			NA	NA
Pengrun GOME Electrical Appliances
Co., Ltd.)
石家莊國美電器售後服務有限公司	NA			NA	NA
(Shijiazhuang GOME Electrical
Appliances Aftersales Services
Co., Ltd.)
太原國美電器售後服務有限公司(Taiyuan	NA			NA	NA
GOME Electrical Appliances
Aftersales Services Co., Ltd.)
天津國美恒信物流有限公司(Tianjin	NA			NA	NA
GOME Hengxin Logistics Co., Ltd.)
天津國美戰聖物流有限公司(Tianjin	NA			NA	NA
GOME Zhansheng Logistics Co., Ltd.)
天津盛源鵬達物流有限公司(Tianjin	NA			NA	NA
Shengyuan Pengda Logistics Co., Ltd.)
烏海國美電器有限公司(Wuhai GOME	NA			NA	NA
Electrical Appliances Co., Ltd.)
無錫國美電器售後服務有限公司(Wuxi	無錫大眾稅務師事			無錫大眾稅務師事	無錫大眾稅務師事
GOME Electrical Appliances	務所(Wuxi			務所(Wuxi	務所(Wuxi
Aftersales Services Co., Ltd.)	Dazhong tax			Dazhong tax	Dazhong tax
	agent	Office)		agent Office)	agent Office)
無錫國美電器有限公司(Wuxi GOME	無錫大眾稅務師事			無錫大眾稅務師事	無錫大眾稅務師事
Electrical Appliances Co., Ltd.)	務所(Wuxi			務所(Wuxi	務所(Wuxi
	Dazhong tax			Dazhong tax	Dazhong tax
	agent	Office)		agent Office)	agent Office)
西藏永泰物流有限公司(Tibet Yongtai	NA			NA	NA
Logistics Co., Ltd.)
咸陽國美電器有限公司(Xianyang	NA			NA	NA
GOME Electrical Appliances Co.,
Ltd.)
新疆國美電器售後服務有限公司	NA			NA	NA
(Xinjiang GOME Electrical Appliances
Aftersales Services Co., Ltd.)
新疆國美電器有限公司(Xinjiang GOME	NA			NA	NA
Electrical Appliances Co., Ltd.)
新疆克拉瑪依國美電器有限公司	NA			NA	NA
(Xinjiang Karamay GOME Electrical
Appliances Co., Ltd.)
新疆奎屯國美電器有限公司(Xinjiang	NA			NA	NA
Kuitun GOME Electrical Appliances
Co., Ltd.)
營口國美三星電器有限公司(Yingkou	NA			NA	NA
GOME Sanxing Electrical Appliances
Co., Ltd.)
長沙國美電器售後服務有限公司	NA			NA	NA
(Changsha GOME Electrical
Appliances Aftersales Services
Co., Ltd.)
浙江國美電器有限公司(Zhejiang GOME	杭州瑞信稅務師事			杭州立信稅務師事	杭州立信稅務師事
Electrical Appliances Co., Ltd.)	務所(Hangzhou			務所(Hangzhou	務所(Hangzhou
	Ruixin tax			Ruixin tax	Ruixin tax
	agent	Office)		agent Office)	agent Office)

– II-14 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

2.1 BASIS OF PREPARATION

The Financial Information and the Interim Comparative Information have been prepared in accordance with IFRSs (which include all International Financial Reporting Standards, IASs and interpretations originated by the IFRS Interpretations Committee). All IFRSs effective for the accounting period commencing from 1 January 2015, together with the relevant transitional provisions, have been early adopted by the Target Group in the preparation of the Financial Information throughout the Relevant Periods. In addition, the Financial Information and the Interim Comparative Information include the applicable disclosures required by the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and Companies Ordinance.

The Financial Information and the Interim Comparative Information have been prepared under the historical cost convention. The Financial Information and the Interim Comparative Information are presented in Renminbi (“RMB”) and all values are rounded to the nearest thousand except when otherwise indicated.

2.2 ISSUED BUT NOT YET EFFECTIVE INTERNATIONAL FINANCIAL REPORTING STANDARDS

The Target Group has not applied the following new and revised IFRSs, that have been issued but are not yet effective, in this Financial Information.

IFRS 9	_Financial Instruments_2
Amendments to IFRS 10 and IAS 28	Sale or Contribution of Assets between an Investor
	_and its Associate or Joint Venture_1
Amendments to IFRS 10, IFRS 12 and IAS 28	Investment Entities: Applying the Consolidation
	_Exception_1
Amendments to IFRS 11	Accounting for Acquisitions of Interests in Joint
	_Operations_1
IFRS 14	_Regulatory Deferral Accounts_3
IFRS 15	_Revenue from Contracts with Customers_3
Amendments to IAS 1	_Disclosure Initiative_1
Amendments to IAS 16 and IAS 38	Clarification of Acceptable Methods of
	_Depreciation and Amortisation_1
Amendments to IAS 16 and IAS 41	_Agriculture: Bearer Plants_1
Amendments to IAS 27	_Equity Method in Separate Financial Statements_1
Annual Improvements 2012-2014 Cycle	Amendments to a number of IFRSs1

1 Effective for annual periods beginning on or after 1 January 2016
2 Effective for annual periods beginning on or after 1 January 2018
3 Effective for an entity that first adopts IFRSs for its annual financial statements beginning on or after 1 January 2016 and therefore is not applicable to the Target Group

While the adoption of some of the new and revised IFRSs and amendments may result in changes in accounting policies, none of these amendments is expected to have a significant impact on the Target Group’s results of operations and financial position.

2.3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of consolidation

The Financial Information includes the financial statements of the Target Company and the Subsidiaries for each of the years ended 31 December 2012, 2013 and 2014 and the 6 months ended 30 June 2015. The Interim Comparative Information includes the consolidated statement of profit or loss, statement of comprehensive income, statement of changes in equity and statement of cash flows of the Target Company and the Subsidiaries for the 6 months ended 30 June 2014. The financial statements of the Subsidiaries are prepared for the same reporting period as the Target Company, using consistent accounting policies. The results of the Subsidiaries are consolidated from the date on which the Target Group obtains control, and continue to be consolidated until the date that such control ceases.

All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Target Group are eliminated in full on consolidation.

– II-15 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

The Target Group reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control described in the accounting policy for subsidiaries below. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction.

If the Target Group loses control over a subsidiary, it derecognises (i) the assets (including goodwill) and liabilities of the subsidiary, (ii) the carrying amount of any non-controlling interest and (iii) the cumulative translation differences recorded in equity; and recognises (i) the fair value of the consideration received, (ii) the fair value of any investment retained and (iii) any resulting surplus or deficit in profit or loss. The Target Group’s share of components previously recognised in other comprehensive income is reclassified to profit or loss or retained earnings, as appropriate, on the same basis as would be required if the Target Group had directly disposed of the related assets or liabilities.

Subsidiaries

A subsidiary is an entity (including a structured entity), directly or indirectly, controlled by the Target Company. Control is achieved when the Target Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee (i.e., existing rights that give the Target Group the current ability to direct the relevant activities of the investee).

When the Target Company has, directly or indirectly, less than a majority of the voting or similar rights of an investee, the Target Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including:

(a) the contractual arrangement with the other vote holders of the investee;
(b) rights arising from other contractual arrangements; and
(c) the Target Group’s voting rights and potential voting rights.

The results of subsidiaries are included in the Target Company’s profit or loss to the extent of dividends received and receivable. The Target Company’s investments in subsidiaries that are not classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations are stated at cost less any impairment losses.

Business combinations and goodwill

Business combinations are accounted for using the acquisition method. The consideration transferred is measured at the acquisition date fair value which is the sum of the acquisition date fair values of assets transferred by the Target Group, liabilities assumed by the Target Group to the former owners of the acquiree and the equity interests issued by the Target Group in exchange for control of the acquiree. For each business combination, the Target Group elects whether it measures the non-controlling interests in the acquiree that are present ownership interests and entitle their holders to a proportionate share of net assets in the event of liquidation either at fair value or at the proportionate share of the acquiree’s identifiable net assets. All other components of non-controlling interests are measured at fair value. Acquisition costs are expensed as incurred.

When the Target Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts of the acquiree.

If the business combination is achieved in stages, the previously held equity interest is remeasured at its acquisition date fair value and any resulting gain or loss is recognised in profit or loss.

Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred, the amount recognised for non-controlling interests and any fair value of the Target Group’s previously held equity interests in the acquiree over the identifiable net assets acquired and liabilities assumed. If the sum of this consideration and other items is lower than the fair value of the net assets acquired, the difference is, after reassessment, recognised in profit or loss as a gain on bargain purchase.

– II-16 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. The Target Group performs its annual impairment test of goodwill as at 31 December. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Target Group’s cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the Target Group are assigned to those units or groups of units.

Where goodwill has been allocated to a cash-generating unit (or group of cash-generating units) and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal. Goodwill disposed of in this circumstance is measured based on the relative values of the disposed operation disposed of and the portion of the cash-generating unit retained.

Fair value measurement

The Target Group measures its investment properties at fair value at the end of each reporting period. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either in the principal market for the asset or liability, or in the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible by the Target Group. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.

The Target Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.

All assets and liabilities for which fair value is measured or disclosed in the Financial Information are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

For assets and liabilities that are recognised in the Financial Information on a recurring basis, the Target Group determines whether transfers have occurred between levels in the hierarchy by reassessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.

Impairment of non-financial assets

– II-17 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

An assessment is made at the end of each reporting period as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such an indication exists, the recoverable amount is estimated. A previously recognised impairment loss of an asset other than goodwill is reversed only if there has been a change in the estimates used to determine the recoverable amount of that asset, but not to an amount higher than the carrying amount that would have been determined (net of any depreciation/amortisation) had no impairment loss been recognised for the asset in prior years. A reversal of such an impairment loss is credited to the statement of profit or loss in the period in which it arises, unless the asset is carried at a revalued amount, in which case the reversal of the impairment loss is accounted for in accordance with the relevant accounting policy for that revalued asset.

Related parties

A party is considered to be related to the Target Group if:

(a) the party is a person or a close member of that person’s family and that person
(i) has control or joint control over the Target Group;
(ii) has significant influence over the Target Group; or
(iii) is a member of the key management personnel of the Target Group or of a parent of the Target Group;

(b) the party is an entity where any of the following conditions applies:
(i) the entity and the Target Group are members of the same group;
(ii) the entity is a post-employment benefit plan for the benefit of employees of either the Target Group or an entity related to the Target Group;
(iii) the entity is controlled or jointly controlled by a person identified in (a); and
(iv) a person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity).

Property and equipment and depreciation

Property and equipment are stated at cost less accumulated depreciation and any impairment losses. The cost of an item of property and equipment comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use.

Expenditure incurred after items of property and equipment have been put into operation, such as repairs and maintenance, is normally charged to the statement of profit or loss in the period in which it is incurred. In situations where the recognition criteria are satisfied, the expenditure for a major inspection is capitalised in the carrying amount of the asset as a replacement. Where significant parts of property and equipment are required to be replaced at intervals, the Target Group recognises such parts as individual assets with specific useful lives and depreciates them accordingly.

– II-18 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Depreciation is calculated on the straight-line basis to write off the cost of each item of property and equipment to its residual value over its estimated useful life as follows:

Buildings 20 to 40 years Leasehold improvements The shorter of the remaining lease terms and five years Equipment and fixtures 4 to 15 years Motor vehicles 5 years

Where parts of an item of property and equipment have different useful lives, the cost of that item is allocated on a reasonable basis among the parts and each part is depreciated separately. Residual values, useful lives and the depreciation method are reviewed, and adjusted if appropriate, at least at each financial year end.

An item of property and equipment and any significant part initially recognised is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss on disposal or retirement recognised in the statement of profit or loss in the year the asset is derecognised is the difference between the net sales proceeds and the carrying amount of the relevant asset.

Investment properties

Gains or losses arising from changes in the fair values of investment properties are included in the statement of profit or loss in the year in which they arise.

Any gains or losses on the retirement or disposal of an investment property are recognised in the statement of profit or loss in the year of the retirement or disposal.

For a transfer from investment properties to owner-occupied properties, the deemed cost of a property for subsequent accounting is its fair value at the date of change in use. If a property occupied by the Target Group as an owner-occupied property becomes an investment property, the Target Group accounts for such property in accordance with the policy stated under “Property and equipment and depreciation” up to the date of change in use, and any difference at that date between the carrying amount and the fair value of the property is accounted for as a revaluation surplus. Any resulting decrease in the carrying amount of the property is recognised in the statement of profit or loss. Any resulting increase in the carrying amount is recognised in the statement of profit or loss to the extent that the increase reverses a previous impairment loss for that property. The amount recognised in the statement of profit or loss does not exceed the amount needed to restore the carrying amount to the carrying amount that would have been determined (net of depreciation) had no impairment loss been recognised. Any remaining part of the increase is recognised in other comprehensive income and increases the asset revaluation reserve. On subsequent disposal of the investment property, the revaluation surplus included in the asset revaluation reserve is transferred to retained earnings.

Intangible assets (other than goodwill)

Operating leases

Leases where substantially all the rewards and risks of ownership of assets remain with the lessor are accounted for as operating leases. Where the Target Group is the lessor, assets leased by the Target Group under operating leases are included in non-current assets, and rentals receivable under the operating leases are credited to the statement of profit or loss on the straight-line basis over the lease terms. Where the Target Group is the lessee, rentals payable under operating leases are charged to the statement of profit or loss on the straight-line basis over the lease terms.

– II-19 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Investments and other financial assets

Initial recognition and measurement

Financial assets are classified, at initial recognition, as loans and receivables, as appropriate. When financial assets are recognised initially, they are measured at fair value plus transaction costs that are attributable to the acquisition of the financial assets, except in the case of financial assets recorded at fair value through profit or loss.

All regular way purchases and sales of financial assets are recognised on the trade date, that is, the date that the Target Group commits to purchase or sell the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace.

Subsequent measurement

The subsequent measurement of financial assets depends on their classification as follows:

Loans and receivables

Derecognition of financial assets

A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognised (i.e., removed from the Target Group’s consolidated statement of financial position) when:

the rights to receive cash flows from the asset have expired; or
the Target Group has transferred its rights to receive cash flows from the asset, or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a “pass-through” arrangement; and either (a) the Target Group has transferred substantially all the risks and rewards of the asset, or (b) the Target Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

When the Target Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, it evaluates if and to what extent it has retained the risk and rewards of ownership of the asset. When it has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the Target Group continues to recognise the transferred asset to the extent of the Target Group’s continuing involvement. In that case, the Target Group also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Target Group has retained.

Impairment of financial assets

The Target Group assesses at the end of each reporting period whether there is any objective evidence that a financial asset or group of financial assets is impaired. An impairment exists if one or more events that occurred after the initial recognition of the asset have an impact on the estimated future cash flows of the financial asset or the Target Group of financial assets that can be reliably estimated. Evidence of impairment may include indications that a debtor or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation and observable data indicating that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

– II-20 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Financial assets carried at amortised cost

For financial assets carried at amortised cost, the Target Group first assesses whether impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Target Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment.

Financial liabilities

Initial recognition and measurement

Financial liabilities are classified, at initial recognition, as loans and borrowings. The Target Group determines the classification of its financial liabilities at initial recognition.

All financial liabilities are recognised initially at fair value and, in the case of loans and borrowings, net of directly attributable transaction costs.

The Target Group’s financial liabilities include trade and bills payables, financial liabilities included in customers’ deposits, other payables and accruals, amounts due to related companies, interest-bearing bank loans and a bond payable.

Subsequent measurement

The subsequent measurement of financial liabilities depends on their classification as follows:

Loans and borrowings

After initial recognition, interest-bearing bank loans and a bond payable are subsequently measured at amortised cost, using the effective interest rate method unless the effect of discounting would be immaterial, in which case they are stated at cost. Gains and losses are recognised in the statement of profit or loss when the liabilities are derecognised as well as through the effective interest rate amortisation process.

Derecognition of financial liabilities

A financial liability is derecognised when the obligation under the liability is discharged or cancelled, or expires.

– II-21 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Offsetting of financial instruments

Inventories

Inventories comprise merchandise purchased for resale and consumables 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.

Cash and cash equivalents

For the purpose of the statement of financial position, cash and cash equivalents comprise cash on hand and at banks, including term deposits, which are not restricted as to use.

Provisions

Income tax

Deferred tax liabilities are recognised for all taxable temporary differences, except:

when the deferred tax liability arises from the initial recognition of goodwill or 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
in respect of taxable temporary differences associated with investments in subsidiaries, when 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.

– II-22 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

when the deferred tax asset relating to the deductible temporary differences 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
in respect of deductible temporary differences associated with investments in subsidiaries, deferred 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.

Government grants

Revenue recognition

Revenue is recognised when it is probable that the economic benefits will flow to the Target Group and when the revenue can be measured reliably, on the following bases:

Income from the sale of goods is recognised when the significant risks and rewards of ownership have been transferred to the buyer, provided that the Target Group maintains neither managerial involvement to the degree usually associated with ownership, nor effective control over the goods sold;
Income from suppliers comprising promotion income, management fee income, display space leasing fees and product listing fees is recognised according to the underlying contract terms when these services have been rendered in accordance therewith;
Income for air-conditioner installation and other service fee income are recognised when such services have been rendered;
Rental income is recognised on a time proportion basis over the lease terms;
Interest income is recognised on an accrual basis using the effective interest method by applying the rate that discounts the estimated future cash receipts through the expected life of the financial instrument or a shorter period, when appropriate, to the net carrying amount of the financial asset; and
Dividend income is recognised when the shareholders’ right to receive payment has been established.

Employee benefits

Salaries, bonuses, paid annual leave and the cost to the Target Group of non-monetary benefits are accrued in the year in which the associated services are rendered by employees of the Target Group. Where payment or settlement is deferred and the effect would be material, these amounts are stated at their present values.

– II-23 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Contributions to defined contribution retirement plans are recognised as an expense in the statement of profit or loss as incurred.

Pursuant to the relevant PRC laws and regulations, the employees of the Target Group’s PRC subsidiaries are required to participate in a central pension scheme operated by the local municipal government. These subsidiaries are required to contribute a certain percentage of the salaries of their employees to the central pension scheme. The only obligation of these subsidiaries with respect to the central pension scheme is the ongoing required contributions. Contributions made to the retirement benefit scheme are charged to the statement of profit or loss as they become payable in accordance with the rules of the central pension scheme.

Termination benefits

Termination benefits are recognised at the earlier of when the Target Group can no longer withdraw the offer of those benefits and when the Target Group recognises restructuring costs involving the payment of termination benefits.

Borrowing costs

Dividends

Final dividends proposed by the Directors are classified as a separate allocation of retained earnings within the equity section of the statement of financial position, until they have been approved by the shareholder. When these dividends have been approved by the shareholder and declared, they are recognised as a liability.

Foreign currencies

These financial statements are presented in Renminbi (“RMB”), which is the Target Company’s functional and presentation currency. Each entity in the Target Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Foreign currency transactions recorded by the entities in the Target Group are initially recorded using their respective functional currency exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency rates of exchange ruling at the end of the reporting period. Differences arising on settlement or translation of monetary items are recognised in the statement of profit or loss.

2.4 SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES

The preparation of the Target Group’s Financial Information and Interim Comparative Information requires management to make judgements, estimates and assumptions that affect the reported amounts of revenue, expenses, assets and liabilities, and their accompanying disclosures, and the disclosure of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amounts of the assets or liabilities affected in the future.

– II-24 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Judgements

In the process of applying the Target Group’s accounting policies, management has made the following judgements, apart from those involving estimations, which have the most significant effect on the amounts recognised in the Financial Information:

Inventories

The Target Group does not have a general provisioning policy on inventories based on ageing given the nature of inventories and the purchase return or exchange protection from suppliers. However, operational procedures are in place to monitor this risk as the majority of the Target Group’s working capital is devoted to inventories. The Target Company reviews the aging of its inventories on a periodical basis and compares the carrying values of the aged inventories with the respective net realisable values. The purpose is to ascertain whether allowance is required to be made in the Financial Information for any obsolete and slow-moving inventories. In addition, physical counts are carried out on a periodical basis in order to determine whether allowance is needed in respect of any missing, obsolete or defective inventories identified.

Operating lease commitments – the Target Group as lessee

The Target Group has entered into commercial property leases for its retail business. The Target Group has determined that the lessor retains all the significant risks and rewards of relevant properties and so accounts for them as operating leases.

Classification between investment properties and owner-occupied properties

The Target Group determines whether a property qualifies as an investment property, and has developed criteria in making that judgement. Investment property is a property held to earn rentals or for capital appreciation or both. Therefore, the Target Group considers whether a property generates cash flows largely independently of the other assets held by the Target Group. Some properties comprise a portion that is held to earn rentals or for capital appreciation and another portion that is held for use in the production or supply of goods or services or for administrative purposes. If these portions could be sold separately or leased out separately under finance lease, the Target Group accounts for the portions separately. If the portions could not be sold separately, the property is an investment property only if an insignificant portion is held for use in the production or supply of goods or services or for administrative purposes. Judgement is made on an individual property basis to determine whether ancillary services are so significant that a property does not qualify as an investment property.

Tax provisions

Determining tax provisions involves judgement on the future tax treatment of certain transactions. The Target Group carefully evaluates tax implications of transactions, and tax provisions are set up accordingly. The tax treatment of such transactions is assessed periodically to take into account all the changes in the tax legislation and practices.

Estimation uncertainty

Impairment of goodwill

The Target Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use of the cash-generating units to which the goodwill is allocated. Estimating the value in use requires the Target Group to make an estimate of the expected future cash flows from the cash-generating units and also to choose a suitable discount rate in order to calculate the present value of those cash flows. The carrying amount of goodwill at 31 December 2012, 2013 and 2014 and 30 June 2015 was RMB963,044,000, RMB963,044,000, RMB963,044,000 and RMB1,206,502,000, respectively. Further details are given in note 14 to the Financial Information.

Impairment of non-financial assets (other than goodwill)

The Target Group assesses whether there are any indicators of impairment of all non-financial assets at the end of each reporting period. Indefinite life intangible assets are tested for impairment annually and at other times when such indicators exist. Other non-financial assets are tested for impairment when there are indicators that the carrying

– II-25 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

amounts may not be recoverable. An impairment exists when the carrying value of an asset or a cash-generating unit exceeds its recoverable amount, which is the higher of its fair value less costs of disposal and its value in use. The calculation of the fair value less costs of disposal is based on available data from binding sales transactions in an arm’s length transaction of similar assets or observable market prices less incremental costs for disposing of the asset. When value in use calculations are undertaken, management must estimate the expected future cash flows from the asset or cash-generating unit and choose a suitable discount rate in order to calculate the present value of those cash flows.

Estimation of fair value of investment properties

In the absence of current prices in an active market for similar properties, the Target Group considers information from a variety of sources, including:

(a) current prices in an active market for properties of a different nature, condition or location, adjusted to reflect those differences;
(b) recent prices of similar properties on less active markets, with adjustments to reflect any changes in economic conditions since the date of the transactions that occurred at those prices; and
(c) discounted cash flow projections based on reliable estimates of future cash flows, supported by the terms of any existing lease and other contracts and (when possible) by external evidence such as current market rents for similar properties in the same location and condition, and using discount rates that reflect current market assessments of the uncertainty in the amount and timing of the cash flows.

The carrying amount of investment properties as at 31 December 2012, 2013 and 2014 and 30 June 2015 was RMB48,467,000, RMB46,646,000, RMB47,044,000 and RMB47,044,000, respectively. Further details, including the key assumptions used for fair value measurement and a sensitivity analysis, are given in note 13 to the Financial Information.

Deferred tax assets

Deferred tax assets are recognised for all unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Significant management judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and level of future taxable profits together with future tax planning strategies. The carrying value of deferred tax assets relating to tax losses as at 31 December 2012, 2013 and 2014 and 30 June 2015 was RMB7,750,000, RMB359,000, nil and nil, respectively. The amount of unrecognised tax losses as at 31 December 2012, 2013 and 2014 and 30 June 2015 was RMB1,409,306,000, RMB1,340,245,000, RMB1,178,471,000 and RMB1,279,728,000, respectively. Further details are given in note 16 to the Financial Information.

Assessment of useful lives of property and equipment

The Target Group has estimated the useful lives of the property and equipment to be 4 to 40 years. Depreciation of items of property and equipment is calculated on the straight-line basis over their expected useful lives. The carrying amount of items of property and equipment as at 31 December 2012, 2013 and 2014 and 30 June 2015 was RMB713,261,000, RMB589,063,000, RMB602,396,000 and RMB2,050,697,000, respectively. Further details are given in note 12 to the Financial Information.

3. OPERATING SEGMENT INFORMATION

All of the Target Group’s turnover and contribution to the operating profit and assets are attributable to the operation and management of the retailing business of electrical appliances and consumer electronic products. All of the Target Group’s turnover and contribution to the operating profit are attributable to customers in Mainland China and all of the Target Group’s operating assets are located in Mainland China. Accordingly, no analysis of operating segment information is presented.

– II-26 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

4. REVENUE, OTHER INCOME AND GAINS

Revenue, which is also the Target Group’s turnover, represents the net invoiced value of goods sold, after allowances for returns and trade discounts.

An analysis of revenue, other income and gains of the Target Group is as follows:

Notes Revenue Sale of electrical appliances and consumer electronic products Other income Income from suppliers, net Income from products installation Gross rental income Government grants (i) Other service fee income Other income from telecommunications service providers Others Gains Fair value gain/(loss) on investment properties 13 Foreign exchange difference, net	Year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 17,487,767 19,610,950 20,992,171 288,189 173,762 192,647 21,678 26,417 41,185 81,478 96,430 89,746 45,501 20,007 32,492 37,499 47,402 87,639 16,039 23,452 43,403 17,982 21,477 31,988 508,366 408,947 519,100 6,760 (1,821) 398 – 2,745 295 6,760 924 693 515,126 409,871 519,793	6 months ended 30 June 2014 2015 RMB’000 RMB’000 (Unaudited) 10,068,204 10,858,393 67,396 74,945 15,787 20,922 43,971 40,313 5,090 13,963 41,006 47,267 21,434 14,533 30,048 12,302 224,732 224,245 – – – 30 – 30 224,732 224,275	6 months ended 30 June 2014 2015 RMB’000 RMB’000 (Unaudited) 10,068,204 10,858,393 67,396 74,945 15,787 20,922 43,971 40,313 5,090 13,963 41,006 47,267 21,434 14,533 30,048 12,302 224,732 224,245 – – – 30 – 30 224,732 224,275

			74,945 20,922 40,313 13,963 47,267 14,533 12,302
			224,245
			– 30
			30
			224,275

Note:

(i) Various local government grants were received to reward the Target Group’s contributions to the local economy. There was no unfulfilled condition or contingency attaching to these government grants.

– II-27 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

5. (LOSS)/PROFIT BEFORE TAX

The Target Group’s (loss)/profit before tax is arrived at after charging/(crediting):

Notes Cost of inventories sold Depreciation 12 Amortisation of other intangible assets 15, (i) Loss on disposal of items of property and equipment Minimum lease payments under operating leases in respect of buildings Impairment provided/(reversed) for items of property and equipment 12 Gross rental income 4 Fair value (gain)/loss on investment properties 13 Service fees to GOME Listed Group (ii) Foreign exchange differences, net Staff costs excluding directors’ remuneration: Wages, salaries and bonuses Pension scheme contributions 7 Social welfare and other costs	Year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 14,599,783 16,131,701 17,554,180 171,740 163,450 167,059 100 100 100 2,487 19,669 59 1,402,592 1,256,633 1,279,548 28,184 (6,842) (9,344) (81,478) (96,430) (89,746) (6,760) 1,821 (398) 250,000 250,000 250,000 17 (2,745) (295) 721,620 678,082 765,371 178,898 161,714 167,799 7,872 6,539 8,874 908,390 846,335 942,044	6 months ended 30 June 2014 2015 RMB’000 RMB’000 (Unaudited) 8,336,525 8,880,363 79,096 77,971 50 2,158 1,769 1,125 630,299 712,967 (5,210) 3,464 (43,971) (40,313) – – 156,437 160,897 838 (30) 371,520 376,641 80,378 88,126 7,174 6,439 459,072 471,206

Notes:

(i) The amortisation of other intangible assets for the year/period is included in “Administrative expenses” in the consolidated statement of profit or loss.
(ii) GOME Electrical Appliances Holding Limited and its subsidiaries (“GOME Listed Group”) provided management and purchasing services to the Target Group. Total amounts of the management service fee and the purchasing service fee were charged based on 0.6% and 0.9%, respectively, of the turnover of the Target Group, with annual maximum amounts of RMB100 million and RMB150 million, respectively. The management service fee of RMB100 million, RMB100 million, RMB100 million and RMB64 million and the purchasing service fee of RMB150 million, RMB150 million, RMB150 million and RMB97 million were charged to the Target Group for the years ended 31 December 2012, 2013 and 2014 and the 6 months ended 30 June 2015, respectively.

– II-28 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

6. FINANCE (COSTS)/INCOME

An analysis of finance costs and finance income of the Target Group is as follows:

Notes Finance costs: Interest on bank loans wholly repayable within one year Interest expense on a bond payable 28 Finance income: Bank interest income Other interest income (i)	Year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 (10,237) (37,757) (123,059) – (434) (10,069) (10,237) (38,191) (133,128) 60,235 60,417 55,344 – 5,360 89,267 60,235 65,777 144,611	6 months ended 30 June 2014 2015 RMB’000 RMB’000 (Unaudited) (56,399) (73,671) (5,650) (5,717) (62,049) (79,388) 27,584 23,689 34,317 49,454 61,901 73,143	6 months ended 30 June 2014 2015 RMB’000 RMB’000 (Unaudited) (56,399) (73,671) (5,650) (5,717) (62,049) (79,388) 27,584 23,689 34,317 49,454 61,901 73,143
			(79,388)

			23,689 49,454
			73,143

Note:

(i) Other interest income represented interest income from the entrusted loans (note 22) to GOME Property and Changsha Xiandao Zhendi through China Merchants Bank and China Bohai Bank. The loans bear interest at a fixed interest rate of 6.40% to 8.00% per annum.

7. PENSION SCHEMES

All of the Target Group’s PRC subsidiaries are required to participate in the employee retirement benefit schemes operated by the relevant local government authorities in the PRC. The PRC government is responsible for the pension liability to these employees upon their retirement. The Target Group is required to make contributions for those employees who are registered as permanent residents in the PRC and are within the scope of the relevant PRC regulations at rates ranging from 20% to 22.5% of the employees’ salaries for the years ended 31 December 2012, 2013 and 2014 and the 6 months ended 30 June 2015.

8. DIRECTORS’ AND CHIEF EXECUTIVE’S REMUNERATION AND FIVE HIGHEST PAID EMPLOYEES

Mr. Wong Kwong Yu and Ms. Du Juan, the spouse of Mr. Wong Kwong Yu, were directors of the Target Company, while Ms. Du Juan was the chief executive during the Relevant Periods. These individuals did not get any remuneration from the Target Company during the Relevant Periods. Therefore, all five highest paid individuals are neither a director nor the chief executive of the Target Group during the Relevant Periods and details are as follows:

Notes Salaries, allowances and other expense Pension scheme contributions	Year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 2,109 2,286 3,491 116 124 138 2,225 2,410 3,629	6 months ended 30 June 2014 2015 RMB’000 RMB’000 (Unaudited) 2,305 2,285 64 75 2,369 2,360	6 months ended 30 June 2014 2015 RMB’000 RMB’000 (Unaudited) 2,305 2,285 64 75 2,369 2,360
			2,360

– II-29 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

The number of non-director and non-chief-executive highest paid individuals whose remuneration fell within the following bands is as follows:

Nil to RMB500,000 RMB500,001 to RMB1,000,000	Year ended 31 December 2012 2013 2014 3 2 – 2 3 5 5 5 5	6 months ended 30 June 2014 2015 (Unaudited) 2 4 3 1 5 5	6 months ended 30 June 2014 2015 (Unaudited) 2 4 3 1 5 5
			5

9. INCOME TAX EXPENSE

An analysis of the provision for tax in the Target Group’s Financial Information and Interim Comparative Information is as follows:

Current income tax Deferred income tax (note 16) Total tax charge for the year/period	Year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 50,172 95,385 106,724 16,074 5,618 (861) 66,246 101,003 105,863	6 months ended 30 June 2014 2015 RMB’000 RMB’000 (Unaudited) 42,380 108,698 (300) (659) 42,080 108,039	6 months ended 30 June 2014 2015 RMB’000 RMB’000 (Unaudited) 42,380 108,698 (300) (659) 42,080 108,039
			108,039

The Target Group is subject to income tax on an entity basis on the profit arising in or derived from the tax jurisdictions in which members of the Target Group are domiciled and operate. The determination of current and deferred income taxes was based on the enacted tax rates.

Under the relevant PRC income tax law, except for certain preferential treatment available to the Target Group, the PRC subsidiaries of the Target Group are subject to income tax at a rate of 25% on their respective taxable income. For the years ended 31 December 2012, 2013 and 2014 and the 6 months ended 30 June 2015, 31, 33, 33 and 36 entities of the Target Group had obtained approval from the relevant PRC tax authorities and were entitled to preferential corporate income tax rates, respectively.

The Target Group realised tax benefits during the year/period through applying the preferential corporate income tax rates. These preferential tax treatments were available to the Target Group pursuant to the enacted PRC tax rules and regulations and are subject to assessment by the relevant PRC tax authorities.

– II-30 –

APPENDIX II

FINANCIAL INFORMATION OF THE TARGET GROUP

A reconciliation of the income tax expense applicable to (loss)/profit before tax at the statutory rate for the jurisdiction in which the Target Company and its subsidiaries are domiciled to the income tax expense at the Target Group’s effective tax rate is as follows:

(Loss)/profit before tax Income tax at the statutory tax rate Tax effect of preferential tax rates Expenses not deductible for tax Tax losses utilised from previous years Tax losses not recognised Effect of withholding tax at 10% on the distributable profits of the Target Group’s subsidiaries in Mainland China Tax charge at the Target Group’s effective rate	Year ended 31 December 2012 2013 2014 RMB’000 % RMB’000 % RMB’000 % (253,219) 467,911 399,785 (63,305) 25 116,978 25 99,946 25 (16,568) (27,831) (5,392) 22,859 1,474 1,130 (7,578) (41,273) (44,492) 130,838 44,018 26,672 – 7,637 27,999 66,246 101,003 105,863	6 months ended 30 June 2014 2015 RMB’000 % RMB’000 % (Unaudited) 187,897 363,925 46,974 25 90,981 25 (2,882) (18,520) 350 298 (32,877) (31,646) 30,515 45,926 – 21,000 42,080 108,039

10. DIVIDENDS

No dividends were declared to the owner of the Target Company during the Relevant Periods.

11. EARNINGS PER SHARE

Earnings per share information is not presented as its inclusion, for the purpose of this report, is not considered meaningful.

– II-31 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

12. PROPERTY AND EQUIPMENT

Target Group

31 December 2012 At 1 January 2012 Cost Accumulated depreciation and impairment Net carrying amount At 1 January 2012, net of accumulated depreciation and impairment Additions Disposals Depreciation provided during the year Impairment provided during the year Surplus on revaluation of properties transferred to investment properties Transfers to investment properties (note 13) At 31 December 2012, net of accumulated depreciation and impairment At 31 December 2012: Cost Accumulated depreciation and impairment Net carrying amount	Buildings RMB’000 275,929 (8,671) 267,258 267,258 – – (8,015) – 3,240 (9,636) 252,847 268,562 (15,715) 252,847	Leasehold improvements RMB’000 584,319 (318,653) 265,666 265,666 167,657 (22,355) (93,809) (16,800) – – 300,359 693,046 (392,687) 300,359	Equipment and fixtures RMB’000 318,240 (119,492) 198,748 198,748 43,346 (13,081) (66,099) (11,170) – – 151,744 322,982 (171,238) 151,744	Motor vehicles RMB’000 30,464 (20,531) 9,933 9,933 2,673 (264) (3,817) (214) – – 8,311 32,104 (23,793) 8,311	Total RMB’000 1,208,952 (467,347) 741,605 741,605 213,676 (35,700) (171,740) (28,184) 3,240 (9,636) 713,261 1,316,694 (603,433) 713,261

– II-32 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Target Group

31 December 2013 At 31 December 2012 and 1 January 2013 Cost Accumulated depreciation and impairment Net carrying amount At 1 January 2013, net of accumulated depreciation and impairment Additions Disposals Depreciation provided during the year Impairment reversed/(provided) during the year At 31 December 2013, net of accumulated depreciation and impairment At 31 December 2013: Cost Accumulated depreciation and impairment Net carrying amount	Buildings RMB’000 268,562 (15,715) 252,847 252,847 – – (7,777) – 245,070 268,562 (23,492) 245,070	Leasehold improvements RMB’000 693,046 (392,687) 300,359 300,359 87,809 (48,150) (92,589) 2,899 250,328 721,924 (471,596) 250,328	Equipment and fixtures RMB’000 322,982 (171,238) 151,744 151,744 23,775 (32,401) (59,375) 4,487 88,230 269,430 (181,200) 88,230	Motor vehicles RMB’000 32,104 (23,793) 8,311 8,311 1,539 (162) (3,709) (544) 5,435 31,769 (26,334) 5,435	Total RMB’000 1,316,694 (603,433) 713,261 713,261 113,123 (80,713) (163,450) 6,842 589,063 1,291,685 (702,622) 589,063

– II-33 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Target Group

31 December 2014 At 31 December 2013 and 1 January 2014 Cost Accumulated depreciation and impairment Net carrying amount At 1 January 2014, net of accumulated depreciation and impairment Additions Disposals Depreciation provided during the year Impairment reversed during the year At 31 December 2014, net of accumulated depreciation and impairment At 31 December 2014: Cost Accumulated depreciation and impairment Net carrying amount	Buildings RMB’000 268,562 (23,492) 245,070 245,070 – – (7,780) – 237,290 268,562 (31,272) 237,290	Leasehold improvements RMB’000 721,924 (471,596) 250,328 250,328 167,143 (18,682) (115,016) 3,778 287,551 852,693 (565,142) 287,551	Equipment and fixtures RMB’000 269,430 (181,200) 88,230 88,230 24,858 (4,742) (41,748) 4,959 71,557 266,260 (194,703) 71,557	Motor vehicles RMB’000 31,769 (26,334) 5,435 5,435 2,762 (291) (2,515) 607 5,998 30,159 (24,161) 5,998	Total RMB’000 1,291,685 (702,622) 589,063 589,063 194,763 (23,715) (167,059) 9,344 602,396 1,417,674 (815,278) 602,396

– II-34 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Target Group

30 June 2015 At 31 December 2014 and 1 January 2015 Cost Accumulated depreciation and impairment Net carrying amount At 1 January 2015, net of accumulated depreciation and impairment Additions Acquisition of subsidiaries (note 31) Disposals Depreciation provided during the period Impairment reversed/(provided) during the period At 30 June 2015, net of accumulated depreciation and impairment At 30 June 2015: Cost Accumulated depreciation and impairment Net carrying amount	Buildings RMB’000 268,562 (31,272) 237,290 237,290 – 1,448,104 – (4,596) – 1,680,798 1,716,666 (35,868) 1,680,798	Leasehold improvements RMB’000 852,693 (565,142) 287,551 287,551 75,758 305 – (56,046) (3,782) 303,786 928,757 (624,971) 303,786	Equipment and fixtures RMB’000 266,260 (194,703) 71,557 71,557 7,696 26 (3,550) (16,058) 293 59,964 260,110 (200,146) 59,964	Motor vehicles RMB’000 30,159 (24,161) 5,998 5,998 1,577 – (180) (1,271) 25 6,149 28,984 (22,835) 6,149	Total RMB’000 1,417,674 (815,278) 602,396 602,396 85,031 1,448,435 (3,730) (77,971) (3,464) 2,050,697 2,934,517 (883,820) 2,050,697

Certain of the buildings of the Target Group in Mainland China were pledged as security for interest-bearing bank loans (note 26). The aggregate carrying value of the Target Group’s buildings pledged as at 31 December 2012, 2013 and 2014 and 30 June 2015 amounted to nil, RMB66,163,000, RMB63,658,000 and RMB651,995,000, respectively.

– II-35 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

13. INVESTMENT PROPERTIES

Target Group

At 1 January Transfer from owner-occupied properties (note 12) Net gain/(loss) from fair value adjustments	At 31 December 2012 2013 RMB’000 RMB’000 32,071 48,467 9,636 – 6,760 (1,821) 48,467 46,646	2014 RMB’000 46,646 – 398 47,044	At 30 June 2015 RMB’000 47,044 – –
			47,044

Investment properties are stated at fair value, which has been determined with reference to the valuations performed by Jones Lang LaSalle Corporate Appraisal and Advisory Limited (“Jones Lang LaSalle”), an independent firm of professionally qualified valuers, using the income approach. The fair value represents the amount of market value at which the assets could be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing seller in an arm’s length transaction at the date of valuation. The Target Group’s management has discussions with the valuer on the valuation assumptions and valuation results once a year when the valuation is performed for annual financial reporting.

As at 31 December 2012, 2013 and 2014 and 30 June 2015, all investment properties were located in Mainland China and were leased to third parties under medium term leases as commercial properties.

All of the investment properties of the Target Group in Mainland China were pledged as security for interest-bearing bank loans (note 26) of the Target Group, as at 31 December 2013 and 2014 and 30 June 2015.

Fair value hierarchy

The following table illustrates the fair value measurement hierarchy of the Target Group’s investment properties:

Recurring fair value measurement for: Commercial properties As at 31 December 2012 As at 31 December 2013 As at 31 December 2014 As at 30 June 2015	Fair value measurement Quoted prices in active markets (Level 1) Significant Observable inputs (Level 2) RMB’000 RMB’000 – – – – – – – –	using Significant unobservable inputs (Level 3) RMB’000 48,467 46,646 47,044 47,044	Total RMB’000 48,467

			46,646

			47,044

			47,044

During the Relevant Periods, there were no transfers of fair value measurements between Level 1 and Level 2 and no transfers into or out of Level 3.

– II-36 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Below is a summary of the valuation techniques used and the key inputs to the valuation of investment properties:

		Valuation	Significant
		Techniques	unobservable inputs	Inputs	Inputs	Inputs	Inputs
				2012	2013	2014	2015
			Estimated rental value	105.9	107.3	109.9	109.9
			(RMB per square
			metre and per month)
Commercial	properties	Income	Rental decrease	1.03%	0.08%	1.02%	1.02%
		approach	per annum
			Long term vacancy rate	10%	10%	10%	10%
			Discount rate	6.71%	6.8%	6.8%	6.8%

A significant increase or decrease in the estimated rental value and the market rental growth rate per annum in isolation would result in a significant increase or decrease in the fair value of the investment properties. A significant increase or decrease in the long term vacancy rate and the discount rate in isolation would result in a significant decrease or increase in the fair value of the investment properties. Generally, a change in the assumption made for the estimated rental value is accompanied by a directionally similar change in the rent growth per annum and the discount rate and an opposite change in the long term vacancy rate.

14. GOODWILL

Target Group

At 1 January: Cost Accumulated impairment Net carrying amount Cost at 1 January, net of accumulated impairment Acquisition of a subsidiary (note 31(ii)) At 31 December/30 June At 31 December/30 June: Cost Accumulated impairment Net carrying amount	At 31 December 2012 2013 RMB’000 RMB’000 986,575 986,575 (23,531) (23,531) 963,044 963,044 963,044 963,044 – – 963,044 963,044 986,575 986,575 (23,531) (23,531) 963,044 963,044	2014 RMB’000 986,575 (23,531) 963,044 963,044 – 963,044 986,575 (23,531) 963,044	At 30 June 2015 RMB’000 986,575 (23,531) 963,044 963,044 243,458 1,206,502 1,230,033 (23,531) 1,206,502

– II-37 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Impairment testing of goodwill

The carrying amount of goodwill allocated to each of the cash-generating units is as follows:

Datong Century GOME Retail Beijing Dingrui Dalian Xinxundian Impairment	At 31 December 2012 2013 RMB’000 RMB’000 79,000 79,000 884,044 884,044 – – 23,531 23,531 986,575 986,575 (23,531) (23,531) 963,044 963,044	2014 RMB’000 79,000 884,044 – 23,531 986,575 (23,531) 963,044	At 30 June 2015 RMB’000 79,000 884,044 243,458 23,531 1,230,033 (23,531) 1,206,502

The recoverable amount of each cash-generating unit has been determined based on a value in use calculation. To calculate this, cash flow projections are prepared based on financial budgets as approved by management which cover a period of five years. The pre-tax discount rate applied to the cash flow projections is 13.19%-16.45%, 13.19%-19.52%, 13.19%-18.10% and 13.19%-18.10%, respectively for 31 December 2012, 2013 and 2014 and 30 June 2015.

The growth rate used to extrapolate the cash flows of the cash-generating units beyond the five-year period is 3% for the Relevant Periods. Management of the Target Company believes that this growth rate is conservative and reliable for the purpose of impairment testing.

Key assumptions used in the value in use calculations

The following describes the key assumptions of the cash flow projections.

Store revenue: the bases used to determine the future earnings potential are historical sales and average and expected growth rates of the retail market in Mainland China.

Gross margins: the gross margins are based on the average gross margin achieved in the past five years. Expenses: the value assigned to the key assumptions reflects past experience and management’s commitment to maintain the Target Group’s operating expenses to an acceptable level. Discount rate: the discount rate used is before tax and reflects management’s estimate of the risks specific to each unit. In determining the appropriate discount rate for each unit, regard has been given to the applicable borrowing rates of the Target Group in the Relevant Periods.

Sensitivity to changes in assumptions

With regard to the assessment of values in use of the respective cash-generating units, management believes that no reasonably possible change in any of the above key assumptions would cause the respective carrying values, including goodwill, of the cash-generating units to exceed the respective recoverable amounts.

– II-38 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

15. OTHER INTANGIBLE ASSETS

Target Group

31 December 2012
At 1 January 2012:
Cost
Accumulated amortisation
Net carrying amount
Cost at 1 January 2012,
net of accumulated amortisation
Amortisation provided during the year
At 31 December 2012
At 31 December 2012:
Cost
Accumulated amortisation
Net carrying amount
Target Group
31 December 2013
At 31 December 2012 and 1 January 2013:
Cost
Accumulated amortisation
Net carrying amount
Cost at 1 January 2013,
net of accumulated amortisation
Amortisation provided during the year
At 31 December 2013
At 31 December 2013:
Cost
Accumulated amortisation
Net carrying amount

Trademark
RMB’000
1,000
(400)
600
600
(100)
500
1,000
(500)
500
Trademark
RMB’000
1,000
(500)
500
500
(100)
400
1,000
(600)
400

– II-39 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

31 December 2014
At 31 December 2013 and 1 January 2014:
Cost
Accumulated amortisation
Net carrying amount
Cost at 1 January 2014,
net of accumulated amortisation
Amortisation provided during the year
At 31 December 2014
At 31 December 2014:
Cost
Accumulated amortisation
Net carrying amount
Target Group
Notes
30 June 2015
At 31 December 2014 and 1 January 2015:
Cost
(i)
Accumulated amortisation
Net carrying amount
Cost at 1 January 2015,
net of accumulated amortisation
Addition
(ii)
Amortisation provided during the period
At 30 June 2015
At 30 June 2015:
Cost
Accumulated amortisation
Net carrying amount

Trademark
RMB’000
1,000
(600)
400
400
(100)
300
1,000
(700)
300
Trademarks
RMB’000
1,000
(700)
300
300
253,000
(2,158)
251,142
254,000
(2,858)
251,142

Notes:

(i) The cost represents the fair value of the trademark of RMB1,000,000 arising from the acquisition of Datong Century in 2008, which is amortised on the straight-line basis over the management’s estimate of its useful life of 10 years.
(ii) The cost represents the fair value of the trademark of 黑天鵝 (Black Swan) for RMB253,000,000 purchased during the 6 months ended 30 June 2015 from Beijing GOME, which is amortised on the straight-line basis over the management’s estimate of its useful life of 10 years. Mr. Wong Kwong Yu and his family members have beneficial equity interests in Beijing GOME.

– II-40 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

16. DEFERRED TAX

Target Group

Note Deferred tax assets: Tax losses (i) Deferred tax liabilities: Fair value adjustment on transfer of owner-occupied properties to investment properties Fair value adjustment on investment properties Fair value adjustment on acquisition of a subsidiary Net carrying amount Deferred tax assets: Tax losses Deferred tax liabilities: Fair value adjustment on transfer of owner-occupied properties to investment properties Fair value adjustment on investment properties Fair value adjustment on acquisition of a subsidiary Net carrying amount	Balance at 1 January 2012 RMB’000 23,453 3,651 (2,792) 47,364 48,223 Note (i)	Recognised in the consolidated statement of profit or loss RMB’000 (15,703) – 1,690 (1,319) 371 Balance at 1 January 2013 RMB’000 7,750 4,461 (1,102) 46,045 49,404	Recognised in the consolidated statement of profit or loss RMB’000 (15,703) – 1,690 (1,319) 371 Balance at 1 January 2013 RMB’000 7,750 4,461 (1,102) 46,045 49,404	Recognised in the consolidated statement of profit or loss RMB’000 (15,703) – 1,690 (1,319) 371 Balance at 1 January 2013 RMB’000 7,750 4,461 (1,102) 46,045 49,404	Recognised in the consolidated statement of comprehensive income RMB’000 – 810 – – 810 Recognised in the consolidated statement of profit or loss RMB’000 (7,391) – (455) (1,318) (1,773)	Balance at 31 December 2012 RMB’000 7,750 4,461 (1,102) 46,045 49,404 Balance at 31 December 2013 RMB’000 359 4,461 (1,557) 44,727 47,631




			Balance at 1 January 2013 RMB’000 7,750 4,461 (1,102) 46,045 49,404

– II-41 –

APPENDIX II

FINANCIAL INFORMATION OF THE TARGET GROUP

Deferred tax assets: Tax losses Deferred tax liabilities: Fair value adjustment on transfer of owner-occupied properties to investment properties Fair value adjustment on investment properties Fair value adjustment on acquisition of a subsidiary Net carrying amount Deferred tax liabilities: Fair value adjustment on transfer of owner-occupied properties to investment properties Fair value adjustment on investment properties Fair value adjustment on acquisition of subsidiaries Net carrying amount	Note (i) Balance at 1 January 2015 RMB’000 4,461 (1,458) 43,408 46,411		Balance at 1 January 2014 Recognised in the consolidated statement of profit or loss Balance at 31 December 2014 RMB’000 RMB’000 RMB’000 359 (359) – 4,461 – 4,461 (1,557) 99 (1,458) 44,727 (1,319) 43,408 47,631 (1,220) 46,411 Recognised in the consolidated statement of profit or loss Acquisition of a subsidiary Balance at 30 June 2015 RMB’000 RMB’000 RMB’000 Note 31(ii) – – 4,461 – – (1,458) (659) 246,088 288,837 (659) 246,088 291,840

Note:

(i) The Target Group has not recognised deferred tax assets in respect of tax losses of RMB1,409,306,000, RMB1,340,245,000, RMB1,178,471,000 and RMB1,279,728,000 as at 31 December 2012, 2013 and 2014 and 30 June 2015, that will expire in one to five years, as they have arisen in subsidiaries that have been loss-making for some time and it is not considered probable that taxable profits will be available against which such tax losses can be utilised.

– II-42 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

17. INVESTMENT IN A SUBSIDIARY

Target Company

					December		At 30 June
				2012	2013	2014	2015
				RMB’000	RMB’000	RMB’000	RMB’000
Unlisted	shares,	at	cost	108,800	108,800	108,800	108,800

The amounts due from a subsidiary included in the Target Company’s current assets are unsecured, interest-free and repayable on demand or within one year.

Particulars of the principal subsidiaries are as follows:

	Place of		Percentage	of equity
	registration	Registered	attributable to the		2015
	and	and paid-up	Target Company		Principal
Company name	operations	capital	Direct	Indirect	activities
		RMB
Beijing Jinzun Technology	PRC	108,800,000	100	–	Investment
Development Co., Ltd. (i)					holding
GOME Retail (i)	PRC	100,000,000	–	100	Note (ii)
Beijing Logistics (i)	PRC	10,000,000	–	100	Note (iii)
Anshan GOME Electrical Appliances	PRC	5,000,000	–	100	Note (ii)
Co., Ltd. (i)
Dalian GOME Electrical Appliances	PRC	10,000,000	–	100	Note (ii)
Co., Ltd. (i)
Daqing GOME Electrical Appliances	PRC	5,000,000	–	100	Note (ii)
Co., Ltd. (i)
Dalian Xinxundian Trading	PRC	500,000	–	100	Note (iv)
Co., Ltd. (i)
Datong Century (i)	PRC	5,000,000	–	100	Note (ii)
Guizhou GOME Electrical Appliances	PRC	5,000,000	–	100	Note (ii)
Co., Ltd. (i)
Henan GOME Electrical Appliances	PRC	10,000,000	–	100	Note (ii)
Co., Ltd. (i)
Hebei GOME Electrical Appliances	PRC	10,000,000	–	100	Note (ii)
Co., Ltd. (i)
Heilongjiang Black Swan Home	PRC	10,000,000	–	100	Note (ii)
Appliances Co., Ltd. (i)
GOME Inner Mongolia Electrical	PRC	5,000,000	–	100	Note (ii)
Appliances Co., Ltd. (i)
Jilin GOME Electrical Appliances	PRC	10,000,000	–	100	Note (ii)
Co., Ltd. (i)
Jiangxi Pengrun Home Electrical	PRC	10,000,000	–	100	Note (ii)
Appliances Co., Ltd. (i)
Ningbo Zhe GOME Electrical	PRC	10,000,000	–	100	Note (ii)
Appliances Co., Ltd. (i)
Nantong GOME Electrical Appliances	PRC	5,000,000	–	100	Note (ii)
Co., Ltd. (i)
Nanning GOME Electrical Appliances	PRC	10,000,000	–	100	Note (ii)
Co., Ltd. (i)
Nanning Gome Logistics Electrical	PRC	6,000,000	–	100	Note (iii)
Appliances Co., Ltd. (i)
Shanghai GOME Electrical Appliances	PRC	40,000,000	–	100	Note (ii)
Co., Ltd. (i)

– II-43 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

	Place of		Percentage	of equity
	registration	Registered	attributable to the		2015
	and	and paid-up	Target Company		Principal
Company name	operations	capital	Direct	Indirect	activities
		RMB
Shanxi GOME Electrical Appliances	PRC	10,000,000	–	100	Note (ii)
Co., Ltd. (i)
Wuxi GOME Electrical Appliances	PRC	10,000,000	–	100	Note (ii)
Co., Ltd. (i)
Xianyang GOME Electrical Appliances	PRC	500,000	–	100	Note (ii)
Co., Ltd. (i)
Xiamen GOME Electrical Appliances	PRC	10,000,000	–	100	Note (ii)
Co., Ltd. (i)
Xinjiang GOME Electrical Appliances	PRC	10,000,000	–	100	Note (ii)
Co., Ltd. (i)
Zhejiang GOME Electrical Appliances	PRC	8,000,000	–	100	Note (ii)
Co., Ltd. (i)
Beijing Hengxin Damei Trading	PRC	5,000,000	–	100	Note (iii)
Co., Ltd. (i)
Tianjin GOME Hengxin Logistics	PRC	20,000,000	–	100	Note (ii)
Co., Ltd. (i)
Beijing GOME Communication	PRC	50,000,000	–	100	Note (ii)
Equipment Co., Ltd. (i)
Tianjin Shengyuan Pengda Logistics	PRC	50,000,000	–	100	Note (iii)
Co., Ltd. (i)
Tianjin GOME Zhansheng Logistics	PRC	20,000,000	–	100	Note (iii)
Co., Ltd. (i)
Wuhai GOME Electrical Appliances	PRC	5,000,000	–	100	Note (ii)
Co., Ltd. (i)
Nanchang GOME Electrical Appliances	PRC	1,000,000	–	100	Note (ii)
Co., Ltd. (i)
Jiangyin GOME Electrical Appliances	PRC	5,000,000	–	100	Note (ii)
Co., Ltd. (i)
Luohe Gome Electrical Appliances	PRC	5,000,000	–	100	Note (ii)
Co., Ltd. (i)
Beijing Gome Baotu Electrical	PRC	10,000,000	–	100	Note (ii)
Appliances Co., Ltd. (i)
Hunan GOME Electrical Appliances	PRC	10,000,000	–	100	Note (ii)
Co., Ltd. (i)
Handan GOME Electrical Appliances	PRC	5,000,000	–	100	Note (ii)
Co., Ltd. (i)
Xinjiang Karamay GOME Electrical	PRC	5,000,000	–	100	Note (ii)
Appliances Co., Ltd. (i)
Xinjiang Kuitun GOME Electrical	PRC	5,000,000	–	100	Note (ii)
Appliances Co., Ltd. (i)
Erlian Haote GOME Electrical	PRC	5,000,000	–	100	Note (ii)
Appliances Co., Ltd. (i)
Hangzhou Pengtou Electrical	PRC	5,000,000	–	100	Note (ii)
Appliances Co., Ltd. (i)
Beihai GOME Electrical Appliances	PRC	10,000,000	–	100	Note (ii)
Co., Ltd. (i)
Baoding GOME Electrical Appliances	PRC	5,000,000	–	100	Note (ii)
Co., Ltd. (i)
Shaoxing Pengrun GOME Electrical	PRC	5,000,000	–	100	Note (ii)
Appliances Co., Ltd. (i)

– II-44 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

	Place of		Percentage	of equity
	registration	Registered	attributable to the		2015
	and	and paid-up	Target Company		Principal
Company name	operations	capital	Direct	Indirect	activities
		RMB
Heilongjiang Black Swan Home	PRC	500,000	–	100	Note (v)
Appliances Aftersales Services
Co., Ltd. (i)
Beijing Dingrui (i)	PRC	10,000,000	–	100	Property
					holding
Heilongjiang Fengxing Communication	PRC	10,000,000	–	100	Note (ii)
Equipment Co., Ltd. (i)
Yingkou GOME Sanxing Electrical	PRC	5,000,000	–	100	Note (ii)
Appliances Co., Ltd. (i)
Tibet Yongtai Logistics Co., Ltd. (i)	PRC	10,000,000	–	100	Note (iii)
Pengrun Electrical Appliances	PRC	500,000	–	100	Note (v)
(Yingkou) Aftersales Services
Co., Ltd. (i)
Wuxi GOME Electrical Appliances	PRC	5,000,000	–	100	Note (v)
Aftersales Services Co., Ltd. (i)
Chongqing Shengan Tonglue Trading	PRC	50,000,000	–	100	Note (iii)
Co., Ltd. (i)
Inner Mongolia GOME Aftersales	PRC	500,000	–	100	Note (v)
Services Co., Ltd. (i)
Jilin City GOME Aftersales Services	PRC	500,000	–	100	Note (v)
Co., Ltd. (i)
Nantong GOME Aftersales Services	PRC	500,000	–	100	Note (v)
Electrical Appliances Co., Ltd. (i)
Jilin GOME Electrical Appliances	PRC	500,000	–	100	Note (v)
Aftersales Services Co., Ltd. (i)
Taiyuan GOME Electrical Appliances	PRC	5,000,000	–	100	Note (v)
Aftersales Services Co., Ltd. (i)
Xinjiang GOME Electrical Appliances	PRC	500,000	–	100	Note (v)
Aftersales Services Co., Ltd. (i)
Changsha GOME Electrical Appliances	PRC	5,000,000	–	100	Note (v)
Aftersales Services Co., Ltd. (i)
Ningbo Haishu GOME Electrical	PRC	500,000	–	100	Note (v)
Appliances Aftersales Services
Electrical Appliances Co., Ltd. (i)
Guizhou GOME Aftersales Services	PRC	500,000	–	100	Note (v)
Co., Ltd. (i)
Datong City Hengyuan Aftersales	PRC	5,000,000	–	100	Note (v)
Services Co., Ltd. (i)
Henan GOME Electrical Appliances	PRC	5,000,000	–	100	Note (v)
Aftersales Services Co., Ltd. (i)
Nanning GOME Electrical Appliances	PRC	500,000	–	100	Note (v)
Aftersales Services Co., Ltd. (i)
Shijiazhuang GOME Electrical	PRC	500,000	–	100	Note (v)
Appliances Aftersales Services
Co., Ltd. (i)
Heilongjiang Black Swan Home	PRC	500,000	–	100	Note (v)
Appliances Maintenance Services
Co., Ltd. (i)
Anshan GOME Aftersales Services	PRC	5,000,000	–	100	Note (v)
Co., Ltd. (i)
Dalian GOME Electrical Appliances	PRC	500,000	–	100	Note (v)
Aftersales Services Co., Ltd. (i)

– II-45 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

	Place of		Percentage of equity
	registration	Registered	attributable to the	2015
	and	and paid-up	Target Company	Principal
Company name	operations	capital	Direct Indirect	activities
		RMB
Hangzhou Pengrun GOME Electrical	PRC	500,000	– 100	Note (v)
Appliances Aftersales Services
Co., Ltd. (i)
Jiangxi GOME Aftersales Services	PRC	500,000	– 100	Note (v)
Co., Ltd. (i)

Notes:

(i) Registered as private companies with limited liability under PRC law
(ii) Retailing of electrical appliances and consumer electronic products
(iii) Provision of logistics services
(iv) Retailing of mobile phones and accessories
(v) Provision of after-sales services of electrical appliances and consumer electronic products

18. INVENTORIES

Target Group

Merchandise for resale Consumables	At 31 December 2012 2013 RMB’000 RMB’000 2,876,097 3,402,457 33,857 36,177 2,909,954 3,438,634	2014 RMB’000 3,351,277 44,644 3,395,921	At 30 June 2015 RMB’000 2,786,475 40,772
			2,827,247

19. TRADE RECEIVABLES

Target Group

All of the Target Group’s sales are on a cash basis except for certain bulk sales of merchandise which are credit sales. The credit term offered to customers is generally one month. The Target Group seeks to maintain strict control over its outstanding receivables and overdue balances are reviewed regularly by senior management. Management considers that there is no significant concentration of credit risk.

An aged analysis of the trade receivables as at the end of the reporting year/period, based on the goods delivery date, is as follows:

Outstanding balances, aged: Within 3 months 3 to 6 months	At 31 December 2012 2013 RMB’000 RMB’000 52,269 47,769 4,424 2,249 56,693 50,018	2014 RMB’000 42,564 33 42,597	At 30 June 2015 RMB’000 61,008 1,550
			62,558

– II-46 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

All trade receivables were neither past due nor impaired, and were related to a large number of diversified customers for whom there was no recent history of default.

The trade receivables are unsecured and non-interest-bearing.

20. PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES

Target Group

Prepayments Current portion of lease prepayments Advances to suppliers Other deposits and receivables	At 31 December 2012 2013 RMB’000 RMB’000 11,027 7,692 209,210 194,076 200,698 334,177 387,926 202,065 808,861 738,010	2014 RMB’000 7,648 225,634 400,512 144,172 777,966	At 30 June 2015 RMB’000 2,725 279,913 413,715 50,506
			746,859

21. DUE FROM RELATED COMPANIES

Target Group

Receivables from: Beijing GOME Beijing Dingrui Beijing Eagle Investment GOME Listed Group Heilongjiang GOME GOME Sports Investment Anxun Logistics Tiandi Shengshi GOME Holding Group GOME Records	At 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 857,129 812,673 1,087,930 462,777 426,738 473,445 103 – 1,157,925 203,724 346,219 399,844 5,348 3,500 3,500 – – – – 1,138 1,138 594 594 – 78 398 78 2 – – 1,529,755 1,591,260 3,123,860	At 30 June 2015 RMB’000 1,096,422 – 1,427,925 644,735 3,500 9,900 1,138 – 78 –
		3,183,698

Mr. Wong Kwong Yu (“Mr. Wong”) and his family member have beneficial interests as equity holders in 北京國美電器有限公司 (Beijing GOME Electrical Appliances Co., Ltd. or “Beijing GOME”), GOME Listed Group, 北京鵬潤投有限公司 (Beijing Eagle Investment Co., Ltd. or “Beijing Eagle Investment”), 黑龍江國美電器有限公司 (Heilongjiang GOME Electrical Appliances Co., Ltd. or “Heilongjiang GOME”), 北京國美體育投資有限公司 (Beijing GOME Sports Investment Co., Ltd. or “GOME Sports Investment”), 安迅物流有限公司 (Anxun Logistics Co., Ltd. or “Anxun Logistics”), 北京天地盛世網絡有限公司 (Beijing Tiandi Shengshi Network Co., Ltd. or “Tiandi Shengshi”), 國美控股集團有限公司 (GOME Holding Group Co., Ltd. or “GOME Holding Group”), 國美音像有限公司 (GOME Records Co., Ltd. or “GOME Records”), 青島國美物流有限公司 (Qingdao GOME Logistics Co., Ltd. or “Qingdao Logistics”), 國美地產控股有限公司 (GOME Property Co., Ltd. or “GOME Property”) and 長沙先導臻締地產開發有限公司 (Changsha Xiandao Zhendi Property Development Co., Ltd. or “Changsha Xiandao Zhendi”).

Beijing Dingrui was a subsidiary of Beijing GOME as at 31 December 2012, 2013 and 2014. In early 2015, 北京戰聖投資有限公司 (Beijing Zhansheng Investment Co., Ltd. or “Beijing Zhansheng”) acquired a 100% equity interest of Beijing Dingrui from Beijing GOME. On 30 June 2015, the Target Group acquired a 100% equity interest of Beijing Dingrui from Beijing Zhansheng (note 31(ii)).

– II-47 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

The balances are interest-free, unsecured and have no fixed terms of repayment. Regarding the settlement with all related companies other than the GOME Listed Group, Subsequent to 30 June 2015, the Target Group collected all amounts due from the respective related companies as disclosed above.

22. ENTRUSTED LOANS

Target Group

Entrusted loans to GOME Property Entrusted loans to Changsha Xiandao Zhendi	At 31 December 2012 2013 RMB’000 RMB’000 – 800,000 – – – 800,000	2014 RMB’000 500,000 240,000 740,000	At 30 June 2015 RMB’000 1,300,000 240,000
			1,540,000

These entrusted loans were provided by the Target Group via China Merchants Bank and China Bohai Bank with fixed interest rates ranging from 6.4% to 8.00% per annum. These entrusted loans are unsecured and are due within one year as at 31 December 2013 and 2014 and 30 June 2015.

23. CASH AND CASH EQUIVALENTS, PLEDGED DEPOSITS AND RESTRICTED CASH

Target Group

Cash and bank balances Time deposits Less: Time deposits pledged for bills payable Cash and cash equivalents Target Company Cash and bank balances Cash and cash equivalents	At 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 1,635,695 1,513,241 1,081,698 1,674,919 1,564,995 1,566,290 3,310,614 3,078,236 2,647,988 (1,674,919) (1,564,995) (1,566,290) 1,635,695 1,513,241 1,081,698 At 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 3 3 – 3 3 –	At 30 June 2015 RMB’000 958,830 1,265,999
		2,224,829 (1,265,999)
		958,830

		At 30 June 2015 RMB’000 –
		–

There were no short term deposits made for varying periods of between one and three months included in cash and bank balances as at 31 December 2012, 2013 and 2014 and 30 June 2015.

At the end of the Relevant Periods, all the cash and bank balances and the time deposits of the Target Group were denominated in Renminbi. The RMB is not freely convertible into other currencies; however, under Mainland China’s Foreign Exchange Control Regulations and Administration of Settlement, Sale and Payment of Foreign Exchange Regulations, the Target Group is permitted to exchange RMB for other currencies through banks authorised to conduct foreign exchange business.

– II-48 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

The bank balances of the Target Group earn interest at floating rates based on daily bank deposit rates. The bank balances and pledged time deposits are deposited with creditworthy banks with no recent history of default.

24. TRADE AND BILLS PAYABLES

Target Group

Trade payables Bills payable	At 31 December 2012 2013 RMB’000 RMB’000 2,619,197 2,920,155 5,338,213 5,128,167 7,957,410 8,048,322	2014 RMB’000 2,594,043 5,070,999 7,665,042	At 30 June 2015 RMB’000 2,356,669 4,264,472
			6,621,141

An aged analysis of the trade and bills payables as at the end of the Relevant Periods, based on the goods receipt date, is as follows:

Within 3 months 3 to 6 months Over 6 months	At 31 December 2012 2013 RMB’000 RMB’000 5,042,544 5,576,906 2,913,779 2,382,920 1,087 88,496 7,957,410 8,048,322	2014 RMB’000 5,186,819 2,426,408 51,815 7,665,042	At 30 June 2015 RMB’000 4,486,528 2,104,630 29,983
			6,621,141

The Target Group’s bills payable were secured by the pledge of the Target Group’s time deposits (note 23).

The trade and bills payables are non-interest-bearing and are normally settled on terms of one to six months.

25. CUSTOMERS’ DEPOSITS, OTHER PAYABLES AND ACCRUALS

Target Group

Notes Customers’ deposits Deferred revenue (i) Payables to Beijing Zhansheng (ii) Other payables and accruals	At 2012 RMB’000 77,525 24,585 – 607,240 709,350	31 December 2013 2014 RMB’000 RMB’000 107,545 101,870 22,649 29,152 – – 572,707 660,513 702,901 791,535	At 30 June 2015 RMB’000 71,654 30,464 989,886 616,819
			1,708,823

– II-49 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Notes:

(i) The deferred revenue relates to the unused points in respect of a loyalty point programme operated by the Target Group. A reconciliation of the deferred revenue is as follows:

At 1 January Additions during the year/ period Revenue recognised on utilised points Revenue recognised on expired points	At 31 December 2012 2013 RMB’000 RMB’000 14,450 24,585 142,470 348,170 (111,166) (322,224) (21,169) (27,882) 24,585 22,649	2014 RMB’000 22,649 449,967 (413,553) (29,911) 29,152	At 30 June 2015 RMB’000 29,152 192,339 (174,859) (16,168) 30,464

(ii) The balance represented the purchase consideration payable for the acquisition of Beijing Dingrui (note 31(ii)).

26. INTEREST-BEARING BANK LOANS

Target Group

					December		At 30 June
				2012	2013	2014	2015
				RMB’000	RMB’000	RMB’000	RMB’000
Bank	loans	–	secured	200,000	1,500,000	2,040,000	3,090,000

The Target Group’s bank loans are all denominated in RMB and bear interest at fixed interest rates ranging from 4.45% to 7.28% per annum.

The Target Group’s bank loans are secured by:

(a) properties of certain related parties as disclosed in note 33(b);
(b) buildings of the Target Group in Mainland China (note 12); and
(c) investment properties of the Target Group (note 13).

The carrying amounts of the Target Group’s bank loans approximate to their fair values.

– II-50 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

27. DUE TO RELATED COMPANIES

Target Group

Payables to: GOME Listed Group Beijing GOME Shinning Crown Holdings Inc. Beijing Eagle Investment Kashmac International Ltd. Qingdao Logistics Heilongjiang GOME Anxun Logistics Beijing Dingrui GOME Records GOME Sports Investment Others	At 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 153,728 102,340 186,569 327,287 326,644 942,439 76,368 74,049 74,298 1,080,186 199,949 7,899 5,892 5,713 5,732 46,400 46,400 46,417 10,608 8,174 8,174 – – – 7,290 – 2,973 – – 500 – – – 17 22 25 1,707,776 763,291 1,275,026	At 30 June 2015 RMB’000 220,587 1,196,089 74,272 7,897 5,730 44,150 8,691 5,222 – 500 10,000 30
		1,573,168

Target Company

Payables to: Shinning Crown Holdings Inc. Beijing Eagle Investment Kashmac International Ltd. Others	At 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 76,368 74,049 74,298 8,119 7,873 7,899 5,892 5,713 5,732 17 22 25 90,396 87,657 87,954	At 30 June 2015 RMB’000 74,272 7,897 5,730 30
		87,929

Mr. Wong and his family member have beneficial equity interests in Shinning Crown Holdings Inc. and Kashmac International Ltd.

All the above balances are interest-free, unsecured and repayable on demand.

28. BOND PAYABLE

On 16 December 2013, the Target Group issued a bond at par value of RMB100 million on the Shenzhen Stock Exchange, which matures on 16 December 2016.

After initial recognition, the bond was subsequently measured at amortised cost, using the effective interest rate method. Amortised cost is calculated by taking into account transaction costs that are an integral part of the effective interest rate. The effective interest rate amortisation of RMB434,000, RMB10,069,000 and RMB5,717,000 for the years ended 31 December 2013 and 2014 and the 6 months ended 30 June 2015, respectively, was included in finance costs of the consolidated statements of profit or loss.

– II-51 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Movements of the bond payable are as follows:

Target Group

Note 6 6 6 At 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 414 414 414 – – –	Note 6 6 6 At 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 414 414 414 – – –	Note 6 6 6 At 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 414 414 414 – – –







–	–	–

Note:

(i) The authorised capital was US$50,000 and the issued and fully paid share capital was 1 share of US$1, which was translated into RMB and rounded to zero.

– II-52 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

30. RESERVES

(a) Target Group

The movements in the reserves of the Target Group are set out in the consolidated statements of changes in equity of the Financial Information.

Statutory reserves

In accordance with the relevant PRC laws and regulations, each of the PRC domestic companies is required to transfer 10% of the profit after income tax, as determined in accordance with the PRC accounting regulations, to the statutory common reserve fund, until the balance of the fund reaches 50% of its registered capital. Subject to certain restrictions as set out in the relevant PRC laws and regulations, the statutory common reserve fund may be used to offset against accumulated losses, if any.

(b) Target Company

The changes in the reserve of the Target Company during the Relevant Periods were as follows:

At 1 January 2012
Loss for the year and total comprehensive income for the year
At 31 December 2012 and 1 January 2013
Profit for the year and total comprehensive income for the year
At 31 December 2013 and 1 January 2014
Profit for the year and total comprehensive income for the year
At 31 December 2014 and 1 January 2015
Profit for the period and total comprehensive income for the period
At 30 June 2015

Retained
earnings
RMB’000
18,430
(23)
18,407
36,498
54,905
250,934
305,839
255,888
561,727

31. BUSINESS COMBINATION

(i) On 30 June 2015, the Target Group acquired a 100% equity interest of Beijing Logistics from GOME Sports Investment. This was accounted for as business combination under common control since Beijing Logistics was ultimately controlled by Mr. Wong immediately before and after the transaction. The book values of the identifiable assets and liabilities of Beijing Logistics as at the date of acquisition were:

Notes Property and equipment 12 Due from a related company Accruals and other payables Total identifiable net assets Deemed distribution to the owner Purchase consideration 31(iii)	Book value recognised on acquisition RMB’000 26 9,900 (40) 9,886 114 10,000

There were no cash flows in respect of the acquisition.

– II-53 –

APPENDIX II

FINANCIAL INFORMATION OF THE TARGET GROUP

(ii) On 30 June 2015, the Target Group acquired a 100% equity interest of Beijing Dingrui from Beijing Zhansheng. The fair values of the identifiable assets and liabilities of Beijing Dingrui as at the date of acquisition were:

Notes Property and equipment 12 Cash and bank balances Prepayments and other receivables Accruals and other payables Due to a related company Deferred tax liability 16 Total identifiable net assets at fair value Goodwill on acquisition 14 Purchase consideration 25, 31(iii)	Fair value recognised on acquisition RMB’000 1,448,409 7,715 28 (1,281) (462,355) (246,088)
	746,428 243,458
	989,886

An analysis of the cash flows in respect of the acquisition of a subsidiary is as follows:

	RMB’000
Cash and bank balances acquired and net inflows of cash and cash
equivalents included in cash flows from investing activities	7,715

(iii) The purchase considerations for acquisition of Beijing Logistics and Beijing Dingrui were not settled as at 30 June 2015 and were carried as amounts due to related companies and other payables, respectively.

32. OPERATING LEASE ARRANGEMENTS

Target Group

As lessee

The Target Group leases certain of its properties under operating lease arrangements. These leases have remaining terms varying from 1 to 20 years and there are no restrictions placed upon the Target Group by entering into these lease agreements.

As at the end of the Relevant Periods, the Target Group had the minimum lease payments under non-cancellable operating leases falling due as follows:

Within one year In the second to fifth years, inclusive After five years	At 31 December 2012 2013 RMB’000 RMB’000 1,285,979 1,184,241 3,857,998 3,182,790 1,838,153 1,248,891 6,982,130 5,615,922	2014 RMB’000 1,183,028 3,138,651 1,680,869 6,002,548	At 30 June 2015 RMB’000 1,325,866 3,723,413 1,322,764
			6,372,043

– II-54 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Pursuant to the relevant lease agreements, upon the payment of an early termination compensation rental which in general ranges from one month to one year, the Target Group is entitled to terminate the underlying lease agreement if a store of the Target Group will not be in a position to continue its business because of the losses or other circumstances as specified under the lease agreements.

As lessor

The Target Group has leased its investment properties (note 13) and entered into commercial property sub-leases on its leased properties under operating lease arrangements. These non-cancellable leases have remaining terms varying from 1 to 13 years. A majority of the Target Group’s leases include a clause to enable upward revision of the rental charge on a regular basis according to the then prevailing market conditions.

As at the end of the Relevant Periods, the Target Group had the following future minimum rentals receivable under non-cancellable operating leases:

Within one year In the second to fifth years, inclusive After five years	At 31 December 2012 2013 RMB’000 RMB’000 74,067 81,516 170,271 193,426 44,551 56,970 288,889 331,912	2014 RMB’000 73,596 158,888 44,413 276,897	At 30 June 2015 RMB’000 60,771 148,205 20,666
			229,642

33. RELATED PARTY TRANSACTIONS

(a) In addition to the transactions and balances which are disclosed elsewhere in this Financial Information, the Target Group had the following significant transactions with the related parties:

Target Group

		At	31 December		At 30 June
		2012	2013	2014	2015
	Notes	RMB’000	RMB’000	RMB’000	RMB’000
Sales to GOME Listed Group	(i)	565,951	733,098	809,386	458,778
Purchases from GOME Listed
Group	(i)	249,554	417,797	1,523,642	1,572,469
Receipt of management and
purchasing services provided by
GOME Listed Group	(ii), 5	250,000	250,000	250,000	160,897
Corporate guarantee executed by
Beijing GOME in respect of the
Group’s bills facilities		100,000	–	–	–
Purchase of a trademark from
Beijing GOME	(iii)	–	–	–	253,000
Entrusted loans to GOME Property	22	–	800,000	500,000	1,300,000
Entrusted loans to Changsha
Xiandao Zhendi	22	–	–	240,000	240,000

– II-55 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Notes:

(i) The sale and purchase transactions and the joint purchase transactions entered into between the Target Group and GOME Listed Group in respect of the electrical appliances and consumer electronic products were conducted based on the actual purchase costs from third party suppliers.

On 5 March 2013, the Target Group terminated the master purchase agreement and the master supply agreement with GOME Listed Group. On the same date, the Target Group entered into (1) the master merchandise purchase agreement for the supply of general merchandise (including electrical appliances and consumer electronics products) by the Target Group and 北京國美銳動電子商務有限公司 (“Beijing GOME Ruidong e-Commerce Co., Ltd.” or “GOME Ruidong”), of which Mr. Wong has a beneficial interest as an equity holder, to GOME Listed Group (including 庫巴科技(北京)有限公司 (Kuba Technology (Beijing) Co., Ltd. ) and 國美在線電子商務有限公司 (GOME-on-line e-Commerce Co., Ltd.) for a period of three years from 1 January 2013 to 31 December 2015, subject to the annual caps of the transaction amounts (excluding value added tax) for the three years ended 31 December 2013, 2014 and 2015 not exceeding RMB5 billion, RMB6.5 billion and RMB8 billion, respectively, and (2) the master merchandise supply agreement for the supply of general merchandise (including electrical appliances and consumer electronics products) by GOME Listed Group to the Target Group for a period of three years from 1 January 2013 to 31 December 2015, subject to the annual caps of the transaction amounts (excluding value added tax) for the three years ended 31 December 2013, 2014 and 2015 not exceeding RMB5 billion, RMB6.5 billion and RMB8 billion, respectively.

(ii) GOME Listed Group provides management services to the Target Group in respect of the retailing of electrical appliances and consumer electronic products. In addition, GOME Listed Group negotiates with various suppliers for both the Target Group and GOME Listed Group on a centralised basis for purchases.

On 17 December 2012, (1) the Target Group entered into a management agreement with the GOME Listed Group, pursuant to which the GOME Listed Group agreed to provide and to procure other members of the GOME Listed Group to provide management services for the business of retailing electrical appliances and consumer electronics products to the Target Group for a period of three years from 1 January 2013 to 31 December 2015; and (2) the Target Group entered into a purchasing service agreement with the GOME Listed Group that the GOME Listed Group agreed to provide and to procure other members of the GOME Listed Group to provide purchasing services for the business of retailing electrical appliances and consumer electronic products to the Target Group for a period of three years from 1 January 2013 to 31 December 2015. The annual caps of the management service fee and the purchasing service fee are RMB100 million and RMB150 million, respectively.

(iii) During the 6 months period ended 30 June 2015, the Target Group purchased the trademark of Black Swan from Beijing GOME at a consideration of RMB253,000,000 (note 15).
(b) Other transactions with related parties:

For the years ended 31 December 2012, 2013 and 2014 and the 6 months ended 30 June 2015, properties of 北京新恒基房地產集團有限公司 (Beijing Xinhengji Property Group Co., Ltd.) with a fair value of RMB200 million, RMB200 million, RMB992 million and RMB992 million, respectively, were pledged for the bank loans of the Target Group.

For the years ended 31 December 2012 and 2014, properties of Beijing Dingrui with a fair value of RMB193 million and RMB657 million respectively were pledged for the bank loans of the Target Group.

– II-56 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

34. FINANCIAL INSTRUMENTS BY CATEGORY

The carrying amounts of each of the categories of financial instruments as at the end of the Relevant Periods are as follows:

Target Group

Financial assets

Trade receivables Financial assets included in prepayments, deposits and other receivables Due from related companies Pledged deposits Cash and cash equivalents Entrusted loans	Loans and receivables At 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 56,693 50,018 42,597 387,926 202,065 144,172 1,529,755 1,591,260 3,123,860 1,674,919 1,564,995 1,566,290 1,635,695 1,513,241 1,081,698 – 800,000 740,000 5,284,988 5,721,579 6,698,617	At 30 June 2015 RMB’000 62,558 50,506 3,183,698 1,265,999 958,830 1,540,000
		7,061,591

Financial liabilities

Interest-bearing bank loans Trade and bills payables Financial liabilities included in customers’ deposits, other payables and accruals Due to related companies Bond payable	Financial liabilities at amortised cost At 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 200,000 1,500,000 2,040,000 7,957,410 8,048,322 7,665,042 277,811 298,676 339,418 1,707,776 763,291 1,275,026 – 98,434 98,653 10,142,997 10,708,723 11,418,139	At 30 June 2015 RMB’000 3,090,000 6,621,141 1,330,537 1,573,168 99,006
		12,713,852

Target Company

Financial assets

					Loans	and receivables
					At	31 December		At 30 June
					2012	2013	2014	2015
					RMB’000	RMB’000	RMB’000	RMB’000
Amounts	due	from	a	subsidiary	–	33,759	284,993	540,856

– II-57 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Financial liabilities

				Financial	liabilities at amortised	cost
					At 31 December		At 30 June
				2012	2013	2014	2015
				RMB’000	RMB’000	RMB’000	RMB’000
Due	to	related	companies	90,396	87,657	87,954	87,929

35. FAIR VALUE AND FAIR VALUE HIERARCHY OF FINANCIAL INSTRUMENTS

The carrying amounts of the Target Group’s financial instruments approximate to fair values.

Management has assessed that the fair values of cash and cash equivalents, pledged deposits, trade receivables, entrusted loans, trade and bills payables, financial assets included in prepayments, deposits and other receivables, financial liabilities included in other payables and accruals, amounts due from/to related companies and interest-bearing bank loans approximate to their carrying amounts largely due to the short term maturities of these instruments.

The Target Group’s management is responsible for determining the policies and procedures for the fair value measurement of financial instruments. At each reporting date, management analyses the movements in the values of financial instruments and determines the major inputs applied in the valuation.

The fair values of the financial assets and liabilities are included at the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The fair value of a bond payable is estimated by discounting the expected future cash flows using an equivalent market interest rate for a similar bond with consideration of the Target Group’s own non-performance risk.

36. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

The Target Group’s principal financial instruments comprise cash and cash equivalents, pledged deposits, entrusted loans, interest-bearing bank loans and bond payable. The main purpose of these financial instruments is to raise finance for the Target Group’s operations. The Target Group has various other financial assets and liabilities such as trade receivables and trade and bills payables, financial assets included in prepayments, deposits and other receivables and financial liabilities included in customers’ deposits, other payables and accruals, amounts due from/to related companies, which arise directly from its operations.

The main risks arising from the Target Group’s financial instruments are interest rate risk, credit risk and liquidity risk. The directors review and agree policies for managing each of these risks and they are summarised below.

Interest rate risk

As at the end of each of the Relevant Periods, the Target Group did not have debt obligations with floating interest rates. Accordingly, the Target Group has no significant interest rate risk.

Credit risk

The Target Group trades on credit only with third parties who have an established trading history with the Target Group and who have no history of default. It is the Target Group’s policy that new customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an ongoing basis and the Target Group’s exposure to bad debts is not significant. The maximum exposure is the carrying amount as disclosed in note 19 to the Financial Information.

The credit risk of the other financial assets of the Target Group, which comprise cash and cash equivalents, pledged deposits, entrusted loans, other receivables and amounts due from related companies, arises from default of the counterparty, with a maximum exposure equal to the carrying amounts of these financial instruments. Since the Target Group trades only with recognised and creditworthy third parties, there is no requirement for collateral. Concentrations of credit risk are managed by customer/counterparty and by geographical region. There are no significant concentrations of credit risk within the Target Group as the customer bases of the Target Group’s trade receivables are widely dispersed in different geographical regions.

– II-58 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Liquidity risk

The Target Group monitors its risk to a shortage of funds based on the maturity of its financial instruments, financial assets and liabilities and projected cash flows from operations.

The Target Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of trade and bills payables. As at 31 December 2012, 2013 and 2014 and 30 June 2015, the Target Group had trade and bills payables amounting to RMB7,957,410,000, RMB8,048,322,000, RMB7,665,042,000 and RMB6,621,141,000, respectively. Management reviewed the Target Group’s working capital and capital expenditure requirements and determined that the Target Group has no significant liquidity risk.

The table below summarises the maturity profile of the Target Group and the Target Company’s financial liabilities at the end of the reporting years/period, based on the contractual or expected undiscounted payments.

Target Group

31 December 2012

Interest-bearing bank loans Trade and bills payables Financial liabilities included in customers’ deposits and other payables Due to related companies	Within 1 year RMB’000 200,000 7,957,410 277,811 1,707,776
	10,142,997

31 December 2013

Interest-bearing bank loans Trade and bills payables Financial liabilities included in customers’ deposits and other payables Due to related companies Bond payable	Within 1 year RMB’000 1,500,000 8,048,322 298,676 763,291 9,850 10,620,139	1 to 2 years RMB’000 – – – – 9,850 9,850	2 to 3 years RMB’000 – – – – 109,850 109,850	Total RMB’000 1,500,000 8,048,322 298,676 763,291 129,550
				10,739,839

31 December 2014

Interest-bearing bank loans Trade and bills payables Financial liabilities included in customers’ deposits and other payables Due to related companies Bond payable	Within 1 year RMB’000 2,040,000 7,665,042 339,418 1,275,026 9,850 11,329,336	1 to 2 years RMB’000 – – – – 109,850 109,850	Total RMB’000 2,040,000 7,665,042 339,418 1,275,026 119,700
			11,439,186

– II-59 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

30 June 2015

Interest-bearing bank loans Trade and bills payables Financial liabilities included in customers’ deposits and other payables Due to related companies Bond payable	Within 1 year RMB’000 3,090,000 6,621,141 1,330,537 1,573,168 9,850 12,624,696	1 to 2 years RMB’000 – – – – 104,486 104,486	Total RMB’000 3,090,000 6,621,141 1,330,537 1,573,168 114,336
			12,729,182

Target Company

Due to related companies	Within 1 year At 31 December 2012 2013 RMB’000 RMB’000 90,396 87,657 90,396 87,657	2014 RMB’000 87,954 87,954	At 30 June 2015 RMB’000 87,929
			87,929

Capital management

The primary objective of the Target Group’s capital management is to ensure that the Target Group has healthy capital structure in order to support the Target Group’s stability and growth.

The Target Group regularly reviews and manages its capital structure and makes adjustments to it, taking into consideration changes in economic conditions, future capital requirements of the Target Group, prevailing and projected profitability and operating cash flows, projected capital expenditures and projected strategic investment opportunities.

– II-60 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

The Target Group monitors capital using a gearing ratio, which is net debt divided by capital plus net debt. Net debt includes amounts due to related companies, interest-bearing bank loans, trade and bills payables, customers’ deposits, other payables and accruals and a bond payable, less cash and cash equivalents and pledged deposits. Capital represents equity attributable to the owner of the parent. The gearing ratios as at the end of the Relevant Periods were as follows:

Target Group

Due to related companies Trade and bills payables Customers’ deposits, other payables and accruals Interest-bearing bank loans Bond payable Less: Cash and cash equivalents Pledged deposits Net debt Equity attributable to the owner of the parent Capital and net debt Gearing ratio	At 31 December 2012 2013 RMB’000 RMB’000 1,707,776 763,291 7,957,410 8,048,322 709,350 702,901 200,000 1,500,000 – 98,434 (1,635,695) (1,513,241) (1,674,919) (1,564,995) 7,263,922 8,034,712 (298,762) 68,146 6,965,160 8,102,858 104% 99%	2014 RMB’000 1,275,026 7,665,042 791,535 2,040,000 98,653 (1,081,698) (1,566,290) 9,222,268 362,068 9,584,336 96%	At 30 June 2015 RMB’000 1,573,168 6,621,141 1,708,823 3,090,000 99,006 (958,830) (1,265,999) 10,867,309 617,840 11,485,149 95%

III. SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements have been prepared by the Target Group, the Target Company or its subsidiaries in respect of any period subsequent to 30 June 2015.

Yours faithfully,

Ernst & Young

Certified Public Accountants Hong Kong

– II-61 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

2. MANAGEMENT DISCUSSION AND ANALYSIS ON THE TARGET GROUP

SUMMARY

During the reporting period of 2012, 2013 and 2014 and as of 30 June 2015 (the “reporting period”), Artway Development Ltd. (the “Target Company”) and its subsidiaries (collectively known as the “Target Group”) and Gome Electrical Appliances Holding Limited have been guided by same strategic goal of becoming an Omni-Channel Retailer, and gradually upgrade to Total Retail Community, as a more open and integrated business model with mutual benefits to value-chain partners, and has achieved outstanding results along the way.

In 2013, the Target Group’s sales revenue was approximately RMB19,611 million, up 12.14% from RMB17,488 million in 2012. In 2014, the Target Group’s sales revenue was approximately RMB20,992 million, up 7.04% from that in 2013, while its sales revenue in the first half of 2015 was approximately RMB10,858 million, up 7.85% from that in the first half of 2014.

During the reporting period, store performance has further improved with sales revenue from comparable stores increased by 14.70%, 5.26% and 3.66% for 2013, 2014 and the first half of 2015, respectively. In particular, sales revenue growth from comparable stores located in the second-tier market was 19.88%, 9.42% and 5.93% for the same respective periods.

Meanwhile, the Target Group’s consolidated gross profit margin maintained at a relatively high level of 19.46%, 19.83%, 18.85% and 20.28% for 2012, 2013, 2014 and the first half of 2015, respectively.

As the Target Group has been tightening its control on operating expenses, the Target Group’s operating expenses ratio has been declining and maintained at a relatively low level, as compared with the industry. The Target Group’s operating expenses ratio for 2012, 2013, 2014 and the first half of 2015 (comprised of selling and distribution expenses, administrative expenses (including management fee and purchasing service fee paid by the Target Group to the Group) and other expenses) were approximately 21.19%, 17.59%, 17.00% and 16.87%, respectively.

With a continuous rise in sales revenue and consolidated gross profit margin as well as effective control on operating expenses, the Target Group achieved an overall improvement in its profitability, except for 2014 when the Target Group adopted lower prices to gain market shares and hence resulted in drop in profitability. The Target Group’s net (loss)/profits were RMB(319) million, RMB367 million, RMB294 million and RMB256 million for 2012, 2013, 2014 and the first half of 2015, respectively, while its net profit margins were 1.82%, 1.87%, 1.40% and 2.36%, respectively.

Looking ahead, the Target Group will continue to leverage its competitive advantage on integrated supply value chain and establish its Total Retail Community with a commitment to bringing mutual benefits to value-chain partners, offering excellent customer experiences, professional services and an extensive range of products.

– II-62 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

INDUSTRY ENVIRONMENT

Globally, the pace of economic development varied across countries in the past few years. While growth in developing countries had flattened out due to downward pressure on the economy, the recovery of the US economy gained momentum as it shook off the impact of the financial crisis and deflation.

In terms of the domestic economy, despite the waning effect of government stimulus measures in recent years, the Chinese government managed to maintain the GDP growth at about 7% in 2014 through timely and effective implementation of macro-control policies. This ensured the stable growth of the national economy.

On the development of the retail industry, sales growth of the retail enterprises showed signs of levelling off in the period since 2014. The traditional retail industry faced significant challenges arising from e-commerce competition.

In response, the Target Group and the Group proactively took initiatives to strengthen its Omni-Channel business model, leveraged its strength in the integrated supply chain and accelerated the integration between offline physical stores and online e-commerce business, so as to expand its overall operating capacity. By launching a series of strategic measures, the Target Group achieved stable operating results.

GROWTH POTENTIAL

Currently, Chinese government has been implementing a series of measures, which aim to strengthen its people’s purchasing power by raising urban employment rate and stimulating growth in imports and exports. Meanwhile, the government’s efforts in urbanization, which involve the construction of public housing and transformation of shanty towns, as well as land reforms in third and fourth tier cities, together with the interest rate cut by the People’s Bank of China, are expected to generate rigid consumer demand.

The home appliance industry benefits from consumption upgrade, which further supports industry demand. At the same time, the government’s Internet Plus action plan promotes the integration between mobile internet, cloud computing, big data, Internet of Things and modern manufacturing industry, and drives further development of e-commerce, industrial internet applications and internet finance.

The cities at which the Target Group operates its stores span across regions that are poised to benefit from favorable government policies and regions with high growth potential, such as Beijing-Tianjin-Hebei region, the Bohai Bay, the Yangtze River Basin Economic Zone, Beibu Gulf Economic Zone and third and fourth tier cities, positioning the Target Group to benefit from enormous growth potential.

– II-63 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

BUSINESS REVIEW

Expanding Store Network

First-tier market

During the reporting period, the Target Group endeavored to pursue optimization of its first-tier store network through upgrading of “Xin Huo Guan” Flagship store and optimizing store layout and merchandising display to enhance shopping experience, and aim to position stores in the first-tier market as the flagship retail stores in order to improve overall profitability of offline stores. Since 2014, the Target Group achieved greater profitability at its stores through the provision of free Wi-Fi at flagship stores, renovating and digitizing selected stores and store revamp projects. The Target Group also further enriched its product mix, both in terms of brands and types, with a special focus on the display of bestsellers, to improve customers’ in-store shopping experience.

Second-tier market

There is significant room for consolidation within the second-tier market in China. In this regard, the Target Group accelerated expansion in the second-tier market through strategies that are cost effective and highly replicable.

During the reporting period, the Target Group implemented measures that not only facilitated the generation of steady stream of income from stores within the market but also accelerated the expansion of store networks in the second-tier market. The Target Group undertook renovation of flagship stores with the principal goal of setting up core stores in commercial districts. At the same time, it stepped up efforts to consolidate its network in the second-tier market by opening satellite stores around flagship stores. During the year, the Target Group refined its strategy and operation of product coverage and penetration, best-selling products and development of professional management staff in the second-tier market. In doing so, it strengthened the Target Group’s logistics distribution capabilities in the second-tier market, helping the Target Group to cater to customers’ needs on every aspect more effectively.

In 2012, 2013, 2014 and the first half of 2015, the Target Group opened 30, 50, 95 and 56 new stores and closed 64, 101, 49 and 22 stores, respectively. In 2013, 2014 and the first half of 2015, the growth of sales revenue of comparable stores of the Target Group were 14.70%, 5.26% and 3.66%, respectively.

– II-64 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

As at 31 December 2012, 2013 and 2014 and 30 June 2015, the Target Group operated a total of 561, 510, 556 and 590 stores, respectively. Following a series of control measures on operating expenses, the Target Group’s rental to sales ratio were 7.87%, 6.31%, 6.02% and 6.47%, respectively. As of 30 June 2015, the Target Group had a total operating area of 1,808,000 sq.m. and 8 self-owned stores with a total area of approximately 78,000 sq.m., accounting for approximately 4.31% of its total operating area.

Flagship stores Standard stores Specialized stores Total Among them: First-tier market Second-tier market Net (decrease)/increase in stores Number of stores opened Among them: First-tier market Second-tier market Number of cities accessed Among them: First-tier cities Second-tier cities Number of cities newly accessed	At 31 December 2012 97 169 295 561 315 246 (34) 30 13 17 169 15 154 12	At 31 December 2013 76 126 308 510 262 248 (51) 50 21 29 183 15 168 14	At 31 December 2014 95 149 312 556 272 284 46 95 39 56 183 15 168 1	At 30 June 2015 107 156 327
				590

				281 309
				34 56 20 36 184 15 169 1

– II-65 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

As at 31 December 2012

As at 31 December 2013

Region Flagship stores Anshan 1 Dalian 5 Guangxi 4 Guizhou 1 Hebei 3 Henan 2 Heilongjiang 10 Hunan 3 Jilin 2 Jiangxi 3 Nantong 1 Inner Mongolia 5 Ningbo 3 Xiamen 1 Shanxi 8 Shanghai 25 Wuxi 2 Xi’an 1 Xinjiang 6 Changchun 1 Zhejiang 10 Total 97	Standard stores Specialized stores 2 3 10 16 7 19 6 15 9 22 17 26 8 23 6 27 2 11 4 13 2 4 7 9 9 14 6 3 11 12 28 10 6 4 3 1 11 10 3 13 12 40 169 295	Total 6 31 30 22 34 45 41 36 15 20 7 21 26 10 31 63 12 5 27 17 62 561 Region Flagship stores Anshan 1 Dalian 5 Guangxi 3 Guizhou 1 Hebei 3 Henan 3 Heilongjiang 8 Hunan 3 Jilin 3 Jiangxi 2 Nantong – Inner Mongolia 3 Ningbo 1 Xiamen 1 Shanxi 8 Shanghai 18 Wuxi 2 Xi’an 1 Xinjiang 4 Changchun – Zhejiang 6 Total 76	Standard stores Specialized stores 2 3 11 11 9 18 5 9 7 15 12 32 8 18 3 25 1 11 3 14 2 7 4 14 7 18 5 4 7 11 16 19 2 6 2 2 10 14 3 12 7 45 126 308	Total 6 27 30 15 25 47 34 31 15 19 9 21 26 10 26 53 10 5 28 15 58
				510

– II-66 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

As at 31 December 2014

As at 30 June 2015

Region Flagship stores Anshan 2 Dalian 6 Guangxi 3 Guizhou 1 Hebei 3 Henan 5 Heilongjiang 10 Hunan 4 Jilin 3 Jiangxi 3 Nantong – Inner Mongolia 3 Ningbo 2 Xiamen 1 Shanxi 7 Shanghai 23 Wuxi 3 Xi’an 1 Xinjiang 5 Changchun 1 Zhejiang 9 Total 95	Standard stores Specialized stores 2 3 10 15 7 31 6 9 8 18 22 30 7 17 8 25 1 11 4 14 2 10 5 13 6 15 5 3 12 15 17 13 2 1 2 2 12 12 3 12 8 43 149 312	Total 7 31 41 16 29 57 34 37 15 21 12 21 23 9 34 53 6 5 29 16 60 556 Region Flagship stores Anshan 2 Dalian 7 Guangxi 4 Guizhou 2 Hebei 5 Henan 6 Heilongjiang 11 Hunan 4 Jilin 3 Jiangxi 3 Nantong – Inner Mongolia 4 Ningbo 3 Xiamen 1 Shanxi 7 Shanghai 23 Wuxi 4 Xi’an 1 Xinjiang 6 Changchun 1 Zhejiang 10 Total 107	Standard stores Specialized stores 2 2 12 14 6 33 6 8 8 20 23 37 6 19 11 26 1 11 4 14 2 11 3 14 5 18 8 3 14 15 18 11 2 – 2 2 12 12 2 12 9 45 156 327	Total 6 33 43 16 33 66 36 41 15 21 13 21 26 12 36 52 6 5 30 15 64
				590

– II-67 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Upgrading Big Data Terminal

Data analysis generated from the Group’s big data terminal could be used to upgrade and coordinate the value platforms such as procurement, logistics and after-sales services. Based on the massive transaction data, the Group is able to categorize the customers based on their demands, analyze shopping behavior, perform targeted marketing to enhance customers’ shopping experience across our online and offline platform.

Enhancing supply chain efficiency

To remain competitive in the internet era, the Target Group relentlessly strengthened its product management capability with a focus on market demand. For example, the Target Group leveraged its economies of scale in procurement to lower procurement costs, provided more differentiated products to boost the consolidated gross profit margin. At the same time, the Target Group continued to deepen cooperation with suppliers through data and information sharing, joint development of new and smart products, as well as the alliances with leading suppliers in terms of resources sharing.

In 2012, 2013 and 2014 and the first half of 2015, the proportion of the Target Group’s differentiated product sales to total revenue were 20%, 30%, 33% and 35%, respectively. The consolidated gross profit margins were 19.46%, 19.83%, 18.85% and 20.28%, respectively and maintained at levels above the industry average.

In addition, the Target Group’s top five suppliers (by brand) accounted for 33.74%, 37.38%, 37.83% and 41.53% of total procurement in 2012, 2013, 2014 and the first half of 2015, respectively, demonstrating the continuous good relationship between the Target Group and its top suppliers.

Improving logistics and delivery services

The Target Group optimized the logistics and delivery services platform during the reporting period, which supported both omni-channel sales and the entire supply chain, promoted the Group’s integration of online and offline storage and logistic resources for a wide range of large and small-sized home appliances, as well as 3C products. By providing “Three deliveries/day, Precise delivery and Installation with delivery”, the Group has established itself as the industry benchmark in managing the logistics and delivery of the home appliance retail business.

Currently, the Target Group are operating a total of 113 warehouses in the country, with a total storage area of approximately 1,090,000 sq.m. that seamlessly covering over 200 counties in China. The competitive edge of GOME’s logistics services lies in the breadth of its logistics network coverage, which ensures the quality of the services. Apart from warehouses, the Target Group’s logistics network also comprised 1,803 chain stores (including the Group’s stores) nationwide, which served as delivery and pick-up points for online orders and last mile delivery centers. These chain stores further strengthened the Target Group’s competitive positioning in logistic services as they reduced transportation distance, increased delivery efficiency and reduced losses arising from inventory obsolescence.

– II-68 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Optimizing after-sales services

During the reporting period, the Target Group focused on several key aspects including service quality and the service network, to improve after-sales services quality by offering consumers comprehensive protection in multiple areas.

The Target Group allowed customers to enjoy after-sales services any time through the establishment of a 24-hour call center. With the after-sales customer survey system, the Target Group has strengthened the assessment of installation and maintenance services. This was effective in controlling and monitoring the defect rate, ensuring service quality. By accelerating the development of its home appliance extended warranty and home appliance recycling services, the Target Group was able to enhance customer satisfaction and grow profits at the same time.

As of 30 June 2015, the Target Group and the Group have an after-sale service network of over 2,000 outlets in over 400 cities throughout China. The self-developed after-sales service team members have passed their technical training and certification assessments, and are able to offer customers more professional and comprehensive services in installation and maintenance.

Strengthening information system

During the reporting period, the Target Group carried out a full upgrade of its information system to strengthen its internal corporate management, achieve seamless connection with suppliers and improve the customer experience.

The Target Group applied big data mobile technology in various self-developed applications for internal management, enabling the management to monitor the Target Group’s operations with realtime data and make timely decisions, thereby significantly improving work efficiency and management effectiveness.

In respect of the cooperation with suppliers, the Target Group formed strategic partnerships with a number of large suppliers to further improve various functions and strengthen its analytical capability including sales information for its Enterprise Cooperation Platform (ECP). The adoption of the ECP facilitated the Target Group’s joint marketing and product design with its suppliers, as it fostered a closer relationship between them on ordering, delivery, reconciliation and settlement via the sharing of information and resources.

The Target Group endeavors to meet its customers’ needs. It provided Wi-Fi services in its flagship stores. It used an intelligent information system to improve customers’ shopping experience by helping them search for store locations and products, as well as compare prices. Meanwhile, the upgrade to the information system and logistic network increased transparency in operation management, achieved automation of warehouse operations, as well as enhanced the effective management of workflows. The Target Group also pioneered the service benchmark of “Three deliveries/day, Precise delivery and Installation with delivery”, which together with the use of mobile App by its delivery and installation staff, met customers’ needs for fast and precise delivery and installation services.

– II-69 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Corporate Governance

The Group has been providing management services to the Target Group since 2004. The Group agreed to provide and procure its other members to provide management services relating to the retail sale of electrical appliances and consumer electronic products to the Target Group. Therefore, the Group initiated and implemented its management on various operations of the Target Group on its high standard of management as required by a listed company.

In addition, the Group has been providing purchasing service to the Target Group since 2004. The Group agree to provide and procure its other members to provide purchasing service to the retail sale of electrical appliances and consumer electronic products to the Target Group. Therefore, the Target Group and the Group are basically purchasing goods on same price and quality.

Human Resources Expertise

The Target Group developed different human resources management programs targeted at different levels of staff. The “Reservoir” project was designed to nurture a pool of outstanding entry level talents. The “Career Acceleration” program, aims at retaining and developing mid-level staff, provides opportunities for staff to advance their careers. Succession planning ensures that there are qualified and motivated employees to fill vacancies in top-level management. By implementing targeted training and development programs, the Group not only developed a pool of talent, but also strengthened its employees’ management skills and professionalism, hence paving a road for the employees to exercise their full potential and maximise their value for their fruitful and successful future.

As at 30 June 2015, the Target Group had a total of 18,081 employees.

FINANCIAL REVIEW

For the period of 6 months ended 30 June 2015

Revenue

The Target Group’s revenue was approximately RMB10,858 million for the first half of 2015, up 7.85% from RMB10,068 million for the corresponding period in 2014. The Target Group’s weighted average sales area was approximately 1,775,000 sq.m. and the revenue per sq.m. was approximately RMB6,117, down 4.24% as compared with RMB6,388 for the corresponding period in 2014.

During the referenced period, aggregate sales of 441 comparable stores recorded a revenue of approximately RMB8,896 million, up 3.66% from RMB8,582 million for the corresponding period last year. Sales revenue from the four regions of Shanghai, Henan, Heilongjiang and Zhejiang accounted for approximately 41.50% of the total revenue, which is similar to 42.31% for the corresponding period last year. Sales revenue from the first and second tier markets accounted for approximately 68.27% and 31.73% of the total revenue, respectively, as compared with 70.56% and 29.44% for the corresponding period last year, demonstrating a rising trend of proportion of sales to revenue of the second-tier market.

– II-70 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Proportion of revenue from each product category over total revenue is as follows:

==> picture [406 x 191] intentionally omitted <==

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

21.88% 21.82%
19.68% [20.22%]
17.86% 18.21%
14.16% [14.85%] [13.51%] 14.07%
8.52% 8.02%
4.39%
2.81%
AV Air-conditioner Refrigerator Telecommunication Small white IT Digital and others
and washing appliances
machine
First half of 2014 First half of 2015
----- End of picture text -----

Cost of sales and gross profit

Cost of sales of the Target Group was approximately RMB8,880 million for the first half of 2015, accounted for 81.78% of total sales revenue, as compared with 82.80% for the corresponding period in 2014. Gross profit was approximately RMB1,978 million, up 14.20% from RMB1,732 million for the corresponding period last year. The gross profit margin was 18.22%, as compared with 17.20% for the corresponding period last year. An increase in gross profit margin was mainly attributable to an increase in proportion of sales to revenue of the second-tier market for the first half of 2015 and the price competition was less severe than that in the first-tier market. Meanwhile, the proportion of sales to revenue of differentiated product of the Target Group increased to 35% from 32% of the corresponding period last year. In addition, increase in the Target Group’s gross profit from air-conditioner, refrigerator and washing machine and telecommunication is the main reason for the 1.02 percentage point increase in overall gross profit.

The gross profit margin of each product category is as follows:

==> picture [406 x 192] intentionally omitted <==

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

21.87% [22.31%]
18.65% 18.45% 19.36% 18.75% [19.94%]
17.87%
14.53%
12.94% [12.82%]
10.96% [12.18% 11.81%]
AV Air-conditioner Refrigerator Telecommunication Small white IT Digital and others
and washing appliances
machine
First half of 2014 First half of 2015
----- End of picture text -----

– II-71 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Other income and gains

During the referenced period, the Target Group recorded other income and gains of approximately RMB224 million, including net income from suppliers, income from extended warranties and rental income, which is similar to RMB225 million for the corresponding period last year.

Consolidated gross profit margin

During the referenced period, benefited from the an increase in sales growth in the second-tier market and an increase in sales portion of differentiated products, the Target Group’s consolidated gross profit margin has improved to 20.28%, from 19.43% for the corresponding period last year by 0.85 percentage point.

Operating expenses

During the referenced period, the Target Group’s total operating expenses (including selling and distribution expenses, administrative expenses and other expenses) were approximately RMB1,832 million, accounted for 16.87% of total sales revenue, down by 0.69 percentage points as compared with 17.56% for the corresponding period in 2014.

As a percentage of sales revenue: Selling and distribution costs Administrative expenses Other expenses Total	First half of 2015 12.82% 3.20% 0.85% 16.87%	First half of 2014 13.05% 3.66% 0.85%
		17.56%

Selling and distribution costs

During the referenced period, the Target Group’s total selling and distribution costs increased from RMB1,314 million to approximately RMB1,392 million, up 5.94%. While the revenue has grown, the expense to sales ratio was 12.82%, down 0.23 percentage points as compared with 13.05% for the corresponding period in 2014. To control the rental expenses and the staff costs effectively, the Target Group has been focusing on optimizing the floor usage of the stores and applying optimized workforce to the stores, which allowed the Target Group to maintain a lower level of rental and staff costs when compared with in the industry. During the referenced period, the rental and staff costs to sales were 6.47% and 3.16%, respectively, representing a slight increase as compared with 6.18% and 3.09% for the corresponding period of 2014. In addition, advertising expense to sales decreased by 0.46 percentage points to 0.38% from 0.84% for the corresponding period of 2014 and led to a lower overall selling and distribution cost ratio.

– II-72 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

As a percentage of sales revenue: Rental Salaries Utility charges Advertising expenses Delivery expenses Others Total	First half of 2015 6.47% 3.16% 0.88% 0.38% 0.73% 1.20% 12.82%	First half of 2014 6.18% 3.09% 0.84% 0.84% 0.77% 1.33%
		13.05%

Administrative expenses

During the referenced period, administrative expenses of the Target Group were approximately RMB347 million, less than that of RMB368 million for the corresponding period in 2014 by 5.71%. The expense over sales was 3.20%, decreased by 0.46 percentage points as compared with 3.66% for the corresponding period in 2014. The Target Group has always been strengthening its control over administrative expenses in order to maintain its expense over revenue ratio at a relatively low level in the industry.

Other expenses

Other expenses of the Target Group mainly comprised, among others, bank charges and business tax, which was approximately RMB93 million and the expense over sales was 0.85%, as compared to RMB87 million for the corresponding period of 2014 and consistent with that for the first half of 2015.

Profit from operating activities

During the referenced period, as a result of the increase in revenue and consolidated gross profit margin, while maintaining operating expenses at a reasonable level where the expenses ratio reduced, the Target Group’s profit from operating activities increased significantly by 96.81% from RMB188 million for the corresponding period of 2014 to approximately RMB370 million.

Profit before tax

During the referenced period, the Target Group’s profit before tax was approximately RMB364 million, significantly increased by 93.62% as compared with RMB188 million for the corresponding period of 2014.

– II-73 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Income tax expense

During the referenced period, in line with increase in profit before tax, the Target Group’s income tax expense increased from RMB42 million for the corresponding period of 2014 to approximately RMB108 million. The management considers the effective tax rate applied to the Target Group for the referenced period is reasonable.

Profit for the period

During the referenced period, the profit increased substantially by 75.34% from RMB146 million for the corresponding period last year to approximately RMB256 million.

Cash and cash equivalents

As at the end of the referenced period, cash and cash equivalents held by the Target Group, which were mainly denominated in Renminbi, were approximately RMB959 million, decreased by 11.37% as compared with RMB1,082 million as at the end of 2014.

Inventories

As at the end of the referenced period, the Target Group’s inventories amounted to approximately RMB2,827 million, down 16.76% as compared with RMB3,396 million as at the end of 2014. Inventory turnover days decreased by 8 days from 71 days in 2014 to 63 days during the referenced period.

Prepayments, deposits and other receivables

Prepayments, deposits and other receivables are mainly advances to suppliers for quality goods at a lower cost and prepayments for rentals of stores. As at the end of the referenced period, prepayments, deposits and other receivables of the Target Group amounted to approximately RMB747 million, down 3.98% from RMB778 million as at 31 December 2014.

Trade and bills payables

As at the end of the referenced period, trade and bills payables of the Target Group amounted to approximately RMB6,621 million, down 13.62% from RMB7,665 million as at the end of 2014. Turnover days of trade and bills payables were approximately 146 days during the referenced period, lower than that 163 days for 2014 by 17 days.

Capital expenditure

During the referenced period, the capital expenditure incurred by the Target Group amounted to approximately RMB85 million, representing a 10.53% decrease as compared with approximately RMB95 million in corresponding period of 2014. The capital expenditure during the period was mainly for the expenses of opening new stores and remodeling of stores.

– II-74 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Cash flows

During the referenced period, the Target Group’s net cash flows used in operating activities amounted to approximately RMB269 million, as compared with net cash inflows of RMB446 million for the corresponding period in 2014. It was mainly attributable to a decrease in trade and bills payables during the period.

Net cash flows used in investing activities amounted to approximately RMB825 million, as compared with RMB241 million for the corresponding period in 2014. It was mainly due to an increase in advances of entrusted loans by approximately RMB800 million.

Net cash flows generated from financing activities amounted to approximately RMB971 million while net cash flow for the corresponding period last year was RMB433 million. It was mainly due to an increase in interest-bearing bank loans by RMB1,050 million during the period.

Contingent liabilities and capital commitment

At the end of the referenced period, the Target Group has no material contingent liabilities or capital commitments.

Financial resources and gearing ratio

During the referenced period, the Target Group’s working capital, capital expenditure and cash for investments were funded from cash on hand, cash generated from operations, interest-bearing bank loans and bond payable.

As at 30 June 2015, the total borrowings of the Target Group, being interest-bearing bank loans which were denominated in RMB with fixed interest rates ranging from 4.45% to 7.28% per annum repayable within one year and bond payable denominated in RMB with 9.85% annual coupon rate which matures on 16 December 2016, amounted to approximately RMB3,090 million and RMB99 million, respectively. The Target Group’s financing activities have been continuingly supported by its bankers.

As at 30 June 2015, the debt to total equity ratio, which was expressed as a percentage of total borrowings of approximately RMB3,189 million over total equity of approximately RMB618 million, decreased by 74.86 percentage points from 590.88% as at 31 December 2014 to 516.02%.

Charge on assets

As at 30 June 2015, the Target Group’s bills payable and interest-bearing bank loans were secured by the Target Group’s time deposits amounting to approximately RMB1,266 million and its certain properties, buildings and investment properties with a carrying value of approximately RMB699 million and properties of its related company with a value of RMB992 million. The Target Group’s bills payable and interest-bearing bank loans amounted to approximately RMB7,354 million.

– II-75 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

For the year ended 31 December 2014

Revenue

The Target Group’s revenue was approximately RMB20,992 million for the year ended 31 December 2014, up 7.04% from RMB19,611 million in 2013. The Target Group’s weighted average sales area was approximately 1,607,000 sq.m. and the revenue per sq.m. was approximately RMB13,063, up 6.65% as compared with RMB12,249 in 2013.

During the referenced period, aggregate sales of 417 comparable stores was approximately RMB17,860 million, up 5.26% from RMB16,967 million in 2013. Sales revenue from the four regions of Shanghai, Henan, Heilongjiang and Zhejiang accounted for approximately 41.94% of the total revenue, which is similar to 41.45% for the corresponding period in 2013. Sales revenue from the first and second tier markets accounted for approximately 70.40% and 29.60% of the total revenue, respectively, as compared with 71.61% and 28.39% for the corresponding period last year.

Proportion of revenue from each product category over total revenue is as follows:

==> picture [407 x 200] intentionally omitted <==

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

24.81%
22.06%
19.96% [20.95%]
17.94%
15.61% 14.70% 14.25% 12.83% [13.23%]
8.62% 8.35%
3.47% [3.22%]
AV Air-conditioner Refrigerator Telecommunication Small white IT Digital and others
and washing appliances
machine
2013 2014
----- End of picture text -----

Cost of sales and gross profit

Cost of sales of the Target Group was approximately RMB17,554 million in 2014, accounted for 83.62% of the revenue, as compared with 82.26% for the corresponding period in 2013. Gross profit was approximately RMB3,438 million, down 1.18% from RMB3,479 million for the corresponding period in 2013. During the reference period, the gross profit margin was 16.38%, as compared with 17.74% for the corresponding period in 2013.

A slight decrease in gross profit margin was mainly due to the Target Group’s efforts to expand in the second-tier market during the period and adopting lower prices to capture market shares. The gross profit margin and proportion of revenue from AV products, which enjoyed higher gross profit margins, also declined during the period.

– II-76 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

The gross profit margin of each product category is as follows:

==> picture [407 x 192] intentionally omitted <==

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

21.97% 20.92%
19.15% 18.29% 19.34% 18.01%
17.01% 17.07%
14.44%
13.07% 12.28% 12.02% 10.83% 11.46%
AV Air-conditioner Refrigerator Telecommunication Small white IT Digital and others
and washing appliances
machine
2013 2014
----- End of picture text -----

Other income and gains

During the referenced period, the Target Group recorded other income and gains of approximately RMB520 million, which mainly consists of net income from suppliers, income from extended warranties and rental income, representing an increase of 26.83% over that of RMB410 million for the corresponding period last year. Among them, net income from suppliers increased by 10.92% and income from extended warranties increased by 87.23%.

Consolidated gross profit margin

During the referenced period, the Target Group’s consolidated gross profit margin dropped by 0.98 percentage points to 18.85% from 19.83% for the corresponding period in 2013 as a result of a decrease in gross profit margin.

Operating expenses

During the referenced period, the Target Group’s total operating expenses (including selling and distribution expenses, administrative expenses and other expenses) were approximately RMB3,569 million, accounted for 17.00% of sales revenue, down by 0.59 percentage points as compared with 17.59% for the corresponding period in 2013.

As a percentage of sales revenue: Selling and distribution costs administrative expenses Other expenses Total	2014 12.95% 3.14% 0.91% 17.00%	2013 13.39% 3.18% 1.02%
		17.59%

– II-77 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Selling and distribution costs

During the referenced period, the Target Group’s total selling and distribution costs increased from RMB2,625 million to approximately RMB2,718 million, up 3.54%. While the revenue has grown, the expense over revenue ratio was 12.95%, down 0.44 percentage points as compared with 13.39% for the corresponding period in 2013. During the referenced period, with the Target Group’s continuous efforts in optimising rationed match between areas and human resources of stores, rental to sales ratio decreased to 6.02% from 6.31% for 2013. Meanwhile, staff costs to sales ratio was 3.18%, similar to 3.14% for 2013 and at a relatively low level in the industry.

As a percentage of sales revenue: Rental Salaries Utility charges Advertising expenses Delivery expenses Others Total	2014 6.02% 3.18% 0.95% 0.81% 0.77% 1.22% 12.95%	2013 6.31% 3.14% 0.96% 0.82% 0.77% 1.39%
		13.39%

Administrative expenses

With the continuous expansion of the Target Group’s scale of operations, administrative expenses increased. During the referenced period, the Target Group’s administrative expenses were approximately RMB659 million, more than that of RMB623 million for the corresponding period in 2013 by 5.78%. The expense to sales ratio was 3.14%, decreased by 0.04 percentage points as compared with 3.18% for the corresponding period in 2013. The Target Group has always been strengthening its control over administrative expenses in order to maintain its administrative expense ratio at a relatively low level in the industry.

Other expenses

The Target Group’s other expenses mainly comprised, among others, business tax and bank charges, which decreased from RMB200 million in 2013 to approximately RMB192 million during the referenced period. The expense to sales ratio was 0.91%, decreased by 0.11 percentage points as compared with 1.02% in 2013.

Profit from operating activities

During the referenced period, as a result of the decrease in gross profit margin and stable operating expenses ratio, the Target Group’s profit from operating activities decreased by 11.82% from RMB440 million in 2013 to approximately RMB388 million.

– II-78 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Profit before tax

During the referenced period, the Target Group’s profit before tax was approximately RMB400 million, decreased by 14.53% as compared with RMB468 million in 2013.

Income tax expense

During the referenced period, the Target Group’s income tax expense was approximately RMB106 million, as compared with RMB101 million for the corresponding period of 2013. The management considers the effective tax rate applied to the Target Group for the referenced period is reasonable.

Profit for the year

During the referenced period, the Target Group’s profit decreased by 19.89% from RMB367 million for the corresponding period in 2013 to approximately RMB294 million.

Cash and cash equivalents

As at the end of the referenced period, cash and cash equivalents held by the Target Group, which were mainly denominated in Renminbi, were approximately RMB1,082 million, decreased by 28.49% as compared with RMB1,513 million as at the end of 2013.

Inventories

As at the end of the referenced period, the Target Group’s inventories amounted to approximately RMB3,396 million, down 1.25% as compared with RMB3,439 million as at the end of 2013. Inventory turnover days decreased by 1 day from 72 days in 2013 to 71 days in 2014.

Prepayments, deposits and other receivables

Prepayments, deposits and other receivables are mainly advances to suppliers for quality goods at a lower cost and prepayments for rentals of stores. As at the end of the referenced period, prepayments, deposits and other receivables of the Target Group amounted to approximately RMB778 million, up 5.42% from RMB738 million as at the end of 2013.

Trade and bills payables

As at the end of the referenced period, trade and bills payables of the Target Group amounted to approximately RMB7,665 million, down 4.76% from RMB8,048 million as at the end of 2013. Turnover days of trade and bills payables were approximately 163 days during the referenced period, decreased by 18 days as compared with 181 days for the corresponding period in 2013.

– II-79 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Capital expenditure

During the referenced period, the capital expenditure incurred by the Target Group amounted to approximately RMB195 million, representing a 72.57% increase as compared with RMB113 million in corresponding period in 2013. The capital expenditure during the period was mainly for the expenses of opening new stores and remodeling of stores.

Cash flows

During the referenced period, the Target Group’s net cash flows used in operating activities amounted to approximately RMB817 million, as compared with RMB636 million for the corresponding period in 2013. An increase in cash flows used in operating activities for 2014 was mainly due to an increase in amounts due from related companies by RMB1,533 million during the year.

Net cash flows used in investing activities amounted to approximately RMB22 million, while RMB847 million was used for the corresponding period in 2013. An increase in cash flows used in investing activities was mainly due to an increase in entrusted loans by RMB800 million in 2013.

Net cash flows generated from financing activities amounted to approximately RMB407 million while net cash flow for the corresponding period last year was RMB1,360 million. An increase in cash flows generated from financing activities was mainly attributable to an increase in new bank loans by RMB1,300 million in 2013.

Contingent liabilities and capital commitment

At the end of the referenced period, the Target Group has no material contingent liabilities or capital commitments.

Financial resources and gearing ratio

As at 31 December 2014, the total borrowings of the Target Group, being interest-bearing bank loans which were denominated in RMB with fixed interest rates ranging from 4.45% to 7.28% per annum repayable within one year and bond payable denominated in RMB with 9.85% annual coupon rate which matures on 16 December 2016, amounted to approximately RMB2,040 million and RMB99 million, respectively. The Target Group’s financing activities have been continuingly supported by its bankers.

As at 31 December 2014, the debt to total equity ratio, which was expressed as a percentage of total borrowings of approximately RMB2,139 million over total equity of approximately RMB362 million, decreased by 1,759.12 percentage points from 2,350.00% as at 31 December 2013 to 590.88%.

– II-80 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Charge on assets

As at 31 December 2014, the Target Group’s bills payable and interest-bearing bank loans were secured by Target Group’s time deposits amounting to approximately RMB1,566 million, its certain properties, buildings and investment properties with a carrying value of approximately RMB111 million and properties of its related company with a value of RMB992 million. Target Group’s bills payable and interest-bearing bank loans amounted to approximately RMB7,111 million.

For the year ended 31 December 2013

Revenue

The Target Group’s revenue was approximately RMB19,611 million for the year ended 31 December 2013, up 12.14% from RMB17,488 million in 2012. The Target Group’s weighted average sales area was approximately 1,601,000 sq.m. and the revenue per sq.m. was approximately RMB12,249, up 23.76% as compared with RMB9,897 in 2012.

During the referenced period, aggregate sales of 430 comparable stores recorded a revenue of approximately RMB17,462 million, up 14.70% from RMB15,224 million in 2012. Sales revenue from the four regions of Shanghai, Henan, Heilongjiang and Zhejiang accounted for approximately 41.45% of the total revenue, which is similar to 41.08% for the corresponding period in 2012. Sales revenue from the first and second tier markets accounted for approximately 71.61% and 28.39% of the total revenue, respectively, as compared with 72.13% and 27.87% for the corresponding period last year , while the proportion of sales in the second-tier market increased by 0.52 percentage points.

Proportion of revenue from each product category over total revenue is as follows:

==> picture [406 x 200] intentionally omitted <==

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

23.86% 24.81%
19.96%
18.01%
15.61%
14.49% 15.88% 14.70%
12.13% [12.83%]
9.63% 8.62%
6.00%
3.47%
AV Air-conditioner Refrigerator Telecommunication Small white IT Digital and others
and washing appliances
machine
2012 2013
----- End of picture text -----

– II-81 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Cost of sales and gross profit

Cost of sales of the Target Group was approximately RMB16,132 million in 2013, accounted for 82.26% of the revenue, as compared with 83.49% for the corresponding period in 2012. Gross profit was approximately RMB3,479 million, up 20.46% from RMB2,888 million for the corresponding period in 2012. With improving market environment for home appliances from a downward trend since 2012, gross profit margins and proportion of revenue of certain product categories, namely AV, air conditioners and refrigerator and washing machine, which enjoy higher profit margins, had recorded growths. The Target Group’s gross profit margin increased by 1.23 percentage points from 16.51% in 2012 to 17.74%.

The gross profit margin of each product category is as follows:

==> picture [405 x 192] intentionally omitted <==

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

21.97%
19.15% 18.29% 18.38% 19.34% 19.98%
17.68% 17.42%
15.03% 14.44%
13.07%
12.48% 11.99% 12.02%
AV Air-conditioner Refrigerator Telecommunication Small white IT Digital and others
and washing appliances
machine
2012 2013
----- End of picture text -----

Other income and gains

During the referenced period, the Target Group recorded other income and gains of approximately RMB410 million, which mainly consists of net income from suppliers, income from extended warranties and rental income, representing a decrease of 20.39% over that of RMB515 million for the corresponding period in 2012. Of which, net income from suppliers decreased by 39.58% to RMB174 million from RMB288 million in 2012. It is mainly due to a change in the execution of contracts between the Target Group and the suppliers that led to an increase in revenue as directly reflected in gross profit.

Consolidated gross profit margin

During the referenced period, the Target Group’s consolidated gross profit margin has improved by 0.37 percentage points to 19.83% as compared with 19.46% for the corresponding period in 2012. It was mainly attributable to the increase in gross profit margin.

– II-82 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Operating expenses

During the referenced period, the Target Group’s total operating expenses (including selling and distribution expenses, administrative expenses and other expenses) were approximately RMB3,449 million, decreased by 6.93% from RMB3,706 million for 2012. Operating expenses accounted for 17.59% of sales revenue, down by 3.60 percentage points as compared with 21.19% for the corresponding period in 2012.

As a percentage of sales revenue: Selling and distribution costs Administrative expenses Other expenses Total	2013 13.39% 3.18% 1.02% 17.59%	2012 16.24% 3.74% 1.21%
		21.19%

Selling and distribution costs

During the referenced period, the Target Group’s total selling and distribution costs decreased from RMB2,840 million for 2012 to approximately RMB2,625 million, down 7.57%. While the revenue has grown, the expense to sales ratio was 13.39%, down 2.85 percentage points as compared with 16.24% for the corresponding period in 2012. It is mainly attributable to the Target Group’s efforts to control both key expenses effectively by focusing on optimizing the floor usage of the stores and applying optimized workforce to the stores. Rental and staff costs to sales ratio decreased from 7.87% and 3.78% for 2012 to 6.31% and 3.14%, respectively.

As a percentage of sales revenue: Rental Salaries Utility charges Advertising expenses Delivery expenses Others Total	2013 6.31% 3.14% 0.96% 0.82% 0.77% 1.39% 13.39%	2012 7.87% 3.78% 1.12% 1.13% 0.75% 1.59%
		16.24%

– II-83 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Administrative expenses

During the referenced period, the Target Group’s administrative expenses were approximately RMB623 million, less than that of RMB654 million for the corresponding period in 2012 by 4.74%. The expense to sales ratio was 3.18%, decreased by 0.56 percentage points as compared with 3.74% for the corresponding period in 2012. The Target Group has always been strengthening its control over administrative expenses in order to maintain its expense over revenue ratio at a relatively low level in the industry.

Other expenses

Other expenses of the Target Group mainly comprised, among others, business tax and bank charges, which decreased from RMB213 million in 2012 to approximately RMB200 million during the referenced period. The expense to sales ratio was 1.02%, decreased by 0.19 percentage points as compared with 1.21% in 2012.

Profit/(loss) from operating activities

During the referenced period, as a result of the increase in revenue and gross profit, and a decrease in operating expenses where the operating expenses to sales ratio reduced, the Target Group’s profit from operating activities increased significantly by 245.21% from a loss of RMB303 million in 2012 to a profit of approximately RMB440 million.

Profit/(loss) before tax

During the referenced period, the Target Group’s profit before tax was approximately RMB468 million, significantly increased by 284.98% as compared with a loss of RMB253 million in 2012.

Income tax expense

During the referenced period, in line with the increase in profitability from a loss, the Target Group’s income tax expense increased from RMB66 million in 2012 to approximately RMB101 million. The management considers the effective tax rate applied to Target Group for the referenced period is reasonable.

Profit/(loss) for the year

During the referenced period, the Target Group’s profit increased substantially by 215.05% from a loss of RMB319 million for 2012 to a profit of approximately RMB367 million.

Cash and cash equivalents

As at the end of the referenced period, cash and cash equivalents held by the Target Group, which were mainly denominated in Renminbi, were approximately RMB1,513 million, decreased by 7.52% as compared with RMB1,636 million as at the end of 2012.

– II-84 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Inventories

As at the end of the referenced period, the Target Group’s inventories amounted to approximately RMB3,439 million, up 18.18% as compared with RMB2,910 million as at the end of 2012. Inventory turnover days decreased by 13 days from 85 days in 2012 to 72 days in 2013.

Prepayments, deposits and other receivables

Prepayments, deposits and other receivables are mainly advances to suppliers for quality goods at a lower cost and prepayments for rentals of stores. As at the end of the referenced period, prepayments, deposits and other receivables of the Target Group amounted to approximately RMB738 million, down 8.78% from RMB809 million as at the end of 2012.

Trade and bills payables

As at the end of the referenced period, trade and bills payables of the Target Group amounted to approximately RMB8,048 million, up 1.14% from RMB7,957 million as at the end of 2012. Turnover days of trade and bills payables were approximately 181 days during the referenced period, lower than 211 days for 2012 by 30 days.

Capital expenditure

During the referenced period, the capital expenditure incurred by the Target Group amounted to approximately RMB113 million, representing a 47.20% decrease as compared with approximately RMB214 million in corresponding period in 2012. The capital expenditure during the period was mainly for the expenses of opening new stores and remodeling of stores.

Cash flows

During the referenced period, the Target Group’s net cash flows used in operating activities amounted to approximately RMB636 million, as compared with net cash inflows of RMB360 million for the corresponding period in 2012 which was mainly attributable to an increase in inventory and a decrease in amounts due to related companies during the period.

Net cash flows used in investing activities amounted to approximately RMB847 million, while RMB180 million was used for the corresponding period in 2012. It was mainly due to an increase in advances of entrusted loans by approximately RMB800 million during the referenced period.

During the referenced period, the Target Group had new bank loans of RMB1,300 million, which net cash flows generated from financing activities amounted to approximately RMB1,360 million, while net cash flow for the corresponding period last year was RMB190 million.

Contingent liabilities and capital commitment

At the end of the referenced period, the Target Group has no material contingent liabilities or capital commitments.

– II-85 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Financial resources and gearing ratio

As at 31 December 2013, the total borrowings of the Target Group, being interest-bearing bank loans which were denominated in RMB with fixed interest rates ranging from 4.45% to 7.28% per annum repayable within one year and bond payable denominated in RMB with 9.85% annual coupon rate which matures on 16 December 2016, amounted to approximately RMB1,500 million and RMB98 million, respectively. The Target Group’s financing activities have been continuingly supported by its bankers.

As at 31 December 2013, the debt to total equity ratio, which was expressed as a percentage of total borrowings of approximately RMB1,598 million over total equity of approximately RMB68 million was 2,350.00%. Since the Target Group had a negative equity of RMB299 million, thus debt to equity ratio is not applicable and not meaningful.

Charge on assets

As at 31 December 2013, the Target Group’s bills payable and interest-bearing bank loans were secured by the Target Group’s time deposits amounting to approximately RMB1,565 million and its certain properties, buildings and investment properties with a carrying value of approximately RMB113 million and properties of its related companies with a value of RMB 200 million. The Target Group’s bills payable and interest-bearing banks loans amounted to approximately RMB6,628 million.

For the year ended 31 December 2012

Revenue

The Target Group’s revenue was approximately RMB17,488 million for the year ended 31 December 2012. The Target Group’s weighted average sales area was approximately 1,767,000 sq.m. and the revenue per sq.m. was approximately RMB9,897 in 2012.

During the referenced period, sales revenue from the four regions of Shanghai, Henan, Heilongjiang and Zhejiang accounted for approximately 41.08% of the total revenue. Sales revenue from the first and second tier markets accounted for approximately 72.13% and 27.87%, respectively.

Cost of sales and gross profit, other income and gains and consolidated gross profit margin

Cost of sales of the Target Group was approximately RMB14,600 million in 2012, accounted for 83.49% of the revenue. Gross profit was approximately RMB2,888 million, gross profit margin was 16.51%. The Target Group recorded other income and gains of RMB515 million in 2012, and consolidated gross profit margin was 19.46%.

– II-86 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Operating expenses

The Target Group’s total operating expenses (including selling and distribution costs, administrative expenses and other expenses) were approximately RMB3,706 million, accounted for 21.19%. The Target Group’s total selling and distribution costs were approximately RMB2,840 million. The expense to sales ratio was 16.24% in 2012. To control the rental expenses and the staff costs effectively, the Target Group has been focusing on optimizing the floor usage of the stores and applying optimized workforce to the stores. During the referenced period, the Target Group’s administrative expenses were approximately RMB654 million. The expense to sales ratio was 3.74%. Other expenses of the Target Group mainly comprised, among others, business tax and bank charges were RMB213 million. The expense to sales ratio was 1.21%.

Loss from operating activities, loss before tax, income tax expense and loss for the year

As a result of relatively weak revenue and gross profit performance, while operating expenses were at a relatively high level, the Target Group recorded a loss from operating activities of RMB303 million. The Target Group’s loss before tax and income tax expense were RMB253 million and RMB66 million, respectively. The management considers the effective tax rate applied to the Target Group for the referenced period is reasonable. As a result of the foregoing, the loss for the year was RMB319 million.

Capital expenditure

During the referenced period, the capital expenditure incurred by the Target Group amounted to approximately RMB214 million. The capital expenditure during the period was mainly for the expenses of opening new stores and remodeling of stores.

Contingent liabilities and capital commitment

At the end of the referenced period, the Target Group has no material contingent liabilities or capital commitments.

Financial resources and gearing ratio

During the referenced period, the Target Group’s working capital, capital expenditure and cash for investments were funded from cash on hand, cash generated from operations and interest-bearing bank loans. As at 31 December 2012, the total borrowings of the Target Group, being interest-bearing bank loans which were denominated in RMB with fixed interest rates ranging from 4.45% to 7.28% per annum repayable within one year, amounted to approximately RMB200 million. The Target Group’s financing activities have been continuingly supported by its bankers. As at 31 December 2012, the Target Group had a negative equity of RMB299 million, thus debt to equity ratio is not applicable and not meaningful.

– II-87 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Charge on group assets

As at 31 December 2012, the Target Group’s bills payable and interest-bearing bank loans were secured by the Target Group’s time deposits amounting to approximately RMB1,675 million and certain investment properties with a carrying value of approximately RMB49 million and properties of its related companies with a value of RMB200 million. The Target Group’s bills payable and interest-bearing bank loans amounted to approximately RMB5,538 million.

Foreign currencies and treasury policy

All the Target Group’s income and a majority of its expenses were denominated in Renminbi. The Target Group has adopted effective measures to reduce its foreign exchange risks. The Target Group’s treasury policy is that it will only manage such exposure (if any) when it posts significant potential financial impact on the Target Group. The management estimates that less than 10% of the Target Group’s current purchases are imported products, which are sourced indirectly from distributors in the PRC, and the transactions are denominated in Renminbi.

3. INDEBTEDNESS STATEMENT

The statement of indebtedness and contingent liabilities of the Target Group as at 31 October 2015

As at 31 October 2015, the latest practicable date for the purpose of determining indebtedness, the Target Group had bank loans of RMB3,754 million and a corporate bond of RMB99 million.

As at 31 October 2015, the Target Group’s bills payable and interest-bearing bank loans were secured by the Target Group’s time deposits amounting to RMB1,279 million, and the Target Group’s certain buildings and investment properties with carrying values of RMB211 million and RMB47 million, respectively. As at 31 October 2015, except for above, the Target Group had no material contingent liabilities.

The Target Company’s directors confirm that, as of 31 October 2015, the latest practicable date for the purpose of determining indebtedness, save as aforesaid, the Target Group did not have any bank overdrafts or other similar indebtedness, hire purchase commitments, guarantees or other material contingent liabilities or authorized debentures.

– II-88 –

PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

A. UNAUDITED PRO FORMA FINANCIAL INFORMATION

The following unaudited pro forma financial information (the “Unaudited Pro Forma Financial Information”) of the Enlarged Group, comprising the unaudited pro forma consolidated statement of financial position of the Enlarged Group as at 30 June 2015, has been prepared by the Directors in accordance with rule 4.29 of the Listing Rules for the purpose of illustrating the effect of the proposed acquisition of the Target Group (the “Acquisition”) to the Group. Details of the Acquisition are set out in the letter from the Board contained in this Circular.

The unaudited pro forma consolidated statement of financial position is based on (i) the unaudited consolidated statement of financial position of the Group as at 30 June 2015, which is extracted from the Group’s interim report for the 6 months ended 30 June 2015 published on 11 September 2015 and (ii) the audited consolidated statement of financial position of the Target Group as at 30 June 2015, which has been extracted from the accountants’ report as set out in Appendix II to this Circular, adjusted in accordance with the pro forma adjustments described in the notes thereto, as if the Acquisition had been completed on 30 June 2015. A narrative description of the pro forma adjustments of the Acquisition that are directly attributable to the transactions and factually supportable is summarised in the accompanying notes.

Since the distribution to the Vendor is a precondition for the completion of the Acquisition, the effect of the distribution to the Vendor has also been taken into account in preparing the Unaudited Pro Forma Financial Information. Because of its hypothetical nature, the Unaudited Pro Forma Financial Information may not purport to describe the financial positions of the Enlarged Group had the Acquisition been completed as at the respective dates to which it is made up to or at any future dates. Furthermore, the Unaudited Pro Forma Financial Information of the Enlarged Group does not purport to predict the Enlarged Group’s future financial positions. The Unaudited Pro Forma Financial Information of the Enlarged Group should be read in conjunction with the financial information on the Group as set out in Appendix I to this Circular, the published unaudited interim report of the Group for the 6 months ended 30 June 2015 published on 11 September 2015 and other financial information included elsewhere in this Circular. The Unaudited Pro Forma Financial Information of the Enlarged Group does not take into account any trading or other transactions subsequent to the dates of the respective financial statements of the companies comprising the Enlarged Group.

– III-1 –

PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 30 June 2015

Non-current assets Property and equipment Investment properties Goodwill Other intangible assets Other investments Lease prepayments and deposits Deferred tax assets Total non-current assets Current assets Inventories Trade and bills receivables Prepayments, deposits and other receivables Due from related companies Equity investments at fair value through profit or loss Entrusted loans Pledged deposits Cash and cash equivalents Total current assets	Group RMB’000 4,384,014 601,224 7,145,117 254,082 476,820 368,940 28,217	Target Group Pro forma adjustments Pro forma Enlarged Group RMB’000 RMB’000 (note 1) RMB’000 (note 2) RMB’000 (note 3) RMB’000 2,050,697 6,434,711 47,044 648,268 1,206,502 7,518,400 15,870,019 251,142 505,224 – 476,820 51,171 420,111 – 28,217 3,606,556 24,383,370 2,827,247 12,612,593 62,558 479,799 746,859 4,163,427 3,183,698 (865,322) 2,577,315 – 976,309 1,540,000 1,540,000 1,265,999 5,349,494 958,830 (835,290) 10,839,518 10,585,191 38,538,455	Pro forma Enlarged Group RMB’000 6,434,711 648,268 15,870,019 505,224 476,820 420,111 28,217
	13,258,414		24,383,370
	9,785,346 417,241 3,416,568 258,939 976,309 – 4,083,495 10,715,978
	29,653,876		38,538,455

– III-2 –

PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

						Pro forma
		Target				Enlarged
	Group	Group	Pro forma adjustments			Group
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
			(note 1)	(note 2)	(note 3)
Current liabilities
Interest-bearing bank loans	1,523,494	3,090,000				4,613,494
Trade and bills payables	20,375,192	6,621,141				26,996,333
Customers’ deposits, other payables
and accruals	2,575,996	1,708,823				4,284,819
Due to related companies	767,316	1,573,168	560,000		(865,322)	2,035,162
Tax payable	671,850	189,929				861,779
Total current liabilities	25,913,848	13,183,061				38,791,587
Net current assets/(liabilities)	3,740,028	(2,597,870)				(253,132)
Total assets less current liabilities	16,998,442	1,008,686				24,130,238
Non-current liabilities
Deferred tax liabilities	159,401	291,840				451,241
Bond payable	–	99,006				99,006
Total non-current liabilities	159,401	390,846				550,247
Net assets	16,839,041	617,840				23,579,991

Equity
Equity attributable to owners of the
parent
Issued capital	423,268	–		114,852		538,120
Reserves	17,214,222	617,840	(560,000)	6,568,258		23,840,320
Proposed dividends	234,864	–				234,864
	17,872,354	617,840				24,613,304
Non-controlling interests	(1,033,313)	–				(1,033,313)
Total equity	16,839,041	617,840				23,579,991

– III-3 –

PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Notes:

The adjustment represents distribution to the Vendor.
The adjustment represents the combination of 100% equity interests of the Target Group by the issuance of 5,500,000,000 Consideration Shares at HK$1.39 each, 2,500,000,000 Warrants at HK$0.18 each and cash of HK$1,000 million, as if the Acquisition had been completed as at 30 June 2015. For purpose of this Unaudited Pro Forma Financial Information, exchange rate of HK$1 to RMB0.83529, which was the prevailing market rate as at 21 December 2015, was adopted to translate the abovementioned consideration other than Warrants for which the exchange rate was at HK$1 to RMB0.78924 as also mentioned elsewhere in this circular. Under International Financial Reporting Standard 3 (Revised) Business Combinations issued by the International Accounting Standards Board, the Group will apply the purchase method to account for the acquisition of the Target Group in the consolidated financial statements of the Group.

For the purpose of this Unaudited Pro Forma Financial Information of the Enlarged Group, in the opinion of the Directors, the fair values of the assets and liabilities of the Target Group being acquired are subject to changes upon completion of the acquisition because the fair values of the assets and liabilities being acquired shall be assessed on the date of completion. The Group has ensured that the steps taken on the assessment of impairment of goodwill has been properly performed in accordance with International Accounting Standard 36 “Impairment of Assets” which is consistent with the accounting policies of the Company. On that basis, the Company concluded that no impairment in the valuation of goodwill is considered necessary.

The Group will adopt consistent accounting policies for impairment tests in the future. The Group’s auditor will review the Group’s assessment on impairment of goodwill in accordance with Hong Kong Standards on Auditing at the end of each reporting period for the purposes of its audit in the future.

The adjustment represents the internal balances offset.

– III-4 –

PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

B. INDEPENDENT REPORTING ACCOUNTANTS’ ASSURANCE REPORT ON THE COMPILATION OF UNAUDITED PRO FORMA FINANCIAL INFORMATION

The Board of Directors

GOME Electrical Appliances Holding Limited Suite 2915, 29th Floor Two International Finance Centre 8 Finance Street, Central Hong Kong

Dear Sirs,

We have completed our assurance engagement to report on the compilation of unaudited pro forma financial information of GOME Electrical Appliances Holding Limited (the “Company”) and its subsidiaries (hereinafter collectively referred to as the “Group”) and Artway Development Ltd. (the “Target Company”) and its subsidiary (collectively referred as the “Target Group”) by the directors of the Company (the “Directors”) for illustrative purpose only. The unaudited pro forma financial information consists of the unaudited pro forma consolidated statement of financial position as at 30 June 2015 and related notes as set out on pages III-1 to III-4 of the circular of the Company dated 24 December 2015 (the “Circular”) (the “Unaudited Pro Forma Financial Information”). The applicable criteria on the basis of which the Directors have compiled the Unaudited Pro Forma Financial Information are described in Section A of Appendix III to the Circular.

The Unaudited Pro Forma Financial Information has been compiled by the Directors to illustrate the impact of the proposed acquisition of the Target Group (the “Acquisition”) on the Group’s consolidated statement of financial position as at 30 June 2015 as if the transaction had taken place at 30 June 2015. As part of this process, the Group’s consolidated statement of financial position has been extracted by the Directors from the Group’s financial statements for the 6 months ended 30 June 2015, on which a review report has been published.

Directors’ responsibility for the Unaudited Pro Forma Financial Information

The Directors are responsible for compiling the Unaudited Pro Forma Financial Information in accordance with paragraph 4.29 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) and with reference to Accounting Guideline 7 Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars (“AG 7”) issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”).

Our independence and quality control

We have complied with the independence and other ethical requirements of the Code of Ethics for Professional Accountants issued by the HKICPA, which is founded on fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behavior.

– III-5 –

PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Our firm applies Hong Kong Standard on Quality Control 1 Quality Control for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements , and accordingly maintains a comprehensive system of quality control including documented policies and procedures regarding compliance with ethical requirements, professional standards and applicable legal and regulatory requirements.

Reporting Accountant’s responsibilities

Our responsibility is to express an opinion, as required by paragraph 4.29(7) of the Listing Rules, on the Unaudited 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 Unaudited Pro Forma Financial Information beyond that owed to those to whom those reports were addressed by us at the dates of their issue.

We conducted our engagement in accordance with Hong Kong Standard on Assurance Engagements 3420 Assurance Engagements to Report on the Compilation of Pro Forma Financial Information Included in a Prospectus issued by the HKICPA. This standard requires that the reporting accountants plan and perform procedures to obtain reasonable assurance about whether the Directors have compiled the Unaudited Pro Forma Financial Information, in accordance with paragraph 4.29 of the Listing Rules and with reference to AG7 issued by HKICPA.

For purposes of this engagement, we are not responsible for updating or reissuing any reports or opinions on any historical financial information used in compiling the Unaudited Pro Forma Financial Information, nor have we, in the course of this engagement, performed an audit or review of the financial information used in compiling the Unaudited Pro Forma Financial Information.

The purpose of the Unaudited Pro Forma Financial Information included in the Circular is solely to illustrate the impact of the Acquisition on unadjusted financial information of the Group as if the transaction had been undertaken at an earlier date selected for purposes of the illustration. Accordingly, we do not provide any assurance that the actual outcome of the transaction would have been as presented.

A reasonable assurance engagement to report on whether the Unaudited Pro Forma Financial Information has been properly compiled on the basis of the applicable criteria involves performing procedures to assess whether the applicable criteria used by the Directors in the compilation of the Unaudited Pro Forma Financial Information provide a reasonable basis for presenting the significant effects directly attributable to the Acquisition, and to obtain sufficient appropriate evidence about whether:

the related pro forma adjustments give appropriate effect to those criteria; and
the Unaudited Pro Forma Financial Information reflects the proper application of those adjustments to the unadjusted financial information.

– III-6 –

PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

The procedures selected depend on the reporting accountants’ judgment, having regard to the reporting accountants’ understanding of the nature of the Group, the Acquisition in respect of which the Unaudited Pro Forma Financial Information has been compiled, and other relevant engagement circumstances.

The engagement also involves evaluating the overall presentation of the Unaudited Pro Forma Financial Information.

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

Opinion

In our opinion:

(a) the Unaudited Pro Forma Financial Information has been properly compiled on the basis stated;
(b) such basis is consistent with the accounting policies of the Group; and
(c) the adjustments are appropriate for the purpose of the Unaudited Pro Forma Financial Information as disclosed pursuant to paragraph 4.29(1) of the Listing Rules.

Yours faithfully,

ERNST & YOUNG

Certified Public Accountants

Hong Kong 24 December 2015

– III-7 –

WARRANT VALUATION REPORT

APPENDIX IV

24 December 2015

The Board of Directors GOME Electrical Appliances Holdings Limited

Suite 2915, 29th Floor Two International Finance Centre 8 Finance Street, Central Hong Kong

Dear Sirs,

In accordance with the instructions received by GOME Electrical Appliances Holding Limited (“GOME” or the “Company”), we have undertaken a valuation exercise to express an independent opinion on the market value of the warrants (the “Warrants”) to be issued by the Company as at 16 July 2015 (the “Valuation Date” and will be defined in the report). The report which follows is dated 24 December 2015 (the “Report Date”).

The purpose of this valuation is to express an independent opinion on the market value of the warrants to the Company for Circular reference.

Our valuation was carried out on a market value basis. Market value is defined as “the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion”.

BACKGROUND

On 17 July 2015, the Company has entered into a subscription agreement (“Agreement”) with a subscriber that the Company will issue and allot 2,500,000,000 warrants at the issue price of HK$0.18 per warrant. The Warrants Shares to be issued and allotted upon exercising of the subscription rights attaching to the warrants will be issued under the Specific Mandate to be sought at the SGM.

The principal terms of the warrants are as following:

Parameter	Term
Number of warrant	2,500,000,000
Term to maturity (year)	2.00
Exercise price	HK$2.15 per warrant
Exercisable Period	For a period of 24 months commencing
	from the date of issue of the Warrants

– IV-1 –

WARRANT VALUATION REPORT

APPENDIX IV

APPROACH AND METHODOLOGY

In carrying out this valuation exercise, we have considered the key features and economic properties of the Warrants.

An option is a financial instrument that gives the owner the right to buy or sell a specified number of shares of a specified company at a specified price within a specified period of time. A call option allows the buyer to purchase the underlying asset on or at any time up to the expiry date of the contract. A put option allows the buyer to sell the underlying asset on or at any time up to the expiration date of the contract.

Given the Warrants are not traded in the market and we have not identified any comparable instruments in the market, we have adopted an option pricing model to derive the market value of the Warrants. We have considered the following option pricing models in deriving the market value of the Warrants:

The Black-Scholes Option Pricing Model

In a paper published in 1973, “The Pricing of Options and Corporate Liabilities”, Fischer Black and Myron Scholes published an option valuation formula that today is known as the Black-Scholes Model. It has become the standard method for pricing European options (options that can be exercised on the maturity date only).

The Black-Scholes Model is a mathematical formula used to calculate the theoretical value of a European-style option (ignoring dividends paid during the life of the option) using the five key determinants: share price, strike price, expected volatility, time to expiration, and short-term (risk free) interest rate.

The Binomial Model

The binomial option pricing model (or Binomial Model) is a flexible, intuitive and popular approach to price options. It is based on the simplification that over a single period of a very short duration, the underlying asset can only move from its original price to an upper and lower level with defined probability. By increasing the number of periods, a binomial lattice/tree can be developed. This binomial tree represents the possible paths that the future price of the underlying asset can take within the periods.

The Binomial Model utilizes the binomial lattice of the underlying asset by incorporating in the terms and structures of the option. Since the binomial tree provides the possible future prices for each period in time as well as the respective probability, value of the option of the underlying asset can then be determined for each point in time.

– IV-2 –

WARRANT VALUATION REPORT

APPENDIX IV

Monte Carlo Simulation

Monte Carlo simulation is a widely used tool for estimating derivative security prices when there is no closed-form solution. It was first introduced by Boyle (1977) to price options. Monte Carlo method is especially useful when one deals with path dependent asset prices and/or option payoffs. The price of a derivative contract in an arbitrage-free economy can be expressed as a discounted expected value of its random payoffs. Monte Carlo simulation is hence a natural tool for approximating this expectation by the sample average. The commonly used Monte Carlo simulation procedure for option pricing can be briefly described as follows: first, simulate sample paths for the underlying asset price; secondly, compute its corresponding option payoff for each sample path; and finally, average the simulated payoffs and discount the averages to determine the Monte Carlo price of an option.

SELECTION OF VALUATION METHODOLOGY

We have compared the appropriateness of the above mentioned methods for the valuation of the Warrants. We are of the opinion that the Binomial Model is more appropriate for calculating the value of the Warrants.

ASSUMPTIONS

In this exercise, we have used the following parameters as at the Valuation Date to determine the market value of the Warrants:

Parameters

Assumed issuance date	16 July 2015
Term to maturity (year)	2.00
Spot price (HKD)	1.41
Exercise price (HKD)	2.15
Risk free rate (%)	0.346%
Expected volatility (%)	50.01%
Dividend yield (%)	2.6653%

Spot price – being the closing share price of the Company as at the Valuation Date.
Exercise price – based on the terms of the respective warrants.
Expected volatility – based on The Company’s historical weekly volatility over 2 years (Source: Bloomberg).
Risk-free rate – with reference to the risk free rate of Hong Kong at the Valuation Date (Source: Hong Kong Monetary Authority Exchange Fund Bills and Notes).
Dividend yield – with reference to the Company’s historical dividend yield (Source: Bloomberg).

– IV-3 –

WARRANT VALUATION REPORT

APPENDIX IV

INFORMATION AND DOCUMENTS

In forming our opinion of value of the Warrants, we have considered, reviewed and relied upon the following information:

(i) Background of the Company;
(ii) Details and documents relating to the issuance of the Warrants; and
(iii) Discussions with the management of the Company concerning the particulars of the Warrants.

We have analyzed and considered the features of the Warrants. In our valuation of the Warrants, we have made the following assumptions:

In arriving at the value of the Warrants, we have assumed that the adjustment of the exercise price under the terms of the Warrants will offset the potential effect on the values of the Warrants due to future dilutive events of the Company.
We have assumed and relied upon the accuracy and completeness of the information reviewed by us for the purpose of this exercise. In addition, we have relied upon the statements, information, opinion and representations provided to us by the Company and their officers, executives and employees.

Our opinion is based upon economic, market, financial and other conditions that can be evaluated as they exist on the Valuation Date and we assume no responsibility to update or revise our opinion based on events or circumstances occurring after the respective Valuation Date. In reaching our opinion, we have made assumptions with respect to such economic, market, financial and other conditions and other matters, many of which are beyond our control or the control of any party involved in this valuation exercise.

OPINION OF VALUE

Based on the results of our investigation and analysis outlined in this report, we are of the opinion that as at the Valuation Date, the market value of the Warrants in is reasonably stated as follows:

Valuation Date	Warrant per share
	(HKD)
16 July 2015	0.18

– IV-4 –

WARRANT VALUATION REPORT

APPENDIX IV

LIMITING CONDITIONS

The conclusion of value is based on accepted valuation procedures and practices that rely substantially on the use of numerous assumptions and the consideration of many uncertainties, not all of which can be easily quantified or ascertained. Further, while the assumptions and other relevant factors are considered by us to be reasonable, they are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the control of the Company and Jones Lang LaSalle Corporate Appraisal and Advisory Limited.

We do not intend to express any opinion on matters which require legal or other specialized expertise or knowledge, beyond what is customarily employed by valuers. Our conclusions assume continuation of prudent management of the Company over whatever period of time that is reasonable and necessary to maintain the character and integrity of the assets valued.

Yours faithfully, For and on behalf of Jones Lang LaSalle Corporate Appraisal and Advisory Limited

Simon M.K. Chan

Regional Director

Note: Simon M.K. Chan is a CPA Fellow member of the Hong Kong Institute of Certified Public Accountants, a CPA Fellow member of CPA Australia, a member of the Royal Institution of Chartered Surveyors and a Certified Valuation Analyst, who has extensive experience in valuation and corporate advisory business. He has provided a wide range of valuation services to numerous listed and private companies in different industries, including telecommunication-related companies, in Mainland China and Hong Kong for over 20 years.

– IV-5 –

LETTER ON THE WARRANT VALUATION REPORT

APPENDIX V

The following is the text of a letter prepared for the purpose of incorporation in this circular received from Barclays Capital Asia Limited, financial adviser to the Company, in connection with the valuation report on the Warrants produced by Jones Lang La Salle Corporate Appraisal and Advisory Limited.

24 December 2015

The Board of Directors

GOME Electrical Appliances Holding Limited (the “Company”) Suite 2915, 29th Floor Two International Finance Centre 8 Finance Street, Central Hong Kong

Dear Sirs,

We refer to the valuation report dated 24 December 2015 setting out an independent valuation (the “Valuation”) of the market value of the warrants (the “Warrants”) to be issued by the Company (the “Warrant Valuation Report”) prepared by Jones Lang LaSalle Corporate Appraisal and Advisory Limited (the “Valuer”) as set out in Appendix IV to the circular of the Company as of the date of this letter (the “Circular”). Unless the context requires otherwise, capitalised terms used in this letter shall have the same meaning as those defined in the Circular.

This letter constitutes our report under Rule 11.1(b) of the Takeovers Code.

We have reviewed the Warrant Valuation Report and discussed the same with the management of the Group and the Valuer. In particular, we have reviewed and discussed the qualifications, bases and assumptions set out in such Warrant Valuation Report with the Group’s management and with the Valuer.

As regards the qualifications and experience of the Valuer, we have conducted reasonable checks to assess the relevant qualifications, experience and expertise of the Valuer, including reviewing supporting documents and have discussed with the Valuer their qualifications and experience.

In arriving at our views, we have relied on information and materials supplied to us by or on behalf of third parties including the Group and the Valuer, and the opinions expressed by, and the representations of, the employees and/or the management of the Group and the Valuer, which we have assumed to be true, accurate, complete and not misleading and remain so as of the date hereof, and that no material fact or information has been omitted therefrom. Circumstances could have developed or could develop in the future that, if known to us at the time of the issue of this letter, may alter our assessment and review. Further, we would caution that qualifications, bases and assumptions of the Valuation are inherently subject to potential significant business, economic and competitive uncertainties and contingencies, which are beyond the control of the Company and the Valuer.

– V-1 –

LETTER ON THE WARRANT VALUATION REPORT

APPENDIX V

Our work does not constitute any valuation of the Warrants and we have assumed, without independent verification, the accuracy of the parameters stated in the Warrant Valuation Report with respect to the Warrants.

We are acting only as the financial adviser to the Company in relation to the Acquisition. We and our respective directors and affiliates will not, whether jointly or severally, be responsible to anyone other than the Company for providing advice in connection with the foregoing, nor will we, our respective directors and affiliates, whether jointly or severally, owe any responsibility to anyone other than the Company. For the avoidance of doubt, all duties and liabilities (including without limitation those arising from negligence) to third parties are specifically disclaimed, except those of our responsibilities under the Takeovers Code that cannot be disclaimed.

Nothing in this letter should be construed as an opinion or recommendation to any person as to how to vote on the Acquisition, the Acquisition Agreement or the transactions contemplated thereunder or the Whitewash Waiver. Shareholders are recommended to read all information (including the letter from the Independent Board Committee and the letter from the Independent Financial Adviser) as set out in the Circular.

On the basis of the foregoing and the information contained in the Warrant Valuation Report, we are of the opinion that the bases and assumptions set out therein, for which the Directors are solely responsible, have been made with due care, consideration and objectivity, and on a reasonable basis. We are also satisfied that the Valuer has the qualifications and experience to prepare the Warrant Valuation Report.

Yours faithfully,

Vanessa Koo

Managing Director, Head of Mergers and Acquisitions, Asia Pacific

Barclays Capital Asia Limited

– V-2 –

GENERAL INFORMATION

APPENDIX VI

1. RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Listing Rules and the Takeovers Code for the purpose of giving information with regard to the Group, the Acquisition and the Whitewash Waiver.

This circular, for which the Directors collectively and individually accept full responsibility, includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Group. The Directors, having made all reasonable enquiries, confirm that to the best of their knowledge and belief, the information contained in this circular is accurate and complete in all material respects and not misleading or deceptive, and there are no other matters the omission of which would make any statement herein or this circular misleading.

All the Directors jointly and severally accept full responsibility for the accuracy of the information contained in this circular (except for the information relating to the Vendor or the Target Group) and confirm, having made all reasonable inquiries, that to the best of their knowledge, opinions expressed in this circular (other than opinions expressed by the Vendor) 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 statement in this circular misleading.

All the directors of the Vendor jointly and severally accept full responsibility for the accuracy of the information contained in this circular (other than relating to the Group) and confirm, having made all reasonable inquiries, that to the best of their knowledge, opinions expressed in this circular (other than relating to the Group) 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 statement in this circular misleading.

– VI-1 –

GENERAL INFORMATION

APPENDIX VI

2. MARKET PRICES

(a) The table below shows the closing prices of the Share on the Stock Exchange on (i) the Latest Practicable Date; (ii) the Last Trading Day; and (iii) the last trading day of each of the calendar months during the Relevant Period:

	Closing price
Date	per Share
	(HK$)
30 January 2015	1.07
27 February 2015	1.05
31 March 2015	1.12
30 April 2015	1.99
29 May 2015	2.03
30 June 2015	1.71
17 July 2015, the Last Trading Day	1.46
31 July 2015	1.35
31 August 2015	1.23
30 September 2015	1.18
30 October 2015	1.43
30 November 2015	1.33
21 December 2015, the Latest Practicable Date	1.32

(b) The highest and lowest closing prices of the Shares as quoted on the Stock Exchange during the Relevant Period were HK$2.49 on 13 April 2015 and HK$1.01 on 5 February. 6 February, 9 February, 16 March and 17 March 2015, respectively.

3. SHARE CAPITAL AND OPTIONS

(1) Share Capital

Set out below are the authorised and issued share capital of the Company:

(a) as at the Latest Practicable Date:

Authorised HK$ 200,000,000,000 Shares 5,000,000,000 Issued and fully paid 16,961,573,422 Shares 424,039,335.55

– VI-2 –

GENERAL INFORMATION

APPENDIX VI

(b) immediately after allotment and issuance of the Consideration Shares and the Underlying Shares:

Authorised 200,000,000,000 Shares Issued and fully paid 16,961,573,422 Shares in issue as at the Latest Practicable Date 5,500,000,000 Consideration Shares to be allotted and issued upon Completion 2,500,000,000 Underlying Shares to be allotted and issued assuming full exercise of the subscription rights attaching to the 2,500,000,000 Warrants 24,961,573,422 Shares	HK$ 5,000,000,000

	424,039,335.55 137,500,000 62,500,000
	624,039,335.55

All the issued Shares rank pari passu with each other in all respects including the rights in respect of capital, dividends and voting.

Shares were issued by the Company upon the exercise of share options previously granted by the Company pursuant to the Share Option Scheme, in April 2015 (39,000 Shares), and May 2015 (2,306,000 Shares). The exercise monies received amount to HK$4,455,500 and were used for general working capital.

Save as aforesaid, since 31 December 2014 (being the end of the last financial year of the Company) and up to the Latest Practicable Date, no new Shares have been issued by the Company.

As at the Latest Practicable Date, other than the 91,077,000 share options outstanding pursuant to the Share Option Scheme, the Company did not have any outstanding warrants, options or securities convertible into Shares.

– VI-3 –

GENERAL INFORMATION

APPENDIX VI

4. DISCLOSURE OF INTERESTS

(a) Directors and Chief Executive

As at the Latest Practicable Date, the interests and short positions of the Directors and the chief executive of the Company in the shares, underlying shares and debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) as recorded in the register required to be kept under Section 352 of the SFO, or as otherwise notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers (the “ Model Code ”) were as follows:

Long positions in the shares, the underlying shares and debentures of the Company

Name	of Director/	Personal	Interest	Corporate			Approximate %
Chief	Executive	interest	of spouse	interest	Trustee	Total	shareholding
Wang	Jun Zhou	10,187,000	–	–	–	10,187,000	0.06
		(Note 1)

Note:

The relevant interests represented 10,187,000 Shares issuable upon exercise of the options (the “Option(s)”) granted to the Chief Executive pursuant to the share option scheme adopted by the Company on 15 April 2005. These Options were held by the Chief Executive beneficially.

(b) Substantial Shareholders

So far as is known to any Director or the chief executive of the Company, as at the Latest Practicable Date, Shareholders who had interests or short positions in the shares and underlying shares of the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO, or which were recorded in the register required to be kept by the Company pursuant to Section 336 of the SFO were as follows:

Long positions in shares and underlying shares of the Company

		Number of	Approximate
		ordinary	percentage of
Names of Shareholders	Nature	Shares held	shareholding
Mr. Wong Kwong Yu	Long position	5,500,503,338	32.43
(“Mr. Wong”) (Note 1)
Ms. Du Juan (Note 2)	Long position	5,500,503,338	32.43
Shinning Crown Holdings	Long position	4,619,779,938	27.24
Inc. (Note 3)

– VI-4 –

GENERAL INFORMATION

APPENDIX VI

Notes:

(1) Of these 5,500,503,338 Shares, 4,619,779,938 Shares were held by Shinning Crown Holdings Inc. and 634,016,736 Shares were held by Shine Group Limited (both companies are 100% beneficially owned by Mr. Wong), and 240,955,927 Shares were held by Smart Captain Holdings Limited and 5,750,737 Shares were held by Wan Sheng Yuan Asset Management Company Limited (both companies are 100% beneficially owned by Ms. Du Juan, the spouse of Mr. Wong).
(2) Ms. Du Juan is the spouse of Mr. Wong. The aforesaid Shares that Mr. Wong and Ms. Du Juan are deemed to be interested refer to the same parcel of Shares.
(3) Shinning Crown Holdings Inc. is 100% beneficially owned by Mr. Wong.

Save as disclosed above and Mr. Wong’s interest in the 5,500,000,000 Consideration Shares and Warrants convertible into 2,500,000,000 Underlying Shares as disclosed under the paragraph headed “3. SHAREHOLDING STRUCTURE BEFORE AND AFTER COMPLETION” in the “Letter from the Board”, so far as is known to the Directors and the chief executive of the Company, as at the Latest Practicable Date, no other person (other than a Director or chief executive of the Company) had, or was deemed or taken to have, an interest or short position in the Shares or 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, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other member of the Group or held any option in respect of such capital.

5. DIRECTORS’ SERVICE CONTRACTS

As at the Latest Practicable Date:

(i) none of the Directors had any existing or proposed service contracts with any member of the Group or any associated company of the Company (excluding contracts expiring or determinable within one year without payment of compensation, other than statutory compensation).
(ii) none of the Directors had any continuous or fixed term service contracts with the Company or any of its subsidiaries or associated companies that were entered into or amended within the Relevant Period.
(iii) none of the Directors had entered into any continuous service contracts with the Company or any of its subsidiaries or associated companies with a notice period of 12 months or more.
(iv) none of the Directors had entered into any fixed term contracts with the Company or any of its subsidiaries or associated companies with more than 12 months to run irrespective of the notice period.

6. COMPETING BUSINESS INTEREST OF DIRECTORS

As at the Latest Practicable Date, Mr. Wong, Ms. Du Juan being the spouse of Mr. Wong and Ms. Huang Xiu Hong, being a sister of Mr. Wong (who was elected as a Director of the Company on 24 June 2015), remained as directors of certain subsidiaries of the Company and had beneficial interest or held directorship or otherwise had control in companies which

– VI-5 –

GENERAL INFORMATION

APPENDIX VI

operate an electrical appliances and consumer electronics products retail network under the trademark of “GOME Electrical Appliances”, and their related operations, mainly in cities other than the designated cities of the PRC which the Group already operates.

On 29 July 2004 and 28 February 2006, Mr. Wong and the Company entered into non-competition undertakings to govern competitions between the Group and the Non-listed GOME Group. Pursuant to the terms of the non-competition undertakings (i) the Group is restricted from carrying on retail business of electrical appliances and consumer electronics products by whatever means (whether through conventional retail stores or non-conventional modes of business (including online sales)) in areas where the Non-listed GOME Group operated the retail business of electrical appliances and consumer electronics products under the “GOME” brand name as at 3 June 2004; and (ii) reciprocally, the Non-listed GOME Group is restricted from carrying on the retail business of electrical appliances and consumer electronics products by whatever means (whether through conventional retail stores or non-conventional modes of business (including online sales)) in areas where the Group operated the retail business of electrical appliances and consumer electronics products under the “GOME” brand name as at 3 June 2004. In May 2012, pursuant to the subscription of a 40% interest in GOME-on-line by Mr. Wong and his associates, Mr. Wong has granted to the Group a waiver from compliance with the restriction set out in (i) above (excluding conventional mode of business). The effect is that the Group is able to operate its non-conventional modes of business via GOME-on-line with no geographical restriction.

Upon Completion, the 40% interest in GOME-on-line will remain with Mr. Wong and his associates, which will be the only business that carry on retail business of electrical appliances and consumer electronics products under the brand name “GOME” held by Mr. Wong and his associates.

Except as disclosed above, as at the Latest Practicable Date, none of the Directors or their respective associates was interested in any business which competes or is likely to compete, either directly or indirectly, with the business of the Group as required to be disclosed pursuant to the Listing Rules.

7. LITIGATION

So far as the Company is aware, as at the Latest Practicable Date, no member of the Group was engaged in any litigation or arbitration of material importance and there is no litigation or claim of material importance known to the Directors pending or threatened by or against any member of the Group.

8. MATERIAL ADVERSE CHANGE

The Directors are not aware of any material adverse change in the financial or trading position of the Group since 31 December 2014, the date to which the latest published audited financial statement of the Group were made up.

– VI-6 –

GENERAL INFORMATION

APPENDIX VI

9. EXPERTS’ QUALIFICATIONS AND CONSENTS

Set out below are the qualification of the experts who have given opinions or advices contained in this circular:

Name	Qualifications
Barclays Capital	a corporation licensed to carry out Type 1 (dealing in
	securities), Type 2 (dealing in futures contracts),
	Type 4 (advising on securities) and Type 6 (advising
	on corporate finance) regulated activities under the
	SFO
Ernst & Young	Certified Public Accountants
Jones Lang LaSalle	independent warrant valuer
Corporate Appraisal and
Advisory Limited
Platinum Securities	a corporation licensed to carry out Type 1 (dealing in
	securities) and Type 6 (advising on corporate finance)
	regulated activities under the SFO

As at the Latest Practicable Date, each of the expert listed in the table above has given and has not withdrawn its written consent to the issue of this circular with the inclusion of its letter and references to its name in the form and context in which it appears.

As at the Latest Practicable Date, each of the expert listed in the table above did not have any direct or indirect interest in any assets which had been acquired, disposed of by, or leased to any member of the Group, or was proposed to be acquired, or disposed of by, or leased to any member of the Group, since 31 December 2014, the date to which the latest audited financial statements of the Group was made up; and was not beneficially interested in the share capital of any member of the Group and did not have any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group.

10. MATERIAL CONTRACTS

As at the Latest Practicable Date, the following are the material contract entered into after the date 2 years before the date of the July Announcement, not being a contract entered into in the ordinary course of business carried on or intended to be carried on by the Company or any of its subsidiaries:

(i) the Acquisition Agreement;

– VI-7 –

GENERAL INFORMATION

APPENDIX VI

(ii) the loan extension agreement dated 4 December 2015 entered into between 北京戰聖投資有限公司 (Beijing Zhansheng Investment Co. Ltd.) (“ Beijing Zhansheng ”), as the borrower, 天津國美商業管理諮詢有限公司 (Tianjin GOME Commercial Consultancy Company Limited) (“ Tianjin Consultancy ”), as the principal lender and 興業銀行股份有限公司北京分行 (Beijing Branch of Industrial Bank Co. Ltd.) (the “ Lending Bank ”), as the agent lender, to extend the term of the loan (the “ Original Loan ”) in the amount of RMB3.6 billion advanced by Tianjin Consultancy to Beijing Zhansheng for the purchase of the entire registered capital of 北京市大中家用電器連鎖銷售有限公司 (Beijing Dazhong Home Appliances Retail Co. Ltd.) (“ Dazhong”)* in 2007 (as subsequently renewed and extended);
(iii) the supplemental agreement dated 4 December 2015 to the share pledge agreement (股權質押協議), entered into between Liu Chunlin, Han Yuejun and Tianjin Consultancy dated 14 December 2007 (as subsequently supplemented and amended), entered into between entered into between Liu Chunlin, Han Yuejun and Tianjin Consultancy to reflect the extended term of the Original Loan;
(iv) the supplemental agreement dated 4 December 2015 to the management agreement (委託經營協議), dated 14 December 2007 entered into between the Beijing Zhansheng and Tianjin Consultancy (as subsequently supplemented and amended), entered into between Beijing Zhansheng and Tianjin Consultancy to reflect the extended term of the Original Loan;
(v) the supplemental agreement dated 4 December 2015 to the exclusive purchase agreement (獨家購買權協議), dated 14 December 2007 and entered into between Tianjin Consultancy and the Beijing Zhansheng (as subsequently supplemented and amended), entered into between Tianjin Consultancy and Beijing Zhansheng to reflect the extended term of the Original Loan;
(vi) the supplemental agreement dated 4 December 2015 to the the share pledge agreement (股權質押協議), entered into between Beijing Zhansheng and Tianjin Consultancy dated 14 December 2007 (as subsequently supplemented and amended), entered into between Beijing Zhansheng and Tianjin Consultancy to reflect the extended term of the Original Loan;
(vii) the agreement dated 23 June 2015 entered into between 國美電器有限公司 (GOME Appliance Company Limited) (“ GOME Appliance ”) and 北京戰聖投資有限公司 (Beijing Zhansheng Investment Co. Ltd.) (“ Beijing Zhansheng ”) with respect to the acquisition of the entire registered capital of 北京市大中家用電器連鎖銷售有限公司 (Beijing Dazhong Home Appliances Retail Co. Ltd.*) by GOME Appliance from Beijing Zhansheng pursuant to the terms of the Agreement;
(viii) the agreement dated 11 November 2014 entered into between the Company and 徽商銀行股份有限公司 (Huishang Bank Corporation Limited) (as amended and supplemented by the agreements dated 26 November 2014 and 1 January 2015) with respect to the subscription of 632,500,000 (subsequently adjusted to 471,000,000) new overseas-listed foreign shares in the share capital of Huishang Bank Corporation Limited by the Company.

– VI-8 –

GENERAL INFORMATION

APPENDIX VI

11. GENERAL

(a) None of the Directors had any direct or indirect interest in any assets which had been acquired or disposed of by or leased to any member of the Group or proposed to be so acquired, disposed of by or leased to any member of the Group since 31 December 2014, being the date to which the latest published audited accounts of the Company were made up, and up to the Latest Practicable Date.
(b) Save as disclosed in this circular, as at the Latest Practicable Date, none of the Directors was materially interested in any contract or arrangement entered into by any member of the Group, which was subsisting and was significant in relation to the business of the Group.
(c) The company secretary of the Company is Mr. Szeto King Pui, Albert. Mr. Szeto is a Hong Kong solicitor.
(d) The registered office of the Company is Canon’s Court, 22 Victoria Street, Hamilton HM12, Bermuda.
(e) The principal place of business of the Company in Hong Kong is Suite 2915, 29th Floor, Two International Finance Centre, 8 Finance Street, Central, Hong Kong.
(f) The share registrars of the Company in Hong Kong is Tricor Abacus Limited.
(g) The principal share registrars of the Company is MUFG Fund Services (Bermuda) Limited.
(h) The English text of this circular shall prevail over their respective Chinese text for the purpose of interpretation.

12. DISCLOSURE UNDER THE TAKEOVERS CODE

(a) The registered office of the Vendor is at Suite 2915, 29th Floor, Two International Finance Centre, 8 Finance Street, Central, Hong Kong. The directors of the Vendor are Ms. Du Juan, Ms. Cheng Hung, Ms. Huang Xiu Hong and Mr. Zhou Ya Fei.
(b) The registered office of Shinning Crown Holdings Inc., which is 100% beneficially owned by Mr. Wong, is at Coastal Building, Wickham’s Cay II, P.O. Box 2221, Road Town, Tortola, British Virgin Islands. The directors of Shinning Crown Holdings Inc. are Mr. Wong Kwong Yu, Ms. Du Juan, Ms. Huang Xiu Hong and Mr. Zou Xiao Chun.
(c) The registered office of Shine Group Limited., which is 100% beneficially owned by Mr. Wong, is at Coastal Building, Wickham’s Cay II, P.O. Box 2221, Road Town, Tortola, British Virgin Islands. The directors of Shine Group Limited are Mr. Wong Kwong Yu, Ms. Du Juan and Ms. Huang Xiu Hong.

– VI-9 –

GENERAL INFORMATION

APPENDIX VI

(d) The registered office of Smart Captain Holdings Limited, which is 100% beneficially owned by Ms. Du Juan, spouse of Mr. Wong, is at Coastal Building, Wickham’s Cay II, P.O. Box 2221, Road Town, Tortola, British Virgin Islands. The director of Smart Captain Holdings Limited is Ms. Du Juan.
(e) The registered office of Wan Sheng Yuan Asset Management Company Limited, which is 100% beneficially owned by Ms. Du Juan, spouse of Mr. Wong is at Coastal Building, Wickham’s Cay II, P.O. Box 2221, Road Town, Tortola, British Virgin Islands. The director of Wan Sheng Yuan Asset Management Company Limited is Ms. Du Juan.
(f) As at the Latest Practicable Date, no agreement, arrangement or understanding (including any compensation arrangement) exists between the Vendor or parties acting in concert with it and any of the Directors, recent Directors, Shareholders or recent Shareholders of the Company having any connection with or dependence upon the Acquisition and/or the Whitewash Waiver.
(g) As at the Latest Practicable Date, there was no benefit to be given to any Directors as compensation for loss of office or otherwise in connection with the Acquisition and/or the Whitewash Waiver.
(h) As at the Latest Practicable Date, there was no agreement or arrangement between any Directors and any other persons which was conditional on or dependent upon the outcome of the Acquisition and/or the Whitewash Waiver or otherwise connected with the Acquisition and/or the Whitewash Waiver.
(i) As at the Latest Practicable Date, there was no material contract entered into by the Controlling Shareholder in which any Director had a material personal interest.
(j) As at the Latest Practicable Date, no person had irrevocably committed themselves to vote for or against the resolutions to be proposed at the SGM to approve the Acquisition and/or the Whitewash Waiver.
(k) As at the Latest Practicable Date, there was no agreement, arrangement or understanding pursuant to which the Consideration Shares or Underlying Shares or Warrants to be issued to the Vendor under the Acquisition Agreement would be transferred, charged or pledged to any other persons.
(l) As at the Latest Practicable Date, save as disclosed in the section headed “SHAREHOLDING STRUCTURE BEFORE AND AFTER COMPLETION” in the letter from the Board contained in this circular and the paragraph “DISCLOSURE OF INTERESTS” in this appendix, none of the Directors, directors of the Vendor, the Vendor and parties acting in concert with it owned or controlled or were interested in any other Shares, convertible securities, warrants, options or derivatives of the Company.

– VI-10 –

GENERAL INFORMATION

APPENDIX VI

(m) As at the Latest Practicable Date, as disclosed under paragraph “4. DISCLOSURE OF INTERESTS” of this Appendix, none of the Directors were interested in any Shares, and hence no Director would be entitled to vote for or against any of the resolutions to be proposed at the SGM to approve the Acquisition and the Whitewash Waiver.
(n) Save for the entering into the Acquisition Agreement, none of the Directors, directors of the Vendor, and the Vendor and parties acting in concert with it had dealt for value in any Shares, convertible securities, warrants, options or derivatives of the Company during the Relevant Period.
(o) As at the Latest Practicable Date, none of the Vendor and parties acting in concert with it had any arrangement of the kind referred to in Note 8 to Rule 22 of the Takeovers Code with any person.
(p) None of the Vendor and parties acting in concert with it had borrowed or lent any Shares, convertible securities, warrants, options or derivatives of the Company during the Relevant Period.
(q) None of the Company and the Directors owned or controlled or were interested in any shares, convertible securities, warrants, options or derivatives of the Vendor as at the Latest Practicable Date nor had any of them dealt for value in any shares, convertible securities, warrants, options or derivatives of the Vendor during the Relevant Period.
(r) As at the Latest Practicable Date, none of the subsidiaries of the Company, pension fund of the Company or of a subsidiary of the Company and any advisers to the Company (as specified in class (2) of the definition of associate in the Takeovers Code but excluding exempt principal traders) owned or controlled any Shares, convertible securities, warrants, options or derivatives of the Company or had dealt in any Shares, convertible securities, warrants, options or derivatives of the Company during the Relevant Period.
(s) As at the Latest Practicable Date, no person had any arrangement of the kind referred to in Note 8 to Rule 22 of the Takeovers Code with the Company or any person who is an associate of the Company by virtue of classes (1), (2), (3) and (4) of the definition of associate under the Takeovers Code.
(t) As at the Latest Practicable Date, there was no Shares, convertible securities, warrants, options or derivatives of the Company which were managed on a discretionary basis by fund managers connected with the Company.

– VI-11 –

GENERAL INFORMATION

APPENDIX VI

13. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection at the Company’s principal place of business in Hong Kong at Suite 2915, 29th Floor, Two International Finance Centre, 8 Finance Street, Central, Hong Kong during normal business hours on any weekdays, except public holidays, and on the websites of the Company (www.gome.com.hk) and the Securities and Futures Commission (www.sfc.hk) from the date of this circular up to and including the date of the SGM:

(a) the memorandum of association and bye-laws of the Company;
(b) the memorandum and articles of association of the Vendor;
(c) The annual reports for each of the year ended 31 December 2012, 2013 and 2014 and the interim report for the 6 months ended 30 June 2015 of the Company;
(d) the letter from the Board, the text of which is set out on pages 6 and 64 of this circular;
(e) the letter from the Independent Board Committee, the text of which is set out on pages 65 and 66 of this circular;
(f) the letter from the Independent Financial Adviser, the text of which is set out on pages 67 to 120 of this circular;
(g) the accountants’ report prepared by Ernst & Young in respect of the Target Group, the text of which is set out in Appendix II to this circular;
(h) the report from Ernst & Young in respect of the unaudited pro forma financial information of the Enlarged Group, the text of which is set out in Appendix III to this circular;
(i) the warrant valuation report from Jones Lang LaSalle Corporate Appraisal and Advisory Limited, the text of which is set out in Appendix IV of this circular;
(j) the letter to report on the valuation report referred to in (i) above in accordance with Rule 11.1(b) of the Takeovers Code from Barclays Capital Asia Limited, the text of which is set out in Appendix V of this circular;
(k) the written consents referred to in the paragraph headed “EXPERTS’ QUALIFICATIONS AND CONSENTS” in this appendix;
(l) the material contracts as referred to in the paragraph headed “MATERIAL CONTRACTS” in this appendix;
(m) the circular of the Company dated 9 June 2015; and
(n) this circular.

– VI-12 –

NOTICE OF SGM

==> picture [140 x 58] intentionally omitted <==

GOME ELECTRICAL APPLIANCES HOLDING LIMITED 國美電器控股有限公司[*]

(Incorporated in Bermuda with limited liability)

(Stock Code: 493)

NOTICE IS HEREBY GIVEN that a special general meeting of GOME Electrical Appliances Holding Limited (the “ Company ” ) will be held at Gloucester Room II, 3/F, The Excelsior, 281 Gloucester Road, Causeway Bay, Hong Kong on Friday, 22 January 2016 at 2:30 p.m. for the purpose of considering and, if thought fit, passing the following resolutions as ordinary resolutions of the Company:

ORDINARY RESOLUTIONS

Words and expressions that are not expressly defined in this notice shall bear the same meaning as that defined in the circular dated 24 December 2015 published by the Company (the “ Circular ”).

(a) “ THAT , the Acquisition Agreement (a copy of which (including each of the supplemental agreements dated 24 July 2015, 28 October 2015 and 17 December 2015) has been tabled at the meeting marked “A” and signed by the chairman of the meeting for identification purpose) and all transactions contemplated thereunder, be and are hereby approved, ratified and confirmed, and any one Director be and is authorised to do all such things and take all such actions as he/she may consider necessary or desirable to implement and/or give effect to the Acquisition Agreement and all transactions contemplated thereunder, including, subject to, the Listing Committee of The Stock Exchange of Hong Kong Limited approving the listing of, and granting permission to deal in the Consideration Shares and the Underlying Shares, the issue and allotment of the Consideration Shares and the Underlying Shares (upon exercise of the conversion rights attached to the Warrants) be and is hereby approved, and any one Director be and is authorised to do all such things and take all such actions as he/she may consider necessary or desirable to implement and/or give effects to any of the matters relating to or incidental to the issue and allotment of the Consideration Shares, Warrants and Underlying Shares.”

* For identification purpose only

– SGM-1 –

NOTICE OF SGM

(b) “ THAT , subject to and conditional upon the passing of resolution numbered 1(a) above, the Whitewash Waiver granted or to be granted by the Executive be and is hereby approved and any one Director be and is hereby authorised to do all such things and take all such actions as he/she may consider necessary or desirable to implement and/or give effects to any of the matters relating to or incidental to the Whitewash Waiver.”

CLOSURE OF SHAREHOLDERS’ REGISTER

For the purpose of determining the list of shareholders who are entitled to attend and vote at the Special General Meeting, the shareholders’ register of the Company will be closed on Thursday, 21 January 2016 and Friday, 22 January 2016 (both days inclusive). No transfer of shares of the Company will be registered during both days. In order to qualify to attend and vote at the Special General Meeting, all instruments of transfer together with the relevant share certificate(s) must be lodged with the Company’s branch share registrar in Hong Kong, Tricor Abacus Limited, at Level 22, Hopewell Centre, 183 Queen’s Road East, Hong Kong for registration no later than 4:30 p.m. on Wednesday, 20 January 2016.

By Order of the Board GOME ELECTRICAL APPLIANCES HOLDING LIMITED Zhang Da Zhong Chairman

Hong Kong, 24 December 2015

Notes:

A form of proxy for use at the meeting is enclosed herewith.
The instrument appointing a proxy shall be in writing under the hand of the appointer or his/her attorney duly authorised in writing or, if the appointer is a corporation, either under its seal or under the hand of any officer, attorney or other person authorised to sign the same.
Any shareholder 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 shareholder of the Company.
In order to be valid, a form of proxy in the prescribed form together with the power of attorney or other authority (if any) under which it is signed must be deposited at the Company’s branch registrar in Hong Kong, Tricor Abacus Limited, Level 22, Hopewell Centre, 183 Queen’s Road East, Hong Kong not less than 48 hours before the time fixed for holding the meeting.
Completion and return of the form of proxy will not preclude you from attending and voting in person at the meeting or at any adjourned meeting thereof (as the case may be) should you so wish, and in such an event, the form of proxy shall be deemed to be revoked.
Where there are joint registered holders of any share, any one of such joint holders may vote, either in person or by proxy, in respect of such shares as if he/she was solely entitled thereto, but if more than one of such joint holders are present at the meeting, whether in person or by proxy, the joint registered holder present whose name stands first on the register of members in respect of the shares shall be accepted to the exclusion of the votes of the other registered holders.

As at the date of this notice, the Board of the Company comprises Mr. Zou Xiao Chun as executive director; Mr. Zhang Da Zhong, Ms. Huang Xiu Hong and Mr. Yu Sing Wong as non-executive directors; and Mr. Lee Kong Wai, Conway, Mr. Ng Wai Hung and Ms. Liu Hong Yu and Mr. Wang Gao as independent non-executive directors.

– SGM-2 –

AI assistant

APT Satellite Holdings Limited — Proxy Solicitation & Information Statement 2015

49643_rns_2015-12-23_702dfcb0-efde-40ad-b796-c8bbd599224e.pdf

GOME ELECTRICAL APPLIANCES HOLDING LIMITED 國美電器控股有限公司[*]

MAJOR AND CONNECTED TRANSACTION IN RELATION TO THE ACQUISITION OF ARTWAY DEVELOPMENT LIMITED AND WHITEWASH WAIVER

Financial Adviser to the Company

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

GOME ELECTRICAL APPLIANCES HOLDING LIMITED 國美電器控股有限公司[*]

Non-executive Directors:

Independent non-executive Directors:

Registered Office:

To: the Shareholders

MAJOR AND CONNECTED TRANSACTION IN RELATION TO THE ACQUISITION OF ARTWAY DEVELOPMENT LIMITED AND WHITEWASH WAIVER

1. INTRODUCTION

LETTER FROM THE BOARD

LETTER FROM THE BOARD

2. THE ACQUISITION AGREEMENT

Date:

Parties:

Subject matter:

Consideration

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Scope of the Transaction

LETTER FROM THE BOARD

The Issue Price:

Conditions precedent:

Completion

LETTER FROM THE BOARD

LETTER FROM THE BOARD

SUMMARY OF THE PRINCIPAL TERMS OF THE WARRANTS

LETTER FROM THE BOARD

A B

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

3. SHAREHOLDING STRUCTURE BEFORE AND AFTER COMPLETION

LETTER FROM THE BOARD

4. FUNDS RAISED BY ISSUING EQUITY IN LAST 12 MONTHS

5. FUTURE INTENTIONS OF THE CONTROLLING SHAREHOLDER REGARDING THE GROUP

6. THE TARGET GROUP

Structure of the Target Group

LETTER FROM THE BOARD

Business

LETTER FROM THE BOARD

The Target Group’s historical sales performance

Selected historical sales performance comparison of the Target Group and the Group

Product Mix Breakdown by Each Product Category

Gross Profit Margin Breakdown by Each Product Category

Selected Analysis on Historical Financial Performance of the Target Group

Profits and Losses

Balance Sheet

Cash Flow

Connected Transactions

a) The Management Agreement and Purchasing Service Agreement

b) The 2013 Agreements

LETTER FROM THE BOARD

Due to and due from related parties

7. THE GROUP

8. REASONS FOR AND BENEFITS OF THE ACQUISITION

LETTER FROM THE BOARD

Transformation from a regional to one of the leading national retail, logistics and after-sales platforms, which is expected to further drive revenue growth and improve market share:

LETTER FROM THE BOARD

APT Satellite Holdings Limited Proxy Solicitation & Information Statement 2015