Art Group Holdings Limited - Proxy Solicitation & Information Statement 2008

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 a licensed securities dealer, bank manager, solicitor, professional accountant or other professional advisor.

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

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

ART TEXTILE TECHNOLOGY INTERNATIONAL COMPANY LIMITED 錦藝紡織科技國際有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock code: 565)

MAJOR TRANSACTION

IN RELATION TO THE PROPOSED ACQUISITION OF ENTIRE EQUITY INTERESTS IN COMPANIES AND LOAN ACQUISITION

Financial adviser to the Company

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30 April 2008

	Page
Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5
Appendix I – Financial information on the Group. . . . . . . . . . . . . . . . . . . . . . . . . . . . .	18
Appendix II – Financial information on the Acquirees. . . . . . . . . . . . . . . . . . . . . . . . . . .	63
Appendix III – Unaudited pro forma financial information
of the Enlarged Group. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	98
Appendix IV – Valuation report on the Property
(land and building portion). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	104
Appendix V – General information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	112

DEFINITIONS

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

“Acquirees”

Wide Launch Group and Zhengzhou Huatai

“Acquisitions” Acquisition I and Acquisition II

“Acquisition I” the acquisition of Wide Launch and the Loan pursuant to the Acquisition Agreement I

“Acquisition II”
the acquisition of Zhengzhou Huatai pursuant to the Acquisition Agreement II
“Acquisition Agreement I” the conditional sale and purchase agreement dated 17 March 2008 entered into between the Wide Launch Vendor and Right Lane in relation to the Acquisition I
“Acquisition Agreement II” the conditional equity transfer agreement in Chinese dated 17 March 2008 entered into between the Zhengzhou Huatai Vendors and Fuzhou Huaguan in relation to the Acquisition II
“Announcement” the Company’s announcement dated 17 March 2008 in relation to the Acquisitions
“Approval Authority” 新鄭市工商行政管理局 (Xinzheng City Industry and Commerce Administration Bureau)
“associate(s)” has the meaning given to it under the Listing Rules
“Board” the board of Directors
“Business Day” a day, other than a “general holiday” (as defined in the General Holidays Ordinance (Cap. 149 of the Laws of Hong Kong)), Saturday and any day on which a tropical cyclone warning No. 8 or above is hoisted or remains hoisted between 9:00 a.m. and 12:00 noon and is not lowered at or before 12:00 noon or on which a “black” rainstorm warning signal is hoisted or remains in effect between 9:00 a.m. and 12:00 noon and is not discontinued at or before 12:00 noon, on which licensed banks in Hong Kong are generally open for business
“Company” Art Textile Technology International Company Limited (錦藝紡織科技國際有限公司), a company incorporated in Cayman Islands with limited liability whose Shares are listed on the Stock Exchange
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DEFINITIONS

“Completion Date” the 60th Business Day following the date on which the last of the conditions precedent has been fulfilled or waived, or such later date as the Wide Launch Vendor and Right Lane may agree in writing
“Director(s)” the director(s) of the Company
“Enlarged Group” the Group and the Acquirees
“Fuzhou Huaguan” 福州華冠針紡織品有限公司 (Fuzhou Huaguan Knitting and Sprining Company Limited), a wholly foreign owned-enterprise established in the PRC with limited liability which is 100% indirectly held by the Company
“Group” the Company and its subsidiaries
“Hong Kong” the Hong Kong Special Administrative Region of the PRC
“HK$” Hong Kong dollars, the lawful currency of Hong Kong
“Independent Third Party(ies)” entity and its ultimate beneficial owner(s) which is/are third party(ies) independent of and not connected with the Company and any connected persons (as defined in the Listing Rules) of the Company
“Latest Practicable Date” 28 April 2008, being the latest practicable date prior to the printing of this circular for the purpose of ascertaining and collation of relevant information contained herein
“Listing Rules” the Rules Governing the Listing of Securities on the Stock Exchange
“Loan” a shareholder’s loan in the sum of HK$35 million owed by Wide Launch to the Wide Launch Vendor (such shareholder’s loan as may be owing by Wide Launch to the Wide Launch Vendor immediately prior to completion)
“m[2] ” square meter
“Main Board” the main board of the Stock Exchange
“PRC” the People’s Republic of China
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DEFINITIONS

“Previous Owner” Grand Business Investment Limited (宏業投資有限公司), a company incorporated in the British Virgin Islands with limited liability which is wholly-owned by the Wide Launch Vendor, an Independent Third Party “Property” a manufacturing plant, equipment and ancillary facilities located at 中國河南省新鄭市龍湖鎮雙湖大街 (Shuang Hu Da Street, Long Hu Town, Xinzheng City, Henan Province, the PRC) with a total area of 297,086.03m[2] which is held by Zhengzhou Hongye “Reorganisation” the transfer of the entire equity interest in Zhengzhou Hongye from the Previous Owner to Well Master completed on 26 March 2008, being one of the conditions precedent to the Acquisitions “Right Lane” Right Lane International Limited, a company incorporated in the British Virgin Islands with limited liability which is whollyowned by the Company “RMB” Renminbi, the lawful currency of the PRC “SFO” Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) “Share(s)” the share(s) of HK$0.01 in the issued share capital of the Company “Shareholders” the shareholders of the Company “Stock Exchange” The Stock Exchange of Hong Kong Limited “Talent Crown” Talent Crown Investment Limited, a company incorporated in the British Virgin Islands, the entire issued share capital of which is beneficially owned by Mr. Chen Dong. Mr. Chen Dong is an executive Director “Well Master” Well Master Enterprise Limited (佳萬企業有限公司), a company incorporated in Hong Kong with limited liability on 14 November 2007 which is wholly-owned by Wide Launch “Wide Launch” Wide Launch Investment Limited (廣興投資有限公司), a company incorporated in the British Virgin Islands with limited liability on 14 September 2007 which is wholly-owned by the Wide Launch Vendor

DEFINITIONS

“Wide Launch Group”

Wide Launch, Well Master and Zhengzhou Hongye

“Wide Launch Vendor”
Mr. Lin Shantan (林善談), the vendor to the Acquisition I
“Zhengzhou Hongye”

鄭州宏業紡織有限公司 (Zhengzhou Hongye Textile Company Limited), a wholly foreign-owned enterprise established in the PRC with limited liability on 14 August 2006 and is 100% held by Well Master

“Zhengzhou Huatai”
鄭州華泰紡織有限公司 (Zhengzhou Huatai Textile Company Limited), a domestic enterprise established in the PRC with limited liability on 5 June 2007 and is 100% held by the Zhengzhou Huatai Vendors
“Zhengzhou Huatai Vendors”
Mr. Xu Bao Fang (許寶芳) and Mr. Chen Bao Rong (陳寶榮), the vendors to the Acquisition II

For illustrative purposes in this circular only and unless otherwise stated, exchange of RMB into HK$ has been carried out at an exchange rate of HK$1 = RMB0.9174.

LETTER FROM THE BOARD

ART TEXTILE TECHNOLOGY INTERNATIONAL COMPANY LIMITED 錦藝紡織科技國際有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock code: 565)

Executive Directors: Mr. Chen Jinyan Mr. Chen Dong Ms. Kong Ping

Independent non-executive Directors:

Mr. Lo Kin Chung Mr. Huang Yongfeng Mr. Yu Zhong Ming

Registered Office: Cricket Square Hutchins Drive P.O. Box 2681 Grand Cayman KY1-1111 Cayman Islands

Principal place of business in Hong Kong: Unit 1407, 14/F. China Merchants Tower Shun Tak Centre 168 – 200 Connaught Road Central Hong Kong

30 April 2008

To the Shareholders

Dear Sirs or Madams,

MAJOR TRANSACTION IN RELATION TO THE PROPOSED ACQUISITION OF ENTIRE EQUITY INTERESTS IN COMPANIES AND LOAN ACQUISITION

INTRODUCTION

On 17 March 2008, the Company announced that Right Lane and Fuzhou Huaguan entered into the Acquisition Agreement I and Acquisition Agreement II on 17 March 2008, respectively. Pursuant to the Acquisition Agreement I, Right Lane is to acquire Wide Launch and the Loan at a maximum total consideration of RMB110.00 million (equivalent to approximately HK$119.90 million). Pursuant to the Acquisition Agreement II, Fuzhou Huaguan is to acquire Zhengzhou Huatai at a consideration of RMB50.00 million (equivalent to approximately HK$54.50 million).

LETTER FROM THE BOARD

As no Shareholder has a material interest in the Acquisitions which is different from that of the other Shareholders, no Shareholder is required to abstain from voting on the Acquisitions. Talent Crown, which is beneficially interested in approximately 55.92% of the total issued Shares as at the Latest Practicable Date, has given written consent to the Acquisitions. The written consent from Talent Crown is accepted in lieu of holding a general meeting to approve the Acquisitions pursuant to Rule 14.44(2) of the Listing Rules.

The purpose of this circular is to provide, amongst others, (i) details of the Acquisition Agreement I and Acquisition Agreement II, (ii) information on the transactions contemplated thereunder including the Acquisitions, (iii) financial information of the Acquirees, (iv) pro forma financial information of the Enlarged Group and (v) a valuation report on the Property (land and building portion).

ACQUISITION AGREEMENT I

Date : 17 March 2008 Vendor : the Wide Launch Vendor, namely Mr. Lin Shantan (林善談)

Purchaser : Right Lane, a wholly-owned subsidiary of the Company

The Wide Launch Vendor operates textile trading business with investments in the PRC and is the business acquaintance of the Group’s management. To the best of the Directors’ knowledge, information and belief, and having made all reasonable enquires, the Wide Launch Vendor is an Independent Third Party.

Assets to be acquired

Pursuant to the Acquisition Agreement I, Right Lane has conditionally agreed to acquire and Wide Launch Vendor has conditionally agreed to sell the entire issued share capital in Wide Launch and the Loan, which are wholly owned by the Wide Launch Vendor.

Wide Launch is an investment holding company whose sole asset is 100% direct interest in Well Master and 100% indirect interest in Zhengzhou Hongye immediately after the Reorganisation which was completed on 26 March 2008. The principal asset of Zhengzhou Hongye is the Property. As Zhengzhou Hongye owned the Property and certain domestic textile machinery and equipment, it is beneficial to the Group to acquire Zhengzhou Hongye (through Wide Launch) instead of acquiring the Property. As per the accountants’ report of the Wide Launch Group set out in Appendix II to this circular, it had audited net assets of approximately RMB25.39 million (approximately HK$27.68 million) as at 31 December 2007.

LETTER FROM THE BOARD

Consideration

The maximum total consideration of the Acquisition I is RMB110.00 million (equivalent to approximately HK$119.90 million), subject to adjustment, which shall comprise the share consideration and the loan consideration as follows:

(a) the share consideration for the sale and purchase of the entire issued share capital of Wide Launch shall be the consideration of RMB110.00 million (subject to adjustment) less the loan consideration; and
(b) the loan consideration for the sale and purchase of the Loan shall be on a dollar-fordollar basis, based on the amount of the Loan as shown in the completion accounts (unaudited and compiled using accounting principles generally accepted in the PRC) as at the Completion Date.

This consideration is payable according to the following schedule:

(a) a sum of RMB5,500,000 (equivalent to approximately HK$5,995,000) has been paid on the date of signing of the Acquisition Agreement I as deposit and partial payment of the total consideration of the Acquisition I (the “ Deposit I ”);
(b) a sum of RMB27,500,000 (equivalent to approximately HK$29,976,000), subject to adjustment, to be paid on the Completion Date;
(c) a sum of RMB55,000,000 (equivalent to approximately HK$59,952,000), subject to adjustment to be paid within seven (7) Business Days after the Completion Date; and
(d) the remaining balance of RMB22,000,000 (equivalent to approximately HK$23,981,000) to be paid within one (1) year after the date of the Acquisition Agreement I (the “ Final Payment Date I ”). In the event that it does not fall on a Business Day, the payment date shall be the next Business Day immediately after the Final Payment Date I.

If the unaudited consolidated balance sheet of Wide Lanuch as at the Completion Date shall show that Wide Launch has any liabilities (other than (i) the liabilities disclosed in the unaudited balance sheet of the Wide Launch Group of approximately HK$118.86 million as at 31 January 2008, (ii) the liabilities incurred by Zhengzhou Hongye with the prior written consent of Right Lane and (iii) the Loan), the consideration shall be reduced by the amount of such liabilities on a dollar-for-dollar basis. In the event that the amount of such liabilities exceeds the second payment, the third payment will be reduced accordingly. The Wide Launch Vendor shall pay to Right Lane the amount of any shortfall (after deducting the second payment and the third payment) within seven (7) Business Days after the Completion Date. Wide Launch had unaudited total liabilities of around HK$10,000 as at 31 December 2007 and had unaudited total liabilities of around HK$35.01 million after completion of the Reorganisation.

LETTER FROM THE BOARD

The consideration for the Acquisition I was determined after arm’s length negotiation between the parties to the Acquisition Agreement I with reference to unaudited net assets of Zhengzhou Hongye and the then preliminary current market valuation of the Property (land and building portion) estimated by GA Appraisal Limited, an independent firm of qualified professional valuers. Market approach with direct comparison method has been adopted in arriving at the market value of the Property (land and building portion) as at 31 January 2008 which is RMB211.00 million (equivalent to approximately HK$230.00 million) as set out in the valuation report in Appendix IV to this circular. As the aforementioned valuation is not based on discounted cash flows or projection of profits, earnings or cash flow, the valuation does not constitute a profit forecast under Listing Rule 14.61. The cash consideration will be financed by internal resources of the Group.

Conditions precedent

Completion of the Acquisition Agreement I is conditional upon the fulfillment of the following conditions:

(a) the warranties and representations as set out in the Acquisition Agreement I and the Acquisition Agreement II remaining true and accurate and not misleading at all times between the date of the Acquisition Agreement I and the Completion Date;
(b) Right Lane notifying the Wide Launch Vendor in writing that in reliance of the warranties and upon inspection and investigation of the documents in respect of the Wide Launch Group which may be required by Right Lane after the execution of the Acquisition Agreement I and due diligence carried out by Right Lane on the Wide Launch Group after the execution of the Acquisition Agreement I, it is fully satisfied with the conditions, both financial and operational, of the Wide Launch Group and its prospect;
(c) Fuzhou Huaguan notifying the Zhengzhou Huatai Vendors in writing that in reliance of the warranties and representations as set out in the Acquisition Agreement II and upon inspection and investigation of the documents in respect of Zhengzhou Huatai which may be required by Fuzhou Huaguan after the execution of the Acquisition Agreement II and due diligence carried out by Fuzhou Huaguan on Zhengzhou Huatai after the execution of the Acquisition Agreement II, it is fully satisfied with the conditions, both financial and operational, of Zhengzhou Huatai and its prospect;
(d) the shareholders of the Company approving the Acquisition Agreement I and Acquisition Agreement II and the transactions contemplated under or in connection with the Acquisition Agreement I and the Acquisition Agreement II at a duly convened and held extraordinary general meeting of the Company as required by and in accordance with the Listing Rules or, by a written Shareholder’s approval in lieu of the holding of an extraordinary general meeting pursuant to Rule 14.44(2) of the Listing Rules;
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LETTER FROM THE BOARD

(e) the completion of all approval and registration procedures with the Approval Authority in connection with the change of owner of Zhengzhou Huatai in accordance with the terms of the Acquisition Agreement II and the obtaining of the new Business Licence of Zhengzhou Huatai by Fuzhou Huaguan;
(f) the obtaining of all necessary approvals and consents of the relevant authorities in respect of the Acquisition Agreement I as may be required by the relevant laws;
(g) the obtaining of (i) an approval in writing from the Zhengzhou Municipal of Commerce with regard to the transfer of the entire equity interest of Zhengzhou Hongye in accordance with the relevant equity transfer agreement, including such equity transfer agreement and the change of the investor of Zhengzhou Hongye from the Previous Owner to Well Master as well as other related changes to the articles of association of Zhengzhou Hongye; and (ii) the new Approval Certificate of Zhengzhou Hongye from the Government of Henan Province and the new Business Licence of Zhengzhou Hongye from the Approval Authority each showing that Well Master is the sole investor of Zhengzhou Hongye and that Zhengzhou Hongye becomes a wholly foreign-owned enterprise wholly-owned by Well Master; and
(h) completion of the Acquisition Agreement II simultaneously with the completion of the Acquisition Agreement I.

As at the Latest Practicable Date, condition precedent (g) as mentioned above has been fulfilled with the completion of the Reorganisation on 26 March 2008. Right Lane may at its absolute discretion waive all or any of the conditions (except for condition (d) which will not be waived and must be fulfilled which was fulfilled on 17 March 2008) at any time by notice in writing to the Wide Launch Vendor. If any of the conditions set out above has not been satisfied or waived (as the case may be) within six (6) calendar months from the date of the Acquisition Agreement I or such later date as Right Lane and the Wide Launch Vendor may agree, the Wide Launch Vendor shall forthwith refund the Deposit I to Right Lane with interest calculated at the base lending rates as quoted by the People’s Bank of China from the date of the Acquisition Agreement I up to the date of refund and the Acquisition Agreement I shall cease and determine and neither party shall have any obligations and liabilities thereunder. As at the Latest Practicable Date, Right Lane has no intention to waive any of the above conditions.

The Wide Launch Vendor shall use his best endeavours to procure the fulfilment of the conditions (other than the condition (c)) as soon as practicable but in any event no later than six (6) calendar months after the date of the Acquisition Agreement I.

Completion

Completion is expected to take place on the 60th Business Day after the day on which the last of the outstanding conditions under the Acquisition Agreement I is fulfilled or waived by Right Lane (or such later date as the parties thereto may agree in writing).

LETTER FROM THE BOARD

ACQUISITION AGREEMENT II

Date : 17 March 2008

Vendors : the Zhengzhou Huatai Vendors, namely Mr. Xu Bao Fang (許寶芳) and Mr. Chen Bao Rong (陳寶榮)

Purchaser : Fuzhou Huaguan, a wholly-owned subsidiary of the Company

The Zhengzhou Huatai Vendors operate a fabrics retailing business and have investments in the PRC. Moreover, Mr. Xu Bao Fang is one of the customers of the Group. The Zhengzhou Huatai Vendors maintain frequent business contacts with the Group’s management. To the best of the Directors’ knowledge, information and belief, and having made all reasonable enquires, the Zhengzhou Huatai Vendors are Independent Third Parties.

Assets to be acquired

Pursuant to the Acquisition Agreement II, Fuzhou Huaguan has conditionally agreed to acquire and the Zhengzhou Huatai Vendors have conditionally agreed to sell the entire equity interest in Zhengzhou Huatai, which is owned as to 90% by Mr. Xu Bao Fang (許寶芳) and 10% by Mr. Chen Bao Rong (陳寶榮). The principal assets of Zhengzhou Huatai are the deposits for acquisition of import textile machinery and equipment to be used for yarn production (the “ Assets ”). Yarn production is one of the encouraged businesses by relevant authorities in the PRC for domestic enterprises, therefore, certain tax benefits, such as exemption of custom duty and value added tax, are offered to those domestic enterprises when acquiring import machinery and equipment. Accordingly, the Directors consider that it is beneficial for the Group to acquire Zhengzhou Huatai, a domestic enterprise established in the PRC, so as to enjoy the tax benefit instead of acquiring the Assets from the Zhengzhou Huatai Vendors. In relation to the acquisition of the Assets, commitments contracted but not provided for in the accountants’ report of Zhengzhou Huatai in Appendix II to this circular for the year ended 31 December 2007 were approximately RMB52.37 million. The payment terms of the Assets are through irrevocable and non-transferable documentary letters of credit at normal commercial terms.

Based on the accountants’ report of Zhengzhou Huatai set out in Appendix II to this circular, the deposits paid for the Assets were approximately RMB17.27 million. In addition, the total consideration of the Assets was approximately RMB69.64 million as at 31 December 2007. Furthermore, it had audited net assets of approximately RMB49.96 million (approximately HK$54.46 million) as at 31 December 2007. Zhengzhou Huatai’s net assets include RMB17.27 million of deposits for acquisitions of machinery and equipment, RMB15.00 million of amount owed from shareholder, RMB17.52 million of amount owed from Independent Third Party, RMB0.17 million of bank balance.

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LETTER FROM THE BOARD

Consideration

The total consideration of the Acquisition II is RMB50.00 million (equivalent to approximately HK$54.50 million), subject to adjustment. This consideration is payable according to the following schedule:

(a) a sum of RMB2,500,000 (equivalent to approximately HK$2,725,000) to be paid within seven (7) Business Days after the date of receiving (with acknowledgement issued by the Approval Authority) the whole set of equity transfer document from the Zhengzhou Huatai Vendors by the Approval Authority as deposit and part payment of the total consideration of the Acquisition II;
(b) a sum of RMB12,500,000 (equivalent to approximately HK$13,625,000) to be paid on the date of completion of all approval and registration procedures with the Approval Authority in connection with the change of owner of Zhengzhou Huatai in accordance with the terms of the Acquisition Agreement II;
(c) a sum of RMB25,000,000 (equivalent to approximately HK$27,251,000), subject to adjustment, to be paid within seven (7) Business Days after the Completion Date; and
(d) a sum of RMB10,000,000 (equivalent to approximately HK$10,900,000) to be paid within one (1) year after the date of the Acquisition Agreement II (the “ Final Payment Date II ”). In the event that it does not fall on a Business Day, the payment date shall be the next Business Day immediately after the Final Payment Date II.

If Zhengzhou Huatai has any liabilities (other than the liabilities disclosed in the unaudited balance sheet of Zhengzhou Huatai as at 31 January 2008 and the liabilities incurred by Zhengzhou Huatai with the prior written consent of Fuzhou Huaguan) as at the Completion Date, the consideration shall be reduced by the amount of such liabilities on a dollar-for-dollar basis. In the event that the amount of such liabilities exceeds the third payment, the Zhengzhou Huatai Vendors shall pay to Fuzhou Huaguan the amount of any shortfall within seven (7) Business Days after the Completion Date.

The consideration for the Acquisition II was determined after arm’s length negotiation between the parties to the Acquisition Agreement II with reference to the unaudited net assets value of Zhengzhou Huatai. The cash consideration will be financed by internal resources of the Group.

Conditions precedent

Completion of the Acquisition Agreement II is conditional upon the fulfillment of the same conditions as set out in the Acquisition Agreement I.

Fuzhou Huaguan may at its absolute discretion waive all or any of the conditions (except for condition (d) which will not be waived and must be fulfilled and was fulfilled on 17 March 2008) at any time by notice in writing to the Zhengzhou Huatai Vendors.

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LETTER FROM THE BOARD

If any of the conditions set out above has not been satisfied or waived (as the case may be) within six (6) calendar months from the date of the Acquisition Agreement II or such later date as Right Lane and Wide Launch Vendor may agree, the Zhengzhou Huatai Vendors shall forthwith refund all the part payments of the consideration to Fuzhou Huaguan with interest calculated at the base lending rates as quoted by the People’s Bank of China from the date of the Acquisition Agreement II up to the date of refund and the Acquisition Agreement II shall cease and determine and neither party shall have any obligations and liabilities thereunder. As at the Latest Practicable Date, Fuzhou Huaguan has no intention to waive any of the above conditions.

The Zhengzhou Huatai Vendors shall use their best endeavours to procure the fulfilment of the conditions (other than the condition (b)) as soon as practicable but in any event no later than six (6) calendar months after the date of the Acquisition Agreement II.

Completion

Completion is expected to take place on the 60th Business Day after the day on which the last of the outstanding conditions under the Acquisition Agreement II is fulfilled or waived by Fuzhou Huaguan (or such later date as Right Lane and the Wide Launch Vendor may agree in writing).

REASONS FOR AND THE BENEFITS OF THE ACQUISITIONS

The Group is principally engaged in the manufacture and sale of finished woven fabrics targeting at mid to high-end markets both in the PRC and overseas. By way of the Acquisitions, the Group intends to expand its manufacturing facilities through acquisition of fixed assets and factory premises as a strategy to increase the Group’s revenue. Zhengzhou Huatai has placed deposits to acquire import textile machinery and equipment, while Zhengzhou Hongye owns certain domestic textile machinery and equipment as well as the Property under construction. Accordingly, the Directors consider that Acquisition I and Acquisition II should be carried out simultaneously such that the assets owned by Zhengzhou Huatai and Zhengzhou Hongye can be combined to achieve the desired results. The Acquisitions form part of the expansion strategy of the Group with an aim of strengthening its capacities. In line with the expansion plan of the Group, the Directors consider the Acquisitions represent a good opportunity for the Group to increase its production capacity, enhance its market position and profitability. The Company views the Acquisitions as a step towards vertically expanding into a business area which compliments its principal business of sale and manufacturing of textile products.

Having considered the above, and also (i) the potential positive effects to be realized upon completion of the Acquisitions, (ii) the total consideration represents an approximately 112% premium to the audited net assets of Zhengzhou Huatai and Zhengzhou Hongye and (iii) the consideration under the Acquisition Agreement I represents an approximately 7% discount to the market valuation of the Property (land and building portion) after deducting the audited liabilities of approximately RMB93.00 million imposed on the Property, the Directors, including the independent non-executive Directors, are of the opinion that the Acquisitions are conducted on normal commercial terms and are fair and reasonable so far as the Shareholders as a whole are concerned.

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LETTER FROM THE BOARD

In addition, demand for pure cotton knit fabrics from the Group’s customers keeps increasing with its continuous growth in these few years. The Group has satisfied customers’ demand only by purchasing yarn for producing knit fabrics from external suppliers. However, the Acquisitions would align with the Group’s future development plan because the main products of Zhengzhou Huatai and Zhengzhou Hongye would be yarn for producing pure cotton knit fabrics, which in turn, would enable the vertical integration of the Group. Moreover, an international standard dyeing production line has been installed at the Group’s existing plant for further exploring the market of pure cotton knit fabrics. Consequently, after the Acquisitions, the Group would be able to integrate its production process vertically, from yarn producing, raw fabric weaving to dyeing.

Based on the above, the Directors are of the view that the entering into of conditional agreements for the Acquisitions is fair and reasonable and in the interest of the Shareholders.

INFORMATION ON WIDE LAUNCH

Wide Launch Investment Limited, a company incorporated in the British Virgin Islands with limited liability on 14 September 2007, is wholly-owned by Mr. Lin Shantan (林善談) and its sole business is investment holding.

The sole asset of Wide Launch is its 100% direct interest in Well Master and whose sole business is investment holding and 100% direct interest in Zhengzhou Hongye. Zhengzhou Hongye is a wholly foreign-owned enterprise established in the PRC with limited liability on 14 August 2006. Zhengzhou Hongye has obtained the business license in respect of the design, production and sale of textile products and development of new clothing and textile raw materials. The principal asset of Zhengzhou Hongye is the Property. Though Zhengzhou Hongye owns certain textile machinery and equipment, it has not commenced any business operation yet, hence, it has no profit/loss for the period ended 31 December 2006 and the year ended 31 December 2007. The Property is still under construction at present.

The Property comprises a yarn manufacturing plant which has an approximate site area of 297,086.03m[2] . It is planned to have several phases of development and with an approximate total gross floor area of 212,036m[2] . As at 31 January 2008, the Property had been fenced off and was under construction. Construction of Phase 1 was underway as at 31 January 2008, which primarily consists of 1 block of single storey factory building, 2 blocks of single storey godown building, a block of 4- storey ancillary office building, a block of 6-storey dormitory building, a block of single storey repair and maintenance building, a block of 2-storey canteen and bath building, a single storey pump room & basement water tank, a single storey transformer room, a single storey garage, landscaping areas, recreational facilities, fencing walls and guard posts. It is expected that the above construction would be completed by the end of June 2008. The office premises and the plant would be completed in May 2008 and June 2008 respectively. There would be altogether four production lines installed and trial run during the period from July 2008 to June 2009. And the yarn production would be commenced accordingly once their installation and trial run were completely satisfactorily.

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LETTER FROM THE BOARD

The financial information of the Wide Launch Group as stated in its accountants’ report in Appendix II to this circular for the period ended 31 December 2006 and for the year ended 31 December 2007 is set out below:

	Period ended	Year ended
	31 December 2006 31 December 2007
	RMB’000	RMB’000
	(audited)	(audited)
Loss before tax	5,833,000	10,865,000
Loss after tax	5,833,000	10,865,000

INFORMATION ON ZHENGZHOU HUATAI

Zhengzhou Huatai, a domestic enterprise established in the PRC with limited liability on 5 June 2007, is 100% held by the Zhengzhou Huatai Vendors. It has obtained the business license in respect of the design, production and sale of textile products and development of new clothing and textile raw materials. The financial information of Zhengzhou Huatai as stated in its accountants’ report in Appendix II to this circular for the period ended 31 December 2007 is set out below:

	Period ended
	31 December 2007
	RMB’000
	(audited)
Loss before tax	40,000
Loss after tax	40,000

The Wide Launch Vendor and the Zhengzhou Huatai Vendors are business partners. To the best knowledge of the Directors, they are independent among themselves and to the Group.

INFORMATION ON THE COMPANY

The Company was incorporated in the Cayman Islands as an exempted company with limited liability and its shares are listed on the Main Board of the Stock Exchange. The Group is principally engaged in the manufacture and sale of finished woven fabrics targeting at mid to high-end markets both in the PRC and overseas. The Group vertically integrates its production process, which include research and development, raw fabric weaving, dyeing and setting, cloth finishing such as pattern pressing and calendaring. The Group’s products are used for manufacturing down wear, sports wear, household products such as sofa and curtain and men’s and women’s fashions. The Company was not involved in any previous transaction with the Zhengzhou Huatai Vendors and Wide Launch Vendor which would otherwise require aggregation with the Acquisitions pursuant to Rule 14.22 of the Listing Rules and it has no relationship with any of them.

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LETTER FROM THE BOARD

DISCUSSION OF THE AUDITED FINANCIAL INFORMATION OF THE ACQUIREES IN THIS CIRCULAR

Net asset value of Wide Launch Group

The unaudited net asset value of Zhengzhou Hongye and unaudited net liabilities of Wide Launch of approximately RMB42.09 million and RMB10,000 respectively stated in the Announcement was adjusted by the reporting accountants in respect of the depreciation of property, plant and equipment of approximately RMB8.74 million, the written-off of obsolete inventory of approximately RMB0.82 million and the written-off of pre-operating expenses of approximately RMB7.14 million, which included office expenses, entertainment, travelling, water and electricity supply, staff costs and employee benefit expenses, consumable goods, motor vehicle expenses, telephone expenses, delivery charges and others (due to difference between Hong Kong Accounting Standards and PRC Accounting Standards to the treatment of pre-operating expenses, as Hong Kong Accounting Standards recognise the pre-operating expenses to profit and loss during the period incurred, while PRC Accounting Standards record these expenses as current assets and amortise them over five years) incurred for the year ended 31 December 2007 which resulted in the audited net assets of Wide Launch Group as at 31 December 2007 of approximately RMB25.39 million.

Loss of Wide Launch Group

The audited loss of Wide Launch Group for the period ended 31 December 2006 was mainly attributable to the depreciation of property, plant and equipment of approximately RMB3.48 million, the written-off of obsolete inventory of approximately RMB1.78 million and the written-off of the pre-operating expenses of approximately RMB0.57 million.

The audited loss of Wide Launch Group for the year ended 31 December 2007 was mainly attributable to the depreciation of property, plant and equipment of approximately RMB5.26 million (representing the under provision of RMB7.89 million minus the gain on disposals of property, plant and equipment of RMB2.63 million during the year), the written-off of the pre-operating expenses of approximately RMB6.57 million and the reversal of over-provision of inventory of approximately RMB0.96 million.

Disposal of plant and machinery of Wide Launch Group

The date of the disposal of certain plant and machinery mentioned under note 8 to the accountants’ report of Wide Launch Group in Appendix II to this circular was 25 August 2007 and the assets disposed of were the weaving machineries and their ancillary facilities which were regarded as obsolete and would no longer bring any economic benefit to Wide Launch Group.

The Assets held by Zhengzhou Huatai

In relation to the acquisition of the Assets, the reporting accountants noticed that the commitments of import textile machinery and equipment contracted but not provided for as at 31 December 2007 was approximately RMB46.50 million. The reporting accountants also noticed that a purchase of import textile machinery and equipment authorized but not contracted for of approximately RMB5.88 million needed to be included in the audited figure of commitments in the accountants’ report. The

15 -

LETTER FROM THE BOARD

difference of import textile machinery and equipment of approximately RMB3.59 million (contracted but not provided for) and RMB5.88 million above (authorized but not contracted for) from the unaudited figure disclosed in the Announcement was due to certain contracts in relation to import textile machinery and equipment not yet shown to the Company by Zhengzhou Huatai Vendors before the date of the Announcement.

Based on the unaudited management accounts of Zhengzhou Huatai, the total consideration of the Assets of approximately RMB60.17 million stated in the Announcement was as at 30 November 2007. While the audited figure of such item of approximately RMB69.64 million stated in this circular was at 31 December 2007. The increase of approximately RMB9.47 million represented the difference mentioned above in respect of more commitments recognized for Zhengzhou Huatai.

Loss of Zhengzhou Huatai

The audited loss of Zhengzhou Huatai for the period ended 31 December 2007 represented the written-off of pre-operating expense of approximately RMB40,000 due to the difference between Hong Kong Accounting Standards and PRC Accounting Standards.

FINANCIAL EFFECTS OF THE ACQUISITIONS ON THE GROUP

Following the Completion Date, the results, assets and liabilities of the Acquirees will be fully consolidated into the financial statements of the Group. As shown in the unaudited pro forma consolidated balance sheet of the Enlarged Group as set out in Appendix III to this circular, a goodwill of approximately HK$35.09 million arising from acquisition of the Acquirees will be recorded in the consolidated balance sheet of the Group. According to the requirements of the Hong Kong Financial Reporting Standards, this goodwill is subject to an impairment test annually. If the recoverable amount of the goodwill is less than its carrying amount, an impairment shall have to be recognised directly in the consolidated financial statement of the Group. The Directors shall review the recoverable amount of this goodwill at the balance sheet date for next five years to determine if there is an impairment to be recognised in the consolidated financial statement of the Group.

Assets and liabilities

Based on the unaudited pro forma consolidated balance sheet of the Enlarged Group as set out in Appendix III to this circular, the Group had unaudited total assets and total liabilities of around HK$811.66 million and HK$88.79 million respectively as at 31 December 2007. Upon the completion of the Acquisitions, the Enlarged Group would have unaudited pro forma total assets and total liabilities of around HK$1,000.01 million and HK$277.14 million respectively.

Earnings

According to the audited financial statements of the Acquirees, the audited net loss for the year ended 31 December 2007 was approximately RMB10.91 million (equivalent to approximately HK$11.89 million). When the plant is completed by the end of June 2008 and four production lines are installed and commenced production in phases, the finished product, yarn, can be used for weaving into raw fabric which is ready for dyeing. By implementing the vertical integration from yarn spinning, raw fabric weaving and fabric dyeing, the Group can be benefit in better quality control, shorter production cycle and lower production cost. The Directors believe that the Acquisitions will have a positive impact on the earnings of the Group in the future.

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LETTER FROM THE BOARD

FINANCIAL AND TRADING PROSPECTS OF THE ENLARGED GROUP

Demand for pure cotton knit fabrics from the Group’s customers keeps increasing with its continuous growth in these few years. The Group has satisfied customers’ demand only by purchasing yarn for producing knit fabrics from external suppliers. However, the Acquisitions would align with the Enlarged Group’s future development plan because the main products of Zhengzhou Huatai and Zhengzhou Hongye would be yarn for producing pure cotton knit fabrics, which in turn, would enable the vertical integration of the Enlarged Group. Moreover, an international standard dyeing production line has been installed at the Changle plant in Fujian Province for further exploring the market of pure cotton knit fabrics. Consequently, after the Acquisitions, the Enlarged Group would be able to integrate its production process vertically, from yarn spinning, raw fabric weaving to finished fabric dyeing; which in turn, the goals of better quality control, shorter production cycle and less production costs would be able to meet by the Enlarged Group.

GENERAL

Completion of Acquisition I and Acquisition II are inter-conditional. Accordingly, the Acquisitions are related and are aggregated pursuant to Rule 14.22 of the Listing Rules for the purpose of determining the percentage ratios. As each of the assets ratio and consideration ratio (as defined in the Listing Rules) exceeds 25% but is less than 100%, the Acquisitions constitute a major transaction of the Company under Chapter 14 of the Listing Rules and are subject to the approval of the Shareholders.

As no Shareholder has a material interest in the Acquisitions which is different from that of the other Shareholders, no Shareholder is required to abstain from voting on the Acquisitions. Talent Crown, which is beneficially interested in 581,910,000 Shares, representing approximately 55.92% of the total issued Shares as at the Latest Practicable Date, has given written consent to the Acquisitions. The written consent from Talent Crown is accepted in lieu of holding a general meeting to approve the Acquisitions pursuant to Rule 14.44(2) of the Listing Rules.

The Directors consider that the terms of the Acquisition Agreement I and Acquisition Agreement II are fair and reasonable and the Acquisitions are in the interest of the Company and the Shareholders as a whole. Under the assumption that the Acquisitions are to be approved by the Shareholders by way of an extraordinary general meeting of the Company instead of the written consent from Talent Crown, the Directors would have recommended the Shareholders to vote in favour of any resolution(s) in connection with the Acquisitions that would have been proposed at such an extraordinary general meeting of the Company.

ADDITIONAL INFORMATION

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

By the order of the Board

Art Textile Technology International Company Limited Chen Jinyan Chairman

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

1. SUMMARY OF AUDITED FINANCIAL STATEMENTS

Set out below is a summary of the audited consolidated income statements of the Group for each of the three years ended 30 June, 2005, 2006 and 2007 and the audited consolidated balance sheets of the Group as at 30 June 2005, 2006 and 2007 as extracted from the annual reports of the Company for the relevant years. The auditor of the Company did not issue a qualified opinion in respect of the financial statements of the Group for the three years ended 30 June 2007.

Income statement

Turnover
Cost of sales
Gross profit
Other income
Selling and distribution costs
Administrative expenses
Other expenses
Loss on changes in fair value of
convertible notes
Finance costs
Profit before tax
Income tax expense
Profit for the year
Dividends paid
Earnings per share
Basic, in Hong Kong cents
Diluted, in Hong Kong cents

For the year ended 30 June
2007
2006
2005
HK$’000
HK$’000
HK$’000
645,575
615,767
605,815
(460,906 )
(435,834 )
(429,804 )
184,669
179,933
176,011
5,370
5,173
1,660
(18,326 )
(18,221 )
(19,210 )
(18,946 )
(14,190 )
(16,551 )
(3,992 )
(4,527 )
(1,292 )
(15,663 )
(9,765 )
–
(1,097 )
(1,063 )
(2,952 )
132,015
137,340
137,666
(45,990 )
(44,994 )
(42,871 )
86,025
92,346
94,795
17,532
21,914
21,873
9.73
10.54
10.81
9.71
9.53
9.78

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Assets and liabilities

NON-CURRENT ASSETS Property, plant and equipment Prepaid lease payments – non-current portion Pledged bank deposits Deposits for acquisition of plant and equipment CURRENT ASSETS Inventories Trade and other receivables Prepaid lease payments – current portion Pledged bank deposits Bank balances and cash CURRENT LIABILITIES Trade and other payables Tax liabilities Bank borrowings, secured NET CURRENT ASSETS CAPITAL AND RESERVES Share capital Dividend reserve Share premium and other reserves NON-CURRENT LIABILITY Convertible notes	2007 HK$’000 133,164 14,105 – 2,099 149,368 25,729 62,529 327 3,473 487,659 579,717 58,031 19,667 10,000 87,698 492,019 641,387 10,406 10,406 620,575 641,387 – 641,387	As at 30 June 2006 HK$’000 145,166 14,012 39,007 – 198,185 28,163 61,306 317 4,314 340,735 434,835 56,592 17,112 16,074 89,778 345,057 543,242 8,766 8,766 442,720 460,252 82,990 543,242	2005 HK$’000 (Restated) 157,335 13,917 39,000 –
			210,252
			29,175 62,108 314 6,226 240,387
			338,210
			57,310 13,776 23,500
			94,586
			243,624
			453,876
			8,766 13,148 356,185
			378,099
			75,777
			453,876

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

2. AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2007

Set out below are the audited financial statements of the Company for the year ended 30 June 2007, which are extracted from the annual report of the Company for the year ended 30 June 2007.

CONSOLIDATED INCOME STATEMENT

For the year ended 30 June 2007

NOTES Turnover Cost of sales Gross profit Other income 6 Selling and distribution costs Administrative expenses Other expenses Loss on changes in fair value of convertible notes Finance costs 7 Profit before tax Income tax expense 8 Profit for the year 9 Dividends paid 11 Earnings per share 12 Basic, in Hong Kong cents Diluted, in Hong Kong cents	2007 HK$’000 645,575 (460,906 ) 184,669 5,370 (18,326 ) (18,946 ) (3,992 ) (15,663 ) (1,097 ) 132,015 (45,990 ) 86,025 17,532 9.73 9.71	2006 HK$’000 615,767 (435,834 ) 179,933 5,173 (18,221 ) (14,190 ) (4,527 ) (9,765 ) (1,063 ) 137,340 (44,994 ) 92,346 21,914 10.54 9.53

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

CONSOLIDATED BALANCE SHEET

At 30 June 2007

NOTES NON-CURRENT ASSETS Property, plant and equipment 13 Prepaid lease payments – non-current portion 14 Pledged bank deposits 17 Deposits for acquisition of plant and equipment CURRENT ASSETS Inventories 15 Trade and other receivables 16 Prepaid lease payments – current portion 14 Pledged bank deposits 17 Bank balances and cash 18 CURRENT LIABILITIES Trade and other payables 19 Tax liabilities Bank borrowings, secured 20 NET CURRENT ASSETS CAPITAL AND RESERVES Share capital 21 Dividend reserve Share premium and other reserves NON-CURRENT LIABILITY Convertible notes 22	2007 HK$’000 133,164 14,105 – 2,099 149,368 25,729 62,529 327 3,473 487,659 579,717 58,031 19,667 10,000 87,698 492,019 641,387 10,406 10,406 620,575 641,387 – 641,387	2006 HK$’000 145,166 14,012 39,007 –
		198,185
		28,163 61,306 317 4,314 340,735
		434,835
		56,592 17,112 16,074
		89,778
		345,057
		543,242

		8,766 8,766 442,720
		460,252 82,990
		543,242

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 30 June 2007

At 1 July 2005 Exchange difference on translation of foreign operations recognised directly in equity Profit for the year Total recognised income and expense for the year Transfer Final dividend paid Proposed interim dividend Interim dividend paid Proposed final dividend At 1 July 2006 Exchange difference on translation of foreign operations recognised directly in equity Profit for the year Total recognised income and expense for the year Transfer Recognition of equity-settled share-based payment Issue of shares upon conversion of convertible notes Issue of shares upon exercise of share options Final dividend paid Proposed interim dividend Interim dividend paid Proposed final dividend At 30 June 2007	Share capital HK$’000 8,766 – – – – – – – – 8,766 – – – – – 1,628 12 – – – – 10,406	Share premium HK$’000 69,369 – – – – – – – – 69,369 – – – – – 95,853 616 – – – – 165,838	Statutory Merger Exchange reserve reserve reserve fund HK$’000 HK$’000 HK$’000 136 32 34,013 – 9,759 – – – – – 9,759 – – – 10,444 – – – – – – – – – – – – 136 9,791 44,457 – 12,844 – – – – – 12,844 – – – 10,736 – – – – – – – – – – – – – – – – – – – – – 136 22,635 55,193	Dividend reserve HK$’000 13,148 – – – – (13,148 ) 8,766 (8,766 ) 8,766 8,766 – – – – – – – (8,766 ) 8,766 (8,766 ) 10,406 10,406	Share option reserve HK$’000 – – – – – – – – – – – – – – 1,777 – (88 ) – – – – 1,689	Retained profits HK$’000 254,597 – 92,346 92,346 (10,444 ) – (8,766 ) – (8,766 ) 318,967 – 86,025 86,025 (10,736 ) – – – – (8,766 ) – (10,406 ) 375,804	Total HK$’000 380,061 9,759 92,346 102,105 – (13,148 ) – (8,766 ) – 460,252 12,844 86,025 98,869 – 1,777 97,481 540 (8,766 ) – (8,766 ) – 641,387

The statutory reserve fund is a reserve required by the relevant laws of the People’s Republic of China (the “PRC”) applicable to the Company’s PRC subsidiaries. Appropriations to such reserves are made out of profit for the year as per the statutory accounts of the PRC subsidiaries and the amount and allocation basis are decided by the respective board of directors annually.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

CONSOLIDATED CASH FLOW STATEMENT

For the year ended 30 June 2007

OPERATING ACTIVITIES Profit before tax Adjustments for: Depreciation on property, plant and equipment Interest expense Interest income Loss on changes in fair value of convertible notes Loss on disposal of property, plant and equipment Share-based payment expense Release of prepaid lease payments Reversal of write-down of inventories (Write-back of) allowance for bad and doubtful debts Operating cash flows before movements in working capital Decrease in inventories (Increase) decrease in trade and other receivables Decrease in trade and other payables Cash generated from operations Income tax paid NET CASH FROM OPERATING ACTIVITIES INVESTING ACTIVITIES Decrease in pledged bank deposits Interest received Proceeds on disposal of property, plant and equipment Purchases of property, plant and equipment Deposits for acquisition of plant and equipment NET CASH FROM (USED IN) INVESTING ACTIVITIES	2007 HK$’000 132,015 19,732 1,097 (4,782 ) 15,663 2,565 1,777 327 (34 ) (9 ) 168,351 3,313 (1,617 ) (235 ) 169,812 (43,948 ) 125,864 39,977 4,782 1,590 (7,539 ) (2,099 ) 36,711	2006 HK$’000 137,340 25,984 1,063 (3,614 ) 9,765 2,478 – 317 (18 ) 187 173,502 1,880 2,421 (4,634 ) 173,169 (42,059 ) 131,110 2,086 3,614 971 (12,694 ) – (6,023)

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

2007
HK$’000
FINANCING ACTIVITIES
Repayment of bank borrowings
(21,556 )
Dividends paid
(17,532 )
Payment of interest on convertible notes
(1,172 )
Interest paid on bank borrowings
(1,097 )
New bank borrowings raised
15,000
Proceeds on issue of shares
upon exercise of share options
540
NET CASH USED IN FINANCING ACTIVITIES
(25,817 )
NET INCREASE IN CASH
AND CASH EQUIVALENTS
136,758
EFFECT OF FOREIGN EXCHANGE RATE CHANGES
10,166
CASH AND CASH EQUIVALENTS
AT BEGINNING OF THE YEAR
340,735
CASH AND CASH EQUIVALENTS
AT END OF THE YEAR,
represented by bank balances and cash
487,659

2006
HK$’000
(24,184 )
(21,914 )
(590 )
(1,063 )
16,074
–
(31,677 )
93,410
6,938
240,387
340,735

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 30 June 2007

1. GENERAL

The Company was incorporated in the Cayman Islands as an exempted company with limited liability and its shares are listed on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”). Its immediate and ultimate holding company is Talent Crown Investment Limited, a company incorporated in the British Virgin Islands (“BVI”). The addresses of the registered office and principal place of business of the Company are disclosed in the “Corporate Information” section of the annual report.

The consolidated financial statements are presented in Hong Kong dollars and the functional currency of the Company is Renminbi. The consolidated financial statements are presented in Hong Kong dollars for the convenience of the shareholders, because the Company’s shares are listed in Hong Kong.

The Company is an investment holding company. Particulars of the principal activities of its subsidiaries are set out in note 30.

2. APPLICATION OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS

In the current year, the Group has applied, for the first time, a number of new standards, amendment and interpretations (“new HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”) which are effective for the Group’s financial year beginning on 1 July 2006. The adoption of the new HKFRSs had no material effect on how the results and financial position for the current or prior accounting years have been prepared and presented. Accordingly, no prior period adjustment has been required.

The Group has not early applied the following new or revised standards, amendment and interpretations that have been issued but are not yet effective. The directors of the Company anticipate that the application of these standards, amendment and interpretations will have no material impact on the results and the financial position of the Group.

HKAS 1 (Amendment) Capital Disclosures[1] HKAS 23 (Revised) Borrowing Costs[2] HKFRS 7 Financial Instruments: Disclosures[1] HKFRS 8 Operating Segments[2] HK(IFRIC)-Int 10 Interim Financial Reporting and Impairment[3] HK(IFRIC)-Int 11 HKFRS 2-Group and Treasury Share Transactions[4] HK(IFRIC)-Int 12 Service Concession Arrangements[5] HK(IFRIC)-Int 13 Customer Loyalty Programmes[6] HK(IFRIC)-Int 14 HKAS19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction[5]

1 Effective for annual periods beginning on or after 1 January 2007

2 Effective for annual periods beginning on or after 1 January 2009

3 Effective for annual periods beginning on or after 1 November 2006

4 Effective for annual periods beginning on or after 1 March 2007

5 Effective for annual periods beginning on or after 1 January 2008

6 Effective for annual periods beginning on or after 1 July 2008

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

3. SIGNIFICANT ACCOUNTING POLICIES

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

The consolidated financial statements have been prepared in accordance with Hong Kong Financial Reporting Standards issued by the HKICPA. In addition, the consolidated financial statements include applicable disclosures required by the Rules Governing the Listing of Securities on the Stock Exchange and by the Hong Kong Companies Ordinance.

Basis of consolidation

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

All inter-company transactions, balances, income and expenses are eliminated on consolidation.

Revenue recognition

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

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

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

Property, plant and equipment

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

Depreciation is provided to write off the cost of items of property, plant and equipment, other than construction in progress, over their estimated useful lives and after taking into account their estimated residual value, using the straight line method.

Construction in progress represents property, plant and equipment in the course of construction for production or for its own use purposes. Construction in progress is carried at cost less any recognised impairment loss. Construction in progress is classified to the appropriate category of property, plant and equipment when completed and ready for intended use. Depreciation of these assets, on the same basis as other assets, commences when the assets are ready for their intended use.

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

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Prepaid lease payments

Prepaid lease payments which represent up-front payments to acquire leasehold interests in land are stated at cost and released to profit or loss over the period of the lease on a straight line basis.

Research expenditure

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

An internally-generated intangible asset arising from development expenditure is recognised only if it is anticipated that the development costs incurred on a clearly-defined project will be recovered through future commercial activity. The resultant asset is amortised on a straight line basis over its useful life, and carried at cost less subsequent accumulated amortisation and any accumulated impairment losses on the same basis as intangible assets acquired separately.

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

Operating leases

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

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

Foreign currencies

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

Exchange differences arising on the settlement of monetary items, and on the translation of monetary items, are recognised in profit or loss in the period in which they arise. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in profit or loss for the period.

For the purposes of presenting the consolidated financial statements, the assets and liabilities of the Group’s foreign operations are translated into the presentation currency of the Group (i.e. Hong Kong Dollars) at the rate of exchange prevailing at the balance sheet date, and their income and expenses are translated at the average exchange rates for the year, unless exchange rates fluctuate significantly during the period, in which case, the exchange rates prevailing at the dates of transactions are used. Exchange differences arising, if any, are recognised as a separate component of equity (the exchange reserve). Such exchange differences are recognised in profit or loss in the period in which the foreign operation is disposed of.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Borrowing costs

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

Retirement benefit costs

Payments to state-managed retirement benefit schemes and the Mandatory Provident Fund Scheme are charged as expenses when employees have rendered service entitling them to the contributions.

Taxation

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

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

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

Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at each balance sheet date 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 asset to be recovered.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited to profit or loss, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

Impairment

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

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised as income immediately.

Inventories

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

Financial instruments

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

Financial assets

The Group’s financial assets are mainly classified as loans and receivables. The accounting policies adopted in respect of loans and receivables are set out below.

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. At each balance sheet date subsequent to initial recognition, loans and receivables (including trade and other receivables, pledged bank deposits and bank balances) are carried at amortised cost using the effective interest method, less any identified impairment losses. An impairment loss is recognised in profit or loss when there is objective evidence that the asset is impaired, and is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate. Impairment losses are reversed in subsequent periods when an increase in the asset’s recoverable amount can be related objectively to an event occurring after the impairment was recognised, subject to a restriction that the carrying amount of the asset at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised.

Financial liabilities and equity

An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. The Group’s financial liabilities are generally classified into financial liabilities at fair value through profit or loss and other financial liabilities. The accounting policies adopted in respect of financial liabilities and equity instruments are set out below.

Financial liabilities at fair value through profit or loss

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

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

A financial liability other than a financial liability held for trading may be designated as at fair value through profit or loss upon initial recognition if:

such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise ; or
the financial liability forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group’s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or
it forms part of a contract containing one or more embedded derivatives, and HKAS 39 permits the entire combined contract to be designated as at fair value through profit or loss.

Convertible loan notes issued by the Group that comprise liability host contract and embedded non-equity conversion option component are designated as financial liabilities at fair value through profit or loss. At each balance sheet date subsequent to initial recognition, financial liabilities at fair value through profit or loss are measured at fair value, with changes in fair value recognised directly in profit or loss in the period in which they arise.

Other financial liabilities

Other financial liabilities (including trade and other payables and bank borrowings) are subsequently measured at amortised cost, using the effective interest method.

Equity instruments

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

Derecognition

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

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

Equity-settled share-based payment transactions

Share options granted and vested prior to 1 July 2005

The Group did not recognise the financial effect of these share options until they were exercised.

Upon the exercise of the share options, the resulting shares issued will be recorded by the Company as additional share capital at the nominal value of the shares, and the excess of the exercise price per share over the nominal value of the shares will be recorded by the Company in the share premium account. Options which are lapsed or cancelled prior to their exercise date are deleted from the register of outstanding options.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Share options granted after 7 November 2002 and vested on or after 1 July 2005

The fair value of services received determined by reference to the fair value of share options granted at the grant date is expensed on a straight line basis over the vesting period, with a corresponding increase in equity (share option reserve).

At each balance sheet date, the Group revises its estimates of the number of options that are expected to ultimately vest. The impact of the revision of the estimates, if any, is recognised in profit or loss with a corresponding adjustment to share option reserve.

At the time when the share options are exercised, the amount previously recognised in share option reserve will be transferred to the share premium account. When the share options are forfeited after the vesting date or are still not exercised at the expiry date, the amount previously recognised in share option reserve will be transferred to retained profits.

4. FINANCIAL INSTRUMENTS

a. Financial risk management objectives and policies

The Group’s major financial instruments include trade and other receivables, pledged bank deposits, bank balances and cash, trade and other payables, bank borrowings and convertible notes. Details of these financial instruments are disclosed in respective notes. The risks associated with these financial instruments and the policies on how to mitigate these risks are set out below. Management manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner.

(i) Market Risk

Interest rate risk

The Group’s exposure to cash flow interest rate risk relates primarily to the variable-rate bank balances and bank borrowings.

As at 30 June 2006, the Group also exposed to fair value interest rate risks which is related primarily to its fixed-rate bank borrowings and convertible notes.

The Group currently does not have a policy to hedge against the cash flow interest rate risk as management believes that changes in the interest rate will not have a significant impact on the Group’s financial position. However, management monitors closely the interest rate exposure and will consider using interest rate swap when the need arises.

(ii) Credit Risk

As at 30 June 2007, the Group’s maximum exposure to credit risk which will cause a financial loss to the Group due to failure to perform an obligation by the counter parties arising from the carrying amount of the respective recognised financial assets as stated in the consolidated balance sheet. In addition, the Group has a concentration of credit risk in certain of its major customers for sales of textile products. At the balance sheet date, the outstanding balances from the five largest customers amounted to approximately HK$15,608,000. In order to minimise the credit risk, management of the Group has delegated a team responsible for determination of credit limits, credit approvals and other monitoring procedures to ensure that follow-up action is taken to recover overdue debts. In addition, the Group reviews the recoverable amount of each individual trade debt at each balance sheet date to ensure that adequate impairment losses are made for irrecoverable amounts. In this regard, the directors of the Company consider that the Group’s credit risk is significantly reduced.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

The credit risk on liquid funds is limited because the counterparties are banks and financial institutions with good reputation.

(iii) Liquidity Risk

The objective of the Group is to maintain a balance between the continuity of funding and the flexibility through the use of bank and other borrowings. In addition, banking facilities have been put in place for general funding purposes.

b. Fair value

The fair value of financial assets and liabilities is determined in accordance with generally accepted pricing models based on discounted cash flow analysis, using prices or rates from observable current market transactions as inputs.

The fair value of derivative instruments, are calculated using quoted prices. Where such prices are not available, the fair value of a non-option derivative is estimated using discounted cash flow analysis and the applicable yield curve. For an option-based derivative, the fair value is estimated using option pricing model.

The directors consider that the carrying amounts of financial assets and liabilities recorded at amortised cost in the consolidated financial statements approximate their fair values.

5. SEGMENT INFORMATION

No analysis on business segment is provided as substantially all the Group’s turnover and segment results were derived from the manufacture and sale of finished woven fabrics. In addition, no geographical market analysis is provided as the Group’s turnover and contribution to segment results were substantially derived from the People’s Republic of China (the “PRC”) and the assets are substantially located in the PRC.

6. OTHER INCOME

Bank interest income Exchange gain, net Others 7. FINANCE COSTS Interest on bank borrowings wholly repayable within five years	2007 HK$’000 4,782 427 161 5,370 2007 HK$’000 1,097	2006 HK$’000 3,614 1,458 101
		5,173

		2006 HK$’000 1,063

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

8. INCOME TAX EXPENSE

PRC Foreign Enterprise Income Tax (“FEIT”): Current tax Underprovision in the prior year	2007 HK$’000 45,990 – 45,990	2006 HK$’000 42,702 2,292
		44,994

No provision for Hong Kong Profits Tax has been made in the consolidated financial statements as the Group did not generate any assessable profits arising in Hong Kong for both years.

Fuzhou Huaguan Knitting and Sprining Co., Ltd. (“Fuzhou Huaguan”) and Fuzhou Huasheng Textile Co., Ltd. (“Fuzhou Huasheng”) are subsidiaries of the Company established in the PRC. Fuzhou Huasheng is exempted from the FEIT for two years starting from its first profit-making year of operations and thereafter is eligible for 50% relief from FEIT for the following three years under the relevant rules and regulations of the PRC. The tax exempt period of Fuzhou Huasheng expired on 31 December 2006 and its applicable preferential tax rate, which is 50% relief for the following three years, was 15% for the period from 1 January 2007 to 30 June 2007.

The applicable tax rate for Fuzhou Huaguan was 27% for the year ended 30 June 2007.

The tax charge for the year can be reconciled to the profit before tax per the consolidated income statement as follows:

Profit before tax Tax at the income tax rate of 27% Tax effect of expenses not deductible for tax purpose Tax effect of income not taxable for tax purpose Effect of tax losses not allowable by Hong Kong tax authority Underprovision in respect of the prior year Tax charge for the year	2007 HK$’000 132,015 35,644 9,110 (1,462 ) 2,698 – 45,990	2006 HK$’000 137,340

		37,082 5,228 (903 ) 1,295 2,292
		44,994

No provision for deferred taxation has been recognised in the consolidated financial statements as the amount involved is insignificant.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

9. PROFIT FOR THE YEAR

Profit for the year has been arrived at after charging (crediting): Auditor’s remuneration Staff costs – directors’ emoluments – other staff costs – other staff’s retirement benefit scheme contributions – other staff’s share-based payment expense (Write-back of) allowance for bad and doubtful debts Reversal of write-down of inventories Depreciation on property, plant and equipment Loss on disposal of property, plant and equipment Release of prepaid lease payments Research and development costs	2007 HK$’000 820 4,390 12,570 1,501 1,429 19,890 (9 ) (34) 19,732 2,565 327 1,398	2006 HK$’000 820 4,040 11,292 1,491 –
		16,823
		187 (18 ) 25,984 2,478 317 1,738

Research and development costs include staff costs of HK$399,000 (2006: HK$172,000), which are also included in the staff costs disclosed separately above.

10. DIRECTORS’ AND EMPLOYEES’ EMOLUMENTS

The employments paid or payable to each of the six (2006: six) directors were as follows:

(a) Directors’ emoluments

Details of emoluments of individual directors are set out as follows:

2007

Mr. Chen Dong Mr. Chen Jinyan Ms. Kong Ping Mr. Huang Yongfeng Mr. Yu Zhong Ming Mr. Lo Kin Chung	Directors’ fees HK$’000 – – – 36 36 100 172	Salaries Retirement and other benefit scheme benefits contributions HK$’000 HK$’000 1,800 9 1,440 9 600 12 – – – – – – 3,840 30	Share-based payment expense HK$’000 – 348 – – – – 348	Total HK$’000 1,809 1,797 612 36 36 100
				4,390

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

2006

Mr. Chen Dong Mr. Chen Jinyan Ms. Kong Ping Mr. Huang Yongfeng Mr. Yu Zhong Ming Mr. Lo Kin Chung	Directors’ fees HK$’000 – – – 36 36 100 172	Salaries Retirement and other benefit scheme benefits contributions HK$’000 HK$’000 1,800 8 1,440 8 600 12 – – – – – – 3,840 28	Total HK$’000 1,808 1,448 612 36 36 100
			4,040

No directors waived any emoluments for both years.

(b) Employees’ emoluments

The five highest paid individuals of the Group for the year ended 30 June 2007 included three (2006: three) directors of the Company, details of whose emoluments are included above. The emoluments of the remaining two (2006: two) individuals are as follows:

Salaries and other benefits Retirement benefit scheme contributions Share-based payment expense	2007 HK$’000 1,103 19 661 1,783	2006 HK$’000 1,062 15 –
		1,077

11. DIVIDENDS PAID

Dividends recognised as distribution during the year: Interim–HK1.0 cent per share (2006: HK1.0 cent per share) Final–HK1.0 cent per share (2006: HK1.5 cents per share)	2007 HK$’000 8,766 8,766 17,532	2006 HK$’000 8,766 13,148
		21,914

Subsequent to 30 June 2007, the final dividend of HK1.0 cent per share (2006: HK1.0 cent per share) has been proposed by the directors and is subject to approval by the shareholders in the annual general meeting.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

12. EARNINGS PER SHARE

The calculation of the basic and diluted earnings per share attributable to the ordinary equity holders of the Company is based on the following data:

Earnings: Profit for the year and earnings for the purposes of basic earnings per share Effect of dilutive potential ordinary shares: Convertible notes Earnings for the purposes of diluted earnings per share Number of shares: Weighted average number of ordinary shares for the purposes of basic earnings per share Effect of dilutive potential ordinary shares: Share options Convertible notes Weighted average number of ordinary shares for the purpose of diluted earnings per share	2007 HK$’000 86,025 – 86,025 2007 ’000 884,193 1,815 – 886,008	2006 HK$’000 92,346 9,765
		102,111

		2006 ’000 876,558 – 194,805
		1,071,363

The computation of diluted earnings per share for the year ended 30 June 2006 does not assume the exercise of the Company’s outstanding share options granted on 23 December 2003, as the exercise price of those options is higher than the average market price for the share for that year.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

13. PROPERTY, PLANT AND EQUIPMENT

COST At 1 July 2005 Exchange realignment Additions Transfer Disposals At 30 June 2006 Exchange realignment Additions Transfer Disposals At 30 June 2007 DEPRECIATION At 1 July 2005 Exchange realignment Provided during the year Eliminated on disposals At 30 June 2006 Exchange realignment Provided during the year Eliminated on disposals At 30 June 2007 CARRYING VALUES At 30 June 2007 At 30 June 2006	Buildings HK$’000 84,678 2,466 – – – 87,144 2,615 40 16,708 – 106,507 19,470 567 7,889 – 27,926 838 9,185 – 37,949 68,558 59,218	Furniture, fixtures, office equipment Plant and Leasehold and motor machinery improvements vehicles HK$’000 HK$’000 HK$’000 118,103 1,940 3,510 3,440 47 96 887 – 216 4,363 – – (30,973 ) – – 95,820 1,987 3,822 2,873 50 108 5,201 – – 535 – – (7,300 ) – – 97,129 2,037 3,930 35,530 620 2,351 1,035 16 67 17,171 397 527 (27,524 ) – – 26,212 1,033 2,945 786 27 85 9,768 407 372 (3,145 ) – – 33,621 1,467 3,402 63,508 570 528 69,608 954 877	Construction in progress HK$’000 7,075 206 11,591 (4,363 ) – 14,509 436 2,298 (17,243 ) – – – – – – – – – – – – 14,509	Total HK$’000 215,306 6,255 12,694 – (30,973 ) 203,282 6,082 7,539 – (7,300 ) 209,603 57,971 1,685 25,984 (27,524 ) 58,116 1,736 19,732 (3,145 ) 76,439 133,164 145,166

At 30 June 2007, the Group pledged certain plant and machinery with aggregate carrying values of HK$34,189,000 (2006: HK$37,036,000) to a bank to secure banking facilities granted to the Group.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

At 30 June 2006, the Group also pledged certain buildings with aggregate carrying values of HK$871,000 to a bank to secure banking facilities granted to the Group.

The above items of property, plant and equipment are depreciated on straight line basis at the following rates per annum:

Buildings Plant and machinery Leasehold improvements Furniture, fixtures, office equipment and motor vehicles PREPAID LEASE PAYMENTS The Group’s prepaid lease payments comprise: Leasehold interest in land under medium-term lease in the PRC Analysed for reporting purposes as: Non-current assets Current assets	2007 HK$’000 14,432 14,105 327 14,432	10% 10% – 20% 20% 20% 2006 HK$’000 14,329

		14,012 317
		14,329

14. PREPAID LEASE PAYMENTS

At 30 June 2006, the Group pledged certain prepaid lease payments with a carrying amount of HK$884,000 to banks to secure banking facilities granted to the Group. The pledge was released during the year.

15. INVENTORIES

Raw materials Work in progress Finished goods	2007 HK$’000 3,918 15,102 6,709 25,729	2006 HK$’000 3,966 10,724 13,473
		28,163

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

16. TRADE AND OTHER RECEIVABLES

The Group allows an average credit period ranges from 45 days to 180 days to its trade customers. The following is an aged analysis of trade receivables at the balance sheet date:

0 – 60 days 61 – 90 days Over 90 days Trade receivables Other receivables	2007 HK$’000 53,870 428 6,269 60,567 1,962 62,529	2006 HK$’000 56,761 2,072 809 59,642 1,664
		61,306

17. PLEDGED BANK DEPOSITS

At 30 June 2006, an amount of US$5,000,000, equivalent to HK$39,007,000 was held by the bank as continuing security for the convertible notes issued. The deposit had been pledged to secure convertible notes which would be repayable on 6 December 2007 and was therefore classified as non-current assets. The pledged deposit was released due to the conversion of the convertible notes during the year. Details of the conversion are set out in note 22.

The remaining deposits of HK$3,473,000 (2006: HK$4,314,000) are pledged to a bank to secure facilities granted to the Group. The deposits have been pledged to secure short-term bank borrowings and are therefore classified as current assets. The pledged bank deposits will be released upon settlement of relevant borrowings.

The deposits carry interest rate at 0.72% per annum (2006: 0.72% to 3.60% per annum).

18. BANK BALANCES AND CASH

Bank balances and cash comprise cash held by the Group and bank balances that carry interest rates ranging from 0.72% to 3.0% (2006: 0.72% to 3.0%) per annum and have original maturity of three months or less.

19. TRADE AND OTHER PAYABLES

The following is an aged analysis of trade payables at the balance sheet date:

0 – 60 days 61 – 90 days Trade payables Other payables	2007 HK$’000 41,069 90 41,159 16,872 58,031	2006 HK$’000 40,001 – 40,001 16,591
		56,592

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

20. BANK BORROWINGS, SECURED

The Group’s bank borrowings are wholly repayable within one year and are secured by the following:

(i) certain plant and machinery as set out in note 13; and
(ii) pledged bank deposits as set out in note 17.

The exposure of the Group’s fixed-rate borrowings and variable-rate borrowings and the contractual maturity dates or repricing dates are as follows:

2007: Within one year 2006: Within one year	Fixed-rate borrowings HK$’000 – Fixed-rate borrowings HK$’000 6,408	Variable-rate borrowings HK$’000 10,000 Variable-rate borrowings HK$’000 9,666	Total HK$’000 10,000

			Total HK$’000 16,074

The ranges of effective interest rates per annum (which are equal to contractual interest rates) on the Group’s borrowings are as follows:

	2007	2006
Effective interest rate:
Fixed-rate borrowings	N/A	6.37% to 7.02%
Variable-rate borrowings	5.17% to 7.00%	5.03% to 6.71%

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

21. SHARE CAPITAL

Ordinary shares of HK$0.01 each Authorised: At 1 July 2005, 30 June 2006 and 30 June 2007 Issued and fully paid: At 1 July 2005 and 30 June 2006 Conversion of convertible notes_(Note a) Exercise of share options(Note b)_ At 30 June 2007	Number of shares 2,000,000,000 876,557,583 162,845,000 1,200,000 1,040,602,583	Nominal value HK$’000 20,000

		8,766 1,628 12
		10,406

Notes:

(a) On 14 June 2007, convertible notes issued by the Company with face value of US$10,000,000 (equivalent to approximately HK$78,171,000) were converted into 162,845,000 ordinary shares of HK$0.01 each of the Company.
(b) During the year, 1,200,000 ordinary shares of HK$0.01 each in the Company were issued upon exercise of share options at subscription price of HK$0.45 per share.

The shares issued during the year rank pari passu with the existing shares in all respects.

22. CONVERTIBLE NOTES

	2007	2006
	HK$’000	HK$’000
Convertible notes – unlisted	–	82,990

On 6 December 2004, the Company issued the 1.5% original tranche 1 secured convertible notes (“CN”) of US$10,000,000 to Credit Suisse (Hong Kong) Limited (“Credit Suisse”), an independent investor.

The CN bore interest at 1.5% per annum, which was payable semi-annually in arrears and was repayable on 6 December 2007.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Credit Suisse had an option to convert the CN into ordinary shares of the Company at the option of the bondholder, at any time between the date of issue of the CN to the maturity date of 6 December 2007 at either of the following options:

(i) fixed conversion price of HK$0.8579; or
(ii) floating conversion price being 91% of the average of any 4 consecutive closing prices per share as selected by the bondholder during the 30 consecutive business days immediately prior to the date on which the conversion notice is received by the Company.

Details of the CN are set out in an announcement made by the Company on 8 December 2004. The ordinary shares to be issued upon such conversion rank pari passu in all respects with the ordinary shares of the Company in issue on the relevant conversion date.

Pursuant to a deed of assignment dated 3 December 2004, Credit Suisse deposited the subscription funds for the CN into an account of DB Trustees (Hong Kong) Limited (the “Account”). The Company charged the Account and all moneys (including interest) from time to time standing to the credit of the Account, by way of fixed charge, in favour of DB Trustees (Hong Kong) Limited (who acts as security trustee for Credit Suisse) as continuing security for the payment and discharge of all money owing by the Company to Credit Suisse. Details on the pledged deposits are set out in note 17 to the consolidated financial statements.

The CN was designated as financial liabilities through profit or loss.

On 14 June 2007, the Company received a conversion notice from Credit Suisse to convert in full the CN. The conversion price for the conversion is HK$0.480025 and the whole CN was converted into 162,845,000 ordinary shares of HK$0.01 each of the Company.

The CN was measured at fair value at each balance sheet date and at the date of its conversion into shares of the Company. The CN contain two components, liability and embedded non-equity conversion option. Fair value of the liability host contract is determined based on discounted cash flow model. The discount rate of 6.57% was used in applying the discounted cash flow model. Fair value of the embedded non-equity conversion option is determined based on binomial model, volatility of 33.46% and risk-free rate of 4.78% were used as input in valuing the call option of the shares.

As at 14 June 2007, the fair value of the CN in total is HK$97,483,000.

The interest expense on the convertible notes included in the fair value change of convertible notes for both

years.

23. SHARE-BASED PAYMENT TRANSACTIONS

The Company’s share option scheme (the “Scheme”) was adopted for the purpose of providing incentives and rewards to eligible participants for their contribution to the Group and/or to enable the Group to recruit and retain highcalibre employees and attract human resources that are valuable to the Group and any entity in which the Group holds any equity interest (“Invested Entity”). Eligible participants of the Scheme include the directors and employees of the Company, its subsidiaries or any Invested Entity, suppliers and customers, of the Group or any Invested Entity, any person or entity that provides research, development or other technological support to the Group or any Invested Entity, and any shareholder of any members of the Group or any Invested Entity or any holder of any securities issued by any members of the Group or any Invested Entity. The Scheme became effective on 10 September 2003 (the “Listing date”) and, unless otherwise terminated or amended, will remain in force for 10 years.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

At 30 June 2007, the number of shares in respect of which options had been granted and remained outstanding under the Scheme was 58,250,000 (2006: 38,250,000), representing approximately 6% (2006: 4%) of the shares of the Company in issue at that date. The maximum number of shares which may be issued upon exercise of all outstanding share options granted and yet to be exercised under the Scheme and any other share option schemes adopted by the Group shall not exceed such number of Company’s shares as equal to 30% of the issued share capital of the Company from time to time. The total number of shares which may be issued upon exercise of all share options to be granted under the Scheme and any other share option schemes of the Group must not in aggregate exceed 10% of the Company’s shares in issue as at the Listing date. The number of shares in respect of which options may be granted to any individual in any one year is not permitted to exceed 1% of the shares of the Company in issue at any point in time, without prior approval from the Company’s shareholders. Options granted to substantial shareholders or independent non-executive directors in excess of 0.1% of the Company’s share capital or with a value in excess of HK$5,000,000 must be approved in advance by the Company’s shareholders.

Options granted must be taken up within 28 days of the date of grant, upon payment of HK$1 per option. Options may be exercised at any time from the date of grant of the share option to the 10th anniversary of the date of grant. The exercise price is determined by the directors of the Company, and will not be less than the higher of the closing price of the Company’s shares on the date of grant, and the average closing price of the shares for the five business days immediately preceding the date of grant.

On 4 December 2006, the Company granted share options to entitle the holders to subscribe for shares in the Company at the exercise price of HK$0.45 per share with exercise period from 2 January 2007 to 1 January 2012.

The closing price of the Company’s shares immediately before 4 December 2006, the date of grant of the options, was HK$0.45.

The following table discloses movements of the Company’s share options held by directors and employees during the two years:

Date Category of grant Exercise period Exercise price HK$ Directors 23.12.2003 23.12.2003 to 22.12.2013 0.612 4.12.2006 2.1.2007 to 1.1.2012 0.45 Employees 23.12.2003 23.12.2003 to 22.12.2013 0.612 4.12.2006 2.1.2007 to 1.1.2012 0.45 Granted Total Exercisable at year end	Outstanding at 1.7.2005 and 1.7.2006 4,000,000 – 4,000,000 34,250,000 – 34,250,000 38,250,000	Granted during the year – 4,500,000 4,500,000 – 19,700,000 19,700,000 24,200,000	Exercised during the year – – – – (1,200,000 ) (1,200,000 ) (1,200,000 )	Lapsed during the year – – – (3,000,000 ) – (3,000,000 ) (3,000,000 )	Outstanding at 30.6.2007 4,000,000 4,500,000
					8,500,000

					31,250,000 18,500,000
					49,750,000

					58,250,000

					58,250,000

In respect of the share options exercised during the year, the weighted average share price at the date of exercise and immediately before the date of exercise are HK$0.70 (2006: nil).

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

The fair value of the options granted on 4 December 2006 is HK$1,777,000.

The fair value of the share options granted during the year was calculated using The Black-Scholes option pricing model. The inputs into the model was as follows:

	2007
Weighted average share price at the date of acceptance	HK$0.45
Weighted average exercise price	HK$0.45
Expected life of options	5 years
Expected volatility	27%
Expected dividend yield	5.50%
Risk free rates	3.79%

Expected volatility was determined by using the historical volatility of the Company’s share price over the past year. The expected life used in the model has been estimated, based on management’s best estimate, for the effects of non transferability, exercise restrictions and behavioural considerations.

The Group recognised the share-based payment expense of HK$1,777,000 for the year ended 30 June 2007 (2006: nil) in relation to share options granted by the Company.

The Black-Scholes option pricing model has been used to estimate the fair value of the options. The variables and assumptions used in computing the fair value of the share options are based on the directors’ best estimate. The value of an option varies with different variables of certain subjective assumptions.

24. BALANCE SHEET OF THE COMPANY

Note TOTAL ASSETS TOTAL LIABILITIES CAPITAL AND RESERVES Share capital Dividend reserve (a) Share premium and other reserves (a)	2007 HK$’000 395,269 21,268 374,001 10,406 10,406 353,189 374,001	2006 HK$’000 357,179 92,925
		264,254

		8,766 8,766 246,722
		264,254

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Note:

(a) SHARE PREMIUM AND OTHER RESERVES

At 1 July 2005 Profit for the year Final dividend paid Proposed interim dividend Interim dividend paid Proposed final dividend At 1 July 2006 Profit for the year Recognition of equity-settled share-based payment Issue of shares upon conversion of convertible notes Issue of shares upon exercise of share options Final dividend paid Proposed interim dividend Interim dividend paid Proposed final dividend At 30 June 2007	Share premium HK$’000 69,369 – – – – – 69,369 – – 95,853 616 – – – – 165,838	Capital reserve HK$’000 172,750 – – – – – 172,750 – – – – – – – – 172,750	Dividend reserve HK$’000 13,148 – (13,148 ) 8,766 (8,766 ) 8,766 8,766 – – – – (8,766 ) 8,766 (8,766 ) 10,406 10,406	Share option reserve HK$’000 – – – – – – – – 1,777 – (88 ) – – – – 1,689	Retained profits HK$’000 13,970 8,165 – (8,766 ) – (8,766 ) 4,603 27,481 – – – – (8,766 ) – (10,406 ) 12,912	Total HK$’000 269,237 8,165 (13,148 ) – (8,766 ) –
						255,488 27,481 1,777 95,853 528 (8,766 ) – (8,766 ) –
						363,595

Capital reserve of the Company represents the difference between underlying net assets of the subsidiaries which were acquired by the Company and the nominal value of the share capital issued by the Company to acquire the assets under a group reorganisation on 15 August 2003.

25. MAJOR NON-CASH TRANSACTIONS

During the year, the Company converted the CN in full into 162,845,000 ordinary shares of HK$0.01 each, the conversion resulted in the increase of share capital and share premium of HK$1,628,000 and HK$95,853,000 respectively. Details of the conversion are set out in note 22.

26. OPERATING LEASE ARRANGEMENTS

The Group as lessees

	The Group as lessees	The Group as lessees
	2007	2006
	HK$’000	HK$’000
Minimum lease payments paid under operating leases
during the year in respect of rented premises	2,610	2,559

45 -

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

At the balance sheet date, the Group has commitments for future minimum lease payments for rented premises under non-cancellable operating leases which fall due as follows:

Within one year In the second to fifth year inclusive Over five years	2007 HK$’000 1,348 2,345 85 3,778	2006 HK$’000 1,428 2,180 –
		3,608

Operating lease payments represent rentals payable by the Group for certain of its office premises. Leases are negotiated for an average term of four years with fixed rentals.

27. COMMITMENTS

	2007	2006
	HK$’000	HK$’000
Capital expenditure contacted for but not provided
in the consolidated financial statements in respect
of plant and machinery	500	–
Capital expenditure contracted for but not provided
in the consolidated financial statements in respect
of construction of buildings	–	1,902

At 30 June 2007, the Group had commitments for future research costs of HK$263,000 (2006: HK$400,000) payable under a non-cancellable consultancy agreement which will expire on 31 March 2009.

28. RELATED PARTY TRANSACTIONS

The remuneration of key management during the year were as follows:

Short-term benefits Retirement benefit scheme contributions Share-based payment expense	2007 HK$’000 4,012 30 348 4,390	2006 HK$’000 4,012 28 –
		4,040

The remuneration of key management is determined by the remuneration committee of the Company having regard to the performance of individuals and market trends.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

29. POST BALANCE SHEET EVENT

On 21 August 2007, the Company granted share options to employees to entitle the holders to subscribe for shares in the Company at the exercise price of HK$0.572 per share with exercise period from 1 September 2007 to 31 August 2012. The total number of share options granted are 29,200,000 shares.

30. PRINCIPAL SUBSIDIARIES

Details of the Company’s principal subsidiaries at 30 June 2007 are as follows:

	Place of		Paid up	Proportion of nominal	Proportion of nominal
	incorporation or		issued/	value of	issued/
	registration/		registered	registered capital
Name of subsidiary	operations		capital	held by the	Company	Principal activities
				Directly	Indirectly
				%	%
Fuzhou Huaguan *	PRC	RMB70,000,000		–	100	Manufacture and sale of
						finished woven fabrics
Fuzhou Huasheng *	PRC	US$4,000,000		–	100	Manufacture and sale of
						finished woven fabrics
Global Art International	BVI		US$1	–	100	Investment holding
Limited		Ordinary share
Good Fame Group Limited	BVI		US$1	–	100	Investment holding
		Ordinary share
Right Lane International	BVI		US$30,000	100	–	Investment holding
Limited		Ordinary shares

Fuzhou Huaguan and Fuzhou Huasheng are established as wholly foreign-owned enterprises under the relevant PRC law and regulations with an operating period up to 26 July 2010 and 6 December 2054, respectively.

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

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

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

3. UNAUDITED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED 31 DECEMBER 2007

Set out below are the unaudited financial statements of the Company for the six months ended 31 December 2007, which are extracted from the interim report of the Company for the six months ended 31 December 2007.

CONDENSED CONSOLIDATED INCOME STATEMENT

For the six months ended 31 December 2007

NOTES Turnover Cost of sales Gross profit Other income Selling and distribution costs Administrative expenses Other expenses Loss on changes in fair value of convertible notes Finance costs 4 Profit before tax Income tax expense 5 Profit for the period 6 Dividend paid 7 EARNINGS PER SHARE 8 – Basic, Hong Kong cents – Diluted, Hong Kong cents	Six months ended 31 .12.2007 31.12.2006 (unaudited) (unaudited) HK$’000 HK$’000 300,870 294,635 (214,418 ) (210,493 ) 86,452 84,142 7,210 3,323 (8,330 ) (8,190 ) (15,052 ) (8,866 ) (1,099 ) (516 ) – (824 ) (308 ) (553 ) 68,873 68,516 (19,081 ) (18,776 ) 49,792 49,740 10,406 8,766 4.78 5.67 4.76 4.73

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

CONDENSED CONSOLIDATED BALANCE SHEET

At 31 December 2007

NOTES NON-CURRENT ASSETS Property, plant and equipment 9 Prepaid lease payments – non-current portion Deposits for acquisition of plant and equipment CURRENT ASSETS Inventories Trade and other receivables 10 Prepaid lease payments – current portion Pledged bank deposits Bank balances and cash CURRENT LIABILITIES Trade and other payables 11 Tax liabilities Bank borrowings, secured 12 NET CURRENT ASSETS CAPITAL AND RESERVES Share capital 13 Dividend reserve Share premium and other reserves	31.12.2007 (unaudited) HK$’000 165,260 14,833 1,914 182,007 21,041 64,355 347 4,152 539,755 629,650 64,623 15,659 8,511 88,793 540,857 722,864 10,406 – 712,458 722,864	30.6.2007 (audited) HK$’000 133,164 14,105 2,099
		149,368
		25,729 62,529 327 3,473 487,659
		579,717
		58,031 19,667 10,000
		87,698
		492,019
		641,387

		10,406 10,406 620,575
		641,387

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the six months ended 31 December 2007

At 1 July 2006 Exchange difference on translation to presentation currency recognised directly in equity Profit for the period Total recognised income and expense for the period Transfer Recognition of equity–settled share–based payment Final dividend paid Proposed interim dividend At 1 January 2007 Exchange difference on translation to presentation currency recognised directly in equity Profit for the period Total recognised income and expense for the period Transfer Issue of shares upon conversion of convertible notes Issue of shares upon exercise of share options Interim dividend paid Proposed final dividend At 30 June 2007 Exchange difference on translation to presentation currency recognised directly in equity Profit for the period Total recognised income and expense for the period Transfer Recognition of equity–settled share–based payment share–based Final dividend paid At 31 December 2007	Share capital HK$’000 8,766 – – – – – – – 8,766 – – – – 1,628 12 – – 10,406 – – – – – – 10,406	Share premium HK$’000 69,369 – – – – – – – 69,369 – – – – 95,853 616 – – 165,838 – – – – – – 165,838	Statutory Merger Exchange reserve reserve reserve fund HK$’000 HK$’000 HK$’000 136 9,791 44,457 – 12,844 – – – – – 12,844 – – – 6,179 – – – – – – – – – 136 22,635 50,636 – – – – – – – – – – – 4,557 – – – – – – – – – – – – 136 22,635 55,193 – 36,029 – – – – – 36,029 – – – 6,853 – – – – – – 136 58,664 62,046	Dividend reserve HK$’000 8,766 – – – – – (8,766 ) 8,766 8,766 – – – – – – (8,766 ) 10,406 10,406 – – – – – (10,406 ) –	Share option reserve HK$’000 – – – – – 1,777 – – 1,777 – – – – – (88 ) – – 1,689 – – – – 6,062 – 7,751	Retained profits HK$’000 318,967 – 49,740 49,740 (6,179 ) – – (8,766 ) 353,762 – 36,285 36,285 (4,557 ) – – – (10,406 ) 375,084 – 49,792 49,792 (6,853 ) – – 418,023	Total HK$’000 460,252 12,844 49,740 62,584 – 1,777 (8,766 ) – 515,847 – 36,285 36,285 – 97,481 540 (8,766 ) – 641,387 36,029 49,792 85,821 – 6,062 (10,406) 722,864

The statutory reserve fund is a reserve required by the relevant People’s Republic of China (the “PRC”) laws applicable to the Group’s PRC subsidiaries. Appropriations to such reserves are made out of profit for the year as per the statutory accounts of the PRC subsidiaries and the amount and allocation basis are decided by the respective board of directors annually.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

CONDENSED CONSOLIDATED CASH FLOW STATEMENT

For the six months ended 31 December 2007

Net cash from operating activities
Net cash used in investing activities
Interest received
Purchase of property, plant and equipment
Other investing cash (outflow) inflow
Net cash used in financing activities
New bank borrowings
Dividend paid
Repayments of bank borrowings
Other financing cash outflow
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of the period
Effect of foreign exchange rate changes
Cash and cash equivalent at end of the period
represented by bank balances and cash

Six months ended
31 .12.2007
31.12.2006
(unaudited)
(unaudited)
HK$’000
HK$’000
66,602
81,104
2,437
2,011
(34,988 )
(3,742 )
(241 )
95
(32,792 )
(1,636 )
8,511
5,000
(10,406 )
(8,764 )
(10,638 )
(4,956 )
(308 )
(1,133 )
(12,841 )
(9,853 )
20,969
69,615
487,659
340,735
31,127
10,167
539,755
420,517

51 -

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the six months ended 31 December 2007

1. BASIS OF PREPARATION

The condensed consolidated financial statements have been prepared in accordance with the applicable disclosure requirements of Appendix 16 to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and with Hong Kong Accounting Standard (“HKAS”) 34 “Interim Financial Reporting” issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”).

2. PRINCIPAL ACCOUNTING POLICIES

The condensed consolidated financial statements have been prepared on the historical cost basis.

The accounting policies used in the condensed consolidated financial statements are consistent with those followed in the preparation of the Group’s annual consolidated financial statements for the year ended 30 June 2007.

In the current interim period, the Group has applied, for the first time, the new standard, amendment and interpretations (“new HKFRSs”) issued by the HKICPA, which are effective for the Group’s financial year beginning on 1 July 2007.

The adoption of these new HKFRSs had no material effect on the results and the financial position of the Group for the current or prior accounting periods. Accordingly, no prior period adjustment has been recognised.

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

HKAS 1 (Revised)	Presentation of Financial Statements1
HKAS 23 (Revised)	Borrowing Costs1
HKFRS 8	Operating Segments1
HK(IFRIC) – INT 12	Service Concession Arrangements2
HK(IFRIC) – INT 13	Customer Loyalty Programmes3
HK(IFRIC) – INT 14	HKAS 19: The Limit on a Defined Benefit Asset,
	Minimum Funding Requirements and their Interaction2

1 Effective for annual periods beginning on or after 1 January 2009

2 Effective for annual periods beginning on or after 1 January 2008

3 Effective for annual periods beginning on or after 1 July 2008

The directors of the Company anticipate that the application of these standards or interpretations will have no material impact on the results and the financial position of the Group.

3. SEGMENT INFORMATION

No analysis on business segment is provided as all the Group’s turnover and segment results were derived from the manufacture and sale of finished woven fabrics. In addition, no geographical market analysis is provided as the Group’s turnover and contribution to segment results were substantially derived from the People’s Republic of China (the “PRC”) and the assets are substantially located in the PRC.

52 -

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

4. FINANCE COSTS

	Six months ended	Six months ended
	31.12.2007	31.12.2006
	HK$’000	HK$’000
Interest on bank borrowings wholly repayable within five years	308	553

5. INCOME TAX EXPENSE

		Six months ended	Six months ended
		31.12.2007	31.12.2006
		HK$’000	HK$’000
Current	tax:
PRC	Enterprise Income Tax (“EIT”)	19,081	18,776

No provision for Hong Kong Profits Tax has been made in the condensed consolidated financial statements as the Group did not generate any assessable profits arising in Hong Kong for both periods.

Fuzhou Huaguan Knitting and Sprining Co., Ltd. (“Fuzhou Huaguan”) and Fuzhou Huasheng Textile Co., Ltd. (“Fuzhou Huasheng”) are subsidiaries established in the PRC which are exempted from the EIT for two years starting from their first profit-making year of operations and thereafter are eligible for 50% relief from EIT for the following three years under the income tax law of the PRC. The tax exempt period of Fuzhou Huasheng expired on 31 December 2006 and its applicable preferential tax rate, which is 50% relief for the following three years, was 15% for the period from 1 January 2007 to 31 December 2009.

The applicable tax rate for Fuzhou Huaguan was 27% for the period ended 31 December 2007.

Pursuant to the new PRC Enterprise Income Tax Law promulgated on 16 March 2007, the enterprise income tax for both domestic and foreign-invested enterprises will be unified at 25% effective from 1 January 2008. The effect of this change is reflected in the calculation of deferred taxation at 31 December 2007. The above mentioned preferential tax rates should still be effective after the adoption of unified tax rate.

No provision for deferred taxation has been recognised in the condensed consolidated financial statements as the amount involved is insignificant.

6. PROFIT FOR THE PERIOD

	Six months	ended
	31.12.2007	31.12.2006
	HK$’000	HK$’000
Profit for the period has been arrived at after charging (crediting):
Depreciation of property, plant and equipment	10,993	9,615
Interest income	(2,542 )	(2,011 )
Release of prepaid lease payments	174	163

53 -

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

7. DIVIDEND PAID

	Six months ended	Six months ended
	31.12.2007	31.12.2006
	HK$’000	HK$’000
Dividend recognised as distribution during the period:
Final, paid – HK1.0 cent per share
(2006: HK1.0 cent per share)	10,406	8,766

The directors do not recommend the payment of an interim dividend (2006: HK1.0 cent per share).

8. EARNINGS PER SHARE

The calculation of the basic and diluted earnings per share attributable to the ordinary equity holders of the Company is based on the following data:

Earnings: Profit for the period and earnings for the purposes of basic earnings per share Effect of dilutive potential ordinary shares in respect of convertible notes Earnings for the purposes of diluted earnings per share Number of shares: Number of ordinary shares for the purposes of basic earnings per share Effect of dilutive potential ordinary shares in respect of: Share options Convertible notes Weighted average number of ordinary shares for the purposes of diluted earnings per share	Six months 31.12.2007 HK$’000 49,792 – 49,792 ’000 1,040,603 5,643 – 1,046,246	ended 31.12.2006 HK$’000 49,740 824
		50,564

		’000 876,558 96 192,616
		1,069,270

54 -

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

9. MOVEMENTS IN PROPERTY, PLANT AND EQUIPMENT

During the period, the Group incurred approximately HK$33,306,000 (1.7.2006 to 31.12.2006: HK$3,742,000) on the construction of its new manufacturing plant in the PRC in order to increase its manufacturing capacity. Details of capital commitments were disclosed in note 15.

10. TRADE AND OTHER RECEIVABLES

The Group allows an average credit period ranges from 45 days to 180 days to its trade customers. The following is an aged analysis of trade receivables at the balance sheet date:

0 – 60 days 61 – 90 days Over 90 days Trade receivables Other receivables	31.12.2007 HK$’000 63,129 – – 63,129 1,226 64,355	30.6.2007 HK$’000 53,870 428 6,269
		60,567 1,962
		62,529

11. TRADE AND OTHER PAYABLES

The following is an aged analysis of trade payables at the balance sheet date:

0 – 60 days 61–90 days Over 90 days Trade payables Other payables	31.12.2007 HK$’000 36,881 1,596 2,968 41,445 23,178 64,623	30.6.2007 HK$’000 41,069 90 –
		41,159 16,872
		58,031

12. BANK BORROWINGS, SECURED

During the period, the Group obtained new bank loans amounting to HK$8,511,000. The loans carried interest at market rates of 7.37% to 7.65% per annum and are repayable within one year. The proceeds were used to finance the acquisition of property, plant and equipment.

55 -

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

13. SHARE CAPITAL

Ordinary shares of HK$0.01 each Authorised: At 1 July 2007 and 31 December 2007 Issued and fully paid: At 1 July 2007 and 31 December 2007	Number of shares 2,000,000,000 1,040,602,583	Nominal value HK$’000 20,000

		10,406

14. SHARE-BASED PAYMENT TRANSACTIONS

The Company has a share option scheme for eligible directors of the Company, employees and other participants of the Group. Details of the share options outstanding during the period are as follows:

Outstanding at 1 July 2007 Granted during the period Outstanding at 31 December 2007	Number of share options 58,250,000 29,200,000
	87,450,000

The options granted during the period entitle the holders to subscribe for shares in the Company at the exercise price of HK$0.572 per share during the period from 14 September 2007 to 31 August 2012.

The closing price of the Company’s shares immediately before 14 September 2007, the date of grant of the options, was HK$0.640.

The fair value of options determined at the date of grant using the Black-Scholes option pricing model was HK$6,062,000. The Group recognised an expense of HK$6,062,000 as share-based payment expense for the six months ended 31 December 2007.

The following assumptions were used to calculate the fair value of share options granted during the period:

Weighted average share price at the date of grant	HK$0.630
Weighted average exercise price	HK$0.572
Expected life of options	4.78 years
Expected volatility	39.96%
Expected dividend yield	3.17%
Risk free rates	4.00%

56 -

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

15. CAPITAL COMMITMENTS

	31.12.2007	30.6.2007
	HK$’000	HK$’000
Capital expenditure contracted for but not provided
in the condensed consolidated financial statements
in respect of construction of buildings and
plant and machinery	3,280	500

At 31 December 2007, the Group had commitments for future research cost of HK$199,000 (30 June 2007: HK$263,000) payable under a non-cancellable consultancy agreement which will expire on 31 March 2009.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

4. STATEMENT OF INDEBTEDNESS

Borrowings and contingent liabilities

As at the close of business on 29 February 2008, being the latest practicable date for the purpose of ascertaining certain information relating to this indebtedness statement prior to the printing of this circular, the Enlarged Group had outstanding bank loans of approximately HK$8,511,000 which was secured by fixed charges on certain assets of the Group, including plant and equipment of approximately HK$33,619,000 and short term bank deposits of HK$4,587,000.

Save as aforesaid or as otherwise disclosed herein, and apart from intra-group liabilities, the Enlarged Group did not, at the close of business on 29 February 2008, have any loans capital issued and outstanding or agreed to be issued, bank overdrafts, charges or debentures, mortgages, loans, or other similar indebtedness or any finance lease commitment, hire purchase commitment, liabilities under acceptance (other than normal trade bills and payables), acceptance credits or any guarantees or other material contingent liabilities.

For the purpose of the above indebtedness statement, foreign currency amounts have been translated into Hong Kong dollars at the approximate rates of exchange prevailing at the close of business on 29 February 2008.

The Directors are not aware of any material changes in the Enlarged Group’s indebtedness and contingent liabilities since 29 February 2008.

5. WORKING CAPITAL

The Directors are of the opinion that taking into account the existing cash and bank balances and the financial resources available to the Group, the Enlarged Group has sufficient working capital for its present requirements and up to the period ending 30 April 2009.

6. MATERIAL ADVERSE CHANGES

The Directors confirm that there has been no material adverse change in the financial or trading position of the Group since 30 June 2007 the date to which the latest published audited annual financial statements of the Group were made up.

7. MANAGEMENT DISCUSSION AND ANALYSIS ON THE GROUP

Operational and Financial Review

The Group is principally engaged in the manufacture and sale of finished woven fabrics targeting at mid to high-end markets both in the PRC and overseas. The Group vertically integrates its production process, which includes research and development, raw fabric weaving, dyeing and setting, cloth finishing such as pattern pressing and calendaring. The Group’s products are used for manufacturing down wear, sports wear, household products such as sofa and curtain and men’s and women’s fashions.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

As a result of the installation of more water jet rapier looms, certain complicated fabrics for dyeing process were self supplied by the Group. This ensures steadier supply and better quality control of raw fabrics for the dyeing process, which in turn, reduces production costs and shortens the production cycle. In addition, new dyeing auxiliary facilities purchased in the previous financial year enlarges the varieties of down wear, sports wear and household products with different nature which in turn boosts the market expansion.

To be in line with the Group’s efforts in expanding sales markets, the Group continues to participate in the textile fairs so as to promote and sell its products to local and overseas customers.

Turnover

For the six months ended 31 December 2007 (the “Period”), the Group recorded a turnover of approximately HK$300,870,000 (2006: HK$294,635,000), representing an increase of approximately 2.1% in comparison to the previous financial period. The increase in turnover was attributable to slight increase in productivity as a result of the production during the Period with the new dyeing auxiliary facilities purchased in the previous financial year.

Gross Profit

The gross profit margin of the Group slightly increased from approximately 28.6% in the previous period to approximately 28.7% in the Period. The increase was due to the slight increase in productivity due to the commencement of production with the new dyeing auxiliary facilities during the Period.

Profit for the Period

The Group’s profit for the Period was approximately HK$49,792,000 (2006: HK$49,740,000), approximately 0.1% more than that in 2006. Net profit margin for the Period was approximately 16.5% (2006: 16.9%) which was maintained at the same level as those of the previous period.

Expenses

Selling and distribution costs, amounted to approximately HK$8,330,000 (2006: HK$8,190,000), representing approximately 2.8% (2006: 2.8%) of turnover for the Period which was maintained at the same level as the previous period.

Administrative expenses amounted to approximately HK$15,052,000 (2006: HK$8,866,000), representing approximately 5.0% (2006: 3.0%) of the turnover for the Period. Administrative expenses were increased by approximately 69.8% when compared with that of 2006. It was due to the share-based payment expense incurred as a result of the grant of more share options during the Period.

59 -

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Other expenses amounted to approximately HK$1,099,000 (2006: HK$516,000), representing approximately 0.4% (2006: 0.2%) of the turnover for the Period. The increase in amount was due to more resources contributed in the research and development of new fabrics and improvement of existing fabrics.

There was no loss on changes in fair value of the convertible notes (the “CN”) for the Period as the CN was fully converted during the year ended 30 June 2007. The loss on changes in fair value of the CN in 2006 was approximately HK$824,000 representing approximately 0.3% of turnover for that period.

Finance costs, comprises of interest payment of bank borrowings only, amounted to approximately HK$308,000 (2006: HK$553,000), representing approximately 0.1% (2006: 0.2%) of the turnover for the Period. The decrease in amount was due to a reduction of bank loan borrowed during the Period.

Future Plans and Prospects

As a result of the constant improvement of quality of life in the PRC, the demand for fashionable clothes and quality fabrics continuously increases. In order to diversify the customer base of the Group and tap the market potential, the Group preserves its distribution network in major textile markets in the PRC and overseas textile markets. The Group persists in its market expansion by maintaining good and close relationship with existing distribution agents and valuable customers and strengthening its present sales and marketing team. Moreover, it keeps participating in the textile fairs held in the PRC and overseas in the future so as to promote its products to worldwide customers.

To maintain the competitiveness of the Group’s products in the market, the Group focuses on producing different varieties of fabrics for manufacturing down wear and sports wear due to the increase in market demand of these products. To cope with producing various kinds of fabrics, the Group prolongs to invest approximately HK$55,000,000 for purchase of a piece of land adjacent to the plant in Changle City, construction of a multi-storey plant on it and setting up a new production line for producing knit fabrics. In addition, new state-of-the-art dyeing auxiliary facilities for producing pure cotton fabrics amounted to approximately HK$38,000,000, have been purchased and installed in the first quarter of 2008. The test run is contemplated to be held during the second quarter of 2008 as well as the commencement of the production. For this first stage expansion, the dyeing production capacity for pure cotton fabrics is expected to be approximately 2,500 tons to 3,000 tons per annum.

On account of the continuous change in the trend of the textile and garment markets, the Group keeps putting effort in research and development of new products and improvement of existing products in order to meet the dynamic market needs.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Liquidity and financial resources

As at 31 December 2007, the Group had net current assets and total assets less current liabilities of approximately HK$540,857,000 (30 June 2007: HK$492,019,000) and approximately HK$722,864,000 (30 June 2007: HK$641,387,000), respectively. The Group maintains a strong financial position by financing its operations with the internally generated resources. As at 31 December 2007, the Group had cash and bank deposits of approximately HK$543,907,000 (30 June 2007: HK$491,132,000). The current ratio of the Group was approximately 709.1% (30 June 2007: 661.0%).

Shareholders’ fund of the Group as at 31 December 2007 was approximately HK$722,864,000 (30 June 2007: HK$641,387,000). As at 31 December 2007, the total bank borrowings of the Group, repayable within 12 months from the balance sheet date, were denominated in RMB8,000,000, equivalent to HK$8,511,000 (30 June 2007: HK$10,000,000), giving a gross debt gearing (i.e. total borrowings/shareholders’ fund) of approximately 1.2% (30 June 2007: 1.6%).

The financial health of the Group was strong throughout the Period as indicated by low gearing and high current ratio.

Financing

As at 31 December 2007, the total banking and loan facilities of the Group amounted to approximately HK$26,596,000 (30 June 2007: HK$25,000,000), of which, approximately HK$12,167,000 (30 June 2007: HK$15,210,000) was utilized.

The Board believes that the existing financial resources will be sufficient to meet future expansion plans and, if necessary, the Group will be able to obtain additional financing with favourable term.

Capital Structure

For the period ended 31 December 2007, the share capital of the Company comprises ordinary shares only.

Foreign Exchange Risk and Interest Rate Risk

For the period ended 31 December 2007, the Group was not subject to any significant exposure to foreign exchange rates risk as the majority of the transactions of the Group were denominated in Renminbi. Hence, no financial instrument for hedging was employed.

Though all bank borrowings of the Group were denominated in Renminbi and at floating rate basis, the Board is of the opinion that the Group is not subject to any significant interest rate risk.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Charge on Group’s Assets

As at 31 December 2007, certain plant and machinery of the Group in aggregate, carrying value of approximately HK$33,701,000 (30 June 2007: HK$34,189,000) were pledged to a bank to secure bank facilities granted to the Group; together with the bank deposits of the Group of approximately HK$4,152,000 (30 June 2007: HK$3,473,000).

Staff Policy

The Group had 490 employees altogether in the PRC and Hong Kong as at 31 December 2007. The Group offers a comprehensive and competitive remuneration, retirement scheme and benefit package to its employees. Discretionary bonus is offered to the Group’s staff depending on their performance. The Group is required to make contribution to a social insurance scheme in the PRC. Also, the Group and its employees in the PRC are each required to make contribution to fund the endowment insurance and unemployment insurance at the rates specified in the relevant PRC laws and regulations. The Group has adopted a provident fund scheme, as required under the Mandatory Provident Fund Schemes Ordinance, for its employees in Hong Kong.

The Group also provides periodic internal training to its staff.

Each of the independent non-executive directors is appointed for a term of 1 year commencing from 1 September each year.

Order book

The Group has approximately one month sales orders placed by the customers.

Future plans for material investments

The Group has no future plan for material investments during the period ended 31 December 2007 but there was future plan for capital assets for purchase of a piece of land adjacent to the Changle plant in Fujian Province, construction of a multi-storey plant on it and setting up a new production line for producing knit fabrics. The capital assets of the Group will be funded by internally generated resources.

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APPENDIX II

1. WIDE LAUNCH GROUP

The following is the text of the accountants’ report from Dominic K.F. Chan & Co., Certified Public Accountants, prepared in respect of Wide Launch Group and for the purpose of incorporation in this circular.

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30 April 2008

The Directors

Art Textile Technology International Company Limited

Dear Sirs,

We set out below our report on the financial information (the “Financial Information”) of Wide Launch Investment Limited (“Wide Launch”) and its subsidiaries (together, “Wide Launch Group”) set out in Sections I to III below, for inclusion in the circular of Art Textile Technology International Company Limited (the “Company”) dated 30 April 2008 (the “Circular”) in connection with the proposed acquisition of 100% of Wide Launch by Right Lane International Limited, a company whollyowned by the Company. The Financial Information comprises the combined balance sheets of Wide Launch Group as at 31 December 2006 and 2007, and the combined income statements, the combined statements of changes in equity and the combined cash flow statements of Wide Launch Group for the period from 14 August 2006 (date of establishment of Zhengzhou Hongye Textile Company Limited, a wholly-owned subsidiary of Wide Launch (“Date of Establishment”)) to 31 December 2006 and the year ended 31 December 2007 (the “Relevant Periods”), and a summary of significant accounting policies and other explanatory notes.

Wide Launch was incorporated in the British Virgin Islands on 14 September 2007. Pursuant to a group reorganisation as described in Note 1(b) of Section II headed “Reorganisation” below, which was completed on 26 March 2008, Wide Launch became the holding company of the subsidiaries now comprising Wide Launch Group (the “Reorganisation”). No statutory audited financial statements have been prepared by Wide Launch as it is newly incorporated and has not involved in any significant business transactions since its date of incorporation other than the Reorganisation.

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APPENDIX II

At the date of this report, Wide Launch had direct or indirect interests in the following subsidiaries, all of which are private companies (or, if incorporated/registered outside Hong Kong, have substantially similar characteristics to a private company incorporated in Hong Kong), and the particulars of which are set out below:

	Place and date of	Nominal value	Percentage	Percentage
	incorporation/	of issued and	of equity
	establishment and	paid-up share/	attributable to		Principal
Name	operations	registered capital	Wide	Launch	activities
			Direct	Indirect
Well Master Enterprise	Hong Kong	Ordinary	100	–	Investment
Limited (“Well Master”)(1)	14 November 2007	HK$1			holding
Zhengzhou Hongye Textile	The People’s	RMB34,211,000	–	100	Design, production
Company Limited	Republic of China				and sale of textile
(“Zhengzhou Hongye”)(2)	(the “PRC”)				products and
	14 August 2006				development of
					new clothing and
					textile raw materials

(1) No statutory financial statements have been prepared since its incorporation.
(2) The statutory financial statements for the period from 14 August 2006 (date of establishment) to 31 December 2006 and for the year ended 31 December 2007 were prepared in accordance with accounting principles and regulations applicable in the PRC and were both audited by Henan Tianjian Certified Public Accountant Ltd., Certified Public Accountants registered in the PRC.

For the purpose of this report, the director of Wide Launch has prepared the combined management accounts of Wide Launch Group for the Relevant Periods, in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”) (the “Underlying Management Accounts”). We have undertaken independent audit procedures on the Underlying Management Accounts in accordance with Hong Kong Standards on Auditing (“HKSAs”) issued by the HKICPA.

The Financial Information has been prepared by the directors of the Company based on Underlying Management Accounts for the Relevant Periods in accordance with HKFRSs. We have examined the Financial Information and carried out such additional procedures as are necessary in accordance with the Auditing Guideline 3.340 “Prospectuses and the Reporting Accountant” issued by the HKICPA. No adjustments were considered necessary to restate the Underlying Management Accounts of Wide Launch Group.

The director of Wide Launch is responsible for the preparation and the true and fair presentation of the Underlying Management Accounts. The directors of the Company are responsible for the preparation and the true and fair presentation of the Financial Information in accordance with HKFRSs. It is our responsibility to form an independent opinion, based on our examination, on the Financial Information and to report our opinion to you.

In our opinion, on the basis of presentation set out in Section 1 below, the Financial Information, for the purpose of this report, gives a true and fair view of the combined results and combined cash flows of Wide Launch Group for the Relevant Periods and of the combined balance sheets of Wide Launch Group as at 31 December 2006 and 2007.

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APPENDIX II

I. FINANCIAL INFORMATION

COMBINED INCOME STATEMENTS

Notes Other income 4 Administrative expenses Other expenses LOSS FOR THE YEAR/PERIOD 5 Attributable to: Equity holders of Wide Launch 7	14 August 2006 (Date of Year ended Establishment) 31 December to 31 December 2007 2006 RMB’000 RMB’000 2,646 31 (12,757 ) (5,864 ) (754 ) – (10,865 ) (5,833) (10,865 ) (5,833)

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APPENDIX II

COMBINED BALANCE SHEETS

Notes NON-CURRENT ASSETS Property, plant and equipment 8 Prepaid lease payments – non-current portion 9 Deposits for prepaid lease payments and acquisition of plant and equipment Total non-current assets CURRENT ASSETS Prepayments and other receivables 10 Bank balances and cash 11 CURRENT LIABILITIES Other payables 12 NET CURRENT LIABILITIES Net assets Capital and reserve Combined capital 13 Reserve Total equity	31 December 2007 RMB’000 124,637 22,679 24,027 171,343 8,806 1,623 10,429 156,379 156,379 (145,950 ) 25,393 42,091 (16,698 ) 25,393	31 December 2006 RMB’000 14,002 – 18,000 32,002 306 7,729 8,035 31,991 31,991 (23,956 ) 8,046 13,879 (5,833 ) 8,046

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APPENDIX II

COMBINED STATEMENTS OF CHANGES IN EQUITY

At 14 August 2006 (Date of Establishment) Capital contribution by equity holders Loss and total recognised expenses for the period At 31 December 2006 and 1 January 2007 Capital contribution by equity holders Loss and total recognised expenses for the year At 31 December 2007	Combined Accumulated capital losses RMB’000 RMB’000 (Note 13) – – 13,879 – – (5,833 ) 13,879 (5,833 ) 28,212 – – (10,865 ) 42,091 (16,698 )	Total RMB’000 – 13,879 (5,833 ) 8,046 28,212 (10,865 ) 25,393

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APPENDIX II

COMBINED CASH FLOW STATEMENTS

Notes
CASH FLOWS FROM OPERATING
ACTIVITIES
Loss for the year/period
Adjustments for:
Interest income
4
Depreciation
5
Gain on disposals of property,
plant and equipment
4
Increase in other receivables
Increase in other payables
Net cash inflow from operating activities
CASH FLOWS FROM INVESTING
ACTIVITIES
Interest received
Deposits for prepaid lease payments and
acquisition of plant and equipment
Purchases of items of property,
plant and equipment
Purchases of prepaid lease payments
Net cash outflow from investing activities
CASH FLOWS FROM FINANCING
ACTIVITIES
Capital contribution by equity holders
Net cash inflow from financing activities
NET (DECREASE)/INCREASE
IN CASH AND CASH EQUIVALENTS
Cash and cash equivalents
at beginning of year/period
CASH AND CASH EQUIVALENTS
AT END OF YEAR/PERIOD

14 August 2006
(Date of
Year ended
Establishment)
31 December to 31 December
2007
2006
RMB’000
RMB’000
(10,865 )
(5,833 )
(14 )
(3 )
7,889
3,482
(2,632 )
–
(5,622 )
(2,354 )
(4,537 )
(306 )
30,846
31,991
20,687
29,331
14
3
(24,027 )
(18,000 )
(25,850 )
(17,484 )
(5,142 )
–
(55,005 )
(35,481 )
28,212
13,879
28,212
13,879
(6,106 )
7,729
7,729
–
1,623
7,729

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APPENDIX II

II. NOTES TO FINANCIAL STATEMENTS

1. GROUP REORGANISATION AND BASIS OF PREPARATION

(a) General information

Wide Launch Investment Limited (“Wide Launch”) is an investment holding company. Its subsidiaries (which together with Wide Launch are collectively referred to as “Wide Launch Group”) are principally engaged in the design, production and sale of textile products and development of new clothing and textile raw materials.

Wide Launch was incorporated in the British Virgin Islands (“BVI”) on 14 September 2007. The address of its registered office is Portcullis TrustNet Chambers, P.O. Box 3444, Road Town, Tortola, BVI. Wide Launch and its subsidiaries now comprising the Wide Launch Group is beneficially owned by Mr. Lin Shantan.

(b) Reorganisation

Well Master Enterprise Limited (“Well Master”) was incorporated on 14 November 2007 as a wholly-owned subsidiary of Wide Launch. On 26 March 2008, pursuant to a group reorganisation (the “Reorganisation”), Well Master acquired the entire equity interests of Zhengzhou Hongye Textile Company Limited (“Zhengzhou Hongye”) from Grand Business Investment Limited, a wholly-owned subsidiary of Mr. Lin Shantan, at a cash consideration of HK$35,000,000. Wide Launch became the ultimate holding company of the companies now comprising Wide Launch Group. As Wide Launch and Grand Business Investment Limited are beneficially owned by Mr. Lin Shantan, the Reorganisaiton has been accounted for using the pooling of interest method.

(c) Basis of preparation

The Reorganisation involved companies under common control and Wide Launch and its subsidiaries resulting from the Reorganisation are regarded as a continuing group. Accordingly, the Financial Information has been prepared as if Wide Launch had been the holding company of Wide Launch Group from the beginning of the earliest period presented. For the purpose of this report, the Financial Information is prepared on a combined basis.

The Financial Information presents the combined results, combined cash flows and combined financial position of all companies now comprising Wide Launch Group as if Wide Launch had been in existence throughout the Relevant Periods and the current structure had been in place as at the earliest period presented, or since their respective dates of incorporation/establishment, where they were not existed at those dates.

The Financial Information has been prepared under the going concern concept despite the net current liabilities of Wide Launch Group because Wide Launch Group’s beneficial owners, Mr. Lin Shantan, has agreed to provide continual financial support and adequate funds to Wide Launch Group to meet its liabilities until the completion of the proposed acquisition.

All significant intra-group transactions and balances, if any, have been eliminated on combination.

The Financial Information is presented in thousands of units of Renminbi (“RMB”), unless otherwise stated.

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APPENDIX II

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Financial Information has been prepared in accordance with the Hong Kong Financial Reporting Standards (“HKFRS”) issued by the HKICPA. HKFRS 1, First-time Adoption of Hong Kong Financial Reporting Standards, has been applied in preparing the Financial Information. This Financial Information is the first financial statements of Wide Launch Group prepared in accordance with HKFRS. Wide Launch Group had not made use of the exemptions available under HKFRS in preparing the Financial Information. HKFRS 1 reconciliation note has not been prepared as there had not been any combined financial statement being presented in other GAAP for Wide Launch Group. The policies set out below have been consistently applied during the Relevant Periods.

The Financial Information has been prepared under the historical cost convention. The principal accounting policies applied in the preparation of the combined financial statements are set out below.

At the date of this report, the following new/revised standards, amendments to standards and interpretations have been issued but are not effective for the annual period beginning on 1 January 2007 and have not been early adopted:

Amendments to HKFRS 2 Share-based Payments – Vesting Conditions and Cancellations (effective for annual periods beginning on or after 1 January 2009). The Standard restricts the definition of “vesting condition” to a condition that includes an explicit or implicit requirement to provide services. Any other conditions are non-vesting conditions, which have to be taken into account to determine the fair value of the equity instruments granted. In the case that the award does not vest as the result of a failure to meet a non-vesting condition that is within the control of either the entity or the counterparty, this must be accounted for as a cancellation. Wide Launch Group has not entered into share-based payment schemes with non-vesting conditions attached and, therefore, does not expect significant implications on its accounting for share-based payments.

HKFRS 3 (Revised) Business Combinations and HKAS 27 (Revised) Consolidated and Separate Financial Statements (effective for annual periods beginning on or after 1 July 2009). HKFRS 3 (Revised) introduces a number of changes in the accounting for business combinations that will impact the amount of goodwill recognised, the reported results in the period that an acquisition occurs, and future reported results. HKAS 27 (Revised) requires that a change in the ownership interest of a subsidiary is accounted for as an equity transaction. Therefore, such a change will have no impact on goodwill, nor will it give rise to a gain or loss. Furthermore, the amended standard changes the accounting for losses incurred by the subsidiary as well as the loss of control of a subsidiary. The changes introduced by HKFRS 3 (Revised) and HKAS 27 (Revised) must be applied prospectively and will affect future acquisitions and transactions with minority interests. Wide Launch Group will apply HKFRS 3 (Revised) and HKAS 27 (Revised) from 1 January 2010 and is in the process of making an assessment of the impact of these 2 revised HKFRSs.

HKFRS 8 – Operating Segments (effective for annual periods beginning on or after 1 January 2009). HKFRS 8 replaces HKAS 14 and aligns segment reporting with the requirements of the US standard SFAS 131, “Disclosures about segments of an enterprise and related information”. The new standard requires a “management approach”, under which segment information is presented on the same basis as that used for internal reporting purposes. Wide Launch Group will apply HKFRS 8 from 1 January 2009. The directors of the Company believe that this standard should not have a significant impact to the number of reportable segments, as well as the manner in which the segments are reported as the reportable segment are present in a manner that is consistent with the internal reporting provided to the chief operating decision-maker.

HKAS 1 (Revised) Presentation of Financial Statements (effective for annual periods beginning on or after 1 January 2009). It separates owner and non-owner changes in equity. The statement of changes in equity will include only details of transactions with owners, with all non-owner changes in equity presented as a single line. In addition, the Standard introduces the statement of comprehensive income: it presents all items of income and expense recognised in profit or loss, together with all other items of recognised income and expense, either in one single statement, or in two linked statements. The directors of the Company are still evaluating whether Wide Launch Group will have one or two statements.

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APPENDIX II

HKAS 23 (Revised) – Borrowing Costs (effective for annual periods beginning on or after 1 January 2009). It requires an entity to capitalise borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset (one that takes a substantial period of time to get ready for use or sale) as part of the cost of that asset. The option of immediately expensing those borrowing costs will be removed. Wide Launch Group will apply HKAS 23 (Revised) from 1 January 2009 but the directors of the Company believe that this standard should not have a significant impact to Wide Launch Group as Wide Launch Group has always been capitalising borrowing costs directly attributable to the acquisition, construction or production of qualifying assets.

HK(IFRIC)-Int 11 – HKFRS 2 – Group and Treasury Share Transfer Transactions (effective for annual periods beginning on or after 1 March 2007). It provides guidance on whether share-based transactions involving treasury shares or involving group entities (for example, options over a parent’s shares) should be accounted for as equity-settled or cash-settled share-based payment transactions in the stand-alone accounts of the parent and group companies. Wide Launch Group will apply HK(IFRIC)-Int 11 from 1 January 2008 but is currently not applicable to Wide Launch Group as there are no share-based transactions.

HK(IFRIC)-Int 12 – Service Concession Arrangements (effective for annual periods beginning on or after 1 January 2008). It applies to contractual arrangements whereby a private sector operator participates in the development, financing, operation and maintenance of infrastructure for public sector services. HK(IFRIC)Int 12 is not relevant to Wide Launch Group’s operations because none of the group’s companies provide for public sector services.

HK(IFRIC)-Int 13 – Customer Loyalty Programmes (effective for annual periods beginning on or after 1 July 2008). It clarifies that where goods or services are sold together with a customer loyalty incentive (for example, loyalty points or free products), the arrangement is a multiple-element arrangement and the consideration receivable from the customer is allocated between the components of the arrangement using fair values. Wide Launch Group will apply HK(IFRIC)-Int 13 from 1 January 2009. The directors of the Company consider the interpretation is not relevant to Wide Launch Group as Wide Launch Group do not sell goods together with a customer loyalty incentive.

HK(IFRIC)-Int 14 – HKAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (effective for annual periods beginning on or after 1 January 2008). It provides guidance on assessing the limit in HKAS 19 on the amount of the surplus that can be recognised as an asset. It also explains how the pension asset or liability may be affected by a statutory or contractual minimum funding requirement. Wide Launch Group will apply HK(IFRIC)-Int 14 from 1 January 2008, but it is not relevant on Wide Launch Group’s financial statements as Wide Launch Group do not have defined benefit assets.

Subsidiaries

A subsidiary is an entity whose financial and operating policies Wide Launch controls, directly or indirectly, so as to obtain benefits from its activities.

Revenue recognition

Property, plant and equipment

Property, plant and equipment, other than construction in progress, are stated at cost less subsequent depreciation and accumulated impairment losses. Depreciation is provided to write off the cost of items of property, plant and equipment, other than construction in progress, over their estimated useful lives and after taking into account their estimated residual value, using the straight line method.

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APPENDIX II

Construction in progress is stated at cost, which includes construction and borrowing costs, as appropriate, less any identified impairment loss. When the construction is completed and the asset is ready for its intended use, the related cost is transferred to an appropriate category of property, plant and equipment and depreciated in accordance with the above policy.

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

Impairment

At each balance sheet date, Wide Launch Group reviews the carrying amounts of its assets to determine whether there is any indication that those assets have suffered an impairment loss. If the recoverable amount of the asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately.

Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, such that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years.

A reversal of an impairment loss is recognised as income immediately.

Operating leases

Rentals payable under operating leases are charged to the income statement on a straight-line basis over the relevant lease terms. Benefits received and receivable as an incentive to enter into an operating lease are recognised as a reduction of rental expense over the lease terms on a straight-line basis.

Foreign currencies

The Financial Information is presented in Renminbi, which is Wide Launch’s functional currency. In preparing the financial statements of each individual group company, transactions in currencies other than the functional currency of Wide Launch Group (foreign currencies) are recorded in its functional currency (i.e. the currency of the primary economic environment in which the entity operates) at the rates of exchanges prevailing on the dates of the transactions. At each balance sheet date, monetary items denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Nonmonetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, are capitalised as part of the cost of those assets. 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 eligible for capitalisation.

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APPENDIX II

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

Financial instruments

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

Fair value

The fair value of financial assets and financial liabilities are determined in accordance with generally accepted pricing methods based on discounted cash flow analysis.

Financial assets

Wide Launch Group’s financial assets are classified as loans and receivables. All regular way purchases or sales of financial assets are recognised and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace. The accounting policies adopted in respect of loans and receivables are set out below.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. At each balance sheet date subsequent to initial recognition, loans and receivables (including other receivables, bank balances and cash) are carried at amortised cost using the effective interest method, less any identified impairment losses. An impairment loss is recognised in profit or loss when there is objective evidence that the asset is impaired, and is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate. Impairment losses are reversed in subsequent periods when an increase in the asset’s recoverable amount can be related objectively to an event occurring after the impairment was recognised, subject to a restriction that the carrying amount of the asset at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised.

Financial liabilities and equity

Financial liabilities and equity instruments issued by a group entity are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument. An equity instrument is any contract that evidences a residual interest in the assets of the group after deducting all of its liabilities. Wide Launch Group’s financial liabilities are classified as financial liabilities at amortised cost.

The accounting policies adopted in respect of financial liabilities and equity instruments are set out below.

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APPENDIX II

Financial liabilities at amortised cost

Financial liabilities at amortised cost (including other payables) are subsequently measured at amortised cost, using the effective interest method.

Equity instruments

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

Derecognition

Financial assets are derecognised when the rights to receive cash flows from the assets expire or, the financial assets are transferred and Wide Launch Group has transferred substantially all the risks and rewards of ownership of the financial assets. On derecognition of a financial asset, the difference between the asset’s carrying amount and the sum of the consideration received or receivable is recognised in profit or loss.

For financial liabilities, they are removed from Wide Launch Group’s balance sheet (i.e. when the obligation specified in the relevant contract is discharged, cancelled or expires). The difference between the carrying amount of the financial liability derecognised and the consideration paid or payable is recognised in profit or loss.

3. SEGMENT INFORMATION

No business and geographical segment information is presented as all revenue and assets of Wide Launch Group are related to its design, production and sale of textile products and development of new clothing and textile raw materials in the PRC during the Relevant Periods.

4. OTHER INCOME

Note Bank interest income 5 Gain on disposals of property, plant and equipment Others	Year ended 31 December 2007 RMB’000 14 2,632 – 2,646	14 August 2006 (Date of Establishment) to 31 December 2006 RMB’000 3 – 28
		31

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APPENDIX II

5. LOSS FOR THE YEAR/PERIOD

Wide Launch Group’s loss for the year/period is arrived at after charging/(crediting):

Notes Depreciation 8 Gain on disposals of property, plant and equipment (Reversal)/written-off of obsolete inventory Written-off of pre-operating expenses, which included: Minimum lease payments under operating leases: Land and buildings Auditor’s remuneration Employee benefit expenses ^ Bank interest income 4	14 August 2006 (Date of Year ended Establishment) 31 December to 31 December 2007 2006 RMB’000 RMB’000 7,889 3,482 (2,632 ) – 5,257 3,482 (964 ) 1,780 6,566 571 8 29 3 – 2,849 309 (14 ) (3)

^ None of the directors of Wide Launch received or will receive any fees or emoluments in respect of their services rendered to Wide Launch Group during the Relevant Periods.

6. DIVIDENDS

No dividend had been paid or declared by Wide Launch since its incorporation or the companies comprising Wide Launch Group during the Relevant Periods.

7. LOSS PER SHARE ATTRIBUTABLE TO ORDINARY EQUITY HOLDERS OF WIDE LAUNCH

No loss per share information is presented as its inclusion, for the purpose of this report, is not considered meaningful due to the Reorganisation and the preparation of the results for the Relevant Periods on a combined basis as disclosed in Note 1 above.

8. PROPERTY, PLANT AND EQUIPMENT

Cost At 14 August 2006 (Date of Establishment) Additions during the period At 31 December 2006 and 1 January 2007 Additions during the year Disposals during the year At 31 December 2007	Plant and machinery RMB’000 – 17,059 17,059 4 (8,682 ) 8,381	Office equipment RMB’000 – 104 104 74 – 178	Motor Construction vehicles in progress RMB’000 RMB’000 – – 321 – 321 – 339 118,975 – – 660 118,975	Total RMB’000 – 17,484 17,484 119,392 (8,682 ) 128,194

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APPENDIX II

FINANCIAL INFORMATION ON THE ACQUIREES

		Plant and	Office	Office	Motor	Construction	Construction
	machinery		equipment		vehicles	in progress		Total
		RMB’000	RMB’000		RMB’000		RMB’000	RMB’000
	Accumulated depreciation
	At 14 August 2006
	(Date of Establishment)	–		–	–		–	–
	Depreciation provided
	during the period	3,443		7	32		–	3,482
	At 31 December 2006 and
	1 January 2007	3,443		7	32		–	3,482
	Depreciation provided during the year	7,718		38	133		–	7,889
	Disposals during the year	(7,814 )		–	–		–	(7,814 )
	At 31 December 2007	3,347		45	165		–	3,557

	Net carrying amount:
	At 31 December 2006:	13,616		97	289		–	14,002

	At 31 December 2007:	5,034		133	495		118,975	124,637

9.	PREPAID LEASE PAYMENTS
				31 December			31	December
					2007			2006
					RMB’000			RMB’000
	Carrying amount at the beginning of the year/period					–		–
	Additions				23,142			–
	Recognised during the year/period					–		–
	Carrying amount at the end of year/period				23,142			–
	Current portion included in prepayments
	and other receivables				(463)			–
	Non-current portion				22,679			–

	The leasehold land is held under a long term lease and is situated				in the PRC.
10.	PREPAYMENTS AND OTHER RECEIVABLES

Other receivables Prepaid lease payments – current portion	31 December 2007 RMB’000 8,343 463 8,806	31 December 2006 RMB’000 306 –
		306

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APPENDIX II

None of the above assets is either past due or impaired. The financial assets included in the above balances relate to receivables for which there was no recent history of default.

The directors of the Company consider that the fair values of other receivables approximate the corresponding carrying amounts.

11. BANK BALANCES AND CASH

At as 31 December 2006 and 2007, all the bank balances and cash of Wide Launch Group were denominated in RMB. The RMB is not freely convertible into other currencies, however, under the PRC’s Foreign Exchange Control Regulations and Administration of Settlement, Sale and Payment of Foreign Exchange Regulations, Wide Launch Group is permitted to exchange RMB for other currencies through banks authorised to conduct foreign exchange business.

Cash at banks earns interest at floating rates based on daily bank deposit rates. The bank balances are deposited with creditworthy banks with no recent history of default. The carrying amounts of bank balances and cash approximate to their fair values.

12. OTHER PAYABLES

Other payables Amounts due to a shareholder	31 December 2007 RMB’000 154,260 2,119 156,379	31 December 2006 RMB’000 31,391 600
		31,991

The amounts are unsecured, non-interest bearing and repayable on demand.

The directors of the Company consider that the fair values of other payables and amounts due to a shareholder approximate the corresponding carrying amounts.

13. COMBINED CAPITAL

The combined capital represents the capital contribution in the Wide Launch Group paid by Wide Launch.

14. CONTINGENT LIABILITIES

At the balance sheet date, Wide Launch Group did not have any significant contingent liabilities.

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APPENDIX II

15. COMMITMENTS

Wide Launch Group had the following capital commitments for the acquisition of plant and machinery at the balance sheet date:

Contracted, but not provided for Authorised, but not contracted for	31 December 2007 RMB’000 64,246 121,328 185,574	31 December 2006 RMB’000 5,000 –
		5,000

16. RELATED PARTY TRANSACTIONS

Save as disclosed elsewhere in the Accountants’ Report, Wide Launch Group did not enter into any related party transactions during the Relevant Periods.

17. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

Foreign currency risk

Transactions of Wide Launch Group are mainly settled in RMB. In the opinion of the directors of the Company, Wide Launch Group does not have significant foreign currency risk exposure.

Credit risk

The credit risk of Wide Launch Group’s financial assets, which comprise bank balances and cash, and other receivables arises from default of the counterparty, with a maximum exposure equal to the carrying amounts of these instruments.

There are no significant concentrations of credit risk within Wide Launch Group.

Liquidity risk

Wide Launch Group monitors its risk to a shortage of funds using a recurring liquidity planning tool. This tool considers the maturity of both its financial instruments and financial assets and projected cash flows from operations.

The maturity profile of Wide Launch Group’s financial liabilities as at the balance sheet date, based on the contracted undiscounted payments, was as follows:

	31 December	31 December
	2007	2006
	On demand	On demand
	RMB’000	RMB’000
Other payables	156,379	31,991

Capital risk management

The primary objective of Wide Launch Group’s capital management is to safeguard Wide Launch Group’s ability to continue as a going concern and to maintain healthy capital ratios in order to support its business and maximise shareholder value.

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Wide Launch Group manages its capital structure and makes adjustments to it, in light of changes in economic conditions. To maintain or adjust the capital structure, Wide Launch Group may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. Wide Launch Group is not subject to any externally imposed capital requirements. No changes were made in the objectives, policies or processes during the Relevant Periods.

Wide Launch Group monitors capital using a gearing ratio, which is net debt divided by the total capital plus net debt. Net debt includes other payables and accruals, and less bank balances and cash. Total capital includes equity attributable to equity holders of Wide Launch. The gearing ratios as at the balance sheet dates were as follows:

Other payables_(note 12)_ Less: bank balances and cash Net debt Equity attributable to Wide Launch Capital and net debt Gearing ratio	31 December 2007 RMB’000 156,379 (1,623 ) 154,756 25,393 180,149 86%	31 December 2006 RMB’000 31,991 (7,729 ) 24,262 8,046 32,308 75%

III SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements of Wide Launch Group, Wide Launch or any of the companies now comprising Wide Launch Group have been prepared in respect of any period subsequent to 31 December 2007 up to the date of this report.

Yours faithfully,

Dominic K.F. Chan & Co. Certified Public Accountants Hong Kong

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2. ZHENGZHOU HUATAI

The following is the text of the accountants’ report from Dominic K.F. Chan & Co., Certified Public Accountants, prepared in respect of Zhengzhou Huatai and for the purpose of incorporation in this circular.

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30 April 2008

The Directors

Art Textile Technology International Company Limited

Dear Sirs,

We set out below our report on the financial information (the “Financial Information”) of Zhengzhou Huatai Textile Company Limited (“Zhengzhou Huatai”) set out in Sections I to III below, for inclusion in the circular of Art Textile Technology International Company Limited (the “Company”) dated 30 April 2008 (the “Circular”) in connection with the proposed acquisition of 100% of Zhengzhou Huatai by Fuzhou Huaguan Knitting and Sprining Company Limited, a wholly-owned subsidiary of the Company. The Financial Information comprises the balance sheets of Zhengzhou Huatai as at 31 December 2007, and the income statements, the statements of changes in equity and the cash flow statements of Zhengzhou Huatai for the period from 5 June 2007 (date of establishment of Zhengzhou Huatai) to 31 December 2007 (the “Relevant Period”), and a summary of significant accounting policies and other explanatory notes.

Zhengzhou Huatai was established in the People’s Republic of China (the “PRC”) on 5 June 2007. No statutory audited financial statements have been prepared by Zhengzhou Huatai up to the date of this report.

For the purpose of this report, the directors of Zhengzhou Huatai have prepared the management accounts of Zhengzhou Huatai for the Relevant Period, in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”) (the “Underlying Management Accounts”). We have undertaken independent audit procedures on the Underlying Management Accounts in accordance with Hong Kong Standards on Auditing (“HKSAs”) issued by the HKICPA.

The Financial Information has been prepared by the directors of Company based on Underlying Management Accounts for the Relevant Period in accordance with HKFRSs. We have examined the Financial Information and carried out such additional procedures as are necessary in accordance with the Auditing Guideline 3.340 “Prospectuses and the Reporting Accountant” issued by the HKICPA. No adjustments were considered necessary to restate the Underlying Management Accounts of Zhengzhou Huatai.

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The directors of Zhengzhou Huatai are responsible for the preparation and the true and fair presentation of the Underlying Management Accounts. The directors of the Company are responsible for the preparation and the true and fair presentation of the Financial Information in accordance with HKFRSs. It is our responsibility to form an independent opinion, based on our examination, on the Financial Information and to report our opinion to you.

In our opinion, on the basis of presentation set out in Section 1 below, the Financial Information, for the purpose of this report, gives a true and fair view of the results and cash flows of Zhengzhou Huatai for the Relevant Period and of the balance sheets of Zhengzhou Huatai as at 31 December 2007.

I. FINANCIAL INFORMATION

INCOME STATEMENT

Notes Administrative expenses LOSS FOR THE PERIOD 4 Attributable to: Equity holders of Zhengzhou Huatai 6	5 June 2007 (date of establishment) to 31 December 2007 RMB’000 (40) (40) (40)

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BALANCE SHEET

			31 December
			2007
	Notes		RMB’000
NON-CURRENT ASSET
Deposits for acquisition of plant and equipment			17,266
CURRENT ASSETS
Other receivables	7		35,970
Bank balances and cash	8		174
			36,144
CURRENT LIABILITY
Other payables	9		3,450
			3,450
NET CURRENT ASSETS			32,694
Net assets			49,960

Capital and reserve
Paid-up capital	10		50,000
Reserve			(40)
Total equity			49,960
STATEMENT OF CHANGES IN EQUITY
	Paid-up Accumulated
	capital	loss	Total
	RMB’000	RMB’000	RMB’000
	(Note 10)
Capital contribution upon establishment	50,000	–	50,000
Loss and total recognised
expenses for the period	–	(40 )	(40 )
At 31 December 2007	50,000	(40 )	49,960

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CASH FLOW STATEMENT

CASH FLOWS FROM OPERATING ACTIVITIES
Loss for the period
Increase in other receivables
Increase in other payables
Net cash outflow from operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Deposit for acquisition of plant and machinery
Net cash outflow from investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contribution upon establishment
Net cash inflow from financing activities
NET INCREASE IN CASH AND CASH EQUIVALENTS
Cash and cash equivalents at beginning of period
CASH AND CASH EQUIVALENTS AT END OF
PERIOD

5 June 2007
(date of
establishment) to
31 December
2007
RMB’000
(40 )
(35,970 )
3,450
(32,560 )
(17,266 )
(17,266 )
50,000
50,000
174
–
174

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II. NOTES TO FINANCIAL STATEMENTS

1. BASIS OF PREPARATION

(a). General information

Zhengzhou Huatai Textile Company Limited (“Zhengzhou Huatai”) is principally engaged in the design, production and sale of textile products and development of new clothing and textile raw materials.

Zhengzhou Huatai was established in the PRC on 5 June 2007. The address of its registered office is Shuang Hu Da Street, Long Hu Town, Xincheng City, Henan Province, the PRC. Zhengzhou Huatai is beneficially owned by Mr. Xu Bao Fang and Mr. Chen Bao Rong.

(b). Basis of preparation

The Financial Information is presented in thousands of units of Renminbi (“RMB”), unless otherwise stated.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Financial Information has been prepared in accordance with the Hong Kong Financial Reporting Standards (“HKFRS”) issued by the HKICPA. HKFRS 1, First-time Adoption of Hong Kong Financial Reporting Standards, has been applied in preparing the Financial Information. This Financial Information is the first financial statements of Zhengzhou Huatai prepared in accordance with HKFRS. Zhengzhou Huatai had not made use of the exemptions available under HKFRS in preparing the Financial Information. HKFRS 1 reconciliation note has not been prepared as there had not been any financial statement being presented in other GAAP for Zhengzhou Huatai. The policies set out below have been consistently applied during the Relevant Period.

The Financial Information has been prepared under the historical cost convention. The principal accounting policies applied in the preparation of the Financial Information are set out below.

Amendments to HKFRS 2 Share-based Payments – Vesting Conditions and Cancellations (effective for annual periods beginning on or after 1 January 2009). The Standard restricts the definition of “vesting condition” to a condition that includes an explicit or implicit requirement to provide services. Any other conditions are non-vesting conditions, which have to be taken into account to determine the fair value of the equity instruments granted. In the case that the award does not vest as the result of a failure to meet a non-vesting condition that is within the control of either the entity or the counterparty, this must be accounted for as a cancellation. Zhengzhou Huatai has not entered into share-based payment schemes with non-vesting conditions attached and, therefore, does not expect significant implications on its accounting for share-based payments.

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subsidiary. The changes introduced by HKFRS 3 (Revised) and HKAS 27 (Revised) must be applied prospectively and will affect future acquisitions and transactions with minority interests. Zhengzhou Huatai will apply HKFRS 3 (Revised) and HKFRS 27 (Revised) from 1 January 2010 but is currently not applicable to Zhengzhou Huatai as Zhengzhou Huatai does not have any investment in subsidiary.

HKFRS 8 – Operating Segments (effective for annual periods beginning on or after 1 January 2009). HKFRS 8 replaces HKAS 14 and aligns segment reporting with the requirements of the US standard SFAS 131, “Disclosures about segments of an enterprise and related information”. The new standard requires a “management approach”, under which segment information is presented on the same basis as that used for internal reporting purposes. Zhengzhou Huatai will apply HKFRS 8 from 1 January 2009. The directors of the Company believe that this standard should not have a significant impact to the number of reportable segments, as well as the manner in which the segments are reported as the reportable segment are present in a manner that is consistent with the internal reporting provided to the chief operating decision-maker.

HKAS 23 (Revised) – Borrowing Costs (effective for annual periods beginning on or after 1 January 2009). It requires an entity to capitalise borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset (one that takes a substantial period of time to get ready for use or sale) as part of the cost of that asset. The option of immediately expensing those borrowing costs will be removed. Zhengzhou Huatai will apply HKAS 23 (Revised) from 1 January 2009 but the directors of the Company believe that this standard should not have a significant impact to Zhengzhou Huatai as Zhengzhou Huatai has always been capitalising borrowing costs directly attributable to the acquisition, construction or production of qualifying assets.

HK(IFRIC)-Int 11 – HKFRS 2 – Group and Treasury Share Transfer Transactions (effective for annual periods beginning on or after 1 March 2007). It provides guidance on whether share-based transactions involving treasury shares or involving group entities (for example, options over a parent’s shares) should be accounted for as equity-settled or cash-settled share-based payment transactions in the stand-alone accounts of the parent and group companies. Zhengzhou Huatai will apply HK(IFRIC)-Int 11 from 1 January 2008 but is currently not applicable to Zhengzhou Huatai as there are no share-based transactions.

HK(IFRIC)-Int 12 – Service Concession Arrangements (effective for annual periods beginning on or after 1 January 2008). It applies to contractual arrangements whereby a private sector operator participates in the development, financing, operation and maintenance of infrastructure for public sector services. HK(IFRIC)Int 12 is not relevant to Zhengzhou Huatai’s operations because Zhengzhou Huatai does not provide for public sector services.

HK(IFRIC)-Int 13 – Customer Loyalty Programmes (effective for annual periods beginning on or after 1 July 2008). It clarifies that where goods or services are sold together with a customer loyalty incentive (for example, loyalty points or free products), the arrangement is a multiple-element arrangement and the consideration receivable from the customer is allocated between the components of the arrangement using fair values. Zhengzhou Huatai will apply HK(IFRIC)-Int 13 from 1 January 2009. The directors of the Company consider the interpretation is not relevant to Zhengzhou Huatai as Zhengzhou Huatai does not sell goods together with a customer loyalty incentive.

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HK(IFRIC)-Int 14 – HKAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (effective for annual periods beginning on or after 1 January 2008). It provides guidance on assessing the limit in HKAS 19 on the amount of the surplus that can be recognised as an asset. It also explains how the pension asset or liability may be affected by a statutory or contractual minimum funding requirement. Zhengzhou Huatai will apply HK(IFRIC)-Int 14 from 1 January 2008, but it is not relevant on Zhengzhou Huatai’s financial statements as Zhengzhou Huatai does not have defined benefit assets.

Revenue recognition

Impairment

At each balance sheet date, Zhengzhou Huatai reviews the carrying amounts of its assets to determine whether there is any indication that those assets have suffered an impairment loss. If the recoverable amount of the asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately.

A reversal of an impairment loss is recognised as income immediately.

Foreign currencies

The Financial Informaton is presented in Renminbi, which is Zhengzhou Huatai’s functional currency. In preparing the financial statements of Zhengzhou Huatai, transactions in currencies other than the functional currency of Zhengzhou Huatai (foreign currencies) are recorded in its functional currency (i.e. the currency of the primary economic environment in which the entity operates) at the rates of exchanges prevailing on the dates of the transactions. At each balance sheet date, monetary items denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Nonmonetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

Borrowing costs

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

Financial instruments

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

Fair value

The fair value of financial assets and financial liabilities are determined in accordance with generally accepted pricing methods based on discounted cash flow analysis.

Financial assets

Zhengzhou Huatai’s financial assets are classified as loans and receivables. All regular way purchases or sales of financial assets are recognised and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace. The accounting policies adopted in respect of loans and receivables are set out below.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. At each balance sheet date subsequent to initial recognition, loans and receivables (including other receivables, bank balances and cash) are carried at amortised cost using the effective interest method, less any identified impairment losses. An impairment loss is recognised in profit or loss when there is objective evidence that the asset is impaired, and is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate. Impairment losses are reversed in subsequent periods when an increase in the asset’s recoverable amount can be related objectively to an event occurring after the impairment was recognised, subject to a restriction that the carrying amount of the asset at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised.

Financial liabilities and equity

Financial liabilities and equity instruments issued by Zhengzhou Huatai are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument. An equity instrument is any contract that evidences a residual interest in the assets of the group after deducting all of its liabilities. Zhengzhou Huatai’s financial liabilities are classified as financial liabilities at amortised cost.

The accounting policies adopted in respect of financial liabilities and equity instruments are set out below.

Financial liabilities at amortised cost

Financial liabilities at amortised cost (including other payables) are subsequently measured at amortised cost, using the effective interest method.

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Equity instruments

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

Derecognition

Financial assets are derecognised when the rights to receive cash flows from the assets expire or, the financial assets are transferred and Zhengzhou Huatai has transferred substantially all the risks and rewards of ownership of the financial assets. On derecognition of a financial asset, the difference between the asset’s carrying amount and the sum of the consideration received or receivable is recognised in profit or loss.

For financial liabilities, they are removed from Zhengzhou Huatai’s balance sheet (i.e. when the obligation specified in the relevant contract is discharged, cancelled or expires). The difference between the carrying amount of the financial liability derecognised and the consideration paid or payable is recognised in profit or loss.

3. SEGMENT INFORMATION

No business and geographical segment information is presented as all revenue and assets of Zhengzhou Huatai are related to its design, production and sale of textile products and development of new clothing and textile raw materials in the PRC during the Relevant Period.

4. LOSS FOR THE PERIOD

Zhengzhou Huatai’s loss for the period is arrived at after charging:

5 June 2007 (date of establishment) to 31 December 2007 RMB’000

Auditor’s	remuneration	–
Employee	benefits expenses ^	–

^ None of the directors of Zhengzhou Huatai received or will receive any fees or emoluments in respect of their services rendered to Zhengzhou Huatai during the Relevant Period.

5. DIVIDENDS

No dividend had been paid or declared by Zhengzhou Huatai since its establishment during the Relevant Period.

6. LOSS PER SHARE ATTRIBUTABLE TO ORDINARY EQUITY HOLDERS OF ZHENGZHOU HUATAI

No loss per share information is presented as its inclusion, for the purpose of this report, is not considered meaningful.

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7. OTHER RECEIVABLES

	31	December
		2007
		RMB’000
Other receivables		35,970

None of the above assets is either past due or impaired. The financial assets included in the above balances relate to receivables for which there was no recent history of default.

The directors of the Company consider that the fair values of other receivables approximate the corresponding carrying amounts.

8. BANK BALANCES AND CASH

At the balance sheet date, all the bank balances and cash of Zhengzhou Huatai were denominated in RMB. The RMB is not freely convertible into other currencies, however, under the PRC’s Foreign Exchange Control Regulations and Administration of Settlement, Sale and Payment of Foreign Exchange Regulations, Zhengzhou Huatai is permitted to exchange RMB for other currencies through banks authorised to conduct foreign exchange business.

9. OTHER PAYABLES

	31	December
		2007
		RMB’000
Other payables		3,450

The other payables are unsecured, non-interest bearing and repayable on demand

The directors of the Company consider that the fair values of other payables approximate the corresponding carrying amounts.

10. PAID-UP CAPITAL

Zhengzhou Huatai was established on 5 June 2007 with a registered and paid-up capital of RMB50,000,000.

11. CONTINGENT LIABILITIES

At the balance sheet date, Zhengzhou Huatai did not have any significant contingent liabilities.

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12. COMMITMENTS

Zhengzhou Huatai had the following capital commitments for the acquisition of plant and machinery at the balance sheet date:

Contracted, but not provided for Authorised, but not contracted for	31 December 2007 RMB’000 46,495 5,880
	52,375

13. RELATED PARTY TRANSACTIONS

Save as disclosed elsewhere in the Accountants’ Report, Zhengzhou Huatai did not enter into any related party transactions during the Relevant Period.

14. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

Foreign currency risk

Transactions of Zhengzhou Huatai are mainly settled in RMB. In the opinion of the directors of the Company, Zhengzhou Huatai does not have significant foreign currency risk exposure.

Credit risk

The credit risk of Zhengzhou Huatai’s financial assets, which comprise bank balances and cash, and other receivables arises from default of the counterparty, with a maximum exposure equal to the carrying amounts of these instruments.

There are no significant concentrations of credit risk within Zhengzhou Huatai.

Liquidity risk

Zhengzhou Huatai monitors its risk to a shortage of funds using a recurring liquidity planning tool. This tool considers the maturity of both its financial instruments and financial assets and projected cash flows from operations.

The maturity profile of Zhengzhou Huatai’s financial liabilities as at the balance sheet date, based on the contracted undiscounted payments, was as follows:

	31 December
	2007
	On demand
	RMB’000
Other payables	3,450

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Capital risk management

The primary objective of Zhengzhou Huatai’s capital management is to safeguard Zhengzhou Huatai’s ability to continue as a going concern and to maintain healthy capital ratios in order to support its business and maximise shareholder value.

Zhengzhou Huatai manages its capital structure and makes adjustments to it, in light of changes in economic conditions. To maintain or adjust the capital structure, Zhengzhou Huatai may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. Zhengzhou Huatai is not subject to any externally imposed capital requirements. No changes were made in the objectives, policies or processes during the Relevant Period.

Zhengzhou Huatai monitors capital using a gearing ratio, which is net debt divided by the total capital plus net debt. Net debt includes other payables, and less bank balances and cash. Total capital includes equity attributable to equity holders of Zhengzhou Huatai. The gearing ratio as at the balance sheet date was as follows:

Other payables_(note 9)_ Less: bank balances and cash Net debt Equity attributable to Zhengzhou Huatai Capital and net debt Gearing ratio	31 December 2007 RMB’000 3,450 (174 ) 3,276 49,960 53,236 6%

III SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements of Zhengzhou Huatai have been prepared in respect of any period subsequent to 31 December 2007 up to the date of this report.

Yours faithfully,

Dominic K.F. Chan & Co. Certified Public Accountants Hong Kong

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3. MANAGEMENT DISCUSSION AND ANALYSIS ON THE ACQUIREES

The following is the management discussion and analysis on the Acquirees for the periods ended 31 December 2006 and 2007.

A. Wide Launch Group

Review of operations

Zhengzhou Hongye established in the PRC with limited liability on 14 August 2006, has obtained the business license in respect of the design, production and sale of textile products and development of new clothing and textile raw materials. Wide Launch Group recorded audited net loss of approximately RMB5,833,000 and RMB10,865,000 for the period ended 31 December 2006 and for the year ended 31 December 2007 respectively.

Liquidity and financial resources

Wide Launch Group’s total assets as at 31 December 2006 and 31 December 2007 were approximately RMB40,037,000 and RMB181,772,000 respectively which were financed by shareholders’ funds of approximately RMB8,046,000 and RMB25,393,000 respectively, and total liabilities of approximately RMB31,991,000 and RMB156,379,000 respectively.

Capital structure

As at 31 December 2006, issued and paid-up registered capital of Zhengzhou Hongye was RMB13,879,000 and as at 31 December 2007, issued and paid-up registered capital was RMB34,211,000, which was the full amount of the registered capital of Zhengzhou Hongye.

Wide Launch Group did not have written financial risk management policies and guidelines during the periods. However, the directors periodically analyses and formulates measures to manage Wide Launch Group’s exposure to credit risk, interest rate risk and currency exchange rate risk. Generally, Wide Launch Group employs a conservative strategy regarding its risk management. No bank borrowings and no financial instruments for hedging purpose have been made during the periods.

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Prospects

Demand for pure cotton knit fabrics from the Group’s customers keeps increasing with its continuous growth in these few years. The Group has satisfied customers’ demand only by purchasing yarn for producing knit fabrics from external suppliers. However, the Acquisitions would align with the Group’s future development plan because Wide Launch Group owes the Property and certain domestic textile machinery and equipment for producing yarn, which is raw material for weaving pure cotton knit fabrics. Moreover, an international standard dyeing production line has been installed at the Group’s existing plant for further exploring the market of pure cotton knit fabrics. Consequently, after the Acquisitions, the Group would be able to integrate its production process vertically, from yarn spinning, raw fabric weaving to finished fabric dyeing.

Significant investments

No significant investments have been made by Wide Launch Group during the period ended 31 December 2006 and the year ended 31 December 2007.

Material acquisitions and disposals

Wide Launch Group did not have any material acquisitions and disposals during the period ended 31 December 2006 and the year ended 31 December 2007.

Segment information

No business or geographical segment information is prepared as Wide Launch Group has no operation during the periods.

Employees, remuneration and share option scheme

Staff costs and directors’ emoluments for the period ended 31 December 2006 and the year ended 31 December 2007 were approximately RMB309,000 and RMB2,849,000 respectively. No share option scheme has been adopted by Wide Launch Group.

As at 31 December 2007, Zhengzhou Hongye had around 800 staff and will offer a comprehensive and competitive remuneration, retirement scheme and benefit package to its employees. Discretionary bonus is offered to its staff depending on their performance. Zhengzhou Hongye will be required to make contribution to a social insurance scheme in the PRC. Moreover, Zhengzhou Hongye and its employees in the PRC will each be required to make contribution to fund the endowment insurance and unemployment insurance at the rates specified in the relevant PRC laws and regulations. Zhengzhou Hongye will also provide periodic internal training to its staff.

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Charge on assets

No asset of Wide Launch Group was pledged during the periods.

Future plan for material investments or capital assets and source of funding

Wide Launch Group has no future plan for material investments during the periods but there was future plan for capital assets for the completion of the Property and purchase of domestic textile machinery and equipment subsequent to 31 December 2007. The capital assets of Wide Launch Group will be funded by internally generated resources of the Group.

Gearing ratio

There was no bank borrowing incepted by Wide Launch Group and therefore the debt gearing ratio was zero.

Foreign currency exposure

Wide Launch Group has no operation during the periods and the deposits for acquisition of domestic textile machinery and equipment were not recurring transactions, therefore Wide Launch Group was not exposed to any material foreign currency exchange risk.

Contingent liabilities

Wide Launch Group had no contingent liability during the periods.

B. Zhengzhou Huatai

Review of operations

Zhengzhou Huatai, established in the PRC with limited liability on 5 June 2007, has obtained the business license in respect of the design, production and sale of textile products and development of new clothing and textile raw materials. Zhengzhou Huatai recorded audited net loss of approximately RMB40,000 for the period ended 31 December 2007.

Liquidity and financial resources

Zhengzhou Huatai’s total assets as at 31 December 2007 was approximately RMB53,410,000 which was financed by shareholders’ funds of approximately RMB49,960,000, and total liabilities of approximately RMB3,450,000.

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Capital structure

As at 31 December 2007, the registered and paid-up capital of Zhengzhou Huatai was RMB50,000,000. No share capital movement has been made during the period. Zhengzhou Huatai did not have written financial risk management policies and guidelines during the period. However, the directors periodically analyses and formulates measures to manage Zhengzhou Huatai’s exposure to credit risk, interest rate risk and currency exchange rate risk. Generally, Zhengzhou Huatai employs a conservative strategy regarding its risk management. No bank borrowings and no financial instruments for hedging purpose have been made during the period.

Prospects

Demand for pure cotton knit fabrics from the Group’s customers keeps increasing with its continuous growth in these few years. The Group has satisfied customers’ demand only by purchasing yarn for producing knit fabrics from external suppliers. However, the Acquisitions would align with the Group’s future development plan because the principal assets of Zhengzhou Huatai are the deposits for acquisition of import textile machinery and equipment to be used for producing yarn, which is the raw material for weaving pure cotton knit fabrics. Moreover, an international standard dyeing production line has been installed at the Group’s existing plant for further exploring the market of pure cotton knit fabrics. Consequently, after the Acquisitions, the Group would be able to integrate its production process vertically, from yarn spinning, raw fabric weaving to finished fabric dyeing.

Significant investments

No significant investments have been made by Zhengzhou Huatai during the period ended 31 December 2007.

Material acquisitions and disposals

Zhengzhou Huatai did not have any material acquisitions and disposals during the period ended 31 December 2007.

Segment information

No business or geographical segment information is prepared as Zhengzhou Huatai has no operation during the period.

Employees, remuneration and share option scheme

Zhengzhou Huatai has no operation during the period and no staff has ever been employed, therefore no staff costs and directors’ emoluments were incurred during the period. No share option scheme has been adopted by Zhengzhou Huatai.

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FINANCIAL INFORMATION ON THE ACQUIREES

APPENDIX II

Zhengzhou Huatai will offer a comprehensive and competitive remuneration, retirement scheme and benefit package to its employees. Discretionary bonus is offered to its staff depending on their performance. Zhengzhou Huatai will be required to make contribution to a social insurance scheme in the PRC. Moreover, Zhengzhou Huatai and its employees in the PRC will each be required to make contribution to fund the endowment insurance and unemployment insurance at the rates specified in the relevant PRC laws and regulations. Zhengzhou Huatai will also provide periodic internal training to its staff.

Charge on assets

No asset of Zhengzhou Huatai was pledged during the period.

Future plan for material investments or capital assets and source of funding

Zhengzhou Huatai has no future plan for material investments during the period but there was future plan for capital assets for the purchase of import textile machinery and equipment subsequent to the period end. The capital assets of Zhengzhou Huatai will be funded by internally generated resources of the Group.

Gearing ratio

There was no bank borrowing incepted by Zhengzhou Huatai and therefore the debt gearing ratio was zero.

Foreign currency exposure

Zhengzhou Huatai has no operation during the period and the deposits for acquisition of import textile machinery and equipment were not recurring transactions, therefore Zhengzhou Huatai was not exposed to any material foreign currency exchange risk.

Contingent liabilities

Zhengzhou Huatai had no contingent liability during the period.

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FINANCIAL INFORMATION ON THE ACQUIREES

APPENDIX II

4. RECONCILIATION STATEMENT OF THE PROPERTY (LAND AND BUILDING PORTION)

Set out below is a statement of reconciliation between the values of the Property (land and building portion) as stated in (i) the property valuation in Appendix IV to this circular; and (ii) the accountants’ report on Wide Launch Group set out in this appendix. The statement below was prepared in accordance with Rule 5.07 of the Listing Rules.

Carrying amount of construction in progress as at 31 December 2007_(Note 1) Carrying amount of prepaid lease payments – non-current portion(Note 2) Carrying amount of prepaid lease payments – current portion(Note 2) Adjustment: Adjustment of value of the Property (land and building portion) per property valuation report as disclosed in Appendix IV to this circular(Note 3)_ As adjusted	RMB’000 118,975 22,679 463
	142,117 68,883
	211,000

Notes:

The carrying amount of construction in progress as at 31 December 2007 of approximately RMB118,975,000 as per note 8 to Wide Launch Group’s financial statements for the year ended 31 December 2007 in this appendix consists of 1 block of single storey factory building, 2 blocks of single storey godown building, a block of 4-storey ancillary office building, a block of 6-storey dormitory building, a block of single storey repair and maintenance building, a block of 2-storey canteen and bath building, a single storey pump room & basement water tank, a single storey transformer room, a single storey garage, landscaping areas, recreational facilities, fencing wall and guard posts as mentioned in Appendix IV to this circular.
The carrying amount of non-current portion and current portion of prepaid lease payments as at 31 December 2007 of approximately RMB22,679,000 and RMB463,000 as per notes 9 and 10 respectively to the Wide Launch Group’s financial statements for the year ended 31 December 2007 in this appendix comprises of a textile compound located on northern side of Shuang Hu Da Street, Long Hu Town, Xinzheng City, Zhengzhou Shi, Henan Province, the PRC and has an approximate site area of 297,086.03m[2] as mentioned in Appendix IV to this circular.
In accordance with the valuation report in Appendix IV to this circular, the value of the construction in progress and prepaid lease payments was RMB211,000,000 which was a result of the boom of property market in the PRC recently.
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UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

1. UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

The following is an illustrative and unaudited pro forma consolidated statement of assets and liabilities of Art Textile Technology International Company Limited (the “Company”) and its subsidiaries (hereinafter collectively referred to as the “Group”) which has been prepared on the basis of the notes set out below for the purpose of illustrating the effect of the proposed acquisition of 100% interest in Wide Launch Investment Limited and its subsidiaries (“Wide Launch Group”) and 100% interest in Zhengzhou Huatai Textile Company Limited (hereinafter collectively referred to as the “Acquisitions”), as if it had taken place on 31 December 2007.

This unaudited pro forma consolidated statement of assets and liabilities of the Enlarged Group as at 31 December 2007 has been prepared using the accounting policies materially consistent with that of the Group and based on the unaudited balance sheet of the Group as at 31 December 2007 as extracted from the Group’s published interim financial report for the six months ended 31 December 2007 as set out in Appendix I to this circular, after making certain pro forma adjustments as set out in the notes below.

This unaudited pro forma consolidated statement of assets and liabilities of the Enlarged Group has been prepared for illustrative purposes only and, because of its hypothetical nature, it may not give a true picture of the financial position of the Enlarged Group had the Acquisitions been completed as at 31 December 2007 or at any future date.

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UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

NON-CURRENT ASSETS Property, plant and equipment Prepaid lease payments – non current-portion Deposits for acquisition of plant and equipment Goodwill CURRENT ASSETS Inventories Trade and other receivables Prepaid lease payments – current portion Pledged bank deposits Bank balance and cash CURRENT LIABILITIES Trade and other payables Tax liabilities Bank borrowings, secured NET CURRENT ASSETS/ (LIABILITIES) CAPITAL AND RESERVES Share capital Share premium and other reserves NON-CURRENT LIABILITY Deferred tax liability	Wide Launch The Group Group (unaudited ) (audited ) HK$’000 HK$’000 165,260 132,592 14,833 24,127 1,914 25,561 – – 182,007 182,280 21,041 – 64,355 8,875 347 493 4,152 – 539,755 1,726 629,650 11,094 64,623 166,360 15,659 – 8,511 – 88,793 166,360 540,857 (155,266 ) 722,864 27,014 10,406 44,778 712,458 (17,764 ) 722,864 27,014 – – 722,864 27,014	Unaudited pro forma consolidated statement of assets and and liabilities Zhengzhou Pro forma of the Enlarged Huatai adjustments Group (audited ) (unaudited ) (unaudited ) HK$’000 HK$’000 Note (ii) HK$’000 – 2,154 (c) 300,006 – 71,125 (c) 110,085 18,368 45,843 – 35,048 (e) 35,090 42 (f) 18,368 491,024 – 21,041 38,266 111,496 – 840 – 4,152 185 (117,021 ) (a) 371,454 (53,191 ) (b) 38,451 508,983 3,670 234,653 – 15,659 – 8,511 3,670 258,823 34,781 250,160 53,149 741,184 53,191 (44,778 ) (d) 10,406 (53,191 ) (d) (42 ) 17,764 (d) 42 (d) 712,458 53,149 722,864 – 18,320 (c) 18,320 53,149 741,184

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UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

2. NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES:

(I) BASIS OF PREPARATION

This unaudited pro forma consolidated balance sheet has been prepared in accordance with Rule 4.29 of the Listing Rules and based upon: (i) the unaudited consolidated balance sheet of the Group as of 31 December 2007, which has been extracted from the published interim financial report of the Company for the six months ended 31 December 2007, (ii) the audited combined balance sheet of Wide Launch Group as of 31 December 2007, which has been extracted from the accountants’ report on Wide Launch Group included in Appendix II to this circular, and (iii) the audited balance sheet of Zhengzhou Huatai Textile Company Limited as of 31 December 2007, which has been extracted from the accountants’ report on Zhengzhou Huatai Textile Company Limited included in Appendix II to this circular, incorporating the pro forma adjustments described in note (ii) below.

This unaudited pro forma consolidated balance sheet has been prepared in a manner consistent with both the format and accounting policies adopted by the Group in its audited consolidated financial statements for the year ended 30 June 2007.

For the purpose of the pro forma consolidated statement of assets and liabilities, the balances denominated in Renminbi (“RMB”) have been translated into Hong Kong dollars (“HK$”) at HK$100 = RMB94 which is the prevailing exchange rate as at 31 December 2007.

(II) NOTES TO THE PRO FORMA ADJUSTMENTS

(a) This pro forma adjustment reflects the payment by the Group of RMB110,000,000 (equivalent to approximately HK$117,021,000) for the acquisition of Wide Launch Group.
(b) This pro forma adjustment reflects the payment by the Group of RMB50,000,000 (equivalent to approximately HK$53,191,000) for the acquisition of Zhengzhou Huatai Textile Company Limited.
(c) This pro forma adjustment reflects the recognition of a fair value adjustment on certain land use rights and construction in progress of Wide Launch Group of RMB66,858,000 (equivalent to approximately HK$71,125,000) and RMB2,025,000 (equivalent to approximately HK$2,154,000), and the related deferred tax liabilities of RMB17,221,000 (equivalent to approximately HK$18,320,000) estimated by the Directors. The leasehold land and the land use rights are valued by the direct comparison method.
(d) This pro forma adjustment represents the elimination of the share capital and pre-acquisition reserves of Wide Launch Group and Zhengzhou Huatai Textile Company Limited.
(e) This pro forma adjustment represents the recognition of goodwill of RMB32,945,000 (equivalent to approximately HK$35,048,000) arising from the acquisition of Wide Launch Group, being the excess of the total consideration of RMB110,000,000 (equivalent to approximately HK$117,021,000) over the Group’s interest in the fair value of the net identifiable assets of Wide Launch Group of RMB77,055,000 (equivalent to approximately HK$81,973,000). Since the fair value of the net identifiable assets of Wide Launch Group at the date of completion of the acquisition may be substantially different from the fair value used in the preparation of this unaudited pro forma statement of assets and liabilities of the Enlarged Group, the final amount of the excess over the cost of business combination to be recognised in connection with the acquisition will be different from the estimated excess over the cost of business combination stated herein.
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UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

(f) This pro forma adjustment represents the recognition of goodwill of RMB40,000 (equivalent to approximately HK$42,000) arising from the acquisition of Zhengzhou Huatai Textile Company Limited, being the excess of the total consideration of RMB50,000,000 (equivalent to approximately HK$53,191,000) over the Group’s interest in the fair value of the net identifiable assets of Zhengzhou Huatai Textile Company Limited of RMB49,960,000 (equivalent to approximately HK$53,149,000). Since the fair value of the net identifiable assets of Zhengzhou Huatai Textile Company Limited at the date of completion of the acquisition may be substantially different from the fair value used in the preparation of this unaudited pro forma statement of assets and liabilities of the Enlarged Group, the final amount of goodwill to be recognised in connection with the acquisition will be different from the estimated goodwill stated herein.
(g) No adjustment has been made to reflect any trading result or other transaction of the Group, Wide Launch Group and Zhengzhou Huatai Textile Company Limited entered into subsequent to 31 December 2007.
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APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

3. REPORT FROM ACCOUNTANT ON UNAUDITED PRO FORMA FINANCIAL INFORMATION TO THE DIRECTORS OF ART TEXTILE TECHNOLOGY INTERNATIONAL COMPANY LIMITED

The following is the text of a letter prepared for the sole purpose of inclusion in this circular received from the independent reporting accountants, Dominic K.F. Chan & Co., Certified Public Accountants, in respect of the unaudited pro forma financial information of the Enlarged Group.

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==> picture [351 x 55] intentionally omitted <==

30 April 2008

The Directors

Art Textile Technology International Company Limited

Dear Sirs,

We report on the unaudited pro forma financial information of Art Textile Technology International Company Limited (the “Company”) and its subsidiaries (hereinafter collectively referred to as the “Group”), and 100% interest in Wide Launch Investment Limited and its subsidiaries and 100% interest in Zhengzhou Huatai Textile Company Limited (collectively referred to as the “Acquisitions”) (together with the Group collectively referred to as the “Enlarged Group”), as set out on pages 98 to 101 under the heading of “Unaudited Pro Forma Financial Information of the Enlarged Group” (the “Unaudited Pro Forma Financial Information”) in Appendix III to the circular dated 30 April 2008 (the “Circular”). The Unaudited Pro Forma Financial Information has been prepared by the directors of the Company, for illustrative purposes only, to provide information about how the Acquisitions might have affected the relevant financial information of the Group. The basis of preparation of the Unaudited Pro Forma Financial Information is set out on page 100 in the Circular.

Respective Responsibilities of directors of the Company and reporting accountant

It is the responsibility solely of the directors of the Company to prepare the Unaudited Pro Forma Financial Information in accordance with rule 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” issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”).

It is our responsibility to form an opinion, as required by rule 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.

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UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Basis of Opinion

We conducted our engagement in accordance with Hong Kong Standard on Investment Circular Reporting Engagements 300 “Accountants’ Reports on Pro Forma Financial Information in Investment Circulars” issued by the HKICPA. Our work, which involved no independent examination of any of the underlying financial information, consisted primarily of comparing the unaudited statement of assets and liabilities of the Group as at 31 December 2007 with the unaudited published interim financial report of the Company for the six months ended 31 December 2007 as set out in Appendix I of this Circular, considering the evidence supporting the adjustments and discussing the Unaudited Pro Forma Financial Information with the directors of the Company. This engagement did not involve independent examination of any of the underlying financial information.

We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Unaudited Pro Forma Financial Information has been properly compiled by the directors of the Company on the basis stated, that such basis is consistent with the accounting policies of the Group and that the adjustments are appropriate for the purposes of the Unaudited Pro Forma Financial Information as disclosed pursuant to rule 4.29(1) of the Listing Rules.

The Unaudited Pro Forma Financial Information is for illustrative purposes only, based on the judgements and assumptions of the directors of the Company, and, because of its hypothetical nature, does not provide any assurance or indication that any event will take place in the future and may not be indicative of the financial position of the Group as at 31 December 2007 or any future date.

Opinion

In our opinion:

(a) the Unaudited Pro Forma Financial Information has been properly compiled by the directors of the Company on the basis stated;
(b) such basis is consistent with the accounting policies of the Group; and
(c) the adjustments are appropriate for the purposes of the Unaudited Pro Forma Financial Information as disclosed pursuant to rule 4.29 (1) of the Listing Rules.

Yours faithfully,

Dominic K.F. Chan & Co. Certified Public Accountants Hong Kong

103 -

VALUATION REPORT ON THE PROPERTY (LAND AND BUILDING PORTION)

APPENDIX IV

The following is the text of a letter and a valuation certificate prepared by GA Appraisal Limited in respect of the Property (land and building portion) for the purpose of inclusion in this circular.

Flat D & E 24th Floor Alliance Building Nos. 130 – 136 Connaught Road Central Hong Kong

==> picture [207 x 60] intentionally omitted <==

Date: 30 April 2008

The Board of Directors Art Textile Technology International Company Limited Unit 1407, 14/F. China Merchants Tower Shun Tak Centre 168-200 Connaught Road Central Hong Kong.

Dear Sirs,

Re: A textile compound located on northern side of Shuang Hu Da Street, Long Hu Town, Xinzheng City, Zhengzhou Shi, Henan Province, The People’s Republic of China ( “the PRC” ) ( Land Lot No. 6-G15-2 )

In accordance with your instructions to prepare a report and valuation in respect of the current market value of the property, in its existing state and with the benefit of vacant possession, for a proposed acquisition and incorporation onto a circular to shareholders of your company, we confirm that we have carried out inspection, made relevant enquiries and searches and obtained such further information as we consider necessary for the purpose of providing the capital value of the property interests as at 31 January 2008 (the “date of valuation”).

The valuation is our opinion of market value which in accordance with the Valuation Standards on Properties of the Hong Kong Institute of Surveyors is defined as “the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion”.

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VALUATION REPORT ON THE PROPERTY (LAND AND BUILDING PORTION)

APPENDIX IV

The property interests are under development in the PRC. We have valued the property interests on the assumption that the property will be developed and completed in accordance with the latest development proposal provided to us. In arriving at our opinion of value, we have adopted direct comparison approach by making reference to comparable sales evidence as available in the relevant market and have also taken into consideration the construction costs and professional fees relevant to the stage of construction as at the date of valuation and the remainder of the costs and fees to be expended to complete and reflect quality of the development.

Our valuation has been made on the assumption that the seller sell the property interests in the market without the benefit of a deferred term contract, lease back, joint venture, management agreement or any similar arrangement which could serve to affect the value of the property interests.

No allowance has been made in our report for any charges, mortgages or amounts owing on any of the property interests valued nor for any expenses or taxation which may be incurred in effecting a sale. Unless otherwise stated, it is assumed that the property is free from encumbrances, restrictions and outgoings of an onerous nature, which could affect its value.

In valuing the property interests, we have complied with all the requirements contained in Chapter 5 and Practice Note 12 to the Rules Governing the Listing of Securities issued by The Stock Exchange of Hong Kong Limited; the RICS Appraisal and Valuation Standards (5th Edition May 2003) published by the Royal Institution of Chartered Surveyors; and the HKIS Valuation Standards on Properties (1st Edition January 2005) published by the Hong Kong Institute of Surveyors.

We have relied to a very considerable extent on the information given by the instructing party and have accepted advice given to us on such matters as tenure, planning approvals, statutory notices, easements, particulars of occupancy, lettings, floor areas and all other relevant matters.

We have been provided with copies of title documents relating to the property interests. Where possible, we have examined the original documents to verify the existing title to the property interests in the PRC and any material encumbrances that might be attached to the property interests or any lease amendments which may not appear on the copies handed to us. We have relied considerably on the advice given by the PRC legal advisor of the instructing party – 福建創元律師事務所 (Trend Associates), concerning the validity of title of the property.

In valuing the property interests, we have assumed that transferable land use rights in respect of the property interests at nominal land use fees has been granted and that any premium payable has already been fully settled. We have also assumed that owner of the property shall have an enforceable title of the property interests and have free and uninterrupted rights to occupy, use, sell, lease, charge, mortgage or otherwise dispose of the property without the need of seeking further approval from and paying additional premium to the Government for the unexpired land use term as granted.

105 -

VALUATION REPORT ON THE PROPERTY (LAND AND BUILDING PORTION)

APPENDIX IV

We have not carried out detailed site measurements to verify the correctness of the land or building areas in respect of the property but have assumed that the areas provided to us are correct. Based on our experience of valuation of similar properties in the PRC, we consider the assumptions so made to be reasonable. All documents and contracts have been used as reference only and all dimensions, measurements and areas are approximations. No on-site measurements have been taken. We have also assumed that there was not any material change of the property in between date of our inspection and the valuation date.

We have inspected the exterior and, where possible, the interior of the property. However, no structural survey has been made, but in the course of our inspection, we did not note any serious defects. We are not, however, able to report whether the property are free of rot, infestation or any other structural defects. No tests were carried out on any of the services. We have assumed that utility services, such as electricity, telephone, water, etc., are available.

Moreover, we have not carried out site investigations to determine the suitability of the ground conditions or the services for any property development erected or to be erected thereon. Nor did we undertake archaeological, ecological or environmental surveys for the property interests. Our valuation is prepared on the assumption that these aspects are satisfactory and that no extraordinary expenses or delays will be incurred during the construction period. Should it be discovered that contamination, subsidence or other latent defects exists in the property or on adjoining or neighbouring land or that the property had been or are being put to contaminated use, we reserve right to revise our opinion of value.

We have not arranged for any investigation to be carried out to determine whether or not high alumina cement concrete or calcium chloride additive or pulverized fly ash, or any other deleterious material has been used in the construction of the property. We are therefore unable to report that the property is free from risk in this respect. For the purpose of this valuation, we have assumed that deleterious material has not been used in the construction of the property.

We have had no reason to doubt the truth and accuracy of the information provided to us by the instructing party. We have also sought confirmation from the instructing party that no material factors have been omitted from the information supplied. We consider that we have been provided with sufficient information to reach an informed view, and we have no reason to suspect that any material information has been withheld.

We have not undertaken a survey to determine whether the mechanical and electrical systems within the property (or the building or development in which it is located) would be adversely affected on or after the year 2000 and as such have assumed that the property and those systems would be unaffected.

106 -

VALUATION REPORT ON THE PROPERTY (LAND AND BUILDING PORTION)

APPENDIX IV

We have not investigated any industrial safety, environmental and health related regulations in association with the existing and/or planned manufacturing process. It is assumed that all necessary licences, procedures and measures were implemented in accordance with the Government legislation and guidance.

When the property is located in a relatively under-developed market, such as the PRC, those assumptions are often based on imperfect market evidence. A range of values may be attributable to the property depending upon the assumptions made. While the valuer has exercised his professional judgement in arriving at the value, investors/readers are urged to consider carefully the nature of such assumptions that are disclosed in the valuation report and should exercise caution in interpreting the valuation report.

In accordance with our standard practice, this valuation certificate is for the exclusive use of the party to whom it is addressed and no responsibility is accepted to the third party for the whole or any part of its contents.

Wherever the content of this report is extracted and translated from the relevant documents supplied in Chinese context and there are discrepancies in wordings, those parts of the original documents will take prevalent.

Unless otherwise stated, all amounts are denominated in Renminbi (RMB).

We enclose herewith our valuation certificate.

Yours faithfully, For and on behalf of

GA Appraisal Limited

Evan K L Yuen MRICS MHKIS

Registered Professional Surveyor General Manager – Real Estate

Note: Mr. Evan K L Yuen is a Chartered Valuation Surveyor and a Registered Professional Surveyor, who has more than 13 years’ experience in the valuation of properties in the PRC, Hong Kong and the South East Asia. Mr. Evan K L Yuen is also a valuer on the List of Property Valuers for Undertaking Valuations for Incorporation or Reference in Listing Particulars and Circulars and Valuations in Connection with Takeovers and Mergers published by the HKIS.

107 -

VALUATION REPORT ON THE PROPERTY (LAND AND BUILDING PORTION)

APPENDIX IV

VALUATION CERTIFICATE

Description and tenure

Property

A textile The property comprises a textile compound compound which has an approximate located on site area of 297,086.03 sq.m.. It is northern planned to have several phases of side of development and with an approximate Shuang Hu total gross floor area of 212,036 sq.m.. Da Street, Long Hu As at the date of valuation, Town, construction of Phase 1 was underway, Xinzheng which primarily consists of 1 block City, of single storey factory building, Zhengzhou 2 blocks of single storey godown Shi, Henan building, a block of 4-storey ancillary Province, office building, a block of 6-storey The PRC dormitory building, a block of single ( Land Lot storey repair and maintenance building, No. 6-G15a block of 2-storey canteen and bath 2 ) building, a single storey pump room & basement water tank, a single storey transformer room, a single storey garage, landscaping areas, recreational facilities, fencing walls and guard posts.

Capital value in existing Particular of state as at 31 occupancy January 2008 RMB

We have been 211,000,000 informed that the property (Capital had been Value after fenced off completion: and was under 255,000,000) construction, as at the date of valuation.

The property will be owneroccupied upon completion.

According to the information provided by the Instructing Party, total gross floor area of Phase 1 is approximate 74,611.89 sq.m. with details summarized as follows:–

108 -

VALUATION REPORT ON THE PROPERTY (LAND AND BUILDING PORTION)

APPENDIX IV

Property

Description and tenure

Capital value in existing Particular of state as at 31 occupancy January 2008 RMB

		Approximate
	Designated	Gross Floor
Building	Use	Area (sq.m.)
Main Factory	Industrial	45,381.40
Office	Office	4,991.40
Godown	Godown	10,947.10
Repair &
Maintenance	Industrial	1,340.47
Staff Quarter	Dormitory	7,799.92
Canteen &	Ancillary
Bath	uses	3,446.00
Transformer	Ancillary
Room	Uses	307.60
Pump Room	Ancillary
	Uses	188.00
Garage	Ancillary
	Uses	210.00
	Total:	74,611.89

Phase 1 is scheduled to be completed in stages ranging from March 2008 to June 2008.

The total construction costs are estimated to be approximately RMB 162,177,000, of which approximately RMB 119,143,000 had been incurred at the date of valuation.

Pursuant to the Stated-owned Land Use Rights Certificate dated 23 April 2007, the term of land use rights of the property is till November 2056 for industrial uses.

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VALUATION REPORT ON THE PROPERTY (LAND AND BUILDING PORTION)

APPENDIX IV

Notes:–

鄭州宏業紡織有限公司 (Zhengzhou Hongye Textile Co., Ltd.) has been approved by 河南省人民政府 (Henan Provincial Government) via a certificate 商外資豫府鄭資字(2006) 0023號 (Registration No. 0023) in 2006 and registered with 鄭州市工商行政管理局 (Zhengzhou Shi Administration for Industry and Commerce) as revealed by business licence 企獨豫鄭總字第410100400000034號 (Registration No.: 410100400000034) dated 27 August 2007. 鄭州宏業紡織有限公司 (Zhengzhou Hongye Textile Co., Ltd.) was incorporated as a foreign enterprise with a registered capital of HK$35 million for an operation period commencing from 14 August 2006 to 6 August 2036. The scope of business includes design, manufacturing and sale of textile products and innovation of wearing apparels and new raw materials for textile products.
According to the 新土國用(2007)第147號 (State-owned Land Use Rights Certificate No. 147), dated 23 April 2007 issued by 新鄭市人民政府 (Xinzheng Municipal Government) to 鄭州宏業紡織有限公司 (Zhengzhou Hongye Textile Co., Ltd.), land of the property is held by the latter party via private treaty grant and subject to, inter alia, the following terms:–

(a) Use of the Land : Industrial (b) Land Area : 297,086.03 sq.m. (c) Term : till November 2056

Pursuant to 建設工程規劃許可證編號(2007)新城規建管許字 (026)及(027) 號(Construction Work Planning Permit Nos. (026) & (027) of (2007)) all dated 26 December 2007 issued by 新鄭市規劃管理局 (Xinzheng City Planning Management Bureau) to 鄭州宏業紡織有限公司 (Zhengzhou Hongye Textile Co., Ltd.), various permanent buildings designated for factory, dormitory and other ancillary uses and with a total planned gross floor area of approximately 86,618.16 sq.m. has been approved for construction thereon the property.
Our valuation has been prepared on the following assumptions and basis:–
(i) The term of land use rights of the property is 50 years for industrial use till November 2056.
(ii) 鄭州宏業紡織有限公司 (Zhengzhou Hongye Textile Co., Ltd.) is entitled to transfer the residual term of its land use rights at no extra land premium or other onerous payment payable to the government. All outstanding development taxes and costs relevant to the stage of construction, if any, are assumed to have been settled in full as at the date of valuation.
(iii) There is not any outstanding payment for land premium, purchase price and clearance costs.
(iv) The design and construction of the buildings erected on the property are in compliance with the local planning regulations and have been duly examined and approved by the relevant authorities. The necessary development consent, approvals, licences, permits and proper title documents, if not yet obtained, would be issued without undue delay and in favour of 鄭州宏業紡織有限公司 (Zhengzhou Hongye Textile Co., Ltd.).
(v) The property can be disposed of freely to both local and overseas purchasers in open market.
(vi) The property was not transferred, mortgaged or involved in any contentious or non-contentious dispute as at the date of valuation.
(vii) The property was free from any encumbrance as at the date of valuation.
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VALUATION REPORT ON THE PROPERTY (LAND AND BUILDING PORTION)

APPENDIX IV

We have been provided with a legal opinion regarding the legality of the property issued by PRC legal adviser of the instructing party, which contains, inter alia, the following:–
(i) The land use rights of the property is legally owned by 鄭州宏業紡織有限公司 (Zhengzhou Hongye Textile Co., Ltd.) and can be freely disposed, transferred, leased or mortgaged by 鄭州宏業紡織有限公司 (Zhengzhou Hongye Textile Co., Ltd.) which also owns the building(s) and structure(s) erected or to be erected thereon.
(ii) All land premium and purchase price had been settled in full.
(iii) The development of the property under construction is legal and not in breach of relevant laws or regulations.
The status of the title and grant of major approvals and licences in accordance with the information provided by the Instructing Party are as follows:–

Documents relating to company’s Legality:
Business Licence	Yes
Certificate for Approval of Establishment of Foreign Investment Enterprises in PRC	Yes
Capital Verification Report	Yes
Documents relating to Property Title:
Land Use Rights Grant Contract	Yes
State-owned Land Use Rights Certificate	Yes
Red-line Drawing	Yes
Documents relating to Planning and Construction:
Construction Land Use Planning Permit	Yes (Phase 1)
Construction Work Planning Permit	Yes (Phase 1)
Clearance and Demolition Permit	N/A
Construction Work Commencement Permit	Yes
Completion Certificate	N/A

111 -

GENERAL INFORMATION

APPENDIX V

1. RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Group. The Directors collectively and individually accept full responsibility for the accuracy of the information contained in this circular and confirm, having made all reasonable enquires, that to the best of their knowledge and belief, there are no other facts the omission of which would make any statement herein misleading.

2. SHARE CAPITAL

The authorised and issued capitals of the Company as at the Latest Practicable Date were as follows:

Authorised 20,000,000,000 Shares Issued, fully paid or credited as fully paid 1,040,602,583 Shares	HK$ 20,000,000

	10,406,000

3. DISCLOSURE OF INTERESTS OF DIRECTORS

As at the Latest Practicable Date, the interests or short positions of each Director and 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) which were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which he/she is taken or deemed to have under such provisions of the SFO), or which were required, pursuant to Section 352 of the SFO, to be entered in the register maintained by the Company referred to therein, or which were required, pursuant to the Model Code for Securities Transactions by Directors of Listed Companies contained in the Listing Rules, to be notified to the Company and the Stock Exchange, were as follows:

Long Positions

(a) Ordinary shares of HK1 cent each of the Company

		Number
		of issued	Approximate
		ordinary	shareholding
Name of director	Capacity	shares held	percentage
Mr. Chen Dong	Held by controlled	581,910,000	55.92%
	corporation_(Note)_

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GENERAL INFORMATION

APPENDIX V

Note: The shares are held by Talent Crown, a company incorporated in the British Virgin Islands, the entire issued share capital of which is beneficially owned by Mr. Chen Dong. Mr. Chen Dong is the younger brother of Mr. Chen Jinyan and both are the executive directors of the Company.

(b) Share options

			Number of
		Number of	underlying
Name of director	Capacity	options held	shares
Mr. Chen Jinyan	Beneficial owner	8,500,000	8,500,000
Ordinary share of US$1 of Talent Crown
		Number of
		issued ordinary	Shareholding
Name of director	Capacity	share held	percentage
Mr. Chen Dong	Beneficial owner	1	100%

(c) Ordinary share of US$1 of Talent Crown

Other than as disclosed above, none of the Directors, chief executive of the Company nor their associates had any interest or short position in any shares, underlying shares or debentures of the Company or any of its associated corporations as at the Latest Practicable Date.

4. DISCLOSURE OF INTERESTS OF SUBSTANTIAL SHAREHOLDERS

So far as is known to any Director or chief executive of the Company, other than a Director or chief executive of the Company, the following persons have an interest or short position in the Shares and underlying Shares of the Company as at the Latest Practicable Date which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO:

Long positions – Ordinary shares of HK1 cent each of the Company

		Number
		of issued	Approximate
		ordinary	shareholding
Name of shareholder	Capacity	shares held	percentage
Talent Crown	Beneficial owner	581,910,000	55.92%
Concordia Advisors (Bermuda) Limited	Beneficial owner	179,355,000	17.24%
Veer Palthe Voute NV_(Note)_	Beneficial owner	84,395,000	8.11%

Note: These shares were beneficially held by Veer Palthe Voute NV whose ultimate holding company, Allianz Aktiengesellschaft, indirectly holds 81.1% interest in Veer Palthe Voute NV.

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GENERAL INFORMATION

APPENDIX V

As at the Latest Practicable Date, so far as is known to the Directors and save as disclosed in this circular, there was no person who was, directly or indirectly, interested in 10 per cent. or more of the nominal value of the share capital carrying rights to vote in all circumstances at general meetings of any member of the Enlarged Group or any options in respect of such capital.

5. DIRECTORS’ INTEREST IN ASSETS

As at the Latest Practicable Date, none of the Directors had any interest, direct or indirect, in any asset which have been, since 30 June 2007, being the date to which the latest published audited consolidated financial statements of the Company were made up, acquired or disposed of by or leased to any member of the Group and the Enlarged Group or are proposed to be acquired or disposed of by or leased to any member of the Group and the Enlarged Group.

6. DIRECTORS’ INTEREST IN CONTRACT

None of the Directors was materially interested, directly or indirectly, in any contract or arrangement entered into by any member of the Group and the Enlarged Group subsisting as at the Latest Practicable Date which is significant in relation to their respective businesses.

7. DIRECTORS’ INTEREST IN COMPETING BUSINESS

As at the Latest Practicable Date, none of the Directors or their respective associates is interested in any business which competes or is likely to compete, whether directly or indirectly, with the business of the Enlarged Group.

8. LITIGATION

Neither the Company nor any member of the Enlarged Group are engaged in any litigation or arbitration or claim of material importance and no litigation or claim of material importance is known to the Directors to be pending or threatened by or against the Company or any member of the Enlarged Group.

9. SERVICE CONTRACTS

Mr. Chen Dong and Ms. Kong Ping were re-appointed by the Board on 1 September 2007 to continue to act as executive Directors for a term of one year after the expiration of their service agreements on 31 August 2007. Whilst, the service agreement for Mr. Chen Jinyan expired on 31 August 2006 and he was reappointed by the Board on 1 September 2006 to continue to act as an executive Director for a term of two years. All the above service agreements will be terminated by either party by giving three months’ prior written notice.

114 -

GENERAL INFORMATION

APPENDIX V

Each of the independent non-executive Directors entered into service agreements with the Company for a term of one year and either the Company or the independent non-executive Director may terminate the appointment by giving the other a prior notice of two months in writing before its expiration.

Other than as disclosed above, none of the Directors has a service agreement with the Company which is not determinable by the Company within one year without payment of compensation, other than statutory compensation.

The aggregate remuneration payable to and benefits in kind receivable by the Directors will not be varied in consequence of the Acquisitions.

10. MATERIAL CONTRACTS

The following contracts (not being contracts entered into in the ordinary course of business) have been entered into by the Company and/or member(s) of the Enlarged Group and have been announced within two years immediately preceding the date of this circular which are or may be material:

(a) the amendment agreement dated 13 June 2007 entered into between the Company and Credit Suisse (Hong Kong) Limited (formerly known as Credit Suisse First Boston (Hong Kong) Limited) to amend the subscription agreement dated 6 December 2004 in relation to the issue of up to U$15,000,000 1.5 per cent. unlisted redeemable convertible bonds due 2007;
(b) a tenancy agreement dated 5 December 2007 between Shun Tak Centre Limited and the Company whereby the Company agreed to take Unit 1407, 14th Floor, China Merchants Tower, Shun Tak Centre, No.168-200 Connaught Road Central, Hong Kong at a monthly rent of HK$58,064 (exclusive of management fee, air-conditioning charges, rates and all other outgoings);
(c) the Acquisition Agreement I; and
(d) the Acquisition Agreement II.

11. EXPERTS

The following is the qualification of the experts who have given opinion or advice contained in this circular:

Name	Qualification
Dominic K.F. Chan & Co.	Certified Public Accountants
GA Appraisal Limited	Independent professional valuers

(a) As at the Latest Practicable Date, Dominic K.F. Chan & Co. and GA Appraisal Limited were not beneficially interested in the share capital of any member of the Group nor did they 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 nor did they have any interest, either direct or indirect, in any assets which have been, since 30 June 2007
115 -

GENERAL INFORMATION

APPENDIX V

being the date to which the latest published audited consolidated financial statements of the Company were made up, acquired or disposed of by or leased to or are proposed to be acquired or disposed of by or leased to any member of the Group.

(b) Dominic K.F. Chan & Co. and GA Appraisal Limited have given and have not withdrawn their written consent to the issue of this circular with the inclusion of their letters and/ or reports and/or references to its name and logo (as the case maybe), in the form and context in which they respectively appear.

12. GENERAL

(a) The registered office of the Company is located at Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman KY1-1111, Cayman Islands.
(b) The head office and principal place of business of the Company in Hong Kong is located at Unit 1407, 14/F., China Merchants Tower, Shun Tak Centre, 168 – 200 Connaught Road Central, Hong Kong.
(c) The branch share registrar and transfer office of the Company in Hong Kong is Tricor Investor Services Limited at 26/F, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong.
(d) The qualified accountant of the Company is Ms. Woo Man Wah HKICPA, CPA (Aust).
(e) The company secretary of the Company is Ms. Yeow Mee Mooi HKICPA, CPA (Aust).
(f) The English text of this circular shall prevail over the Chinese text for the purpose of interpretation.

13. PROCEDURES FOR DEMANDING A POLL

Pursuant to Article 66 of the Articles of Association of the Company, every resolution submitted to a general meeting shall be determined on a show of hands in the first instance by the Shareholders present unless (before or upon the declaration of the result of the show of hands or on the withdrawal of any other demand for a poll) a poll is demanded by:

(a) the chairman of the meeting; or
(b) at least 3 Shareholders present in person or in the case a Shareholder being a corporation by its duly authorised representative or by proxy for the time being entitled to vote at the meeting; or
(c) a Shareholder or Shareholders present in person or in the case a Shareholder being a corporation by its duly authorised representative or by proxy and representing not less than one-tenth of the total voting rights of all the Shareholders having the right to vote at the meeting; or
116 -

GENERAL INFORMATION

APPENDIX V

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

Unless a poll is duly demanded in accordance with the foregoing provisions, a declaration of the chairman of the meeting that a resolution has been carried or lost or has or has not been carried by any particular majority, and an entry to that effect in the minutes of the proceedings of the Company, shall be conclusive evidence of the fact without proof of the number, proportion or validity of the votes recorded in favour of or against such resolution.

14. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection at the principal office of the Company at Unit 1407, 14/F., China Merchants Tower, Shun Tak Centre, 168 – 200 Connaught Road Central, Hong Kong, during normal business hours on any weekday, except public holidays, from the date hereof up to and including 14 May 2008.

the Company’s memorandum of association and articles of association;
the service contracts referred to in the paragraph headed “Service Contracts” in this appendix;
the material contracts referred to in the paragraph headed “Material Contracts” in this appendix;
the annual reports of the Group for the two financial years ended 30 June 2006 and 2007;
the interim report of the Group for the six months ended 31 December 2007;
the accountants’ reports on the Acquirees, the text of which is set out in Appendix II to this circular;
the unaudited pro forma financial information of the Enlarged Group, the text of which is set out in Appendix III to this circular;
the valuation report on the Property (land and building portion) in Appendix IV to this circular;
the written consents of Dominic K.F. Chan & Co. and GA Appraisal Limited as referred to under the paragraph headed “Experts” in this appendix;
the Company’s circular(s) since 30 June 2007; and
this circular.
117 -

AI assistant

Art Group Holdings Limited — Proxy Solicitation & Information Statement 2008

49301_rns_2008-04-30_5db1c66f-ebc8-4ae0-a25c-2ea69ae5db10.pdf

ART TEXTILE TECHNOLOGY INTERNATIONAL COMPANY LIMITED 錦藝紡織科技國際有限公司

MAJOR TRANSACTION

IN RELATION TO THE PROPOSED ACQUISITION OF ENTIRE EQUITY INTERESTS IN COMPANIES AND LOAN ACQUISITION

Financial adviser to the Company

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

ART TEXTILE TECHNOLOGY INTERNATIONAL COMPANY LIMITED 錦藝紡織科技國際有限公司

MAJOR TRANSACTION IN RELATION TO THE PROPOSED ACQUISITION OF ENTIRE EQUITY INTERESTS IN COMPANIES AND LOAN ACQUISITION

INTRODUCTION

LETTER FROM THE BOARD

ACQUISITION AGREEMENT I

Assets to be acquired

LETTER FROM THE BOARD

Consideration

LETTER FROM THE BOARD

Conditions precedent

LETTER FROM THE BOARD

Completion

ACQUISITION AGREEMENT II

Assets to be acquired

LETTER FROM THE BOARD

Consideration

Conditions precedent

LETTER FROM THE BOARD

Completion

REASONS FOR AND THE BENEFITS OF THE ACQUISITIONS

LETTER FROM THE BOARD

INFORMATION ON WIDE LAUNCH

LETTER FROM THE BOARD

INFORMATION ON ZHENGZHOU HUATAI

INFORMATION ON THE COMPANY

LETTER FROM THE BOARD

DISCUSSION OF THE AUDITED FINANCIAL INFORMATION OF THE ACQUIREES IN THIS CIRCULAR

Net asset value of Wide Launch Group

Loss of Wide Launch Group

Disposal of plant and machinery of Wide Launch Group

The Assets held by Zhengzhou Huatai

LETTER FROM THE BOARD

Loss of Zhengzhou Huatai

FINANCIAL EFFECTS OF THE ACQUISITIONS ON THE GROUP

Assets and liabilities

Earnings

FINANCIAL AND TRADING PROSPECTS OF THE ENLARGED GROUP

GENERAL

ADDITIONAL INFORMATION

1. SUMMARY OF AUDITED FINANCIAL STATEMENTS

Income statement

Assets and liabilities

2. AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2007

CONSOLIDATED INCOME STATEMENT

CONSOLIDATED BALANCE SHEET

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

CONSOLIDATED CASH FLOW STATEMENT

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL

2. APPLICATION OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS

3. SIGNIFICANT ACCOUNTING POLICIES

Basis of consolidation

Revenue recognition

Property, plant and equipment

Prepaid lease payments

Research expenditure

Operating leases

Foreign currencies

Borrowing costs

Retirement benefit costs

Taxation

Impairment

Inventories

Financial instruments

Financial assets

Financial liabilities and equity

Derecognition

Equity-settled share-based payment transactions

Art Group Holdings Limited Proxy Solicitation & Information Statement 2008