C&D Property Management Group Co., Ltd - 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 your licensed securities dealer or registered institution in securities, bank manager, solicitor, professional accountant or other professional adviser.

If you have sold or transferred all your shares in China Grand Forestry Green Resources Group Limited, you should at once hand this circular and the enclosed form of proxy to the purchaser(s) or the transferee(s), or to the bank, licensed securities dealer or registered institution or other agent through whom the sale or the transfer was effected for transmission to the purchaser(s) or the transferee(s).

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.

This circular is for information purposes only and does not constitute an invitation or offer to acquire, purchase or subscribe for any securities.

CHINA GRAND FORESTRY GREEN RESOURCES GROUP LIMITED 中國林大綠色資源集團有限公司

(Formerly known as “China Grand Forestry Resources Group Limited 中國林大資源集團有限公司[*] ”) (incorporated in Bermuda with limited liability)

(Stock code: 00910)

VERY SUBSTANTIAL ACQUISITION RELATING TO BIOMASS ENERGY BUSINESS

AND

NOTICE OF SPECIAL GENERAL MEETING

Financial Adviser to China Grand Forestry Green Resources Group Limited

A notice convening the special general meeting to be held at Units 3307-11, 33/F., West Tower, Shun Tak Centre, 168-200 Connaught Road Central, Sheung Wan, Hong Kong at 11:00 a.m. on Tuesday, 19 August 2008 (or any adjournment thereof) is set out on pages 354 to 355 of this circular. Form of proxy for use in the special general meeting is enclosed. Whether or not you propose to attend the meeting, you are requested to complete and return the enclosed form of proxy in accordance with the instructions printed thereon as soon as possible and in any event not less than 48 hours before the time appointed for holding of the special general meeting or any adjourned meeting thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the meeting or any adjourned meeting thereof, should you so desire.

For identification purpose only

24 July 2008

	Page
Definitions.......................................................................................................................................	1
Letter from the Board
Introduction ...........................................................................................................................	5
The Acquisition .....................................................................................................................	6
Information on Yunnan Shenyu New Energy and Shuangbai Shenyu ....................................	15
Management discussion and anaysis of the results of the Group ............................................	18
Management discussion and anaysis of the results of Shenyu New Energy Group .................	36
Reasons for the Acquisition ...................................................................................................	38
Financial Effects of the Acquisition on the Group .................................................................	39
Financial and trading prospect ...............................................................................................	39
Implications from the Listing Rules .......................................................................................	40
Shareholding structure of the Company before and after the completion
of the Acquisition ................................................................................................................	40
Previous fund raising activities in the previous 12 months period immediately
preceding the date of the Acquisition Agreement .................................................................	42
The SGM ...............................................................................................................................	42
Procedures for demanding a poll ...........................................................................................	43
Recommendation ...................................................................................................................	43
Additional information ..........................................................................................................	43
Appendix I – Financial Information of the Group.................................................................	44
Appendix IIA – Accountants’ Report on the Shenyu New Energy Group................................	110
Appendix IIB – Accountants’ Report on the Yunnan Shenyu New Energy Group...................	146
Appendix III – Unaudited Pro Forma Financial Information of the Enlarged Group............	181
Appendix IV – Valuation Reports on Shenyu New Energy Group...........................................	194
Appendix V – Valuation Report on the Enlarged Group........................................................	316
Appendix VI – General Information..........................................................................................	344
Notice of Special General Meeting................................................................................................	354

DEFINITIONS

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

“Acquisition” the acquisition of the entire issued share capital of Shenyu New Energy pursuant to the Acquisition Agreement by the Company from the Vendor

“Acquisition Agreement” the agreement dated 5 November 2007 (as amended and supplemented by the supplemental acquisition agreements dated 23 November 2007, 17 December 2007 and 14 June 2008) entered into by the Company and the Vendor in relation to the Acquisition
“Announcement” the announcement dated 19 June 2008 made by the Company in relation to the Acquisition
“Audited Net Profit” the audited consolidated net profit after tax and excluding revaluation gain of the biological assets of Shenyu New Energy Group, including but not limited to the Jatropha Curcas L tree and other trees, and accounting adjustment arising from such revaluation gain to be prepared in accordance with the Hong Kong GAAP
“associate(s)” has the meaning ascribed to it in the Listing Rules
“Beijing Shenhao” 北京神浩新能源科技有限公司(Beijing Shenhao New Energy Technology Company Limited)*, a wholly owned subsidiary of Shenyu New Energy, is a company established in the PRC and is principally engaged in the research and development of technologies in biological energy and forestry resources
“Board” the board of Directors
“Business Day” a day (other than Saturday and Sunday), on which banks in Hong Kong are open for business
“Chinese Mu” or “mu” Chinese acres, one Chinese acre equals approximately 666.67 square meters
“Company” or “Purchaser” China Grand Forestry Green Resources Group Limited, a company incorporated in Bermuda and the shares of which are listed on the Stock Exchange
“Completion” completion of the Acquisition Agreement in accordance with the terms thereof

DEFINITIONS

“Concert Parties” in relation to a person, means the parties “acting in concert” with him under the Takeovers Code
“Consideration” consideration for the Acquisition, being a maximum aggregate amount of HK$4,000 million
“Conversion Shares” the maximum number of 1,120,000,000 Shares to be issued upon conversion of the Convertible Notes, if fully exercised
“Convertible Note(s)” the convertible notes to be issued by the Company in a maximum aggregate principal amount of HK$2,800 million at a conversion price of HK$2.50 per Conversion Share
“Directors(s)” director(s) of the Company “Enlarged Group” the Group as enlarged by the Acquisition “Group” the Company and its subsidiaries “HK$” Hong Kong dollars “Hong Kong” the Hong Kong Special Administrative Region of the PRC “Hong Kong GAAP” Generally Accepted Accounting Principles in Hong Kong “Initial Cash Consideration” HK$300 million to be made up by (i) the refundable interestbearing deposit of HK$50 million and HK$150 million as the first part payment and (ii) HK$100 million as the second part payment and upon and after Completion the Vendor shall receive the same and the Vendor may from time to time deduct one third of which, subject to the terms set out in the third supplemental acquisition agreement dated 14 June 2008 entered into between the Company and the Vendor
“Jatropha Curcas L” 小桐子, is also called Gaotong, Heizaoshu, Muhuasheng, Youluzi and Laopangguo etc. It is a member of the Euphorbiaceae family. It is a deciduous shrub or tree that is two to five meters tall. As a source for bio-diesel after being processed, Jatropha Curcas L is a renewable energy source plant
“Last Trading Date” 13 June 2008, the last trading date for the Shares on the Stock Exchange before the date of the Announcement
“Latest Practicable Date” 22 July 2008, being the latest practicable date before the printing of this circular for the purpose of ascertaining certain information for inclusion in this circular

	DEFINITIONS
“LCH”	LCH (Asia-Pacific) Surveyors Limited
“Letter of Intent”	the Letter of Intent dated 5 September 2007 entered into between
	the Company and the Vendor in connection with the Acquisition
“Listing Rules”	the Rules Governing the Listing of Securities on the Stock
	Exchange
“Mr. Ng”	Mr. Ng Leung Ho, chairman, executive director and substantial
	shareholder of the Company
“Noteholder(s)”	the holder(s) of the Convertible Note(s)
“Pöyry”	Pöyry Forest Industry Limited
“PRC”	The People’s Republic of China
“PRC GAAP”	Generally Accepted Accounting Principles in the PRC
“RMB”	Renminbi, the lawful currency of the PRC
“SGM”	a special general meeting of the Company to be convened to
	approve, amongst other things, the Acquisition and the issue of
	Convertible Notes in connection with the Acquisition
“Share(s)”	ordinary share(s) of HK$0.10 each in the share capital of the
	Company
“Shareholder(s)”	holder(s) of the Shares
“Shenyu New Energy”	Shenyu New Energy Group Limited, is a company incorporated in
	the British Virgin Islands and is principally engaged in investment
	holding
“Shenyu New Energy Group”	Shenyu New Energy and its subsidiaries
“Shuangbai Shenyu”	雙柏神宇新能源基地有限公司(Shuangbai Shenyu New Energy
	Base Company Limited)*, a subsidiary of Yunnan Shenyu New
	Energy Company Limited incorporated in the PRC and is
	principally engaged in the research and development of biological
	energy sources and forestry resources
“Special Mandate”	a special mandate to allot and issue the Convertible Note to be
	sought from the Shareholders at the SGM to satisfy the allotment
	and issue of any Conversion Shares which may fall to be allotted
	and issued upon exercise of the conversion right attaching to the
	Convertible Note

DEFINITIONS

“Stock Exchange” The Stock Exchange of Hong Kong Limited “Takeovers Code” the Hong Kong Code on Takeovers and Mergers “Vendor” Forcemade Investments Limited is a company incorporated in the British Virgin Islands. To the best of the Directors’ knowledge, information and belief after having made reasonable enquiries, the Vendor is principally engaged in investment holding and the Vendor and its ultimate beneficial owner(s) are third parties independent of the Company and its connected persons (as defined in the Listing Rules) and their respective associates

“Yunnan Shenyu New Energy” Yunnan Shenyu New Energy Company Limited, a wholly owned subsidiary of Shenyu New Energy, is a company incorporated in the PRC and is principally engaged in the research and development of Jatropha Curcas L based biological energy sources, such as bio-diesel

“%” or “per cent” percentage

LETTER FROM THE BOARD

CHINA GRAND FORESTRY GREEN RESOURCES GROUP LIMITED 中國林大綠色資源集團有限公司

(Formerly known as “China Grand Forestry Resources Group Limited 中國林大資源集團有限公司[*] ”) (incorporated in Bermuda with limited liability)

(Stock code: 00910)

Executive Directors:

Mr. Ng Leung Ho (Chairman) Ms. Cao Chuan Ms. Lee Ming Hin Mr. Hu Xiaoming Mr. Cheung Wai Tak

Non-executive Director:

Mr. John MacMillan Duncanson

Independent Non-executive Directors:

Mr. Lo Cheung Kin Mr. Zou Zi Ping Mr. Zhu Jian Hong

Registered office: Clarendon House 2 Church Street Hamilton HM 11 Bermuda

Head office and principal place of business in Hong Kong: Unit 3307-11 33rd Floor, West Tower Shun Tak Centre 168-200 Connaught Road Central Hong Kong

24 July 2008

To the Shareholders

Dear Sir or Madam,

VERY SUBSTANTIAL ACQUISITION RELATING TO BIOMASS ENERGY BUSINESS

AND

NOTICE OF SPECIAL GENERAL MEETING

INTRODUCTION

On 16 November 2007, 26 November 2007, 18 December 2007 and 20 June 2008, the Board announced that the Company had entered into the Acquisition Agreement on 5 November 2007 and subsequently, the supplemental agreements dated 23 November 2007, 17 December 2007 and 14 June 2008, which superseded certain terms and conditions of the Acquisition Agreement, in relation to the very substantial acquisition made by the Company. Pursuant to the Acquisition Agreement, the Purchaser has conditionally agreed to acquire and the Vendor has conditionally agreed to dispose of the entire issued share capital of Shenyu New Energy at the consideration up to a maximum aggregate amount of HK$4,000 million.

For identification purpose only

LETTER FROM THE BOARD

Upon the completion of the Acquisition, the Company will wholly own Shenyu New Energy, which in turn owns the entire equity interest in Beijing Shenhao. Beijing Shenhao owns the entire equity interest in Yunnan Shenyu New Energy, which in turn owns 99% equity interest in Shuangbai Shenyu. Yunnan Shenyu New Energy is principally engaged in the research and development of Jatropha Curcas L based biological energy sources, such as bio-diesel. Shuangbai Shenyu is principally engaged in the research and development of biological energy sources and forestry resources and the holder of the minority interest of 1% is a senior management of Yunnan Shenyu New Energy and a legal representative of Shuangbai Shenyu who is an independent third party with the Company and its connected persons (as defined in the Listing Rules).

The purpose of this circular is to give you, among other things, (i) further details of the Acquisition and other necessary disclosures as required pursuant to the Listing Rules; (ii) the valuation reports issued by the independent qualified appraisers on the fair value of the major assets of the Shenyu New Energy Group; and (iii) a notice of the SGM.

THE ACQUISITION

The Acquisition Agreement

Date: 5 November 2007 (with the supplemental acquisition agreements dated 23 November 2007, 17 December 2007 and 14 June 2008)

Parties:

Purchaser: The Company Vendor: Forcemade Investments Limited, an investment holding company incorporated in the British Virgin Islands, owning the entire issued share capital of Shenyu New Energy. To the best of the Directors’ knowledge, information and belief after having made reasonable enquiries, (i) the Vendor and its ultimate beneficial owners are third parties independent of and not connected with the Company and its connected persons (as defined in the Listing Rules) and their respective associates; (ii) the Vendor and its ultimate beneficial owners together with their respective Concert Parties are not acting in concert with Mr. Ng, an executive Director and substantial shareholder of the Company, and his associates under the Takeovers Code; and (iii) save for disclosed in the section headed “Business transactions between Shenyu New Energy Group and the Group” in this Circular, the Vendor (together with its subsidiaries and its ultimate beneficial owners) do not have any prior relationship and/or business relationship with the Company and Mr. Ng.

Assets to be acquired

The entire issued share capital of Shenyu New Energy, a company incorporated in the British Virgin Islands, wholly owns Beijing Shenhao. Beijing Shenhao owns the entire equity interest in Yunnan Shenyu New Energy, which in turn owns 99% equity interest in Shuangbai Shenyu. Yunnan Shenyu New

LETTER FROM THE BOARD

Energy is principally engaged in the research and development of Jatropha Curcas L based biological energy sources, such as bio-diesel. Shuangbai Shenyu is principally engaged in the research and development of biological energy sources and forestry resources and the holder of the minority interest of 1% is a senior management of Yunnan Shenyu New Energy and a legal representative of Shuangbai Shenyu who is an independent third party with the Company and its connected persons (as defined in the Listing Rules).

For further information on Yunnan Shenyu New Energy and Shuangbai Shenyu, please refer to the section headed “Information on Yunnan Shenyu New Energy and Shuangbai Shenyu” in this circular.

Conditions

The completion of the Acquisition Agreement is conditional upon the fulfillment of the following conditions:

(i) the passing of relevant resolutions at the SGM by the Shareholders for approving the Acquisition, the transactions contemplated under the Acquisition Agreement and the issue of Convertible Notes in connection with the Acquisition;
(ii) the representation, warranties and undertakings given by the Vendor in the Acquisition Agreement remain true, correct and not misleading in all respects as at the date of Completion;
(iii) the Purchaser, at the Vendor’s expense, having obtained and being satisfied with the legal opinion issued by a British Virgin Islands legal adviser confirming the legality of the matters for Shenyu New Energy in connection with the Acquisition;
(iv) the Purchaser, at the Vendor’s expense, having obtained and being satisfied with the legal opinion issued by a PRC legal adviser confirming the legality of the matters for each of the subsidiaries of Shenyu New Energy in connection with the Acquisition;
(v) the Purchaser having completed and being reasonably satisfied with and having accepted the results of the financial, accounting and legal due diligence reviews on Shenyu New Energy Group and its subsidiaries;
(vi) the Stock Exchange having granted the listing of and permission to deal in the Conversion Shares; and
(vii) the Acquisition is not deemed to be a reverse takeover (as defined under the Listing Rules) by the Stock Exchange pursuant to the Listing Rules.

In the event that the above conditions are not fulfilled on or about 30 September 2008 or such other later date as may be agreed between the parties, the Acquisition Agreement shall be of no further effect and all parties shall be released from their respective obligations and the parties shall have no claims against each other in respect of the Acquisition Agreement except for any claims arising from breach of obligations contained in the Acquisition Agreement.

LETTER FROM THE BOARD

The Company may waive the above conditions (ii) to (v). Up to the Latest Practicable Date, the Company does not intend to waive any of the above conditions (ii) to (v). The waiver shall provide flexibilities to the Company in dealing with the Acquisition. In case of non-fulfillment of any of the above conditions (ii) to (v), the Board shall consider both advantages and disadvantages for waiving such condition and shall only give the wavier in the interest of the Company and the Shareholders as a whole.

As at the Latest Practicable Date, save that condition (v) above had been fulfilled, none of the conditions had been fulfilled or waived.

Consideration

Upon and after completion of the Acquisition, the Consideration up to a maximum aggregate amount of HK$4,000 million shall comprise:

(i) 30% of the Consideration in cash; and
(ii) 70% of the Consideration by issue of the Convertible Notes at a conversion price of HK$2.50 per Conversion Share to the Vendor.

Notwithstanding the above, the Consideration may be payable by the Purchaser to the Vendor by four consecutive installments, namely, from the date of Completion to 31 March 2009, from 1 April 2009 to 31 March 2010, from 1 April 2010 to 31 March 2011 and from 1 April 2011 to 30 September 2011, under such calculation and in such manner as mentioned hereinafter.

Calculation of the Consideration

The amount payable for each of the four consecutive installments shall be calculated by the Audited Net Profit of that relevant installment multiplied by a price-earnings ratio of 5 times and then divided by 3. The price-earning ration of 5 times has been determined after arm’s length negotiation between the Company and the Vendor with reference to the business prospect and potential profitability of the Shenyu New Energy Group.

Manner of Payment of the Consideration

A refundable interest-bearing deposit of HK$50 million has been deposited by the Company according to the terms of the Acquisition Agreement to an escrow agent who acts as a stakeholder and hold such deposit until satisfactory completion of the Acquisition Agreement upon which time such deposit shall be released to the Vendor as partial payment of the Initial Cash Consideration as stipulated in the Acquisition Agreement. Interest income to be earned on the good-faith deposit is not fixed and the actual interest income to be refunded to the Company upon satisfactory completion of the Acquisition will be subject to prevailing term rate offered by the bank after deduction of handling charges (i.e. 10% of the actual interest) by the escrow agent. To the best of the Directors’ knowledge, information and belief after having made reasonable enquiries, the escrow agent and its ultimate beneficial owner are third parties independent of the Company and its connected persons (as defined in the Listing Rules) and their respective associates.

LETTER FROM THE BOARD

Upon Completion, the Company shall pay HK$150 million in cash and procure the escrow agent to release the refundable interest-bearing deposit of HK$50 million to the Vendor as the first part of the Initial Cash Consideration.

On 31 December 2008, the Company shall pay HK$100 million in cash to the Vendor as the second part of the Initial Cash Consideration.

Subject to the maximum aggregate amount of the Consideration of HK$4,000 million and within one month after issue of the relevant audited accounts of the Shenyu New Energy Group, the Vendor shall:

(a) for each of the first 3 consecutive installments, receive an amount in cash constituting 30% of such consideration of that relevant installment provided that one third of the Initial Cash Consideration shall be treated as part payment of such consideration payable and shall therefore be deducted from the Initial Cash Consideration accordingly. However if such one third of the Initial Cash Consideration has not been wholly deducted because of such consideration of that relevant installment below HK$100 million, the non-deducted amount shall be forthwith refunded to the Company by the Vendor;
(b) for the last consecutive installment, receive an amount in cash constituting 30% of such consideration of that relevant installment; and
(c) for each of the four consecutive installments, receive the Convertible Note(s), equivalent to an amount constituting 70% of such consideration of that relevant installment to be issued by the Company within one month after the grant of the listing of and permission to deal in the Conversion Shares by the Stock Exchange (if applicable).

The Consideration has been determined after arm’s length negotiation between the Company and the Vendor with reference to, amongst other things, (i) the fair value of the major assets of the Shenyu New Energy Group including (1) forest stock and Jatropha; (2) land use rights in the natural, man-made and mixed forest farms; and (3) properties. Please refer to Appendix IV and V of the valuation reports prepared by the independent qualified appraisers; (ii) the business prospect and potential profitability of the Shenyu New Energy Group; and (iii) the manner of payment of consideration. Taking the above factors into consideration, the Directors are of the view that the Consideration is fair and reasonable and in the best interest of the Company and the Shareholders as a whole.

Separate announcements would be made by the Company in due course to disclose the actual amount of the consideration payable by the Company for each of the 4 installments when determined.

The Convertible Notes

The terms of the Convertible Notes have been negotiated on arm’s length basis for the purpose of financing the Acquisition, which requires the Shareholders’ approval. The principal terms of the Convertible Notes are summarized below:

Principal amount:

Maximum aggregate principal amount of HK$2,800 million

LETTER FROM THE BOARD

Interest:

At the rate of 1.5% per annum accrued on a day to day basis on the outstanding principal amount of the Convertible Notes, payable by the Company semiannually in arrears.

Maturity:

4 years from the date of issue of the respective Convertible Notes from time to time.

Denomination:

In multiples of HK$100,000

Form: Registered form only Conversion:

Pursuant to the Acquisition Agreement, the holder(s) of the Convertible Notes may exercise the conversion rights to convert the whole or part of the Convertible Notes into the Conversion Shares at any time and from time to time, following the date of issue of the Convertible Notes, in amounts of not less than HK$100,000 and in integral multiples thereof on each conversion, saves that if at any time, the principal outstanding amount of the Convertible Notes is less than HK$100,000 the whole (but not part only) of the principal outstanding amount of the Convertible Notes may be converted.

The price at which each Conversion Share shall be issued upon conversion shall be HK$2.50 subject to adjustment as hereafter described. No fraction of a Conversion Share will be issued on conversion but (except in cases where any such cash payment would amount to less than HK$10) an equivalent cash payment in Hong Kong dollars will be made to the Noteholder in respect of such fraction.

The conversion rights shall only be exercisable as long as (i) the public float of at least 25 per cent of the issued share capital of the Company as enlarged by the issue of the Conversion Shares can be maintained and (ii) the Noteholder(s) together with their respective associates and parties acting in concert with them (as defined in the Takeovers Code) shall not control 29.90% or more of the voting rights in the Company upon full or partial conversion of the outstanding principal amount of the Convertible Notes, subject to the conditions set out in the Acquisition Agreement.

The Conversion Shares will be issued under the Specific Mandate upon the passing of the relevant resolutions at the SGM and an application will be made to the Stock Exchange for the grant of the listing of and permission to deal in the Conversion Shares.

LETTER FROM THE BOARD

Conversion price:

HK$2.50 per Conversion Share, which is subject to adjustment for, among other matters, sub-division or consolidation of new Shares, bonus issues, rights issues, and other dilutive events, such as an issue of securities that carries conversion rights, capitalization issue and distribution of dividends in cash or specie.

The exercise price of HK$2.50 per Conversion Share of the Convertible Notes represents:

(i) a premium of approximately 257.14% from the closing price of the Shares of HK$0.70 on the Last Trading Date;
(ii) a premium of approximately 253.11% from the 5-day average closing price of the Shares of approximately HK$0.708 immediately before and including the Last Trading Date;
(iii) a premium of approximately 296.83% from the closing price of the Shares of HK$0.63 on the Latest Practicable Date.

The conversion price was determined on 5 September 2007, after arm’s length negotiation between the Company and the Vendor at the time the Letter of Intent was signed which is a legally binding agreement. The Directors are of the view that the conversion price is fair and reasonable and in the best interest of the Company and the Shareholders as a whole.

The overriding principle relating to the adjustment of the conversion price as set out in the Stock Exchange’s letter dated 5 September 2005 is that no adjustment to the exercise price or number of shares that benefits the share option scheme participants shall occur without prior Shareholders’ approval. The Directors believe that the adjustment considerations set out in the Acquisition Agreement are in accordance with the principal as an adjustment will only be made in certain events, such as but not limited to the sub-division or consolidation of new Shares, or the issuance of bonus issues, right issues and other dilutive events.

Conversion Shares:

A maximum aggregate of 1,120,000,000 Conversion Shares are to be issued upon conversion of the Convertible Notes if exercised in full, which represents approximately 20.17% of the existing issued share capital of the Company or approximately 16.79% of the Company’s enlarged share capital assuming the Convertible Notes were fully exercised.

LETTER FROM THE BOARD

Ranking:

The Conversion Shares will rank pari passu in all respects among themselves and with all other Shares in issue on the date of such allotment and issue.

Redemption by the Company:

The Company, at its option, shall have the right to redeem the whole or any part of the outstanding principal amount of the Convertible Notes at par in the amounts of HK$100,000 or integral multiples thereof, on any business day prior to the maturity date of the Convertible Notes, by giving not less than seven Business Days’ prior written notice to the Noteholder(s).

Transferability:

The Convertible Notes are freely transferable, provided that the Noteholder(s) must inform and obtain written consent from the Company of each transfer or assignment made by them. No assignment of transfer (whether in whole or in part(s)) of the Convertible Notes may be made unless the proposed assignee or transferee has given the Company a written confirmation that it/ he/she is not a connected person (as defined in the Listing Rules). The Company will notify the Stock Exchange if any of the Convertible Notes is transferred to a connected person (as defined in the Listing Rules).

Events of default:

Subject to the terms and conditions of the Convertible Notes set out in the Acquisition Agreement, the Convertible Notes contain an event of default provision which provides that on the occurrence of certain events of default (e.g. repayment overdue, insolvency, liquidation and suspension of trading on the Stock Exchange for a continuous period of 30 trading days due to the fault of the Company) specified in the Convertible Notes, each of the Noteholders shall be entitled to demand for immediate repayment of the principal amount outstanding under the relevant Convertible Notes.

Valuation on the Shenyu New Energy Group

On 18 December 2007, the Company announced that they have appointed Pöyry, a renowned independent valuation company recognized as one of the world’s leading advisers to the global forest industry, as the Company’s valuer to particularly carry out a comprehensive valuation on the forest assets owned by the Shenyu New Energy Group. Furthermore, the Company has also appointed LCH to carry out a valuation on the land use rights and properties owned by the Shenyu New Energy Group.

The valuation of forest assets from Pöyry and the valuation of land use rights and properties from LCH (the “Valuations”) provide relevant professional information for the Board to assess the potential profitability of the underlying assets of the Shenyu New Energy Group. The valuation reports on the Valuations are set out in Appendix IV and V to this circular.

LETTER FROM THE BOARD

In general, the valuations employed the expectation approach, which provides the net present value of the future net revenue stream, for forest stock asset. For Jatropha plantation valuation, replacement cost approach and expectation approach were used. The replacement cost valuation approach represents the market value of the Jatropha plantation while the expectation approach represents the investment value of the Jatropha asset.

(i) The forest valuation has been undertaken over a 50 year period with the main costs, price and yield assumptions to be outlined in the finalized valuation reports. Woodflow projections for the resource have included the existing rotations and those which will succeed it but to be consistent with wider conventions in business appraisal, however the valuation is based on the real pre-tax cash flows produced by just the current standing tree crop. This has enabled conformation that the assumed harvest strategy is sustainable in the long term. Domestic sawlog prices in the PRC are expected to increase in real terms at an average rate of 1.7% per annum over the next five years, while pulplog prices are expected to increase more modestly at an average rate of 1.0% per annum. The cost and log price assumptions to be made in the valuation reports are based on the information available at the time of the analysis. Future changes will depend on many factors including government policy, external influences, such as demand for labour, demand for land, productivity and efficiency. Such changes cannot be predicted with certainty.
(ii) The Jatropha Curcas L plantations investment valuation has been undertaken over a 50 year period and included current stocked area only. The investment valuation provides guidance as to the potential investment value of the resource assuming performance of the resource are realised. The main costs, price and yield assumptions to be outlined in the finalized valuation reports. There are no known mature large scale commercial plantations of Jatropha in the world. Therefore, costs, price and yield assumptions to be made in the valuation reports are based on the information available from old mature/natural areas, pilot plantations and other smaller plots. The absence of data from large scale commercial production means that actual yields, agriculture practices and costs cannot be predicted with certainty. It is also assumed that there are no taxes at harvest for Jatropha.

The further detail assumptions, description of assets, valuation methodologies and other information are included in the valuation reports set-out in Appendix IV and V to this circular.

LETTER FROM THE BOARD

Pöyry has adopted three valuation methodologies to value the valuation of Jatropha plantation, they are replacement cost approach of current rotation, expectation approach of current rotation and prospective valuation. The replacement cost approach will be used as market value. The expectation approach will be used as investment value which can provide guidance as to the potential investment of the resource assuming performance of the resource are realized.

Summary of valuation results of major assets of Shenyu New Energy Group under different valuation methodologies as at 30 April 2008 are as follows:

			Land use
			rights in the
			nature, man-
			made and
			mixed forest
	Forest stock	Jatropha	farms	Properties	Total	Total
					RMB million	HK$ million
						(note)
Valuation I
(i) Valuation	Market value	Market value	Market Value	Market Value
Methodology	(Expectation	(Replacement cost	(Market	(Market
	approach)	approach)	approach)	approach)
(ii) Value	1,029.26	504.70	283.90	102.49	1,920.35	2,137.69
(RMB million)
Valuation II
(i) Valuation	Market value	Investment value	Market Value	Market Value
Methodology	(Expectation	(Expectation	(Market	(Market
	approach)	approach)	approach	approach)
(ii) Value	1,029.26	2,202.61	283.90	102.49	3,618.26	4,027.76
(RMB million)

Prospective valuation under expectation approach is not an indication of market value as it attributes values to future crops. The prospective valuation is designed to provide a future plan value of Jatropha for the Company’s assessment only.

Summary of valuation results of major assets of Shenyu New Energy Group with prospective valuation adopted for the forest stock asset and Jatropha plantation as at 30 April 2008 are as follows:

Valuation III
(i) Valuation	Prospective valuation	Prospective valuation	Market Value	Market Value
Methodology	(Expectation	(Expectation	(Market	(Market
	approach)	approach)	approach)	approach)
(ii) Value	1,008.32	3,329.32	283.90	102.49	4,724.03	5,258.68
(RMB million)

Note: As at 30 April, 2008, RMB have been converted into HK$ using an Exchange rate of HK$1.00 = RMB0.89833.

LETTER FROM THE BOARD

INFORMATION ON YUNNAN SHENYU NEW ENERGY AND SHUANGBAI SHENYU

Yunnan Shenyu New Energy

Yunnan Shenyu New Energy, a wholly owned subsidiary of Beijing Shenhao which is in turn wholly owned by Shenyu New Energy, is principally engaged in the research and development of Jatropha Curcas L based biological energy sources, such as bio-diesel. Shenyu New Energy is an investment holding company incorporated in the British Virgin Islands. Beijing Shenhao, a company incorporated in the PRC, is principally engaged in the research and development of technologies in biological energy and forestry resources.

Yunnan Shenyu New Energy has set up seedling bases and planting bases in the PRC. Yunnan Shenyu New Energy also owns the rights to use two patents relating to gene modification of the Jatropha Curcas L tree. In addition, Yunnan Shenyu New Energy has carried out research and development of breed improvement, planting techniques, diseases and pests control techniques, bio-diesel production and processing techniques.

Shuangbai Shenyu

雙柏神宇新能源基地有限公司 (Shuangbai Shenyu New Energy Base Company Limited)*, (“Shuangbai Shenyu”), a subsidiary of Yunnan Shenyu New Energy incorporated in the PRC and is principally engaged in the research and development of biological energy sources and forestry resources would also be acquired by the Company pursuant to the Acquisition. The equity interest in Shuangbai Shenyu by Yunnan Shenyu New Energy as at 31 December 2007 is 99%. The holder of the minority interest of 1% is a senior management of Yunnan Shenyu New Energy and a legal representative of Shuangbai Shenyu who is an independent third party with the Company and its connected persons (as defined in the Listing Rules).

Jatropha Curcas L

Jatropha Curcas L, also called Gaotong, Heizaoshu, Muhuasheng, Youluzi and Laopangguo etc., is a member of the Euphorbiaceae family. It is a deciduous shrub or tree of two to five meters tall. Though it is a native species in tropical areas in America, it has grown in the PRC for over two hundred years, and is mainly found in hot-dry valley regions. The oil content rate of its seed reaches 30-60%. As a source for bio-diesel after being processed, Jatropha Curcas L is a renewable energy source plant and is efficient for water and soil retention as well as ecology restoration.

Current Development Conditions and Schemes of Shenyu New Energy Group

In 2006, Shenyu New Energy Group deployed its first-phase project which included the construction of a production base and seedling breeding base for Jatropha Curcas L based biological energy sources. The project has been listed by National Development and Reform Commission as a project of high-tech renewable energy source.

LETTER FROM THE BOARD

With respect to the development of Jatropha Curcas L based biomaterial energy source, Yunnan Shenyu New Energy is constructing a complete industrial chain, which includes plantation of Jatropha Curcas L, squeeze of fruit of Jatropha Curcas L and refinery Jatropha Curcas L oil. It is also building a processing factory with planned annual bio-diesel production capacity of 100,000 tons.

In June 2007, Yunnan Shenyu New Energy was awarded by Yunnan Forestry Bureau the provincial title of “Leading Enterprise of Forestry Industry”, and was then elected Standing Executive Member of Yunnan Forestry Industry Association.

As at 30 April 2008, Jatropha plantation area of Shenyu New Energy Group was approximately 725,000 mu. The Jatropha plantation area is inclusive of a co-operative rental agreement area of approximately 103,000 mu.

As at 30 April 2008, Yunnan Shenyu New Energy has ownership rights on forest area of approximately 2,151,000 mu. Valuation of forest stock and Jatropha in the area has been set at Appendix IV –B. Among the said forest area, approximately 1,321,000 mu of land in which Yunnan Shenyu New Energy has obtained the Forest Right Certificates, and has the rights to assign, lease or mortgage of the land. Besides, there is an area of approximately 727,000 mu in which Yunnan Shenyu New Energy has entered into various forest farm land transfer agreements and is in the process of applying the relevant Forest Right Certificates for the land. Valuation of the land use rights has been set at Appendix IV – C. Moreover, there is an area of 103,000 mu being occupied under co-operative arrangement and no valuation of land use rights have been performed.

Financial information of Shenyu New Energy Group

The following tables set out a summary of the audited consolidated financial information of the Shenyu New Energy Group:

	As at 30 April 2008	As at 31 Dec 2007
	(audited)	(audited)
	RMB’ million	RMB’ million
Total Assets	1,657	1,677
Net Assets	1,397	1,371
		From 2 November 2006
	For the four months	(the date of incorporation)
	ended 30 April 2008	to 31 December 2007
	(audited)	(audited)
	RMB’ million	RMB’ million
Turnover	–	–
Profit before tax	26	1,371
Profit after tax	26	1,371

Remark: The above audited financial figures are determined on the basis of the normal accounting practice in Hong Kong.

LETTER FROM THE BOARD

As set out above, Shenyu New Energy Group had an audited consolidated net profit of approximately RMB1,371 million from 2 November 2006 (the date of incorporation) to 31 December 2007, which is mainly attributable to the excess of acquirer’s interest in the net fair value of acquiree’s identifiable net assets over costs arising on the acquisition of Yunnan Shenyu and its subsidiary and gains arising from changes in fair value of biological assets less estimated point-of-sale costs amounted to approximately RMB482 million.

For the four months ended 30 April 2008, the net profit of approximately RMB26 million is mainly attributable to the gain arising from changes in fair value of biological assets less estimated point-of-sale costs.

Shenyu New Energy Group benefits from PRC government policies that encourage the development of the forestry industry and its increasing production capacity. The sale of trees is directly proportional to the area of forest land and timber resources. The forest land and timber resources acquired by Shenyu New Energy Group increased significantly during the period ended 31 December 2007 which can substantially increase the production capacity of timber in future. Along with the bio-diesel to be produced in future, the potential profitability of Shenyu New Energy Group will be increased.

The registered capital of Shenyu New Energy amounting to US$10, has been fully paid up as at the date of this circular.

Business transactions between Shenyu New Energy Group and the Group

Yunnan Shenyu New Energy is principal engaged in the research and development of Jatropha Curcas L based biological energy sources, such as bio-diesel. Yuannan Shenyu New Energy has successfully established Jatropha plantation in Yunnan Province and is constructing a processing plant for the production of bio-diesel by using seed of Jatropha as raw materials. Beijing Wan Fu Chun Forest Resources Development Company Limited (“Beijing WFC”), a wholly owned subsidiary of the Company is principal engaged in ecological forestry business in the PRC and continuously search for potential business development in relation to ecological forestry business including bio-diesel industry, in order to assist the Group to achieve a substainable growth. Both Yunnan Shenyu New Energy and Beijing WFC have forest land resources in the PRC but the geographical environment, soil and other conditions may not be adequate for respective plantation species. Being same industry players, Yunnan Shenyu New Energy and Beijing WFC known each other and there are potential co-operation opportunity which can benefits to both parties. In year 2007, Yunnan Shenyu New Energy and Beijing WFC entered into following business transactions:

1) Acquisition of leasehold, interest in a forest land

On 5 June 2007 and 22 July 2007, Beijing WFC and Yunnan Shenyu New Energy entered into two agreements that Yunnan Shenyu New Energy transferred two forest lands of a total area of 476,895.3 mu with a total consideration of RMB228,532,900. Please refer to the announcements published by the Company dated on 5 June 2007 and 24 July 2007 for details.

LETTER FROM THE BOARD

2) Co-operative rental arrangement of forest land

On 30 June 2007, Beijing WFC, entered into a lease co-operative rental arrangement with Yunnan Shenyu New Energy in which Beijing WFC gives the land use right for the area of approximately 116,000 mu with an annual payment of RMB10 per mu to Yunnan Shenyu New Energy. The co-operative rental arrangement expires on 30 June 2056. The commencement date of annual lease payment will be started when the planted Jatropha has generated stable production which is estimated to be three years. Yunnan Shenyu New Energy does not have to pay the annual leased amount if the planted Jatropha does not generate any income and Beijing WFC would not bear any loss for any unavoidable accident. Ownership rights of current forest stocks of the leased land belong to Beijing WFC while ownership rights of Jatropha plantation belong to Yunnan Shenyu New Energy. The geographical environment, soil quality and other conditions of such land may not be adequate for Beijing WFC’s large scale of plantation. Jatropha is a special species tree that can grow well under such conditions and Beijing WFC realized that Yunnan Shenyu New Energy has ready had successful record for large scale of plantation. In view of this, the risk of recoverability of the rental to be received can be minimized. The expected first stable production period is around three years but the life of Jatropha tree can reach thirty to fifty years. In considering the long run benefit to the Group and the Shareholders, Beijing WFC entered into this cooperative rental arrangement with Yunnan Shenyu New Energy. As at the date of this circular, apart from these normal business transactions, Beijing WFC and Yunnan Shenyu New Energy or any member of the Shenyu New Energy Group (include their respective beneficial owners) are independent third parties.

MANAGEMENT DISCUSSION AND ANALYSIS OF THE RESULTS OF THE GROUP

1) For the year ended 30 June 2005

FINANCIAL HIGHLIGHTS

For the financial year ended 30 June 2005, the Group recorded turnover of HK$138.3 million, representing a 27 per cent decrease from the preceding year. The decrease in turnover was mainly the result of increasingly fierce competition in the People’s Republic of China (the “PRC”) apparel and uniform market. Along with the reduced sales, the Group’s profit margin is also reduced to the level of approximate range of 8 to 9 per cent, which was mainly due to heavy pricing pressure and absorption of factory overhead over lesser units of production.

Selling and distribution expenses increased by approximately HK$3.2 million pursuant to the Group’s effort in promulgating an expanded sales network in major cities in the PRC and related promotional campaign, including television advertising. In addition, the substantial increase in other operating expenses of HK$87.5 million for the year represents mainly non-recurrent impairment of business goodwill in respect of investment in high-tech business of Nano technology and software compression; and also provision for inventories.

During the year, the Group’s high-tech nano-technology investment in Zhongke Nanotech Engineering Center Co., Ltd. (“Zhongke Nanotech”) has undergone a period of consolidation whereby several major proposed contracts are still in negotiation and have not proceeded to the stage where revenue can be recognized. The Group’s share of Zhongke Nanotech’s operational loss for the year amounted to HK$30.8 million.

As a result mainly of the above factors, the Group recorded a net loss of HK$150.2 million for the year (2004: net profit of HK$30.3 million), representing a loss per share of HK5.61 cents per share.

LETTER FROM THE BOARD

BUSINESS AND OPERATIONAL REVIEW

The Group’s core business continued to be focused on the design, manufacture and sale of a range of high-end apparel and uniforms. The PRC market remained the most important market segment, accounting for over 80 per cent of the Group’s total sales. During the period, the Group’s turnover decreased by 27 per cent from the previous period mainly because of the increasingly fierce competition in the PRC apparel market from local competitors and the introduction of more foreign brands into the PRC market. The intensified competition has imparted considerable pricing pressure on the Company. Meanwhile, the retirement of Mr. Ng Leung Tung, the Company’s former deputy chairman and executive director, from direct participation in garment operation and management for reason of personal health concern; and the unfavourable emerging factors of group orders in the PRC adopting the form of open bid tender which negatively affected profit margin, all had implications on the Group’s operation. On the side of uniform merchandising, during the period the PRC Government initiated the internet bidding of contracts by qualified manufacturers which has increased the pricing exposure and hence competitions in respect of this market segment. In order to maintain its market competitiveness, the Group has adjusted downward the selling prices of its products. The reduction in product pricing and the absorption of factory overhead over fewer units of production have together contributed to the pronounced reduction in the Group’s gross profit margin.

Selling and distribution expenses

In the order of turning around and streamlining the Group’s garment business, efforts and resources are deployed in promulgating sales network in major cities in the PRC on a provincial agency basis. The Group’s effort in bolstering its sales and marketing initiatives includes the appointment of renowned screen celebrity as spokesperson for the Group’s products and rolled out a series of television commercials and exhibitions to enhance its market share in the PRC. These efforts account for the increase in selling and distribution expenses for the year notwithstanding reduced sales.

Share of results of jointly-controlled entities

The Group’s share of results of jointly-controlled entities, in the amount of HK$30.8 million represents share of operational loss from high-tech investment in Zhongke Nanotech. Owing to the nature of the Nanotech business, the business contracts entered are mainly in respect of technology transfer to established conglomerate. The period covered by this annual report witnessed Zhongke Nanotech undergoing a period of consolidation whereby several proposed business contracts are still in negotiation and have not proceeded to the stage where revenue can be recognized. Further, provisions were made of certain business contract receivables of which repayment has been delayed.

Other operating expenses

Significant increase in other operating expenses is attributable to (i) the impairment of the Group’s investment in software compression technologies; and related goodwill balance; (ii) the impairment of goodwill in respect of high-tech investment in Nano technologies applications; and (iii) provisions for inventories.

LETTER FROM THE BOARD

Notwithstanding that the “Smartcomprez” series of information technology compression products launched by the Group’s investment vehicle, Global Network Corporation, had been scientifically proven to execute superior electronic data compression exceeding other similar products in the international market, Global Network has experienced severe difficulty in opening up the PRC market and achieve sustainable profitability, due to the very high rate of counterfeit copies and other problematic situations with the PRC software market. There is an increasing appreciation of the difficulty in demonstrating the eventual return with continual investment of the Group’s resources. Accordingly, the resources may be more appropriately dedicated to other of the Group’s business and new emerging investments. In light of the foregoing considerations, the Board concurred with a full impairment of the investment cost and goodwill involved of HK$37.1 million.

Additional impairment is made in respect of the Group’s goodwill in respect of investment in Zhongke Nanotech group of companies, in the amount of HK$31.5 million. In March 2004, the Group acquired additional equity interest in Zhougke Nanotech at a provisional consideration subject to adjustment in the event the Zhougke Nanotech failed to attain a guaranteed profit. Details of the adjustment and guaranteed profit are disclosed in the Company’s circular to its shareholders of 13 April 2004. The due course of event subsequent to acquisition confirmed the failure on part of Zhongke Nanotech in meeting the guaranteed profit. The current year set-back in financial performance of Zhongke Nanotech group of companies highlighted the fluctuation in earnings in respect of this high-tech industry segment. Upon prudent consideration by the directors, full provision is made of the related goodwill balance. Further, provision for inventories in the amount of HK$13.4 million has been made to certain of the Group inventories; for which the sales effort will be mitigated under the Group’s directive in rededicating its future direction in respect of its garment business.

LIQUIDITY AND FINANCIAL RESOURCES

The Group maintains a healthy financial position. The Group’s net current assets amounted to over HK$340 million as at the reporting end date; and the current ratio maintained a very high of over 10 times. As at 30 June 2005, the Group’s interest-bearing borrowings were exclusively finance lease payables of minimal magnitude.

The Group has obtained available bank credit facilities which are secured by certain of the Group’s pledged bank deposits of approximately HK$14.8 million; short term investments of approximately HK$7.8 million and corporate guarantees given by the Company. During the year, these available bank credit facilities have been utilized in trade credit financing.

As at 30 June 2005, the Group’s cash and bank balances, which were principally Renminbi and Hong Kong dollar denominated, amounted to over HK$230 million. The Group was not exposed to any substantial risk in foreign exchange fluctuations.

LETTER FROM THE BOARD

CAPITAL STRUCTURE, GEARING LEVERAGE AND USE OF PROCEEDS

As at 30 June 2005, the capital structure of the Company is constituted exclusively of 2,941,487,600 Shares. Apart from options to subscribe for shares in the Company, there are no other capital instruments in issue.

The Group generally finances its operation with internally generated resources. The Group’s gearing ratio, measured on the basis of total borrowings as a percentage of total assets, remained at a low level over the two years at less than 1 percent.

During the year on 13 January 2005, the Company raised share issue proceeds, net of related expenses, of approximately HK$95 million from the issue of 489,000,000 new Shares under a top-up placing and subscription arrangement. The resulting net proceeds will be used for general working capital of the Group and/or any future possible acquisition. At the present stage, the share issue proceeds has been retained as general working capital of the Group.

EXPOSURE TO FLUCTUATION IN EXCHANGE RATE

The majority of the Group’s transactions and borrowings are denominated in Hong Kong dollars and Renminbi, and therefore the Group’s exposure to exchange rate fluctuation is relatively insignificant. In general, the Group mainly utilizes its Renminbi income receipt for operating expenditures in China and does not use any financial instruments for hedging purpose.

MATERIAL ACQUISITIONS AND SIGNIFICANT INVESTMENTS HELD

There were no material acquisitions and disposal of subsidiaries and associated companies during the year.

The significant investment held by the Group as at 30 June 2005 includes principally a 55% equity interest in Zhongke Nanotech Engineering Center Co., Ltd. (“Zhongke Nanotech”), a PRC limited liability company engaged in the development and sale of nano material and related products. Zhongke Nanotech is a jointly-controlled entity established amongst the Group, the Chinese Academy of Science and certain other joint venture partners. The headquarter of Zhongke Nanotech is based in Beijing, the PRC, and currently contained a strong research team of over 40 scientific researchers, including Mr. Jiang Lei, the chief scientist of China 863 project in nano-technology, and various senior researchers of doctoral and master’s degrees. More than 30 patents of the nano-technology research projects had already been filed. In addition, Zhongke Nanotech also operates a second industrialization plant in Suzhou, the PRC, which will be engaged in the production of Nano high elastic plastic and Nano metallic paint; Nano interior and exterior paint; and Nano paste. The Group’s interests in Zhongke Nanotech group of companies are accounted for as interests in jointly-controlled entities in the accompanying audited financial statements.

As at 30 June 2005, the Group’s aggregate carrying value in respect of its investment in Zhongke Nanotech group of companies, comprising share in net assets, amounted to HK$19.5 million.

The net sharing in result, after minority interest, in Zhongke Nanotech group of companies for the year ended 30 June 2005 and as reflected in the accompanying audited financial statements amounted to a loss of HK$30.8 million.

LETTER FROM THE BOARD

PLEDGE OF ASSETS

The Group’s bank borrowing facilities are secured by certain of the Group’s pledged bank deposits of HK$14.8 million; short term investments of approximately HK$7.8 million and corporate guarantees given by the Company.

CONTINGENT LIABILITIES

The Company and the Group do not have contingent liabilities of material amounts outstanding as at 30 June 2005.

CAPITAL COMMITMENTS

At 30 June 2005, the Group had capital commitments in relation to Group’s interests in and Group’s share of capital commitment of Jointly-controlled entities contracted but not provided for amounted to HK$7.6 million and HK$13.9 million respectively. The capital commitment is expected to be funded by existing financial resources.

EMPLOYEE

At 30 June 2005, the Group employed approximately 700 employees in our factory premises and approximately 17 staff in Hong Kong. In addition to competitive package offered to the employees, other benefits for eligible candidates include contributions to mandatory provident fund, group medical and accident insurance. On-going training sessions were also conducted to enhance the competitiveness of the Group’s human assets. The Company also maintains a share option scheme, pursuant to which share options may be granted to directors, executives and employees of the Company to provide them with incentive interest in the growth of the Group.

PROPOSED INVESTMENT IN FORESTRY BUSINESS

On 26 October 2005, the Company entered into a conditional sale and purchase agreement pursuant to which the Company may acquire the entire shareholding interest in an investment company, the sole asset of which consist of a 70 per cent equity interest in a sino-foreign joint venture company principally engaged in the business of tree planting and management, manufacture and distribution of forest products such as timber and wood pulp. The Sino-Foreign JV has obtained a registered patent underlying accelerated plant growth and operates by making use of the modified tree species Broussonetia Papyriferalvent in its plantation process that can be applied to ecological and forestry purposes. The favorable chemical characteristic of the modified tree species may serve to improve soil quality and fertile. Since the plantation can be carried out on infertile land, the area of cultivatable agricultural land will be greatly enhanced. The accelerated growth period of Broussonetia Papyriferalvent appears to offer a solution to the high domestic demand in wood pulp from the paper making industry in the People’s Republic of China.

LETTER FROM THE BOARD

In accordance with the conditional sale and purchase agreement, a guarantee undertaking has been given to the Company of aggregate profits on part of the Sino-Foreign JV of no less than HK$200 million for the ensuring two years, for which the Company will be able to enjoy a 70 per cent share. The Board believes that this proposed new investment has huge growth potential that in turn will maximize shareholders’ value. The proposed investment is subject to; among other things, the approval of the Company’s shareholders in general meetings and information on this new proposed investment will be distributed to the Company’s shareholders in due course.

2) For the year ended 30 June 2006

FINANCIAL HIGHLIGHTS

For the financial year ended 30 June 2006, the Group recorded turnover of HK$360.7 million, representing a 160 per cent increase from the preceding year. The Group’s profit attributable to shareholders was approximately HK$83.2 million (2005: net loss of 150.1 million), and earnings per share for the year was HK2.72 cents (2005: loss per share of HK5.61 cents).

During the year under review, the Company completed the acquisition of the ecological forestry business and the post-acquisition turnover and profit contribution from the newly diversified business was first-time consolidated into the Group accounts. The increase in turnover was mainly attributable to postacquisition revenue generated from the newly acquired ecological forestry business. For the year under review, the Group’s ecological forestry business and garment business accounted for approximately 60.7 per cent and 39.3 per cent, respectively, of the Group’s total turnover.

In arriving at the Group’s net profit, sharing in profits of joint-venture investment in Nanotechnologies in the amount of HK$1.6 million (2005: sharing in loss of HK$30.8 million) has been included.

DIVIDEND

The Board of directors has resolved not to recommend any dividend for the financial year ended 30 June 2006.

BUSINESS AND OPERATIONAL REVIEW

The Ecological Forestry Business Segment

The Group’s business operations in the ecological forestry business was carried out by Beijing WFC, a Sino-Foreign joint venture principally engaged in the business of tree planting and management, manufacture and distribution of forest products such as timber and bark materials. The Company held a 70 per cent effective equity interest in Beijing WFC.

For the first post-acquisition period, the Group’s share in net profit contribution from Beijing WFC attributable to the Company’s shareholders amounted to approximately HK$93.8 million. The profit contribution, which has been consolidated into the Group accounts for the financial year ended 30 June 2006, arose mainly from the sale of paper mulberry sapling and also quality pinewood by Beijing WFC.

LETTER FROM THE BOARD

The sale of paper mulberry sapling was undertaken in Beijing WFC’s initial stage of business launching to avail working capital and cash resources for future large scale plantation of the modified tree specie Broussonetia Papyriferalvent. The Group’s turnover in respect of its forestry operations were entirely derived from the PRC.

In addition to the direct sale of saplings, during the post-acquisition period Beijing WFC has also commenced the plantation of the modified tree specie Broussonetia Papyriferalvent. The plantation works was carried out in a leasehold agricultural premise in the Shandong province and also certain other leased premises in other regions of the PRC; mainly near the Beijing border. Based on professional survey performed, as at 30 June 2006, the harvestable volume of Broussonetia Papyriferalvent being grown was assessed as approximately 805 tons of bark and 5,926 tons of tree trunk. During the current year, postacquisition profit contribution in the amount of HK$11.9 million was recorded in respect of the fair value re-measurement gains assessed in terms of harvestable timber which can be obtained by Beijing WFC from its plantation activities rendered during the period. At this stage of new commencement of plantation, however, the growth of the Broussonetia Papyriferalvent was still in continuance and has not reached their optimal stage for harvest. Therefore, no harvesting of the modified tree specie and sale of the collectible timber has been made during the year.

In respect of the Group’s secondary forestry business operation in pinewoods, namely, the Shanxi Xiyang Dongfeng Forest Farm and the Shanxi Xiyang State-run Bixiaguan Forest Farm, both of them being located in Shanxi province, the PRC, during the post-acquisition period, harvesting has been made of approximately 56,000 cubic meters by volume of the pinewoods and sale of the collectible timber. Based on professional survey performed, as at 30 June 2006, the flocks of living pine trees of different maturities grown thereon was assessed to have an aggregate bulk volume of approximately 332,000 cubic meters. Amongst these, approximately 91 per cent by volume of the living pine trees have reached optimal harvestable stage of full maturity and near-maturity. Of these wholesome living pine trees, the Group has vested interests in contracts for the sale of portions of the flocks of approximately HK$49 million by sales value, the delivery of which has not been completed as at 30 June 2006.

The Garment Business Segment

The Group’s core garment business consisted of the design, manufacture and sale of a range of high-end apparel and uniforms. The PRC market remained the most important market segment, accounting for over 90 per cent of the Group’s total garment sales. During the year, the turnover generated from the garment business remains stable while the gross product margin normalized and improved from 8.4 per cent in last year to a healthier level of around 13.6 per cent. As a result, the Group succeeded in considerably reducing the net operating loss from its garment operation to approximately HK$2.6 million for the year ended 30 June 2006.

The improvement was mainly the result of the Group’s effort in rectifying its operations and advertising and intensified marketing and promotional campaign, including the appointment of renowned screen celebrity as the brand image ambassador and the roll out of a series of television advertisements to increase customers’ brand awareness. In addition, the Group’s effort in promulgating a nationwide sales retail network in the PRC and broaden sales channel has enabled the Group to concentrate on products with higher profit margin. Such promotional effort while requires a higher level of overhead outlay on part of the Group over the last two years, was beginning to impart its benefits. Along with the increase in brand awareness, a higher emphasis of sales effort was placed with apparel products under the Group’s

LETTER FROM THE BOARD

own branding which generally command higher profit margin than uniform sales. During the year, the Group also introduced to the market the leisure series of apparel to complement the men’s suits and uniform product lines; and was well received by the market.

Investment in Nano-technology Business

The Group’s share of results of jointly-controlled entities, in the amount of HK$1.6 million, represents share of operational profits from high-tech investment in Zhongke Nanotech, the Group’s joint venture investment vehicle engaged in the development and sales of nano materials and transfer of related technology. Following a period of loss-incurring operational consolidation over the last year, Zhongke Nanotech succeeded in turning around the operation for the current year. The result contribution for the year was derived mainly from the sale of nano metallic paint; nano interior and exterior paint; and nano paste as successfully commercialized by Zhongke Nanotech’s second industrialization plant in Suzhou, the PRC. In addition, technology transfer contracts completed during the year includes the technology in the industrial manufacture of nano self-cleansing glass material.

Selling and distribution expenses

The increase in selling and distribution expenses for the year is mainly the result of the consolidation of post-acquisition expenses incurred in respect of the Group’s newly acquired ecological forestry business. These include cost incurred in harvesting pine woods and related storage and transportation charges.

Other operating expenses

The other operating expenses for the current year of approximately HK$28.3 million include mainly (i) patent amortisation of HK$9.1 million, (ii) amortization of paper mulberry saplings of approximately HK$17.8 million, and (iii) research and development cost of approximately HK$10.5 million.

The significant other operating expenses for last year included: (i) impairment of the Group’s investment in software compression technologies and related goodwill balance (HK$37.1 million); (ii) the impairment of goodwill in respect of high-tech investment in Nano technologies applications (HK$31.5 million); and (iii) provision for inventories (HK$13.4 million). These impairment losses are mainly nonrecurrent in nature and accordingly the significant reduction in expense incurred for the current year.

LIQUIDITY AND FINANCIAL RESOURCES

As at 30 June 2006, the Group’s cash and bank balances, which were principally Renminbi and Hong Kong dollar denominated, amounted to over HK$284 million. The Group was not exposed to any substantial risk in foreign exchange fluctuations.

LETTER FROM THE BOARD

As at 30 June 2006, the Group’s total borrowings (excluding convertible notes liabilities) amounted to approximately HK$276.6 million, out of which approximately HK$220.6 million represents the amortised value of non-interest bearing promissory notes payable and HK$56.0 million represents current account payable to minority shareholder. The promissory notes have an aggregate nominal value of HK$230 million. Partial of the Company’s promissory notes in the denomination of HK$130 million are repayable on demand at any time starting from 1 October 2006 and the corresponding amortised value are classified as current liabilities as at 30 June 2006. Settlement is in progress subsequent to 30 June 2006 of the above current portion of the promissory notes which has fallen due. The remaining outstanding portions of the Company’s promissory notes are repayable by two installments each of HK$50 million which shall fall due on 1 April 2007 and 1 July 2007, respectively.

The Group’s presently available liquidity resources are sufficient in servicing its promissory notes and other borrowings and meeting its capital commitments. The Group generally finances its operation with internally generated resources. As at 30 June 2006, the Group’s net current assets amounted to over HK$239.5 million as at the reporting end date. The Group’s current ratio, expressed as a percentage of current assets to current liabilities, amount to 1.7 times.

The Group has obtained available bank credit facilities which are secured by certain of the Group’s pledged bank deposits and corporate guarantees given by the Company. During the year, these available bank credit facilities have been utilised in trade credit financing.

CAPITAL STRUCTURE

As at 30 June 2006, the capital structure of the Company is constituted exclusively of 3,879,807,600 Shares. Apart from ordinary shares in issue, the capital instruments in issue of the Company include convertible notes and options to subscribe for Shares.

During the year under review, a total of 206,200,000 new Shares have been issued as a result of the exercise of options to subscribe for new Shares. Subsequent to 30 June 2006, options were further exercised for the subscription of an additional 18,000,000 new Shares.

During the year, the Company issued 580,000,000 consideration shares, credited as fully paid, and convertible notes in aggregate principal amount of HK$210.4 million as consideration for the acquisition of Strong Lead Investments Limited, details of which are set out in the below section on “Material Acquisitions”.

The Company’s convertible notes in aggregate principal amount of HK$210.4 million are Hong Kong dollar denominated and interest-bearing at a fixed rate of 1.5 per cent per annum. The principal denomination of the convertible notes is convertible in full or in part into ordinary shares in the Company at a conversion price of HK$0.12 per share. During the year, partial of the principal denomination of HK$18.6 million of the convertible notes has been converted into 155,000,000 Shares. Subsequent to 30 June 2006, further conversion has been made of principal denomination of HK$91.8 million in the convertible notes into 765,000,000 Shares. After accounting for the above share issues, as at the date of this report, there are 4,662,807,600 Shares in issue with the Company.

LETTER FROM THE BOARD

The remaining outstanding convertible notes in an aggregate principal amount of HK$100 million are restricted portion convertible only subsequent to the year 2007. Assuming full conversion is made of these outstanding convertible notes, under the existing capital structure of the Company, the capital base of the Company will be increased to approximately 5,496,140,930 Shares under the existing capital structure of the Company. To accommodate the future expansion and growth of the Group and facilitate the business acquisition, on 8 May 2006, the Company increased its authorised share capital from HK$500 million to HK$650 million by the creation of an additional 1,500,000,000 unissued Shares.

As at 30 June 2006, the Group’s gearing ratio, measured on the basis of total borrowings (including convertible notes) as a percentage of total shareholders’ fund, was approximately 61 per cent.

EXPOSURE TO FLUCTUATION IN EXCHANGE RATE

MATERIAL ACQUISITIONS

During the year, the Company completed the acquisition of Strong Lead Investments Limited, a company incorporated in the British Virgin Islands and held as its sole asset a 70 per cent equity interest in Beijing Wan Fu Chun Forest Resources Development Company Limited, a Sino-Foreign joint venture principally engaged in the business of tree planting and management, manufacture and distribution of forest products such as timber and bark materials. The acquisition consideration of HK$560 million is satisfied by cash consideration and the issuance by the Company of consideration shares; promissory notes and convertible notes. The Company’s interest in Strong Lead Investments Limited is accounted for as a subsidiary undertaking and form part of the Group’s principal operation. The details of the acquisition, which constitutes a very substantial acquisition under the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Ltd., were disclosed in the Company’s circular to its shareholders of 18 April 2006.

SIGNIFICANT INVESTMENTS HELD

The significant investment held by the Group as at 30 June 2006 includes principally a 55 per cent equity interest in Zhongke Nanotech Engineering Center Co., Ltd. (Zhongke Nanotech), a PRC limited liability company engaged in the development and sale of nano material and related products. Zhongke Nanotech is a jointly-controlled entity established amongst the Group, the Chinese Academy of Science and certain other joint venture partners. The headquarter of Zhongke Nanotech is based in Beijing, the PRC, and currently contained a strong research team of over 40 scientific researchers, including Mr. Jiang Lei, the chief scientist of China 863 project in nano-technology, and various senior researchers of doctoral and master’s degrees. More than 30 patents of the nano-technology research projects had already been filed. In addition, Zhongke Nanotech also operates a second industrialization plant in Suzhou, the PRC, which is mainly engaged in the production of nano high elastic plastic and nano metallic paint; nano interior and exterior paint; and Nano paste. The Group’s interests in Zhongke Nanotech group of companies are accounted for as interests in jointly-controlled entities in the accompanying audited financial statements.

LETTER FROM THE BOARD

As at 30 June 2006, the Group’s aggregate carrying value in respect of its investment in Zhongke Nanotech group of companies, comprising share in net assets, amounted to HK$28.2 million.

The net sharing in result, after minority interest, in Zhongke Nanotech group of companies for the year ended 30 June 2006 and as reflected in the accompanying audited financial statements amounted to a profit of HK$1.6 million, as compared to a sharing in net loss of HK$30.8 million for last year. Following a period of operational consolidation during the last year, the current year improvement in financial performance was mainly attributable to completion of certain technology transfer contracts and the successful commercialization of new products of nano paint and nano paste during the year.

PLEDGE OF ASSETS

The Group’s bank borrowing facilities are secured by certain of the Group’s pledged bank deposits of HK$10.9 million and corporate guarantees given by the Company.

CAPITAL COMMITMENTS

As at 30 June 2006, the Group’s capital commitments contracted but not provided for principally include approximately HK$1.1 million in respect of construction contractor cost; and approximately HK$19.2 million in respect of acquisition of leasehold forest land.

CONTINGENT LIABILITIES

The Company and the Group do not have contingent liabilities of material amounts outstanding as at 30 June 2006.

EMPLOYEES

At 30 June 2006, the Group employed a total of approximately 750 employees of which 19 staff was employed in Hong Kong. In addition to competitive package offered to the employees, other benefits for eligible candidates include contributions to mandatory provident fund, group medical and accident insurance. On-going training sessions were also conducted to enhance the competitiveness of the Group’s human assets. The Company also maintains a share option scheme, pursuant to which share options may be granted to directors, executives and employees of the Company to provide them with incentive interest in the growth of the Group.

3) For the year ended 31 March 2007

FINANCIAL HIGHLIGHTS

For the year ended 31 March 2007, the Group recorded a turnover of approximately HK$829 million, representing an increase of 130% compared with the year ended 30 June 2006. The Group’s gross profit and profit attributable to shareholders were approximately HK$530 million and HK$1,319 million respectively, and its earnings per share for the year was HK28.82 cents, representing an increase of 173%, 1,486% and 960% respectively compared with the year ended 30 June 2006. The Group’s profit attributable to shareholders excluding the revaluation gain of biological assets was approximately HK$298 million.

LETTER FROM THE BOARD

During the year, the Group actively pursued the opportunities of acquiring forest lands, and the lands so acquired, coupled with forest lands previously acquired was over 1,000,000 Chinese Mu as at 31 March 2007. In addition, the turnover and profit derived from the ecological forestry business was consolidated into the Group accounts for the whole year. The increase in turnover and profit of the Group was mainly attributable to its ecological forestry business. For the year, the Group’s ecological forestry business and garment business accounted for approximately 88% and 12%, respectively, of the Group’s total turnover.

In arriving at the Group’s net profit, sharing in losses of its joint-venture investment in Nanotechnologies in the amount of HK$3.7 million (in the year ended 30 June 2006, the Group recorded a profit in the amount of HK$1.6 million for this investment) has been included.

DIVIDEND

The Board has resolved not to recommend any dividend for the year ended 31 March 2007.

BUSINESS AND OPERATIONAL REVIEW

The ecological forestry business segment

The Group’s business operations in the ecological forestry business was carried out by Beijing Wan Fu Chun Forest Resources Development Company Limited (“Beijing WFC”). During the year, the Group’s share in the net profit of Beijing WFC which was attributable to the Company’s shareholders amounted to approximately HK$1,351,416,000. The turnovers from the sale of timber and sale of paper mulberry saplings during the year were approximately HK$587,947,000 and HK$145,179,000 respectively.

Sales of timber

During the year, the profit margin from the sale of timber was improved owing to an increase in the average selling price of the timber and the effective cost control by the Group as a result of the improvement in its management. The timber sold during the year mainly came from Miaowan Forest Farm, Baiyunshan Forest Farm, Shizhu Forest Farm, Leimaping Forest Farm, Ruicheng Forest Farm and Shanxi Xiyang County Dongfeng Forest Farm.

Plantation of modified tree specie Broussonetia Papyriferalvent

During the year, Beijing WFC planted the modified tree specie Broussonetia Papyriferalvent in various saplings centre and forest lands. Based on a survey performed by a professional institution, as at 31 March 2007, Beijing WFC had planted over 91 million of the modified tree specie Broussonetia Papyriferalvent. As the growth of the Broussonetia Papyriferalvent continued and has not reached their golden stage for harvest, no felling of this modified tree specie nor sale of the collectible timber was made during the year. It was estimated that the aggregate volume of bark and trunk of the living modified tree specie Broussonetia Papyriferalvent of different maturities planted by Beijing WFC were approximately 10,497 net tons and 85,384 net tons respectively.

LETTER FROM THE BOARD

Forest land resources

During the year, the Group actively pursued the opportunity of acquiring forest lands. As at 31 March 2007, the long lease-term forest lands so acquired, coupled with the forest lands previously acquired by the Group was over 1,000,000 Chinese Mu.

The lease periods of the forest lands range from 20 years to 70 years. The Group had received the forest ownership certificates or other title documents in respect of an area of 273,191 Chinese Mu of the lands as at 31 March 2007. Application for the forest ownership certificates in respect of the remaining forest lands has been made.

Value of biological assets

Biological assets of the Group include paper mulberry saplings, paper mulberry trees and other trees. The values of such assets amounted to approximately HK$21,781,000, HK$279,860,000 and HK$1,296,492,000 respectively as at 31 March 2007. The increase in the fair value of biological assets for the year was approximately HK$1,117,515,000.

The Garment business segment

Investment in nano-technology business

The Group’s share of losses of jointly-controlled entities amounted to HK$1,358,000, representing its share of operational losses in the amount of HK$3,684,000 suffered from its high-tech investment in Zhongke Nanotech, the Group’s joint venture investment vehicle engaged in the development and sales of nano materials and transfer of related technology, together with its share of gain derived from the disposal of Beijing Zhongke Health Medical Products Co., Ltd. in the amount of HK$2,326,000.

LETTER FROM THE BOARD

OPERATING RESULTS REVIEW

Turnover

During the year ended 31 March 2007, the Group captured various business opportunities and recorded a turnover of HK$828,918,000, representing an increase of 130% over the year ended 30 June 2006.

The table below sets out the sales of products by the Group for the year ended 31 March 2007:

Product Unit Price Volume (HK$) (cubic meters) Ecological forestry business Sales of timber Mixed hard wood 8,193.64 33,768 Other wood 2,261.68 137,625 Sales of Saplings Garment business Total	Amount (HK$’000) 276,683 311,264 587,947 145,179 733,126 95,792 828,918

LETTER FROM THE BOARD

An analysis of gross profit and gross profit margin

Cost of sales mainly included cost incurred in logging timber, raw materials consumption, direct labour costs, road repairs and maintenance and miscellaneous direct charges. The Group’s increase in cost for the year was mainly a result of the consolidation of the expenses incurred in respect of the Group’s ecological forestry business for the full period.

The table below sets out details of the gross profit and gross profit margin for the year ended 31 March 2007:

		Gross Profit
	Gross Profit	Margin
	HK$’000	%
Ecological forestry business
Sales of timber	410,065	69.7
Sales of Saplings	114,501	78.9
	524,566	71.6
Garment business	5,769	6.0
Total	530,335	64.0

The Group’s aggregate gross profit margin increased from 53.8% to 64.0% in the year ended 31 March 2007, which was mainly attributed to an increase in the gross profit and gross profit margin of the ecological forestry business of the Group.

Selling and distribution cost

During the year ended 31 March 2007, the Group’s selling and distribution costs increased by 243% to HK$88,666,000, which was mainly resulted from an increase in transportation costs due to an increase in the sales volume of timber.

Administration expenses

The Group’s administration expenses in the year amounted to HK$52,908,000, representing an increase of 231% compared with the year ended 30 June 2006. Such increase was brought by the expansion of ecological forestry business which caused a substantial increase in management expenses.

Other operating expenses

The Group’s other operating expenses for the year in the amount of approximately HK$62,861,000 included patent amortisation, amortisation of paper mulberry saplings and expenses of share option scheme of approximately HK$18,865,000, HK$22,146,000 and HK$21,850,000 respectively.

LETTER FROM THE BOARD

LIQUIDITY, FINANCIAL RESOURCES AND CAPITAL STRUCTURE

As at 31 March 2007, the Group’s cash and bank balances, which were principally Renminbi and Hong Kong dollar denominated, totally amounted to approximately HK$624,309,000. The Group was not exposed to any substantial risk in foreign exchange fluctuations. In general, the Group mainly used its Renminbi income receipt for operating expenses in China and did not use any financial instruments for hedging purpose.

The table below summarises the cash flow information for the year ended 31 March 2007:

Net cash inflow from operating activities Net cash (outflow) from investing activities Net cash inflow from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Effect of foreign exchange rate changes Cash and cash equivalents at end of year	HK$’000 516,783 (509,899) 321,102 327,986 273,400 11,658 613,044

As at 31 March 2007, the Group’s total borrowings (excluding convertible notes liabilities) amounted to approximately HK$98,969,000, which represented the amortised value of non-interest bearing promissory notes payable. The promissory notes had an aggregate nominal value of HK$100,000,000. The promissory notes were repayable by two instalments each of HK$50,000,000 which fell due on 1 April 2007 and 1 July 2007 respectively.

The Group’s currently available liquidity resources are sufficient to repay its promissory notes and to meet its capital commitments. The Group generally finances its operation using internally generated resources. As at 31 March 2007, the Group’s net current assets amounted to approximately HK$351,982,000. The Group’s current ratio, being the percentage of its current assets in its current liabilities, amounted to 1.67 times.

The Group has obtained bank credit facilities which are secured by certain pledged bank deposits of the Group and corporate guarantees provided by the Company. During the year, these bank credit facilities were utilised in trade credit financing.

As at 31 March 2007, the share capital of the Company was consisted of 5,062,807,600 Shares. Apart from the ordinary shares in issue, the Company issued convertible notes as alternative financing instruments.

LETTER FROM THE BOARD

During the year, a total of 18,000,000 new Shares were issued as a result of the exercise of options to subscribe for new shares in the Company.

During the year, a total of 400,000,000 new Shares were issued under a top-up placing and

subscription arrangement.

During the year, the Company’s convertible notes with principal denominated value of

HK$91,800,000 were converted into 765,000,000 Shares.

As at 31 March 2007, the Group’s gearing ratio, measured on the basis of total borrowings (including convertible notes) as a percentage of total shareholders’ fund, was approximately 7%. (30 June 2006: 61%)

MATERIAL ACQUISITION

Pursuant to a resolution passed by the Shareholders on 17 January 2007 approving an agreement for the acquisition of an additional 30% equity interest in Beijing WFC, Beijing WFC became a wholly owned subsidiary of the Company.

EVENTS AFTER THE BALANCE SHEET DATE

On 25 May 2007, Ms. Cao Chuan was appointed as an executive Director, chief executive officer and deputy chairman of the Company.

On 30 April 2007 and 2 May 2007, by virtue of exercise of the rights granted by the Shareholders to the Directors under general mandate, the Company repurchased on the Stock Exchange in aggregate 7,000,000 of the Share at a total consideration before expenses of approximately HK$5,930,000. The subject Shares were cancelled after the repurchases and the issued share capital of the Company was reduced by the nominal value thereof.

Pursuant to a resolution passed by the Shareholders on 7 May 2007, the Company increased its authorised share capital from HK$650,000,000 divided into 6,500,000,000 Shares to HK$2,000,000,000 divided into 20,000,000,000 Shares by the creation of an additional 13,500,000,000 unissued Shares.

On 5 June 2007, 11 June 2007 and 12 June 2007, the Company’s wholly owned subsidiary, Beijing WFC, entered into agreements to acquire certain leasehold forest lands in the PRC. Further details are set out in the Company’s press announcements of 5 June 2007, 11 June 2007 and 12 June 2007.

CHARGE ON THE GROUP’S ASSETS

As at 31 March 2007, the Group’s available banking facilities were secured by pledged bank deposits of the Group in the amount of HK$11,265,000 and corporate guarantees provided by the Company.

LETTER FROM THE BOARD

CONTINGENT LIABILITIES

As at 31 March 2007, the Group did not have contingent liabilities of material amounts.

CAPITAL COMMITMENTS

As at 31 March 2007, the capital commitment in respect of acquisition of leasehold forest lands which had been made but which had not been provided for by the Group was approximately HK$144,548,000.

EXPOSURE TO FLUCTUATION IN EXCHANGE RATE

The majority of the Group’s transactions and borrowings are denominated in Hong Kong dollars and Renminbi. Therefore, the Group’s exposure to exchange rate fluctuation is relatively insignificant. In general, the Group mainly uses its Renminbi income receipt for operating expenditures in China and does not use any financial instruments for hedging purpose.

EMPLOYEES

As at 31 March 2007, the Group employed a total of approximately 645 employees of which 19 staff was employed in Hong Kong. In addition to the competitive package offered to the employees, other benefits provided to eligible candidates include contributions to mandatory provident fund as well as group medical and accident insurance. On-going training sessions were also conducted to enhance the competitiveness of the Group’s human assets. The Company also maintains a share option scheme, pursuant to which share options may be granted to directors, executives and employees of the Company to provide them with incentive interest in the growth of the Group.

LETTER FROM THE BOARD

MANAGEMENT DISCUSSION AND ANALYSIS OF THE RESULTS OF SHENYU NEW ENERGY GROUP

For the period from 2 November 2006 to 31 December 2007

FINANCIAL HIGHLIGHTS

For the period from 2 November 2006 to 31 December 2007, Shenyu New Energy Group did not generate any turnover. Shenyu New Energy Group had an audited consolidated net profit of approximately RMB1,371 million from 2 November 2006 (the date of incorporation) to 31 December 2007, which is mainly attributable to the excess of acquirer’s interest in the net volume of acquiree’s identifiable net assets over costs and gains arising from changes in fair values less estimated point-of-sale costs of biological assets of RMB892 million and RMB482 million respectively.

BUSINESS AND OPERATIONAL REVIEW

The ecological forestry business segment

As at 31 December 2007, Shenyu New Energy Group established Jatropha Plantations, area amounted to approximately 619,000 mu. There was no tunover generated during this relevant period and Shenyu New Energy Group had an audited consolidated net profit of approximately RMB1,371 million from 2 November 2006 to 31 December 2007, which is mainly attributable to the excess of acquirer’s interest in the net volume of acquiree’s identifiable net assets over costs and gains arising from changes in fair values less estimated point-of-sale costs of biological assets.

CAPITAL STRUCTURE, LIQUIDITY AND FINANCIAL RESOURCES

As at 31 December 2007, Shenyu New Energy Group did not have any borrowing and cash and cash equivalents was RMB29,449,000. Shenyu New Energy Group was not exposed to any substantial risk in foreign exchange fluctuations. In general, Shenyu New Energy Group mainly used its Renminbi income receipt for operating expense in China and did not use any financial instruments for hedging purpose.

As at 31 December 2007, the total assets of Shenyu New Energy Group amounted to RMB1,676,556,000 which mainly included biological assets of RMB1,481,514,000 and receivable of RMB95,333,000 arising from disposal of forest farms.

As at 31 December 2007 the share capital of Shenyu New Energy Group was US$10.

CONTINGENT LIABILITIES AND CHARGES ON THE ASSETS

There were no material contingent liabilities or charges on the assets of Shenyu New Energy Group as at 31 December 2007.

LETTER FROM THE BOARD

MATERIAL ACQUISITION

During the relevant period, Shenyu New Energy Group acquired 100% equity interest of Yunnan Shenyu for a consideration of RMB156,000,000 in cash.

CAPITAL COMMITMENT

As at 31 December 2007, Shenyu New Energy Group has contracted but not provided for construction cost and acquisition of leasehold forest land amounted to RMB26,334,000 and RMB7,744,000 respectively.

EMPLOYEE INFORMATION

As at 31 December 2007, Shenyu New Energy Group has a total of approximately 100 employees. The staff cost incurred for the period amounted to approximately RMB2,002,000, mainly represented the salaries, allowances and staff welfare funds.

FUTURE PLANS FOR CAPITAL ASSETS

Shenyu New Energy Group plans to increase the Jatropha plantation areas in the future by converting all non-forest land and 70% of existing traditional forests into Jatropha plantations. In addition, Shenyu New Energy is building a processing plant to produce bio-diesel with annual capacity 100,000 tons by using seeds of Jatropha as raw materials.

For the four months period ended 30 April 2008

FINANCIAL HIGHLIGHTS

For the period from 1 January 2008 to 30 April 2008, Shenyu New Energy Group did not generate any turnover. Shenyu New Energy Group had an audited consolidated net profit of approximately RMB26 million for the four months period ended 30 April 2008, which is mainly attributable to gains arising from changes in fair value less estimated point-of-sale costs of biological assets amounted to approximately RMB31 million.

BUSINESS AND OPERATIONAL REVIEW

The ecological forestry business segment

As at 30 April 2008, Shenyu New Energy Group established Jatropha plantations amounted to approximately 725,000 mu. New Japtropha plantation area established during the relevant period was 106,000 mu. All of Shenyu New Energy’s Japtropha estate is located in the province of Yunnan in South West of PRC. There was no turnover generated during this Shenyu New Energy Group assets. Shenyu New Energy Group had an audited consolidated net profit of approximately RMB26 million for the four months period ended 30 April 2008.

LETTER FROM THE BOARD

CAPITAL STRUCTURE, LIQUIDITY AND FINANCIAL RESOURCES

As at 30 April 2008, Shenyu New Energy Group did not have any borrowing and cash and cash equivalents was RMB32,891,000. Shenyu New Energy Group was not exposed to any substantial risk in foreign exchange fluctuations. In general, Shenyu New Energy Group mainly used its Renminbi income receipt for operating expense in China and did not use any financial instruments for hedging purpose.

As at 30 April 2008, the total assets of Shenyu New Energy Group amounted to RMB1,656,555,000 which mainly included biological assets of RMB1,533,960,000.

As at 30 April 2008, the share capital of Shenyu New Energy Group was US$10.

CONTINGENT LIABILITIES AND CHARGES ON THE ASSETS

There were no material contingent liabilities or charges on the assets of Shenyu New Energy Group as at 30 April 2008.

CAPITAL COMMITMENT

As at 30 April 2008, Shenyu New Energy Group has contracted but not provided for construction cost and acquisition of leasehold forest land amounted to RMB39,040,000 and RMB42,845,000 respectively.

EMPLOYEE INFORMATION

As at 30 April 2008, Shenyu New Energy Group has a total of approximately 140 employees. The staff cost incurred for the period amounted to approximately RMB1,443,000, mainly represented the salaries, allowances and staff welfare funds.

REASONS FOR THE ACQUISITION

The Group is principally engaged in the ecological forestry business. The Directors consider the acquisition of high-growth potential biomass energy to be an extension of the Group’s existing ecological forestry business, which will broaden its revenue sources and increase the efficiency of management of forest land. Accordingly, the Directors confirm that there will be no change in the Company’s principal business immediately subsequent to completion of the Acquisition. The Directors are of the view that the terms of the Acquisition Agreement are fair and reasonable and in the best interest of the Company and the Shareholders as a whole.

After the Acquisition has been consummated, the Company intends to retain Shenyu New Energy Group’s existing management team. This team will train and share its expertise with the Company.

The Board is currently comprised of 9 members including 5 executive Directors, 1 non-executive Director and 3 independent non-executive Directors. The Directors confirm that there will be no significant change in the Board upon completion of the Acquisition.

LETTER FROM THE BOARD

FINANCIAL EFFECTS OF THE ACQUISITION ON THE GROUP

Following the Completion, Shenyu New Energy, Beijing Shenhao, Yunnan Shenyu New Energy will become wholly owned subsidiaries of the Company. In addition, the Company will have 99% equity interest in Shuangbai Shenyu. The unaudited pro forma financial information of the Enlarged Group as if the Acquisition has been completed on 31 March 2007 for the pro forma consolidated balance sheet and at the commencement of the period ended 31 March 2007 for the pro forma consolidated income statement and pro forma consolidated cash flow statement. The accompanying unaudited pro forma financial information of the Enlarged Group has been prepared to illustrate the effect of the acquisition of the entire share capital of Shenyu New Energy Group. The unaudited pro forma financial information of the Enlarged Group is set out in Appendix III.

Assets and liabilities

The unaudited pro forma net assets of the Enlarged Group would be slightly increased by RMB67,000 which is mainly arising from capital contribution from minority shareholder of Shuangbai Shenyu.

Earnings

The unaudited pro forma net profit of the Enlarged Group would increase by approximately RMB1,594,909,000 which is mainly arising from the gains from changes in fair value less estimated point-of-sale costs of biological assets of Shenyu New Energy Group.

FINANCIAL AND TRADING PROSPECT

The Directors expect the existing ecological forestry business of the Group will be continued into foreseeable future immediately upon completion of the Acquisition. There are presently no plans for the divestment of this existing business as the Directors has identified ecological business is a opportunity with highly favorable long term prospect. The Directors expect the wood product market will remain stable in foreseeable future and being a raw materials suppliers, the Group’s position is favorable. In view of potential risk of general economic unstable condition, the Group is closely monitoring the market condition of wood products as well as the consolidation of existing forest land and timber resources. After the Acquisition, the turnover in respect of its forestry operations are still derived mainly from the PRC.

The Directors have identified biofuel industry can further assist the Enlarged Group to achieve substainable growth of its ecological forestry business segment. The Directors have the view that the biofuel industry in China is driven by at least three factors: (1) Fuel shortages (2) Air pollution (3) Development of more options for the rural economy. Liquid biofuel is citied in the 11th Five-Years Development Policy and Regulations as one of the major future directions for new Chinese industrial development. In view of the enormous market demand of energy in PRC, the Directors believe that development of biofuel industry is a good opportunity with favorable long-term prospect.

The Directors have identified Shenyu New Energy Group, a group which focuses on research and develop of Jatropha Curcas L based biological energy sources, such as bio-diesel. As at 30 April 2008, Shenyu New Energy Group established Jatropha plantations amounted to approximately 725,000 mu,

LETTER FROM THE BOARD

acquired around approximately 839,000 mu of forest farms and other area consists of bush, harvested, burnt and bareland areas of approximately 587,000 mu. The PRC government policy changes put more emphasis on non-edible and non-traditional biofuel crops like Jatropha, the developed plantation base of Jatropha by Shenyu New Energy Group stands on a favorable position. Shenyu New Energy Group plans to increase the Jatropha plantation areas in the future by converting all non-forest land and 70% of existing traditional forests into Jatropha plantations. The sales of existing timber of forest can provide stable operating cash flow which in turn can support the development of Jatropha base. Develop Jatropha plantation base can provide stable and sufficient raw materials for the production of bio-diesel to achieve satisfactory profit margin. Commencement of production of bio-diesel will generate a new business segment to the Enlarged Group.

The Directors are optimistic towards ecological forestry business segment and the extension of biomass area to bio-diesel business segment through acquisition of Shenyu New Energy Group can utilize the competitive edge of the business to create synergy.

IMPLICATIONS FROM THE LISTING RULES

With reference to the aggregate value of consideration to be given and market capitalisation of the Company, the Acquisition constitutes a very substantial acquisition for the Company pursuant to the Listing Rules. Details of the valuation reports on the fair value of the major assets and the audited financial reports of the Shenyu New Energy Group prepared under the Hong Kong GAAP are set out in this circular. In general, the Valuations employed replacement cost approach, expectation approach which provides the net present value of the future net discount cash flow, and market approach. The Company has complied with all disclosure requirements under Rules 14.61 and 14.62 of the Listing Rules.

The Acquisition and the issue of Convertible Notes, which will be included in the resolutions in respect of the Acquisition, are subject to the Shareholders’ approval at the SGM. An application will be made to the Listing Committee of the Stock Exchange for the listing of and the permission to deal in the Conversion Shares.

To the best of the Directors’ knowledge, information and belief after having made all reasonable enquiries, the Vendor and its respective ultimate beneficiaries are the third parties independent of the Company and any connected persons of the Company. The Directors are of the view and confirm that the no Shareholder has any interests in the Acquisition and the transactions contemplated under the Acquisition Agreement that will conflict with the interests of the other Shareholders. No Shareholder, therefore, is required to abstain from voting for the approval of the Acquisition at the SGM.

SHAREHOLDING STRUCTURE OF THE COMPANY BEFORE AND AFTER THE COMPLETION OF THE ACQUISITION

As at the Latest Practicable Date, there were an aggregate outstanding principal amount of HK$100,000,000 convertible notes convertible into 833,333,333 new Shares and an aggregate of 114,100,000 outstanding employee share options entitling the holders thereof to subscribe for up to 105,100,000 Shares and 9,000,000 Shares at an exercise price of HK$0.98 per Share and HK$2.61 per Share respectively. Except for the convertible notes and the employee share option, there are no other options, warrants, or convertible notes entitling the holder to convert into Shares.

LETTER FROM THE BOARD

The following table sets out the shareholding structure of the Company (i) as at the Latest Practicable Date; and (ii) immediately after the completion of the Acquisition assuming all the Convertible Notes were converted into Conversion Shares:

Mr. Ng_(Note 1) Other directors of the Company (Note 2) Vendor(Note 3)_ Public Total	As at the Latest Practicable Date Shares % 968,000,000 17.44 7,425,000 0.13 – – 4,576,200,600 82.43 5,551,625,600 100.00	Immediately after the completion of the Acquisition and assuming the Convertible Notes were exercised in full into Conversion Shares Shares % 968,000,000 14.51 7,425,000 0.11 1,120,000,000 16.79 4,576,200,600 68.59 6,671,625,600 100.00	Immediately after the completion of the Acquisition and assuming the Convertible Notes were exercised in full into Conversion Shares Shares % 968,000,000 14.51 7,425,000 0.11 1,120,000,000 16.79 4,576,200,600 68.59 6,671,625,600 100.00
			100.00

Notes:

As at the Latest Practicable Date, excluding the interests in the underlying Shares of the options granted by the Company under its existing share option scheme, Mr. Ng is beneficially interested in an aggregate of 968,000,000 Shares comprising (i) corporate interest in 960,000,000 Shares held through Golden Prince Group Limited, which is wholly owned by Mr. Ng; and (ii) personal interest in 8,000,000 Shares.
As at the Latest Practicable Date, excluding the interests in the underlying Shares of the options granted by the Company under its existing share option scheme, Ms. Lee Ming Hin, being an executive Director of the Company is beneficially interested in 4,000,000 Shares, Mr. John MacMillian Duncanson, being a non-executive Director of the Company is beneficially interested in 125,000 Shares, and Mr. Lo Cheung Kin, Mr. Zou Zi Ping and Mr. Zhu Jian Hong, being the independent non-executive Directors of the Company are beneficially interested in 300,000 Shares, 1,500,000 Shares and 1,500,000 Shares respectively.
Conversion Shares to be issued and allotted pursuant to the terms and conditions of the Convertible Notes as set out in the Acquisition Agreement.

The existing authorised share capital of the Company consists of 20,000,000,000 Shares out of which 5,551,625,600 Shares have been issued and fully paid up or credited as fully paid up. The Acquisition will not result in change of control of the Company.

LETTER FROM THE BOARD

PREVIOUS FUND RAISING ACTIVITIES IN THE PREVIOUS 12 MONTHS PERIOD IMMEDIATELY PROCEEDING THE DATE OF THE ACQUISITION AGREEMENT

On 30 January 2007, the Company raised proceeds, net of related expenses, of approximately HK$448,000,000 from a top-up placing and subscription arrangement whereby an aggregate of 400,000,000 new Shares were issued and allotted at a price of HK$1.15 per Share to Golden Prince Group Limited, which is a company incorporated in the British Virgin Islands. Mr. Ng, chairman and executive Director of the Company, wholly owns Golden Prince Group Limited. Both of Mr. Ng and Golden Prince Group Limited are substantial Shareholders of the Company. Up to date of the announcement, HK$30,000,000 of the proceeds raised by the said Shares issuance was used to pay for partial consideration of 30% acquisition in Beijing Wan Fu Chun Forest Resources Development Company Limited, HK$100,000,000 was used for settlement of the Company’s promissory notes and approximately HK$318,000,000 have been used for the acquisition of forestry lands.

During July, August and September 2007, by virtue of the exercise of options to subscribe for new Shares in the Company, the Company issued and allotted 80,000,000 new Shares at a share issue price of HK$0.98. The net price to the Company of each new Share issued approximately equals to the respective share issue price. The aggregate net proceeds amounts to approximately HK$78,400,000 and has been used by the Group for general working capital purposes.

On 17 September 2007, the Company further raised proceeds, net of related expenses, of approximately HK$1,268,000,000 from a top-up placing and subscription arrangement whereby an aggregate of 539,560,000 new Shares were issued and allotted at a price of HK$2.4 per Share to Golden Prince Group Limited, which is a company incorporated in the British Virgin Islands. Mr. Ng, chairman and executive Director of the Company, wholly owns Golden Prince Group Limited. Both of Mr. Ng and Golden Prince Group Limited are substantial Shareholders of the Company. Up to date of the announcement, approximately HK$127,000,000 was used for the acquisition of forestry lands and approximately HK$68,000,000 was used for working capital purposes.

Except for the above, the Company has not conducted any equity and fund raising activities in the past twelve months.

THE SGM

The SGM will be held to consider and, if thought fit, pass the resolutions to approve, amongst other things, the Acquisition and the issue of the Convertible Notes in connection with the Acquisition and the grant to Special Mandate. To the best of the Directors’ knowledge, information and belief having made all reasonable enquiries, as at the Latest Practicable Date, no Shareholders had any interest in the Acquisition including the issue of the Convertible Notes in connection with the Acquisition which is different from the interest of the other Shareholders and therefore no Shareholders are required to abstain from voting for the approval of, amongst other things, the Acquisition and the issue of the Convertible Notes in connection with the Acquisition and the grant of the Special Mandate at the SGM.

Form of proxy for use at the SGM is enclosed in this circular. Whether or not you are able to attend the SGM in person, you are requested to complete and return the form of proxy in accordance with the instructions printed thereon as soon as possible but in any event not later than 48 hours before the time appointed for holding of the SGM or any adjourned meeting thereof. Completion of the form of proxy will not preclude you from attending and voting at the SGM or any adjourned meeting thereof should you so wish.

LETTER FROM THE BOARD

PROCEDURES FOR DEMANDING A POLL

Pursuant to clause 66 of the bye-laws, at any general meeting of the Company, a resolution put to the vote of the meeting shall be decided on a show of hands unless a poll is (before or on the declaration of the result on the show of hands or on the withdrawal of any other demand for a poll) demanded:

(a) by the chairman of such meeting; or
(b) by at least three Shareholders present in person (or, in the case of 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) by a Shareholder or Shareholders present in person (or, in the case of 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 Shareholders having the right to vote at the meeting; or
(d) by a Shareholder or Shareholders present in person (or, in the case of 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; or
(e) if required by the rules of the stock exchange in the relevant territory, by any Director or Directors who, individually or collectively, hold proxies in respect of Shares representing five per cent. (5%) or more of the total voting rights at such meeting.

RECOMMENDATION

The Directors consider that the terms and conditions of the Acquisition are fair and reasonable and are in the best interests of the Company and its Shareholders as a whole. Accordingly, the Directors recommend the Shareholders to vote in favour of the resolutions to be proposed at the SGM to approve the Acquisition and the transactions contemplated thereunder.

ADDITIONAL INFORMATION

Please refer to the Appendices to this circular for additional information.

By Order of the Board

China Grand Forestry Green Resources Group Limited Ng Leung Ho Chairman

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

1. SUMMARY OF AUDITED FINANCIAL INFORMATION OF THE GROUP

The following is a summary of the audited consolidated results and the assets and liabilities of the Group for the three years ended 30 June 2005, 30 June 2006 and 31 March 2007 as extracted from the published audited financial statements of the Group:

Audited Consolidated Income Statement

for the Year Ended 31 March 2007

Notes Turnover 3 Cost of sales Gross profit Other revenue 3 Other net gain 4 Selling and distribution expenses Administrative expenses Other operating expenses Profit from operating activities 5 Finance costs 6 Share of (losses)/profits of jointly- controlled entities Gain on disposal of interest in a jointly- controlled entity Profit before taxation Taxation 7 Profit for the year Attributable to: – Equity holders of the Company – Minority interests Earnings per share for result attributable to the equity holders of the Company during the year – basic 8(a) – diluted 8(b)	Year Ended 31 March 2007 HK$’000 828,918 (298,583) 530,335 5,159 1,141,730 (88,666) (52,908) (62,861) 1,472,789 (14,155) (3,684) 2,326 1,457,276 (68,874) 1,388,402 1,319,310 69,092 1,388,402 HK28.82 cents HK24.49 cents	Year Ended 30 June 2006 HK$’000 360,770 (166,852) 193,918 4,435 8,752 (25,839) (15,992) (40,714) 124,560 (3,295) 1,640 – 122,905 534 123,439 83,208 40,231 123,439 HK2.72 cents HK2.56 cents	Year Ended 30 June 2005 HK$’000 138,262 (126,776) 11,486 2,722 (8,580) (13,035) (14,885) (96,486) (118,778) (152) (30,838) – (149,768) (421) (150,189) (150,189) – (150,189) (HK5.61 cents) N/A

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Audited Consolidated Balance Sheet

As at 31 March 2007

Notes ASSETS Non-current assets Property, plant and equipment Construction in progress Prepaid lease payments Deposits for acquisition of forest farms Investment properties Intangible assets Interests in jointly-controlled entities Biological assets Current assets Inventories Trade receivables 9 Prepaid lease payments Other receivables, deposits and prepayments Financial assets at fair value through profit or loss Non-current asset held for sale Pledged bank deposits Bank and cash balances Total assets	31 March 2007 HK$’000 63,790 12,081 17,730 154,234 3,160 571,657 28,755 1,598,133 2,449,540 31,886 156,328 430 40,333 23,578 – 11,265 613,044 876,864 3,326,404	30 June 2006 HK$’000 64,232 11,240 13,122 – 2,500 594,479 28,282 241,691 955,546 38,264 207,344 301 24,350 4,992 2,735 10,988 273,421 562,395 1,517,941	30 June 2005 HK$’000 63,897 – 4,620 – 10,909 – 19,509 – 98,935 33,021 40,719 125 40,465 14,140 – 14,760 217,382 360,612 459,547

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Notes EQUITY AND LIABILITIES Capital and reserves attributable to the Company’s equity holders Share capital 30 Reserves Minority interests Total equity Non-current liabilities Promissory notes payable 33 Convertible notes payable 34 Deferred taxation 35 Current liabilities Trade payables 36 Other payables and accruals Promissory notes payable 33 Amount due to minority interests Interest-bearing bank borrowings 37 Provision for taxation Deferred revenue 39 Total liabilities Total equity and liabilities	31 March 2007 HK$’000 506,281 2,084,307 2,590,588 – 2,590,588 – 82,367 128,567 210,934 4,414 415,890 98,969 – – 5,609 – 524,882 735,816 3,326,404	30 June 2006 HK$’000 387,981 310,138 698,119 236,818 934,937 46,146 150,858 63,000 260,004 2,926 25,829 174,452 56,005 21 5,235 58,532 323,000 583,004 1,517,941	30 June 2005 HK$’000 294,149 148,443 442,592 – 442,592 – – 691 691 2,869 8,031 – – 88 5,156 – 16,264 16,955 459,547

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

2. AUDITED FINANCIAL STATEMENTS OF THE GROUP FOR THE YEAR ENDED 31 MARCH 2007

The following is an extract of the financial statements of the Group from the latest annual report of the Company for the year ended 31 March 2007:

Consolidated Income Statement

for the Year Ended 31 March 2007

Note Turnover 6 Cost of sales Gross profit Other revenue 6 Other net gain 8 Selling and distribution expenses Administrative expenses Other operating expenses Profit from operating activities 9 Finance costs 12 Share of (losses)/profits of jointly-controlled entities Gain on disposal of interest in a jointly-controlled entity Profit before taxation Taxation 13 Profit for the year Attributable to: Equity holders of the Company Minority interest Earnings per share for result attributable to the equity holders of the Company during the year – basic 15 – diluted 15	Year Ended 31 March 2007 HK$’000 828,918 (298,583) 530,335 5,159 1,141,730 (88,666) (52,908) (62,861) 1,472,789 (14,155) (3,684) 2,326 1,457,276 (68,874) 1,388,402 1,319,310 69,092 1,388,402 HK 28.82 cents HK 24.49 cents	Year Ended 30 June 2006 HK$’000 360,770 (166,852) 193,918 4,435 8,752 (25,839) (15,992) (40,714) 124,560 (3,295) 1,640 – 122,905 534 123,439 83,208 40,231 123,439 HK 2.72 cents HK 2.56 cents

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated Balance Sheet

at 31 March 2007

Note ASSETS Non-current assets Property, plant and equipment 16 Construction in progress 17 Prepaid lease payments 18 Deposits for acquisition of forest farms 24 Investment properties 19 Intangible assets 20 Interests in jointly-controlled entities 22 Biological assets 23 Current assets Inventories 25 Trade receivables 26 Prepaid lease payments 18 Other receivables, deposits and prepayments 27 Financial assets at fair value through profit or loss 28 Non-current asset held for sale Pledged bank deposits 38 Bank and cash balances 29 Total assets EQUITY AND LIABILITIES Capital and reserves attributable to the Company’s equity holders Share capital 30 Reserves Minority interests Total equity	At 31 March 2007 HK$’000 63,790 12,081 17,730 154,234 3,160 571,657 28,755 1,598,133 2,449,540 31,886 156,328 430 40,333 23,578 – 11,265 613,044 876,864 3,326,404 506,281 2,084,307 2,590,588 – 2,590,588	At 30 June 2006 HK$’000 64,232 11,240 13,122 – 2,500 594,479 28,282 241,691
		955,546
		38,264 207,344 301 24,350 4,992 2,735 10,988 273,421
		562,395
		1,517,941

		387,981 310,138
		698,119 236,818
		934,937

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Note Non-current liabilities Promissory notes payable 33 Convertible notes payable 34 Deferred taxation 35 Current liabilities Trade payables 36 Other payables and accruals Promissory notes payable 33 Amount due to minority interests Interest-bearing bank borrowings 37 Provision for taxation Deferred revenue 39 Total liabilities Total equity and liabilities	At 31 March 2007 HK$’000 – 82,367 128,567 210,934 4,414 415,890 98,969 – – 5,609 – 524,882 735,816 3,326,404	At 30 June 2006 HK$’000 46,146 150,858 63,000
		260,004
		2,926 25,829 174,452 56,005 21 5,235 58,532
		323,000
		583,004
		1,517,941

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Balance Sheet

at 31 March 2007

Note ASSETS Non-current assets Interests in subsidiaries 21 Current assets Other receivables, deposits and prepayments Bank and cash balances Total assets EQUITY AND LIABILITIES Capital and reserves attributable to the Company’s equity holders Share capital 30 Reserves 32 Total equity Non-current liabilities Promissory notes payable 33 Convertible notes payable 34 Deferred taxation 35 Current liabilities Other payables and accruals Promissory notes payable 33 Total liabilities Total equity and liabilities	At 31 March 2007 HK$’000 1,129,344 431 121,555 121,986 1,251,330 506,281 558,140 1,064,421 – 82,367 3,086 85,453 2,487 98,969 101,456 186,909 1,251,330	At 30 June 2006 HK$’000 930,052
		484 8,706
		9,190
		939,242

		387,981 170,653
		558,634
		46,146 150,858 7,165
		204,169
		1,987 174,452
		176,439
		380,608
		939,242

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Consolidated Statement of Changes in Equity

for the Year Ended 31 March 2007

At 1 July 2005 Currency translation difference Arising on exercise of share options Arising on business combination Arising from issuance of convertible notes Arising upon conversion of convertible notes into new shares, net of deferred taxation Repurchase of shares Surplus on revaluation, net of deferred taxation Transfer upon asset reclassification as held for sale Net profit for the year Share in reserve movement of jointly-controlled entities Reserve appropriation As 30 June 2006 Currency translation difference Arising on exercise of share options Placement of new shares Arising upon conversion of convertible notes into new shares, net of deferred taxation Equity settled share-based transactions Net profit for the year Share in reserve movement of jointly-controlled entities Reserve appropriation Arising from increase in equity interest in a subsidiary At 31 March 2007	Share capital HK$’000 294,149 – 20,620 58,000 – 15,500 (288) – – – – – 387,981 – 1,800 40,000 76,500 – – – – – 506,281	Share premium account HK$’000 73,538 – 27,860 11,600 – 3,100 (21) – – – – – 116,077 – 2,520 406,799 15,300 – – – – – 540,696	Share-based compensation reserve HK$’000 – – – – – – – – – – – – – – – – – 21,850 – – – – 21,850	Subscription right reserve HK$’000 (note i) 24,543 – – – – – – – – – – – 24,543 – – – – – – – – – 24,543	Fixed asset revaluation reserve HK$’000 5,316 – – – – – – 1,636 (73) – (1,180) – 5,699 – – – – – – (107) – – 5,592	Statutory reserve fund HK$’000 (note ii) 1,859 – – – – – – – – – – 11,882 13,741 – – – – – – – 22,495 – 36,236	Capital reserve HK$’000 3,504 – – – – – – – – – – – 3,504 – – – – – – 739 – – 4,243	Exchange fluctuation reserve HK$’000 (1,598) 495 – – – – – – – – 376 – (727) 21,750 – – – – – 1,590 – – 22,613	Conversion option reserve HK$’000 (note iii) – – – – 37,949 (3,328) – – – – – – 34,621 – – – (15,582) – – – – – 19,039	Retained profits HK$’000 41,281 – – – – – – – 73 83,208 – (11,882) 112,680 – – – – – 1,319,310 – (22,495) – 1,409,495	Minority interest HK$’000 – – – 196,587 – – – – – 40,231 – – 236,818 – – – – – 69,092 – – (305,910) –	Total HK$’000 442,592 495 48,480 266,187 37,949 15,272 (309) 1,636 – 123,439 (804) –
												934,937 21,750 4,320 446,799 76,218 21,850 1,388,402 2,222 – (305,910)
												2,590,588

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Notes:

(i) Subscription right reserve represents net proceeds received from issue of warrants.
(ii) In accordance with the relevant People’s Republic of China (“PRC”) regulations, the subsidiaries of the Group established in the PRC are required to transfer a certain percentage of the profit after taxation, if any, to a statutory reserve fund. The statutory reserve fund can be converted into share capital of the subsidiaries, and subject to certain restrictions as set out in the relevant PRC regulations, the statutory reserve fund may be used to offset the accumulated losses, if any, of the subsidiaries.
(iii) Conversion option reserve represents equity portion of convertible notes issued by the Company and are transferred to the share premium account upon exercise of the conversion rights vested with the convertible note instruments; or directly released to retained profits when the convertible notes are redeemed.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated Cash Flow Statement

for the Year Ended 31 March 2007

Operating activities Profit before taxation Interest income Dividend income from listed and unlisted investment Share-based compensation expenses Finance costs Amortisation of intangible assets Amortisation of patent Amortisation of paper mulberry saplings Depreciation on property, plant and equipment Net realised loss on disposal of financial assets at fair value through profit or loss Net (profit)/loss on re-measurement of financial assets at fair value through profit or loss Surplus on revaluation of leasehold properties, net Surplus on revaluation of investment properties, net Release of prepaid lease payments Share of losses/(profits) of jointly-controlled entities Gain on changes in fair value less estimated point-of sale costs of biological assets Gain on disposal of property, plant and equipment Gain on disposal of a jointly-controlled entity Provision for obsolete inventories Effect of foreign exchange differences Operating profit before working capital changes Increase due to plantation Decrease due to harvest Decrease/(increase) in inventories Decrease/(increase) in trade receivables (Increase)/decrease in other receivables, deposits and prepayments Increase in trade payables Increase in other payables and accruals (Decrease)/increase in deferred revenue Cash generated from operations Hong Kong profits tax refunded Net cash inflow from operating activities	Year Ended 31 March 2007 HK$’000 1,457,276 (3,713) – 21,850 14,155 67 18,865 22,146 6,721 140 (20,421) – (660) 179 3,684 (1,117,515) (4,235) (2,326) 1,431 8,314 405,958 (98,040) 133,817 4,947 51,016 (15,983) 1,488 92,112 (58,532) 516,783 – 516,783	Year Ended 30 June 2006 HK$’000 122,905 (3,644) (148) – 3,295 – 9,064 17,833 6,810 450 3,611 (43) (850) 154 (1,640) (11,920) – – – – 145,877 (17,860) 44,525 (5,243) (166,804) 17,175 57 14,841 9,616 42,184 79 42,263

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Investing activities Interest received Dividend received from listed and unlisted investments Acquisition of biological assets Deposits for acquisition of forest farms Acquisition of financial assets at fair value through profit or loss Acquisition of intangible assets Capital contribution to jointly-controlled entities Purchases of property, plant and equipment Addition of prepaid lease payment Increase in construction in progress Net cash outflow on business combination Proceeds from disposal of investment properties Proceeds from disposal of financial assets at fair value through profit or loss Proceeds from disposal of prepaid lease payments (Increase)/decrease in pledged bank deposits Net cash outflow from investing activities Financing activities Interest paid Advance from minority interests Repayment to minority interests Capital element of finance lease rental payments Proceeds from issue of shares Proceeds from exercise of share options and warrants Repurchase of shares Expenses on issue of shares Repayment of promissionary notes Net cash inflow from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Effect of foreign exchange rate changes Cash and cash equivalents at end of year Analysis of balances of cash and cash equivalents at end of year Bank and cash balance Interest-bearing bank borrowings	Year Ended 31 March 2007 HK$’000 3,713 – (296,850) (154,234) (1,255) (2,020) – (4,318) (13,849) (274) (60,000) 7,000 2,950 9,515 (277) (509,899) (17) – – – 460,000 4,320 – (13,201) (130,000) 321,102 327,986 273,400 11,658 613,044 613,044 – 613,044	Year Ended 30 June 2006 HK$’000 3,644 148 – – – – (7,936) (1,000) – (11,240) (47,092) 9,259 5,087 – 3,772 (45,358) (77) 32,365 (21,138) (120) – 48,480 (309) – – 59,201 56,106 217,294 – 273,400 273,421 (21) 273,400

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Notes to the Financial Statements

for the Year Ended 31 March 2007

1. GENERAL

The Company was incorporated in Bermuda as an exempted company with limited liability and its shares are listed on The Stock Exchange of Hong Kong Limited. The address of registered office and principal place of business of the Company are disclosed in corporate information to the annual report.

The board of directors of the Company considered the audited consolidated results of the Company and its subsidiaries (collectively, the “Group”) for the period from 1 July 2006 to 31 March 2007, being the financial year 2006 of the Company by virtue of its change of financial year end date from 30 June to 31 March.

The principal activity of the Company is investment holding. The principal activities of the Company’s subsidiaries are set out in note 21 to the financial statements.

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

In the current reporting year, the Group has applied, for the first time, a number of new and revised Hong Kong Financial Reporting Standards (“HKFRSs”), Hong Kong Accounting Standards (“HKASs”) and Interpretations (hereinafter collectively referred to as the “new HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”), which are effective for accounting periods beginning on or after 1 December 2005 and 1 January 2006. The adoption of the new HKFRSs has had no material effect on how the results for the current or prior accounting periods have been prepared and presented.

The HKICPA has issued the following new standards and interpretations that are not yet effective. The Group has already commenced an assessment of these new standards and interpretations but is not yet in a position to state whether these new standards and interpretations would have a significant impact on its result of operations and financial position.

		Notes
HKAS 1 (Amendment)	Capital Disclosures	1
HKFRS 7	Financial Instruments: Disclosures	1
HKFRS 8	Operating Segments	5
HK (IFRIC) – Int 8	Scope of HKFRS 2	6
HK (IFRIC) – Int 10	Interim Financial Reporting and Impairment	2
HK (IFRIC) – Int 11	HKFRS 2 – Group and Treasury Share Transactions	3
HK (IFRIC) – Int 12	Service Concession Arrangements	4

Notes:

Effective for the financial years beginning on or after 1 January 2007. 2. Effective for the financial years beginning on or after 1 November 2006. 3. Effective for the financial years beginning on or after 1 March 2007. 4. Effective for the financial years beginning on or after 1 January 2008. 5. Effective for the financial years beginning on or after 1 January 2009. 6. Effective for the financial years beginning on or after 1 May 2006.

3. SIGNIFICANT ACCOUNTING POLICIES

(a) Statement of compliance

These financial statements have been prepared in accordance with all applicable HKFRSs, accounting principles generally accepted in Hong Kong and the disclosure requirements of the Hong Kong Companies Ordinance. These financial statements also comply with the applicable disclosure provisions of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(b) Basis of preparation of financial statements

The consolidated financial statements have been prepared under the historical cost convention, as modified for the revaluation of leasehold properties, investment properties, certain financial instruments and certain biological assets which are carried at fair value. These financial statements are presented in Hong Kong dollar and all values are rounded to the nearest thousand (HK$’000) except when otherwise indicated.

The presentation of financial information in conformity with HKFRSs requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts to assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of revision and future periods if the revision affects both current and future periods.

(c) Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries made up to 31 March each year.

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

All significant inter-company transactions and balances within the Group are eliminated on consolidation. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Effects of different accounting policies of subsidiaries are adjusted for where necessary to ensure consistency with the policies adopted by the Company.

Minority interests in the net assets of consolidated subsidiaries are identified separately from the Group’s equity therein. Minority interests consist of the amount of those interests at the date of the original business combination and the minority’s share of changes in equity since the date of the combination. Losses applicable to the minority in excess of the minority’s interest in the subsidiary’s equity are allocated against the interests of the Group except to the extent that the minority has a binding obligation and is able to make an additional investment to cover the losses.

(d) Business combinations

The acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree, plus any costs directly attributable to the business combination. The acquiree’s identifiable assets, liabilities and contingent liabilities assumed in a business combination are recognised at their fair values at the acquisition date.

Goodwill arising on acquisition is recognised as an asset and initially measured at cost, being the excess of the cost of the acquisition over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. If, after reassessment, the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the excess is recognised immediately in the profit and loss account.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(e) Subsidiaries

A subsidiary is an enterprise in which the Group has the power, directly or indirectly, to govern the financial and operating policies, so as to obtain benefits from their activities. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another enterprise.

In the Company’s balance sheet interests in subsidiaries are stated at cost together with advances from the Company which are neither planned nor likely to be settled in the foreseeable future, less provision for any impairment losses. The results of subsidiaries are included in the Company’s income statement to the extent of dividends received and receivable.

(f)

Jointly-controlled entities

A joint venture is a contractual arrangement whereby the Group and other parties undertake an economic activity which is subject to joint control, that is when the strategic financial and operating policy decisions relating to the activities require the unanimous consent of the parties sharing control.

Where a group company undertakes its activities under joint venture arrangements directly, the Group’s share of jointly controlled assets and any liabilities incurred jointly with other venturers are recognised in the financial statements of the relevant company and classified according to their nature. Liabilities and expenses incurred directly in respect of interests in jointly controlled assets are accounted for on an accrual basis. Income from the sale or use of the Group’s share of the output of jointly controlled assets, and its share of jointly venture expenses, are recognised when it is probable that the economic benefits associated with the transactions will flow to/from the Group and their amount can be measured reliably.

Joint venture arrangements which involve the establishment of a separate entity in which each venturer has an interest are referred to as jointly controlled entities. The Group reports its interests in jointly controlled entities using the equity method of accounting. Under the equity method, investments in jointly controlled entities are carried in the consolidated balance sheet at cost as adjusted for post-acquisition changes in the Group’s share of the net assets of the jointly controlled entities, less impairment in the value of individual investments. Losses of a jointly controlled entities in excess of the Group’s interest in that jointly controlled entity are not recognised. The goodwill is included within the carrying amount of the investment and is assessed for impairment as part of the investment.

Any goodwill arising on the acquisition of the Group’s interest in a jointly controlled entity is accounted for in accordance with the Group’s accounting policy for goodwill arising on the acquisition of a subsidiary.

Where a group enterprise transacts with a jointly controlled entity of the Group, unrealised gains and losses are eliminated to the extent of the Group’s interest in the joint venture, except where unrealised losses provide evidence of an impairment of the assets transferred.

(g) Intangible assets

Goodwill

Goodwill represents the excess of the cost of acquisition over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the subsidiary, associate or jointly controlled entity recognised at the date of acquisition. Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. Goodwill on acquisitions of subsidiaries is presented separately. Goodwill on acquisitions of associates or jointly controlled entities is included in investments in associates or jointly controlled entities.

For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Gain or loss on the disposal of a subsidiary, associate or jointly controlled entity include the carrying amount of goodwill relating to the subsidiary, associate or jointly controlled entity sold.

Patent

Patent is stated in the balance sheet at cost less accumulated amortisation (where the estimated useful life is other than indefinite) and impairment losses. Amortisation of patent is charged to the profit and loss account on a straight line basis over its estimated useful life unless such life is indefinite. The patent is amortised from the date they are available for use and its estimated useful life is 20 years. Both the period and method of amortisation and any conclusion drawn about the useful life of the patent are reviewed annually.

Technical know-how

Technical know-how acquired by the Group during the course of business is capitalised on the basis of the cost incurred to acquire and bring to use the specific technical know-how. The cost is amortised on the straight line basis over its estimated useful life of 10 years.

(h) Property, plant and equipment

Buildings held for use in production or supply of goods, or for administrative purposes, are stated in the balance sheet at their revalued amounts, being the fair value at the date of revaluation, less any subsequent accumulated depreciation and accumulated impairment losses. Revaluations are performed with sufficient regularity such that the carrying amount does not differ materially from that which would be determined using fair values at the balance sheet date. Other property, plant and equipment are stated at historical cost less accumulated depreciation and any accumulated impairment losses.

Any revaluation increase arising on the revaluation of such buildings is credited to the fixed asset revaluation reserve, except to the extent that it reverses a revaluation decrease for the same asset previously recognised in the profit and loss account, in which case the increase is credited to the profit and loss account to the extent of the decrease previously charged. A decrease in carrying amount arising on the revaluation of such buildings is charged to the profit and loss account to the extent that it exceeds the balance, if any held in the fixed asset revaluation reserve relating to a previous revaluation of that asset.

Depreciation on revalued buildings is charged to the profit and loss account. On the subsequent sale or retirement of a revalued property, the attributable revaluation surplus remaining in the fixed asset revaluation reserve is transferred directly to retained profits.

Historical cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its present working condition and location for its intended use. Expenditure incurred after the asset has been put into operation, such as repairs and maintenance and overhaul costs, is charged to the profit and loss account in the period in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the assets, the expenditure is capitalised as an additional cost of the asset or a separate asset.

Depreciation is charged so as to write off the cost or valuation of assets, other than properties under construction, over their estimated useful lives, using the straight-line method. The useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. The principal annual rates are as follows:

Leasehold properties The shorter of 50 years and the lease term Plant and machinery 5 to 10 years Furniture, office equipment and motor vehicles 5 to10 years

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the profit and loss account.

(i)

Construction in progress

Construction in progress represents property, plant and equipment under construction and pending installation and is stated at cost less accumulated impairment losses, if any. Cost includes the costs of construction of buildings, the cost of plant and machinery and interest charges arising from borrowings used to finance these assets during the period of construction or installation and testing, if any. No provision for depreciation is made on construction in progress until such time as the relevant assets are completed and are available for intended use. When the assets concerned are brought into use, the costs are transferred to property, plant and equipment and depreciated in accordance with the policy as stated in the preceding paragraphs.

(j) Prepaid lease payment

Prepaid lease payments represent upfront premium paid for use of land. Prepaid lease payments are released to the profit and loss account over the lease term on a straight-line basis.

(k) Investment properties

Investment properties are land and/or buildings which are held to earn rental income or for capital appreciation. These include land held for a currently undetermined future use.

On initial recognition, investment properties are measured at cost, including any directly attributable expenditure. Subsequent to initial recognition, investment properties are measured using the fair value model. Gains or losses arising from changes in the fair value of investment properties are recognised in the profit and loss account for the period in which they arise.

An investment property is derecognised upon disposal or when the investment property is permanently withdrawn from use or no future economic benefits are expected from its disposal. Any gain or loss arising on de-recognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the consolidated income statement in the period in which the item is derecognised.

(l) Biological assets

Biological assets are living plants involved in the agricultural activities of the transformation of biological assets into agricultural produce for sale or into additional biological assets. Biological assets and agricultural produce, other than paper mulberry saplings, are measured at fair value less estimated pointof-sale costs at initial recognition and at each balance sheet date. The fair value less estimated point-ofsale costs at the time of harvest is deemed as the cost of agricultural produce for further processing, if applicable.

If an active market exists for a biological asset or agricultural produce with reference to comparable specie, growing condition and expected yield of the crops, the quoted price in that market is adopted for determining the fair value of that asset. If an active market does not exist, the Group uses the most recent market transaction price, provided that there has not been a significant change in economic circumstances between the transaction date and the balance sheet date, or the market prices for similar assets adjusted to reflect differences to determine fair values. The gain or loss arising on initial recognition and subsequent changes in fair values less estimated point-of-sale costs of biological assets is recognised in the profit and loss account in the period in which it arise. Upon the sale of the agricultural produce as forestry products, the carrying amount is transferred to cost of sales in the consolidated income statement.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Paper mulberry saplings in the absence of an active open market in which they are traded are stated at their initial cost of acquisition and transferred to the carrying value of stumps upon commencement of plantation.

Plantation expenditure on paper mulberry trees and the purchase cost of saplings for plantation are capitalised as costs for cultivation of stumps. Stumps are stated at cost less accumulated amortisation and impairment. Stumps are amortised on the straight line basis over their estimated useful lives of 8 years.

Deposits/proceeds received from the sale of pre-harvest biological assets are accrued as liability of deferred revenue and are recognised as revenue in the consolidated income statement upon the transfer to the customers of the risks and rewards associated with ownership when the harvest and delivery of the forestry products have been made.

(m) Impairment of assets excluding goodwill

Assets that have an indefinite useful life are not subject to amortisation and tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in the profit and loss account, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.

Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) 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 (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in the profit and loss account, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

(n) 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 the profit and loss account.

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 market place.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(i) 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 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 the profit and loss account 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.

(ii) Financial assets at fair value through profit or loss

Financial assets at fair value through profit or loss has two sub-categories, including financial assets held for trading and those designated at fair value through profit or loss on initial recognition. At each balance sheet date subsequent to initial recognition, financial assets at fair value through profit or loss are measured at fair value, with changes in fair value recognised directly in the profit and loss account in the period in which they arise.

(iii) Financial liabilities and equity instruments

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. 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.

(iv) Financial liabilities at fair value through profit or loss

Financial liabilities at fair value through profit or loss of the Group are those designated at fair value through profit or loss on initial recognition. 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 the profit and loss account in the period in which they arise. The Group does not have financial liabilities at fair value through profit or loss as at the balance sheet date.

(v) Convertible notes

Convertible notes are regarded as compound instruments, consisting of a liability component and an equity component. At the date of issue, the fair value of the liability component is estimated using the prevailing market interest rate for similar non-convertible debt. The difference between the proceeds of issue of the convertible notes and fair value assigned to the liability component, representing the embedded option for the holder to convert the note into equity of the Group, is included in equity (capital reserves).

Issue costs are apportioned between the liability and equity components of the convertible notes based on their relative carrying amounts at the date of issue. The portion relating to the equity component is charged directly to equity.

The interest expense on the liability component is calculated by applying the prevailing market interest rate of similar non-convertible debt to the liability component of the instrument. The difference between this amount and the interest paid is added to the carrying amount of the convertible notes.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(vi) Other financial liabilities

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

(vii) Equity instruments

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

(viii) 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 the profit and loss account in the period during which the derecognition arises.

For financial liabilities, they are removed from the Group’s balance sheet, i.e., 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 is recognised in the profit and loss account in the period during which the derecognition arises.

(o) Inventories

Inventories are stated at the lower of cost and net realisable value after allowance for obsolete or slowmoving items. Cost is determined on the first-in, first-out basis and, in the case of work in progress and finished goods, comprises direct materials, direct labour and an appropriate proportion of overheads based on a normal level of operating activities. Net realisable value is based on estimated selling prices less any estimated costs to be incurred to completion and disposal.

(p) Non-current assets held for sale

Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification.

Non-current assets (and disposal groups) classified as held for sale are measured at the lower of the assets’ previous carrying amount and fair value less costs to sell.

(q) Revenue recognition

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

(i) from the sale of goods and forestry products, on the transfer of risks and rewards of ownership, which generally coincides with the time the goods and forestry products are delivered to customers and title has passed;
(ii) rental income, on a time proportion basis over the lease terms;
(iii) interest income, on a time proportion basis, taking into account the principal outstanding and the effective interest rate applicable; and
(iv) dividend income, when the shareholders’ right to receive payment has been established.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(r) Leases

Assets that are held by the Group under leases which transfer to the Group substantially all the risks and rewards of ownership are classified as being held under finance leases. Leases which do not transfer substantially all the risks and rewards of ownership to the Group are classified as operating leases, with the following exceptions:

property held under operating leases that would otherwise meet the definition of an investment property in HKAS 40 is classified as an investment property on a property-by-property basis and, if classified as investment property, is accounted for as if held under a finance lease; and
land held for own use under an operating lease, the fair value of which cannot be measured separately from the fair value of a building situated thereon at the inception of the lease, is accounted for as being held under a finance lease, unless the building is also clearly held under an operating lease. For these purposes, the inception of the lease is the time that the lease was first entered into by the Company, or taken over from the previous lessee, or at the date of construction of those buildings, if later.

Finance leases are capitalised at the commencement of the lease at the lower of the fair value of the leased asset and the present value of the minimum lease payments. The corresponding rental liabilities, net of finance charges, are recorded as obligations under finance leases. Finance charges are charged to the profit and loss account over the period of the leases so as to produce a constant periodic rate of charge on the finance balance outstanding.

Payments made under operating leases are charged to the profit and loss account in equal instalments over the period of the leases. Lease incentives received are recognised to the profit and loss account as an integral part of the aggregate lease payments made. Contingent rentals are charged to the profit and loss account when incurred.

(s) Foreign currencies

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

Exchange differences arising on the settlement of monetary items, and on the translation of monetary items, are recognised in the profit and loss account in the period in which they arise, except for exchange differences arising on a monetary item that forms part of the Group’s net investment in a foreign operation, in which case, such exchange differences are recognised in equity in the consolidated financial statements. Exchange differences arising on the retranslation of non-monetary items carried at fair value are recognised in the profit and loss account 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 currency translation reserve). Such exchange differences are recognised in the profit and loss account in the period in which the foreign operation is disposed of.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(t) Employee benefits

(i) Employee leave entitlements

Employee entitlements to annual leave and long service leave are recognised when they accrue to employees. A provision is made for the estimated liability for annual leave and long service leave as a result of services rendered by employees up to the balance sheet date.

Employee entitlements to sick leave and maternity or paternity leave are not recognised until the time of leave.

(ii) Retirement benefits scheme

The Group operates a defined contribution Mandatory Provident Fund retirement benefits scheme (the “Scheme”) under the Mandatory Provident Fund Schemes Ordinance for all those employees who are eligible to participate in the Scheme. Contributions are made based on a percentage of the employees’ basic salaries and are charged to the profit and loss account as they become payable in accordance with the rules of the Scheme. The contributions are recognised as employee benefit expense when they are due and not reduced by contributions forfeited by those employees who leave the Scheme prior to vesting fully in the contributions.

The assets of the Scheme are held separately from those of the Group in an independently administered fund. The Group’s employer contributions vest fully with the employees when contributed into the Scheme. The Group has no legal or constructive obligations to make further payments once the required contributions have been paid, even if the Scheme does not hold sufficient assets to discharge all employee benefits relating to employee service in the current and prior periods.

(iii) Share based payments

The Group issues equity-settled share-based payments to certain directors and employees. Equitysettled share-based payments are measured at fair value (excluding the effect of non market-based vesting conditions) at the date of grant. The fair value determined at the grant date of the equitysettled share-based payments is expensed on a straight-line basis over the vesting period with a corresponding increase in a capital reserve within equity, based on the Group’s estimate of the shares that will eventually vest and adjusted for the effect of non market-based vesting conditions. The equity amount is recognised in the capital reserve until either the option is exercised (when it is transferred to the share premium account) or the option expires (when it is released directly to retained earnings).

Fair value is measured using the Black-Scholes Option Pricing Model. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of nontransferability, exercise restrictions and behavioural considerations.

(u) Research and development costs

Research costs are charged to the profit and loss account in the period in which they are incurred. Development costs are expensed as incurred, except where a specific project is undertaken, the technical feasibility of the product under development has been demonstrated, costs are identifiable and a market exists for the product such that the development costs are expected to be recoverable from related future economic benefit. Such development costs are recognised as deferred development costs in the balance sheet and amortised on a straight-line basis over period over which the deferred development costs is expected to confer economic benefits, commencing from the date the product is available for sale. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(v) Borrowing cost

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.

All other borrowings costs are recognised in the profit and loss account in the period in which they are incurred.

(w) Provisions and contingent liabilities

Provisions are recognised for liabilities of uncertain timing or amount when the Group has a present legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made. Where the time value of money is material, provisions are stated at the present value of the expenditures expected to settle the obligation.

Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow is remote.

(x) 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 expenses 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 liabilities are provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements and deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. However, such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. Taxation rates enacted or substantively enacted by the balance sheet date are used to determine deferred taxation.

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 profits will be available to allow all or part of the asset to be recovered.

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

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(y) Segment reporting

A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment that are subject to risks and return that are different from those of segments operating in other economic environments.

Segment revenue, expenses, results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis to that segment. Segment revenue, expenses, results, assets and liabilities are determined before intragroup balances and intra-group transactions are eliminated as part of the consolidation process, except to the extent that such intra-group balances and transactions are between group enterprises within a single segment.

Segment capital expenditure is the total cost incurred during the period to acquire segment assets that are expected to be used for more than one year.

Unallocated items mainly comprise financial and corporate assets, interest-bearing loans, borrowings, corporate and financing expenses and minority interests.

(z) Dividends

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

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

(aa) Cash and cash equivalents

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

(bb) Related parties

Two parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. Related parties may be individuals (being members of key management personnel, significant shareholders and/or their close family members) or other entities and include entities which are under the significant influence of related parties of the Group where those parties are individuals, and postemployment benefit plans which are for the benefit of employees of the Group or of any entity that is a related party of the Group.

(cc) Financial guarantees issued

Financial guarantees are contracts that require the issuer (i.e. the guarantor) to make specified payments to reimburse the beneficiary of the guarantee (the “holder”) for a loss the holder incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Where the Group issues a financial guarantee, the fair value of the guarantee (being the transaction price, unless the fair value can otherwise be reliably estimated) is initially recognised as deferred income within other payables and accruals. Where consideration is received or receivable for the issuance of the guarantee, the consideration is recognised in accordance with the Group’s policies applicable to that category of asset. Where no such consideration is received or receivable, an immediate expense is recognised in the profit and loss account on initial recognition of any deferred income.

The amount of the guarantee initially recognised as deferred income is amortised in the profit and loss account over the term of the guarantee as income from financial guarantees issued. In addition, provisions are recognised in accordance with note 3(w) if and when (i) it becomes probable that the holder of the guarantee will call upon the Group under the guarantee, and (ii) the amount of that claim on the Group is expected to exceed the amount currently carried in other payables and accruals in respect of that guarantee i.e. the amount initially recognised, less accumulated amortisation.

4. KEY SOURCE OF ESTIMATION OF UNCERTAINTY

The key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial years, are discussed below.

(a) Estimated impairment of goodwill

Management tests annually whether goodwill has suffered any impairment, in accordance with the accounting policy stated in note 3(g). The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of estimates. Management has not identified any indications that the goodwill has or would have suffered any impairment in term of its value to the Group.

(b) Estimated impairment of patent

Management assesses periodically whether the patent has suffered any impairment due to change of technologies. As at the financial statements date, management has not identified any indications that the patent has or would has suffered any impairment in term of its value to the Group.

(c) Fair values of biological assets

Management estimates the balance sheet date current market prices less estimated point-of-sale costs of biological assets of paper mulberry trees and other trees with reference to market prices and professional valuations. Management considers that there are presently an absence of effective financial instruments for hedging against the pricing risks with the underlying agricultural produce. Un-anticipated volatile changes in market prices of the underlying agricultural produce could significantly affect the fair values of these biological assets and result in fair value re-measurement losses in future accounting periods.

The Group’s forestry business is subject to the usual agricultural hazards from fire, wind and insects. Forces of nature such as temperature and rainfall may also affect harvest efficiency. Management considers adequate preventive measures are in place and the relevant legislation under forestry laws in the PRC will assist in minimizing exposure. Nevertheless, to the extent that un-anticipated factors affecting harvestable agricultural produce may result in re-measurement or harvest losses in future accounting periods.

(d) Accounting policy and estimated useful lives of the stumps of paper mulberry trees

Management estimates the expected live-hood for the stumps of paper mulberry trees and determines the related amortisation policy. Management concluded that the estimate would not be significantly affected in the foreseeable future under conditions of maintenance with appropriate rearing faculties.

In ascertaining the accounting policy suited for the stumps of paper mulberry trees, management have taken into consideration the currently absence of an active open market in which these biological assets are traded and decided that the adoption of an amortisation policy will be appropriate.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(e) Useful lives of property, plant and equipment

Management estimates the expected useful lives for its property, plant and equipment and determines the related depreciation policy. The estimated useful life of the property, plant and equipment and the residual value reflects management’s estimates of the number of years that the Group intends to derive future economic benefits from the use of property, plant and equipment. It could change significantly as a result of technological innovations in response to industry cycles. The depreciation expenses in future accounting periods may be adjusted if there are significant changes in those estimates.

(f) Recoverability of trade receivables

Recoverability of the trade receivable are reviewed by management based on the receivables’ aging characteristics, management evaluation of the current creditworthiness and past collection history of each customer. Judgement is required in assessing the ultimate realisation of these receivables, and the financial conditions of the debtors may undergo adverse changes since the last management evaluation. If the financial conditions of the customers were to deteriorate, resulting in an impairment of their ability to make payments, additional provision may be required in future accounting periods.

(g) Net realisable value of inventories

Management reviews the conditions of garment inventories at each balance sheet date, and make allowances for obsolete and slow-moving inventory items identified that are no longer suitable for use in production and/or sales in the market. These estimates are based on current market conditions and the historical experience of selling goods of similar nature. It could change significantly as a result of change in market condition. Management will reassess the estimations at each balance sheet date.

5. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

The Group’s major financial instruments include trade receivables, financial assets at fair value through profit or loss, bank deposits, bank and cash balances, trade payables, promissory notes and convertible notes. Details of these financial instruments are disclosed in the respective notes. The Group’s activities expose certain of these financial instruments to a variety of financial risks which are discussed below.

(a) Foreign exchange risk

The Group mainly operates in the People’s Republic of China (the “PRC”) with most of the transactions denominated and settled in Renminbi (the “RMB”) which is not freely convertible into other foreign currencies. Conversion of RMB into foreign currencies is subject to rules and regulations of foreign exchange control promulgated by the PRC government. The PRC subsidiaries of the Company transact in their functional currency and therefore no currency risk is expected to arise in respect of these subsidiaries. The Company’s financial statements are presented in Hong Kong dollar (“HKD”) and fluctuations of RMB against HKD will result in adjustment to financial amounts. The Group currently does not utilise any forward contracts, currency borrowings or other means to hedge against its foreign currency exposure.

(b) Credit risk

The carrying amounts of cash and cash equivalents, trade and other receivables except for prepayments, present the Group with credit risk regarding its financial assets. The maximum exposure is the carrying amounts of the respective financial assets at the balance sheet date. The Group has a concentration of credit risk in relation to certain of its major customers.

The Group has a credit policy in place and the exposure to credit risk is managed through the application of credit approvals, credit limits and monitoring procedures. In addition, the Group reviews the recoverable amount of each individual trade receivable at each balance sheet date to ensure that adequate impairment losses are made for balances with recoverability problem.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(c) Interest rate risk

The Group’s financial instruments issued at fixed interest rate terms include principally convertible notes and promissory notes. These financial instruments expose the Group to fair value interest rate risk. The Group currently does not have a policy to hedge against the interest rate risk, as management considers that the changes in interest rate will not have a significant impact on the carrying amounts of these financial instruments having regard to their maturity profile and share conversion option.

The financial instruments which expose the Group to cash flow interest rate risk principally include variable-rate bank borrowings, mainly utilised for short term trade financing. The cash flow interest rate risk exposure of the Group is minimal as the Group principally finances its operations by internally generated funds with only limited use of external financing.

(d) Market price risk

The Group invested its surplus fund in listed securities in Hong Kong which are classified in the balance sheet as financial assets at fair value through profit or loss and subject to the usual equity security price risk. The Group is not exposed to any commodity price risk.

(e) Liquidity risk

Prudent liquidity risk management implies maintaining sufficient cash and cash equivalents and the availability of funding through an adequate amount of committed credit facilities. Due to the dynamic nature of the underlying business, the Group aims to maintain flexibility in funding by keeping committed credit lines available.

6. TURNOVER AND REVENUE

Turnover represents the net invoiced value of garment products, forestry products and saplings sold, after allowances for returns and trade discounts.

Turnover Sale of garment products Sale of forestry products Sale of paper mulberry saplings Other revenue Dividend income from listed investments Interest income Others Total revenue	Group Year Ended Year Ended 31 March 2007 30 June 2006 HK$’000 HK$’000 95,792 141,540 587,947 92,307 145,179 126,923 828,918 360,770 – 148 3,713 3,644 1,446 643 5,159 4,435 834,077 365,205	Group Year Ended Year Ended 31 March 2007 30 June 2006 HK$’000 HK$’000 95,792 141,540 587,947 92,307 145,179 126,923 828,918 360,770 – 148 3,713 3,644 1,446 643 5,159 4,435 834,077 365,205
		360,770
		148 3,644 643
		4,435
		365,205

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

7. SEGMENTAL INFORMATION

Segmental information is presented by way of two segment formats: (a) on a primary segment reporting basis, by business segment; and (b) on a secondary segment reporting basis, by geographical segment.

For management purpose, the Group’s operations are currently organised into the ecological forestry business and the manufacture and sale of garment. The following tables represent revenue and profit/(loss) information on each of the above business segments for the Year Ended 31 March 2007 and for the Year Ended 30 June 2006 and certain assets and liabilities information regarding business segments at 31 March 2007 and 30 June 2006:

(a) Primary Reporting Format – Business segments

Revenue and profit/(loss) information

Garment	Business	Elimination	Elimination	Consolidated	Consolidated
Year 31 March 2007 HK$’000 95,792 – 95,792 15,736	Ended 30 June 2006 HK$’000 141,540 – 141,540 (2,705)	Year 31 March 2007 HK$’000 – – – –	Ended 30 June 2006 HK$’000 – – – –	Year Ended 31 March 30 June 2007 2006 HK$’000 HK$’000 828,918 360,770 – – 828,918 360,770 1,506,576 130,897 2,460 1,276 (36,247) (7,613) 1,472,789 124,560 (14,155) (3,295) (3,684) 1,640 2,326 – 1,457,276 122,905 (68,874) 534 1,388,402 123,439
					360,770

					130,897 1,276 (7,613)
					124,560 (3,295) 1,640 –
					122,905 534
					123,439

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Assets and liabilities information

Business	Unallocated	Unallocated	Consolidated	Consolidated
30 June 2006 HK$’000 364,375 26,673 12,211 6,757 – – –	31 March 2007 HK$’000 150,741 186,909 – – – – –	30 June 2006 HK$’000 64,973 384,351 – – – – –	31 March 2007 HK$’000 3,326,404 735,816 5,564 47,732 – 1,431 –	30 June 2006 HK$’000 1,517,941
				583,004
				12,240
				33,708
				–
				–
				–

In presenting information on the basis of geographical segments, segment revenue is based on the geographic location of customers, whereas segment assets and capital expenditure are based on the geographical location of the assets.

The following is the analysis of the Group’s turnover by geographic markets based on geographic location of customers:

Segment revenue: External sales Inter-segment sales	The PRC (excluding Hong Kong) Year Ended 31 March 30 June 2007 2006 HK$’000 HK$’000 828,411 352,903 3,771 8,106 832,182 361,009	Hong Kong	Elimination	Consolidated	Consolidated
		Year Ended 31 March 30 June 2007 2006 HK$’000 HK$’000 507 7,867 – – 507 7,867	Year Ended 31 March 30 June 2007 2006 HK$’000 HK$’000 – – (3,771) (8,106) (3,771) (8,106)	Year Ended 31 March 30 June 2007 2006 HK$’000 HK$’000 828,918 360,770 – – 828,918 360,770
					360,770

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Additional information in respect of segment assets and cost for capital expenditure, based on the geographical location of assets is as follows:

Segment assets Intangible assets Goodwill Patent Capital expenditure	The PRC (excluding Hong Kong and Macau) Year Ended 31 March 30 June 2007 2006 HK$’000 HK$’000 2,458,870 756,350 – – – – – – 2,458,870 756,350 The PRC (excluding Hong Kong and Macau) Year Ended 31 March 30 June 2007 2006 HK$’000 HK$’000 5,315 11,471	Hong Kong Year Ended 31 March 30 June 2007 2006 HK$’000 HK$’000 189,309 73,898 – – – – – – 189,309 73,898 Hong Kong Year Ended 31 March 30 June 2007 2006 HK$’000 HK$’000 249 769	Macau Year Ended 31 March 30 June 2007 2006 HK$’000 HK$’000 106,568 93,214 – – – – – – 106,568 93,214 Macau Year Ended 31 March 30 June 2007 2006 HK$’000 HK$’000 – –	Unallocated Year Ended 31 March 30 June 2007 2006 HK$’000 HK$’000 – – 1,953 – 85,511 91,421 484,193 503,058 571,657 594,479 Unallocated Year Ended 31 March 30 June 2007 2006 HK$’000 HK$’000 – –	Consolidated Year Ended 31 March 30 June 2007 2006 HK$’000 HK$’000 2,754,747 923,462 1,953 – 85,511 91,421 484,193 503,058 3,326,404 1,517,941 Consolidated Year Ended 31 March 30 June 2007 2006 HK$’000 HK$’000 5,564 12,240

8. OTHER NET GAIN

Gain arising from changes in fair value less estimated point-of-sale costs of biological assets Net unrealised gain/(loss) on financial assets at fair value through profit or loss Net realised gain on disposal of non-current asset held for sale Surplus on revaluation of investment properties, net Surplus on revaluation of leasehold properties, net Loss on disposal of property, plant and equipment Net realised loss on disposal of financial assets at fair value through profit or loss Others	Group Year Ended Year Ended 31 March 2007 30 June 2006 HK$’000 HK$’000 1,117,515 11,920 20,421 (3,611) 4,223 – 660 850 – 43 (985) – (140) (450) 36 – 1,141,730 8,752	Group Year Ended Year Ended 31 March 2007 30 June 2006 HK$’000 HK$’000 1,117,515 11,920 20,421 (3,611) 4,223 – 660 850 – 43 (985) – (140) (450) 36 – 1,141,730 8,752
		8,752

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

9. PROFIT FROM OPERATING ACTIVITIES

The Group’s profit from operating activities is arrived at after charging/(crediting) the following:


	Year Ended	Year Ended
	31 March 2007	30 June 2006
	HK$’000	HK$’000
Amortisation of patent	18,865	9,064
Amortisation of paper mulberry saplings and trees	22,146	17,833
Auditor’s remuneration	820	800
Cost of goods and forestry products sold	267,905	140,019
Cost of saplings sold	30,678	26,833
Depreciation on property, plant & equipment	6,721	6,810
Minimum lease payments under operating leases
on leasehold properties	11,778	1,664
Release of prepaid lease payments	179	154
Research and development cost	20,739	10,577
Provision for doubtful debts	–	1,923
Provision for obsolete inventories	1,431	–
Directors’ emoluments	6,589	2,578
Staff costs (excluding directors’ emoluments)
Wages and salaries	26,148	11,353
Retirement benefits scheme contributions	277	295
Exchange gain	(748)	(64)

10. DIRECTORS’ EMOLUMENTS

Emoluments paid and payable to the Company’s directors for the Year Ended 31 March 2007 and Year Ended 30 June 2006 were as follows:

Executive Directors: Ng Leung Ho Lee Ming Hin Hu Xiaoming Wang Weining Ge Wen Hong Non-Executive Directors: Ng Leung Tung Independent Non-Executive Directors: Lo Cheung Kin Zou Zi Ping Zhu Jian Hong			Year Ended 31 March 2007	Year Ended 31 March 2007	Year Ended 31 March 2007	Total emoluments HK$’000 2,190 1,689 462 – 1,645 – 204 204 195 6,589	Year Ended 30 June 2006 Total emoluments HK$’000 842 637 144 240 50 572 48 33 12
		Fees HK$’000 – – – – – – 27 27 18 72	Basic salaries allowances and bonuses HK$’000 1,000 500 108 – 465 – – – – 2,073	Retirement benefit schemes contributions HK$’000 9 9 – – – – – – – 18	Share-based payments HK$’000 1,181 1,180 354 – 1,180 – 177 177 177 4,426
							2,578

Resigned on 28 November 2006.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

11. DIRECTORS’ AND FIVE HIGHEST PAID INDIVIDUALS’ EMOLUMENTS

(a) Directors’ emoluments

There was no arrangement under which a director of the Company waived or agreed to waive any remuneration during the year.

During the year, no emoluments were paid by the Group to the directors of the Company as an inducement to join, or upon joining the Group, or as compensation for loss of office.

(b) Five highest paid individuals

The emoluments of the five individuals with highest emoluments in the Group for the year included one (2006: three) directors, details of whose emoluments have been disclosed above.

Details of the emoluments of the remaining four (2006: two) non-director, highest paid individuals for the year are as follows:

Salaries, allowances and benefits in kinds Retirement benefits scheme contributions	Year Ended 31 March 2007 HK$’000 7,943 9 7,952	Year Ended 30 June 2006 HK$’000 1,141 24
		1,165

The emoluments fell within the following bands:

Emolument bands

	Number of individuals	Number of individuals
	Year Ended	Year Ended
	31 March 2007	30 June 2006
HK$
0-1,000,000	–	2
1,000,001 – 1,500,000	–	–
1,500,001 – 2,000,000	3	–
2,000,001 – 2,500,000	1	–

One of the non-director, highest paid individuals for the year was a director of the Company up to 28 November 2006.

12. FINANCE COSTS

Interest on bank loans and overdrafts Interest on a finance lease Interest on convertible notes Interest on promissory notes Total finance costs	Group Year Ended 31 March 2007 HK$’000 17 – 5,767 8,371 14,155	Year Ended 30 June 2006 HK$’000 74 3 1,340 1,878
		3,295

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

13. TAXATION

TAXATION
Hong Kong profits tax – current – deferred tax credit Overseas tax – deferred tax (charge)/credit	Group Year Ended 31 March 2007 HK$’000 (2) 774 (69,646) (68,874)	Year Ended 30 June 2006 HK$’000 – 42 492
		534

Hong Kong profits tax had been provided at 17.5% based on the estimated assessable profit for the year. Taxes on profits assessable elsewhere had been calculated at the rates of tax prevailing in the jurisdictions in which the Group operates, based on existing legislation, interpretations and practices in respect thereof.

In accordance with the relevant applicable tax regulations of the PRC, Beijing WFC, the Company’s principal operating subsidiary engaged in the forestry business, is entitled to full exemption from PRC enterprise income tax for the first three years and 50% reduction in enterprise income tax for the next three years, commencing from the first profitable year after offsetting all unexpired tax losses carried forward from the previous years. Local income tax is exempted during the tax concession years. Currently, Beijing WFC is under the full tax exemption period and accordingly no tax provision has been made in respect of the operating results derived by Beijing WFC during the year.

The taxation on the Group’s profit before taxation differs from the theoretical amount that would arise using the Hong Kong profits tax rate is as follows:

Profit before taxation Tax at Hong Kong profits tax rate of 17.5% Tax effect of income that is not taxable in determining taxable profit Tax effect of expense that are not deductible in determining taxable profit Tax effect of temporary difference not recognised Tax effect of temporary difference realised through harvest of biological assets Tax effect of utilisation of tax losses not previously recognised Tax effect of unused tax loss not recognised Tax effect of equity portion of convertible notes Effect of tax concessionary treatment Effect of different tax rates of subsidiaries operating in other jurisdictions Effect of revision of applicable tax rate Taxation charge/(credit)	Group Year Ended 31 March 2007 HK$’000 1,457,276 255,023 (414) 4,075 (849) – (2,056) 6,938 (774) (178,482) (14,587) – 68,874	Year Ended 30 June 2006 HK$’000 122,905

		21,508 (3,249) 8,514 (10,365) (2,094) (8) 1,121 (179) (15,512) (1,708) 1,438
		(534)

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

14. NET LOSS ATTRIBUTABLE TO SHAREHOLDERS

The net loss attributable to shareholders for the Year Ended 31 March 2007 dealt with in the financial statements of the Company was approximately HK$43,400,000 (2006: HK$7,472,000 loss).

15. EARNINGS PER SHARE

(a) Basic earnings per share

Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year. The calculation of the basic earnings per share is based on the following data:

Profit attributable to equity holders of the Company Weighted average number of ordinary shares in issue (thousands)	Year Ended 31 March 2007 HK$’000 1,319,310 4,577,257	Year Ended 30 June 2006 HK$’000 83,208

		3,055,886

(b) Diluted earnings per share

Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The Company has two categories of dilutive potential ordinary shares: convertible notes and share options. The convertible notes is assumed to have been converted into ordinary shares and the net profit is adjusted to eliminate the related interest expense less tax effect. For the share options a calculation is made to determine the number of shares that could have been acquired at fair value (determined as the average annual market share price of the Company’s shares) based on the monetary value of the subscription rights attached to outstanding share options. The number of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of the share options. Reconciliation of the earnings and number of shares used in the calculation of diluted earnings for shares is as follows:

Earnings: Profit for the year and earning for the purposes of basic earnings per share Effect of dilutive potential ordinary shares in respect of convertible notes Earnings for the purpose 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 in respect of: Share options Convertible notes Weighted average number of ordinary shares for the purpose of diluted earnings per share	Year Ended 31 March 2007 HK$’000 1,319,310 5,767 1,325,077 ’000 4,577,257 21 833,333 5,410,611	Year Ended 30 June 2006 HK$’000 83,208 1,340
		84,548

		’000 3,055,886 3,103 248,781
		3,307,770

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

16. PROPERTY, PLANT AND EQUIPMENT

Cost or valuation At 30 June 2005 Exchange difference Additions Arising on business combination Reclassification as non-current assets held for sale Surplus on revaluation At 30 June 2006 Exchange difference Additions Disposals At 31 March 2007 Accumulated depreciation 30 June 2005 Exchange difference Provided during the year Arising on business combination Written back on revaluation 30 June 2006 Exchange difference Provided during the year Written back on disposal At 31 March 2007 Net book value At 31 March 2007 At 30 June 2006	Leasehold properties HK$’000 45,340 – – – (2,480) 720 43,580 – – – 43,580 – – 1,557 – (1,557) – – 1,081 – 1,081 42,499 43,580	Group Furniture, office Plant and equipment and machinery motor vehicles HK$’000 HK$’000 45,438 11,345 1,728 252 76 924 3,000 2,960 – – – – 50,242 15,481 2,417 551 2,459 2,831 – (189) 55,118 18,674 32,788 5,438 1,194 113 4,168 1,085 – 285 – – 38,150 6,921 1,742 207 3,530 2,110 – (159) 43,422 9,079 11,696 9,595 12,092 8,560	Total HK$’000 102,123 1,980 1,000 5,960 (2,480) 720 109,303 2,968 5,290 (189) 117,372 38,226 1,307 6,810 285 (1,557) 45,071 1,949 6,721 (159) 53,582 63,790 64,232

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Analysis of cost or valuation of the above assets is as follows: At end of year At cost At valuation At beginning of year At cost At valuation	Leasehold properties HK$’000 – 43,580 43,580 – 43,580 43,580	Group Furniture, office Plant and equipment and machinery motor vehicles HK$’000 HK$’000 55,118 18,674 – – 55,118 18,674 50,242 15,481 – – 50,242 15,481	Total HK$’000 73,792 43,580
			117,372

			65,723 43,580
			109,303

The Group’s properties included above at net book value are held under the following lease terms:

Leasehold properties at valuation: Medium term lease in Hong Kong Medium term lease outside Hong Kong	Group Year Ended 31 March 2007 HK$’000 3,385 39,114 42,499	Year Ended 30 June 2006 HK$’000 3,450 40,130
		43,580

The Group’s leasehold properties were revalued at 30 June 2006. Valuations were made on the basis of depreciated replacement cost carried out by LCH (Asia-Pacific) Surveyors Limited (“LCH”), a firm of independent chartered surveyors which have appropriate qualifications and experience in the valuation of properties in the relevant locations. The valuation, which conforms to International Valuation Standards, was arrived at by reference to market evidence of transaction prices for similar properties.

Had the Group’s leasehold properties held in Hong Kong been carried at historical cost less accumulated depreciation, their carrying value would have been approximately HK$3,156,000 (2006: HK$3,275,000).

Had the Group’s leasehold properties held outside Hong Kong been carried at historical cost less accumulated depreciation, their carrying value would have been approximately HK$34,524,000 (2006: HK$35,494,000).

The Group has reviewed the residual values used for the purposes of depreciation calculations in the light of the definition of residual value in the accounting standard. The review did not highlight any requirement for an adjustment to the residual values used in the current or prior periods. These residual values will be reviewed and updated annually in the future.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

17. CONSTRUCTION IN PROGRESS

At beginning of year Exchange difference Additions At end of year	Group Year Ended 31 March 2007 HK$’000 11,240 567 274 12,081	Year Ended 30 June 2006 HK$’000 – – 11,240
		11,240

The Group’s construction in progress are in respect of the Group’s garment business and includes headquarter building, product development center and showroom under construction.

In presenting the segmental information (note 7), the Group’s construction in progress has been included within the primary reporting format of business segment under the category of “Garment Business”; and in the secondary reporting format of geographical segment under the location of “The PRC (excluding Hong Kong)”.

18. PREPAID LEASE PAYMENTS

The Group’s prepaid lease payment comprise: Medium leasehold term land in Hong Kong Medium leasehold term land outside Hong Kong Analysed for reporting purpose as: Non-current assets Current assets Movements in prepaid lease payments are as follows: At beginning of year Exchange difference Additions Arising on business combination Disposal Amount released to the profit and loss account Reclassification as non-current asset held for sale At end of year	Year Ended 31 March 2007 HK$’000 1,655 16,505 18,160 17,730 430 18,160 Year Ended 31 March 2007 HK$’000 13,423 582 13,849 – (9,515) (179) – 18,160	Year Ended 30 June 2006 HK$’000 1,690 11,733
		13,423

		13,122 301
		13,423

		Year Ended 30 June 2006 HK$’000 4,745 – – 9,087 – (154) (255)
		13,423

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

19. INVESTMENT PROPERTIES

At beginning of the year Surplus arising on revaluation – note 8 Disposal At end of year	Year Ended 31 March 2007 HK$’000 2,500 660 – 3,160	Year Ended 30 June 2006 HK$’000 10,909 850 (9,259) 2,500

The Group’s investment properties were held on medium term lease in Hong Kong.

All of the Group’s property interests held under operating leases to earn rentals or for capital appreciation purposes are measured using the fair value model and are classified and accounted for as investment properties. At 31 March 2007, the Group’s investment properties in Hong Kong were appraised on the basis of market value at approximately HK$3,160,000 by LCH.

The Group did not earn any property rental income from its investment property during the year (2006: HK$93,000).

20. INTANGIBLE ASSETS

Cost: At 1 July 2005 Arising on business combination At 30 June 2006 Additions Arising on business combination_(Note)_ At 31 March 2007 Accumulated amortisation: At 1 July 2005 Charge for the year At 30 June 2006 Charge for the year At 31 March 2007 Net book value: At 31 March 2007 At 30 June 2006	Goodwill HK$’000 – 91,421 91,421 – (5,910) 85,511 – – – – – 85,511 91,421	Group Technical Patent Know-how HK$’000 HK$’000 – – 512,122 – 512,122 – – 2,020 – – 512,122 2,020 – – 9,064 – 9,064 – 18,865 67 27,929 67 484,193 1,953 503,058 –	Total HK$’000 – 603,543 603,543 2,020 (5,910) 599,653 – 9,064 9,064 18,932 27,996 571,657 594,479

Note: The Group acquired the remaining 30% equity interest in Beijing WFC in January 2007. The above amount represents the excess of the 30% share in the fair value of Beijing WFC’s identifiable assets, liabilities and contingent liabilities over cost of acquisition. The excess was not recognised immediately as income as the directors consider the acquisition a business combination achieved in stages. Accordingly, the amount was used to offset the goodwill arose in the acquisition of the 70% equity interest in Bejing WFC in prior year.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Goodwill

Goodwill acquired in a business combination is allocated, at acquisition, to the cash generating units that are expected to benefit from that business combination. The Group’s carrying goodwill as at 31 March 2007 are in relation to the operation in the plantation of the modified tree specie Broussonetia Papyriferalvent within the reportable segment of ecological forestry business and represents the fair value of considerations paid over the net assets acquired of the underlying business. The directors consider it impractical to estimate the useful live of business goodwill, which are regarded as having an indefinite useful live but subject to test for impairment on the basis as set out in note 3(g) to the financial statements.

The recoverable amount of the cash generating unit is determined from value in use calculations. The Group prepares cash flow forecast derived from the most recent available financial budget and extrapolates over the following five years. In preparing the forcasts, management made reference to the land reserve presently available for plantation, the anticipated increase in available land reserve as contracted for, and the modified tree species’s growth data per unit of plantation area complied by research institutes . The key assumptions for the value in use calculations are those regarding discount rates, long term growth rates and anticipated changes to future selling prices, as follows:

For the estimation of long term growth rate, besides growth through the increase in cultivatable land reserve, management has made reference to factors including the historical growth rate of forestry industry and the economy in the PRC, and adopted a long term growth rate of 5%.
Management use discount rate which is derived as the Company’s cost of capital, representing the expected return on all of a company’s capital, and assigned a discount rate of 15%.
Future selling prices are estimated with reference to existing and past quoted commodity prices with the forestry industry. In view of the general soar of timber prices over the past few years, management assume the existing price level will prevail in the future and did not concede with an anticipated price drop with the calculation.

Patent

The Group’s patent is in relation to the technology in the coding protein and application of a Broussonetia Papyrifera Dehydration-Responsive Element Binding transcription factor gene to regulate and enhance the tolerance of Broussonetia Papyrifera to stress conditions such as drought, low temperature and high salt, and was assessed as having a finite useful live of 10 years in prior year. Upon the receipt of the patent certificate issued by the State Intellectual Property Office of the PRC, the patent was amortised over a finite useful live of 20 years according to the patent certificate.

Patent amortisation are provided on a straight-line basis over the estimated useful live of 20 years. The patent amortisation charge for the year of HK$18,865,000 (2006: HK$9,064,000) is included in the consolidated income statement within the line item of “other operating expenses”.

In testing for any impairment on the Group’s patent, management has adopted the income approach – royalty income stream analysis to identify the indication value of the pending patent by discounting the future economic benefits of the pending patent throughout its economic life to its present value.

By using this method, the patent is assessed by reference to the estimated amount of royalty income it can generate if it was licensed as at the date of assessment, in an arm’s length transaction, to a third party. The benchmark royalty rate determined with reference to industry standards is multiplied by the revenues expected by the management to be generated from the underlying business. The product is an estimate of the royalty income that could be generated hypothetically by licensing the pending patent in the expected life of the pending patent. The estimated royalty income so derived is thereby discounted as an annuity over the expected life of the pending patent, at an appropriate discount rate. The projection period covers 5 years up to September 2011. The key assumptions for the calculations are those regarding royalty rates, long term growth rates and discount rates, as follows:

royalty rate of 3.5%
long term growth rate of 6%
discount rate of 15%

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

21. INTERESTS IN SUBSIDIARIES

Unlisted shares, at cost Due from subsidiaries	Company Year Ended Year Ended 31 March 2007 30 June 2006 HK$’000 HK$’000 614,646 614,646 514,698 315,406 1,129,344 930,052	Company Year Ended Year Ended 31 March 2007 30 June 2006 HK$’000 HK$’000 614,646 614,646 514,698 315,406 1,129,344 930,052
		930,052

At 31 March 2007, the amounts due from subsidiaries principally represent advances which are unsecured and interest-free. These advances are considered as quasi-equity loans to the subsidiaries of which the repayment/ settlement is neither planned nor likely to happen in the foreseeable future.

Particulars of the Company’s principal subsidiaries as at 31 March 2007 are as follows:

	Place of				Percentage
	incorporation/				of equity
	establishment	Type of		Paid-up share/	attributable to
Name	and operation	legal entity		registered capital	the Company	Principal activities
Directly held
Holt Hire Holdings Limited	British Virgin	–		Ordinary US$3	100%	Investment holding
	Island (“BVI”)
Indirectly held
Able Business Developments	BVI	–		Ordinary US$10	100%	Investment holding
Limited
Beijing Wan Fu Chun Forest	The PRC	wholly foreign-		Registered	100%	Tree plantation and
Resources Development			owned enterprise	RMB50,000,000		management, manufacture
Company Limited						and distribution of forestry
(“Beijing WFC”)						products
Cannon Ape Company	Hong Kong	–		Ordinary	100%	Property holding
Limited				HK$10,000
Digital 910 Limited	Hong Kong	–		Ordinary	100%	Investment holding
				HK$10,000
Fujian Good Fellow Fashion	The PRC	wholly foreign-		Registered	100%	Trading of garment
Co., Ltd			owned enterprise	RMB10,000,000
Fujian Yingfu-Kerun Software	The PRC	wholly foreign-		Registered	100%	Investment holding
Co., Ltd			owned enterprise	HK$15,000,000
Good Country Investment	Hong Kong	–		Ordinary HK$2	100%	Property holding and trading
Limited				Non-voting deferred		of securities
				HK$10,000
Good fellow (Macau)	Macau	–		MOP100,000	100%	Trading of garment
Commercial Offshore
Limited
Good Fellow Fashion	Hong Kong	–		Ordinary	100%	Distribution of garment
(Group) Limited				HK$10,000

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

	Place of			Percentage
	incorporation/			of equity
	establishment	Type of	Paid-up share/	attributable to
Name	and operation	legal entity	registered capital	the Company	Principal activities
Indirectly held (continued)
Good Fellow Garment	The PRC	wholly-foreign	Registered	100%	Manufacture and sale of
(Fujian) Co.,Ltd		owned enterprise	US$5,000,000		garment
Hi-Tech Market Limited	BVI	–	Ordinary US$100	100%	Investment holding
Putian Keneng High	The PRC	wholly-foreign	Registered	100%	Investment holding
Technology Co., Ltd		owned enterprise	RMB55,600,000

The above table lists the subsidiaries of the Company which, in the opinion of the directors, principally affected the results for the year or formed a substantial portion of the net assets of the Group. To give details of other subsidiaries would, in the opinion of the directors, result in particulars of excessive length.

22. INTERESTS IN JOINTLY-CONTROLLED ENTITIES


		Year Ended	Year Ended
	31	March 2007	30 June 2006
		HK$’000	HK$’000
Share of net assets, unlisted		28,755	28,282

Particulars of the principal jointly-controlled entities as at 31 March 2007 are as follows:

			Percentage
			of ownership
	Form of	Place of	interest
	business	establishment	attributable
Name	structure	and operation	to the Group	Principal activities
中科納米技術工程中心有限公司	Corporated	The PRC	55%	Development and sales of nano
(Zhongke Nanotech Engineering				materials and transfer of
Center Co. Ltd)				related technology
中科納米技術工程（蘇州）	Corporated	The PRC	68.5%	Development and sales of nano
有限公司				materials and transfer of
(Zhongke Nanotech Engineering				related Technology
(Suzhou) Co. Ltd)
北京中科納米高彈材料有限公司	Corporated	The PRC	38.5%	Manufacture and sales of nano
(Beijing Zhongke Nanotech				high-elastic plastic and
High-elastic Material Co. Ltd)				materials
北京時代科能科技開發有限公司	Corporated	The PRC	44%	Dormant
(Beijing Shidai Keneng Technology
Development Co. Ltd)
蘇州中科納米高彈材料有限公司	Corporated	The PRC	34.9%	Development and sales of nano
(Suzhou Zhongke Nanotech				high elastic plastic
High-elastic Material Co. Ltd)

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

23. BIOLOGICAL ASSETS

Reconciliation of movement in carrying value of the Group’s biological assets during the year is as follows:

Increase due to business combination Amortisation during the year Transfer upon plantation Plantation expenditure incurred Harvest as agricultural produce Direct sales Gain arising from changes in fair value less estimated point-of-sale cost of biological assets At 30 June 2006 Purchase during the year Amortisation during the year Transfer upon plantation Plantation expenditure incurred Harvest as agricultural produce Direct sales Gain arising from changes in fair value less estimated point-of-sale cost of biological assets At 31 March 2007	Paper mulberry saplings HK$’000 151,577 (17,833) (71,182) – – (26,833) – 35,729 37,174 – (88,130) 67,686 – (30,678) – 21,781	Group Paper mulberry trees Other trees HK$’000 HK$’000 – 122,692 – – 71,182 – 17,860 – – (17,692) – – 11,920 – 100,962 105,000 – 259,676 (22,146) – 88,130 – – 30,354 – (24,688) – (78,451) 112,914 1,004,601 279,860 1,296,492	Total HK$’000 274,269 (17,833) – 17,860 (17,692) (26,833) 11,920 241,691 296,850 (22,146) – 98,040 (24,688) (109,129) 1,117,515 1,598,133

The paper mulberry saplings are stated at cost, less accumulated amortisation. An analysis of the carrying amount of these biological assets as at 31 March 2007 is as follows:

Biological assets carried at cost less accumulated amortisation: Historical cost of procurement Less: accumulated amortisation Net carrying amount	Year Ended 31 March 2007 HK$’000 43,213 (21,432) 21,781	Year Ended 30 June 2006 HK$’000 57,161 (21,432) 35,729

Biological assets of paper mulberry trees and other trees are stated at their current market prices less estimated point-of-sale costs. In accordance with the valuation report by LCH, the current market prices less estimated pointof-sale costs of the biological assets is determined under the following basis:

(i) Paper mulberry trees: market-determined prices after accounting for normal rate of recovery, cost of harvesting, debarking and handling cost.

(ii) Other trees: market-determined prices after accounting for normal rate of harvest recovery, cost of harvesting, transportation cost and other associated cost.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Paper mulberry saplings

As at 31 March 2007, the Group maintained consumable paper mulberry saplings of various stages of propagation. The majority of these paper mulberry saplings are maintained in the Group’s various saplings rearing facilities held under leases in the PRC and are being fostered for further growth and diversification. The Group’s paper mulberry saplings are available for future field plantation for rearing the genetically modified tree specie Broussonetia Papyriferalvent which is a Moraceae plant under the category of Deciduous Trees. As at 31 March 2007, the Group had planted over 100 million of the saplings of modified tree specie Broussonetia Papyriferalvent. Paper mulberry saplings were carried at cost.

Paper mulberry trees

The Group’s paper mulberry trees represent the modified tree specie Broussonetia Papyriferalvent which is a Moraceae plant under the category of Deciduous Trees. The plantation was carried out in various leasehold lands in the PRC. An one-time plantation of Broussonetia Papyriferalvent can offer consecutive annual loggings for 8 to 10 years. Based on a survey performed by a professional institution, as at 31 March 2007, the Group had planted over 91 million of the modified tree specie Broussonetia Papyriferalvent in Shandong, Hebei, Beijing, Hunan, Chongqing, Sichuan and Shanxi.

Plantation expenditure on paper mulberry trees and the purchase cost of paper mulberry saplings transferred for plantation are capitalised as costs for cultivation of stumps. Stumps are stated at cost less accumulated amortisation and impairment. Stumps are amortised on the straight line basis over their estimated useful lives of 8 years.

Other trees

Other trees are standing trees in the natural, man-made and mixed forest farms located in various locations in Hunan Province, Chongqing City, Sichuan Province, Shanxi Province and Guangxi Province of the PRC. As at 31 March 2007, the Group maintained consumable biological assets of standing forests of standing trees of various maturities of approximately 2,250,000 cubic meters by volume in aggregate. Other trees are stated at cost.

24. DEPOSITS FOR ACQUISITION OF FOREST FARMS

Deposits for acquisitions of forest farms are deposits paid for acquisition of certain forest farms in the PRC by a subsidiary, Beijing WFC, and obtaining the operation rights for forestry during the year. The remaining consideration of approximately HK$144,548,000 was disclosed in note 42.

25. INVENTORIES

Raw materials Work in progress Finished goods	Group Year Ended 31 March 2007 HK$’000 13,329 946 17,611 31,886	Year Ended 30 June 2006 HK$’000 13,411 869 23,984
		38,264

At 31 March 2007, the carrying amount of inventories that are carried at net realisable value is approximately HK$20,689,000 (2006: HK$8,654,000).

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

26. TRADE RECEIVABLE

The Group normally allows credit terms to established customers ranging from 30 to 120 days. The Group seeks to maintain strict control over its outstanding receivables to minimise credit risk, with overdue balances regularly reviewed by senior management. Trade receivables are generally non-interest bearing and their carrying amounts approximate to their fair values.

The aging analysis of the trade receivables as at the balance sheet date, based on the date of recognition of the sales, is as follows:

0-30 days 31-60 days 61-90 days Over 90 days	Group Year Ended 31 March 2007 HK$’000 81,561 60,543 7,966 6,258 156,328	Year Ended 30 June 2006 HK$’000 66,906 127,426 5,640 7,372
		207,344

The directors consider that the carrying amounts of the Group’s trade receivables at 31 March 2007 approximate to their fair values.

27. OTHER RECEIVABLES, DEPOSITS AND PREPAYMENTS

The directors consider that the fair values of the Group’s other receivables, deposits and prepayments at 31 March 2007 approximate to their carrying amounts.

28. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS


		Year Ended	Year Ended
	31	March 2007	30 June 2006
		HK$’000	HK$’000
Securities listed in Hong Kong, at market value		23,578	4,992

Changes in fair values of financial assets at fair value through profit or loss are recorded in the consolidated income statement as part of other net gain (note 8).

At 31 March 2007, no securities have been pledged to a bank for the Group’s banking facilities (2006: HK$1,126,892).

29. BANK AND CASH BALANCES

At 31 March 2007, the bank and cash balances of the Group denominated in Renminbi (“RMB”) amounted to approximately HK$477 million (2006: HK$241 million). Conversion of RMB into foreign currencies is subject to the PRC’s Foreign Exchange Control Regulations and Administration of Settlement, Sale and Payment of Foreign Exchange Regulations.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

30. SHARE CAPITAL

Ordinary shares of HK$0.10 each Authorised: Issued and fully paid: At beginning of year Arising on business combination Arising upon conversion of convertible notes into new shares_(note i) Placement of new shares(note ii) Shares issued on exercise of share options(note iii)_ Repurchase of shares At end of year	Number of shares Year Ended Year Ended 31 March 30 June 2007 2006 ’000 ’000 6,500,000 6,500,000 3,879,807 2,941,487 – 580,000 765,000 155,000 400,000 – 18,000 206,200 – (2,880) 5,062,807 3,879,807	Ordinary share capital Year Ended Year Ended 31 March 30 June 2007 2006 HK$’000 HK$’000 650,000 650,000 387,981 294,149 – 58,000 76,500 15,500 40,000 – 1,800 20,620 – (288) 506,281 387,981

(i) During the Year Ended 31 March 2007, part of the convertible notes outstanding with the Company in the principal denomination of HK$91,800,000 was converted into 765,000,000 new shares at a conversion price of HK$0.12 per share. The fair value of the portion of the convertible notes as converted, in the amount of HK$72,913,000, was credited to the share capital account of the Company. In addition, the portion of the conversion option reserve realised, after reversal of deferred taxation of HK$3,305,000, in the total amount of HK$18,887,000, was credited to as to HK$3,587,000 to the share capital account and as to HK$15,300,000 to the share premium account of the Company.
(ii) On 30 January 2007, the Company raised share issue proceeds, net of related expenses, of approximately HK$448,000,000 from a top-up placing and subscription arrangement whereby an aggregate of 400,000,000 new ordinary shares in the Company were issued and allotted at price of HK$1.15 per share to Golden Prince Group Limited, a company incorporated in the British Virgin Islands. Mr. Ng Leung Ho, chairman and executive director of the Company, owned the entire issued share capital of Golden Prince Group Limited. Both of Mr. Ng Leung Ho and Golden Prince Group Limited are substantial shareholders of the Company. Up to Year Ended 31 March 2007, HK$30,000,000 of the share issue proceeds raised have been used to pay for partial consideration of 30% acquisition in Beijing WFC. The remaining net share issue proceeds not utilised of approximately HK$418,000,000 has been retained as general working capital of the Company and will be used in further expansion of the its forestry business thereby improving its production facilities when suitable investment opportunities arise.
(iii) During the Year Ended 31 March 2007, options were exercised to subscribe for 18,000,000 shares in the Company. The option exercise price was HK$0.24 per share. The total consideration received by the Company of HK$4,320,000 was credited as to HK$1,800,000 to the share capital and as to HK$2,520,000 to the share premium account.

31. SHARE BASED COMPENSATIONS

The Company operates an equity-settled, share-based compensation plan for the purpose of providing incentives and rewards to eligible participants for their contribution to the success of the Group’s operations. Pursuant to this objective, on 25 October 1998, the Company adopted a share option scheme (the “Old SO Scheme”) whose eligible participants include directors and employees of the Company and its subsidiaries as determined by the directors of the Company.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

In compliance with the amendments to the Listing Rules, the directors of the Company consider that it is in the interest of the Company to terminate the Old SO Scheme and to adopt a new share option scheme (the “New SO Scheme”). An ordinary resolution was passed at the annual general meeting of the Company held on 23 November 2001 for the approval of the said adoption of the New SO Scheme and termination of the Old SO Scheme. Pursuant to the amendments to the Listing Rules, no further options may be granted under the Old SO Scheme thereunder but in other respects, the provisions of the Old SO Scheme remain in force and all outstanding options granted continue to be valid and exercisable in accordance therewith.

Eligible participants of the New SO Scheme include directors and employees of the Company and its subsidiaries. The New SO Scheme will, unless otherwise cancelled or amended, remain in force for 10 years from 23 November 2001.

The maximum number of unexercised share options currently permitted to be granted under the New SO Scheme is an amount equivalent, upon their exercise, to 30% of the shares of the Company in issue at any time. The maximum number of shares issuable under share options to each eligible participant in the New SO Scheme within any 12-month period is limited to 1% of the shares of the Company in issue at any time. Any further grant of share options in excess of this limit is subject to shareholders’ approval in a general meeting.

Share options granted to a director or substantial shareholder of the Company, or to any of their associates, are subject to approval in advance by the independent non-executive directors of the Company. In addition, any share options granted to a substantial shareholder or an independent non-executive director of the Company, or to any of their associates, in excess of 0.1% of the shares of the Company in issue at any time and with an aggregate value (based on the price of the Company’s shares at the date of the grant) in excess of HK$5 million, within any 12-month period, are subject to shareholders’ approval in advance in a general meeting.

The offer of a grant of share options may be accepted within the date specified in the offer, upon payment of a nominal consideration of HK$1 in total by the grantee. The exercise period of the share options granted is determinable by the directors of the Company, and commences after a certain vesting period and ends on a date which is not later than 10 years from the date of the grant of the share options or the expiry date of the New SO Scheme, if earlier.

The option shall be exercisable in the following manner:

Starting from	1	April	2007	to	31	March	2008	Not more than	40%
	1	April	2008	to	31	March	2009	Not more than	70%
	1	April	2009	to	31	March	2010	Not more than	100%

The exercise price of the share options is determinable by the directors of the Company, but may not be less than the higher of: (i) the closing price of the Company’s shares as stated in the Stock Exchange’s daily quotations sheet on the date of the offer of grant, which must be a trading day; (ii) the average closing price of the Company’s shares as stated in the Stock Exchange’s daily quotations sheets for the five trading days immediately preceding the date of the offer of the grant; and (iii) the nominal value of the Company’s shares.

Movements in share options during the year are as follows:

At beginning of year Granted Exercised_(note i) At end of year Options vested and unexercised at 31 March/30 June(note ii)_	Year Ended 31 March 2007 Number 18,000,000 185,100,000 (18,000,000) 185,100,000 185,100,000	Year Ended 30 June 2006 Number 217,000,000 – (199,000,000) 18,000,000 18,000,000

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Notes:

(i) Details of share options exercised during the year:

Name of category			Exercise price	Exercise price
of participant		Exercise date	per share			2007 Number
				HK$
Employees		12 Oct 2006		0.24		18,000,000

Terms of unexpired and unexercised share options under New SO Scheme				at balance	sheet date are as
follows:
Name or
category of			Exercise price	2007		2006
participant	Date of grant	Exercise period	per share	Number		Number
			HK$
Director	27 Mar 2007	27 Mar 2007	0.98	37,500,000		–
		to 26 Mar 2017
Employees	27 Mar 2007	27 Mar 2007	0.98	147,600,000		–
		to 26 Mar 2017
	10 Jan 2005	10 Jan 2005	0.24		–	18,000,000
		to 23 Nov 2011
Total				185,100,000		18,000,000

(ii) Terms of unexpired and unexercised share options under New SO Scheme at balance sheet date are as follows:

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

32. RESERVES

Company

Company
At 30 June 2005 Arising on exercise of share options Issue of consideration shares for business combination Arising upon issuance of convertible notes Arising upon conversion of convertible notes into new shares, net of deferred taxation Repurchase of shares Net loss for the year At 30 June 2006 Arising on exercise of share options Equity settled share-based transaction Arising upon conversion of convertible notes into new shares, net of deferred taxation Issue of shares Net loss for the year At 31 March 2007	Share premium account HK$’000 73,538 27,860 11,600 – 3,100 (21) – 116,077 2,520 – 15,300 406,799 – 540,696	Subscription right reserve HK$’000 (note i) 24,543 – – – – – – 24,543 – – – – – 24,543	Conversion Share-based option compensation reserve reserve HK$’000 HK$’000 (note ii) (note iii) – – – – – – 37,949 – (3,328) – – – – – 34,621 – – – – 21,850 (15,582) – – – – – 19,039 21,850	Retained profits/ (accumulated loss) HK$’000 2,884 – – – – – (7,472) (4,588) – – – – (43,400) (47,988)	Total HK$’000 100,965 27,860 11,600 37,949 (228) (21) (7,472)
					170,653 2,520 21,850 (282) 406,799 (43,400)
					558,140

Note:

(i) Subscription right reserve represents net proceeds received from issue of warrants.
(ii) Conversion option reserve represents equity portion of convertible notes issued by the Company and are transferred to the share premium account upon exercise of the conversion rights vested with the convertible note instruments; or directly released to retained profits when the notes are redeemed.
(iii) Share-based compensation reserve represents the fair value of the actual or estimated number of unexercised share options granted to employees of the Company recognised in accordance with the accounting policy adopted for share based payments.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

33. PROMISSORY NOTES PAYABLE

Financial liabilities of promissory notes, at amortised cost Less: Portion repayable in 12 months’ time included in current liabilities Long term portion	Year Ended 31 March 2007 HK$’000 98,969 (98,969) –	Year Ended 30 June 2006 HK$’000 220,598 (174,452) 46,146

The Company’s promissory notes are non-interest bearing and have an aggregate principal amount of HK$100 million, which is repayable in the following manner:

(a) as to HK$50 million, repayable on demand by any time starting from 1 April 2007; and
(b) as to HK$50 million, repayable on demand by any time starting from 1 July 2007.

During the year, the Company repaid promissory notes in the principal amount of HK$130 million. The amortised cost of the financial liabilities of promissory notes as at 31 March 2007 of approximately HK$99 million (30 June 2006: HK$220.6 million) was ascertained with reference to professional appraisal and upon discounting the face value of the promissory notes by a discount rate of 8%, which is considered by the directors to be the incremental borrowing rate applicable to the Company’s borrowings.

34. CONVERTIBLE NOTES PAYABLE

The movement on the liability component of the convertible notes as follows:

Liability at beginning of year Issue of convertible notes Interest expenses Interest paid Redemption Liability at end of year	Year Ended 31 March 2007 HK$’000 150,858 – 5,767 (1,345) (72,913) 82,367	Year Ended 30 June 2006 HK$’000 – 163,378 1,340 (317) (13,543) 150,858

During the Year Ended 30 June 2006, pursuant to the business combination of Strong Lead and its subsidiary, Beijing WFC, the Company issued convertible notes (the “Convertible Notes”) as partial settlement of the acquisition consideration. The principal terms of the Convertible Notes are as follows:

Date of issue 8 May 2006 Aggregate principal amount HK$210.4 million Denomination In multiple of HK$100,000 Interest rate per annum 1.5%, payable semi-annually in arrears Conversion price applicable HK$0.12, subject to adjustments Maturity date 4 years from the date of issue

(a) Conversion period

Apart from the portion of Restricted Convertible Notes (as described below), the holders of the Convertible Notes shall have the rights at any time and from time to time, following the date of issue of the Convertible Notes, to convert the whole or any part of the outstanding principal amount into new ordinary shares in the Company. The shares to be issued and allotted upon conversion shall rank pari passu in all respects among themselves and with all other ordinary shares in issue by the Company on the date of such allotment and issue.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(b) Restricted Convertible Note

Part of the Convertible Notes in principal amount of HK$100 million (the “Restricted Convertible Notes”) has been put under security to the Company for performance by the vendors of the Strong Lead shares of the Profit Guarantee (as described below). The vendors of the Strong Lead shares have undertaken not to exercise the rights attaching the portion of denomination in the balance of HK$100 million on the Convertible Notes up to end of the period of the Profit Guarantee (as described below).

(c)

Profit Guarantee

The vendors of the Strong Lead shares has undertaken to the Company that the total audited consolidated net profit after tax of Beijing WFC prepared in accordance with Hong Kong GAAP for the two financial years ending 31 December 2006 and 31 December 2007 shall not be less than HK$200 million (the “Profit Guarantee”), and shall compensate the Company in cash for any shortfall between the Profit Guarantee and the audited consolidated net profit after tax of Beijing WFC prepared in accordance with Hong Kong GAAP. The compensation amount will be calculated on the basis of the shortfall percentage of the total consideration of HK$560 million payable for the Strong Lead acquisition. In the event that the Restricted Convertible Notes is not sufficient to cover the compensation amount due to the shortfall from the Profit Guarantee, the vendors of the Strong Lead shares will be liable to pay the Company in cash for any outstanding compensation amount after deduction of the Restricted Convertible Notes.

During the year, the conversion rights vested with Convertible Notes in the denominated value of HK$91.8 million have been exercised and resulted in the issue and allotment of 765,000,000 ordinary shares of the Company, credited as fully paid. The fair value of the portion of the convertible notes as converted, in the amount of HK$72,913,000, was credited to the share capital account of the Company. In addition, the portion of the conversion option reserve realised, after reversal of deferred taxation of HK$3,305,000, in the total amount of HK$18,887,000, was credited to as to HK$3,587,000 to the share capital account and as to HK$15,300,000 to the share premium account of the Company.

At 31 March 2007, the aggregate outstanding principal amount of the Convertible Notes is HK$100 million. The amortised cost of the Convertible Notes as at 31 March 2007 of approximately HK$82.4 million was ascertained with reference to professional appraisal and upon discounting the face value of the outstanding Convertible Notes by a discount rate of 8%, which is considered by the directors to be the incremental borrowing rate applicable to the Company’s borrowings.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

35. DEFERRED TAXATION

(a) The following are the deferred tax liabilities recognised by the Group and movement thereon during the current and prior years:

At 30 June 2005 Arising on business combination Arising on issuance of convertible notes Amount realised through conversion of convertible notes into shares Deferred tax debit accounted for as revaluation reserve movement Deferred tax charged/ (credited) to profit and loss account At 30 June 2006 Amount realised through conversion of convertible notes into shares Deferred tax charged/ (credited) to profit and loss account At 31 March 2007	Revaluation of properties HK$’000 691 – – – 598 137 1,426 – (686) 740	Fair value of biological assets over historical procurement cost HK$’000 – 4,967 – – – 390 5,357 – 64,816 70,173	Group Amortised fair value of patent over transfer consideration HK$’000 – 49,934 – – – (882) 49,052 – 5,516 54,568	Principal denomination over fair value of convertible notes HK$’000 – – 8,050 (706) – (179) 7,165 (3,305) (774) 3,086	Total HK$’000 691 54,901 8,050 (706) 598 (534)
					63,000 (3,305) 68,872
					128,567

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

At 30 June 2005 Arising on issuance of convertible notes Amount realised through conversation of convertible notes into shares Deferred tax credited to profit and loss account At 30 June 2006 Amount realised through conversation of convertible notes into shares Deferred tax credited to profit and loss account At 31 March 2007	Revaluation of properties HK$’000 – – – – – – –	Fair value of biological assets over historical procurement cost HK$’000 – – – – – – –	Company Amortised fair value of patent over transfer consideration HK$’000 – – – – – – –	Principal denomination over fair value of convertible notes HK$’000 8,050 (706) (179) 7,165 (3,305) (774) 3,086	Total HK$’000 8,050 (706) (179)
					7,165 (3,305) (774)
					3,086

(b) At the balance sheet date, the Group has unused tax losses of approximately HK$47,424,000 (2006: HK$30,659,000) available for offset against future profits. No deferred tax asset in relation to tax losses has been recognised due to the unpredictability of future taxable profit streams. These tax losses may be carried forward indefinitely.

(c) As the balance sheet date, the Group has no unrecognised deferred tax asset (2006: approximately HK$1,069,000) in respect of the excess of the carrying value of biological assets of paper mulberry saplings over historical procurement cost. These deferred tax assets have not been recognised due to the unpredictability of attributable future taxable profit streams.

36. TRADE PAYABLES

The Group normally obtains credit terms ranging from 30 to 120 days from its suppliers. An aging analysis of the trade payables as at the balance sheet date, based on the receipt of goods purchased, is as follows:

0-30 days 31-60 days 61-90 days Over 90 days	Group Year Ended 31 March 2007 HK$’000 1,358 201 – 2,855 4,414	Year Ended 30 June 2006 HK$’000 1,268 325 13 1,320
		2,926

The directors consider that the carrying amounts of the Group’s trade payables at 31 March 2007 approximate to their fair values.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

37. INTEREST-BEARING BANK BORROWINGS

Group Year Ended Year Ended 31 March 2007 30 June 2006 HK$’000 HK$’000 Bank overdrafts, secured – 21

38. BANKING FACILITIES

At 31 March 2007, the Group’s banking facilities were secured by the following:

(i) bank deposits of approximately HK$11,265,000 (2006: HK$10,988,000);

(ii) corporate guarantees given by the Company to the extent of HK$13,500,000 (2006: HK$13,500,000).

39. DEFERRED REVENUE

Deposits/proceeds received in respect of: Pre-harvest wholesome living pine trees Paper mulberry sapling	Group Year Ended 31 March 2007 HK$’000 – – –	Year Ended 30 June 2006 HK$’000 48,917 9,615
		58,532

40. CONTINGENT LIABILITIES

The Company has given guarantees in favour of certain banks to the extent of HK$13,500,000 (2006: HK$13,500,000) in respect of banking facilities granted to certain subsidiaries of the Company. At 31 March 2007, the banking facilities utilised by these subsidiaries amounted to approximately HK$3,000 (2006: HK$21,000).

The Company has not recognised any deferred income in respect of the corporate guarantees as its fair value cannot be reliably measured and their transaction price was HK$Nil.

41. OPERATING LEASE ARRANGEMENTS

At 31 March 2007, the Group had total future minimum lease payments under noncancellable operating leases falling due as follows:

Within one year In the second or fifth years, inclusive More than five years	Group Year Ended Year Ended 31 March 30 June 2007 2006 HK$’000 HK$’000 6,048 5,708 12,363 11,707 92,159 83,888 110,570 101,303	Company Year Ended Year Ended 31 March 30 June 2007 2006 HK$’000 HK$’000 1,363 1,289 114 1,136 – – 1,477 2,425	Company Year Ended Year Ended 31 March 30 June 2007 2006 HK$’000 HK$’000 1,363 1,289 114 1,136 – – 1,477 2,425
			2,425

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

42. COMMITMENTS

At 31 March 2007, the Group had commitments, so far as not provided for in the consolidated financial statements, as follows:

Capital commitments contracted but not provided for: Construction cost Acquisition of leasehold forest land Group’s share of capital commitments of jointly-controlled entities	Group Year Ended 31 March 2007 HK$’000 – 144,548 144,548 – 144,548	Year Ended 30 June 2006 HK$’000 1,067 19,230
		20,297
		158
		20,455

43. RELATED PARTY TRANSACTIONS

(a) Key management compensation

The remuneration of directors as disclosed in note 10 and other members of key management during the year was as follows:

Salaries and other short-term employee benefits Post-employment benefits Share options	Group Year Ended 31 March 2007 HK$’000 2,676 29 13,516 16,221	Year Ended 30 June 2006 HK$’000 3,833 72 –
		3,905

(b) Amount due to minority interests

The amount due was unsecured, non-interest bearing and had no fixed repayment terms. The amount was transferred to other payables and accruals when the Group acquired the remaining equity interest of Beijing WFC in January 2007.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

44. EVENTS AFTER THE BALANCE SHEET DATE

i) On 30 April 2007 and 2 May 2007, by virtue of the exercise of the rights granted by the Company’s shareholders to the directors under general mandate, the Company repurchased on The Stock Exchange of Hong Kong Limited in aggregate 7,000,000 of its ordinary shares of HK$0.10 each at a total consideration before expenses of approximately HK$5,930,000. The subject shares were cancelled upon repurchase and the issued share capital of the Company was reduced by the nominal value thereof.
ii) Pursuant to a resolution passed by the Company’s shareholders on 7 May 2007, the Company increased its authorised share capital from HK$650,000,000 divided into 6,500,000,000 shares of HK$0.10 each to HK$2,000,000,000 divided into 20,000,000,000 shares of HK$0.10 each by the creation of an additional 13,500,000,000 unissued shares of HK$0.10 each.
iii) On 5 June 2007, 11 June 2007 and 12 June 2007, the Company’s wholly owned subsidiary, Beijing WFC, entered into agreements to acquire certain leasehold forest lands in the PRC. Further details are set out in the Company’s press announcements of 5 June 2007, 11 June 2007 and 12 June 2007.

45. APPROVAL OF THE FINANCIAL STATEMENTS

The financial statements were approved and authorised for issue by the board of directors on 10 July 2007.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

3. UNAUDITED FINANCIAL STATEMENTS OF THE GROUP FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2007

The following is an extract of the financial statements of the Group from the latest interim report of the Company for the six months ended 30 September 2007:

Condensed Consolidated Income Statement

Notes
Turnover
2
Cost of sales
Gross profit
Other revenue
Other net gain
Selling and distribution expenses
Administrative expenses
Other operating expenses
Profit from operations
4
Finance costs
5
Share of losses of jointly-controlled entities
Gain on disposal of interest in a
jointly-controlled entity
Profit before taxation
Taxation
6
Profit for the period
Profit attributable to:
Equity holders of the Company
Minority interest
Earnings per share for profit attributable
to equity holders of the Company
7
Basic
Diluted

Six months ended
30 September
31 December
2007
2006
(Unaudited)
(Unaudited)
HK$’000
HK$’000
691,509
366,551
(295,652)
(111,775)
395,857
254,776
7,859
2,131
1,034,764
124,263
(18,158)
(38,685)
(53,279)
(22,648)
(32,338)
(74,740)
1,334,705
245,097
(4,463)
(10,610)
(1,457)
(3,457)
–
2,258
1,328,785
233,288
(59,629)
556
1,269,156
233,844
1,269,156
164,752
–
69,092
1,269,156
233,844
HK24.76 cents
HK3.74 cents
HK21.06 cents
HK3.22 cents

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Condensed Consolidated Balance Sheet

Notes ASSETS Non-current assets Property, plant and equipment 8 Construction in progress Prepaid lease payments Deposits for acquisition of forest farms Investment properties Intangible assets Interests in jointly-controlled entities 9 Biological assets Current assets Inventories Trade receivables 10 Bills receivables Prepaid lease payments Other receivables, deposits and prepayments Financial assets at fair value through profit or loss Pledged bank deposits Bank and cash balances Total assets EQUITY AND LIABILITIES Capital and reserves attributable to the Company’s equity holders Share capital 11 Reserves 12 Total equity	30 September 2007 (Unaudited) HK$’000 74,787 – 542,954 – 3,160 559,016 26,099 3,058,530 4,264,546 26,454 195,422 463 12,102 141,211 78,560 11,265 1,479,870 1,945,347 6,209,893 567,537 4,691,527 5,259,064	31 March 2007 (Audited) HK$’000 63,790 12,081 17,730 154,234 3,160 571,657 28,755 1,598,133
		2,449,540
		31,886 156,328 – 430 40,333 23,578 11,265 613,044
		876,864
		3,326,404

		506,281 2,084,307
		2,590,588

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Notes Non-current liabilities Convertible notes payable Deferred taxation Current liabilities Trade payables 13 Other payables and accruals Convertible notes payable Promissory notes payable Bank overdrafts Provision for taxation Total liabilities Total equity and liabilities NET CURRENT ASSETS TOTAL ASSETS LESS CURRENT LIABILITIES	30 September 2007 (Unaudited) HK$’000 – 182,030 182,030 6,757 671,351 85,040 – 208 5,443 768,799 950,829 6,209,893 1,176,548 5,441,094	31 March 2007 (Audited) HK$’000 82,367 128,567
		210,934
		4,414 415,890 – 98,969 – 5,609
		524,882
		735,816
		3,326,404

		351,982

		2,801,522

100

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Condensed Consolidated Cash Flow Statement

NET CASH GENERATED FROM
OPERATING ACTIVITIES
NET CASH USED IN INVESTING ACTIVITIES
NET CASH GENERATED FROM
FINANCING ACTIVITIES
NET INCREASE/(DECREASE) IN CASH AND
CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD
EFFECT OF FOREIGN EXCHANGE RATE CHANGES
CASH AND CASH EQUIVALENTS AT END OF PERIOD
ANALYSIS OF BALANCES OF CASH AND
CASH EQUIVALENTS
CASH AND BANK BALANCES
BANK OVERDRAFTS

Six months ended
30 September
31 December
2007
2006
(Unaudited)
(Unaudited)
HK$’000
HK$’000
402,684
37,402
(786,742)
(118,672)
1,241,127
5,912
857,069
(75,358)
613,044
273,400
9,549
13,217
1,479,662
211,259
1,479,870
211,259
(208)
–
1,479,662
211,259

101

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Condensed Consolidated Statement of Changes in Equity

Total shareholders’ equity as at 1 April 2007/1 July 2006 Repurchase of shares Profit for the period Exchange difference on translation of foreign operations recognized directly in equity Share of reserve movement of jointly-controlled entities Exercise of share options Conversion of convertible notes Placement of new shares Equity settled share-based transactions Total shareholders’ equity as at 30 September 2007/31 December 2006	Six months 30 September 2007 (Unaudited) HK$’000 2,590,588 (5,952) 1,269,156 51,071 391 78,400 – 1,268,682 6,728 5,259,064	ended 31 December 2006 (Unaudited) HK$’000 934,937 – 233,844 16,999 79 4,320 76,218 – –
		1,266,397

102

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Notes to the Condensed Consolidated Financial Statements

1. BASIS OF PREPARATION AND ACCOUNTING POLICIES

The unaudited condensed consolidated financial statements have been prepared in accordance with the Hong Kong Accounting Standard (“HKAS”) 34 “Interim Financial Reporting” and the applicable disclosure provisions of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”).

The accounting policies used in preparation of the condensed consolidated interim financial statements are consistent with those adopted in the annual financial statements for the year ended 31 March 2007 with addition of certain new standards and interpretations of Hong Kong Financial Reporting Standards (“HKFRSs”) issued and effective as at the time of preparing this report. These are:

HKAS 1 (Amendment) Capital Disclosures HKFRS 7 Financial Instruments: Disclosures HK(IFRIC)-Int 8 Scope of HKFRS 2 HK(IFRIC)-Int 9 Reassessment of Embedded Derivatives HK(IFRIC)-Int 10 Interim Financial Reporting and Impairment HK(IFRIC)-Int 11 HKFRS 2 – Group and Treasury Shares Transactions

The adoption of such standards or interpretations does not result in substantial changes to the Group’s accounting policies and has no significant effect on the results reported for the six months ended 30 September 2007.

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

HKAS 23 (Revised) Borrowing Costs1 HKFRS 8 Operating Segments1 HK(IFRIC) – Int 12 Service Concession Arrangement2 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

2. TURNOVER

Turnover represents the net invoiced value of goods and forestry products, after allowances for returns and trade discounts.

103

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

3. SEGMENT INFORMATION

(a) Business segments:

For management purpose, the Group’s operations are currently organised into the ecological forestry business and the manufacture and sale of garment.

Group

	Ecological	Forestry
	Business		Garment	Business	Elimination			Consolidated
	For the six	For the six	For the six	For the six	For the six	For	the six	For the six	For the six
	months ended	months ended	months ended	months ended	months ended	months	ended	months ended	months ended
	30 September	31 December	30 September	31 December	30 September	31 December		30 September	31 December
	2007	2006	2007	2006	2007		2006	2007	2006
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000		HK$’000	HK$’000
Revenue:
External sales	641,157	294,546	50,352	72,005	–		–	691,509	366,551
Inter-segment sales	–	–	–	–	–		–	–	–
Total sales	641,157	294,546	50,352	72,005	–		–	691,509	366,551

Segment results	1,357,784	230,307	(16,482)	(2,846)				1,341,302	227,461
Unallocated revenue
and other net gain								6,386	23,134
Unallocated expenses								(12,983) (5,498)
Profit from operations								1,334,705	245,097
Finance costs								(4,463) (10,610)
Share of results of
jointly-controlled
entities								(1,457) (1,199)
Profit before taxation								1,328,785	233,288
Taxation								(59,629) 556
Profit for the period								1,269,156	233,844

(b) Geographical segments

In determining the Group’s geographical segments, revenue is attributed to the segment based on the location of the customers.

Group

	The PRC
	(excluding Hong Kong
	and Macau)		Hong	Kong	Elimination			Consolidation
	For the six	For the six	For the six	For the six	For the six	For	the six	For the six	For the six
	months ended months ended months ended			months ended months ended		months	ended months ended		months ended
	30 September 31 December 30 September			31 December 30 September		31 December 30 September			31 December
	2007	2006	2007	2006	2007		2006	2007	2006
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000		HK$’000	HK$’000
Segment revenue:
External sales	690,439	366,073	1,070	478	–		–	691,509	366,551
Inter-segment sales	1,815	4,212	360	–	(2,175)		(4,212)	–	–
Total revenue	692,254	370,285	1,430	478	(2,175)		(4,212)	691,509	366,551

104

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

4. PROFIT FROM OPERATIONS

The Group’s profit from operations are arrived at after charging/(crediting):

		Six months ended	Six months ended	Six months ended
		30 September	31 December
		2007		2006
		(Unaudited)		(Unaudited)
		HK$’000		HK$’000
	Gain on disposal of property held for disposal	–		(4,223)
	Gain from changes in fair value of biological assets	(1,036,170)		(103,260)
	Unrealised gain on financial assets at fair value
	through profit or loss	(4,303)		(16,780)
	Realised loss on disposal of financial assets at
	fair value through profit or loss	5,482		–
	Amortisation of prepaid lease payment	5,102		203
	Depreciation of property, plant and equipment	4,349		2,641
	Provision for doubtful debt	8,000		–
	Provision for slow moving inventories	4,000		–
	Interest income	(6,752)		(981)

5.	FINANCE COSTS

		Six months ended	Six months ended
		30 September	31	December
		2007		2006
		(Unaudited)	(Unaudited)
		HK$’000		HK$’000
	Interest on bank loans and overdrafts	3		80
	Interest on convertible notes	3,429		4,092
	Interest on promissory notes	1,031		6,438
		4,463		10,610

6.	TAXATION

	Six months	ended
	30 September	31	December
	2007		2006
	(Unaudited)	(Unaudited)
	HK$’000		HK$’000
Current:
Hong Kong	1		–
Deferred	(59,630)		556
Tax (debit)/credit for the period	(59,629)		556

No provision for Hong Kong profits tax was made as the Group had no assessable profit in Hong Kong.

Taxes on profits assessable elsewhere have been calculated at the rates of tax prevailing in the jurisdictions in which the Group operates, based on existing legislation, interpretations and practices in respect thereof.

105

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

7. EARNINGS PER SHARE

The calculation of basic earnings per share for six months ended 30 September 2007 is based on the Group’s profit attributable to the equity holders of the Company for the period of approximately HK$1,269,156,000 (for the six months ended 31 December 2006: HK$164,752,000) and the weighted average number of 5,126,721,480 (for the six months ended 31 December 2006: 4,402,802,165) ordinary shares in issue during the period.

The calculation of diluted earnings per share for six months ended 30 September 2007 is based on the Group’s profit attributable to the equity holders of the Company for the period of approximately HK$1,272,585,000 (for the six months ended 31 December 2006: HK$168,844,000) and the weighted average number of 6,042,017,983 (for the six months ended 31 December 2006: 5,236,135,498) ordinary shares after adjusting for the effects of all dilutive potential ordinary shares of the Company’s convertible note outstanding during the period.

8. PROPERTY, PLANT AND EQUIPMENT

During the period, additions of property, plant and equipment amounted to approximately HK$15,420,000 (for the six months ended 31 December 2006: HK$4,137,000).

9. INTERESTS IN JOINTLY-CONTROLLED ENTITIES

	30 September	31 March
	2007	2007
	(Unaudited)	(Audited)
	HK$’000	HK$’000
Shares of net assets, unlisted	26,099	28,755

Particulars of the jointly-controlled entity which account principally for the results and net assets shared by the Group are as follow:

			Percentage of
			ownership
		Place of	interest
		establishment	attributable	Principal
Name	Legal entity	and operations	to the Group	activities
中科納米技術工程	Sino-foreign equity	The PRC	55%	Development
中心有限公司	joint venture			and sale of
(Zhongke Nanotech				nano materials
Engineering				and transfer of
Center Co., Ltd.*)				related technology
中科納米技術工程	Sino-foreign equity	The PRC	68.5%	Development
（蘇州）有限公司	joint venture			and sale of
(Zhongke Nanotech				nano materials
(Suzhou) Co., Ltd.*)				and transfer of
				related technology

* For identification only

106

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

10. TRADE RECEIVABLES

The Group normally allows credit terms to established customers ranging from 30 to 120 days. An aging analysis of the trade receivables as at the balance sheet date, based on the date of recognition of the sales, is as follows:

30 September 2007 (Unaudited) HK$’000 0-30 days 172,829 31-60 days 6,902 61-90 days 6,232 Over 90 days 9,459 195,422 11. SHARE CAPITAL 30 September 2007 (Unaudited) HK$’000 Authorised: 20,000,000,000 (31 March 2007: 6,500,000,000) ordinary shares of HK$0.10 each 2,000,000 Issued and fully paid: 5,675,367,600 (31 March 2007: 5,062,807,600) ordinary shares of HK$0.10 each 567,537	31 March 2007 (Audited) HK$’000 81,561 60,543 7,966 6,258
	156,328

	31 March 2007 (Audited) HK$’000 650,000

	506,281

During the period ended 30 September 2007, by virtue of exercise of the rights granted by the Company’s shareholders to the directors under general mandate, the Company repurchased on the Stock Exchange of Hong Kong Limited in aggregate 7,000,000 of its ordinary shares of HK$0.1 each at a total consideration before expenses of approximately HK$5,930,000.

Share options

The Company operates a share option scheme for eligible participants, including directors and employees of the Company and its subsidiaries, for the subscription of new shares in the Company. A summary of the terms of the Company’s share option scheme was included in the Company’s 2006/07 annual report. The Company has not granted any share option under its existing share option scheme during the period ended 30 September 2007.

During the period ended 30 September 2007, options were exercised to subscribe for 80,000,000 shares in the Company. The attributable option exercise price for these shares was HK$0.98 per share. The total consideration received by the Company of HK$78,400,000 was credited as to HK$8,000,000 to the share capital and as to HK$94,008,000 to the share premium account and was debited as to HK$23,608,000 to the share-based compensation reserve.

During the period ended 30 September 2007, the Company raised share issue proceeds, net of related expenses, of approximately HK$1,268,000,000 from a top-up placing and subscription arrangement whereby an aggregate of 539,560,000 new ordinary shares in the Company were issued and allotted at price of HK$2.4 per share to Golden Prince Group Limited, a company incorporated in the British Virgin Islands. Mr. Ng Leung Ho, chairman and executive director of the Company, owned the entire issued share capital of Golden Prince Group Limited. Both of Mr. Ng Leung Ho and Golden Prince Group Limited are substantial shareholders of the Company.

107

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

12. RESERVES

At 1 April 2007 Currency translation difference Equity settled share-issued transactions Arising on exercise of share options Repurchase of shares Placement of new share Profit attributable to equity holders of the Company Share in reserve movement of jointly-controlled entities At 30 September 2007	Share Share-based premium compensation account reserve HK$’000 HK$’000 540,696 21,850 – – – 6,728 94,008 (23,608) (5,252) – 1,214,726 – – – – – 1,844,178 4,970	Subscription right reserve HK$’000 24,543 – – – – – – – 24,543	Fixed asset revaluation reserve HK$’000 5,592 – – – – – – (185) 5,407	Statutory reserve fund HK$’000 36,236 – – – – – – – 36,236	Capital reserve HK$’000 4,243 – – – – – – 576 4,819	Exchange fluctuation reserve HK$’000 22,613 51,071 – – – – – – 73,684	Convention option reserve HK$’000 19,039 – – – – – – – 19,039	Retained profits HK$’000 1,409,495 – – – – – 1,269,156 – 2,678,651	Total HK$’000 2,084,307 51,071 6,728 70,400 (5,252) 1,214,726 1,269,156 391
									4,691,527

13. TRADE PAYABLES

30 September 2007 (Unaudited) HK$’000 0-30 days 2,229 31-60 days 943 61-90 days 923 Over 90 days 2,662 6,757	31 March 2007 (Audited) HK$’000 1,358 201 – 2,855
	4,414

14. COMMITMENTS

As at 30 September 2007, the Group had the following commitments contracted but not provided for:

30 September 2007 (Unaudited) HK$’000 Research and development expenditure 15,450 Acquisition of leasehold forest land 560,056 575,506	31 March 2007 (Audited) HK$’000 – 144,548
	144,548

4. STATEMENT OF INDEBTEDNESS

As at the close of business on 31 May 2008, being the latest practicable date for the purpose of this indebtedness statement prior to the printing of this circular, the Group and the Shenyu New Energy Group had total outstanding borrowing of approximately HK$88,500,000 representing the unsecured convertible notes due May 2010 with outstanding principal amount of approximately HK$100,000,000.

108

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

As at 31 May 2008, the Group and the Shenyu New Energy Group did not have any debt securities.

Save as aforesaid if any or as otherwise mentioned herein, and apart from intra-group liabilities and normal trade and other payables in the ordinary course of business, at the close of business on 31 May 2008, the Group and the Shenyu New Energy Group did not have any outstanding indebtedness, loan capital, bank overdrafts and liabilities under acceptances or other similar indebtedness, debenture, mortgages, charges or loans or acceptance credits or hire purchase or finance lease commitment, guarantees or contingent liabilities.

The Directors confirm that, save as disclosed herein, there has not been any material change in the indebtedness or contingent liabilities of the Group and the Shenyu New Energy Group since 31 May 2008.

5. MATERIAL ADVERSE CHANGE

The Directors are not aware of any material adverse changes in the financial or trading position of the Group since 30 September 2007, being the date of which the latest published financial statements of the Group were made up.

6. WORKING CAPITAL

Taking into consideration the financial resources available to the Group and the Shenyu New Energy Group, including their internally generated funds and other financial resources, and in the absence of unforeseen circumstances, we are satisfied that the statement in the Circular as to the sufficiency of the working capital for their present requirements, that is for at least twelve months from the date of this circular.

109

ACCOUNTANTS’ REPORT ON THE SHENYU NEW ENERGY GROUP

APPENDIX IIA

A. ACCOUNTANTS’ REPORT

The following is the text of a report, prepared for the sole purpose of inclusion in this circular, received from the independent reporting accountants, Shu Lun Pan Horwath Hong Kong CPA Limited.

Shu Lun Pan Horwath Hong Kong CPA Limited 香港立信浩華會計師事務所有限公司 20th Floor, Central Plaza 18 Harbour Road Wanchai, Hong Kong Telephone : (852) 2526 2191 Facsimile : (852) 2810 0502 Website : [email protected] Email : www.horwath.com.hk

24 July 2008

The Board of Directors

China Grand Forestry Green Resources Group Limited Unit 3307-11, 33/F, West Tower Shun Tak Centre 168-200 Connaught Road Central Hong Kong

Dear Sirs

We set out below our report on the consolidated financial information (the “Financial Information”) relating to Shenyu New Energy Group Limited (“Shenyu New Energy”) and its subsidiaries (hereinafter collectively referred to as “Shenyu New Energy Group” or the “Group”) for the period from 2 November 2006 (date of incorporation) to 31 December 2006, year ended 31 December 2007 and four months ended 30 April 2008 (the “Relevant Periods”), prepared for inclusion in the circular of China Grand Forestry Green Resources Group Limited (formerly known as China Grand Forestry Resources Group Limited) (the “Company”) dated 24 July 2008 (the “Circular”) in connection with the proposed acquisition of the 100% equity interest of Shenyu New Energy Group by the Company (the “Acquisition”).

Shenyu New Energy was incorporated on 2 November 2006 in the British Virgin Islands (“BVI”) with limited liability. Shenyu New Energy is an investment holding company which has been inactive since its incorporation until it set up 北京神浩新能源科技有限公司 (“Beijing Shenhao New Energy Technology Company Limited”) (“Beijing Shenhao”) in August 2007 and became the sole shareholder of Beijing Shenhao.

110

ACCOUNTANTS’ REPORT ON THE SHENYU NEW ENERGY GROUP

APPENDIX IIA

As at 30 April 2008, Shenyu New Energy had the following subsidiaries:

Equity interest Name of Place and date of Registered attributable to company establishment paid-in capital the Company Principal activity 北京神浩新能源 The People’s Republic HK$30,000,000 100% Reseach and development 科技有限公司 of China (the “PRC”) of technologies in (“Beijing Shenhao 24 August 2007 biological energy and New Energy forestry resources Technology Company Limited”) Yunnan Shenyu The PRC RMB16,000,000 100% Reseach and development New Energy 1 March 2006 of Jatropha Curcas L Company Limited based biological energy sources, such as bio-diesel 雙柏神宇新能源 The PRC RMB6,000,000 99% Research and development 基地有限公司 23 January 2007 of biological energy (“Shuangbai Shenyu sources and forestry New Energy Base resources Company Limited”)

Shenyu New Energy and Shenyu New Energy Group adopted 31 December as its financial year end date. No audited financial statements of Shenyu New Energy and Shenyu New Energy Group have been prepared since the date of incorporation of Shenyu New Energy.

For the purpose of this report, the directors of Shenyu New Energy have prepared the financial statements (the “HKFRS Financial Statements”) for the Relevant Periods in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”). The HKFRS Financial Statements were audited by Shu Lun Pan Horwath Hong Kong CPA Limited.

111

ACCOUNTANTS’ REPORT ON THE SHENYU NEW ENERGY GROUP

APPENDIX IIA

Directors’ responsibility

The directors of Shenyu New Energy are responsible for the preparation and the true and fair presentation of the HKFRS Financial Statements in accordance with HKFRSs. This responsibility includes designing, implementing and maintaining internal control relevant to the preparation and the true and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Reporting accountants’ responsibility

For the Financial Information for the period from 2 November 2006 (date of incorporation) to 31 December 2006, year ended 31 December 2007 and four months ended 30 April 2008, our responsibility is to express an opinion on the Financial Information based on our examination and to report our opinion to you. We examined the HKFRS Financial Statements and carried out such additional procedures as are necessary in accordance with Auditing Guideline 3.340 “Prospectuses and the Reporting Accountant” issued by the HKICPA.

For the Financial Information for four months ended 30 April 2007, it is our responsibility to form an independent conclusion, based on our review, on the Financial Information and to report our conclusion to you. We conducted our review on the Financial Information for four months ended 30 April 2007 in accordance with Hong Kong Standard on Review Engagements 2400 “Engagements to Review Financial Statements” issued by the HKICPA. A review consists principally of making enquiries of the management and applying analytical procedures to the Financial Information and based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit and therefore provides a lower level of assurance than an audit. Accordingly we do not express an audit opinion on the Financial Information for four months ended 30 April 2007.

Opinion and review conclusion

In our opinion, the Financial Information for the period from 2 November 2006 (date of incorporation) to 31 December 2006, year ended 31 December 2007 and four months ended 30 April 2008, for the purpose of this report, gives a true and fair view of the state of affairs of Shenyu New Energy Group as at 31 December 2006 and 2007 and 30 April 2008 and of its results and cash flows for the periods and year then ended.

On the basis of our review which does not constitute an audit, for the purpose of this report, we are not aware of any material modifications that should be made to the financial information for the four months ended 30 April 2007.

112

ACCOUNTANTS’ REPORT ON THE SHENYU NEW ENERGY GROUP

APPENDIX IIA

B. FINANCIAL INFORMATION

Consolidated income statements

Notes Turnover 6 Cost of sales Gross profit Interest income Excess of acquirer’s interest in the net fair value of acquiree’s identifiable net assets over costs Gains arising from changes in fair value of biological assets less estimated point-of-sale costs Administrative expenses Profit from operating activities Finance costs 7 Profit before taxation 9 Taxation 10 Profit for the period/year attributable to the equity holders of the Company	From 2 November 2006 to 31 December 2006 RMB’000 – – – – – – – – – – – –	Year ended 31 December 2007 RMB’000 – – – 250 891,927 481,994 (2,245) 1,371,926 (699) 1,371,227 – 1,371,227	Four months ended 30 April 2007 2008 RMB’000 RMB’000 (unaudited) – – – – – – – 32 – – – 31,200 – (4,448) – 26,784 – (620) – 26,164 – – – 26,164

The accompanying notes form part of these Financial Information.

113

ACCOUNTANTS’ REPORT ON THE SHENYU NEW ENERGY GROUP

APPENDIX IIA

B. FINANCIAL INFORMATION (Continued)

Consolidated balance sheets

Notes ASSETS AND LIABILITIES Non-current assets Property, plant and equipment 11 Prepaid lease payments 12 Biological assets 13 Current assets Inventories Trade receivables Prepaid lease payments 12 Other receivables, deposits and prepayments 14 Bank and cash balances Current liabilities Trade payables Other payables and accruals 15 Amount due to a shareholder 16 Net current assets/(liabilities) Total assets less current liabilities Non current liabilities Provision for plantation costs 17 Long-term payables 18 NET ASSETS EQUITY Paid-up in capital 19 Reserves Equity attributable to equity holders of the Company Minority interest TOTAL EQUITY	As at 31 2006 RMB’000 – – – – – – – – – – – – – – – – – – – – – – – – –	December 2007 RMB’000 17,928 29,961 1,481,514 1,529,403 119 78 627 116,880 29,449 147,153 174 105,756 38,777 144,707 2,446 1,531,849 125,555 35,007 160,562 1,371,287 – 1,371,227 1,371,227 60 1,371,287	As at 30 April 2008 RMB’000 29,215 38,469 1,533,960
			1,601,644
			130 – 806 21,084 32,891
			54,911

			174 53,236 28,947
			82,357
			(27,446)
			1,574,198
			125,555 51,192
			176,747
			1,397,451

			– 1,397,391
			1,397,391 60
			1,397,451

The accompanying notes form part of these Financial Information.

114

ACCOUNTANTS’ REPORT ON THE SHENYU NEW ENERGY GROUP

APPENDIX IIA

B. FINANCIAL INFORMATION (Continued)

Consolidated statements of changes in equity

At 2 November 2006 (date of incorporation) Issue of shares capital At 31 December 2006 Profit for the year and total recognised income for the year Capital contribution At 31 December 2007 Profit for the period and total recognised income for the period At 30 April 2008 For four months ended 30 April 2007 (unaudited) At 1 January 2007 Profit for the period and total recognised income for the period At 30 April 2007	Paid-in capital RMB’000 Note 19 – – – – – – – – 1 – 1	Retained profits RMB’000 – – – 1,371,227 – 1,371,227 26,164 1,397,391 – – –	Minority interest RMB’000 – – – – 60 60 – 60 60 – 60	Total RMB’000 – –
				– 1,371,227 60
				1,371,287 26,164
				1,397,451

				60 –
				60

The accompanying notes form part of these Financial Information.

115

ACCOUNTANTS’ REPORT ON THE SHENYU NEW ENERGY GROUP

APPENDIX IIA

B. FINANCIAL INFORMATION (Continued)

Consolidated cash flow statements

Notes Operating activities Profit before taxation Adjustments for: Depreciation of Property, plant and equipment Recognition of prepaid lease payments Fair value gain on biological assets Excess of acquirer’s interest in the net fair value of acquiree’s identifiable net assets over costs Operating cash flow before working capital changes Increase in provision for plantation costs (Increase)/decrease in trade receivables (Increase)/decrease in other receivables, deposits and prepayments Increase in inventories Increase/(decrease) in other payables and accruals Increase in long-term payables Interest received Net cash generated from operating activities Investing activities Interest received Purchase of property, plant and equipment Purchase of biological assets Additions of prepaid lease payments Net cash outflow from acquisition of subsidiaries 21 Net cash used in investing activities Financing activities Issue of shares Increase/(decrease) in amount due to holding company Net cash generated from financing activities Increase in cash and cash equivalents Cash and cash equivalents at beginning of period/year Cash and cash equivalents at end of period/year	From 2 November 2006 to 31 December 2006 RMB’000 – – – – – – – – – – – – – – – – – – – – – – – – – – –	Year ended 31 December 2007 RMB’000 1,371,227 238 627 (481,994) (891,927) (1,829) (10,110) (78) (18,852) (119) 55,994 16,185 41,191 (27) 41,164 27 (8,526) (23,978) (5,001) (13,014) (50,492) – 38,777 38,777 29,449 – 29,449	Four months ended 30 April 2007 2008 RMB’000 RMB’000 (unaudited) – 26,164 – 183 – 268 – (31,200) – – – (4,585) – (6,262) – 78 – 95,796 – (11) – (52,520) – 16,185 – 48,681 – (32) – 48,649 – 32 – (11,470) – (14,984) – (8,955) – – – (35,377) – – – (9,830) – (9,830) – 3,442 – 29,449 – 32,891

The accompanying notes form part of these Financial Information.

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C. NOTES TO THE FINANCIAL INFORMATION

1. General information and basis of presentation

Shenyu New Energy was incorporated on 2 November 2006 in the British Virgin Islands (“BVI”) with limited liability. The address of the registered office of Shenyu New Energy is P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands. The principal activity of Shenyu New Energy is investment holding.

The Financial Information set out in this report has been prepared in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”), which collective term includes all applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards and Interpretations issued by HKICPA and the applicable disclosure requirements of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and have been consistently applied throughout the Relevant Periods.

The Financial Information is presented in Renminbi and all values are rounded to the nearest thousand except otherwise indicated.

2. Adoption of new and revised Hong Kong Financial Reporting Standards (“HKFRSs”)

Shenyu New Energy Group has not early adopted the following HKFRSs that have been issued but are not yet effective:

HKAS 1 (Revised)	Presentation of Financial Statements	1
HKAS 23 (Revised)	Borrowing Costs 1
HKAS 27 (Revised)	Consolidated and Separate Financial	Statements			2
HKAS 32 & 1 (Amendments)	Puttable financial instruments and obligations arising on
	liquidation 1
HKFRS 2 (Amendment)	Vesting Conditions and Cancellations		1
HKFRS 3 (Revised)	Business Combinations 2
HKFRS 8	Operating Segments 1
HK(IFRIC) – Int 12	Service Concession Arrangements 2
HK(IFRIC) – Int 13	Customer Loyalty Programmes 4
HK(IFRIC) – Int 14	HKAS19 – The Limit on a defined benefit asset, minimum
	funding requirements and their interaction			5

Notes:

1 Effective for annual periods beginning on or after 1 January 2009
2 Effective for annual periods beginning on or after 1 July 2009
3 Effective for annual periods beginning on or after 1March 2007
4 Effective for annual periods beginning on or after 1 July 2008
5 Effective for annual periods beginning on or after 1 January 2008

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3. Summary of significant accounting policies

(a) Basis of preparation

The Financial Information has been prepared on the historical cost basis except for biological assets and financial liabilities disclosed in Notes 13, 17 and 18, which have been measured at fair value.

The preparation of Financial Information in conformity with HKFRSs requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and assumptions are reviewed on an ongoing basis.

A summary of the significant accounting policies followed by Shenyu New Energy Group in the preparation of the Financial Information is set out below:

(b) Basis of consolidation

The Financial Information incorporate the financial statements of Shenyu New Energy and its subsidiaries.

The results of subsidiaries acquired and disposed during the Relevant periods are included in the consolidated income statements from the effective date of acquisition or up to the effective date of disposal, as appropriate.

All significant intercompany transactions, balances and unrealised gains on transactions between Group enterprises are eliminated in full on consolidation. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment on the asset transferred.

Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Shenyu New Energy Group.

Minority interests in the net assets of consolidated subsidiaries are identified separately from the Shenyu New Energy Group’s equity therein. Minority interests consist of the amount of those interests at the date of the original business combination and the minority’s share of changes in equity since the date of the combination. Losses applicable to the minority in excess of the minority’s interest in the subsidiary’s equity are allocated against the interests of Shenyu New Energy Group except to the extent that the minority has a binding obligation and is able to make an additional investment to cover the losses.

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(c) Business combinations

Acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured as the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by Shenyu New Energy in exchange for control of the acquiree, plus any costs directly attributable to the business combination. The acquiree’s identifiable assets, liabilities and contingent liabilities are recognised at their fair values at the acquisition date.

Goodwill or discount on acquisition arising on acquisition is recognised in accordance with the accounting policy for goodwill in Note 3(e) below.

The interest of minority shareholders in the acquiree is initially measured at the minority’s proportion of the net fair value of the assets, liabilities and contingent liabilities recognised.

(d) Subsidiaries

Subsidiaries are entities in which Shenyu New Energy Group has the power to govern the financial and operating policies, so as to obtain benefits from their activities. In assessing control, potential voting rights that presently are exercisable are taken into account.

Investments in subsidiaries are included in Shenyu New Energy’s balance sheet at cost less any impairment loss.

(e) Goodwill

Goodwill arising on the acquisition of a subsidiary represents the excess of the cost of acquisition over Shenyu New Energy Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the subsidiary recognised at the date of acquisition. Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses.

For the purpose of impairment testing, goodwill is allocated to each of the Shenyu New Energy Group’s cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to other asset of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period.

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Where Shenyu New Energy Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the excess, after reassessment, is recognised immediately in profit or loss.

(f) Property, plant and equipment

Buildings held for use in production or supply of goods or services, or for administrative purposes, are stated in the balance sheet at their cost less any subsequent accumulated depreciation and subsequent accumulated impairment losses.

Other property, plant and equipment are stated at historical cost less accumulated depreciation and any accumulated impairment losses.

Depreciation is charged so as to write off the cost of assets, other than properties under construction, over their estimated useful lives, using the straight-line method. The estimated useful lives, residual values and depreciation method are reviewed at each balance sheet date, with the effect of any changes in estimate accounted for on a prospective basis. The principal annual rates are as follows:

Buildings and structures	20%
Leasehold improvements	20%
Motor vehicles	20%
Furnitures and equipment	20%

Construction in progress represents property, plant and equipment under construction or pending installation and is stated at cost. Cost includes the costs of construction of property and costs of plant and equipment. No provision for depreciation is made on construction-in-progress until such time as the relevant assets are completed and ready for intended use. When the assets concerned are brought into use, the costs are transferred to property, plant and equipment and depreciated in accordance with the policy as stated above.

(g) Prepaid lease payments

Prepaid lease payments represent upfront premium paid for use of land. Prepaid lease payments are released to profit or loss over the lease term on a straight-line basis.

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(h) Biological assets

Biological assets are living plants involved in the agricultural activities of the transformation of biological assets into agricultural produce for sale or into additional biological assets. Biological assets and agricultural produce are measured at fair value less estimated point-of-sale costs at initial recognition and at each balance sheet date. The fair value of biological assets is determined based on either the present value of expected net cash flows from the biological assets discounted at a current marketdetermined pre-tax rate or under replacement cost basis.

The gain or loss arising on initial recognition and subsequent changes in fair values less estimated point-of-sale costs of biological assets is recognised in profit or loss in the period in which it arise. Upon the sale of the agricultural produce as forestry products, the carrying amount is transferred to cost of sales in the income statement.

Deposits/proceeds received from the sale of pre-harvest biological assets are accrued as liability of deferred revenue and are recognised as revenue in the income statement upon the transfer to the customers of the risks and rewards associated with ownership when the harvest and delivery of the forestry products have been made.

(i) Inventories

Inventories, comprising agricultural materials are carried at the lower of cost and net realisable value. Costs of agricultural materials are stated at their purchase cost calculated on a first-in, first-out basis. Net realisable value is the estimated selling prices in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

(j) Impairment of tangible and intangible assets (excluding goodwill)

At each balance sheet date, Shenyu New Energy Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, Shenyu New Energy Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified.

Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment annually, and whenever there is an indication that the asset may be impaired.

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Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.

Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) 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 (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

(k) Financial instruments

Financial assets and financial liabilities are recognised on the balance sheets when Shenyu New Energy Group becomes a party to the contractual provisions of the assets. 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 the income statement.

Financial assets

Shenyu New Energy Group’s financial assets are mainly loans and receivables. All regular way purchases or sales of financial assets are recognised and derecognised on a settlement 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 financial assets are set out below.

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Loans and receivables

Effective interest method

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

Impairment of financial assets

Loans and receivables are assessed for indicators of impairment at each balance sheet date. Loans and receivables are impaired where there is objective evidence that, as a result of one or more events occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been impacted. Objective evidence of impairment could include:

significant financial difficulty of the issuer or counterparty; or
default or delinquency in interest or principal payments; or
it becoming probable that the borrower will enter bankruptcy or financial reorganisation; or
significant changes in the technological, market, economic or legal environment that have an adverse effect on the debtor.

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

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

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Financial liabilities and equity

Financial liabilities and equity instruments issued by Shenyu New Energy Group 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 Shenyu New Energy Group after deducting all of its liabilities. The accounting policies adopted in respect of financial liabilities and equity instruments are set out below.

Equity instruments

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

Financial liabilities

Financial liabilities, including accounts and other payables and borrowings, are subsequently measured at amortised cost, using the effective interest method.

Effective interest method

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

Derecognition

Financial assets are derecognised when the contractual rights to receive cash flows from the assets expire or the assets are transferred and Shenyu New Energy 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 and receivable is recognised in profit or loss.

Financial liabilities are derecognised when the obligation specified in the relevant contract is discharged, cancelled or expires.

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(l) Cash and cash equivalents

Cash and cash equivalents comprise cash on hand and deposits held at call with banks, and other short-term highly liquid investments with original maturities of three months or less that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.

(m) Operating leases

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease.

Prepaid lease payments represent upfront payments made for the use of land and are released to profit or loss over the unexpired terms of the lease on a straight-line basis.

(n) Provisions and contingent liabilities

Provisions are recognised when Shenyu New Energy Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of obligation.

The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the balance sheet date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows.

When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, the receivable is recognised as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably.

Where it is probable that an outflow of economic benefits will be required, or the amount not be estimated reliably, the obligation is disclosed as contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.

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(o) Taxation

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

(i) Current tax

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

(ii) Deferred tax

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

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

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Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realised, based on tax rates (and tax laws) that have been enacted or substantively enacted by the balance sheet date. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which Shenyu New Energy Group expects, at the balance sheet date, to recover or settle the carrying amount of its assets and liabilities.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and Shenyu New Energy Group intends to settle its current tax assets and liabilities on a net basis.

(p) Translation of foreign currencies

The individual financial statements of each Group entity are presented in the currency of the primary economic environment in which the entity operates (“functional currency”). For the purpose of the Financial Information, the results and financial position of each Group entity are expressed in Renminbi which is the functional currency of Shenyu New Energy, and the presentation currency for the Financial Information.

In preparing the financial statements of the individual entities, foreign currency transactions are translated into Renminbi, being the functional currency at the rates of exchange 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 retranslation of monetary items, are included in profit or loss for the period. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in profit or loss for the period except for differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognised directly in equity. For such non-monetary items, any exchange component of that gain or loss is also recognised directly in equity.

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(q) Employee pension obligations

Pursuant to laws and regulations in the PRC, contributions to the basic old age insurance for Shenyu New Energy’s PRC employees are made monthly to a government agency based on 28% of the standard salary set by the provincial government, of which 20% is borne by Shenyu New Energy Group and the remainder is borne by the employees. Except for the monthly contribution of 20% on standard salary to the government agency, Shenyu newe Energy Group has no further obligation in connection with PRC employees’ retirement benefits. The government agency is responsible for the pension liabilities relating to such employees on their retirement. Shenyu New Energy Group accounts for these contributions on an accrual basis.

Contributions to the above retirement schemes are charged to profit or loss as incurred.

(r) Research and development costs

Research costs are charged to the profit and loss in the period in which they are incurred. Development costs are expensed as incurred, except where a specific project is undertaken, the technical feasibility of the product under development has been demonstrated, costs are identifiable and a market exists for the product such that the development costs are expected to be recoverable from related future economic benefit. Such development costs are recognised as deferred development costs in the balance sheet and amortised on a straight-line basis over period over which the deferred development costs is expected to confer economic benefits, commencing from the date the product is available for sale. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period.

(s) Government grants

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

Government grants whose primary condition is that Shenyu New Energy Group should purchase, construct or otherwise acquire non-current assets are recognised as deferred income in the balance sheet and transferred to profit or loss on a systematic and rational basis over the useful lives of the related assets.

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Other government grants are recognised as income over the periods necessary to match them with the costs for which they are intended to compensate, on a systematic basis. Government grants that are receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to Shenyu New Energy Group with no future related costs are recognised in profit or loss in the period in which they become receivable.

(t) Related parties

Two parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. Related parties may be individuals (being members of key management personnel, significant shareholders and/or their close family members) or other entities and include entities which are under the significant influence of related parties of Shenyu New Energy Group where those parties are individuals, and post-employment benefit plans which are for the benefit of employees of Shenyu New Energy Group or of any entity that is a related party of Shenyu New Energy Group.

(u) Revenue recognition

Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for services provided in the normal course of business, net of discounts.

(i) from the sale of goods and forestry products, on the transfer of risks and rewards of ownership, which generally coincides with the time the goods and forestry products are delivered to customers and title has passed; and
(ii) interest income, on a time proportion basis, taking into account the principal outstanding and the effective interest rate applicable.

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4. Financial risk management

(a) Financial risk factors

The main risks arising from Shenyu New Energy Group’s financial instruments in the normal course of its business are credit risk, liquidity risk, interest rate and currency risk. Shenyu New Energy Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on Shenyu New Energy Group’s financial performance.

(i) Currency risk

Currency risk to Shenyu New Energy Group is minimal as most of Shenyu New Energy Group’s transactions are carried out in Renminbi.

(ii) Credit risk

Shenyu New Energy Group has no significant concentrations of credit risk. It has policies in place to ensure that transactions are made to customers with an appropriate credit history. The exposure to these credit risks are monitored on an ongoing basis.

(iii) Liquidity risk

Shenyu New Energy Group’s policy is to regularly monitor its liquidity requirements and its compliance with lending covenants, to ensure that it maintains sufficient reserves of cash and adequate committed lines of funding from major financial institutions to meet its liquidity requirements in the short and longer term.

The following table details the remaining contractual maturities at the balance sheet date of Shenyu New Energy Group’s non-derivative financial liabilities and derivative financial liabilities, which are based on contractual undiscounted cash flows (including interest payments computed using contractual rates, or if floating, based on rates current at the balance sheet date) and the earliest date Shenyu New Energy Group can be required to pay.

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At 30 April 2008 Provision for plantation costs Long-term payables Other payables and accruals Amount to a shareholder Trade payables At 31 December 2007 Provision for plantation costs Long-term payables Other payables and accruals Amount due to a shareholder Trade payables	Carrying amount RMB’000 125,555 51,192 53,236 28,947 174 259,104 125,555 35,007 105,756 38,777 174 305,269	Total contractual undiscounted cash flow RMB’000 145,000 106,242 53,236 28,947 174 333,599 145,000 75,722 105,756 38,777 174 365,429	Within 1 year or on demand RMB’000 – – 53,236 28,947 174 82,357 – – 105,756 38,777 174 144,707	More than 1 year but less than 2 years RMB’000 – 4,221 – – – 4,221 – 2,297 – – – 2,297	More than 2 years but Less than 5 years RMB’000 145,000 10,386 – – – 155,386 145,000 8,599 – – – 153,599	More than 5 years _RMB’00_0 – 91,635 – – –
						91,635

						– 64,826 – – –
						64,826

(iv) Cash flow and fair value interest-rate risk

As Shenyu New Energy Group has no significant interest-bearing assets and liabilities, Shenyu New Energy Group’s income and operating cash flows are substantially independent of changes in market interest rate.

(b) Fair value estimation

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

The directors of Shenyu New Energy consider that the carrying amounts of financial assets and liabilities at amortised cost in the Financial Information are approximate to their fair values.

The carrying amounts of significant financial assets and liabilities are approximate their respective fair values as at 31 December 2006 and 2007 and 30 April 2008 because of the immediate or short-term maturity, except for biological assets, provision for plantation costs and long-term payables. The basis of fair values estimation of biological assets, provision for planation costs and long-term payables are disclosed in notes 13, 17 and 18.

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(c) Business risk

Shenyu New Energy Group is exposed to financial risks arising from changes in prices of agricultural produce which are determined by constantly changing market forces of supply and demand, and other factors. The other factors include weather conditions. Shenyu New Energy Group has little or no control over these conditions and factors.

(d) Capital risk management

Shenyu New Energy Group’s objective of managing capital is to safeguard its ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce cost of capital.

In order to maintain or adjust the capital structure, Shenyu New Energy Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debts.

The capital structure of Shenyu New Energy Group consists of equity attributable to equity holders of the company only, comprising share capital and reserves.

5. Critical accounting estimates and judgements

In the application of Shenyu New Energy Group’s accounting policies, the directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

(a) Impairment on tangible assets

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discounted to their present value, which requires significant judgement relating to the level of revenue and amount of operating costs. The Group uses all readily available information in determining an amount that is reasonable approximation of recoverable amount, including estimates based on reasonable and supportable assumptions and projections of revenue and amount of operating costs. Changes in these estimates could have a significant impact on the carrying value of the assets and could result in additional impairment charge or reversal of impairment in future periods.

(b) Fair values of biological assets

Shenyu New Energy Group’s management determines the fair values less estimated point-of-sale costs of biological assets on initial recognition and at each balance sheet date with reference to the market-determined prices, cultivation area, species, growing conditions, cost incurred and expected yield of the crops and/or the professional valuation.

Shenyu New Energy Group’s forestry business is subject to the usual agricultural hazards from fire, wind and insects. Forces of nature such as temperature and rainfall may also affect harvest efficiency. Management considers adequate preventive measures are in place and the relevant legislation under forestry laws in the PRC will assist in minimizing exposure. Nevertheless, to the extent that un-anticipated factors affecting harvestable agricultural produce may result in re-measurement or harvest losses in future accounting periods.

6. Turnover

No turnover was generated during the Relevant Periods.

7. Finance costs

		From
	2	November
		2006 to	Year ended	Four months ended
	31	December	31 December	30 April
		2006	2007	2007	2008
		RMB’000	RMB’000	RMB’000	RMB’000
				(unaudited)
Interest on amortised financial liabilities		–	699	–	620

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8. Directors’ emoluments and senior executive emoluments

(a) Details of the emoluments paid by Shenyu New Energy Group to the directors during the Relevant Periods are as follows:

Fees Other emoluments	From 2 November 2006 to 31 December 2006 RMB’000 – – –	Year ended 31 December 2007 RMB’000 – – –	Four months ended 30 April 2007 2008 RMB’000 RMB’000 (unaudited) – – – – – –	Four months ended 30 April 2007 2008 RMB’000 RMB’000 (unaudited) – – – – – –
				–

During the Relevant Periods, no remuneration was paid by Shenyu New Energy Group to its directors or the five highest paid employees as an inducement to join or upon joining Shenyu New Energy Group or as compensation for loss of office. No directors of Shenyu New Energy have waived any remuneration during the Relevant Periods.

(b) Five highest paid individuals

The five individuals whose remuneration were the highest in Shenyu New Energy Group during the Relevant Periods are as follows:

Salaries and other benefits Retirement benefit: scheme contributions	From 2 November 2006 to 31 December 2006 RMB’000 70 6 76	Year ended 31 December 2007 RMB’000 450 39 489	Four months ended 30 April 2007 2008 RMB’000 RMB’000 (unaudited) 168 244 13 13 181 257	Four months ended 30 April 2007 2008 RMB’000 RMB’000 (unaudited) 168 244 13 13 181 257
				257

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9. Profit before taxation

Profit before taxation is arrived at after charging:

	From
	2 November
	2006 to	Year ended	Four months ended
	31 December	31 December	30 April
	2006	2007	2007	2008
	RMB’000	RMB’000	RMB’000	RMB’000
			(unaudited)
Staff costs	–	2,002	–	1,443
Depreciation of property, plant and equipment	–	238	–	183
Release of prepaid lease payments	–	627	–	268
Auditor’s remuneration	–	–	–	–

Note: Staff costs amounted to approximately RMB383,000 and RMB967,000 were capitalised in Biological assets for four months ended 30 April 2008 and year ended 31 December 2007 respectively.

10. Taxation

(a) Taxation in the consolidated income statements represents:

		From
	2	November
		2006 to	Year ended	Four months ended
	31	December	31 December	30 April
		2006	2007	2007	2008
		RMB’000	RMB’000	RMB’000	RMB’000
				(unaudited)
Current tax – PRC enterprise income tax		–	–	–	–

No provision for PRC enterprise income tax has been made as Shenyu New Energy and its subsidiaries has no estimated assessable profits arising from Relevant Periods.

In accordance with the relevant applicable tax regulations of the PRC, a subsidiary Shenyu New Energy is entitled to full exemption from PRC enterprise income tax for the first three years commencing from year 2007. Local income tax is exempted during the tax concession years. Currently, Yunnan Shenyu New Energy is under the full tax exemption period and accordingly no tax provision has been made in respect of the operating results derived by Yunnan Shenyu New Energy during the Relevant Periods.

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APPENDIX IIA

On 16 March 2007, the Fifth Plenary Session of the Tenth National People’s Congress of the PRC promulgated the Corporate Income Tax Law of the PRC (“the New Tax Law”), which became effective on 1 January 2008. Further, on 6 December 2007, the State Council released the Implementation Rules to the Corporate Income Tax Law of the PRC.

(b) Taxation for the Relevant Periods can be reconciled to the accounting profit as follows:

Profit before taxation Taxation calculated at 25% Tax effect on non-taxable items Tax exemption	From 2 November 2006 to 31 December 2006 RMB’000 – – – – –	Year ended 31 December 2007 RMB’000 1,371,227 342,807 (222,982) (119,825) –	Four months ended 30 April 2007 2008 RMB’000 RMB’000 (unaudited) – 26,164 – 6,541 – – – (6,541) – –

(c) During the Relevant Periods, no deferred taxation has been provided in respect of the fair value adjustment on biological assets of Yunnan Shenyu. It is because according to the Implementation Rules, all forestry business is entitled to full exemption from PRC enterprise income tax commencing from 1 January 2008.

Yunnan Shenyu is currently under the full tax exemption period and therefore has not yet lodged application for full exemption under the New Tax Law. However, as Yunnan Shenyu is operating forestry business, the directors are confident that full exemption will be granted from the PRC tax authority when the application is lodged.

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11. Property, plant and equipment

At Cost: At 2 November 2006 and 31 December 2006 Acquisition of a subsidiary (Note 20) Additions At 31 December 2007 Additions At 30 April 2008 Accumulated depreciation: At 2 November 2006 and 31 December 2006 Acquisition of a subsidiary Charge for the year At 31 December 2007 Charge for the period At 30 April 2008 Net book value: At 30 April 2008 At 31 December 2007 At 31 December 2006	Building and structures RMB’000 – 800 – 800 – 800 – 168 23 191 46 237 563 609 –	Leasehold improvements RMB’000 – 985 53 1,038 – 1,038 – – 131 131 – 131 907 907 –	Motor vehicles RMB’000 – 1,532 – 1,532 142 1,674 – 133 61 194 104 298 1,376 1,338 –	Furnitures and equipment RMB’000 – 399 75 474 150 624 – 47 23 70 33 103 521 404 –	Construction in progress RMB’000 – 6,272 8,398 14,670 11,178 25,848 – – – – – – 25,848 14,670 –	Total RMB’000 – 9,988 8,526
						18,514 11,470
						29,984
						– 348 238
						586 183
						769
						29,215

						17,928

						–

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12. Prepaid lease payments

Shenyu New Engery Group’s prepaid lease payments represent land use rights in the PRC under medium term lease.

At the beginning of period Acquisition of a subsidiary_(Note 20)_ Additions Recognition in profit or loss At the end of period/year Classified as current portion Classified as non-current portion	As at 31 December 2006 2007 RMB’000 RMB’000 – – – 26,214 – 5,001 – (627) – 30,588 – (627) – 29,961	As at 30 April 2008 RMB’000 30,588 – 8,955 (268) 39,275 (806) 38,469

13. Biological assets

Reconciliation of movements in carrying value of Shenyu New Energy Group’s biological assets during the Relevant Periods is as follows:

At 2 November 2006 and 31 December 2006 Acquisition of a subsidiary Purchases during the period Plantation expenditure incurred Gain arising from change in fair value less estimated point-of-sale cost At 31 December 2007 Purchases during the period Plantation expenditure incurred Gain arising from change in fair value less estimated point-of-sale cost At 30 April 2008	Jatropha Curas L RMB’000 – 306,421 – 4,268 165,128 475,817 – 6,262 22,620 504,699	Other trees RMB’000 – 659,011 29,820 – 316,866 1,005,697 14,984 – 8,580 1,029,261	Total RMB’000 – 965,432 29,820 4,268 481,994
			1,481,514 14,984 6,262 31,200
			1,533,960

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The Group’s biological assets in PRC were independently valued by Pöyry Forest Industry Limited.

In valuing the Group’s biological assets, the valuer has considered the expectation approach for other trees (or forest asset) and cost (replacement) approach for Jatropha Curas L (or Jatropha assets). The expectation approach is a widely accepted method of valuation for biological assets amongst international appraisers. However, it is most appropriate in circumstances where actual yields, agriculture practices and costs are more certain. Jatropha curas have not yet reached large scale commercial production and therefore absence of actual cost, price and yield information to forecast realiable future cash flows.

The valuer employs an income expectation approach based on projected wood flows to value the forest assets and a replacement cost approach based on standard industry costs to value the Jatropha asset. Forest asset value has been estimated by projecting pre-tax cash flows and applying a discount rate expressed in real terms. Jatropha market asset value has been estimated by projecting industry standard costs involved in establishing and maintaining the plantation and accumulates these with compound interest from their inception of the investment to the current point in time.

In using the expectation approach, the valuer has taken the following into consideration:

The current extent and condition of the forest assets as at 31 December 2007 and 30 April 2008;
The location, accessibility and attractiveness of the forests from a harvesting, transportation and market perspective;
Prevailing log prices and the impacts of log grade and stem quality on price;
Expectations of future log prices;
Industry standard cost of establishing Jatropha plantation;
New evidence of the market perception of forest value as demonstrated in recent transaction results, i.e. the implied discount rates;
Risks that may prevent the realisation of forest value.

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14. Other receivables, deposits and prepayments

Receivables for sale of forest farms_(note ii)_ Others	As at 31 December 2006 2007 RMB’000 RMB’000 – 95,333 – 21,547 – 116,880	As at 30 April 2008 RMB’000 550 20,534
		21,084

Notes:

(i) The carrying amounts of other receivables approximate their fair values at each of the balance sheet date.

(ii) The amounts represented receivables from sales of two forest farms in the PRC at a consideration of RMB228,532,900 during the year.

15. Other payables and accruals

Receipt in advance_(note ii) Payables for forest farms Other payables and accruals Government grants(note iii)_	As at 31 December 2006 2007 RMB’000 RMB’000 – 75,464 – 8,335 – 9,407 – 12,550 – 105,756	As at 30 April 2008 RMB’000 25,464 12,686 2,536 12,550
		53,236

(i) The directors of Shenyu New Energy Group consider that the carrying amount of other payables and accruals approximate their fair value at each of the balance sheet dates.

(ii) The amount represented advanced receipts from a customer for the sales of wood.
(iii) Government grants represented the incentives subsidies granted by the local authorities of the PRC to Shenyu New Energy Group regarding the research and development projects on Jatropha Curcas L.

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16. Amount due to a shareholder

The amount due to shareholder is unsecured, interest free and has no fixed repayment term.

The directors of Shenyu New Energy consider that the carrying amount of the amount due to shareholder approximate to its fair value at each of the balance sheet dates.

17. Provision for plantation costs

At 2 November 2006 and 31 December 2006 Acquisition of a subsidiary_(Note 20)_ At 31 December 2007 and 30 April 2008	RMB’000 – 125,555
	125,555

The above provision represents the present value of the management’s best estimate of the future outflow of economic benefits that will be required under the supplemental sale agreements of forest farms.

Under the terms of the supplemental sale agreements, Yunnan Shenyu will incur total plantation expenditures of RMB145,000,000 during the period from 1 January 2008 to 31 December 2010. Provision is therefore made for the best estimate of the expected payment under these agreements.

18. Long-term payables

Long term payables represent the present value of the consideration payables for acquisition of various forest farms by Yunnan Shenyu as at 31 December 2007 and 30 April 2008.

Under the terms of the acquisition agreements, Yunnan Shenyu is required to settle the considerations for periods from 2 years to 50 years. The long-term payables are unsecured and interest free.

The amounts payable under the contracts are as follows: After one year but within two years After two years but within five years After five years	RMB’000 4,221 10,386 91,635
	106,242

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APPENDIX IIA

19. Share capital

Authorised: 50,000 ordinary shares of US$1 each Issued and paid up: 10 ordinary shares of US$1 each	As at 31 December 2006 2007 RMB365,000 RMB365,000 RMB73 RMB73	As at 30 April 2008 RMB365,000

		RMB73

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20. Acquisition of a subsidiary

On 18 October 2007, Shenyu New Energy Group acquired 100% of the equity interest of Yunnan Shenyu New Energy Company Limited for a consideration of RMB156,000,000 in cash. This transaction has been accounted for by the acquisition method of accounting.

The net assets acquired in the transaction, and the discount on acquisition arising, are as follows:

Acquiree’s carrying amount before combination RMB’000 Net assets acquired: Property, plant and equipment_(Note 11) 9,640 Prepaid lease payments(Note 12) 26,214 Biological assets(Note 13) 20,075 Trade and other receivables 234,082 Bank and cash balances 2,986 Trade and other payables (56,332) Long-term payables(Note 18) (8,480) Provision for plantation costs(Note 17)_ (125,555) Deferred taxation – Minority interest (60) 102,570 Excess of acquirer’s interest in the net fair value of acquiree’s identifiable net assets Total consideration Net cash outflow arising on acquisition: Total consideration Less: Bank and cash balances acquired	Fair value adjustments RMB’000 – – 945,357 – – – – – – – 945,357	Fair value RMB’000 9,640 26,214 965,432 234,082 2,986 (56,332) (8,480) (125,555) – (60) 1,047,927 (891,927) 156,000 156,000 (2,986) 153,014

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APPENDIX IIA

21. Operating lease commitments

At each of the balance sheet dates, Shenyu New Energy Group had total future minimum lease payments under non-cancellable operating leases falling due as follows:

Within one year In the second to fifth years, inclusive Capital commitments Contracted but not provided for: Construction costs incurred for building of a processing factory and a hotel Acquisition of leasehold forest farms	As at 31 December 2006 2007 RMB’000 RMB’000 – 292 – 433 – 725 As at 31 December 2006 2007 RMB’000 RMB’000 – 26,334 – 7,744	As at 30 April 2008 RMB’000 201 380
		581

		As at 30 April 2008 RMB’000 39,040 42,845

22. Capital commitments

23. Contingent liabilities

At the balance sheet date, Shenyu New Energy Group did not have any significant contingent liabilities.

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APPENDIX IIA

D. SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements have been prepared by Shenyu New Energy Group in respect of any period subsequent to 30 April 2008.

Yours faithfully, For and on behalf of

Shu Lun Pan Horwath Hong Kong CPA Limited Certified Public Accountants Hong Kong

Chan Kam Wing, Clement

Director

Practising Certificate number P02038

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APPENDIX IIB

A. ACCOUNTANTS’ REPORT

The following is the text of a report, prepared for the sole purpose of inclusion in this circular, received from the independent reporting accountants, Shu Lun Pan Horwath Hong Kong CPA Limited.

24 July 2008

The Board of Directors

China Grand Forestry Green Resources Group Limited Unit 3307-11, 33/F, West Tower Shun Tak Centre 168-200 Connaught Road Central Hong Kong

Dear Sirs

We set out below our report on the consolidated financial information (the “Financial Information”) relating to Yunnan Shenyu New Energy Company Limited (“Yunnan Shenyu”) and its subsidiary (hereinafter collectively referred to as the “Group”) for the period from 1 March 2006 (date of incorporation) to 31 December 2006, year ended 31 December 2007 and four months ended 30 April 2007 and 2008 (the “Relevant Periods”), prepared for inclusion in the circular of China Grand Forestry Green Resources Group Limited (formerly known as China Grand Forestry Resources Group Limited) (the “Company”) dated 24 July 2008 (the “Circular”) in connection with the proposed acquisition of the 100% equity interest of Shenyu New Energy Group by the Company (the “Acquisition”). As at the date of this report, Yunnan Shenyu is an indirect wholly owned subsidiary of Shenyu.

Yunnan Shenyu was established on 1 March 2006 in the People’s Republic of China (the “PRC”) with limited liability. Yunnan Shenyu is principally engaged in the research and development of Jatropha Curcas L based biological energy sources, such as bio-diesel.

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APPENDIX IIB

As at 30 April 2008, Yunnan Shenyu had the following subsidiary:

			Equity interest
Name of	Place and date of	Registered	attributable to
company	establishment	paid-in capital	the Company	Principal activity
雙柏神宇新能源	The People’s Republic	RMB6,000,000	99%	Research and development
基地有限公司	of China			of biological energy
(Shuangbai Shenyu	23 January 2007			sources and forestry
New Energy Base				resources
Company Limited)

Yunnan Shenyu and its subsidiary adopted 31 December as its financial year end date. No audited financial statements of Yunnan Shenyu nor its subsidiary have been prepared since its date of incorporation.

For the purpose of this report, the directors of Yunnan Shenyu have prepared the financial statements (the “HKFRS Financial Statements”) for the Relevant Periods in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”). The HKFRSs Financial Statements were audited by Shu Lun Pan Horwath Hong Kong CPA Limited.

Directors’ responsibility

The directors of Yunnan Shenyu are responsible for the preparation and the true and fair presentation of the HKFRS Financial Statements in accordance with HKFRS. This responsibility includes designing, implementing and maintaining internal control relevant to the preparation and the true and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Reporting accountants’ responsibility

For the financial information for the period from 1 March 2006 (date of incorporation) to 31 December 2006, year ended 31 December 2007 and four months ended 30 April 2008, our responsibility is to express an opinion on the financial information based on our examination and to report our opinion to you. We examined the HKFRS Financial Statements and carried out such additional procedures as are necessary in accordance with Auditing Guideline 3.340 “Prospectuses and the Reporting Accountant” issued by the HKICPA.

For the Financial Information for four months ended 30 April 2007, it is our responsibility to form an independent conclusion, based on our review, on the Financial Information and to report our conclusion to you. We conducted our review on the Financial Information for four months ended 30 April 2007 in accordance with Hong Kong Standard on Review Engagements 2400 “Engagements to Review Financial Statements” issued by the HKICPA. A review consists principally of making enquiries of the management and applying analytical procedures to the financial information and based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit and therefore provides a lower level of assurance than an audit. Accordingly we do not express an audit opinion on the Financial Information for four months ended 30 April 2007.

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APPENDIX IIB

Opinion and review conclusion

In our opinion, the financial information for the period from 1 March 2006 (date of incorporation) to 31 December 2006, year ended 31 December 2007 and the four months ended 30 April 2008, for the purpose of this report, gives a true and fair view of the state of affairs of the Group as at 31 December 2006 and 2007 and 30 April 2008 and of its results and cash flows for the period and year then ended.

B. FINANCIAL INFORMATION

Consolidated income statements

Notes Turnover 6 Cost of sales Gross profit Interest income Gain on disposal of forestland Gain arising from changes in fair value of biological assets less estimated point-of-sale costs Administrative expenses (Loss)/profit from operating activities Finance costs 7 (Loss)/profit before taxation 9 Taxation 11 Net (loss)/profit for the period/year attributable to the equity holders of the Company	From 1 March 2006 to 31 December 2006 RMB’000 – – – 4 – – (3,045) (3,041) – (3,041) – (3,041)	Year ended 31 December 2007 RMB’000 78 (31) 47 27 92,011 1,427,351 (4,592) 1,514,844 (690) 1,514,154 – 1,514,154	Four months ended 30 April 2007 2008 RMB’000 RMB’000 (unaudited) – – – – – – 1 23 – – – 31,200 (810) (4,378) (809) 26,845 (1) (620) (810) 26,225 – – (810) 26,225

The accompanying notes form part of these Financial Information.

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APPENDIX IIB

B. FINANCIAL INFORMATION (Continued)

Consolidated balance sheets

Notes ASSETS AND LIABILITIES Non-current assets Property, plant and equipment 11 Prepaid lease payments 12 Biological assets 13 Current assets Inventories Trade receivables Prepaid lease payments 12 Other receivables, deposits and prepayments 14 Amount due from holding company 22(b) Bank and cash balances Current liabilities Trade payables Other payables and accruals 15 Net current (liabilities)/assets Total assets less current liabilities Non current liabilities Provision for plantation costs 16 Long-term payables 17 NET ASSETS EQUITY Paid-in capital 18 Reserves Equity attributable to equity holders of the Company Minority interest TOTAL EQUITY	As at 31 2006 RMB’000 3,071 3,637 16,407 23,115 53 – 17 2,532 – 235 2,837 – 12,993 12,993 (10,156) 12,959 – – – 12,959 16,000 (3,041) 12,959 – 12,959	December 2007 RMB’000 17,928 29,961 1,481,514 1,529,403 119 78 627 104,513 140,000 16,525 261,862 174 103,356 103,530 158,332 1,687,735 (125,555) (35,007) (160,562) 1,527,173 16,000 1,511,113 1,527,113 60 1,527,173	As at 30 April 2008 RMB’000 29,215 38,469 1,533,960 1,601,644
			130 – 806 8,724 139,981 29,871
			179,512
			174 50,837
			51,011 128,501 1,730,145
			(125,555) (51,192)
			(176,747) 1,553,398 16,000 1,537,338 1,553,338 60 1,553,398

The accompanying notes form part of these Financial Information.

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APPENDIX IIB

B. FINANCIAL INFORMATION (Continued)

Consolidated statements of changes in equity

At 1 March 2006 (date of incorporation) Loss for the period and total recognised income for the period Capital injection At 31 December 2006 Capital injection Profit for the year At 31 December 2007 Profit for the period and total recognised income for the period At 30 April 2008 For four months ended 30 April 2007 (unaudited) At 31 January 2007 Loss for the period and total recognised income for the period At 30 April 2007	Paid-in capital RMB’000 Note 19 – – 16,000 16,000 – – 16,000 – 16,000 16,000 – 16,000	Attributable to equity Retained holders of profits the Company RMB’000 RMB’000 – – (3,041) (3,041) – 16,000 (3,041) 12,959 – – 1,514,154 1,514,154 1,511,113 1,527,113 26,225 26,225 1,537,338 1,553,338 (3,041) 12,959 (810) (810) (3,851) 12,149	Minority Interest RMB’000 – – – – 60 – 60 – 60 – – –	Total RMB’000 – (3,041) 16,000 12,959 60 1,514,154 1,527,173 26,225 1,553,398 12,959 (810) 12,149

The accompanying notes form part of these Financial Information.

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APPENDIX IIB

B. FINANCIAL INFORMATION (Continued)

Consolidated cash flow statements

Operating activities (Loss)/Profit before taxation Adjustments for: Depreciation of Property, plant and equipment Recognition of prepaid lease payments Fair value gain on biological assets Gain on disposal of forest farms Operating cash flow before working capital changes Increase in provision for costs plantation (Increase)/decrease in trade receivables (Increase)/decrease in other receivables, deposits and and prepayment (Increase)/decrease in inventories Increase in trade payables Increase/(decrease) in other payables and accruals (Decrease)/increase in amount due from holding company Increase in long-term payables Interest received Net cash generated from/(used in) operating activities Investing activities Interest received Purchase of property, plant and equipment Purchase of biological assets Proceeds from disposal of biological assets Addition of prepaid lease payments Capital injection from a minority shareholder Net cash (used in)/generated from investing activities Financing activities Capital injection Net cash generated from financing activities Increase in cash and cash equivalents Cash and cash equivalents at beginning of period/year Cash and cash equivalents at end of period/year	From 1 March 2006 to 31 December 2006 RMB’000 (3,041) 55 – – – (2,986) (1,891) – (2,532) (53) – – – 12,993 5,531 (4) 5,527 4 (3,126) (14,516) – (3,654) – (21,292) 16,000 16,000 235 – 235	Year ended 31 December 2007 RMB’000 1,514,154 531 627 (1,427,351) (92,011) 4,050 (10,110) (78) (98,035) (67) 174 86,418 (140,000) 35,007 (130,741) (27) (130,768) 27 (15,388) (38,613) 228,533 (27,561) 60 147,058 – – 16,290 235 16,525	Four months ended 30 April 2007 2008 RMB’000 RMB’000 (unaudited) (810) 26,225 121 183 – 268 – (31,200) – – (689) (4,524) (1,218) (6,262) – 78 (6,685) 95,789 53 (11) – – 8,098 (52,519) – 19 5,470 16,185 5,029 48,755 (1) (23) 5,028 48,732 1 23 (2,333) (11,470) (2,691) (14,984) – – – (8,955) – – (5,023) (35,386) – – – – 5 13,346 235 16,525 240 29,871

The accompanying notes form part of these Financial Information.

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APPENDIX IIB

C. NOTES TO THE FINANCIAL INFORMATION

1. General information and basis of presentation

Yunnan Shenyu was established in the People’s Republic of China (the “PRC”) on 1 March 2006 with limited liability. The address of the registered office of Yunnan Shenyu is 中國昆明市學府路690號金鼎科技園綜合業務樓506室. The principal activity of Yunnan Shenyu is research and development of Jatropha Curcas L based biological energy sources, such as bio-diesel.

The Financial Information is presented in Renminbi and all values are rounded to the nearest thousand except otherwise indicated.

2. Adoption of new and revised Hong Kong Financial Reporting Standards (“HKFRSs”)

The Group has not early adopted the following HKFRSs that have been issued but are not yet effective:

HKAS 1 (Revised) Presentation of Financial Statements1 HKAS 23 (Revised) Borrowing Costs1 HKAS 27 (Revised) Consolidated and Separate Financial Statements2 HKAS 32 & 1 (Amendments) Puttable financial statements and obligations arising on liquidation1 HKFRS 2 (Amendment) Vesting Conditions and Cancellations1 HKFRS 3 (Revised) Business Combinations2 HKFRS 8 Operating Segments1 HK(IFRIC) – Int 12 Service Concession Arrangements2 HK(IFRIC) – Int 13 Customer Loyalty Programmes4 HK(IFRIC) – Int 14 HKAS 19 – The Limit on a defined asset, minimum funding requirements and their interaction5

Notes:

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

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

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

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

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

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3. Summary of significant accounting policies

(a) Basis of preparation

The Financial Information has been prepared on the historical cost basis except for biological assets and financial liabilities disclosed in Notes 13, 16 and 17, which have been measured at fair value.

A summary of the significant accounting policies followed by the Group in the preparation of the Financial Information is set out below:

(b) Basis of consolidation

The consolidated Financial Information incorporate the financial statements of Yunnan Shenyu and its subsidiaries.

Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Yunnan Shenyu Group.

Minority interests in the net assets of consolidated subsidiaries are identified separately from the Yunnan Shenyu Group’s equity therein. Minority interests consist of the amount of those interests at the date of the original business combination and the minority’s share of changes in equity since the date of the combination. Losses applicable to the minority in excess of the minority’s interest in the subsidiary’s equity are allocated against the interests of Yunnan Shenyu Group except to the extent that the minority has a binding obligation and is able to make an additional investment to cover the losses.

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(c) Business combinations

Acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured as the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by Yunnan Shenyu in exchange for control of the acquiree, plus any costs directly attributable to the business combination. The acquiree’s identifiable assets, liabilities and contingent liabilities are recognised at their fair values at the acquisition date.

Goodwill or discount on acquisition arising on acquisition is recognised in accordance with the accounting policy for goodwill in Note 3(e) below.

The interest of minority shareholders in the acquiree is initially measured at the minority’s proportion of the net fair value of the assets, liabilities and contingent liabilities recognised.

(d) Subsidiaries

Subsidiaries are entities in which the Group has the power to govern the financial and operating policies, so as to obtain benefits from their activities. In assessing control, potential voting rights that presently are exercisable are taken into account.

Investments in subsidiaries are included in Yunnan Shenyu’s balance sheet at cost less any impairment loss.

(e) Goodwill

Goodwill arising on the acquisition of a subsidiary represents the excess of the cost of acquisition over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the subsidiary recognised at the date of acquisition. Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses.

For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to other asset of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period.

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Where the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the excess is recognised immediately in profit or loss.

(f) Property, plant and equipment

Other property, plant and equipment are stated at historical cost less accumulated depreciation and any accumulated impairment losses.

Buildings and structures	20%
Leasehold improvements	20%
Motor vehicles	20%
Furnitures and equipment	20%

(g) Prepaid lease payments

Prepaid lease payments represent upfront premium paid for use of land. Prepaid lease payments are released to profit or loss over the lease term on a straight-line basis.

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(h) Biological assets

Biological assets are living plants involved in the agricultural activities of the transformation of biological assets into agricultural produce for sale or into additional biological assets. Biological assets and agricultural produce are measured at fair value less estimated point-of-sale costs at initial recognition and at each balance sheet date. The fair value of biological assets is determined based on either the present value of expected net cash flows from the biological assets discounted at a current marketdetermined pre-tax rate or under replacement cost basis.

(i) Inventories

(j) Impairment of tangible and intangible assets (excluding goodwill)

At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified.

Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment annually, and whenever there is an indication that the asset may be impaired.

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If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.

Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) 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 (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

(k) Financial instruments

Financial assets and financial liabilities are recognised on the balance sheets when the Group becomes a party to the contractual provisions of the assets. 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 the income statement.

Financial assets

The Group’s financial assets are mainly loans and receivables. All regular way purchases or sales of financial assets are recognised and derecognised on a settlement 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 financial assets are set out below.

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Loans and receivables

Effective interest method

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

Impairment of financial assets

significant financial difficulty of the issuer or counterparty; or
default or delinquency in interest or principal payments; or
it becoming probable that the borrower will enter bankruptcy or financial reorganisation; or
significant changes in the technological, market, economic or legal environment that have an adverse effect on the debtor.

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Financial liabilities and equity

Financial liabilities and equity instruments issued by the Group 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. The accounting policies adopted in respect of financial liabilities and equity instruments are set out below.

Equity instruments

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

Financial liabilities

Financial liabilities, including accounts and other payables and borrowings, are subsequently measured at amortised cost, using the effective interest method.

Effective interest method

Derecognition

Financial assets are derecognised when the contractual rights to receive cash flows from the assets expire or the 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 and receivable is recognised in profit or loss.

Financial liabilities are derecognised when the obligation specified in the relevant contract is discharged, cancelled or expires.

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(l) Cash and cash equivalents

(m) Operating leases

Prepaid lease payments represented upfront payments made for the use of land and are released to profit or loss over the unexpired terms of the lease on a straight-line basis.

(n) Provisions and contingent liabilities

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of obligation.

Where it is probable that an outflow of economic benefits will be required, or the amount not be estimated reliably, the obligation is disclosed as contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurence or non-occurence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.

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(o) Taxation

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

(i) Current tax

The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the income statement because it excludes items of income or expenses 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.

(ii) Deferred tax

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Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and Shenyu New Energy Group intends to settle its current tax assets and liabilities on a net basis.

(p) Translation of foreign currencies

The individual financial statements of each Group entity are presented in the currency of the primary economic environment in which the entity operates (“functional currency”). For the purpose of the Financial Information, the results and financial position of each Group entity are expressed in Renminbi which is the functional currency of Yunnan Shenyu, and the presentation currency for the Financial Information.

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(q) Employee pension obligations

Pursuant to laws and regulations in the PRC, contributions to the basic old age insurance for Yunnan Shenyu’s PRC employees are made monthly to a government agency based on 28% of the standard salary set by the provincial government, of which 20% is borne by Yunnan Shenyu New Energy and the remainder is borne by the employees. Except for the monthly contribution of 20% on standard salary to the government agency, Yunnan Shenyu has no further obligation in connection with PRC employees’ retirement benefits. The government agency is responsible for the pension liabilities relating to such employees on their retirement. Yunnan Shenyu accounts for these contributions on an accrual basis.

Contributions to the above retirement schemes are charged to profit or loss as incurred.

(r) Research and development costs

(s) Government grants

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

Government grants whose primary condition is that the group should purchase, construct or otherwise acquire non-current assets are recognised as deferred income in the balance sheet and transferred to profit or loss on a systematic and rational basis over the useful lives of the related assets.

Other government grants are recognised as income over the periods necessary to match them with the costs for which they are intended to compensate, on a systematic basis. Government grants that are receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the group with no future related costs are recognised in profit or loss in the period in which they become receivable.

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(t) Related parties

Two parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. Related parties may be individuals (being members of key management personnel, significant shareholders and/or their close family members) or other entities and include entities which are under the significant influence of related parties of the Group where those parties are individuals, and post-employment benefit plans which are for the benefit of employees of the Group or of any entity that is a related party of the Group.

(u) Revenue recognition

Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for services provided in the normal course of business, net of discounts.

(i) from the sale of goods and forestry products, on the transfer of risks and rewards of ownership, which generally coincides with the time the goods and forestry products are delivered to customers and title has passed; and
(ii) interest income, on a time proportion basis, taking into account the principal outstanding and the effective interest rate applicable.

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APPENDIX IIB

4. Financial risk management

(a) Financial risk factors

The main risks arising from the Group’s financial instruments in the normal course of its business are currency, credit risk, liquidity risk and interest rate risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance.

(i) Currency risk

Currency risk to the Group is minimal as most of the Group’s transactions are carried out in Renminbi.

(ii) Credit risk

The Group has no significant concentrations of credit risk. It has policies in place to ensure that transactions are made to customers with an appropriate credit history. The exposure to these credit risks are monitored on an ongoing basis.

(iii) Liquidity risk

The Group’s policy is to regularly monitor its liquidity requirements and its compliance with lending covenants, to ensure that it maintains sufficient reserves of cash and adequate committed lines of funding from major financial institutions to meet its liquidity requirements in the short and longer term.

The following table details the remaining contractual maturities at the balance sheet date of the Group’s non-derivative financial liabilities and derivative financial liabilities, which are based on contractual undiscounted cash flows (including interest payments computed using contractual rates, or if floating, based on rates current at the balance sheet date) and the earliest date the Group can be required to pay.

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At 30 April 2008 Provision for plantation costs Long-term payables Other payables and accruals Trade payables At 31 December 2007 Provision for plantation costs Long-term payables Other payables and accruals Trade payables At 31 December 2006 Other payables and accruals	Carrying amount RMB’000 125,555 51,192 50,837 174 227,758 125,555 35,007 103,356 174 264,092 12,993	Total contractual undiscounted cash flow RMB’000 145,000 106,242 50,836 174 302,252 145,000 75,722 103,356 174 324,252 12,993	Within 1 year or on demand RMB’000 – – 50,836 174 51,010 – – 103,356 174 103,530 12,993	More than 1 year but less than 2 years RMB’000 – 4,221 – – 4,221 – 2,297 – – 2,297 –	More than 2 years but Less than 5 years RMB’000 145,000 10,386 – – 155,386 145,000 8,599 – – 153,599 –	More than 5 years RMB’000 – 91,635 – –
						91,635

						– 64,826 – –
						64,826

						–

(iv) Cash flow and fair value interest-rate risk

As the Group has no significant interest-bearing assets and liabilities, the Group’s income and operating cash flows are substantially independent of changes in market interest rate.

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(b) Fair value estimation

The directors of Yunnan Shenyu consider that the carrying amounts of financial assets and liabilities at amortised cost in the Financial Information are approximate to their fair values.

The carrying amounts of significant financial assets and liabilities are approximate their respective fair values as at 31 December 2007 and 30 April 2008 because of the immediate or short-term maturity, except for biological assets, provision for plantation costs and long-term payables. The basis of fair values estimation of biological assets, provision for planation costs and long-term payables are disclosed in notes 13, 16 and 17.

(c) Business risk

The Group is exposed to financial risks arising from changes in prices of agricultural produce which are determined by constantly changing market forces of supply and demand, and other factors. The other factors include weather conditions. The Group has little or no control over these conditions and factors.

(d) Capital risk management

The Group’s objective of managing capital is to safeguard its ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce cost of capital.

In order to maintain or adjust the capital structure, Yunnan Shenyu may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debts.

The capital structure of the Group consists of equity attributable to equity holders of the company only, comprising share capital and reserves.

5. Critical accounting estimates and judgements

In the application of the Group’s accounting policies, the directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results differ from these estimates.

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(a) Impairment on tangible assets

If circumstances indicate that the carrying amount of a tangible asset may not be recoverable, the asset may be impaired and an impairment loss may be recognised in accordance with accounting policy for impairment on long-lived asset as described in Note 3(j). The carrying amounts of tangible assets are reviewed periodically in order to assess whether the recoverable amounts have declined below the carrying amounts. These assets are tested for impairment whenever events or changes in circumstances indicate that their recorded carrying amounts may not be recoverable. When such a decline has occurred, the carrying amount is reduced to recoverable amount. The recoverable amount is the greater of the net selling price and the value in use. In determining the value in use, expected future cash flows generated by the asset are discounted to their present value, which requires significant judgement relating to the level of revenue and amount of operating costs. The Group uses all readily available information in determining an amount that is reasonable approximation of recoverable amount, including estimates based on reasonable and supportable assumptions and projections of revenue and amount of operating costs. Changes in these estimates could have a significant impact on the carrying value of the assets and could result in additional impairment charge or reversal of impairment in future periods.

(b) Fair values of biological assets

The Group’s management determines the fair values less estimated point-of-sale costs of biological assets on initial recognition and at each balance sheet date with reference to the market-determined prices, cultivation area, species, growing conditions, cost incurred and expected yield of the crops and/or the professional valuation.

6. Turnover

Turnover was represents the invoice value of saplings sold during the Relevant Periods.

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APPENDIX IIB

7. Finance costs

		From
		1 March
		2006 to	Year ended	Four months ended
	31	December	31 December	30 April
		2006	2007	2007	2008
		RMB’000	RMB’000	RMB’000	RMB’000
				(unaudited)
Interest on long-term payables repayable		–	690	1	617

8. Directors’ emoluments and senior executive emoluments

(a) Details of the emoluments paid by the Group to the directors during the Relevant Periods are as follows:

Fees Other emoluments	From 1 March 2006 to 31 December 2006 RMB’000 – – –	Year ended 31 December 2007 RMB’000 – – –	Four months ended 30 April 2007 2008 RMB’000 RMB’000 (unaudited) – – – – – –	Four months ended 30 April 2007 2008 RMB’000 RMB’000 (unaudited) – – – – – –
				–

During the Relevant Periods, no remuneration was paid by the Group to its directors as an inducement to join or upon joining the Group or as compensation for loss of office. No directors of Yunnan Shenyu have waived any remuneration during the Relevant Periods.

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(b) Five highest paid individuals

The five individuals whose remuneration were the highest in Yunnan Shenyu during the Relevant Periods are as follows:

Salaries and other benefits Retirement benefit: Scheme contributions	From 2 November 2006 to 31 December 2006 RMB’000 70 6 76	Year ended 31 December 2007 RMB’000 450 39 489	Four months ended 30 April 2007 2008 RMB’000 RMB’000 (unaudited) 168 244 13 13 181 257	Four months ended 30 April 2007 2008 RMB’000 RMB’000 (unaudited) 168 244 13 13 181 257
				257

9. (Loss)/profit before taxation

Loss/profit before taxation is arrived at after charging:

	From
	1 March
	2006 to	Year ended	Four months ended
	31 December	31 December	30 April
	2006	2007	2007	2008
	RMB’000	RMB’000	RMB’000	RMB’000
			(unaudited)
Staff costs_(note)_	166	2,002	–	1,443
Depreciation of property, plant and equipment	55	531	–	183
Release of prepaid lease payment	–	627	–	268
Auditor’s remuneration	–	–	–	–

Note: Staff costs amounted to approximately RMB383,000 and RMB967,000 were capitalised in Biological assets for four months ended 30 April 2008 and the year ended 31 December 2007 respectively.

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APPENDIX IIB

10. Taxation

(a) Taxation in the consolidated income statements represents:

		From
		1 March
		2006 to	Year ended	Four months ended
	31	December	31 December	30 April
		2006	2007	2007	2008
		RMB’000	RMB’000	RMB’000	RMB’000
				(unaudited)
Current tax – PRC enterprise income tax		–	–	–	–

No provision for PRC enterprise income tax has been made as Yunnan Shenyu and its subsidiary have no estimated assessable profits arising from Relevant Periods.

In accordance with the relevant applicable tax regulations of the PRC, Yunnan Shenyu is entitled to full exemption from PRC enterprise income tax for the first three years commencing from the year ended 31 December 2007 after offsetting all unexpired tax losses carried forward from the previous years. Local income tax is exempted during the tax concession years. Currently, Yunnan Shenyu New Energy is under the full tax exemption period and accordingly no tax provision has been made in respect of the operating results derived by Yunnan Shenyu during the Relevant Periods.

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(b) Taxation for the Relevant Periods can be reconciled to the accounting profit as follows:

(Loss)/profit before taxation Taxation (credit)/charge calculated at 25% Tax effect of unused tax loss not recognised Effect of tax concessionary treatment Taxation charge for the period/year	From 1 March 2006 to 31 December 2006 RMB’000 (3,041) (760) 760 – –	Year ended 31 December 2007 RMB’000 1,514,154 378,538 – (378,538) –	Four months ended 30 April 2007 2008 RMB’000 RMB’000 (unaudited) (810) 26,225 (202) 6,556 202 – – (6,556) – –

(c) During the Relevant Periods, no deferred taxation has been provided in respect of the fair value adjustment on biological assets of Yunnan Shenyu. It is because according to the Implementation Rules, all forestry business is entitled to full exemption from PRC enterprise income tax commencing from 1 January 2008.

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APPENDIX IIB

11. Property, plant and equipment

At Cost: At 1 March 2006 Additions At 31 December 2006 Additions At 31 December 2007 Additions At 30 April 2008 Accumulated depreciation and impairment losses: At 1 March 2006 Charge for the period At 31 December 2006 Charge for the year At 31 December 2007 Charge for the period At 30 April 2008 Net book value: At 30 April 2008 At 31 December 2007 At 31 December 2006	Building and structures RMB’000 – 790 790 10 800 – 800 – 18 18 173 191 46 237 563 609 772	Leasehold improvements RMB’000 – 246 246 792 1,038 – 1,038 – 16 16 115 131 – 131 907 907 230	Motor vehicles RMB’000 – 237 237 1,295 1,532 142 1,674 – 12 12 182 194 104 298 1,376 1,338 225	Furnitures and equipment RMB’000 – 200 200 274 474 150 624 – 9 9 61 70 33 103 521 404 191	Construction in progress RMB’000 – 1,653 1,653 13,017 14,670 11,178 25,848 – – – – – – – 25,848 14,670 1,653	Total RMB’000 – 3,126
						3,126 15,388
						18,514 11,470
						29,984
						– 55
						55 531
						586 183
						769
						29,215

						17,928

						3,071

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12. Prepaid lease payments

The Group’s prepaid lease payments represent land use rights in the PRC under medium term lease.

At the beginning of period Additions Recognition in profit or loss At the end of period/year Classified as current portion Classified as non-current portion	As at 31 December 2006 2007 RMB’000 RMB’000 – 3,637 3,654 27,578 – (627) 3,654 30,588 (17) (627) 3,637 29,961	As at 30 April 2008 RMB’000 30,588 8,955 (268) 39,275 (806) 38,469

13. Biological assets

Reconciliation of movements in carrying value of the Group’s biological assets during the Relevant Periods is as follows:

At 1 March 2006 Purchase during the period Plantation expenditure incurred At 31 December 2006 Purchases during the year Plantation expenditure incurred Disposal of forest farms Gain arising from change in fair value less estimated point-of-sale cost At 31 December 2007 Purchases during the period Plantation expenditure incurred Gain arising from change in fair value less estimated point-of-sale cost At 30 April 2008	Jatropha Curas L RMB’000 – – 1,891 1,891 – 10,110 – 463,816 475,817 – 6,262 22,620 504,699	Other trees RMB’000 – 14,516 – 14,516 38,613 – (10,967) 963,535 1,005,697 14,984 – 8,580 1,029,261	Total RMB’000 – 14,516 1,891 16,407 38,613 10,110 (10,967) 1,427,351 1,481,514 14,984 6,262 31,200 1,533,960

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APPENDIX IIB

The Group’s biological assets in PRC were independently valued by Pöyry Forest Industry Limited.

In valuing the Group’s biological assets, the valuer has considered the expectation approach for other trees (or forest asset) and cost (replacement) approach for Jatropha curas (or Jatropha assets). The expectation approach is a widely accepted method of valuation for biological assets amongst international appraisers. However, it is most appropriate in circumstances where actual yields, agriculture practices and costs are more certain. Jatropha curas have not yet reached large scale commercial production and therefore absence of actual cost, price and yield information to forecast realiable future cash flows.

In using the expectation approach, the valuer has taken the following into consideration:

The current extent and condition of the forest assets as at 31 December 2007 and 30 April 2008;
The location, accessibility and attractiveness of the forests from a harvesting, transportation and market perspective;
Prevailing log prices and the impacts of log grade and stem quality on price;
Expectations of future log prices;
Industry standard cost of establishing Jatropha plantation;
New evidence of the market perception of forest value as demonstrated in recent transaction results, i.e. the implied discount rates;
Risks that may prevent the realisation of forest value.

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14. Other receivables, deposits and prepayments

Receivables for sales of forest farms_(note ii)_ Others	As at 31 December 2006 2007 RMB’000 RMB’000 – 95,333 2,532 9,180 2,532 104,513	As at 30 April 2008 RMB’000 550 8,174
		8,724

Notes:

(i) The carrying amounts of other receivables approximate their fair values at each of the balance sheet date.

(ii) The amounts represented receivables from sales of two forest farms in the PRC at a consideration of RMB228,532,900 during the year.

15. Other payables and accruals

Receipt in advance_(note ii) Payables for forest farms Other payables and accruals Government grants(note iii)_	As at 31 December 2006 2007 RMB’000 RMB’000 – 75,464 5,570 8,335 7,423 7,007 – 12,550 12,993 103,356	As at 30 April 2008 RMB’000 25,464 12,686 136 12,550
		50,836

(i) The directors of Yunnan Shenyu consider that the carrying amount of other payables and accruals approximate to their fair value at each of the balance sheet dates.

(ii) Receipt in advance represented advanced receipts from a customer for the sales of wood.

(iii) Government grants represented the incentives subsidies granted by the local authorities of the PRC to Yunnan Shenyu regarding the research and development projects on Jatropha Curcas L.

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APPENDIX IIB

16. Provision for plantation costs

At 1 March 2006 and 31 December 2006 Provision during the year At 31 December 2007 and 30 April 2008	RMB’000 – 125,555
	125,555

17. Long-term payables

Long term payables represent the present value of the consideration payables for acquisition of various forest farms by Yunnan Shenyu as at 31 December 2007 and 30 April 2008.

Under the terms of the acquisition agreements, Yunnan Shenyu is required to settle the considerations for periods from 2 years to 50 years. The long-term payables are unsecured and interest free.

The amounts payable under the contracts are as follows: After one year but within two years After two years but within five years After five years	RMB’000 4,221 10,386 91,635
	106,242

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APPENDIX IIB

18. Capital

Registered capital At beginning of period/year Increase in registered capital At end of period/year Paid up capital At beginning of period/year Capital injection At end of period/year	As at 31 December 2006 2007 RMB’000 RMB’000 – 16,000 16,000 – 16,000 16,000 – 16,000 16,000 – 16,000 16,000	As at 30 April 2008 RMB’000 16,000 –
		16,000

		16,000 –
		16,000

Yunnan Shenyu was established on 1 March 2006 with an initial registered capital of RMB16,000,000.

19. Operating lease commitments

At each of the balance sheet dates, the Group had total future minimum lease payments under non-cancellable operating leases falling due as follows:

Within one year In the second to fifth years, inclusive	As at 31 December 2006 2007 RMB’000 RMB’000 99 187 273 91 372 278	As at 30 April 2008 RMB’000 96 91
		187

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APPENDIX IIB

20. Capital commitments

Capital expenditure of the Group at each of the balance sheet dates but not yet incurred is as follows:

			As at
	As at 31	December	30 April
	2006	2007	2008
	RMB’000	RMB’000	RMB’000
Contracted but not provided for:
Construction costs incurred for building
of a processing factory and a hotel	4,222	26,334	39,040
Acquisition of leasehold forest farms	–	7,744	42,845

21. Contingent liabilities

At the balance sheet date, Yunnan Shenyu New Energy Group did not have any significant contingent liabilities.

22. Related party transactions

(a) At 30 April 2008, the directors consider the immediate holding company and ultimate holding company to be Beijing Shenhao New Energy Technology Company Limited (incorporated in the People’s Republic of China) and Shenyu New Energy Group Limited (incorporated in the British Virgin Islands) respectively.
(b) The amount due from holding company is unsecured, interest free and has no fixed repayment terms.

179

ACCOUNTANTS’ REPORT ON THE YUNNAN SHENYU NEW ENERGY GROUP

APPENDIX IIB

D. SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements have been prepared by the Group in respect of any period subsequent to 30 April 2008.

Yours faithfully, For and on behalf of

Shu Lun Pan Horwath Hong Kong CPA Limited Certified Public Accountants Hong Kong

Chan Kam Wing, Clement

Director Practising Certificate number P02038

180

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

A. UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

The following is the unaudited pro forma financial information of the Enlarged Group as if the Acquisition has been completed on 31 March 2007 for the pro forma consolidated balance sheet and at the commencement of the period ended 31 March 2007 for the pro forma consolidated income statement and pro forma consolidated cash flow statement. The accompanying unaudited pro forma financial information of the Enlarged Group has been prepared to illustrate the effect of the acquisition of the entire share capital of Shenyu New Energy Group Limited (“Shenyu New Energy”) and its subsidiaries (“Shenyu New Energy Group”).

The accompanying unaudited pro forma financial information is based on a number of assumptions, estimates, uncertainties and currently available information, and is provided for illustrative purposes. Accordingly, as a result of the uncertain nature of the accompanying unaudited pro forma financial information of the Enlarged Group, it may not give a true picture of the actual financial position or results of the Enlarged Group’s operations that would have been attained had the Acquisition actually occurred on the dates indicated herein. Further, the accompanying unaudited pro forma financial information does not purport to predict the Enlarged Group’s future financial position or results of operations.

For the purpose of unaudited pro forma financial information, the balances stated in Renminbi have been translated into Hong Kong dollars at an exchange rate of RMB0.8892 to HK$1.

(I) UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET OF THE ENLARGED GROUP

The unaudited pro forma consolidated balance sheet is based on the audited consolidated balance sheet of the Group as at 31 March 2007 which has been extracted from the annual report of the Group as set out in Appendix I to this circular and the audited balance sheet of Shenyu New Energy Group as at 31 December 2007 as set out in Appendices IIA to this circular, and adjusted to reflect the effect of the Acquisition.

As the unaudited pro forma consolidated balance sheet of the Enlarged Group is prepared for illustrative purpose only and because of its nature, it may not give a true picture of the financial position of the Enlarged Group as at the date to which it is made up to or at any future date.

181

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

ASSETS Non-current assets Property, plant and equipment Construction in progress Prepaid lease payments Deposits for acquisition of forest farms Investment properties Intangible assets Interests in jointly-controlled entities Biological assets Current assets Inventories Trade receivables Prepaid lease payments Other receivables, deposits and prepayments Financial assets at fair value through profit or loss Pledged bank deposits Bank and cash balances Total assets EQUITY AND LIABILITIES Share capital Reserves Capital and reserves attributable to the Company’s equity holders Minority interests Total equity	Audited consolidated balance sheet of the Group as at 31 March 2007 HK$’000 63,790 12,081 17,730 154,234 3,160 571,657 28,755 1,598,133 2,449,540 31,886 156,328 430 40,333 23,578 11,265 613,044 876,864 3,326,404 506,281 2,084,307 2,590,588 – 2,590,588	Audited consolidated balance sheet of Shenyu New Energy Group as at 31 December Pro forma 2007 adjustments HK$’000 HK$’000 Notes 20,162 – 33,694 – – – 2,017,779 1(a) – 1,666,120 1,719,976 134 88 705 131,443 – – 33,120 (200,000) 2(a) 165,490 1,885,466 – 1,542,091 (1,542,091) 1(b) 1,542,091 67 1,542,158	Unaudited pro forma consolidated balance sheet of the Enlarged Group HK$’000 83,952 12,081 51,424 154,234 3,160 2,589,436 28,755 3,264,253
			6,187,295
			32,020 156,416 1,135 171,776 23,578 11,265 446,164
			842,354
			7,029,649

			506,281 2,084,307
			2,590,588 67
			2,590,655

182

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

Non-current liabilities Convertible notes payable Long-term payables Provision for plantation costs Deferred taxation Purchase consideration payable Current liabilities Trade payables Other payables and accruals Promissory notes payable Tax payable Purchase consideration payable Total liabilities Total equity and liabilities	Audited consolidated balance sheet of the Group as at 31 March 2007 HK$’000 82,367 – 128,567 – 210,934 4,414 415,890 98,969 5,609 – 524,882 735,816 3,326,404	Audited consolidated balance sheet of Shenyu New Energy Group as at 31 December Pro forma 2007 adjustments HK$’000 HK$’000 Notes – 39,369 141,200 – – 3,259,870 2(c) 180,569 196 162,543 – – – 100,000 2(b) 162,739 343,308 1,885,466	Unaudited pro forma consolidated balance sheet of the Enlarged Group HK$’000 82,367 39,369 141,200 128,567 3,259,870
			3,651,373
			4,610 578,433 98,969 5,609 100,000
			787,621
			4,438,994
			7,029,649

(II) UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT OF THE ENLARGED GROUP

The unaudited pro forma consolidated income statement is based on the audited consolidated income statement of the Group for the period ended 31 March 2007 which has been extracted from the annual report of the Group as set out in Appendix I to this circular and the audited consolidated income statement of Yunnan Shenyu Group for the year ended 31 December 2007 as set out in Appendix IIB to this circular, and adjusted to reflect the effect of the Acquisition. The consolidated profit of Yunnan Shenyu Group for the year ended 31 December 2007 is used as Shenyu New Energy did not have any significant business transactions since incorporation other than the establishment of Beijing Shenhao New Energy Technology Company Limited (“Beijing Shenhao”) in August 2007 and became the sole shareholder of Beijing Shenhao. Should Shenyu New Energy Group be used in preparing the pro forma consolidated income statement, the acquisition method (required under HKFRS3) is adopted and then the pre-acquisition profit or loss of Yunnan Shenyu Group would be excluded from consolidation into that of Shenyu New Energy Group. In the opinion of directors, such exclusion would distort the financial results of the Enlarged Group under the pro forma financial information, resulting in giving unmeaningful picture for preparing unaudited pro forma financial information of the Enlarged Group.

183

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

As the unaudited pro forma consolidated income statement of the Enlarged Group is prepared for illustrative purpose only and because of its nature, it may not give a true picture of the results of the Enlarged Group for the period ended to which it is made up to or for any future period.

Turnover Cost of sales Gross profit Other revenue Other net gain Selling and distribution expenses Administration expenses Other operating expenses Profit from operating activities Finance costs Share of losses of jointly-controlled entities Gain on disposal of interest in a jointly-controlled entity Profit before taxation Taxation Profit for the period/year Attributable to: Equity holders of the Company Minority interest	Audited consolidated income statement of the Group for the period ended 31 March 2007 HK$’000 828,918 (298,583) 530,335 5,159 1,141,730 (88,666) (52,908) (62,861) 1,472,789 (14,155) (3,684) 2,326 1,457,276 (68,874) 1,388,402 1,319,310 69,092 1,388,402	Audited consolidated income statement of Yunnan Shenyu Group for the year ended 31 December Pro forma 2007 adjustments HK$’000 HK$’000 Notes 88 (35) 53 31 1,708,684 – (5,164) – 1,703,604 (776) (177,011) 3 – – 1,702,828 – 1,702,828 1,702,828 – 1,702,828	Unaudited pro forma consolidated income statement of the Enlarged Group HK$’000 829,006 (298,618) 530,388 5,190 2,850,414 (88,666) (58,072) (62,861) 3,176,393 (191,942) (3,684) 2,326 2,983,093 (68,874) 2,914,219 2,914,219 69,092 2,983,311

184

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

(III) UNAUDITED PRO FORMA CONSOLIDATED CASH FLOW STATEMENT OF THE ENLARGED GROUP

The unaudited pro forma consolidated cash flow statement is based on the audited consolidated cash flow statement of the Group for the period ended 31 March 2007 which has been extracted from the annual report of the Group as set out in Appendix I to this circular and the audited consolidated cash flow statement of Yunnan Shenyu Group for the year ended 31 December 2007 as set out in Appendix IIB to this circular, and adjusted to reflect the effect of the Acquisition. The consolidated cash flows of Yunnan Shenyu Group for the year ended 31 December 2007 is used as Shenyu New Energy did not have any significant business transactions since incorporation other than the establishment of Beijing Shenhao New Energy Technology Company Limited (“Beijing Shenhao”) in August 2007 and became the sole shareholder of Beijing Shenhao. Should Shenyu New Energy Group be used in preparing the pro forma consolidated cash flow statement, the acquisition method (required under HKFRS3) is adopted and then the pre-acquisition cash flows of Yunnan Shenyu Group would be excluded from consolidation into that of Shenyu New Energy Group. In the opinion of directors, such exclusion would distort the cash flow position of the Enlarged Group under the pro forma financial information, resulting in giving unmeaningful picture for preparing unaudited pro forma financial information of the Enlarged Group.

As the unaudited pro forma consolidated cash flow statement of the Enlarged Group is prepared for illustrative purpose only and because of its nature, it may not give a true picture of the cash flows of the Enlarged Group for the period ended to which it is made up to or for any future period.

185

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

		Audited	Audited
	consolidated		consolidated			Unaudited
	cash flow		cash flow of			pro forma
	statement		Yunnan			consolidated
	of the Group		Shenyu Group			cash flow
	for the period		for the year			statement
		ended 31	ended 31			of the
		March	December	Pro forma		Enlarged
		2007	2007	adjustments		Group
		HK$’000	HK$’000	HK$’000	Notes	HK$’000
Operating activities
Profit before taxation	1,457,276		1,702,828	(177,011)	3	2,983,093
Interest income		(3,713)	(30)			(3,743)
Share-based compensation expenses		21,850	–			21,850
Finance costs		14,155	–	177,011	3	191,166
Amortisation of intangible assets		67	–			67
Amortisation of patent		18,865	–			18,865
Amortisation of biological assets		22,146	–			22,146
Depreciation of property, plant and equipment		6,721	597			7,318
Net realised loss on disposal of financial
assets at fair value through profit or loss		140	–			140
Net profit on re-measurement of financial
assets at fair value through profit or loss		(20,421)	–			(20,421)
Surplus on revaluation of investment
properties, net		(660)	–			(660)
Release of prepaid lease payments		179	705			884
Share of losses of
jointly-controlled entities		3,684	–			3,684
Gain on changes in fair value less estimated
point-of sale costs of biological assets	(1,117,515)		(1,605,208)			(2,722,723)
Gain on disposal of forest farms		–	(103,476)			(103,476)

186

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

Audited
Audited
consolidated
consolidated
cash flow
cash flow of
statement
Yunnan
of the Group Shenyu Group
for the period
for the year
ended 31
ended 31
March
December
Pro forma
2007
2007
adjustments
HK$’000
HK$’000
HK$’000
Notes
Gain on disposal of property, plant and
equipment
(4,235)
–
Gain on disposal of a jointly-controlled
entity
(2,326)
–
Provision for obsolete inventories
1,431
–
Effect of foreign exchange rate changes
8,314
–
Operating profit before working
capital changes
405,958
(4,584)
Increase in biological assets due to
plantation
(98,040)
(11,370)
Decrease in biological assets due to
harvest
133,817
–
Decrease/(increase) in inventories
4,947
(75)
Decrease/(increase) in trade receivables
51,016
(88)
Increase in other receivables, deposits
and prepayments
(15,983)
(267,696)
Increase in trade payables
1,488
197
Increase in other payables and accruals
92,112
136,555
Decrease in deferred revenue
(58,532)
–
Net cash inflow from operating activities
516,783
(147,061)
Investing activities
Interest received
3,713
30
Acquisition of biological assets
(296,850)
(43,424)
Deposits for acquisition of forest farms
(154,234)
–
Acquisition of financial assets at fair value
through profit or loss
(1,255)
–
Acquisition of intangible assets
(2,020)
–
Purchase of property, plant and equipment
(4,318)
(17,305)
Addition of prepaid lease payments
(13,849)
(30,995)
Increase in construction in progress
(274)
–
Net cash outflow on business combination
(60,000)
–
(200,000)
2(a)
Proceeds from disposal of investment
properties
7,000
–
Proceeds from disposal of financial assets
at fair value through profit or loss
2,950
–
Proceeds from disposal of prepaid
lease payments
9,515
–
Proceed from disposal of biological assets
–
257,010
Increase in pledged bank deposits
(277)
–
Capital injection from minority
shareholder
–
67
Net cash outflow from investing
activities
(509,899)
165,383

Unaudited
pro forma
consolidated
cash flow
statement
of the
Enlarged
Group
HK$’000
(4,235)
(2,326)
1,431
8,314
401,374
(109,410)
133,817
4,872
50,928
(283,679)
1,685
228,667
(58,532)
369,722
3,743
(340,274)
(154,234)
(1,255)
(2,020)
(21,623)
(44,844)
(274)
(260,000)
7,000
2,950
9,515
257,010
(277)
67
(544,516)

187

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Audited consolidated cash flow statement of the Group for the period ended 31 March 2007 HK$’000 Financing activities Interest paid (17) Proceeds from issue of shares 460,000 Proceeds from exercise of share options and warrants 4,320 Expenses on issue of shares (13,201) Repayment of promissory notes (130,000) Net cash inflow from financing activities 321,102 Net increase in cash and cash equivalents 327,986 Cash and cash equivalents at beginning of year 273,400 Effect of foreign exchange rate changes 11,658 Cash and cash equivalents at end of year 613,044 Analysis of balances of cash and cash equivalents at end of year Bank and cash balances 613,044	Audited consolidated cash flow of Yunnan Shenyu Group for the year ended 31 December Pro forma 2007 adjustments HK$’000 HK$’000 Notes – – – – – – 18,322 264 – 18,586 18,586 (200,000) 2(a)	Unaudited pro forma consolidated cash flow statement of the Enlarged Group HK$’000 (17) 460,000 4,320 (13,201) (130,000)
		321,102
		146,308 273,664 11,658
		431,630

		431,630

188

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

Notes:

Upon the completion of the Acquisition, Shenyu New Energy will be accounted for as a wholly-owned subsidiary of the Company. Under HKFRS 3, Business Combinations, the Group will apply the purchase method to account for the Acquisition. In applying the purchase method, the identifiable assets, liabilities and contingent liabilities of Shenyu New Energy Group will be recorded on the consolidated balance sheet of the Group at its fair value at the date of acquisition. Any goodwill or discount arising on the acquisition will be determined as the excess or deficit of the consideration to be incurred by the Group over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of Shenyu New Energy Group at the date of completion. Excess of Group’s interests in the net fair value of the identifiable assets, liabilities and contingent liabilities of Shenyu New Energy Group over the fair consideration paid should be recognised immediately in the consolidated income statement.
(a) The adjustment represents goodwill of approximately HK$2,017,779,000 arising from the Acquisition, which is derived from the calculation as follows:

Fair value of net assets of Shenyu New Energy Group Goodwill Total consideration Total consideration will be settled as follows: Initial cash consideration (notes 2a & 2b) Fair value of the Remaining Portion (note 2c)	HK$’000 1,542,091 2,017,779
	3,559,870

	300,000 3,259,870
	3,559,870

(b) The adjustment reflects (i) the elimination of the share capital of Shenyu New Energy of approximately HK$73 and (2) the elimination of pre-acquisition reserve of Shenyu New Energy Group of approximately HK$1,542,091,000.
In accordance with the Third Supplemental Acquisition Agreement, the Consideration shall be up to a maximum aggregate amount of HK$4,000 million and shall comprise:-
(i) 30% of the Consideration in cash; and
(ii) 70% of the Consideration by issue of the Convertible Notes.

Upon Completion, the Company shall pay HK$150 million in cash and procure the escrow agent to release a refundable interest bearing deposit of HK$50 million to the Vendor as the first part of the Initial Cash Consideration. On 31 December 2008, the Company shall pay HK$100 million in cash to the Vendor as the second part of the Initial Cash Consideration.

Subject to the above maximum aggregate amount of the Consideration, the remaining portion of the Consideration of HK$3,700 million (the “Remaining Portion”) shall be payable by four consecutive instalments, namely, from the date of Completion to 31 March 2009, from 1 April 2009 to 31 March 2010, from 1 April 2010 to 31 March 2011 and from 1 April 2011 to 30 September 2011.

For the purpose of this unaudited pro forma financial information, the total consideration is assumed to be HK$4,000 million.

The adjustments reflects:

(a) The payment of the first part of the Initial Cash Consideration of HK$200 million upon Completion.
(b) The second part of the Initial Cash Consideration of HK$100 million which shall be payable on 31 December 2008.

189

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

(c) The adjustment of approximately HK$3,259,870,000 represents the present value of the Remaining Portion of which HK$900 million and HK$2,800 million will be settled by way of cash and Convertible Notes respectively.
- For the purpose of this unaudited pro forma financial information, it is presumed that (i) cash settlement of HK$648 million, HK$1,107 million, HK$1,480 million and HK$465 million will be made on the last dates of the settlement periods as mentioned above, i.e. 31 March 2009, 2010 and 2011 and 30 September 2011; (ii) cash settlement immediately made upon the issuance of Convertible Notes on 31 March 2009, 2010 and 2011 and 30 September 2011; (iii) the discount rate was adopted at 5.43% per annum, which is the prevailing market interest rate as estimated by management and based on the valuation performed by an independent valuer, LCH (Asia-Pacific) Surveyors Limited.
The adjustment represents the imputed interest expense for the period ended 31 March 2007 on the consideration payables assuming an effective interest rate of 5.43% per annum. This adjustment is expected to have a continuing effect on the Group.
No adjustments have been made to reflect any trading results or other transactions of the Group and Shenyu New Energy Group entered into subsequent to 31 March 2007 and 31 December 2007, respectively.

190

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

B. REPORT ON UNAUDITED PRO FORMA FINANCIAL INFORMATION

The following is the text of a report from Shu Lun Pan Horwath Hong Kong CPA Limited, the reporting accountants of the Company, in respect of the unaudited pro forma financial information of the Enlarged Group as set out in this Appendix and prepared for the sole purpose of inclusion in this circular.

24 July 2008

The Board of Directors

China Grand Forestry Green Resources Group Limited Unit 3307-11, 33/F, West Tower Shun Tak Centre 168-200 Connaught Road Central Hong Kong

Dear Sirs,

We report on the unaudited pro forma financial information (the “Unaudited Pro Forma Financial Information”) of China Grand Forestry Green Resources Group Limited (the “Company”) and its subsidiaries (collectively referred to as the “Group”) and Shenyu New Energy Group Limited (“Shenyu New Energy”) (together with the Group hereinafter referred to as the “Enlarged Group”) as set out on pages 181 to 190 under the heading of “Unaudited Pro Forma Financial Information on the Enlarged Group” in Appendix III to the Company’s circular (the “Circular”) dated 24 July 2008, which has been prepared by the directors of the Company, solely for illustrative purposes only, to provide information about how the proposed acquisition of the entire interests in Shenyu New Energy by the Company (the “Acquisition”), might have affected the financial information of the Group. The basis of preparation of the Unaudited Pro Forma Financial Information is set out in section A of this Appendix.

Respective Responsibilities of Directors of the Company and Reporting Accountants

It is the responsibility solely of the directors of the Company to prepare the Unaudited Pro Forma Financial Information in accordance with paragraph 4.29 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) and Accounting Guideline 7

191

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

“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 paragraph 4.29(7) of the Listing Rules, on the Unaudited Pro Forma Financial Information and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the Unaudited Pro Forma Financial Information beyond that owed to those to whom those reports were addressed by us at the dates of their issue.

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 unadjusted financial information as set out in Appendices I and II of the Circular with the source documents, considering the evidence supporting the adjustments and discussing the Unaudited Pro Forma Financial Information with the directors of the Company.

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 paragraph 4.29(1) of the Listing Rules.

The Unaudited Pro Forma Financial Information is for illustrative purpose only, based on the judgments 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 Enlarged Group as at 31 March 2007 or any future date; or
the financial results and cash flows of the Enlarged Group for the period ended 31 March 2007 or for any future period.

192

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

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 paragraph 4.29(1) of the Listing Rules.

Yours faithfully,

For and on behalf of

Shu Lun Pan Horwath Hong Kong CPA Limited Certified Public Accountants

Hong Kong

Chan Kam Wing, Clement

Director

Practising Certificate number P02038

193

APPENDIX IV VALUATION REPORTS ON SHENYU NEW ENERGY GROUP

(A) LETTERS FROM SHU LUN PAN HORWATH HONG KONG CPA LIMITED AND KINGSTON CORPORATE FINANCE LIMITED

(i) Comfort letter from Shu Lun Pan Horwath Hong Kong CPA Limited

Set out below is the text of the comfort letter on the cash projection of biological assets of Yunnan Shenyu New Energy Company Limited which forms part of the basis of valuation performed by Pöyry Forest Industry Ltd. received from Shu Lun Pan Horwath Hong Kong CPA Limited for inclusion in this circular.

24 July 2008

The Board of Directors China Grand Forestry Green Resources Group Limited Unit 3307-11, 33/F, West Tower Shun Tak Centre 168-200 Connaught Road Central Hong Kong

Dear Sirs,

We refer to the valuation report dated 24 July 2008 (“Valuation Report”) prepared by Pöyry Forest Industry Ltd. (the “Valuer”) in respect of the biological assets of Yunnan Shenyu New Energy Company Limited (“Yunnan Shenyu”) as at 30 April 2008 (the “Valuation”) set out on pages 194 to 315 (Appendix IV) of the circular of China Grand Forestry Green Resources Group Limited (the “Company”) dated 24 July 2008 (the “Circular”).

The Valuation including the bases and assumptions, as set out in the Valuation Report in Appendix IV, for which the directors of the Company and the Valuer are solely responsible, has been prepared based on the cash flow projection of the biological assets for fifty years up to 30 April 2058 made by the directors of the Company (the “Projection”). The Projection, being a projection of future cash flows, does not involve the adoption of accounting policies and accordingly, there are no accounting policies for us to report on. The Projection has been prepared using a set of assumptions that include hypothetical assumptions about future events and other assumptions that may or may not necessarily be expected to occur. Consequently, readers are cautioned that the Projection may not be appropriate for purposes other than for deriving the Valuation as at 30 April 2008. Even if the events anticipated under the hypothetical assumptions occur, actual results are still likely to differ from the Projection since the other anticipated events frequently may or may not occur as expected and the variation may be material.

194

VALUATION REPORTS ON SHENYU NEW ENERGY GROUP

APPENDIX IV

We conducted our work in accordance with Hong Kong Standard on Assurance Engagements 3000 “Assurance engagements other than audits or reviews of historical financial information” with reference to the procedures under Auditing Guideline 3.341 “Accountants’ report on profit forecasts” issued by the Hong Kong Institute of Certified Public Accountants. We examined the arithmetical accuracy of the Projection. Our work has been undertaken solely to assist the directors of the Company in evaluating whether the Projection, so far as the calculations are concerned, has been properly complied in accordance with the bases and assumptions made by the directors of the Company and adopted by the Valuer. Our work does not constitute any valuation of Yunnan Shenyu.

As set out in the paragraph headed “Assumptions and Limiting Conditions” on page 212 of the Circular, the Projection has been prepared on the basis that:

The hypothetical assumptions made by the management as to the future growth, yields, costs or returns of the forest will be the same as stated in the Valuation. Given the inherent uncertainties including the environmental, government policy, future political, legal, economic or financial aspects in the People’s Republic of China and the potential impact of fluctuation in interest rates and foreign currency exchange rates, we were unable to obtain sufficient appropriate evidence to evaluate or express any opinion on the appropriateness of the bases and assumptions made.
The hypothetical assumption that the income generated from the biological assets of Yunnan Shenyu over a period of fifty years up to 30 April 2058 will be the same as stated in the Valuation. Given the limited operational history of Yunnan Shenyu and the uncertainties for the wood log market, we were unable to obtain sufficient appropriate evidence to evaluate or express any opinion on the appropriateness of the bases and assumptions made.

Because of the significance of the matters discussed above, we are unable to evaluate the appropriateness of the above bases and assumptions used in arriving at the Projection.

Based on the work we have performed, in our opinion, the Projection, so far as the calculations are concerned, has been properly complied in accordance with the bases and assumptions made by the directors of the Company and adopted by the Valuer as set out in the Valuation Report.

Our work in connection with the Projection has been undertaken solely for the purpose of reporting under paragraphs 14.62(2) and 14A.59(17b) of the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited and for no other purpose. We accept responsibility solely to the directors of the Company. We accept no responsibility to any other person in respect of, arising out of or in connection with our work.

Yours faithfully, For and on behalf of

Shu Lun Pan Horwath Hong Kong CPA Limited Certified Public Accountants Hong Kong

Chan Kam Wing, Clement Director

Practising Certificate number P02038

195

VALUATION REPORTS ON SHENYU NEW ENERGY GROUP

APPENDIX IV

(ii) Letter from Kingston Corporate Finance Limited

==> picture [40 x 39] intentionally omitted <==

KINGSTON CORPORATE FINANCE LIMITED

24 July 2008

The Directors

China Grand Forestry Green Resources Group Limited

Dear Sirs,

We refer to the valuation dated 24 July 2008 prepared by Pöyry Forest Industry Ltd. (the “Valuer”) in respect of the biological assets of Yunnan Shenyu New Energy Company Limited (the “Valuation”) as at 30 April 2008 set out in Appendix IV of the circular of China Grand Forestry Green Resources Group Limited (the “Company”) dated 24 July 2008 (the “Circular”).

The Valuation including the bases and assumptions, as set out in the valuation report on pages 197 to 304 of the Circular, for which the directors of the Company and the Valuer are solely responsible, has been prepared based on the cash flow projection of the biological assets for fifty years ending 30 April 2058 made by the directors of the Company (the “Projection”). The Projection has been prepared using a set of assumptions that include hypothetical assumptions about future events and other assumptions that may or may not necessarily be expected to occur. Consequently, readers are cautioned that the Projection may not be appropriate for purposes other than for deriving the Valuation as at 30 April 2008. Even of the events anticipated under the hypothetical assumptions occur, actual results are still likely to differ from the Projection since the other anticipated events frequently may or may not occur as expected and the variation may be material.

We have reviewed the bases and assumptions made by the directors of the Company and adopted by the Valuer as set out in the valuation report of Shenyu New Energy Group as set out in Appendix VI to this circular upon which the Valuation has been prepared. We have also considered the letter dated 24 July 2008 addressed to yourselves from Shu Lun Pan Horwath Hong Kong CPA Limited (“Horwath”) regarding the bases and assumptions upon which the Valuation has been made.

On the basis of the information comprising (i) the Valuation and (ii) the bases and assumptions made by the directors of the Company and adopted by the Valuer after properly reviewed by the directors of the Company and Horwath, we are of the opinion that the Valuation, for which the directors of the Company and the Valuer are solely responsible, has been made after due and careful enquiry.

Yours faithfully, For and on behalf of

Kingston Corporate Finance Limited Vincent Chung Responsible Officer

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(B) VALUATION REPORT ON THE FOREST ASSETS OWNED BY THE SHENYU NEW ENERGY GROUP

Report

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Valuation of Yunnan Shenyu New Energy’s Forestry and Jatropha Assets in China as at April 30 2008

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All rights are reserved. This document or any part thereof may not be copied or reproduced without permission in writing from Pöyry Forest Industry.

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PREFACE

This report is issued by Pöyry Forest Industry Ltd ( Pöyry ) to China Grand Forestry Green Resources ( CGF ) for its own use. No responsibility is accepted for any other use.

Pöyry has previously prepared an independent Valuation of Yunnan Shenyu’s forest and Jatropha estate as at 31[st] December 2007 . The report contains the opinion of Pöyry as to the market valuation, prospective valuation and investment valuation of the Company’s forest and Jatropha estate.

China Grand Forestry Green Resources (CGF) has requested for an update of the valuation to include new areas planted till 30[th] of April 2008. This report contains the opinion of Pöyry as to the Value of Yunnan Shenyu New Energy’s forestry and Jatropha assets in China (Yunnan Shenyu) as at 30[th] April 2008. A prospective valuation of Yunnan Shenyu’s future plans and an investment value of Yunnan Shenyu’s Jatropha estate (current stocked area) as at 30[th] April 2008 have also been undertaken. The market valuation, prospective valuation and investment valuation exclude the following:

Value of the Land Use Rights
The valuations exclude volume arising from areas harvested beyond 50 years including a second selective cut in the broadleaf forest and harvesting of some replanted pine areas.
Other non forestry and non Jatropha plantation related assets belonging to Yunnan Shenyu.

The findings and conclusions presented in this report are subject to the assumptions and limiting conditions set out in the following pages and to any further qualifications referred to in the body of the report.

See Young Ho Saku Rantanen VICE PRESIDENT CONSULTANT

Juha Leppanen Di Ye CONSULTANT ANALYST Contact 2208-2210 Cloud Nine Plaza No. 1118 West Yan An Rd., SHANGHAI 200052 P.R.China Tel. +86 21 6115 9660 Fax +86 21 6115 9670 Email [email protected] Pöyry Forest Industry Consulting Shanghai

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SUMMARY

China Grand Forestry Green Resources (CGF) wishes to expand its operations in Yunnan by acquiring the forestry and Jatropha assets of Yunnan Shenyu New Energy (Yunnan Shenyu).

At CGF’s request, Pöyry has previously prepared an independent market valuation of Yunnan Shenyu’s forest and Jatropha estate as at 31 December 2007. In addition, a prospective valuation of the plans of Yunnan Shenyu and investment valuation have also been undertaken. In preparing the 31 December 2007 valuations, Pöyry has relied on information provided by Yunnan Shenyu, other industry information available to the organisation and the results of a high level field inspection and assessment.

China Grand Forestry Green Resources (CGF) has requested for an update of the valuation to include new areas planted till 30[th] of April 2008. Pöyry has relied on information supplied by Yunnan Shenyu regarding new areas planted (between 1[st] January 2008 and 30[th] April 2008). Area survey was conducted by Chongqing Forestry Science Institute. No additional field inspection was conducted for this update. This valuation report sets out Pöyry’s assessment and valuation of Yunnan Shenyu’s forest and Jatropha estate and should be considered in conjunction with the assumptions and qualifications expressed in the 31 December 2007 valuation report.

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CONTENT
PREFACE		I
SUMMARY		1
1	INTRODUCTION	3
1.1	MARKET VALUATION OF YUNNAN SHENYU’S FOREST AND JATROPHA
ESTATE	( CURRENT STOCKED AREA)	4
1.2	INVESTMENT VALUE OF YUNNAN SHENYU’S FOREST AND JATROPHA
ESTATE	(CURRENT STOCKED AREA)	6
1.3	PROSPECTIVE VALUATION OF FUTURE PLANS	7

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1 INTRODUCTION

According to Yunnan Shenyu’s records, the Company’s total area as at 30 April 2008 totalled 143 388 ha (2150 820 mu). All of the land holdings are located in Yunnan Province. 47 467 ha (712 005mu) is forest area, 8 461 ha (126 915 mu) is open forest, 4 8325 ha (724 875 mu) is Jatropha plantation with the remaining 32 900 ha (493 500 mu) and 6235 ha (93525 mu) being bare land and bush areas to be planted. The Jatropha area is inclusive of a co-operative rental agreement area of 6 876 ha (103 410 mu).

Table 1-1:

Area Statement for Yunnan Shenyu Estate as at 30[th] of April 2008

County Huize Yangbi Gengma Yongren Qiubei Yunlong Shuangbai	Total Area (ha) 41,363 21,072 17,757 13,936 6,251 4,431 10,418	Forest Area (ha) 11,226 14,937 12,441 2,243 1,270 3,100 1,932	Jatropha Area (ha) 15,223 4,064 4,304 10,321 4,383 0 1,505	Co- operative rental agreement area (ha) 0 0 0 0 0 0 6,876	Open forest (ha) 2,948 522 942 960 459 206 0	Bush (ha) 3,652 108 56 266 94 605 56	Bareland (ha) 8,314 1,440 14 147 45 520 49
Shuangjiang Yuanmou	10,452 17,708	318 0	1,650 0	0 0	1,333 1,091	813 585	6,338 16,032
Total	143,388	47,467	41,449	6,876	8,461	6,235	32,900

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1.1 Market Valuation of Yunnan Shenyu’s forest and Jatropha Estate (Current Stocked Area)

Pöyry has established the value of Yunnan Shenyu’s forest estate as at 30 April 2008. Two components of the estate have been valued. The current forest rotation of areas classed as Forest and Open Forest in Yunnan Shenyu’s records and secondly areas currently established with Jatropha Plantations. Two valuation methods were used: Expectation approach for forestry asset and cost (replacement) approach for Jatropha estate.

The values are set out in the following table:

Table 1-2:

Market Value and Current Stocked Area of Yunnan Shenyu’s Estate as at 30[th] of April 2008

April 2008
Estate Component	Stocked Area (ha)	30 April 2008 – million RMB
Forest Current rotation only (Expectation approach)	58 201	1 029.261
Yunnan Shenyu Jatropha Plantations for current crop (cost replacement approach)	41 449	458.319
Yunnan Shenyu Jatropha Plantations for current crop under co-operative rental agreement ( cost replacement approach)	6 876	46.380
Current Stocked Estate	106 526	1533.96

Table 1-3:

Summary of main assumptions in Yunnan Shenyu Forest Valuation

Item	Assumptions	Assumptions	Assumptions
Delivered Log Prices - Pine - Broadleaf	Small (6-14cm SED) RMB550/m3 RMB515/m3	Medium (14-26cm SED) RMB800/m3 RMB1050/m3	Large (>26cm SED) RMB1200/m3 RMB1650/m3
Real Price Growth	Small Logs: 1.0% per annum for next 5 years	Medium and Large Logs: 1.7% per annum for next 5 years
Volume mix at maturity - Pine - Broadleaf	Small (6-14cm SED) 20% 20%	Medium (14-26cm SED) 50% 40%	Large (>26cm SED) 30% 40%
Yields	Pine Selective cut at 25yrs: 25-30 m3/ha Pine Clearfall at 50yrs: 127-147 m3/ha Broadleaf Selective cut at 60yrs: 64-75m3/ha
Silviculture Costs - Pine	Year 1 RMB4858.5/ha (RMB324/mu)	Year 2 onwards RMB37.5/ha/a (RMB2.5/mu/a)
Harvest Cost - Pine (clearfall) - Broadleaf and Pine (selective cut)	RMB80/m3 RMB115/m3
Harvest Roading Costs	RMB10/m3

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Item	Assumptions
Transport Costs	Range: RMB75-137.5/m3(Distances of 100-250km)
Forest Taxes	Armand Pine: RMB80/m3	Broadleaf: RMB50/m3	Yunnan Pine: RMB30/m3
Overheads	RMB150/ha/a (RMB10/mu/a)
Land Rental	RMB15/ha/a (RMB1/mu/a)
Minimum Harvest Ages	Pine: 40 years (clearfall) Broadleaf: 50 years (selective cut once in 50 year cycle)
Table 1-4: Summary of main assumptions in Yunnan Shenyu Jatropha Plantation Market Valuation as at 30th of April 2008

Valuation as at 30th	of April 2008
Cost Items	Assumption
Land Preparation	RMB 1200 / ha ( RMB 80/mu)
Planting	RMB 375 / ha ( RMB 25/mu)
Seedlings	RMB 2 per seedling, RMB 3000 / ha ( RMB 200/mu)
Fertilising	RMB 375 / ha ( RMB 25/mu)
Maintenance	RMB 600 / ha ( RMB 40/mu) in first year and RMB 825 / ha ( RMB 55/mu) in subsequent years
Land Rent	RMB 300 / ha ( RMB 20/mu)
Administration	RMB 150 / ha ( RMB 10/mu)

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1.2 Investment Value of Yunnan Shenyu’s forest and Jatropha Estate (Current Stocked Area)

Pöyry has also prepared a valuation for Yunnan Shenyu’s Jatropha Estate (Current Stocked Area) using Expectation method, which represents the Investment Value of the Company’s current stocked Jatropha estate. Expectation approach is a widely accepted method of valuation for biological assets amongst international appraisers. However, it is most appropriate in circumstances where actual yields, agriculture practices and costs are more certain. Poyry has however produced an expectation value of the Jatropha resource to provide guidance as to the potential investment value of the resource assuming performance of the resource are realised.

An investment value of Yunnan Shenyu’s estate (current stocked area) as at 30 April 2008 is set out in the following table:

Table 1-5:

Investment Value of Yunnan Shenyu’s Estate (Current Stocked Area) as at 30[th] of April 2008

Investment Value of Yunnan Shenyu’s Estat April 2008	e (Current Stock	ed Area) as at 30th of
Estate Component	Stocked Area (ha)	30 April 2008 – million RMB
Forest Current rotation only (Expectation approach)	58 201	1 029.261
Yunnan Shenyu Jatropha Plantations (current crop) – Expectation approach	41 449	1,914.899
Yunnan Shenyu Jatropha Plantations for current crop under co-operative rental agreement – Expectation approach	6 876	287.706
Current Stocked Estate	106 526	3231.866

Table 1-6: Summary of main assumptions in Yunnan Shenyu Jatropha Plantation Investment Valuation

Investment Valuation
Item	Assumption
Delivered Seed Prices	RMB2.0/kg (RMB2000/ton)
Yields	Year 1: 50kg/mu (0.75ton/ha) Year 2: 133kg/mu (2.0 ton/ha) Year 3 onwards: 333kg/mu (5.0ton/ha)
Silviculture Costs	Year 1 RMB3300/ha (RMB220/mu) Year 2 onwards: RMB1200/ha/a (RMB80/mu/a)
Harvest and Transport Costs	RMB0.6/kg (RMB600/ton)
Overheads	RMB150/ha/a (RMB10/mu/a)
Land Rental	RMB15/ha/a (RMB1/mu/a)

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1.3 Prospective Valuation of Future Plans

A prospective valuation of Yunnan Shenyu’s future plans has also been undertaken. The prospective valuation is designed to provide a business plan value for use internally by China Grand Forest. It is not an indication of market value as it attributes values to future crops and is not compliant with IAS 41.

Table 1-7: Prospective Value of Yunnan Shenyu’s future plans as at 30[th] of April 2008

2008
Estate Component	30 April 2008 – million RMB
Forest Perpetual Rotation Value	1 ,008 .323
Jatropha Perpetual Rotation Value	3,041.614
Co-operative rental agreement’s Jatropha Perpetual Rotation Value	287.706
Total Prospective Value	4337.643

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Report

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Valuation of Yunnan Shenyu New Energy’s Forestry and Jatropha Assets in China as at December 31 2007

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All rights are reserved. This document or any part thereof may not be copied or reproduced without permission in writing from Pöyry Forest Industry.

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PREFACE

This report is issued by Pöyry Forest Industry Ltd ( Pöyry ) to China Grand Forestry Green Resources ( CGF ) for its own use. No responsibility is accepted for any other use.

The report contains the opinion of Pöyry as to the Value of Yunnan Shenyu New Energy’s forestry and Jatropha assets in China (Yunnan Shenyu) as at 31 December 2007 . A prospective valuation of Yunnan Shenyu’s future plans and an investment value of Yunnan Shenyu’s Jatropha estate (current stocked area) as at 31 December 2007 have also been undertaken. The market valuation, prospective valuation and investment valuation exclude the following:

Value of the Land Use Rights
The valuations exclude volume arising from areas harvested beyond 50 years including a second selective cut in the broadleaf forest and harvesting of some replanted pine areas.
Other non forestry and non Jatropha plantation related assets belonging to Yunnan Shenyu.

See Young Ho Saku Rantanen VICE PRESIDENT CONSULTANT Juha Leppanen Di Ye CONSULTANT ANALYST

Contact See Young Ho 2208-2210 Cloud Nine Plaza No. 1118 West Yan An Rd., SHANGHAI 200052 P.R.China Tel. +86 21 6115 9660 Fax +86 21 6115 9670 Email [email protected] Pöyry Forest Industry Consulting Shanghai

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CERTIFICATION

Pöyry certifies to the following statements to the best of our knowledge and belief:

The statements of fact contained in this report are true and correct.
� The reported analyses, opinions, and conclusions are limited only by the reported assumptions and limiting conditions, and are our personal, impartial, and unbiased professional analyses, opinions, and conclusions.
Pöyry has no present or prospective interest in the subject property, and no personal interest or bias with respect to the parties involved.
Pöyry’s compensation for completing this assignment is not contingent upon: 1. the development or reporting of a predetermined value or direction in value that favours the cause of the client,
the amount of the value opinion,
the attainment of a stipulated result, or
the occurrence of a subsequent event directly related to the intended use of this appraisal.
Qualitative inspections were made of a sample of Yunnan Shenyu New Energy’s forest and Jatropha areas in Yunnan Province during FebruaryMarch 2008.
The report has been prepared by staff consultants and office support personnel of Pöyry.

Pöyry is a global consulting and engineering firm focusing on the energy, forest industry and infrastructure & environment sectors. Pöyry employs more than 6000 experts, and Pöyry Plc is listed on the OMX Nordic Stock Exchange.

Management Consulting is one of the key practice areas of the Pöyry Forest Industry Group. The Management Consulting segment of this group maintains permanent offices in 11 countries. This includes offices in Vantaa, Stockholm, Moscow, Munich, London, New York, Montreal, Singapore, Shanghai, Auckland and Melbourne. The Auckland office currently values some USD4 billion worth of forest assets annually, located in all parts of the world.

Our clients include a range of forest sector participants; forest owners, managers, institutional investors and financiers. Forest valuations are prepared for a variety of purposes:

Financial reporting
Insurance
Taxation
Compensation
Acquisition/divestment/restructuring

Clients cover a wide spectrum including governments, commercial and private sector owners and investors. Changing international accounting standards are increasingly emphasizing the concept of “fair-market value” as the basis for asset

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reporting. This requires careful attention to transaction evidence for which Pöyry’s global presence is invaluable.

All Pöyry’s valuation activities for the Asia-Pacific area including China, South America, North and South East Asia, South Africa, Australia, New Zealand and the Pacific Islands are coordinated from the Auckland office. The Auckland team, includes personnel with specialist skills in forest valuation and modelling. Within the firm's substantial track record are valuations of natural and planted forests throughout the Southern Hemisphere and Asia, including: Australia, New Zealand, Brazil, Argentina, Uruguay, Suriname, Guyana, Chile, Fiji, South Africa, Indonesia, Malaysia, the Philippines and China.

The key forest consulting team of Pöyry directly involved in this valuation all hold relevant forest related academic qualifications and have many years of forest valuation experience between them.

Project Supervisor – Mr. Andy Fyfe is President of Asia Pacific Consulting based in Pöyry’s Singapore office. Mr Fyfe holds a Bachelor of Forestry Science from University of Canterbury, New Zealand, gained in 1983, and has over 20 years experience in Forest Valuations within in Asia Pacific region. Mr Fyfe’s forest valuation experience covers asset valuations for both private and public companies as well as valuations. Mr Fyfe is a member of the New Zealand Institute of Foresters.

Project Manager – Mr. Ho See Young is Vice President of China Operation. Mr. Ho graduated from Melbourne Business School, University of Melbourne with a Master of Marketing and has over ten years of mutli-discipline forestry project experience across Asia Pacific countries. Mr. Ho is responsible for client and project management.

Project Teams – Mr. Andrew Crisp is Forestry Consultant based in Pöyry China. Mr Crisp graduated from Australian National University with a Bachelor of Science (Forestry) and Bachelor of Economics. Mr. Saku Rantanen works as a Consultant at Pöyry Singapore. In his position Mr Rantanen acts as bioenergy expert in Asia including Jatropha and other tropical first generation biofuel feedstock. Mr. Oliver Somerville works as a Forestry Consultant at Pöyry New Zealand. Mr. Somerville graduated from University of Canterbury, New Zealand with a Bachelor of Forestry Science (Hon). His main areas of expertise include Forest Valuation, Forest Estate Modelling – FOLPI, FORSIGHT, Woodstock Computer Mapping and Related Fields, Natural and Plantation Forest Inventory, Forest assessment using field and aerial processes.

iii

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ASSUMPTIONS AND LIMITING CONDITIONS

This report was prepared at the request of and for the exclusive use of the client, China Grand Forestry Green Resources (CGF). This report may not be used for any purpose other than the purpose for which it was prepared. Its use is restricted to consideration of its entire contents.

Details concerning the location and basic physical characteristics of the subject property were taken from data provided by Yunnan Shenyu New Energy (Yunnan Shenyu).

Pöyry has viewed a sample of Yunnan Shenyu’s lease agreements and has assumed legal descriptions to be authoritative. Maps, diagrams and pictures presented in this report are intended merely to assist the reader.

Pöyry has undertaken a limited visual inspection of the forest resource from the ground during February-March 2008. This appraisal assumes that the sites visited by Pöyry during its February-March 2008 field inspection represent the full range of conditions present in Yunnan Shenyu’s forests. The forest inspection process has been limited to a high-level review.

Legal matters are beyond the scope of this report, and any existing liens and encumbrances have been disregarded. Pöyry has appraised the forest resource as though it is free and clear and under responsible ownership and competent management.

Unless otherwise stated in this report, the existence of hazardous materials or other adverse environmental conditions, which may or may not be present on the property, were neither called to the attention of Pöyry, nor did the consultants become aware of such during the inspection.

Pöyry recognizes the possibility that any valuation can eventually become the subject of audit or court testimony. If such audit or testimony becomes necessary as a result of this valuation, it will be a new assignment subject to fees then in effect. Pöyry has no responsibility to update this report for events and circumstances occurring after the date of this report.

Any liability on the part of Pöyry is limited to the amount of fee actually collected for work conducted by Pöyry. Nothing in the report is, or should be relied upon as, a promise by Pöyry as to the future growth, yields, costs or returns of the forests. Actual results may be different from the opinion contained in this report, as anticipated events may not occur as expected and the variation may be significant.

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EXECUTIVE SUMMARY

Overview

China Grand Forestry Green Resources (CGF) wishes to expand its operations in Yunnan by acquiring the forestry and Jatropha assets of Yunnan Shenyu New Energy (Yunnan Shenyu). At CGF’s request, Pöyry has prepared an independent market valuation of Yunnan Shenyu’s forest and Jatropha estate. The valuation date is as at 31 December 2007. In addition, a prospective valuation of the plans of Yunnan Shenyu has been undertaken.

In preparing these valuations, Pöyry has relied on information provided by Yunnan Shenyu, other industry information available to the organisation and the results of a high level field inspection and assessment. This report sets out Pöyry’s assessment and valuation of Yunnan Shenyu’s forest and Jatropha estate and should be considered in conjunction with the assumptions and qualifications expressed.

Yunnan Shenyu’s forest and Jatropha estate covers a total area of some 117 169.6 ha (1 757 545 mu). Around 55 127 ha (826 905 mu) is forest or open forest, 41 247.6 ha (618 714 mu) are established with Jatropha plantations and the remaining area of 20 795 ha (311 925 mu) consists of bush, harvested, burnt and bareland areas. The Jatropha area is inclusive of a co-operative rental arrangement established with Beijing Wanfuchun of 6 876 ha (103 410 mu). The co-operative rental agreement was dated 30 June 2007 and expires on 30 June 2056.. In the agreement Beijing Wanfuchun gives the land use right for the area of 7 733 ha (116 000 mu) with an annual payment of RMB10/mu to Yunnan Shenyu.

The bush, harvested, burnt and bareland areas are considered by Yunnan Shenyu as suitable for establishing with new Jatropha plantations. Yunnan Shenyu also plan to re-establish 70% of clear fallen pine areas with Jatropha plantations.

Figure S-1: Yunnan Shenyu Estate Area by current landuse

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Burnt Areas Bareland
0% 10%
Harvested Areas
1%
Bush
6%
Forest
41%
Jatropha
Plantation
35%
Open Forest
7%
Total Estate Area: 117 169.6 ha
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The Yunnan Shenyu resource is spread across 7 counties located throughout Yunnan. The predominant species in the forested areas are Broadleaf natural forests, Yunnan Pine and Armand Pine.

Market Valuation

Pöyry has established the value of Yunnan Shenyu’s forest estate as at 31 December 2007. Two components of the estate have been valued. The current forest rotation of areas classed as Forest and Open Forest in Yunnan Shenyu’s records and secondly areas currently established with Jatropha Plantations. Two valuation methods were used: Expectation approach for forestry asset and cost (replacement) approach for Jatropha estate.

The values are set out in the following table:

Table S-1-1:

Market Value and Current Stocked Area of Yunnan Shenyu’s Estate

Estate Component	Stocked Area (ha)	31 December 2007 – million RMB
Forest Current rotation only (Expectation approach)	55 127	1 005.697
Yunnan Shenyu Jatropha Plantations for current crop (Cost Replacement Approach)	34 372	429. 115
Yunnan Shenyu Jatropha Plantations for current crop under co-operative rental agreement (Cost Replacement Approach)	6 876	46 .702
Current Stocked Estate	96 375	1 481.514

Pöyry has tested the sensitivity of the December 2007 market value to changes in prices, costs and discount rate. The changes in market value resulting from these variables in the current rotation forest valuation are shown in the following table and in the following table for the current Jatropha plantations:

Table S-1-2:

Sensitivity Analysis of the Forest Market valuation as at 31 December 2007 (million RMB)

RMB)
Scenario		Discount rate %
	10.5%	11.5%	12.5%
Base Case	1 065.230	1 005.697	954.454
10% increase in current prices	1 218.668	1 150.555	1 091.910
10% decrease in current prices	911.792	860.839	816.998
10% increase in harvesting costs	1 042.819	984.532	934.364
10% decrease in harvesting costs	1 087.640	1 026.862	974.544
10% increase in transport costs	1 048.405	989.830	939.415
10% decrease in transport costs	1 082.055	1 021.564	969.492
SG&A 20% increase in fixed cost	1 053.737	994.836	944.153
SG&A 20% decrease in fixed cost	1 076.723	1 016.557	964.755

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The forest value is most sensitive to the level of current prices, with a 10% change causing a 14% difference in value. A 10% movement in either harvesting costs or transport costs has a significantly smaller impact on value with 2% and 1% changes, respectively. The value is relatively insensitive to overhead costs, with a 20% change causing a less than 2% movement in value.

Table S-1-3:

Sensitivity Analysis of the Jatropha Plantation Market Valuation as at 31 December 2007 (million RMB)

2007 (million RMB)
Scenario	Value (million RMB)
Base Case	475.186
25% increase in discount rate	518.453
25% decrease in discount rate	438.454
25% increase in land rental	495.506
25% decrease in land rental	456.127
10% increase in Silviculture cost	513.733
10% decrease in Silviculture cost	437.900

The Jatropha plantation value is most sensitive to the estimated silviculture cost. Silviculture cost which includes all costs except for land rental and overheads. A 10% change in silviculture cost will cause an 8% difference in value. In comparison, land rental is a smaller component of the overall cost, a 25% movement in either direction has an impact of 4% on value. The value is moderately sensitive to discount, with a 25% change causing a 9% movement in value.

The forest valuation has been undertaken over a 50 year period with the main costs, price and yield assumptions as outlined in the following table.

Table S-1-4:

Summary of main assumptions in Yunnan Shenyu Forest Valuation

Item	Assumptions	Assumptions	Assumptions	Report Reference
Delivered Log Prices - Pine - Broadleaf	Small (6-14cm SED) RMB550/m3 RMB515/m3	Medium (14-26cm SED) RMB800/m3 RMB1050/m3	Large (>26cm SED) RMB1200/m3 RMB1650/m3	Section 6.5
Real Price Growth	Small Logs: 1.0% per annum for next 5 years	Medium and Large Logs: 1.7% per annum for next 5 years		Section 6.6
Volume mix at maturity - Pine - Broadleaf	Small (6-14cm SED) 20% 20%	Medium (14-26cm SED) 50% 40%	Large (>26cm SED) 30% 40%	Section 4.5.3
Yields	Pine Thinning cut at 25yrs: 25-30 m3/ha Pine Clearfall at 50yrs: 127-147 m3/ha Broadleaf Selective cut at 60yrs: 64-75m3/ha			Section 4.5.3
Silviculture Costs - Pine	Year 1 RMB4858.5/ha (RMB324/mu)	Year 2 onwards RMB37.5/ha/a (RMB2.5/mu/a)		Section 5.1
Harvest Cost - Pine (clearfall)	RMB80/m3			Section 5.2.1

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==> picture [385 x 130] intentionally omitted <==

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Item Assumptions Report Reference
- Broadleaf and Pine RMB115/m [3]
(selective cut)
Harvest Roading Costs RMB10/m [3] Section 5.2.1
Transport Costs Range: RMB75-137.5/m [3] (Distances of 100-250km) Section 5.2.1
Forest Taxes Armand Pine: Broadleaf: Yunnan Pine: Section 5.2.2
RMB80/m [3] RMB50/m [3] RMB30/m [3]
Overheads RMB150/ha/a (RMB10/mu/a) Section 5.3
Land Rental RMB15/ha/a (RMB1/mu/a) Section 5.4
Minimum Harvest Ages Pine: 40 years (clearfall) Section 8.5.1
Broadleaf: 50 years (selective cut once in 50 year cycle)
----- End of picture text -----

The resulting woodflows by species from the Yunnan Shenyu Forest Estate are shown in the figure below. The increased volumes in the first three periods of the model is a result of Yunnan Shenyu’s plan to cut larger areas of forest to accelerate conversion to Jatropha. The reduction in volumes available towards the end of the 50 year period is a result of the majority of existing pine areas being replanted with Jatropha.

Figure S-2: Woodflow by Species from the Yunnan Shenyu Forest Estate

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Volume ('000 m [3] )
300
250
200
150
100
50
0
2008 2012 2016 2020 2024 2028 2032 2036 2040 2044 2048 2052 2056
Year Ending 30 June
Pine Open Pine Broadleaf Open Broadleaf Thinning
----- End of picture text -----

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The Jatropha plantation market valuation has been undertaken using replacement cost based approach. Emphasis has been placed on standard industry costs hence use of market land rentals and seeding costs.

Table S-1-5:

Summary of main assumptions in Yunnan Shenyu Jatropha Plantation Market Valuation

Valuation
Cost Items	Assumption	Report Reference
Land Preparation	RMB 1200 / ha ( RMB 80/mu)	Section 5.1
Planting	RMB 375 / ha ( RMB 25/mu)	Section 5.1
Seedlings	RMB 2 per seedling, RMB 3000 / ha ( RMB 200/mu)	Section 7.4
Fertilising	RMB 375 / ha ( RMB 25/mu)	Section 5.1
Maintenance	RMB 600 / ha ( RMB 40/mu) in first year and RMB 825 / ha ( RMB 55/mu) in subsequent years	Section 5.1
Land Rent	RMB 300 / ha ( RMB 20/mu)	Section 5.4
Administration	RMB 150 / ha ( RMB 10/mu)	Section 5.3

Investment Value

Pöyry has also prepared a valuation for Yunnan Shenyu’s Jatropha Estate (Current Stocked Area) using Expectation method, which represents the Investment Value of the Company’s current stocked Jatropha estate. Expectation approach is a widely accepted method of valuation for biological assets amongst international appraisers. However, it most appropriate in circumstances where actual yields, agriculture practices and costs are more certain. Poyry has however produced an expectation value of the Jatropha resource to provide guidance as to the potential investment value of the resource assuming performance of the resource are realised.

An investment value of Yunnan Shenyu’s estate (current stocked area) as at 31 December 2007 is set out in the following table:

Table S-1-6:

Investment Value of Yunnan Shenyu’s Estate (Current Stocked Area)

Estate Component	Stocked Area (ha)	31 December 2007 – million RMB
Forest Current rotation only (Expectation approach)	55 127	1 005.697
Yunnan Shenyu Jatropha Plantations (current crop) – Expectation approach	34 372	1,560.576
Yunnan Shenyu Jatropha Plantations for current crop under co-operative rental agreement – Expectation approach	6 876	287.706
Current Stocked Estate	96 375	2853.979

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Table S-1-7:

Sensitivity Analysis of Jatropha Plantation (current crop) Investment Value to changes in key inputs.

Table S-1-7: Sensitivity Analysis of Jatropha changes in key inputs.	Plantation (current crop) Investment Value to
Scenario	Value (million RMB)
Base Case	1,848.282
10% increase in price of seed	2,169.038
10% decrease in price of seed	1,527.526
10% increase in yield at maturity	2,060.176
10% decrease in yield at maturity	1,629.967
10% increase in Harvesting cost	1,752.055
10% increase in Silviculture cost	1,944.509

The Jatropha plantation investment value is very sensitive to the level of estimated seed selling prices, with a 10% change causing a 17% difference in value. A 10% movement in either yield assumptions also has impact on value with 11%. Yield refers to the kg/mu of seed yield at maturity, whilst harvesting rate is the assumed average volume in kg/person/day of seeds that can be collected. The valuation is relatively less sensitive to harvesting cost, with a 10% change resulting in a 5% change in value.

The following table presents the results of the investment valuation of Yunnan Shenyu’s Jatropha asset at real discount rates of 10.5%, 11.5% and 12.5% applied to real pre-tax cash flows

Investment Valuation Jatropha Estate (Current Stocked Area) as at 31 December 2007

2007
Valuation Treatment	Real Discount R	ate Applied to Pre	-taxCash Flows
	10.5%	11.5%	12.5%
		RMB million
Jatropha Current rotation only	2,026.889	1,848.282	1,696.533

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The Jatropha plantation investment valuation has been undertaken over a 50 year period with the main costs, price and yield assumptions as outlined in the table below.

Table S-1-8: Summary of main assumptions in Yunnan Shenyu Jatropha Plantation Investment Valuation

Valuation
Item	Assumption	Report Reference
Delivered Seed Prices	RMB2.0/kg (RMB2000/ton)	Section 7.4
Yields	Year 1: 50kg/mu (0.75ton/ha) Year 2: 133kg/mu (2.0 ton/ha) Year 3 onwards: 333kg/mu (5.0ton/ha)	Section 4.5.3
Silviculture Costs	Year 1 RMB3300/ha (RMB220/mu) Year 2 onwards: RMB1200/ha/a (RMB80/mu/a)	Section 5.1
Harvest and Transport Costs	RMB0.6/kg (RMB600/ton)	Section 5.2.3
Overheads	RMB150/ha/a (RMB10/mu/a)	Section 5.3
Land Rental	RMB15/ha/a (RMB1/mu/a)	Section 5.4

Annual forecasted yields from both the current Jatropha estate are shown in the following figure.

Figure S-3: Forecast annual seed yields from the existing areas of Jatropha in the Yunnan Shenyu Estate

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250,000
Co-operative rent
Yunnan Shenyu
200,000
150,000
100,000
50,000
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Volume (tons)
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Prospective Valuation of Future Plans

A prospective valuation of Yunnan Shenyu’s future plans has also been undertaken. The prospective valuation is designed to provide a future plan value for use internally by China Grand Forest. It is not an indication of market value as it attributes values to future crops and is not compliant with IAS 41. The prospective valuation is subject to the assumptions as outlined in the table below.

Table S-1-9:

Assumptions for Prospective Valuation of Yunnan Shenyu’s Future Plans

Estate component	Assumption
Existing Secured Bush, Harvested, Burnt and Bareland areas (20 795 ha)	Planted with Jatropha in 2008
Existing Pine Forest ( 21 717 ha)	Following clearfalling - 70% replanted with Jatropha ( 15 202 ha) - 30% replanted with Pine ( 6 515 ha)
Open forest planted with Jatropha following clear falling ( 7 978 ha)	Open forest planted with Jatropha following clear falling

The resulting prospective valuation of Yunnan Shenyu’s plans is summarised below –

Table S-1-10:

Prospective Value of Yunnan Shenyu’s future plans

Table S-1-10: Prospective Value of Yunnan Shenyu’s	future plans
Estate Component	31 December 2007 – million RMB
Forest Perpetual Value	999.957
Jatropha Perpetual Value	2,837.450
Co-operative rental agreement Jatropha area Perpetual Value	287.706
Total Prospective Value	4,125.113

In the prospective valuation of the forestry resource 30% of harvested pine area is replanted with pine which has an IRR less than the current discount rate of 11.5%. The next rotation is NPV-negative and when included in the perpetual forestry model, leads to a reduction in the overall value result. Also the perpetual forestry model has reduced area in subsequent rotations due to the open forest and 70% of pine areas being replanted with Jatropha. This reduction in area and value in the forestry perpetual model is reflected in an increase in area and value in the Jatropha prospective valuation.

Included in the valuations are recoverable volumes for logs larger than 6cm SED. Recoverable volume for logs between 3- 6cm has been excluded from the valuationshe as current markets for these logs don’t exist. In the future reconstituted panel producers or pulp mills could demand these logs. Replanting of pine has been included in the prospective valuation but excluded from market valuation. The prospective valuations have been undertaken over a 50 year period that coincides with Yunnan Shenyu’s lease agreements. Therefore, although replanting of pine has been included in the prospective valuation, volume arising for areas harvested beyond 50 years including a second selective cut in the

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broadleaf forest and harvesting of some replanted pine forest areas has been excluded.

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CONTENTS
PREFACE		I
CERTIFICATION		II
ASSUMPTIONS AND LIMITING CONDITIONS		IV
1	INTRODUCTION	17
2	PURPOSE AND SCOPE	18
2.1	Purpose of the Valuation	18
2.2	Scope of the Valuation	18
2.3	Matters Outside the Scope of the Valuation	19
3	VALUATION METHODOLOGY	20
3.1	Outline of Valuation Methods	20
3.2	Comparable Sales	20
3.3	Expectation Approach	21
3.3.1	Realisation Value of Current Standing Stock	22
3.4	Compounding of Costs	23
3.5	Valuation Methods Applied in Valuing the Yunnan Shenyu Forest Assets	23
3.6	Valuation Process	24
3.7	Other Aspects of Applying the Expectation Approach	25
3.7.1	Analysis of Pre-tax or Post-tax Cash Flows	26
3.7.2	The Period of Analysis	26
4	FOREST DESCRIPTION	27
4.1	Resource Location	27
4.2	Forest Area	27
4.3	Species	30
4.4	Age Class Distribution	33
4.5	Growth and Yield	34
4.5.1	Forest Inventory Procedure	34
4.5.2	Tree Volume Calculations	36
4.5.3	Yield Table Formulation	37
4.5.4	Yield Benchmarks	40
5	COSTS	41
5.1	Establishment Costs	41
5.2	Costs of Production	43
5.2.1	Forest Harvesting, Roading and Transport Costs	43
5.2.2	Forest Taxes at Harvest	44
Copyright © Pöyry Forest Industry		14

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5.2.3	Jatropha Harvesting, Transport Costs	44
5.2.4	Jatropha Harvesting Taxes and Government Subsidies	45
5.3	Company Overhead Costs	45
5.4	Land Rental	46
6	YUNNAN FOREST MARKETS AND LOG PRICES	47
6.1	Log Demand	47
6.2	Log Supply	47
6.3	Panel Industry Demand	48
6.4	Other Processing Industry	49
6.5	Overview of Forest Product Prices	49
6.6	Log Price Outlook	50
7	BIOFUEL MARKETS	52
7.1	China Biofuel Policies	52
7.2	China Biofuel Demand	54
7.3	China Biofuel (Biodiesel) Supply	54
7.3.1	Biofuels Demand and Supply Balance	55
7.4	Market Prices for Biofuel Feedstock	55
8	FOREST ESTATE MODEL	57
8.1	Overview	57
8.2	Observed Practice in Wood Flow Modelling	60
8.3	Modelling Supply and Demand	61
8.4	Croptype Allocation	61
8.5	Model Constraints	62
8.5.1	Clearfell Age Constraints	62
8.5.2	Wood Flow and Allocation Constraints	63
8.5.3	Wood Flow and Allocation Model Results	64
8.6	Prospective Valuation of Future Business Plans	67
9	DISCOUNTED CASH FLOW VALUATION	68
9.1	Overview	68
9.2	Treatment of Taxation	68
9.3	Scope of the Analysis	69
9.4	Timing of Cash Flows	70
9.5	Date of Valuation	70
10	DISCOUNT RATE	71
10.1	Discount Rate Derived from WACC/CAPM	71
10.2	Implied Discount Rates	71
10.3	Incorporating Risk in the Discount Rate	72
10.4	The Discount Rate Applied in Valuing the Yunnan Shenyu Resource	72
11	VALUATION RESULTS	74

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11.1	Exchange Rate	74
11.2	Valuation as at 31 December 2007	74
11.3	Investment Value of Yunnan Shenyu’s Jatropha Estate (Current Stocked Area)	75
11.4	Prospective Valuation of Future Business Plans	75
12	RISKS AND SENSITIVITY ANALYSIS	78
12.1	Sensitivity Analysis	78
12.2	Risk Analysis	80
12.2.1	Frost	80
12.2.2	Fire	80
12.2.3	Pest and Diseases	80
12.2.4	Storm Damage	80
12.2.5	Land Slides	81
12.2.6	Cost and Price Assumptions	81
12.2.7	Risk Analysis Conclusions	81
12.2.8	Jatropha related business risks	81

Appendices

Appendix 1: Forestry Field Inspection Photo Essay Appendix 2: Jatropha Field Inspection Photo Essay Appendix 3: Field Inspection Inventory Results

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INTRODUCTION

Yunnan Shenyu New Energy Company Limited (Yunnan Shenyu) is a company based in Yunnan, China, which principally engages in bio-energy industry development, more specifically in the research and development of Jatropha Curcas . The Company has a land area totalling around 118 046 ha (1 770 695 mu) as at December 31[st] 2007. The majority of area is forest or open forest area and totals 55 127 ha (826 905 mu). Around 41 247.6 ha (618 714 mu) are currently Jatropha plantations including 6 876 ha (103 410 mu) under co-operative rental agreement (Cost Replacement Approach) with Beijing Wanfuchun. The remaining area of 20 795 ha (311 925 mu) consist of other land-use types such as bush, bare land, burnt or cutover areas. Yunnan Shenyu is considering converting it’s open forest, 70% of clearfallen pine forests and bare land areas into Jatropha plantation, for it’s bio-diesel industry development.

Southwest China, including Guizhou Province, Sichuan Province, and Yunnan Province is the official target area for Jatropha production in China. In Southwest China, the chief national target area for Jatropha plantations, provincial governments have plans to expand Jatropha area to 15.4 million mu (1 million ha) on marginal land over the next decade and a half, or a roughly 15-fold increase over current areas, much of which is wild.

The Yunnan government wants to construct the largest production base for biofuels in China. The plan is to cultivate ten million mu of Jatropha and form a biofuel industry. The areas will focus on Honghe, Chuxiong, Wenshan, Lijiang, Lincang and another 6 counties. While research on Jatropha in China dates back to the late 1970s, the infrastructure that would support a rapid scaling up of Jatropha plantations in Southwest China needs to be developed. At present no large scale commercial Jatropha oil or Jatropha biodiesel production exists in China. Therefore, compared to traditional forest or agricultural asset valuation, there is much higher variance and uncertainty involved in the valuation of Jatropha plantations. However, production yields, agriculture practices and costs will become more certain over the next few years along with further development in large scale plantations.

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2 PURPOSE AND SCOPE

2.1 Purpose of the Valuation

The purpose of the valuation is to provide and independent estimate the market value of Yunnan Shenyu’s forest assets to assist China Grand Forestry Green Resources decision to acquire the company. A market valuation has been undertaken as at December 31 2007.

A definition of “market value” is:

“the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming that the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby

The buyer and seller are typically motivated.
Both parties are well informed or well advised, and acting in what they consider their own best interests.
A reasonable time is allowed for exposure in the open market.
The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale”[1] .

The study also include an estimate the investment value of Yunnan Shenyu’s Jatropha asset. The investment value on has been undertaken as at December 31 2007.

Prospective valuation of the future plans of the company has also been conducted so as to provide a value for evaluating the Yunnan Shenyu’s expansion plans.

2.2 Scope of the Valuation

The valuation employs an income expectation approach based on projected wood flows to value Yunnan Shenyu’s forest asset (Section 3) and a replacement cost approach based on standard industry costs to value the Company’s Jatropha asset. Forest asset value has been estimated by projecting pre-tax cash flows and applying a discount rate expressed in real terms. Jatropha market asset value has been estimated by projecting industry standard costs involved in establishing and maintaining the plantation and accumulates these with compound interest from their inception of the investment to the current point in time.

1 Uniform Standards of Professional Appraisal Practice, The Appraisal Institute (www.appraisalinstitute.org). Copyright © Pöyry Forest Industry

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A separate Investment value of Yunnan Shenyu’s Jatropha asset has also been conducted using an income expectation approach.

As a market valuation, the exercise has specifically addressed the following:

The current extent and condition of the forest assets as at 31 December 2007.
The location, accessibility and attractiveness of the forests from a harvesting, transport and market perspective.
Prevailing log prices and the impacts of log grade and stem quality on price.
Expectations of future log prices.
Industry standard cost of establishing Jatropha plantation
New evidence of the market perception of forest value as demonstrated in recent transaction results. These can be expressed as implied discount rates.
Weighted average cost of capital (WACC) estimates as provided by Auckland UniServices Limited.
Risks that may prevent the realisation of forest value.

2.3 Matters Outside the Scope of the Valuation

In arriving at the forest values, Pöyry has not confirmed the following:

The current legal ownership of the forests and the security of tenure.
The impacts of possible changes in forest management systems and labour availability.
The volume and log assortments that forests will produce. The timeframe of the valuation has not allowed the growth projection process to be derived with statistical rigour.
Estimates of planted area.
The costs of forest operations undertaken by Yunnan Shenyu.
The appropriateness of the species, genetic material and management techniques that Yunnan Shenyu is employing in managing and reestablishing the forests.

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3 VALUATION METHODOLOGY

3.1 Outline of Valuation Methods

Accompanying the global expansion in planted forests has been ongoing refinement of the processes employed in forest appraisal.

Three main methods of appraisal are commonly distinguished. These are:

Comparable sales
Expectation value
Cost

If these methods are to be effectively utilised within a forest valuation framework then all three of them generally require a discounted cash-flow (DCF) approach. A schematic representation of the relationship between the methods is illustrated in Figure 3-1 below.

Figure 3-1: Valuation Approaches

==> picture [294 x 185] intentionally omitted <==

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

Approaches Employing
Discounted Cash Flow
Analysis
Comparable Expectation Cost
Sales Approach Approach
Standing Stock Projected
Approach [1] Wood/Seed Flows
1 The standing stock approach is the special case where the
discounting period used in the DCF analysis is zero.
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3.2 Comparable Sales

In principle, the most satisfactory basis for valuing forests is to turn to the evidence provided by sales transactions.

In comparing transaction results it is necessary to consider which attributes influence the value of planted forests. Important factors may include:

Forest maturity
Species composition
Site productivity
Proximity to market

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Forest terrain (and thereby harvesting system)
Silvicultural history
Land value

Each of these factors may have a profound effect on forest value. Other features may also be influential. These include the standard of roading infrastructure in the forest, and risks arising from climatic and pathogenic agents. Forest size may also have an influence, although there may not be a consistent trend with changing forest area.

When comparing forests and the prices paid for them, it is also necessary to consider the time at which an example sale took place. In the first instance, the timing is reflected in perceptions of current log prices and their anticipated future movement.

Given the range of factors affecting forest value, it is statistically unlikely that forests can be found that are closely similar to the subject forest that is being valued. This is especially the case given that forest estate transactions in China have not, to date, been particularly frequent. Achieving a forest-to-forest match is extremely unlikely, as it would require finding forests alike in all respects, including size.

Forest appraisers have generally come to accept that the one distillable parameter that can be most usefully extracted from transactions involving heterogeneous forest resources is the Implied Discount Rate (IDR). Derivation of the IDR involves developing a credible cash flow projection for each transacted forest, using the best information the analyst can obtain. This is then compared with the price actually paid for each resource. The discount rate at which the discounted cash flows match the purchase price is the IDR.

The IDR offers a device by which differences in size, timing, markets, location, age-class, volume, operability and other relevant factors are recognised. Further, the approach also recognises that a useful method of arriving at a market comparable result is to employ the same means that market participants utilise in deriving and supporting their negotiating positions. For Asia Pacific forest resources, the most common method of negotiating transaction values involves DCF constructions.

3.3 Expectation Approach

The Expectation approach provides the Net Present Value of the future net revenue stream. It is variously referred to as the “NPV”, “PV”, or “Income” approach[2] . As the terminology implies, the NPV approach involves projecting the anticipated future net income stream, and then “discounting” this, at a suitable cost of capital, in order to acknowledge the lower economic value of delayed receipts.

2 The list is not exhaustive. Other acronyms that may appear include PNW (Present Net Worth) and PW (Present Worth). In some jurisdictions, Net Present Value may include the costs of bringing the valued entity to sale. However in referring to NPV in this document we have used the term in its popular if inexact role, and treated it as providing equivalent results to the income approach.

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The NPV approach generally involves adopting the standpoint of a potential forest purchaser. To this individual or entity, funds previously invested in the forest are irrelevant – the exclusive focus is on the forest’s future earning capability.
A crucial parameter within the NPV analysis is the “discount rate”. The longer the period before income realisation, and the greater the discount rate, the greater the reduction in NPV. Forest investments are generally of a long term and their value is especially sensitive to the discount rate.
Provided that the eventual revenues are as good as or better than the valuation assumes, an investor purchasing the forest at the derived value is assured of a rate of return on investment at least equivalent to the discount rate.

For the so-called Expectation approach, it is common practice to derive a Weighted Average Cost of Capital (WACC). This distinguishes the distinct costs of debt and equity. A well-recognised procedure for deriving the cost of equity is through application of the Capital Asset Pricing Model (CAPM). Pöyry engages the services of an external expert, Associate Professor Alastair Marsden of Auckland University, to prepare a WACC-based derivation of discount rate.

The manner in which the Comparable Sales and Expectation approaches are applied appears at first impression to be similar. Both employ a DCF formulation and refer to estimates of future cash flows. This does not imply that they should be unquestioningly coalesced into one single method. There is sufficient difference between them that they can potentially lead to quite different results.

3.3.1 Realisation Value of Current Standing Stock

This method warrants some distinct discussion because it has had some historical application. It recognises the potential net realisation value of the current timber content of the forest if it were cut down immediately or the current seed production in the Jatropha plantations. A value is based on the merchantable content (or “standing stock”) at the time of the valuation. It is therefore a special case within the Expectation approach. Because the forest is harvested immediately, the cash flow modelling is confined to a single period. No discounting is required to recognise the cost of capital. This value is both tangible and comparatively straightforward to calculate. It does however have obvious limitations:

For plantation forests, the timber realisation value of the stand may be very low for most of the rotation length. Despite this, the vendor will be mindful of the funds invested in each stand and can be expected to seek some reimbursement.
By the final years of the characteristic rotation, the marginal rate of value growth of the standing stock becomes considerable. An informed and rational owner will recognise the economic opportunity associated with holding the growing trees rather than selling them. Only if the purchaser’s offer matches the vendor’s perception of economic opportunity cost can the vendor be indifferent as to whether to hold or

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sell. Inherently, therefore, the vendor’s perspective is based not on the current timber content but instead on the future anticipated revenue.

For forest resources of significant size it is unlikely that the market could absorb all of the forest wood content at once without log prices being depressed. Furthermore, Annual Allowable Cut (AAC) constraints prevent such harvesting strategies from being employed operationally.

The first effect leads to an unduly conservative valuation while the third can lead to an overly optimistic result. It is plausible, but unlikely, that the two effects might offset one another. Pöyry’s preference in valuing forests is to avoid this method altogether, as it has no rational basis for emulating expected investor behaviour.

3.4 Compounding of Costs

This method takes the costs involved in acquiring or establishing and maintaining the forest and accumulates these with compound interest from their inception of the investment to the current point in time. This forest value is therefore the price that forest owners would have to receive if they were to obtain a satisfactory rate of return on their investment to date. The method is equivalent to the accountants’ concept of “capitalising” establishment/acquisition costs plus interest, although the forest valuer is more inclined to adopt assumed costs which are "standard" and current at the time of the valuation.

By using costs that are current, along with a “real” (inflation-corrected) compounding rate, the valuation is updated for inflation. The use of “industry standard” costs ensures that only costs consistent with efficient practice are recognised. Forest valuers are wary of the compounding approach, and likewise capitalisation. In the market place a “high cost” forest does not necessarily prove to be a “high value” forest and yet this is what the method can imply.

3.5 Valuation Methods Applied in Valuing the Yunnan Shenyu Forest Assets

There is a lack of available comparable sales data for China and hence Pöyry has needed to look further a field in the Asia-Pacific region for Implied Discount Rate (IDR) evidence. There are also complexities in identifying what margin above other implied discount rates that forestry in Southern China should attract. For these reasons, Pöyry considers that there should not be exclusive reliance on the comparable sales method in valuing the Yunnan Shenyu forest assets. The cost method is not commonly found to be a reliable guide to the market’s behaviour and is therefore treated warily for traditional forest assets.

Pöyry has placed greatest emphasis on an expectation approach in valuing the Yunnan Shenyu’s forests. Some comparable sales evidence has nevertheless been incorporated through consideration of relevant IDRs.

Pöyry has used Compounding of Costs method in valuing the Yunnan Shenyu’s Jatropha assets. This is due to the crop having not yet reached large scale commercial production and therefore absence of actual cost, price and yield information to forecast reliable future cashflows.

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Woodflow projections for the resource have included the existing rotations and those which will succeed it. This has enabled conformation that the assumed harvest strategy is sustainable in the long term. To be consistent with wider conventions in business appraisal, however the valuation is based on the real pretax cash flows produced by just the current standing tree crop (see Section 3.7.2).

3.6 Valuation Process

The process employed in valuing the Yunnan Shenyu resource can be summarised under the following key steps:

i) Data assembly and construction of the forest description.
ii) Execution of a field inspection.
iii) Incorporation of the field inspection findings within the resource description.
iv) Consideration of land costs and how these are to be incorporated in the forest valuation.
v) Collection and review of relevant direct and indirect costs.
vi) Collecting log price data and modelling of log allocation to available markets.
vii) Construction of the forest estate model and projection of the future wood flows by log grade.
viii) Derivation of cost and revenue flows.
ix) Selection of the appropriate discount rates, including analysis of:
a) Implied discount rates from transaction evidence
b) Discount rates derived from WACC/CAPM formulations.
x) Estimation of the value of the tree crop.
xi) Sensitivity analysis.

These various elements are illustrated in Figure 3-2.

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Figure 3-2: Schematic Outline of the Valuation Process

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FOREST DESCRIPTION
Condition of the forest crop, including its current
Physical characteristics of the forest site , including location, area, terrain, soil and climate status, and future growth potential by quanitity and log quality
Forest estate model, driven by a forest management and
harvesting strategy, providing: Log Market Prices:
� Woodflow projection by log type and origin Domestic market
Land Value � Revenue Flows Offshore market
� Cost flows
Cashflow model
This is primarily derived from the forest estate model, but
also recognises other management cost inputs, plus a
treatment of land value.
Practical Woodflow No
Strategy?
Yes
Reporting of Physical
Outputs
Financial environment Reporting of Financial
the forest investment Outputs
environment
the general invetment
environment
These provide determining influences on the cost of Selection and Application of a Discount Rate
capital (i.e. the Discount Rate)
Sensitivity
Analysis
Calculation of Net Present
Value
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3.7 Other Aspects of Applying the Expectation Approach

In applying the expectation approach, the following aspects also require consideration:

Analysis of pre-tax or post-tax cash flows
The period of analysis.

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3.7.1 Analysis of Pre-tax or Post-tax Cash Flows

Both approaches have been demonstrated in valuing planted forests. For cash flows derived on a pre-tax basis, a pre-tax discount rate is applied. The Yunnan Shenyu valuation has been completed on a pre-tax basis, using cash flows (and discount rate) expressed in real-terms.

3.7.2 The Period of Analysis

Wood flows and associated cash flows may be modelled on a perpetual basis or they may be confined to the current rotation.

Forest estate models have come to be an integral part of the forest valuation process, being applied to identify the forest’s long-term supply capability. Despite this extended wood flow-modelling horizon, there has been a general tendency to confine the scope of the financial analysis to those cash flows solely associated with the tree crop that currently exists. This includes all parts of the present forest from the oldest stands to those just established. It excludes, however, trees that are yet to be planted as these are considered to be part of a new investment cycle.

Wider business appraisal practice encourages the confinement of the scope of analysis to the current investment cycle. There are arguments that forest valuation should be no different. The practice of considering the performance of the existing tree crop alone lies with the general preference for avoiding unnecessary conjecture associated with costs, yields, anticipated revenues and the future discount rate.

As generally applied, the current rotation model is not to be confused with the “standing-stock approach”. Instead, the harvesting strategy for the current tree crop is assumed to be consistent with a long-term sustainable management policy, and although there will be future rotations, they will not contribute to the net present value calculation, i.e. they are “NPV neutral”. In effect, all funds invested in them are assumed to earn such proceeds that the investment generates exactly the discount rate.

The current rotation model effectively assumes that through adaptive management the forest owners will seek to secure at least NPV neutrality on their reinvestment in succeeding rotations. Within the valuation of the Yunnan Shenyu forest assets, Pöyry has modelled the resource over multiple rotations in order to reflect the longterm management outlook of the estate. The market valuation assumes however that second and subsequent rotations will be NPV neutral. The analysis is therefore effectively confined to the cash flows associated with the current rotation.

Pöyry has also undertaken a prospective valuation of Yunnan Shenyu’s future plans. The prospective valuation is designed to provide a future plan value for use internally by China Grand Forest. It is not an indication of market value as it attributes values to future crops and is not compliant with IAS 41.

The valuations utilises a 1 Jan to 31 Dec calendar year.

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4 FOREST DESCRIPTION

4.1 Resource Location

All of Yunnan Shenyu’s estate is located in the province of Yunnan in South West China (Figure 4-1). The map below shows the 7 counties where the estate is located together with the route Pöyry field team took during the forest field inspection.

According to Yunnan Shenyu the Jatropha plantations are located in 6 counties and in 55 individual stands.

Figure 4-1:

Location of Yunnan Shenyu Forest and Jatropha Estates in Yunnan Province

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4.2 Forest Area

According to Yunnan Shenyu’s records, the Company’s total area as at 31 December 2007 totalled 117 169.6 ha (1 757 545 mu). All of the land holdings are located in Yunnan Province. 47 149 ha (707 235mu) is forest area, 7 978 ha (119 671 mu) is open forest, 41 247.6 ha (618 714 mu) is Jatropha plantation with the remaining 20 795 ha (311 925 mu) being bare land, bush and areas to be planted. The Jatropha area is inclusive of a co-operative rental agreement area of 6 876 ha (103 410 mu).

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Most of the forest area is located in three counties (Figure 4-2), whilst the geographical distribution for Jatropha plantations is more even (Figure 4-3).

Figure 4-2:

Yunnan Shenyu’s Forest Area by Counties

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16,000
Forest Area (ha)
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
Yangbi Gengma Huize Yunlong Yongren Shuangbai Qiubei
County
Area (ha)
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Figure 4-3: Yunnan Shenyu’s Jatropha Plantation Area by Counties

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16,000
14,000 Co-operative Rental Agreement
Yunnan Shenyu Jatropha Area (ha)
12,000
10,000
8,000
6,000
4,000
2,000
0
Huize Shuangbai Yongren Gengma Yangbi Qiubei Yunlong
County
Area ( ha)
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by converting all non-forest land and 70% of existing Pine forests into Jatropha plantations.

Figure 4-4:

Yunnan Shenyu’s land area by categories

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Burnt Areas Bareland
0% 10%
Harvested Areas
1%
Bush
6%
Forest
41%
Jatropha
Plantation
35%
Open Forest
7%
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Total Estate Area: 117 169.6 ha

Table 4-1:

Area Statement for Yunnan Shenyu Estate

County	Total Area (ha)	Forest Area (ha)	Jatropha Area (ha)	Jatropha Area (ha) (underco- operative rental agreement)	Open forest (ha)	Bush (ha)	Bareland (ha)
Huize Yangbi Gengma Yongren Qiubei Yunlong Shuangbai Total	42 266 21 753 17 719 14 153 10 419 6 331 4 531 117 170	11 226 14 937 12 441 2 243 1 932 1 270 3 100 47 149	14 761 3 421 4 014 7 357 3 314 0 1 506 34 372	0 0 0 0 0 0 6 876 6 876	3 851 1 203 905 1 175 539 306 0 7 978	3 652 108 200 1 590 601 605 56 6 812	8 776 2 084 159 1 788 607 520 49 13 983

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4.3 Species

Yunnan Shenyu’s forest assets consist of two conifer species - Yunnan and Armand Pine, and three broadleaf species: Southwest Birch, Oak and Alder.

Yunnan Pine ( Pinus yunnanensis )

An endemic conifer species that can only be found in Southwest China. The wood air-dry density is ca. 0.586-0.624g/cm³. It is widely used in various forest industries, such as furniture making, timber frame building, door/window frame, packaging, mine supports, wooden railroad crosstie, and pulp & paper industry. It is also an important species in resin producing. Most of near mature/mature trees visited in the region during the field inspection have been tapped. The commonly designated rotation length is 50 years for plantation.

Southwest Birch/Alder-leaf Birch ( Betula alnoides )

A valuable indigenous broadleaf species with fast growth and high-quality wood. It is generally suited to an annual average temperature of 13.5�20.6 � and an annual rainfall of more than 1 000 mm. Regarded as pioneer species, rapidly colonising open ground especially in secondary successions following a disturbance or fire. The usually designated rotation age is about 40 years for plantations. The species is a good material for wood flooring, furniture and panel board.

Oak Family ( Quercus L. )

The oak family in Southwest China mainly consist of Sawtooth Oak and Oriental white oak . Oak wood has a density of ca. 0.75 g/cm³, great strength and hardness, and is very resistant to insect or fungal attack because of its high tannin content. It is commonly used for furniture making and flooring, door/window frame, and for veneer production. The typical rotation length is 40 years for plantations.

Alder ( Alnus cremastogyne )

A fast-growing species, even on damaged sites such as burned areas and mining sites. The wood basic density of the species is ca. 0.419 g/cm³. It is mostly used for packaging or pallets, in wood flooring, and some furniture. The typical designated rotation length is 20 years for plantations.

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Figure 4-5: Species Distribution of Yunnan Shenyu’s Forest Resources

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Armand Pine
15%
Broadleaf
54%
Yunnan Pine
31%
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Jatropha

Jatropha is non-edible oil-yielding perennial shrub. Jatropha grows in tropical and subtropical regions with approximately 175 species distributed throughout the world.

In India, the current distribution shows that the introduction of Jatropha has been most successful in the drier regions of the tropics with annual rainfall of 3001 000 mm. According to the literature[3] , 900-1 200 mm is considered the optimal rainfall range. In Indonesia with evenly distributed annual rainfall of over 2000 mm Jatropha does not drop its leaves and can produce fruit all year round. Low yields have been recorded in low rainfall areas while it can be grown with higher yields in high rainfall or irrigated areas.

Jatropha occurs mainly at lower altitudes (0-500 m) but can grow at higher altitudes up to an elevation of 1 000 m according to Indian sources and typically up to 1400 m according to Chinese sources[4] . The Yunnan Shenyu believes that Jatropha could grow at higher altitudes of up to 1600m. Jatropha occurs in areas with average annual temperatures of 20-28°C[5] and tolerates light frosts. It grows on well-drained soils with good aeration and is well adapted to marginal soils with low nutrient content. It is easy to establish, grows relatively quickly and has a productive life that can span from 35 to 50 years. However, there are records of 7080 year old trees in China.

3 Tree Oils India Ltd. http://www.treeoilsindia.com/

4 Biofuels in China. An Analysis of the Opportunities and Challenges of Jatropha Curcas in Southwest China

5 Centre of Excellence for Jatropha Biodiesel Promotion, India

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Jatropha will act as a deciduous tree with one to three fruiting cycle per year when grown without irrigation in a seasonal rainfall area. With ample water available (on a year-round basis irrigation or evenly distributed rainfall), more fruiting cycles (Yunnan Shenyu believes that it could be up to 7 cycles) may occur within a year. Jatropha can be maintained as a hedgerow by implementing thinning and trimming operations each year.

In Indian conditions, depending on planting, soil quality and rainfall, oil can be extracted from the Jatropha nuts after 18 months. In some other areas first seeds can be harvested after 6 months of planting the seedling. Jatropha reaches its maximum productivity by year five.

Each Jatropha tree can produce an average of 3.5 kg of seeds each year depending on soil conditions, sunshine, temperature and rainfall or irrigation levels. According to D1's[6] estimates, if 2 200 Jatropha trees are planted per hectare, each hectare could yield up to 7 tonnes of beans per annum. Jatropha beans can produce oil yields between 30% and 40%. One hectare is expected to deliver about 3 000 L of biodiesel. More conservative yield estimates suggest yields from 1.7 ton/ha. According to Gaydou et al (1982), seed yields approach 6–8 ton/ha with around 37% oil yields. They calculate that such yields could produce the equivalent of 2 100–2 800 L fuel oil/ha. Based on a small-scale study made by Yunnan Academy of Agricultural Sciences the seed yield in Yunnan province varies between 1.7 and 2.2 ton/ha in barren land and between 3.9 and 7.5 ton/ha in normal soils.

It is difficult to estimate with certainty the yield of a plant that is able to grow in very different conditions. Many pilot plantations have been established for example in China, Indonesia, Philippines, Malaysia, India, Cambodia, Madagascar, Hawaii and Belize but limited scientific data is available.

Harvesting in large scale plantations is recognised to be an issue due to the low productivity from hand picking but it is thought that seeds could be harvested using machinery somewhat similar to equipment used for thrashing coffee plants to knock coffee beans loose. An issue with Jatropha is that the fruits do not ripen at the same time. Another issue making harvesting more difficult is the fact that the fruit does not fall from the tree when it is ripe. However, Jatropha plantation are mostly established in regions where agriculture is core industry, therefore availability of labourers is not likely to be an issue.

Although in China, Africa, India, Southeast Asia and the Americas, Jatropha is considered one of the most promising feedstock for biodiesel, there are risks involved. There are no known mature large scale commercial plantations of Jatropha in the world. Therefore, the yield and other information are coming from old mature/natural areas, pilot plantations and other smaller plots. As the large scale commercial plantations have not been field tested, there is some uncertainty in investing in large scale plantations where large areas are planted at once.

6 D1 Oils plc: http://www.ecoworld.com/home/articles2.cfm?tid=356

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4.4 Age Class Distribution

Forest Areas

The age distribution by species shows that the area of different species is relatively evenly distributed in each age class. Only the proportion of Armand Pine to Yunnan Pine increases when moving into younger age classes. There is also a larger number of young age stands when compared with the other three age groupings.

Figure 4-6:

Yunnan Shenyu Forest Age Class Distribution by Species and Area

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20,000
Broadleaf
18,000 Yunnan Pine
Armand Pine
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
Young Age Middle Age Near Mature Mature and Over
Mature
Age Class
Area (ha)
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The age classes for pines and broadleaves graphed above differ and are presented in the table below.

Table 4-2:

Age classes by Species in the Yunnan Shenyu Forest Estate

Species	Young	Middle Age	Near Mature	Mature	Over Mature
Pine	10-20 years	20-30 years	30-40 years	40-60 years	> 60 years
Broadleaf	10-20 years	20-40 years	40-50 years	50-70 years	> 70 years

Jatropha Areas

The average plantation size in the Jatropha resource is small and the areas are scattered in different parts of Yunnan province. Mature plantations, planted between 1960-90, were typically established by local farmers under Government programmes. According to Yunnan Shenyu they have acquired the land lease agreements also for the mature Jatropha plantations. Areas classified as Young

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have been planted mainly in 2006. The age distribution of the Jatropha Plantations is shown in Table 4-3.

Table 4-3: Yunnan Shenyu current Jatropha plantation area by county

County Gengma Huize Qiubei Yongren Yangbi Shuangbai Total Area	Mature 648 2 227 785 1 936 706 530 6 831	Jatropha Areas (ha) Young (planted in 2005-07 Spring) Recent Planting (Autumn 2007) Co-operative rental agreement with Beijing Wanfuchun 1 405 1 961 0 3 513 9 021 0 1 849 680 0 3 394 2 027 0 2 039 676 0 975 0 6 876 13 175 14 365 6 876	Total Area 4 014 14 761 3 314 7 357 3 421 8 381 41 248

4.5 Growth and Yield

During February-March 2008, two Pöyry assessment teams of two staff undertook a field inspection and data gathering of Yunnan Shenyu’s Forest and Jatropha plantations. The field inspection was limited to a ground based inspection.

The forest inspections included visits and tree measurements at two counties and 5 forests. Because of the distance between various forests, the amount of time used at the stands was limited, and emphasis had to be given on visual examination of the forests.

In winter time the leaves of Jatropha fall and there is no fruit production. Therefore the Jatropha assessment focused on analysing site characteristics, planting, spacing, terrain and the road access. All these factors have an influence on a discounted cash flow (DCF) valuation.

4.5.1 Forest Inventory Procedure

The inventory method used by Pöyry during its field inspections was to establish fixed area plots of 0.005 to 0.04 ha (i.e. 3.99 to 15.96m radius) in each stand visited. The radius used was varied in order to gain a sufficient number of trees at each plot for measurement. The number of trees measured at plots varied from 17 to 43 stems. One assessment team of two people from Pöyry measured 8 plots in total. GPS waypoint was recorded at each plot to record its location. Each tree in the plot had a DBH measured and recorded. Tree heights were measured using a digital hypsometer FORESTER VERTEX for 3 trees in each plot; a small, medium and large diameter tree. The heights of the remaining trees in the plot were predicted using a regression model (power function) separately for Yunnan pine and broadleaf stands as shown in Figure 4-7 and Figure 4-8. To make the

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regression more accurate Pöyry also data gathered from 5 plots measured at China Grand Forestry Green Resources’s estate in a nearby county were used.

Figure 4-7: Height Diameter Regression from Inventory Results (Yunnan pine)

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25
y = 2.3595x [0.5983]
R [2] = 0.8697
20
15
10
5
0
0 5 10 15 20 25 30 35
DBH (cm)
Height (m)
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Figure 4-8: Height Diameter Regression from Inventory Results (Broadleaf stands)

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35 y = 2.1978x [0.6241]
R [2] = 0.8647
30
25
20
15
10
5
0
0 10 20 30 40 50 60 70 80
DBH (cm)
Height (m)
----- End of picture text -----

Given the timeframe concerned and the size and geographical spread of Yunnan Shenyu’s plantations, the sampling could not be very intensive or statistically rigorous. However, the inventories do provide an estimate of likely yields from the estate. The results have also been benchmarked with other inventories and projects Pöyry has undertaken in forests in Southern China. The detailed inventory results are contained in Appendix 3.

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4.5.2 Tree Volume Calculations

Stem Volumes (V)/tree were then calculated using tree volume equations supplied by Yunnan Shenyu staff for Yunnan pine and Armand pine in Yunnan and broadleaves in Northwest Yunnan.

Equation 1:

Tree Volume Equation for Yunnan pine

V = 0.0000582901175D^1.979634H^0.9071515

Equation 2: Tree Volume Equation for Armand pine

V= 0.000059973839D^1.8334312H^1.0295315

Equation 3: Tree Volume Equation for Broadleaf in Northwest Yunnan

V= 0.000052750716D^1.9450324H^0.9388533

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4.5.3 Yield Table Formulation

Forest Areas

The inventories provided total tree volumes which were summed for each inventory plot and converted to per hectare estimates Because of geographical spread of Yunnan Shenyu’s resource, the number of plots measured by Pöyry was insufficient for statistical analysis. The results of the Pöyry field inventory did not however appear inconsistent with the inventory data in Yunnan Shenyu’s records which was compiled by the local Forest Bureau.

Recoverable volume estimates were then calculated. Assumed minimum clearfell age for Pine is 40 years. In Young and Middle Age Pine stands a thinning occurs at 25 years of age. The Pine thinning at 25 years of age is 40% of Total Standing Volume.

Broadleaf can be selectively cut from a minimum of 50 years with 50% removal of standing volume in each cutting cycle. Pöyry estimates that 75% of the total standing volume in both species groups will be recoverable as marketable logs. This assumes a minimum Small End Diameter (SED) of 6cm underbark.

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Figure 4-9:

Yunnan Shenyu Pine Recoverable Clearfall Yields

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Pine Yieldtables
200
150
Gengma - Yunnan Pine
Qiubei - Yunnan Pine
100 Shuangbai - Yunnan PineYangbi - Yunnan Pine
Yunlong - Yunnan Pine
Huize - Armand Pine
50
0
30 35 40 45 50 55 60
Age (years)
Total Recoverable Volume (m3/ha)
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Figure 4-10:

Yunnan Shenyu Broadleaf Recoverable Yields – note that a selective cut at a given age would be 50% of these volumes

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Broadleaf Yieldtables
200
150
Gengma
Huize
Qiubei
100 Shuangbai
Yangbi
Yunlong
Yongren
50
0
45 50 55 60 65 70
Age (Years)
Total Recoverable Volume (m3/ha)
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Main market grades for pine species in Yunnan. ‘Small logs’ (6 to 14 cm small end diameter) are utilised by MDF/HDF, woodchip mills and for mining poles. Logs greater than 14 cm small end diameter are utilised by a large number of small family run sawmills and veneer mills (often many 100s of such mills in each city area). These bigger logs are further broken down into two size classes based on SED; Medium Logs 14-26cm SED, Large logs >26cm SED.

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Log grade allocations between small and large logs have been estimated from figures provided by Yunnan Shenyu, County Bureau estimates. The average product mix allocation assumed in the yield tables is shown in Table 4.4 and Table 4.5.

Table 4-4: Log Size Breakdown Percentages by Age used in Yield Table Development for Yunnan pine

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Age Small Medium Large
Age Range Midpoint (SED 6-14cm) (SED 14-26cm) (SED > 26cm)
40-60 50 20% 50% 30%
Table 4-5:
Log Size Breakdown Percentages by Age used in Yield Table Development for
Broadleaves
Age Small Medium Large
Age Range Midpoint (SED 6-14cm) (SED 14-26cm) (SED > 26cm)
50-70 60 20% 40% 40%
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Based on Pöyry’s assessment, 13 separate yield separate tables have been developed for species / county combinations. The yield tables cover from 35 years onwards for pine and at selective cutting ages of 45 years onwards for broadleaves.

Jatropha Plantations

The investment and prospective value of the Jatropha plantation is highly sensitive to evaluation of the yield. There are no mature large scale commercial plantations in Yunnan or other parts of the world and the information from mature Jatropha areas in Yunnan is limited. This makes the estimation of yield challenging.

Yunnan Shenyu estimates that Jatropha will be at its full fruit stage after 3 years and the yield would be 375kg/mu. The yield of fruits in the first year is about 10% (35-40 kg/mu) and about 40% (110-120kg/mu) in the second year.

The yields presented in the following table are based on communications with Southwest China-based researchers and a small-scale study conducted by the Yunnan Academy of Agricultural Science[7] (YAAS) on wild Jatropha plants in four sites.

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Figure 4-11: Jatropha Yield Estimates

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Estimated Seed Yield
600
500
400
300 Low
High
200
100
0
Barren land, Normal soils, Yunnan Shenyu Kunming Institute
YAAS YAAS Estimate of Botany
kg/mu
----- End of picture text -----

Based on field trip observations part of the plantations are in high altitude (up to 1700 m), on shallow soils and in very steep slopes. Some of the plantations visited have mature Jatropha trees close by but some plantations are trials and the yield in these areas will be lower.

Pöyry’s yield at maturity estimate for the Yunnan Shenyu plantations is 333 kg/mu and this is based on the assumption that 20% of the plantations are in areas of lower yield class. The assumed yield at each age in the Yunnan Shenyu Jatropha plantations is shown in Table 4-6. The assumed yields by age follow Yunnan Shenyu’s estimates for Jatropha to reach full fruit stage.

Table 4-6:

Assumed Yields by age in Yunnan Shenyu’s Jatropha plantations

Age	Yield (kg/mu)	Yield (tons/ha)
1	50	0.75
2	133	2.0
3	333	5.0

4.5.4 Yield Benchmarks

Pöyry had benchmarked the Yunnan Shenyu forest yield tables against wider industry data the Company has collected in Southern China. At a harvest age of 60 years the total recoverable volume for Pine in Yunnan typically ranges from 100180m[3] /ha. Yunnan Shenyu’s records indicate that mature pine stands at 50 years range between 127-147m[3] /ha. In broadleaf stands total recoverable volumes at maturity can range between 100-300 m[3] /ha. Yunnan Shenyu’s records indicate that for mature broadleaf stands at 60 years recoverable volumes range from 127-149 m[3] /ha. The Yunnan Shenyu inventory records are within the range of other volume estimates that Pöyry has collected in Yunnan.

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COSTS

Costs for the valuation have been provided to Pöyry by Yunnan Shenyu staff. Where possible, Pöyry has benchmarked these costs to wider Southern China industry data for reasonableness.

5.1 Establishment Costs

Forest Areas

The following table gives the current Pine establishment and operational costs provided to Pöyry by Yunnan Shenyu (Table 5-1).

Table 5-1: Establishment Costs for Pine Species Used in the Forest Valuation

Item Land Clearing Land Preparation Setting Fertilizer Planting Seedling Tending and Fertilizer Labour Maintenance	Year 1 Costs 375 1332 1332 666 666 450 37.5	RMB/ha Year 2+ Annual Cost 37.5
Total	4858.5	37.5

As the Broadleaf are natural forests the only costs they incur is the annual maintenance cost of RMB37.5/ha/a (RMB2.5/mu/a).

Pöyry has benchmarked these establishment and operational costs and has found them to be within the range of other companies in southern China.

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Jatropha Plantations

The following table gives the current establishment and operational costs provided to Pöyry by Yunnan Shenyu for its Jatropha Plantations (Table 5-2).

Table 5-2:

Establishment and maintenance Costs for Jatropha provided by Yunnan Shenyu

Operation	0	1	Costs p 2	er year (RMB/mu) 3 4	er year (RMB/mu) 3 4	5	6�
Land Clearing & Preparation Planting Seedling Fertilizer – base Fertilizer – supplementary applications Maintenance Total	80 25 50 25 40 220	25 55 80	25 55 80	25 55 80	25 55 80	25 55 80	25 55 80

Pöyry has benchmarked these establishment and operational costs for Jatropha and has found them to be within the range of other companies.

Jatropha market asset value has been estimated by projecting industry standard costs involved in establishing and maintaining the plantation and accumulates these with compound interest from their inception of the investment to the current point in time.

Emphasis has been placed on standard industry costs hence use of market land rentals and seeding costs.

Table 5-3:

Establishment and maintenance Costs for Jatropha Used in the Market Valuation

Cost Items	Assumption
Land Preparation	RMB 1200 / ha ( RMB 80/mu)
Seedlings	RMB 2 per seedling, RMB 3000 / ha ( RMB 200/mu)
Planting	RMB 375 / ha ( RMB 25/mu)
Fertilising	RMB 375 / ha ( RMB 25/mu)
Maintenance	RMB 600 / ha ( RMB 40/mu) in first year and RMB 825 / ha ( RMB 55/mu) in subsequent years
Land Rent	RMB 300 / ha ( RMB 20/mu)
Administration	RMB 150 / ha ( RMB 10/mu)

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5.2 Costs of Production

5.2.1 Forest Harvesting, Roading and Transport Costs

Forest Harvesting

Yunnan Shenyu staff have provided Pöyry with details of anticipated harvesting costs for their forests. The harvesting costs are influenced by terrain, site conditions and distance from forest to nearest accessible road. A harvesting cost of RMB80/m[3] has been provided for pine, which includes allowances for clearfelling, cross cutting, collection from forest to roadside and loading onto truck. A harvesting cost of RMB115/m[3] has been provided for selective cutting of pine and broadleaf, which includes allowances for selectively cutting, cross cutting, collection from forest to roadside and loading onto truck. As with other forest owners in Southern China, harvesting methods of Yunnan Shenyu’s forests would be largely manually based.

Table 5-4:

Harvesting Cost Used in the Forest Valuation

Table 5-4: Harvesting Cost Used in the	Forest Valuation
Cost	RMB/m3
Pine clearfell harvesting	80
Broadleaf and Pine selective harvesting	115

Pöyry has benchmarked Yunnan Shenyu’s harvesting costs and has found them to be within the range of other companies in China.

Forest Harvest Roading

Harvest roading costs include the cost of any road construction required, upgrading roads to harvest standard and maintenance during the harvesting operation. Yunnan Shenyu has provided Pöyry with an average cost for harvest roading of RMB10/m[3] .

Table 5-5:

Harvest Roading Costs Used in the Forest Valuation

Cost	RMB/m3
Harvest Roading	10

Forest Transport Costs

Yunnan Shenyu have yet to undertake any harvesting of their forests. Pöyry has estimated transport costs to forest markets in the nearest City from each County. Yunnan Shenyu’s forest areas are generally located within a 100 to 250 km road haulage distance from forest markets in these cities. Pöyry have estimated these average haulage distances from forest to the nearest forest markets on a County basis. Pöyry has used these distances to calculate the appropriate haulage costs based on cost information from wider industry sources. The average haulage distances and transport costs including loading and unloading charges are given in Table 5-6.

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Table 5-6: Transport Costs used in the Forest Valuation

County	Nearest City Market	Haulage Distance (km)	RMB/m3	RMB/m3/km
Gengma	Baoshan	250	137.5	0.55
Huize	Kunming	250	137.5	0.55
Qiubei	Honghe	200	120	0.6
Shuangbai	Kunming	150	97.5	0.65
Yangbi	Dali or Baoshan	100	75	0.75
Yongren	Kunming	200	120	0.6
Yunlong	Baoshan	150	97.5	0.65

5.2.2 Forest Taxes at Harvest

Yunnan Shenyu staff had provided Pöyry a document called “T he Levy and Usage of Regeneration Fee in Yunnan ”, which was issued by Yunnan Provincial Forest Bureau and came into effect from January 1[st] 1994. Regeneration fee is levied per cubic meter basis on wood recovered from harvesting. Detailed forest taxes by species in Yunnan can be seen in Table 5-7. Applying species composition of Yunnan Shenyu Company’s forest assets, forest taxes of 30 RMB/m3 and 50 RMB/m3 for Yunnan Pine and broadleaf were used in the valuation calculation respectively.

Table 5-7:

Harvest and Regeneration Fee in RMB/m[3] Used in Yunnan Shenyu Forest Valuation

Group	Species	Regeneration Fee (RMB/m3)
I	Armand Pine, Cypress, Spruce, Fir	80
II	Alder, Southwestern Birch, Oak	50
III	Yunnan Pine, Simao Pine, Eucalyptus	30

5.2.3 Jatropha Harvesting, Transport Costs

The Jatropha harvesting is planned to be done by local farmers. The farmers are also expected to transport the seeds to the collecting points. It is assumed that Yunnan Shenyu will build decentralised processing/collecting of Jatropha seeds and that the average transportation distance for farmers is between 60 and 100 kilometres.

The harvesting costs of Jatropha are influenced by terrain, site conditions and distance from plantation to nearest accessible road. The harvesting cost is estimated based on picking rate (how much seeds one person can pick in one day) and daily labour rate. The values used are 100 kg/day/person and RMB35/day/person.

The cost of harvesting including onsite processing (dehulling) and transportation is RMB0.60/kg of seeds.

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The average plantation size is fairly small and they are generally located quite close to the public roads. According to Yunnan Shenyu no new road building is required.

5.2.4 Jatropha Harvesting Taxes and Government Subsidies

Liquid biofuel is cited in the 11th Five-Years Development policy and Regulations as a major future direction for new Chinese industrial development. The development of a biofuel industry is under strict government control. The support for biofuels is strong and there are several programs dealing with different parts of the value chain.

The China Renewable Energy Law was drafted and passed in February 2005 and came into effect 1 January 2006. The law regulates that “the state government encourages clean and highly efficient development of biofuels and energy crops/plants. Liquid biofuels shall be included in the fuel sales network”. The law also offers financial incentives, such as a national fund to foster renewable energy development, and discounted lending and tax preferences for renewable energy projects. The regulations under the Renewable Energy Law will establish incentives to invest in renewable energy in China. The exact forms that these schemes will take and the level of incentives which will be provided was not stated, although the Renewable Energy Law states that they will apply to renewable energy development and utilisation projects.

In November 2006 � Finance Dept, SDRC, Agriculture Ministry, the State Taxation Administration, the State Forestry Bureau published the implementation guideline for development of bio-energy and subsidizing bio-chemical industry which forms a basis for the government’s role and details its support for the bioenergy industry. Tax incentives are stated in the guidelines but exact form is not known. The governmental has proposed in the same guideline plans to provide subsidies of RMB 200/mu for establishment of feedstock plantation for bio-energy industry.

In this valuation it is assumed that there are no taxes at harvest for Jatropha.

The Chinese Government has proposed to provide subsidy of RMB 200/mu for Jatropha plantation and that has been included into the cash flows. According to Yunnan Shenyu, the Company is eligible to receive subsidy for the areas planted in 2006 and 2007 (See ‘Young’ and ‘Recent Planted’ areas in Table 4-3). The subsidy will be paid out based on audit results. These audits will be conducted by the Chinese government. The exact arrangement regarding the audit and payment period is unclear at the moment.

5.3 Company Overhead Costs

Overhead costs include items that cannot be directly attributed to an operational area or to a harvest volume. These costs cover such items as administration, insurance, selling costs, and so forth and are commonly known as sales, general and administration costs or SG&A.

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Pöyry has undertaken recent valuations of commercial forestry companies in China and has gathered a dataset of overhead costs. The overhead cost range from RMB150–285/ha/a.

Pöyry considers an overhead cost of RMB150/ha/a (RMB10/mu/a) is appropriate for managing a forest and Jatropha resource of the scale of Yunnan Shenyu’s.

Table 5-8: Overhead Cost Assumed for Establishing FGHY Plantations in the Region

Cost	RMB/ha/a	RMB/mu/a
Overhead	150	10

5.4 Land Rental

Yunnan Shenyu has provided Pöyry with 4 land lease contracts that they have entered into with local governments in Yunnan province. The sample contracts cover an area of 65 981 ha (989 714 mu), which covers 61 % of total area under Yunnan Shenyu control. The typical land lease period is 50 years, whilst rental payments will be paid at even instalments.

Table 5-9: Sample Land Rentals provided by Yunnan Shenyu

Contract No.	Total Land Area (mu)	Land Rental (RMB/mu/a)
1	66472	0.86
2	209 045	0.90
3	93759	0.82
4	620438	0.7
Average		0.82

Yunnan Shenyu is a leading company in the Yunnan province and thus has obtained provincial governmental support and thus the rental cost obtained is lower than the average rental in Southern China. While the lease costs for Yunnan Shenyu to date have been significantly lower than those Pöyry is aware of in Southern China. Average industry data for land rentals in Southern China is typically within the range of RMB150-300/ha/a (RMB10-20/mu/a). However upon review of a sample set of contracts described Pöyry has assumed that all land areas managed by Yunnan Shenyu will incur an average annual land rental of 15 RMB/ha/a (RMB1.0/mu/a).

Table 5-10: Annual Land Rentals Used in the Valuation

Cost	RMB/mu/a	RMB/ha/a
LandRental	1.0	15

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6 YUNNAN FOREST MARKETS AND LOG PRICES

6.1 Log Demand

Total log demand in Yunnan is approximately 6.8 million m[3] . Sawn timber production and wood based panel production accounts for 64% and 24% respectively, of the total log consumption in the Province.

Figure 6-1: Yunnan Total Log Demand

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Woodchip
Pulp 4%
8% Wood Based Panels
24%
Sawn Timber
64%
Total Log Demand: 6.8 million m [3]
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6.2 Log Supply

Total available supply under the 2006-2010 quotas for commercial volume is some 10.8 million m[3] , of which only some 7 million m[3] is regarded as commercially recoverable.

Figure 6-2: Total Log Supply

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Supply/demand is tightly balanced in Yunnan. Any further industry expansion will lead to a future wood shortage in the province.

6.3 Panel Industry Demand

Total wood demand in the panel industry in Yunnan is about 1.6 million m[3] . MDF is the largest wood based panel industry.

Figure 6-3:

Wood Based Panel Capacity

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Fiberboard
Plywood
Particle board
Block board
0 100 200 300 400 500 600 700
000 m [3]
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Figure 6-4: Log Demand By Panel Industry

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Block board
9.5%
Particle board
8.6%
Plywood
20.6% Fiberboard
61.4%
Total Wood Demand: 1.6 million m [3]
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6.4 Other Processing Industry

Log consumption in the sawn timber industry in Yunnan is 4.3 million m[3] . Log demand in the pulp industry is about 550 000 m[3] . Yunjing Paper Mill in the Province manufactures chemical pulp.

Figure 6-5: Log Demand in Sawmilling, Pulp & Paper and Woodchip Industries

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Sawn Timber
Pulp
Woodchip
0 500 1 000 1 500 2 000 2 500 3 000 3 500 4 000 4 500 5 000
000 m [3]
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6.5 Overview of Forest Product Prices

In determining delivered log prices Pöyry has examined wider industry data that we have collated from recent projects in 2007/08 within Southern China as well as data supplied by Yunnan Shenyu.

All log prices are at a ‘delivered’ price point, which is the sum of the stumpage, harvesting cost, extraction cost, loading cost, transport cost, unloading cost, plus any taxes and charges. Pöyry has chosen however to carry-out the valuation using delivered log prices, with associated deductions of all supply-chain costs.

Real price increases of 1.0% per annum for small diameter pulpwood and 1.7% for larger diameter logs for sawntimber and veneer have been used in the first five years of the valuation. The basis for the real log price increases is summarised in the subsequent section. The log prices by species, size class and period are shown in Table 6-1.

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6.6 Log Price Outlook

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Table 6-1: Forest Log Prices used in the Yunnan Shenyu Valuation

Species	Grade	2008	2009	2010	2011	2012	2013 +
Pine	Small (SED 6-14cm)	550	556	561	567	572	578
	Medium (SED 14-26cm)	800	814	827	841	856	870
	Large (SED > 26cm)	1200	1220	1241	1262	1284	1306
Broadleaf	Small (SED 6-14cm)	515	520	525	531	536	541
	Medium (SED 14-26cm)	1050	1068	1086	1104	1123	1142
	Large (SED > 26cm)	1650	1678	1707	1736	1765	1795

The broadleaf prices have been derived from a volume weighted species mix. The individual log prices for the four main species groups of Southwest Birch, Oak Alder and Other Broadleaf’s have been weighted as outlined in Table 6-2.

Table 6-2:

Derivation of Broadleaf Prices based on species mix

Species	Delivered Sales Price (RMB/m3)	Delivered Sales Price (RMB/m3)		Species mix
	6�14cm SED	14�26cm SED	SED>26cm
Southwest Birch	650	1700	2800	20%
Oak	550	1150	1850	25%
Alder	450	800	1200	25%
Other Broadleaf	450	800	1200	30%
Weighted average	515	1050	1650

China’s macroeconomic trend and wood consuming industries growth outlook suggest that future demand for wood products over the next five years will continue to expand. The continued growth in wood products demand coupled with an underlying shortage of fibre supply in China will widen the country’s supply and demand gap of fibre. This is expected to have a positive impact upon log price development in the medium term.

The key drivers and influencers for positive log price outlook in China can be summarised as follows:

Continued demand growth for wood products
Fundamental shortage of fibre
Increasing costs in forestry and transportation
Imported log prices increase.

Log demand in China is forecast to continue growing over the next five years, albeit at a slower rate than the previous decade, supported by the country’s continued positive macroeconomic trends. Majority of increases are expected to be generated from the development of domestic pulp and reconstituted panel manufacturing industries. In particular, demand from the pulp making industry is

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anticipated to expand significantly. Sawlog and peeler log demand is generated by domestic production of lumber and plywood/veneer products. The demands remain strong and the industries have been reliant on imported logs such as from Russia and Southeast Asia.

China is short of wood. Domestic roundwood removals are under a quota of some 248 million m[3] /a from 2006 until 2010. It is estimated that the actual domestic industrial roundwood production has lately been in the order of 100 million m[3] /a. The removal has stagnated and decreased since the late 1990s due to the government’s harvesting ban on natural forests. Despite the government’s recent efforts toward commercial plantation development, it is inevitable that the country will continue relying heavily on the imported logs to meet the massive domestic demands.

Forestry and transportation costs in China are rising. As China’s economy develops, the forestry costs have increased to a level that is considered as global standards. As a result, wood costs in China today are no longer very competitive, relative to other countries in the region. The increases in transportation cost have been driven primarily by increasing oil costs and the accelerated need to procure fibre from farther locations. These rising costs are generally contributing to the recent log price increases.

China is the largest log importer in the world. Russia has accounted a predominant portion the country’s softwood log imports, while Malaysia, Papua New Guinea, Myanmar and Gabon have been the major suppliers of imported hardwood logs. On the softwood side, Russia’s anticipated introduction of substantial export log tariffs and its ongoing log production cost increases are expected to lead to a notable price increase in the affected region. As for (tropical) hardwood, availability of quality logs are getting tighter and the related regulations are also becoming stricter. As such, increased imported log prices are forecast, setting upward pressure on overall log pricing not only in China but also within Asia-Pacific.

In summary, taking into consideration the key price factors above and using a combination of formal modelling techniques and informed judgement, domestic sawlog prices in China are forecast to increase in real terms at an average rate of 1.7%/a over the next five years, while pulplog prices are expected to increase more modestly at an average rate of 1.0%/a.

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BIOFUEL MARKETS

China’s biofuel production has historically focused on ethanol. Large scale production of fuel ethanol was actually aimed at disposing of high stocks of stale cereal stored in 2001 when the total volume reached about 100 million tons. In addition to disposing of cereal store fuel ethanol production was driven by at least three other issues:

Fuel shortages
Air pollution
Development of more options for the rural economy.

Since 2004, with the dramatic increase in prices of crude oil and consequently that of coal and other energy sources, fuel ethanol producers started to expand capacities which used mostly based on food raw materials (corn and wheat). At the end of 2006, foreseeing a conflict between food safety and the bio-energy industry, the state government issued policies that banned any new biofuel capacity based on food raw material, but encouraged development of a biofuel industry backed by non-food crops and cellulose materials (e.g. Jatropha, wood residue and straw) based biofuel production.

There is growing interest in the development of biofuels, intended to reduce oil imports, which currently account for more than 46% of China’s total oil supply – a major security concern for the government.

The history of biodiesel production is not as long as the history of ethanol production. China started experimental research on biodiesel derived from vegetable oil in 1981. Projects to develop biodiesel production have been encouraged more recently and since 2004 biodiesel investments have been a hot topic in China.

7.1 China Biofuel Policies

Liquid biofuel is cited in the 11th Five-Years Development Policy and Regulations as a major future direction for new Chinese industrial development.

The development of a biofuel industry is under strict government control. The support for biofuels is strong and there are several programs that deal with different parts of the value chain. It has been estimated that energy-oriented agriculture and the biodiesel industry can create about 6 million jobs.

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The China Renewable Energy Law came into effect 1 January 2006. The law regulates that “the state government encourages clean and highly efficient development of biofuels and energy crops/plants. Liquid biofuels shall be included in the fuel sales network”. The law also offers financial incentives, such as a national fund to foster renewable energy development, and discounted lending and tax preferences for renewable energy projects. China's government imposed a national renewable energy requirement that is expected to boost the use of renewable energy capacity up to 15% by the year 2020.

The regulations under the Renewable Energy Law will establish incentives for investing in renewable energy in China. Although the exact forms that these schemes will take and the level of incentives which will be provided are not yet known, although the Renewable Energy Law states that the incentives will be available to renewable energy development and utilisation projects.

In March 2006�the 11th 5-year plan for China Economic & Social Development named expansion of fuel ethanol and biodiesel capacity as a means of developing bio-energy.

In November 2006 � Finance Dept, SDRC, Agriculture Ministry, the State Taxation Administration, the State Forestry Bureau published the implementation guideline for development of bio-energy and subsidizing bio-chemical industry which forms the basis for the government’s role and details its support for the bioenergy industry. The governmental has proposed in the same guideline plans to provide subsidies of RMB 200/mu for establishment of feedstock plantation for bio-energy industry.

Since 2006, the state government has been working on the 11th 5 year plan for fuel ethanol and modified automobile ethanol which discourages fuel-ethanol capacity expansion on food cereals and encourages using non-food material for growth.

National biofuels standards[8] have been established. Oil companies (Sinopec and China Petroleum) must also incorporate biofuels that accord with these standards into their distribution systems.

In September 2007, China National Development and Reform Commission issued the Renewable Energy Middle-Long Term Development Program . In this document, China plans to achieve fuel ethanol production of 10 million tons and biodiesel production of 2 million tons by 2020.

Biodiesel

The ministry of Science and Technology of China, the China National Reform and Development Committee, and the China Engineering Academy rank biodiesel research and production as the leading priority of the Chinese energy industry.

The government encourages biodiesel manufacturing based on oil crops and oilbearing plants, and raw material plantations should be developed as the supply base for the production line.

8 National standard-GB/T 20828-2007 covering Diesel vehicle fuels and biodiesel standard

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7.2 China Biofuel Demand

Fossil gasoline and diesel demand in China has increased due to the fact that private vehicle ownership has increased six-fold in 10 years. In 2020 motor vehicles in China will achieve numbers of 100 – 150 million.

Although biodiesel production at a policy level just got addressed in 2006, the industry is expected to expand rapidly as China now consumes twice as much diesel as gasoline. Higher diesel use is a result of the widespread use of trucks, particularly for farms. Mechanized farm equipment has also contributed to increases. The nation is one of the biggest diesel users in the world, consuming approximately 60-70 million tons per year.

In 2020 the fossil fuel demand only for motor vehicles is estimated to be about 228 million ton (76 MT of gasoline and 152 MT of fossil diesel).

China expects biofuels to meet 15% of its transportation energy needs by 2020. If 15% of biodiesel is added up to diesel and the vehicle structure will remain the same, the demand for biodiesel in 2020 will reach about 23 million ton.

The demand is calculated based on assumption that 50% of total gasoline and diesel consumption by 2010 will have a biofuel component of 10% and in 2020, 15% of total fuel consumption will be biofuel. Should the current policy remain unchanged the targeted biofuel components may need to be revised.

7.3 China Biofuel (Biodiesel) Supply

Total biodiesel production nationwide in 2005 was estimated to be about 200 000 metric tons. It was mainly produced from grease trap waste oil and waste cooking oil. There was active research and some joint venture companies in China, but in 2004 the industry was still in its infancy stage. A few small plants (capacity from 5 to 30 thousand tons per year) had been built for biodiesel production.

The main feedstock is still waste oil. However, canola oil, cotton seed oil and wild plant oil such as jatropha seed oil are potential feedstock for China’s biodiesel in the near future. Currently the availability of feedstock is limiting the growth of biodiesel production. Due to the feedstock constraint, illegal collection of used oil is rampant which results in limited supply and high prices for feedstock sourcing. The success of large scale plantations of non field-tested crops like Jatropha is going to determine the total production of biodiesel in coming years.

China increased biodiesel production to somewhere 300 000 metric tons in 2006; under current biofuel development policies, the country is expected to increase its biodiesel production to 2 million tons per year by 2010 and to 5 million tons by 2020. There are some conflicting estimates made by government. Some estimates indicate as high as 12 million tons of biodiesel production by 2020. It is possible that some government organisations are reporting old production estimates before the policy change. The policy change puts more emphasis on non-edible and nontraditional biofuel crops like Jatropha. As stated before, the production volume is highly dependent on success of large scale biofuel plantations.

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7.3.1 Biofuels Demand and Supply Balance

Demand for biofuels in China is expected to increase significantly over the next decade, driven by increasing domestic demand for fuel (from rising motor vehicle units) and the government's target for biofuels to satisfy 15% of the nation's transportation energy needs by 2020. Estimated biofuels demand growth is expected to fuel significant production capacity additions, although capacity growth could be constrained by limited feedstock availability. Strong demand for biofuels is expected to continue to outpace supply in the next decade, especially for biodiesel whose excess demand is expected to increase over the same time period.

7.4 Market Prices for Biofuel Feedstock

The main source of biodiesel raw material has been waste cooking oil. However, canola oil, cotton seed oil and wild plant oil such as Jatropha seed oil are potential feedstock for china biodiesel in the near future. Current government policy is putting more emphasis on non-edible and non-traditional biodiesel feedstock, like Jatropha.

Growth in biodiesel production capacity has increased demand for feedstock and the prices of feedstock, like waste cooking oil has risen sharply. The sales price of biodiesel has remained stable and gross margins have fallen. Some of the biodiesel producers have diversified to production of raw material for plastics and Wuxi Huahong announced bankruptcy in February 2008 (Source:Platts).

Figure 7-1: Biodiesel Feedstock Price Development

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

9,000.0
Waste oil
Jatropha (limited market)
Palm oil (CIF Rotterdam)
7,000.0
5,000.0
3,000.0
1,000.0
2005 2006 2007 2008
RMB/ton (oil)
----- End of picture text -----

The prices of available raw material for biodiesel production clearly suggest that there is an acute demand for low-cost feedstock. It is not expected that the feedstock prices would fall in the near future.

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From 2005 to mid-2006 Jatropha seed price ranged from RMB0.8-1/kg[9] . This price does not reflect seed cost at a commercial scale. The commercial scale markets and the market pricing will form only after few years. At the end of 2006 and in 2007 prices in many areas reached RMB2/kg.

The future policy and possible Government subsidies to biodiesel will have an effect to seed prices in the future. Based on current prices and policy Pöyry has used the seed price of RMB2.0/kg in the investment and prospective valuation of the Jatropha business. Assuming 31.5% extractable oil content this translates to RMB6350/ton of oil. The seed price of RMB 2.0/kg assumes that RMB0.6/kg of the seed price comes from glycerin sales and revenues from the seedcake (remaining after the oil is extracted from the seeds). The seedcake is assumed to be converted to electricity and fertilizer. Currently selling the electricity to the public grid is not common but the latest regulations suggest that this is going to change. According to NDRC, the use of biomass in the electricity generation can have a subsidy of RMB0.25/kWh for 15 years if the share of biomass fuel is more than 80%.

9 Biofuels in China: An Analysis of the Opportunities and Challenges of Jatropha Curcas in Southwest China Copyright © Pöyry Forest Industry

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8 FOREST ESTATE MODEL

8.1 Overview

There is an important choice to be made in modelling a forest estate of any size in terms of how the forest's future management is represented. The alternatives are:

A pure stand-based (bottom-up) approach. Individual stands within the forest are effectively considered in isolation. Once their yield potential at a certain target age is identified, data are accumulated to provide a result for the forest as a whole.
A forest estate (top-down) approach. All stands are modelled collectively to achieve some desired result from the total forest resource.

The primary distinction between the two approaches can be seen in the production profile of the resource. Characteristically, most plantation forests have an irregular age distribution. The age-class distribution of an example forest depicting this characteristic is shown in Figure 8-1.

Figure 8-1: Example Forest Estate Age-class Distribution

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600
500
400
300
200
100
0
0 1 2 3 4 5 6 7 8 9 10 11 12
Age (years)
Area (hectares)
----- End of picture text -----

Assuming for simplicity, that all stands share the same yield table (Figure 8-2).

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Figure 8-2: Example Forest Estate Yield Table

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250
200
150
100
50
0
0 1 2 3 4 5 6 7 8 9 10
Age (years)
Yield (m3 per hectare)
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Forests managed on a stand based approach would typically provide for each stand to be cut at some externally determined target age. A commonly applied concept is that of the optimum economic rotation age. Accumulating the results gives an irregular wood production, as shown below. The harvest profile effectively becomes the mirror image[10] , with a scaling factor, of the age-class distribution (Figure 8-3).

Figure 8-3: Example Harvest at Fixed Rotation Age

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100000
90000
80000
70000
60000
50000
40000
30000
20000
10000
0
1 2 3 4 5 6 7 8 9 10 11 12
Harvest Period
Harvest Volume (m3)
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10 Note that the full extent of the harvest in the first period is not shown as all ages >9 years are assumed harvested.

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In practice, it can be unrealistic to harvest all stands at a fixed rotation age. Most plantation forest estates have, through various circumstances, an uneven age-class distribution. A harvesting strategy that employs a fixed rotation age will lead to a wood flow profile that reflects the age-class distribution as illustrated in Figure 8-3 previously.

An irregular wood flow may be inappropriate for several reasons:

An irregular supply is more difficult to market.
The logistics of harvesting and transport make an irregular supply difficult to manage.
Supply commitments may exist to associated processing plants.
Irregular cash flows make it difficult to fund ongoing forest management and meet stakeholder’s requirements.

To address these considerations other harvesting strategies are likely to be preferred. A forest estate modelling approach can therefore be used to smooth the harvest rate, achieving this by manipulating both the age and area of harvest[11] (Figure 8-4).

Figure 8-4: Example Smoothed Forest Harvest

==> picture [300 x 219] intentionally omitted <==

The choice of modelling method has implications for the forest valuation results. For each stand, examined in isolation, it is possible to identify an optimum economic rotation age. At this rotation length, the NPV of the stand is maximised. If the optimum economic rotation is employed as the target clearfelling age in a stand-based model, this will produce the highest theoretical value for the forest.

11 Note that the chart series for the average age of harvest is not shown. It does however vary over time.

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However, if a forest estate modelling approach is employed, this invariably involves some departure from the optimum economic rotation age and results in a notionally lower value for the forest. The extent of difference between the modelling approaches depends on the degree to which the harvest age varies from the theoretical optimum.

8.2 Observed Practice in Wood Flow Modelling

Pöyry observes that wood flow modelling for valuation purposes invariably involves smoothing of wood flows. For large resources (in excess of a few hundred ha) a non-declining yield is the most common default representation. To a large extent, the degree of smoothing implemented is determined by the resource’s age-class distribution.

The modelling profile adopted in forest valuations is guided by two factors:

What the forest valuer believes is a credible and pragmatic profile, and
� What the market evidently assumes in determining what forest purchase value it is prepared to pay.

Figure 8-5: Example Non-Declining Yield Profile

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120000
100000
80000
60000
40000
20000
0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39
Harvest Period
Harvest Volume (m3)
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Pöyry has profound misgivings with production profiles for any particular forest that involve large fluctuations in wood flow. They may lead to real inefficiencies in start-up and withdrawal of harvesting operations, a less than enthusiastic participation by market partners, and forest financial flows that are most inefficient to manage.

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Pöyry’s perception of the market for forests is that most investors prefer valuations based on pragmatic wood flow profiles. Pöyry has consistently been engaged in preparing and evaluating managed wood flow profiles for intending forest investors.

8.3 Modelling Supply and Demand

Forest estate modelling provides the means to manage the collective output of the estate to best effect, managing supply chain optimisation by matching production by log type to the various markets. These include; local sawmills, panel mills and pulpmills, local and distant forest product users, and export ports.

A schematic outline of the entire forest estate modelling concept used to project future wood flows as well as projected costs and revenue by destination is shown below.

Figure 8-6: Schematic Illustration of the Forest Estate Model

==> picture [325 x 203] intentionally omitted <==

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

= Large Logs Existing Forest Estate 4 0003 500
= Small Logs 3 0002 500
2 000
1 500
1 000
500
0
1 7 13 19 25 31 37 Period of Model 43 49 55
Sawmills
Veneer Mills
Sawmills
VARIOUS MODEL CONSTRAINTS
- Optimisation of forest asset NPV
Weihua MDF Mills - Minimum net cash flow requirement
- Maximum level of operational cost
- Correct log mix at various mills
- Non-declining yields by forests
2007
2008
2009
2010+
Volume
----- End of picture text -----

As illustrated, the model maintains the identity of the forest units within the collective resource. Each has a distinct age-class distribution. The linear programming model operates on a year-by-year basis, with each year being unique in respect to clearfell age, location of harvest and the quantities delivered to various destinations.

8.4 Croptype Allocation

Forest estate modelling has conventionally taken the approach of allocating each stand in the forest to a croptype. A croptype is normally initially defined by stand productivity, with all stands within a croptype expected to share the same yield

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table. Factors affecting yields include the species, site characteristics and silvicultural regimes of the stands. Therefore, croptypes are normally distinct with respect to these attributes. With increasing sophistication in the modelling process, other criteria for differentiation may also apply. Forest location, slope classification, soil type and tenure are also commonly distinguished.

The practice of aggregating stands into croptypes has largely been driven by limits on the computational capacity of available computers. With processing speeds continuing to increase rapidly, the requirements for aggregation are diminishing. It is increasingly practicable to construct models in which each stand is a croptype in its own right. The improved modelling resolution that this offers is attractive, although greater automation of model construction also becomes necessary. The forest estate model that has been constructed to describe the Yunnan Shenyu forest estate employs a substantial measure of aggregation, but retains a useful degree of resolution inasmuch as geographical identities are maintained and the coppicing of future stands is modelled.

8.5 Model Constraints

The linear programming based framework allows the specification of a variety of constraints. The following types of constraint are included within both the wood flow model and the supply chain optimisation model:

Lower and upper harvest age limits.
Overall objective of optimising the NPV of future cash flows.
Croptype allocation for replanting/regeneration of future crops, with an accompanying variety of replanting constraints and limits.
Harvest constraints, which in turn include a range of further options such as non-declining/non-increasing yields and product smoothing capabilities.
Cash flow and budgeting constraints, such as maximum expenditure and minimum cash flow requirements on an annual basis.
Supply chain management such as the delivery of required product mixes to specific destinations over a managed time horizon.

8.5.1 Clearfell Age Constraints

To enable smoothing of the harvest profile, the age at which a particular stand can be harvested must be allowed to vary within some finite range. The linear programming model determines the year of harvest from within a constrained range of ages that are realistic industry standards. The minimum and maximum clearfell ages employed in the Yunnan Shenyu forest estate model for each species are shown in Table 8-1.

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Table 8-1: Clearfell Age Restrictions

Period	Species	Harve	st Age
		Minimum	Maximum
1to 8	Open Pine	30	90
9+	Open Pine	30	60
1to 8	ClosedPine	40	60
9+	ClosedPine	40	90
All	Broadleaf	50	90

8.5.2 Wood Flow and Allocation Constraints

A number of smoothing and harvest cut constraints have been applied to the woodflow model. There are two major objectives of the smoothing constraints; to produce an overall smoothed woodflow for the entire estate, and to ensure each species group has limited year on year harvest level fluctuations. Poyry has insured that the initial periods of the model avoid major fluctuations by applying a flat smoothing constraint over periods 1 to 3 (Table 8-2). Future fluctuations are mitigated through the cut constraints.

Table 8-2: Harvest Smoothing Constraints

Period	Group	Decrease	Increase	Unit	Constraint	Subject
1 to 3	All Forest	0	0	%	Smoothing	Clearfell

For the first few periods of the model Poyry attempted to replicate CGF’s intended management plans including relative ratios of pine and broadleaf species (Table 8-3). Importantly, all forest classified as ‘open forest’ are to be removed within the first eight years of the model. This area is to be converted to Jatropha plantations for oil production.

Table 8-3: Harvest Cut Constraints

Period 4 to 15 8 to 60 1 to 3 1 to 3 1 to 3 4 to 40 4 to 40 4 to 40	Group All Forest Open Forest Yunnan Pine Armand Pine Broadleaf Yunnan Pine Armand Pine Broadleaf	Attribute All Open All All All All All All	Sign < = < < < > > >	Quantity 120000 0 144000 33000 130000 39000 9000 34000	Unit m3 ha m3 m3 m3 m3 m3 m3	Constraint Harvested Remaining Harvested Harvested Harvested Harvested Harvested Harvested	Subject Clearfell Clearfell Clearfell Clearfell Clearfell Clearfell Clearfell Clearfell

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8.5.3 Wood Flow and Allocation Model Results

Figures 8-7 to 8-10 illustrate the derived harvest profile over 50 years for the entire Yunnan estate. The primary focus of the estate model has been to have a higher cut in the first three periods of the model for Yunnan Shenyu’s plan to cut larger areas of forest to accelerate conversion to Jatropha. The reduction in volumes available towards the end of the 50 year period is a result of the majority of existing pine areas being replanted with Jatropha. The reduction in forest area due to the conversion of pine forests to jatropha plantations results in a reduced output volume for the last ten years of the project.

Figure 8-7: Perpetual Woodflow by Log Grade

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Volume ('000 m [3] )
300
250
200
150
100
50
0
2008 2012 2016 2020 2024 2028 2032 2036 2040 2044 2048 2052 2056
Year Ending 31 December
Large Log Medium Log Small Log Thinning
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Figure 8-8:
Perpetual Woodflow by Species
Volume ('000 m [3] )
300
250
200
150
100
50
0
2008 2012 2016 2020 2024 2028 2032 2036 2040 2044 2048 2052 2056
Year Ending 31 December
Pine Open Pine Broadleaf Open Broadleaf Thinning
Figure 8-9:
Perpetual Woodflow by Origin
----- End of picture text -----

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

Volume ('000 m [3] )
300
250
200
150
100
50
0
2008 2012 2016 2020 2024 2028 2032 2036 2040 2044 2048 2052 2056
Year Ending 31 December
Gengma Huize Qiubei Shuangbai Yangbi Yongren Yunlong
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Figure 8-10:
Perpetual Woodflow by Destination
Volume ('000 m [3] )
300
250
200
150
100
50
0
2008 2012 2016 2020 2024 2028 2032 2036 2040 2044 2048 2052 2056
Year Ending 31 December
Baoshan Honghe Kunming
----- End of picture text -----

Figure 8-11 illustrates the annual harvest area and the gradual reduction of the currently standing resource. The reduction in total forest area is due to the conversion of 70% of the closed pine forest areas and 100% conversion of the open forest areas to Jatropha plantations.

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Figure 8-11:
Harvest Area Summary
Area (hectares)
60000
50000
40000
30000
20000
10000
0
2008 2012 2016 2020 2024 2028 2032 2036 2040 2044 2048 2052 2056
Year Ending 31 December
Net Standing Area (current rotation) Net Standing Area (future rotation)
Cut-over awaiting Replanting Removal for Conversion to Jatropha
----- End of picture text -----

8.6 Prospective Valuation of Future Plans

Pöyry has undertaken a prospective valuation of Yunnan Shenyu’s future plans. The prospective valuation is designed to provide a future plan value for use internally by China Grand Forest. It is not an indication of market value as it attributes values to future crops and is not compliant with IAS 41. The prospective valuation is subject to the assumptions provided by Yunnan Shenyu.

In the prospective valuation the yield from Secured Area to Be Planted (existing secured bush, harvested, burnt and bareland areas) totalling to 20 795 ha (311 925 mu) is included to the cash flows. Furthermore 70% of existing pine forest is assumed to be replanted with Jatropha following the clear falling.

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9 DISCOUNTED CASH FLOW VALUATION

9.1 Overview

The diagram below illustrates the structure of the valuation model. The generation of the wood flows has been described in the previous section. These wood flows are then optimised in their delivery throughout the supply chain to the various enduse markets. Revenue is generated at each destination, the price point being delivered at mill gate (AMG). Harvesting and transport costs, annual forest management costs, indirect overhead costs and the net cost of land rentals are deducted from this revenue to give an operating margin.

The linear programming model generates all of these costs streams, since their profile depends on the harvesting strategy and age-class structure of the forest.

Figure 9-1:

Schematic Illustration of the Forest Valuation Process

==> picture [320 x 241] intentionally omitted <==

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

SUPPLY CHAIN OPTIMISATION
ALLOCATION TO MARKETS
LOG SALES REVENUE
HARVESTING & TRANSPORT
FOREST MANAGEMENT COSTS
INDIRECT OVERHEAD COSTS
“SALE” OF FREEHOLD LAND
PRE-TAX CASH FLOW NET PRESENT VALUE FROM
SCHEDULE MODEL PRE-TAX CASH FLOWS
----- End of picture text -----

9.2 Treatment of Taxation

Astute forest investors are expected to prepare valuations based on post-tax cash flows. In general, however, the accessible information with which to interpret transaction evidence almost always excludes any evidence of the buyer’s taxation

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position. Accordingly, when forest valuers have sought to derive implied discount rates, these have largely been based on pre-tax cash flows.

The Yunnan Shenyu valuation has been based on real pre-tax cash flows.

9.3 Scope of the Analysis

In this context, scope refers to the time span of the analysis. The forest estate modelling process can provide projections of cash flows far into the future. Providing the existing forest is replanted into productive croptypes, it would be possible to run the analysis indefinitely. Two alternatives are demonstrated in forest valuation:

Perpetual cash flows - the forest is modelled as a going concern, where stands are replanted as they are felled. All revenue and costs associated with the sustained venture are modelled in perpetuity. In practice, the model is extended to the point where, after the discounting process, incremental cash flows are effectively immaterial. A figure in the order of sixty years is not uncommon when modelling a large plantation resource.
Current rotation analysis - only the revenue and costs associated with the existing tree crop are included in the analysis. This is effectively a liquidation valuation.

In general, Pöyry prefers to confine the analysis to the current rotation. The justification for this approach is that future rotations, which include a degree of conjecture, are excluded from the analysis. The current rotation approach is especially compelling when future rotations appear either highly profitable, or especially unprofitable. In either case, it could be anticipated that some modifying influence would prevail.

If subsequent rotations are unprofitable, the forest owner will look to contain costs and increase log prices. If there is no prospect of either, a rational investor will quit forest ownership.

If subsequent rotations appear super-profitable, it can be anticipated that there will be competition for the underlying land and its price will increase. When charged with a higher land price, the profitability of the tree crop, and hence its value, will decline.

The approach is consistent with wider business appraisal that generally seeks to confine the analysis to the current investment cycle, and thereby avoid unnecessary conjecture. However, a disadvantage of the current rotation approach is the requirement to identify any terminal value associated with the investment. Application of the current rotation approach assumes that the land leases terminate as the current crop is harvested.

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9.4 Timing of Cash Flows

With large forests that are subject to continuous harvesting, it would be impractical to fell all stands just as they turn their nominated target age. Instead, in a valuation model of the type represented here, they are expected to be felled across the duration of a year. Commonly applied financial modelling procedures would suggest that the assumption that revenues arise at year-beginning would seem unduly aggressive. Seemingly, a more realistic approach would be to assume that cash flows arise no sooner than mid-year.

However, between the exact anniversary of planting and the felling operations, the tree crop will have grown. If the harvest age is near to the optimal economic rotation age, the marginal rate of value growth will be close to the discount rate.

Treating the revenue flow as a point event at the planting anniversary is therefore an acceptable assumption. In principle, cost flows should be treated differently. It would appear more realistic to consider them as occurring at mid-year. For convenience, they, like revenues, have been treated as coinciding with the stand anniversary. This approach results in them being discounted less, and therefore represents conservatism in the valuation process.

9.5 Date of Valuation

The valuations have been prepared as at 31 December 2007. Pöyry uses proprietary software that allows the isolation of both the cash flows arising from the current rotation and all future rotations at any point in the valuation horizon. The cash flows contributing to the 31 December 2007 Yunnan Shenyu valuation arise during the 50-year period beginning 1 January 2008 and ending 30 December 2057.

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10 DISCOUNT RATE

A valuation based on an NPV approach requires the identification of an appropriate discount rate. In selecting the rates, there are two broad approaches:

Deriving the discount rate from first principles. The most common expression of this approach turns first to the Weighted Average Cost of Capital (WACC). This recognises the costs of both debt and equity. The cost of equity may be derived using a Capital Asset Pricing Model (CAPM) method.
A second approach is to derive implied discount rates from transaction evidence.

10.1 Discount Rate Derived from WACC/CAPM

Pöyry periodically commissions, Dr Alastair Marsden of Auckland UniServices Limited to prepare a report on the cost of capital for a generic forest investment located in China.

Dr Marsden’s December 2007 report concluded that depending on the modelling assumptions a range of discount rates might be proposed for a forest-owning venture in China. His derived ranges of rates are shown in Table 10-1.

Table 10-1: Estimate of Post-tax WACC by Marsden (33% corporate tax rate)

Lower bound	Average estimate	Upper bound
5.7%	6.9%	8.1

The formulation of WACC employed by Dr Marsden, was associated with post-tax cash flows and includes the cost of debt. Dr Marsden also converted his estimate of nominal post-tax WACC to an ‘equivalent” real pre-tax WACC through a simple transformation with appropriate qualification. The average estimate of WACC to apply to real pre-tax cash flows is 10.25% (Table 10-2).

Table 10-2:

Estimate of Real Pre-tax WACC by Marsden (33% corporate tax rate)

Lower bound	Average estimate	Upper bound
8.5%	10.25%	12.0

10.2 Implied Discount Rates

In common with other valuers of Asia-Pacific planted forests, Pöyry maintains a register of significant forest transactions. The available evidence is then analysed in an effort to derive the discount rate implied by each transaction. The process involves preparing a credible representation of the forest’s future potential cash flows and then relating these to the transaction price.

From this type of exercise conducted in Australia and New Zealand, Pöyry has observed derived discount rates for recent transactions to generally fall within the range of 8-10%. These are real rates, applied to post-tax cash flows.

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Two recent transactions in China that Pöyry is aware of provide anecdotal evidence supporting discount rates within the high end of this range. As the commercial plantation forest industry develops in China and more forests are transacted, empirical evidence from which to derive implied discount rates is expected to develop.

The capacity to utilise implied discount rates in this valuation is limited to considering how the forest investment in China compares with such investment in other locations.

Commercial forestry in Southern China is still its infancy and faces some challenges, these include:

The reliability of forest descriptions
The accuracy of yield prediction
Achieving high growth rates in a consistent manner.

It is Pöyry’s opinion that for many forest investors, investing in plantation forestry in China would be considered a riskier proposition than investing in the industry in Australia or New Zealand, for instance.

10.3 Incorporating Risk in the Discount Rate

If forest investment in China is at present perceived to be a more risky proposition than like activity in other international jurisdictions, the issue then becomes how to quantify this difference. The textbook treatments of the subject make it clear that the discount rate cannot be regarded as a simple catch-all for any and all forms of perceived risk. Because the discount rate may be a very blunt instrument in such a role, it is preferable instead to attempt to acknowledge risk in the development of the cash flows to which the discount rate is applied. However, despite this principle, there is an inclination by potential purchasers to load the discount rate where they feel uneasy.

Pöyry has considered the risk and uncertainty associated with the yield tables and area statements derived for Yunnan Shenyu in selecting an appropriate discount rate for the 31 December 2007 valuation.

10.4 The Discount Rate Applied in Valuing the Yunnan Shenyu Resource

Given the complexities in identifying what margin above other implied discount rates that forestry in Southern China should attract, Pöyry is disinclined to place weight on an implied discount rate derivation for this resource. This is consistent with the position taken by Pöyry in other recent valuations undertaken in China. The range of rates suggested by the alternative approach (WACC/CAPM) is very broad.

Ultimately, we have exercised our professional judgement in selecting a rate at the upper end of the WACC/CAPM range. This is a real rate of 11.5%. In selecting such a rate, we have been inclined to recognise that investors in forestry in Southern China will inherently be taking a long term view, and do have grounds for optimism on the forest industry’s future there. The fundamental factors that affect

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forestry performance are favourable. Importantly, too, the definition of market value for the forests requires that there be not just willing buyers, but also willing sellers. If the only purchase offers to be extended involved very high discount rates we would expect that forests would not be willingly sold.

In the current market, Pöyry considers that 10.5% to 12.5% is representative of the range of real pre-tax discount rates that might be expected in forest transactions in Southern China. A discount rate of 11.5% has been selected and applied to pre-tax cash flows in the calculation of the Market and Prospective Valuation Yunnan Shenyu’s forestry assets. The same discount rate has been used in the Investment Valuation calculation for Yunnan Shenyu’s Jatropha asset It is Pöyry’s perception that with a carefully timed and managed sale, other buyers could be attracted who would be willing to accept a similar pre-tax discount rate.

A higher risk discount rate of 20% has been assumed for market valuation of Yunnan Shenyu’s Jatropha assets under compounding of costs method. A higher risk discount rate has been used to account for higher variance and uncertainty involved in the valuation of Jatropha plantations compared to traditional forest or agricultural asset valuation.

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11 VALUATION RESULTS

11.1 Exchange Rate

The cost and price data utilised within the valuation is denominated in Chinese renminbi (RMB). The resulting cash flows generated from the forest estate wood and seed flows and allocation model are also in RMB.

11.2 Valuation as at 31 December 2007

Pöyry has determined the market valuation of the Yunnan Shenyu forest assets including Jatropha as at 31 December 2007 to be as follows:

Table 11-1:

Value of Yunnan Shenyu Forest Plantations (current rotation basis)

Component	Area (ha)	RMB millions
Forest Current rotation only – Expectation approach	55 127	1 005.697
Yunnan Shenyu Jatropha Plantations Current crop only– Replacement CostApproach	34 372	429. 115
Yunnan Shenyu Jatropha Plantations for current crop under co-operative rental agreement – Replacement CostApproach	6 876	46 .702
Total Current Stocked Estate	96 375	1 481.514

This is the result of a valuation of the existing forest areas and uses an 11.5% discount rate applied to real, pre-tax cash flows for forest asset valuation and 20% discount rate for Jatropha plantation valuation,

The following table presents the results of the valuation of Yunnan Shenyu’s forest estate at real discount rates of 10.5%, 11.5% and 12.5% applied to real pre-tax cash flows and discount rate of 15% and 25% for Yunnan Shenyu’s Japtropha asset.

Table 11-2: Market Valuation Forest (Expectation Approach) as at 31 December 2007

Table 11-2: Market Valuation Forest (Expectation	Approach) as at 31 December 2007	Approach) as at 31 December 2007	Approach) as at 31 December 2007
Valuation Treatment	Real Discount Rate Applied to Pre-tax Cash Flows
	10.5%	11.5%	12.5%
	RMB million
Forest Current rotation only	1 065.230	1 005.697	954.454
Jatropha Plantation Market Valuation( Replacement Cost Approach )as at 31 December 2007

December 2007
Scenario	Value (million RMB)
Base Case ( = 20% discount rate)	475.186
25% increase in discount rate ( = 25% discount rate)	518.453
25% decrease in discount rate ( = 15% discount rate)	438.454

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11.3 Investment Value of Yunnan Shenyu’s Jatropha Estate (Current Stocked Area)

An investment value of Yunnan Shenyu’s Jatropha estate (current stocked area) as at 31 December 2007 has also been calculated using the expectation method based on input data provided by the Company has been calculated.

The values are set out in the following table:

Table 11-3:

Investment Value of Yunnan Shenyu’s Jatropha Estate (Current Stocked Area)

Estate Component	Stocked Area (ha)	31 December 2007 – million RMB
Yunnan Shenyu Jatropha Plantations (current crop) – Expectation approach	34 372	1,560.576
Yunnan Shenyu Jatropha Plantations for current crop under co-operative rental agreement – Expectation approach	6 876	287.706

The following table presents the results of the investment valuation of Yunnan Shenyu’s Jatropha asset at real discount rates of 10.5%, 11.5% and 12.5% applied to real pre-tax cash flows

Investment Valuation Jatropha Estate (Current Stocked Area) as at 31 December 2007

2007
Valuation Treatment	Real Discount R	ate Applied to Pre	-tax Cash Flows
	10.5%	11.5%	12.5%
		RMB million
Jatropha Current rotation only	2,026.889	1,848.282	1,696.533

11.4 Prospective Valuation of Future Plans

Pöyry has undertake a prospective valuation of Yunnan Shenyu’s future plans. The prospective valuation is designed to provide a future plan value for use internally by China Grand Forest. It is not an indication of market value as it attributes values to future crops and is not compliant with IAS 41. The prospective valuation is subject to the assumptions provided by Yunnan Shenyu as outlined in the table below.

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Table 11-4:

Assumptions for Prospective Valuation of Yunnan Shenyu’s Future Plans

	Estate component	Assumption
	Existing Secured Bush, Harvested,	Planted with Jatropha in 2008
	Burnt and Bareland areas (20 795
	ha)
	Existing Pine Forest ( 21 717 ha)	Following clearfalling
		- 70% replanted with Jatropha ( 15 202 ha)
		- 30% replanted with Pine ( 6 515 ha)
	Open forest planted with Jatropha	Open forest planted with Jatropha following clear falling
	following clear falling ( 7 978 ha)

Pöyry has prepared a going concern forest valuation that includes the revenues and costs of re-establishing and maintaining the forests for a 50 – year period.

The resulting prospective valuation of Yunnan Shenyu’s plans is summarised below -

Table 11-5:

Prospective Value of Yunnan Shenyu’s future plans

Estate Component	31 December 2007 – million RMB
Forest Perpetual Value	999.957
Jatropha Perpetual Value	2,837.450
Co-operative rental agreement Jatropha area Perpetual Value	287.706
Total Prospective Value	4,125.113

The following table presents the results of the valuation of Yunnan Shenyu’s forest and Jatropha estate at real discount rates of 10.5%, 11.5% and 12.5% applied to real pre-tax cash flows.

Table 11-6:

Prospective Valuation of Yunnan Shenyu’s future plans – Forest

Valuation Treatment	Real Discount R	ate Applied to Pre	-taxCash Flows
	10.5%	11.5%	12.5%
		RMB million
Existing forest, Perpetual rotations	1 058.437	999.957	949.591
Prospective Valuation of Yunnan Shenyu’s future plans - Jatropha Estate
Valuation Treatment	Real Discount R	ate Applied to Pre	-tax Cash Flows
	10.5%	11.5%	12.5%
		RMB million
Jatropha Perpetual Rotation	3,457.647	3,125.157	2,844.371

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pine areas being replanted with Jatropha. This reduction in area and value in the forestry perpetual model is reflected in an increase in area and value in the Jatropha prospective valuation.

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12 RISKS AND SENSITIVITY ANALYSIS

12.1 Sensitivity Analysis

Market Valuation Sensitivity Analysis

A sensitivity analysis has been conducted on the December 2007 market valuation that addresses the main drivers of value within the Yunnan Shenyu current rotation valuation model. These are:

Discount rate and log price changes (in combination)
Changes in the level of fixed overhead costs
Changes in the costs of production (logging and loading, transport etc).

Table 12-1: Sensitivity Analysis of the Forest Market valuation as at 31 December 2007 (million RMB)

RMB)
Scenario		Discount rate %
	10.5%	11.5%	12.5%
Base Case	1 065.230	1 005.697	954.454
10% increase in current prices	1 218.668	1 150.555	1 091.910
10% decrease in current prices	911.792	860.839	816.998
10% increase in harvesting costs	1 042.819	984.532	934.364
10% decrease in harvesting costs	1 087.640	1 026.862	974.544
10% increase in transport costs	1 048.405	989.830	939.415
10% decrease in transport costs	1 082.055	1 021.564	969.492
SG&A 20% increase in fixed cost	1 053.737	994.836	944.153
SG&A 20% decrease in fixed cost	1 076.723	1 016.557	964.755

The forest value is most sensitive to the level of current prices, with a 10% change causing a 14.6% difference in value. A 10% movement in either harvesting costs or transport costs has a significantly smaller impact on value with 2% and 1.4% changes, respectively. The value is relatively insensitive to overhead costs, with a 20% change causing a less than 2% movement in value.

Table 12-2:

Sensitivity Analysis of Jatropha Plantation (current crop)Replacement Cost Approach as at December 31 2007 (million RMB).

Scenario	Value (million RMB)
Base Case	475.186
25% increase in discount rate	518.453
25% decrease in discount rate	438.454
25% increase in land rental	495.506
25% decrease in land rental	456.127

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10% increase in Silviculture cost 513.733 10% decrease in Silviculture cost 437.900

The Jatropha plantation value is most sensitive to the level of estimated silviculture cost. Silviculture cost which includes all costs except for land rental and overheads. A 10% change in silviculture cost. will cause an 8% difference in value. In comparison, land rental is a smaller component of the overall cost, a 25% movement in either direction has an impact of 4% on value. The value is moderately sensitive to discount, with a 25% change causing a 9% movement in value.

Investment Valuation (Expectant Approach) Sensitivity Analysis

A sensitivity analysis has been conducted on the December 2007 investment valuation ( expectant approach) that addresses the main drivers of value within the Yunnan Shenyu current rotation valuation model.

Table 12-3:

Sensitivity Analysis of Jatropha Plantation (current crop) Investment Value to changes in key inputs.

Sensitivity Analysis of Jatropha changes in key inputs.	Plantation (current crop) Investment Value to
Scenario	Value (million RMB)
Base Case	1,848.282
10% increase in price of seed	2,169.038
10% decrease in price of seed	1,527.526
10% increase in yield at maturity	2,060.176
10% decrease in yield at maturity	1,629.967
10% increase in Harvesting cost	1,752.055
10% decrease in Harvesting cost	1,944.509

The following table presents the results of the investment valuation of Yunnan Shenyu’s Jatropha asset at real discount rates of 10.5%, 11.5% and 12.5% applied to real pre-tax cash flows

Investment Valuation Jatropha Estate (Current Stocked Area) as at 31 December 2007

2007	2007
Copyright © Pöyry Forest Industry Valuation Treatment Jatropha Current rotation only	Valuation Treatment	Real Discount R	ate Applied to Pre	-tax Cash Flows
		10.5%	11.5%	12.5%
			RMB million
	Jatropha Current rotation only	2,026.889	1,848.282	1,696.533
				79

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12.2 Risk Analysis

12.2.1 Frost

The species at Yunnan Shenyu’s estates in Yunnan compose of native broadleaf species and Yunnan pine. These species are adapted to local conditions. Even there had been snow and related damages in many parts of Yunnan during the preceding few weeks prior to field inspection, no frost damages were observed.

12.2.2 Fire

It is customary for the local farmers to burn fields during the months of winter and spring. Therefore, risk of forest fire exists. In particular, Yunnan pine stands are suspect to fire hazard. The estates visited were fairly far away from agricultural land, yet on Yunnan pine stands, indications on past fires were seen.

Tapping larger size pine trees for resin extraction is a common practise by local farmers. Most of the saw log size trees on the locations visited were tapped. Among other things, tapping of trees results in the lower part of the stem being covered in pine resin, thus making them more prone to fire damage.

12.2.3 Pest and Diseases

Yunnan pine stands are typically large, uniform compartments which may be suspect to large scale damage by pests and diseases. In Yunnan province, damages caused by the pine shoot beetle ( Tomicus Yunnanensis ) and Pine Wilt disease have been recorded and may be of potential reasons of concern. During the field visit, however, no disturbances were observed at the Yunnan pine woods or at the vicinity. Defoliation caused by caterpillars was observed at the broadleaf stands. This seemed to be small case, affecting individual trees, and mainly on alder.

12.2.4 Storm Damage

Storms and high winds pose some risk to Yunnan Shenyu forest holdings in Yunnan. Some of the forests are situated at high altitudes and at mountain tops.

Yunnan pine stands have been established at very high initial density. Thinning of stands is recommended to reduce risk of windthrow. Due to high density, trees on the stands have a high height to diameter ratio making them suspect to wind damage. Small scale disturbances and groups of fallen trees were observed on the estates visited.

Even if the trees do not fall, storms and high winds bend the trees increasing curvature and lowering the salvageable volume. The stem form in particular young or middle aged pine stands visited was affected by winds.

Broadleaf stands are situated at lower altitudes due to the species natural requirements for growth conditions. The risk for these stands is lower and no damage was observed during the field inspection.

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12.2.5 Land Slides

The Jatropha plantations are planted to steep hills and there is high risk for landslides. During the field trip many signs of landslides near the Jatropha plantations were detected. The plantation areas are scattered and the effects of single landslide should remain limited.

12.2.6 Cost and Price Assumptions

The cost and log price assumptions that Pöyry has made in this report are based on the information available at the time of this analysis. Future changes will depend on many factors including Government policy, external influences, such as demand for labour, demand for land, productivity and efficiency. Such changes cannot be predicted with certainty.

12.2.7 Risk Analysis Conclusions

Pöyry considers that Yunnan Shenyu’s forest estate is not suffering unduly from any pathogen attack or damage by any other natural agencies. Damage observed during field inspection was small scale and not out of the ordinary compared with other estates in South-East China. It is likely that some of the impact caused by wind damage and residue tapping will already be captured in Pöyry’s assessment of growth and yield.

12.2.8 Jatropha related business risks

While research on Jatropha curcas in China dates back to the late 1970s, the infrastructure that would support a rapid scaling up of Jatropha plantations in Southwest China needs to be developed. Expected oil content and seed yields are still uncertain. Compared to traditional forest or agricultural asset valuation there is higher variance and uncertainty involved in the valuation of Jatropha plantations. At present no large scale commercial Jatropha oil or Jatropha biodiesel production exist in China. Worldwide interest on Jatropha did not begin until 2005. Jatropha is in the trial stage and the actual yields, agriculture practices and costs will become more certain over the next few years.

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APPENDIX 1

Forestry Field Inspection Report

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2BA09934 Appendix 1

Photo 1:

Yuannan pine stand in Yangbi County. Age of stand was estimated to be 25 years.

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Photo 2: Same location as Photo 1. Some minor burn marks on tree trunks. Some evidence of forest fire was seen on the tree trunks, but the fire seems to have been limited to the ground and seems not to have affected the wood quality.

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Photo 3: Forest road leading to a broadleaf stand in Yangbi County. The forest roads leading to compartments were in good condition.

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Photo 4: The broadleaf stand visited was not homogenous. Gaps from earlier selective cuttings appear within the forest.

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

Photo 5:
Same location as Photo 4.
----- End of picture text -----

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Photo 6:

Second Yunnan pine stand visited at Yangbi County. Stocking was good at both pine stands visited.

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Photo 7:

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

Broadleaf stand at Gengma County.
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Photo 8: Same location as previous photo. Many trees have resprouted into a few stems after regeneration.

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Photo 9: The dominant trees were usually birch, oak or alder.

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Photo 10: Tree grows at a forest gap, it typically shows better DBH and Height growing, as it enjoys more sunshine and less competition.

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Photo 11: The stocking at the lower elevations where Alder dominates was low.

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Photo 12: Yunnan pine stand at Gengma county.

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Photo 13:

Same location as Photo 12. The stand was dense and trees with small diameterheight ratio where susceptable to wind damage. Small scale damage was seen in this compartment.

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Photo 14:

All the large diameter trees were tapped for resin exctraction, thus reducing the log recovery rate usable for sawmilling.

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Photo 15: Same location. An overview of compartment. Areas of larger trees with lower stocking and denser areas with small diameter trees within the compartment.

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APPENDIX 2

Jatropha Field Visit and Site Inspection

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1 INTRODUCTION

Yunnan Shenyu Jatropha assets span the following counties; Gengma, Huize, Qiubei, Yongren, Yangbi and Shuangbai. Given the timeframe and resources with which the valuation is undertaken, it is not feasible to visit all of the areas. The field trip covered areas in Shuangbai, Yongren and Huize counties.

The following narrative and photo essay is intended to provide an understanding of the Yunnan Shenyu business and its environment.

2 YUNNAN FIELD INSPECTION AND SITE VISIT

Two representatives from Pöyry undertook field inspections in Yunnan in Province during 5 to 12 March 2008. The field inspections where conducted along with local Yunnan Shenyu staff.

2.1 Plantations

Pöyry inspection route of Jatropha plantations in Yunnan is as follows:

Shuangbai: Nursery and research centre

Shuangbai: Taihejiang Forest Farm, 3 areas

Shuangbai: Haizidi Forest Farm and Nursery, 5 areas

Yongren: Yijiu Town, 3 areas

Huize: Nagu Mature plantation of 200-300 mu

In addition the team visited one research station and plantation owned and operated by Sunshine Technology Company and interviewed several persons with Jatropha plantation experience.

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Figure 2-1: Location of Yunnan Shenyu Forest and Jatropha Estates in Yunnan Province

==> picture [330 x 255] intentionally omitted <==

In addition the team visited one research station and plantation owned and operated by Sunshine Technology Company and interviewed several persons with Jatropha plantation experience.

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Top Left and Right : Irrigated and fertilized Jatropha trees in good growing conditions No leafs or fruit production during the site visit (winter/early spring).

Bottom Left: Seedlings prepared for transportation and planting in Haizidi nursery.

Bottom Right: Growing of seedlings in Haizidi nursery.

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APPENDIX 3

Forest Inventory Results

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Volume (m3/ha)	137.2	132.8	291.9	355.3	217.6	92.1	70.9	80.4
Plot Volume (m3)	1.4	1.3	23.4	28.4	2.2	0.5	2.8	0.8
Average Height (m)	8.8	8.5	15.5	18.1	12.1	7.8	11.8	7.0
Average of DBH (cm)	9.2	8.8	25.2	31.6	15.2	7.5	14.8	6.6
Stems per ha	4,100	4,300	338	325	1,700	4,200	525	2,600
Tree Count	41	43	27	26	17	21	21	26
Plot Size (ha)	0.01	0.01	0.08	0.08	0.01	0.005	0.04	0.01
Species	yunnan pine	yunnan pine	broadleaf	broadleaf	yunnan pine	yunnan pine	yunnan pine	yunnan pine
Ageclass	1992	1992	1928	1928	1968	1993	1993	1993
Village	panlongshi	panlongshi	dahuoshan	dahuoshan	Qingmuyuan	xiaowengnong	xiaowengnong	xiaowengnong
Town	jijie	jijie	longtan	longtan	longtan	sipaishan	sipaishan	sipaishan
County	yangbi	yangbi	yangbi	yangbi	yangbi	gengma	gengma	gengma
Plot WP	1	2	3	4	5	7	8	9
Plot #	1	2	3	4	5	6	7	8
Date	26/02/2008	26/02/2008	26/02/2008	26/02/2008	26/02/2008	28/02/2008	28/02/2008	28/02/2008

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(C) VALUATION REPORT ON LAND USE RIGHTS HELD BY SHENYU NEW ENERGY GROUP

The following is the valuation report on land use rights of various forest farms held by Shenyu New Energy Group as at 30 April 2008 prepared by LCH (Asia-Pacific) Surveyors Limited for the purpose of inclusion in this circular.

==> picture [237 x 60] intentionally omitted <==

The readers are reminded that the report which follows has been prepared in accordance with the guidelines set by the International Valuation Standards, Eighth Edition, 2007 (the “IVS”) published by the International Valuation Standards Committee and the HKIS Valuation Standards on Properties, First Edition, 2005 (“HKIS Standards”) published by the Hong Kong Institute of Surveyors (the “HKIS”), both standards entitle the valuer to make assumptions which may on further investigation, for instance by the readers’ legal representative, prove to be inaccurate. Any exception is clearly stated below. Headings are inserted for convenient reference only and have no effect in limiting or extending the language of the paragraphs to which they refer. It is emphasised that the findings and conclusions presented below are based on the documents and facts known to the valuer at the date of this report. If additional documents and facts are made available, the valuer reserves the right to amend this report and its conclusions. The word valuation has the same meaning as appraisal in our report.

17th Floor Champion Building Nos. 287-291 Des Voeux Road Central Hong Kong

24 July 2008

The Directors China Grand Forestry Green Resources Group Limited Units 3307-11 33rd Floor, West Tower Shun Tak Centre 168-200 Connaught Road, Central Hong Kong

Dear Sirs,

We refer to the instruction given by the management of China Grand Forestry Green Resources Group Limited (hereinafter referred to as the “Company”) to us to conduct an agreed-upon procedures valuation of various designated land use rights of forest farms (the “Subject Assets”) presented to us as those currently owned by 神宇新能源集團有限公司 (Shenyu New Energy Group Limited and hereinafter

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referred to as “Shenyu New Energy”) in various locations of the People’s Republic of China (hereinafter referred to as the “PRC” or “China”) as at 30 April 2008 (hereinafter referred to as the “Date of Valuation”) for the Company’s internal management reference purpose. Our findings and conclusions in this agreed-upon procedures appraisal are documented in a narrative report (the “Narrative Report”) and submitted to the Company at today’s date.

We understand that the management of the Company will use our work product as part of its business due diligence and we have not been engaged to make specific sale or purchase recommendations, or to give opinion of value for the Company’s financing arrangement. We further understand that the use of our work product will not supplant other due diligence, which the management of the Company should conduct in reaching its business decisions regarding the Subject Assets. Our work is designed solely to provide information that will give the management of the Company a reference to form part of its internal due diligence process.

At the request of the management of the Company, we prepared this summary report to summarise our findings and conclusion as documented in the Narrative Report for the purpose of inclusion in this circular at today’s date for the Company’s shareholders’ reference. Terms herein used without definition shall have the same meanings as in the Narrative Report, and the assumptions and caveats adopted in the Narrative Report also apply to this report.

1. Instructions

Our instruction is to investigate and to conduct an agreed-upon procedures appraisal (the word appraisal has the same meaning as valuation in this report) on the market value of the Subject Assets and as part of a going concern business of Shenyu New Energy for the Company’s internal management reference purpose. Based on the instruction, we have carried out limited scope inspections, made relevant enquiries and obtained such further information as we consider necessary to support our opinion of value of the Subject Assets as at the Date of Valuation.

According to the instruction given to us, the Subject Assets comprise the following locations in China:

Various mixed and natural forest farms in Lincang City, Qujing City, Wenshan Zhuangzu Miaozu Zizhizhou, Chuxiong Yizu Zizhizhou, Dali Baizu Zizhizhou of Yunnan Province.

The scope of valuation has been determined with reference to the asset list provided by the management of the Company. Unless otherwise stated, all assets on the list have been included in our valuation. The management of the Company has confirmed to us that Shenyu New Energy has no assets other than those specified on the list supplied to us for this particular valuation.

According to the IVS of which the HKIS Standards follows, the term “Market Value” 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”. Under this definition, we further assumed that both the buyer and the seller contemplate the retention of the Subject Assets valued at its present location for the continuation of the current operations, and both seeking their maximum economic selfinterest in arriving at an arm’s-length transaction.

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Since we are not authorised person to conduct forestry survey in China and the enormous resources required in conducting a detailed inspection and survey, we were further instructed to conduct our valuation based on the data and information given in the various forestry survey reports (the “Forestry Reports”) as at the Date of Valuation and provided by the management of Shenyu New Energy, and summary statistic table on various 林權證 (translated as Forest Right Certificate) provided by the management of Shenyu New Energy.

The Forestry Reports were prepared by 河北省承德縣林業規劃勘察設計院 (translated as Hebei Province, Chengde County Forestry Planning Survey and Design Institute), 湖南省林業調查規劃設計院 (translated as Hunan Province, Forestry Survey Planning and Design Institute), 河北省平泉縣林業規劃設計院 (translated as Hebei Province, Pingquan County Forestry Planning and Design Institute), and 河北省平泉縣林業勘察工程諮詢服務有限公司 (translated as Hebei Province, Pingquan County Forestry Investigation Engineering Consultation Services Limited), forestry consultants in China, respectively and dated October 2007.

2. Valuation Procedures Adopted

In performing the valuation of each of the Subject Assets, we have adopted the following procedures which were agreed with the management of the Company before the engagement. They were:

to read and based on the content of the supplied materials such as the Forestry Reports to arrive at our opinion. In the course of valuation, we will assume the supplied data and information are correct and we will not ascertain the correctness of the information that contained in the supplied materials;
to prepare and submit list(s) of required document and information regarding the Subject Assets during the course of valuation. The completeness of our valuation depends on the availability of the required information being supplied by the management of Shenyu New Energy via the Company;
to hold discussions with relevant personnel and to review various documents in order to have a better understanding on the Subject Assets and the use of the Subject Assets as part of a going concern business of Shenyu New Energy;
to conduct a limited scope physical inspection and to gather relevant information regarding the Subject Assets. The purpose of the inspection is not to create an error free asset schedule or to have a full scope investigation on the quantity and quality of the Subject Assets; rather, it is designed to give the valuer a better understanding of the Subject Assets on a sampling basis. No responsibility or liability is assumed;
to conduct appropriate research/consultation in order to obtain sufficient market information to support our valuation. The scope of research/consultation is at the valuer’s own discretion;
to value the Subject Assets using the appropriate standards of value and approach to value; and,
to document our findings and conclusion in our appraisal report.

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3. Description of the Subject Assets

The Subject Assets comprise the land use rights of various designated natural, man-made or mixed forest farms (land element only) in various locations of China. Details of the Subject Assets are:

	City	County/Town	Site Area (Chinese Mu (畝))
1.	LincangCity(臨滄市)	Gengma County(耿馬縣)	266,349.50
2.	QujingCity(曲靖市)	Huize County(會澤縣)	620,397.00
3.	Wenshan Zhuangzu Miaozu Zizhizhou (文山壯族苗族自治州)	Qiubei County (丘北縣)	50,912.00
4.	Chuxiong Yizu Zizhizhou (楚雄彝族自治州)	Yongren County (永仁縣)	115,748.00
5.	Chuxiong Yizu Zizhizhou (楚雄彝族自治州)	Shuangbai County (雙柏縣)	53,141.00
6.	Dali Baizu Zizhizhou (大理白族自治州)	Yangyizu Zizhixian Jijie Town (漾濞彝族自治縣雞街鄉)	132,967.63
7.	Dali Baizu Zizhizhou (大理白族自治州)	Yangyizu Zizhixian Longtan Town (漾濞彝族自治縣龍潭鄉)	81,111.57
		Total	1,320,626.70

Shenyu New Energy obtained the relevant Forest Right Certificates for the above forest farms.

In addition to the Subject Assets, we were advised that Shenyu New Energy has entered into various forest farm land transfer agreements with various parties for forest farms located in various locations in China with a total site area of approximately 727,015 Chinese Mu. We were further advised that Shenyu New Energy is in the process of applying the relevant Forest Right Certificates for the addition areas.

4. Exclusions

This valuation is limited to the Subject Assets and we have excluded the stocks of trees grown on the subject land and other types of assets like machinery and equipment, furniture and fixtures, financial assets and any intangible assets that might exist.

The scope of valuation has been determined with reference to the instructions given by the management of the Company.

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5. Inspections

At the instruction of the Company, we conducted a random on-site inspection to the selected forest farms that situated in Yongren County, Shuangbai County, and Yangyizu Zizhixian Jijie Town between 26 May 2008 to 31 May 2008. Our inspection was conducted on limited scope basis and designed to let the valuer to have a general understand on the environs of the subject land. The purpose of the inspection is not to create an error free asset schedule or to have a full scope investigation on the quantity and the quality of the subject land under appraised, no responsibility or liability in the correctness of the quantity/ quality shown in this report is assumed.

Due to the limited time frame made available to us and the existence of physical barrier to access the subject land, we were unable to report in detail the inspected asset which were covered, unexposed or inaccessible or not being arranged.

We cannot express an opinion about or advice upon the condition of the Subject Assets and the subject land and this report should not be taken as making any implied representation or statement about the conditions of the Subject Assets. We are not, however, able to report that the inspected assets are free from rot, insect, soil erosion, infestation or any other defects. No responsibility or liability is assumed.

We have not carry out on-site measurements to verify the correctness of the information provided in the Forestry Reports and have assumed that all the information provided to us are correct. All dimensions, measurements and areas are approximations.

Our engagement and the agreed procedure to value did not include an independent land survey to verify the legal boundaries and the exact locations of the Subject Assets and we have assumed that the information provided in the Forestry Reports are correct. Since we are not land surveyors, we assume no responsibility in the verification or in ascertaining legal boundaries and locations of the Subject Assets. The management of the Company or any interested party in the Subject Assets are advised to conduct their own legal boundaries due diligence work.

We are not aware of the content of any environmental audit or other environmental investigation or soil survey which may have been carried out on the Subject Assets. In undertaking our work, we have been instructed to assume that no contaminants or potentially contaminative uses have ever been carried out in the sites of the Subject Assets. However, should it be established subsequently that contamination, seepage or pollution exists at the Subject Assets or on any neighbouring land, or that the premises have been or are being put to a contaminative use, this might reduce the value now reported.

Unless otherwise stated, our valuation has been made on the assumption that no unauthorised alteration, extension or addition has been made in the subject land, and that the inspection and the use of this work product do not purport to be a condition survey of the Subject Assets or the subject land. If the management of the Company wants to satisfy them as to the condition of the Subject Assets or the subject land, then the management of the Company should obtain a third party surveyor’s detailed inspection and report of their own.

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6. Basis of Valuation and Assumptions

The Subject Assets are valued on the basis of Market Value in continued use and as part of a going-concern business of Shenyu New Energy. The continued use premise assumes that the Subject Assets will be used for the purpose for which the Subject Assets were conceived or are currently used. Implicit in this definition is the fact that a (hypothetical willing and able) buyer would not pay more to acquire the Subject Assets than he could reasonably expect to earn in the future from an investment in the Subject Assets.

Under the premise of continued use, the opinion of market value assumes operation and use of the Subject Assets at its present locations for continuation of the existing business. It further assumes that prospective earnings would provide a reasonable return to the Subject Assets valued plus the value of other assets not included in this valuation and adequate working capital.

Our valuation has been made on the assumptions, that

the legally interested party in the Subject Assets sells each of the Subject Assets in the market in its existing state (as a forest farm) without the benefit of a deferred terms contract, leaseback, joint venture, management agreement or any other similar arrangement which would serve to increase the value of the Subject Assets;
the legally interested party in the Subject Assets has free and uninterrupted rights to assign the interests for the whole of the unexpired terms as granted and any premiums payable have already been fully paid; and
that the Subject Assets can be freely disposed and transferred free of all encumbrances at the Date of Valuation for its existing uses in the market to both local and overseas purchasers without payment of any premium to the government.

Should this not be the case, it will have adverse impact to the value as reported.

Market value in continued use is not intended to represent the amount that might be realised from piecemeal or break-up disposition in the open market or for other alternate use.

This valuation is concerned solely with the value of the Subject Assets and our opinion of value is not related to or dependent upon the earning capacity of the business they are presently in use.

Unless otherwise stated, it is assumed that all required licenses, certificates, consents, or other legislative or administrative authority from any local, provincial, or national government or private entity or organisation have been or can readily be obtained or renewed for any use on which the value estimates contained in this report are based.

In arriving at our opinion, we have also assumed that the management of Shenyu New Energy has adopted reasonable and necessary security measures and has considered several contingency plans against any disruption (such as fire, insects and soil erosion) to the operation of the business and the proper usage of the Subject Assets.

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7. Valuation Methodology

There are three generally accepted asset appraisal approaches to value, namely the Cost Approach, the Market Approach and the Income Approach. In conducting our valuation, we considered all three approaches and concluded that the Market Approach is the most appropriate approach in valuing the Subject Assets under the premise of continued use.

We have adopted the comparable sales method of the Market Approach (also called sales comparison approach) in this valuation. The comparable sales method considers the sales, listings or offering of similar or substitute properties and related market data and establishes a value of a property that a reasonable investor would have to pay for a similar property of comparable utility and with an absolute title.

By using this method, the land should be assumed to have the benefit of approved usage for the replacement of the existing improvement i.e. forest farm and it is always necessary when valuing the land, to have regard to the manner in which the land is developed by the existing improvement and site works, and the extent to which these realise the full potential value of the land.

8. Matters that Might Affect the Value Reported

No allowance has been made in our valuation for any charges, mortgages, outstanding premium or amounts owed on the Subject Assets. Any expenses, depreciation or taxation, which may be incurred in effecting a sale of the Subject Assets were not taken into consideration. Unless otherwise stated, it is assumed that the Subject Assets are free from all encumbrances, restrictions, and outgoings of an onerous nature which could affect its value.

As at the Latest Practicable Date of this circular, we are unable to identify or were informed by the Company of any adverse news against the Subject Assets which may affect the reported value in this report. Thus, we are not in the position to report or comment on its impact (if any) to the Subject Assets. However, should it be established subsequently that such adverse news exist at the Date of Valuation, we reserve the right to adjust the value reported herein.

9. Establishment of Titles

Due to the market value basis of valuation, the management of the Company was requested to provide us the necessary documents to support that the Shenyu New Energy has free and uninterrupted rights to assign the Subject Assets (in this instance, an absolute title) free of all encumbrances and any premiums payable have already been paid in full or outstanding procedures have been completed. However, our procedures to value as agreed with the management of the Company did not required us to conduct legal due diligence on the legality and formality on the way that Shenyu New Energy obtained the Subject Assets from the relevant authorities. We agreed with the management of the Company that this should be the responsibility of the legal advisor to the management of the Company. Thus, no responsibility or liability is assumed from our part to the origin and continuity of the titles to the Subject Assets.

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APPENDIX IV

In the course of valuation, we have not been provided with copies of the Forest Right Certificates but have inspected the originals of most Forest Right Certificates in Shenyu New Energy’s office. However, due to inherent defects in the land registration system of China, we are unable to search the original documents from the relevant land registration departments to verify the existing titles of the Subject Assets or any material encumbrances that might be attached to the Subject Assets. As we are not legal professional and we are unable to ascertain the titles and to report any encumbrances (if any) that are registered against the Subject Asset. All documents disclosed (if any) are for reference only and no responsibility is assumed.

Having said that, we have relied solely on the copy of the PRC legal opinion dated 24 July 2008 (“Legal Opinion”) as provided by the management of the Company with regards to Shenyu New Energy’s title on the Subject Assets. We are given to understand that the Legal Opinion was prepared by the Company’s PRC legal adviser, 北京市凱鵬律師事務所 (Kai Peng Law Firm). No responsibility or liability is assumed in relation to the Legal Opinion. According to the Legal Opinion, Shenyu New Energy has the rights to freely transfer, lease or mortgage the 1,320,626.70 Chinese Mu of forest farms (as mentioned in Section 3 above) in which Shenyu New Energy obtained the relevant Forest Right Certificates. However, Shenyu New Energy does not have the rights to assign, lease or mortgage additional 727,015 Chinese Mu land use rights of the forest farms in which it only entered the transfer agreements. Thus, no commercial value has been assigned to these additional forest farms.

In our valuation, we have assumed that the legally interested party in the Subject Assets has obtained all the approval and/or endorsement from the relevant authorities, and that there would have no legal impediment (especially from the regulators) for the legally interested party to continue the ownership of the Subject Asset. Should this not be the case, it will affect our conclusions in this report significantly. The readers are reminded to have their own legal due diligence work on such issues. No responsibility or liability is assumed.

10. Sources of Information and its Verification

Due to the instructions given to us, we have relied solely on the information provided by the management of the Company or its appointed personnel without further verification and have fully accepted advice given to us on such matters as planning approvals or statutory notices, locations, titles, easements, tenure, occupation, site areas and all other relevant matters. Since we are not legal professionals, we are not in the position to advise or comment on the legality and effectiveness of the documents provided by the management of Shenyu New Energy via the Company. No responsibility or liability is assumed.

We have sought and received confirmation from the management of the Company that no material factors have been omitted from the information supplied. Our analysis and appraisal are based upon full disclosure between us and the management of the Company of material and latent facts that may affect the appraisal. We consider that we have been provided with sufficient information to reach an informed view, and have had no reason to suspect that any material information has been withheld.

Our engagement did not include an independent forestry survey to verify the information provided. We need to state that we are not in the forestry survey profession, therefore, we are not in the position to verify or ascertain the correctness with regard to the information provided. No responsibility is assumed.

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VALUATION REPORTS ON SHENYU NEW ENERGY GROUP

APPENDIX IV

We were not contracted to conduct a due diligence to review the existing forestry industry and related resources granting out policies in China. In the course of our appraisal, we have solely depended on the advice given by the management of the Company. We are unable to accept any responsibility for the reliability of the advice.

The scope of valuation has been determined by reference to the property list provided by the management of the Company. All property on the list has been included in our valuation. The management of the Company has confirmed to us that it has no property interest other than those specified on the list supplied to us.

Unless otherwise stated, we have not carried out any valuation on the study of possible alternative development options on the subject land and the related economics do not come within the scope of our work product.

No investigation has been made of the legal title or any liabilities attached to the Subject Assets. All documents disclosed (if any) are for reference only and no responsibility is assumed for any legal matters concerning the legal title and the rights (if any) to the Subject Assets. We have not verified the original documents furnished to us, any responsibility for our misinterpretation of the documents, therefore, cannot be accepted.

Information from others sources, upon which all or portions of this report are based, are believed to be reliable but have not been verified in all cases. Our procedures to value or work do not constitute an audit, review, or compilation of the information provided. Thus, no warranty is made nor liability assumed for the accuracy of any data, advice, opinions, or estimates identified as being furnished by others which have been used in formulating this report.

When we adopted the work products from other professions, external data providers, the management of Shenyu New Energy and the management of the Company in our valuation, the assumptions and caveats adopted by them in arriving at their figures also applies in our valuation. The procedures we have taken do not provide all the evidence that would be required in an audit and, as we have not performed an audit, accordingly, we do not express an audit opinion.

Unless otherwise stated, the base currency of this report is Renminbi Yuan (“RMB”).

To the best of our knowledge, all data set forth in this report is true and accurate. Although gathered from reliable sources, no warranty is made nor liability assumed for the accuracy of any data, opinions, or estimates identified as being furnished by others which have been used in formulating this report.

11. Limiting Conditions of This Summary Report

This report is provided strictly for the sole use of the Company. Neither the whole nor any part of this report or any reference made hereto may be included in any published documents, circular or statement, or published in any way, without our written approval of the form and context in which it may appear. Nonetheless, we consent to the publication of this summary report in this circular to the Company’s shareholders’s reference.

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VALUATION REPORTS ON SHENYU NEW ENERGY GROUP

APPENDIX IV

Our opinion of value in this report is valid only for the stated purpose and only for the Date of Valuation. We or our personnel shall not be required to give testimony or attendance in court or to any government agency by reason of this report, and the valuers accept no responsibility whatsoever to any other person.

No responsibility is taken for changes in market conditions and no obligation is assumed to revise this report to reflect events or change of government policy or financial condition or other conditions, which occur subsequent to the date hereof.

Our maximum liability relating to services rendered under this engagement (regardless of form of action, whether in contract, negligence or otherwise) shall be limited to the charges paid to us for the portion of its services or work products giving rise to liability. In no event shall we be liable for consequential, special, incidental or punitive loss, damage or expense (including without limitation, lost profits, opportunity costs, etc.), even if it has been advised of their possible existence.

The Company is required to indemnify and hold us and our personnel harmless from any claims, liabilities, costs and expenses (including, without limitation, attorney’s fees and the time of our personnel involved) brought against, paid or incurred by us at a time and in any way based on the information made available in connection with our report except to the extent that any such loses, expenses, damages or liabilities are ultimately determined to be the result of gross negligence of our engagement team in conducting its work. This provision shall survive even after the termination of this engagement for any reason.

12. Opinion of Value

Based on the investigation, analysis, stated assumptions, limitations, reasoning and data outlined as above, and on the appraisal method employed, it is our opinion that as of the Date of Valuation, the market value in continued use of the Subject Assets (before taking into consideration any transaction costs), as part of a going-concern business of Shenyu New Energy, is reasonably stated by the amount of RENMINBI TWO HUNDRED EIGHTY THREE MILLION AND NINE HUNDRED THOUSAND YUAN ONLY (RMB283,900,000.00).

13. Statements

The concluded value is based on generally accepted appraisal procedures and practices that rely extensively on assumptions and considerations, not all of which can be easily quantified or ascertained exactly. While we have exercised our professional judgement in arriving at the appraisal, the readers are urged to consider carefully the nature of such assumptions which are disclosed in this report and should exercise caution in interpreting this report.

Our report is prepared in line with the requirements contained in the IVS as well as the guidelines contained in the HKIS Standards. The valuation has been undertaken by valuers, acting as independent valuers, qualified for the purpose of the valuation.

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VALUATION REPORTS ON SHENYU NEW ENERGY GROUP

APPENDIX IV

We retain a copy of this report together with the data from which it was prepared, and these data and documents will, according to the Laws of Hong Kong, keep for a period of 6 years from the date of this report and to be destroyed thereafter. We considered these records confidential, and we do not permit access to them by anyone, with the exception for law enforcement authorities or court order, without the Company’s authorisation and prior arrangement made with us. Moreover, we will add the Company’s information into our client list for our future reference.

We hereby certify that we have no present nor contemplated future interest in the Subject Assets. Neither our employment nor our compensation in connection with this valuation report is in any way contingent upon the conclusions reached or value estimates.

Yours sincerely, For and on behalf of LCH (Asia-Pacific) Surveyors Limited

Joseph C. Ho BSc PgD RPS(GP) Managing Director

Contributed Valuers:

Elsa Ng Hung Mui BSc MSc Leslie Wong Tak Chiu BSc

Mr. Joseph Ho Chin Choi has been conducting asset valuations and advisory work in Hong Kong, Macau, Taiwan, mainland China, Japan, South East Asia, Australia, Germany, Scotland, Finland, Guyana, Canada and the United States of America for various purposes since 1988. He obtained the Examination Certificate of the Uniform Standards of Professional Appraisal Practice issued by the American Society of Appraisers in 1996. He has extensive experience in the valuation of various types of intangible assets and power plants, toll road, health products and foodstuffs, mineral resources, agricultural property assets, financial services, luxurious consumer goods, pharmaceutical and biotechnology, electronic consumer products manufactory, semiconductors, telecommunication, media and information technology related businesses for the listed companies in Hong Kong, Taiwan, mainland China, Singapore, Malaysia, the United Kingdom, Canada and the United States of America. At present, he is a valuer on the List of Property Valuers for Undertaking Valuation for Incorporation or Reference in Listing Particulars and Circulars and Valuations in Connection with Takeovers and Mergers published by the Hong Kong Institute of Surveyors.

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APPENDIX V

(A) PROPERTY INTERESTS OF THE GROUP

The following is the text of the letter, summary of values and valuation certificate on property interests of the Group as at 30 April 2008 prepared by LCH (Asia-Pacific) Surveyors Limited for the purpose of inclusion in this circular.

==> picture [237 x 60] intentionally omitted <==

The readers are reminded that the report which follows has been prepared in accordance with the guidelines set by the HKIS Valuation Standards on Properties, First Edition, 2005 (“HKIS Standards”) published by the Hong Kong Institute of Surveyors (the “HKIS”) and entitles the valuer to make assumptions which may on further investigation, for instance by the readers’ legal representative, prove to be inaccurate. Any exception is clearly stated below. Headings are inserted for convenient reference only and have no effect in limiting or extending the language of the paragraphs to which they refer. If additional documents and facts are made available, the valuer reserves the right to amend this report and conclusion.

17th Floor Champion Building Nos. 287-291 Des Voeux Road Central Hong Kong

24 July 2008

The Directors China Grand Forestry Green Resources Group Limited Units 3307-11 33rd Floor, West Tower Shun Tak Centre 168-200 Connaught Road, Central Hong Kong

Dear Sirs,

In accordance with your instructions to us to value the properties in which China Grand Forestry Green Resources Group Limited (hereinafter referred to as the “Company”) and its subsidiaries (collectively, hereinafter together with the Company referred to as the “Group”) have interests in Hong Kong and in the People’s Republic of China (hereinafter referred to as the “PRC” or “China”), we confirm that we have carried out inspections, made relevant enquiries and obtained such further information as we consider necessary to support our opinions of value of the properties of the Group as at 30 April 2008 (hereinafter referred to as the “Date of Valuation”) for the Company’s shareholders’ reference purpose.

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VALUATION REPORT ON THE ENLARGED GROUP

We understand that the management of the Company will incorporate our work product (i.e. this letter, summary of values and the valuation certificate) as part of its business due diligence and we have not been engaged to make specific sale or purchase recommendations, or to give our opinions of value for the Company’s financing arrangement. We further understand that the use of our work product will not supplant other due diligence, which the management of the Company should conduct, in reaching its business decisions regarding the properties valued. Our work is designed solely to provide an independent valuation that will give the management of the Company a reference to form part of its internal due diligence process.

BASIS OF VALUATION AND ASSUMPTIONS

According to the HKIS Standards, there are two valuation bases in valuing property, namely market value basis and valuation bases other than market value. Our valuations of the properties are on Market Value basis.

The term “Market Value” 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”.

For valuing the properties rented by the Group in Hong Kong and in China, we have assigned no commercial value due mainly to the short-term nature of the tenancy agreements or prohibition against assignment or sub-letting or lack of substantial profit rents.

Unless otherwise stated, we have not carried out a valuation on a redevelopment basis and the study of possible alternative development options and the related economics do not come within the scope of our work.

MATTERS THAT MIGHT AFFECT THE VALUES REPORTED

No allowance has been made in our valuations for any charges, mortgages or amounts owing on the properties. Unless otherwise stated, it is assumed that the properties are free from encumbrances, restrictions, and outgoings of an onerous nature which could affect their values.

As at the Latest Practicable Date of this circular, we are unable to identify any adverse news against the properties which may affect the reported values in our work product. Thus, we are not in the position to report and comment on its impact (if any) to the properties. However, should it be established subsequently that such news did exist at the Date of Valuation, we reserve the right to adjust the values reported herein.

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APPENDIX V

ESTABLISHMENT OF TITLES

We have been provided with copies of tenancy agreements but we have not been provided with title documents regarding the properties. We have conducted title searches of the properties in Group I in the Land Registry of Hong Kong. We have not examined the original documents to verify the ownership and encumbrances, or to ascertain the existence of any lease amendments which may not appear on the copies handed to us. Due to inherent defects in the land registration system of China, we are unable to search the original documents from the relevant land registration departments to verify the existing titles of the properties or any material encumbrances that might be attached to the properties in Group II. As we are not legal professional and we are unable to ascertain the titles and to report any encumbrances (if any) that are registered against the properties. All documents disclosed (if any) are for reference only and no responsibility is assumed for any legal matters concerning the legal title and the rights (if any) to the properties. Any responsibility for our misinterpretation of the documents cannot be accepted.

INSPECTIONS AND INVESTIGATIONS OF THE PROPERTIES IN ACCORDANCE WITH VS4 OF THE HKIS STANDARDS

As part of the agreed-upon procedures, we have inspected the exterior, and where possible, the interior of most of the properties in respect of which we have been provided with such information as we have requested for the purpose of our valuations. We have not inspected those parts of the properties which were covered, unexposed, not being arranged, excluded or inaccessible and such parts have been assumed to be in reasonable condition. We cannot express an opinion about or advice upon the condition of the properties and the attached valuation certificate should not be taken as making any implied representation or statement about the condition of the properties. No structural survey, investigation or examination has been made, but in the course of our inspections, we did not note any serious defects in the properties inspected. We are not, however, able to report that the properties are free from rot, infestation or any other structural defects. No tests were carried out to the services (if any) and we are unable to identify those services covered, unexposed or inaccessible.

We have not carried out on-site measurements to verify the correctness of the area of the properties, but have assumed that the area shown on the documents and handed to us are correct. All dimensions, measurements and areas are approximations.

We have not arranged for any investigation to be carried out to determine whether or not any deleterious or hazardous material has been used in the construction of the properties, or has since been incorporated, and we are therefore unable to report that the properties are free from risk in this respect. For the purpose of this valuation, we have assumed that such investigation would not disclose the presence of any such material to any significant extent.

SOURCES OF INFORMATION AND ITS VERIFICATION IN ACCORDANCE WITH VS5 OF THE HKIS STANDARDS

We have relied solely on the information provided by the management of the Company or its appointed personnel without further verification and have fully accepted advice given to us on such matters as planning approvals or statutory notices, locations, titles, easements, tenure, occupation, lettings, rental, floor areas and all other relevant matters.

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The scope of valuation has been determined by reference to the property list provided by the management of the Company. The management of the Company has confirmed to us that the Group has no property interests other than those disclosed in the attached summary of values and valuation certificate.

Information furnished by others, upon which all or portions of our work product are based, is believed to be reliable but has not been verified in all cases. Our procedures to value or work do not constitute an audit, review, or compilation of the information provided. Thus, no warranty is made nor liability assumed for the accuracy of any data, advice, opinions, or estimates identified as being furnished by others which have been used in formulating our work product.

When we adopted the work products from other professions, external data providers and the management of the Company in our valuations, the assumptions and caveats that adopted by them in arriving at their figures also applied in our valuations. The procedures we have taken do not provide all the evidence that would be required in an audit and, as we have not performed an audit, accordingly, we do not express an audit opinion. We are unable to accept any responsibility for the information that has not been supplied to us by the management of the Company or its appointed personnel. Also, we have sought and received confirmation from the management of the Company or its appointed personnel that no materials factors have been omitted from the information supplied. Our analysis and valuations are based upon full disclosure between us and the Company of material and latent facts that may affect the valuations.

We have had no reason to doubt the truth and accuracy of the information provided to us by the management of the Company or its appointed personnel, and have had no reason to suspect that any material information has been withheld.

Unless otherwise stated, all monetary amounts are in Hong Kong dollars and that the conversion rate we adopted was HK$ 1 to 0.89789 Renminbi Yuan (“RMB”) as at the Date of Valuation.

LIMITING CONDITIONS

Our opinions of value of the properties in this report are valid only for the stated purpose and only for the Date of Valuation, and for the sole use of the named Company. We or our personnel shall not be required to give testimony or attendance in court or to any government agency by reason of this report, and the valuer accepts no responsibility whatsoever to any other person.

Our valuations have been made on the assumption that no unauthorised alteration, extension or addition has been made in the properties, and that the use of the attached valuation certificate should not be used as a building survey of the properties. If the management of the Company wants to satisfy them as to the condition of the properties, then the management of the Company should obtain a surveyor’s detailed inspection and report of their own.

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No responsibility is taken for changes in market conditions and local government policy and no obligation is assumed to revise the attached valuation certificate to reflect events or conditions, which occur or make known to us subsequent to the date hereof. Neither the whole nor any part of this report or any reference made hereto may be included in any published documents, circular or statement, or published in any way, without our written approval of the form and context in which it may appear. Nonetheless, we consent to the publication of this report in this circular to the Company’s shareholders’ reference.

STATEMENTS

Our valuations have been prepared in line with the requirements contained in Chapter 5 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited as well as the guidelines contained in the HKIS Standards. The valuations have been undertaken by valuers, acting as external valuers, qualified for the purpose of the valuations.

We retain a copy of this report together with the data from which it was prepared, and these data and documents will, according to the Laws of Hong Kong, keep for a period of 6 years from the date of this report and to be destroyed thereafter. We considered these records confidential, and we do not permit access to them by anyone, with the exception for law enforcement authorities or court order, without the Company’s authorisation and prior arrangement made with us. Moreover, we will add Company’s information into our client list for future reference.

We hereby certify that the fee for this service is not contingent upon our conclusion of values and we have no significant interest in the properties, the Group, or the values reported.

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APPENDIX V

Our valuations are summarised below and the valuation certificate is attached.

Yours faithfully, For and on behalf of

LCH (Asia-Pacific) Surveyors Limited

Joseph Ho Chin Choi Elsa Ng Hung Mui B.Sc. PG Dip RPS (GP) B.Sc. M.Sc. RPS (GP) Managing Director Associate Director

Contributed valuer:

Leslie Wong Tak Chiu BSc

Notes:

Mr. Joseph Ho Chin Choi has been conducting asset valuations and advisory work in Hong Kong, Macau, Taiwan, mainland China, Japan, South East Asia, Australia, Scotland, Finland, Germany, Guyana, Canada and the United States of America for various purposes since 1988. He has more than 19 years of experience in valuing real estate properties in mainland China.
Ms. Elsa Ng Hung Mui is a Registered Professional Surveyor who has been conducting valuation of real estate properties in Hong Kong since 1994 and has more than 9 years of experience in valuing properties in mainland China.
Both Mr. Joseph Ho Chin Choi and Ms. Elsa Ng Hung Mui are valuers on the List of Property Valuers for Undertaking Valuation for Incorporation or Reference in Listing Particulars and Circulars and Valuations in Connection with Takeovers and Mergers published by the HKIS.

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APPENDIX V

SUMMARY OF VALUES

Group I – Properties occupied by the Group under operating leases in Hong Kong and valued on market value basis

Property

Amount of Valuations in its existing state attributable to the Group as at 30 April 2008 HK$

Units 3307, 3308, 3309, 3310, 3311 and Portion of 3312 on the 33rd Floor

No Commercial Value

West Tower

Shun Tak Centre Nos. 168-200 Connaught Road Central Hong Kong

Unit 3405 on 34th Floor

No Commercial Value

China Merchants Tower

Shun Tak Centre Nos. 168-200 Connaught Road Central Hong Kong

Sub-total:

NIL

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APPENDIX V

Group II – Properties occupied by the Group under operating leases in the PRC and valued on market value basis

Property

Amount of valuation in its existing state attributable to the Group as at 30 April 2008 HK$

Levels 1 and 2

No Commercial Value

Block C, Shuguang Building No. 5 Jing Shun Road Chaoyang District Beijing The People’s Republic of China
Room 310 on Level 3 Block 1 No. 11 An Xiang Beili Jia Chaoyang District Beijing The People’s Republic of China

No Commercial Value

Sub-total:

Grand Total:

NIL NIL

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APPENDIX V

VALUATION CERTIFICATE

Group I – Properties occupied by the Group under operating leases in Hong Kong and valued on market value basis

Property

Description and occupancy

Amount of valuations in its existing state attributable to the Group as at 30 April 2008

Units 3307, 3308, 3309, The property comprises six units on the 33rd Floor of a 39-storeyed No Commercial Value 3310, 3311 and Portion commercial/office building which was completed in 1985. of 3312 on the 33rd Floor According to the information available to us, the property has a West Tower lettable area of approximately 11,806 sq.ft. Shun Tak Centre Nos. 168-200 The property is rented to the Company for a term of 3 years Connaught Road Central commencing from 1 February 2008 to 31 January 2011 at a Hong Kong monthly rental of HK$436,822.00 exclusive of rates, Government rent and management fee with 2 months rent free period.

The property is currently occupied by the Company for office purpose.

Notes:

According to a tenancy agreement made between Fujian Properties Limited and China Grand Forestry Resources Group Ltd. dated 5 February 2008, the property was leased to China Grand Forestry Resources Group Limited (currently renamed as China Grand Forestry Green Resources Group Limited).
The registered owner of the property is Fujian Properties Limited, an independent third party to the Group.

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APPENDIX V

Property

Description and occupancy

Amount of valuations in its existing state attributable to the Group as at 30 April 2008

Unit 3405 on 34th Floor The property comprises an unit on the 34th Floor of a 39-storeyed No Commercial Value China Merchants Tower commercial/office building which was completed in 1985. Shun Tak Centre Nos. 168-200 According to the information available to us, the property has a Connaught Road Central lettable area of approximately 2,665 sq.ft. Hong Kong The property is rented to the Company for a term of 2 years commencing from 10 May 2006 to 9 May 2008 at a monthly rental of HK$74,620.00 exclusive of rates, Government rent and management fee.

The property was occupied by the Company as at the Date of Valuation for office purpose. The property is not occupied by the Company after the expiry of the lease term.

Notes:

According to a tenancy agreement made between Master Land (HK) Limited and Good Fellow Group Limited dated 10 May 2006, the property was leased to Good Fellow Group Limited (currently renamed as China Grand Forestry Green Resources Group Limited).
The registered owner of the property is Master Land (HK) Limited, an independent third party to the Group.

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APPENDIX V

Group II – Properties occupied by the Group under operating leases in the PRC and valued on market value basis
Property Description and occupancy
1. Levels 1 and 2 The property comprises the whole of the Levels 1 and 2 of a Block C, Shuguang 4-storey building which was completed in around 2002. Building No. 5 Jing Shun Road The total gross floor area of the property is approximately 4,274.40 Chaoyang District sq.m. Beijing The People’s Republic The property is leased to the Group for a term of 5 years of China commencing from 1 September 2007 at a total monthly rental of RMB 415,983.20 exclusive of management fee and utility charges. The Group enjoys a rent free period of 5 months from 1 September 2007 to 30 November 2007 and 1 July 2012 to 31 August 2012.

Amount of valuation in its existing state attributable to the Group as at 30 April 2008 No Commercial Value

The property is restricted for office purpose and is currently under renovation.

Notes:

The lessor of the property is 北京樂康物業管理有限責任公司 (translated as Beijing Lekang Property Management Company Limited), an independent third party to the Group.
The lessee of the property is 北京萬富春森林資源發展有限公司 (Beijing Wan Fu Chun Forest Resources Development Beijing Company Limited), a wholly-owned subsidiary of the Company.

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APPENDIX V

VALUATION REPORT ON THE ENLARGED GROUP

			Amount of valuation
			in its existing state
			attributable to
			the Group as at
	Property	Description and occupancy	30 April
			2008
4.	Room 310 on Level 3	The property comprises an unit on the Level 3 of a 23-storeyed	No Commercial
	Block 1	building which was completed in around 2004.	Value
	No. 11
	An Xiang Beili Jia	According to the information available to us, the property has a
	Chaoyang District	gross floor area of approximately 43 sq.m for office purpose.
	Beijing
	The People’s Republic	The property is rented to the Group for a term of one year
	of China	commencing from 3 April 2008 to 2 April 2009 at a rental of RMB
		14.517 per quarter.
		The property is currently occupied by the Group for office purpose.

Notes:

The lessor of the property is Hi-Tech International Business Incubator Co., Ltd.
The lessee of the property is 北京萬富春森林資源發展有限公司 (Beijing Wan Fu Chun Forest Resources Development Beijing Company Limited), a wholly-owned subsidiary of the Company.

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APPENDIX V

(B) PROPERTY INTERESTS OF THE TARGET GROUP

The following is the text of letter, summary of values and valuation certificate on property interests of the Target Group as at 30 April 2008 prepared by LCH (Asia-Pacific) Surveyors Limited for the purpose of inclusion in this report.

==> picture [237 x 60] intentionally omitted <==

17th Floor Champion Building Nos. 287-291 Des Voeux Road Central Hong Kong

24 July 2008

The Directors China Grand Forestry Green Resources Group Limited Units 3307-11 33rd Floor, West Tower Shun Tak Centre 168-200 Connaught Road, Central Hong Kong

Dear Sirs,

In accordance with your instructions to us to value the properties in which China Grand Forestry Green Resources Group Limited (hereinafter referred to as the “Company”) and its subsidiaries (collectively, hereinafter together with the Company referred to as the “Group”) have intention to acquire in the People’s Republic of China (hereinafter referred to as the “PRC” or “China”), we confirm that we have carried out inspections, made relevant enquiries and obtained such further information as we consider necessary to support our opinions of value of the properties as at 30 April 2008 (hereinafter referred to as the “Date of Valuation”) for the Company’s shareholders’ reference purpose.

We understand that the properties to be acquired by the Group are currently held by Shenyu New Energy Group Limited and its subsidiaries (hereinafter referred to as the “Target Group”).

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APPENDIX V

VALUATION REPORT ON THE ENLARGED GROUP

We understand that the management of the Company will incorporate our work product (i.e. this letter, summary of values and the valuation certificate) as part of its business due diligence and we have not been engaged to make specific sale or purchase recommendations, or to give our opinions of value for the Company’s financing arrangement. We further understand that the use of our work product will not supplant other due diligence, which the management of the Company should conduct, in reaching its business decisions regarding the properties valued. Our work is designed solely to provide information that will give the management of the Company a reference to form part of its internal due diligence process.

BASIS OF VALUATION AND ASSUMPTIONS

According to the HKIS Standards, there are two valuation bases supported by the HKIS Standards, namely the Market Value basis and valuation bases other than the Market Value. Our valuations of the properties are on Market Value basis.

Our valuations have been made on the assumptions, that

the legally interested party in the properties sells each of the properties in Groups I and II in the market in its existing state without the benefit of a deferred terms contract, leaseback, joint venture, management agreement or any other similar arrangement which would serve to increase the values of the properties;
the legally interested party in the properties in Groups I and II has free and uninterrupted rights to assign the property interests for the whole of the unexpired terms as granted and has the rights to freely assign, let or mortgage the properties. We have also assumed any premiums payable have already been fully paid for properties in Groups I and II, and has the right to occupy the properties in Group III; and
that the properties in Groups I and II can be freely disposed and transferred free of all encumbrances at the Date of Valuation for its existing uses in the market to both local and overseas purchasers without payment of any premium to the government.

Should this not be the case, it will have adverse impact to the values as reported.

VALUATION METHODOLOGY

For valuing properties in Groups I and II, we have adopted the Depreciated Replacement Cost (the DRC) Method which is an application of the Cost Approach. The DRC Method is a procedural value based on an estimate of the Market Value for the existing use of the land, plus the current gross replacement (reproduction) costs of the improvements erected thereon, less allowance for physical deterioration and all relevant forms of obsolescence and optimisation.

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For owner occupied specialised properties where it is impracticable to identify the Market Value by sales comparison approach, the DRC Method is considered as the most appropriate method. The underlying theory of this method is the Market Value of the valued properties should, at least, be equivalent to the replacement cost of the remaining service potential of the valued properties i.e. the DRC of the valued properties. In our opinion, the DRC generally furnishes the most reliable indication of value for property where it is not practicable to ascertain its value on market basis.

Specialised properties are certain types of properties which are rarely, if ever, sold in the open market, except by way of a sale of the business of which they are a part (called the business in occupation), due to their uniqueness arising from their specialised nature and design of the buildings, their configuration, size, location or otherwise. Examples are: standard properties located in particular geographical areas and remote from main business centres for operational or business reasons, that are of such an abnormal size for that district, that there would be no market for such buildings there; buildings and site engineering works related directly to the business of the owner, as it is highly unlikely that they would have a value to anyone other than a company acquiring the undertaking; and properties of such construction, arrangement, size or specification that there would be no market (for a sale to a single owner occupier for the continuation of existing use) for those buildings. Having considered the inherent and general characteristics of the property, we are of the opinion that the property is specialised properties.

As the properties in Groups I and II being valued are classified as specialised properties for private sector, our valuations of the properties are on the basis of the DRC of these properties and being subject to the adequate potential profitability of the business having due regard to the values of the total assets employed and the nature of the operation.

By using the DRC basis, the land should be assumed to having obtained planning permission for the replacement of the existing buildings and it is always necessary when valuing the land, to have regard to the manner in which the land is developed by the existing buildings and site works, and the extent to which these realise the full potential value of the land. When considering a notional replacement site, it should normally be regarded as having the same physical and location characteristics as the actual site, other than characteristics of the actual site which are not relevant, or are of no value, to the existing use. In considering the buildings, it further stipulates that the gross replacement cost of the buildings should take into consideration everything which is necessary to complete the construction from a new green field site to provide buildings as they are at the Date of Valuation which are fit for and capable of being occupied and used for the current use. These estimated costs are not for erecting buildings in the future but for providing buildings to be available for occupation at the Date of Valuation, the work having commenced at the appropriate time.

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VALUATION REPORT ON THE ENLARGED GROUP

The current status of the properties in Groups I and II regarding major approvals, consents or licences required in the PRC is set out as follows:

		Enterprise	Document/Approval
		Legal Person	State-owned Land Use Rights
		Business Licence	Certificate
Property	1	Yes	Yes
Property	2	Yes	Yes

The properties in Group III are rented by the Target Group in the PRC and have no commercial value due mainly to the short-term nature of the tenancy agreements or prohibition against assignment or sub-letting or lack of substantial profit rents.

MATTERS THAT MIGHT AFFECT THE VALUES REPORTED

ESTABLISHMENT OF TITLES

Due to the market value basis of valuation, the management of the Company was requested to provide us the necessary documents to support that the Target Group has free and uninterrupted rights to assign the properties in Groups I and II (in this instance, an absolute title) free of all encumbrances and any premiums payable have already been paid in full or outstanding procedures have been completed; and has the right to occupy properties in Group III. However, our procedures to value as agreed with the management of the Company did not required us to conduct legal due diligence on the legality and formality on the way that the Target Group obtained the properties from the relevant authorities. We agreed with the management of the Company that this should be the responsibility of the legal advisor to the management of the Company. Thus, no responsibility or liability is assumed from our part to the origin and continuity of the titles to the properties.

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VALUATION REPORT ON THE ENLARGED GROUP

In the course of valuations, we have been provided with copies of the title documents and the tenancy agreements regarding the properties. Due to inherent defects in the land registration system of China, we are unable to search the original documents from the relevant land registration departments to verify the existing titles of the properties or any material encumbrances that might be attached to the properties. As we are not legal professional and we are unable to ascertain the titles and to report any encumbrances (if any) that are registered against the properties. However, we have relied solely on the copy of the PRC legal opinion dated 24 July 2008 as provided by the management of the Company with regard to the Target Group’s titles on the properties as disclosed in the attached valuation certificate. We are given to understand that the PRC legal opinion was prepared by the Company’s PRC legal adviser, 北京市凱鵬律師事務所 (Kai Peng Law Firm). No responsibility or liability is assumed in relation to the legal opinion or copies of document.

In our valuations, we have assumed that the legally interested party in the properties has obtained all the approval and/or endorsement from the relevant authorities, and that there would have no legal impediment (especially from the regulators) for the legally interested party to continue the ownership or occupation of the properties. Should this not be the case, it will affect our conclusions in this report significantly. The readers are reminded to have their own legal due diligence work on such issues. No responsibility or liability is assumed.

INSPECTIONS AND INVESTIGATIONS OF THE PROPERTIES IN ACCORDANCE WITH VS4 OF THE HKIS STANDARDS

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We are not aware of the content of any environmental audit or other environmental investigation or soil survey which may have been carried out on the properties and which may draw attention to any contamination or the possibility of any such contamination. In undertaking our work, we have been instructed to assume that no contaminative or potentially contaminative uses have ever been carried out in the properties. We have not carried out any investigation into past or present uses, either of the properties or of any neighbouring land, to establish whether there is any contamination or potential for contamination to the properties from these uses or sites, and have therefore assumed that none exists. However, should it be established subsequently that contamination, seepage or pollution exists at the properties or on any neighbouring land, or that the premises have been or are being put to a contaminative use, this might reduce the values now reported.

SOURCES OF INFORMATION AND ITS VERIFICATION IN ACCORDANCE WITH VS5 OF THE HKIS STANDARDS

The scope of valuation has been determined by reference to the property list provided by the management of the Company. The management of the Company has confirmed to us that the Target Group has no property interests other than those disclosed in the attached summary of values and valuation certificate.

Our valuations have been made based on the advice and information made available to us. While a limited scope of general inquiries had been made to the local property market practitioners, we are not in a position to verify and ascertain the correctness of the advice given by the relevant personnel. No responsibility and liability is assumed.

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APPENDIX V

We have had no reason to doubt the truth and accuracy of the information provided to us by the management of the Company or its appointed personnel and have had no reason to suspect that any material information has been withheld.

Unless otherwise stated, all monetary amounts are in Renminbi Yuan (“RMB”).

LIMITING CONDITIONS

Our engagement did not include a land survey to verify the legal boundaries and the exact location of the properties. We need to state that we are not in the land survey profession, therefore, we are not in the position to verify or ascertain the correctness of the representation of the Group’s or the Target Group’s personnel with regard to the legal boundaries and location of the properties. No responsibility is assumed in this regard.

To the best of our knowledge, all data set forth in the attached valuation certificate are true and accurate. Although gathered from reliable sources, no warranty is made nor liability assumed for the accuracy of any data, opinions, or estimates identified as being furnished by others which have been used in formulating the attached valuation certificate.

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VALUATION REPORT ON THE ENLARGED GROUP

STATEMENTS

Our valuations have been prepared in line with the requirements contained in Chapter 5 and Practice Note No. 12 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited as well as the guidelines contained in the HKIS Standards. The valuations have been undertaken by valuers, acting as external valuers, qualified for the purpose of the valuations.

We retain a copy of this report together with the data from which it was prepared, and these data and documents will, according to the Laws of Hong Kong, keep for a period of 6 years from the date of this report and to be destroyed thereafter. We considered these records confidential, and we do not permit access to them by anyone, with the exception for law enforcement authorities or court order, without the Company’s authorisation and prior arrangement made with us. Moreover, we will add Company’s information into our client list for future reference.

We hereby certify that the fee for this service is not contingent upon our conclusion of values and we have no significant interest in the properties, the Group, the Target Group or the values reported.

Our valuations are summarised below and the valuation certificate is attached.

Yours faithfully, For and on behalf of

LCH (Asia-Pacific) Surveyors Limited

Joseph Ho Chin Choi Elsa Ng Hung Mui B.Sc. PG Dip RPS (GP) B.Sc. M.Sc. RPS (GP) Managing Director Associate Director

Contributed valuer:

Leslie Wong Tak Chiu BSc

Notes:

Mr. Joseph Ho Chin Choi has been conducting asset valuations and advisory work in Hong Kong, Macau, Taiwan, mainland China, Japan, South East Asia, Australia, Scotland, Finland, Germany, Guyana, Canada and the United States of America for various purposes since 1988. He has more than 19 years of experience in valuing real estate properties in mainland China.
Ms. Elsa Ng Hung Mui is a Registered Professional Surveyor who has been conducting valuation of real estate properties in Hong Kong since 1994 and has more than 9 years of experience in valuing properties in mainland China.
Both Mr. Joseph Ho Chin Choi and Ms. Elsa Ng Hung Mui are valuers on the List of Property Valuers for Undertaking Valuation for Incorporation or Reference in Listing Particulars and Circulars and Valuations in Connection with Takeovers and Mergers published by the HKIS.

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VALUATION REPORT ON THE ENLARGED GROUP

APPENDIX V

SUMMARY OF VALUES

Group I – Property held by the Target Group under long-term title certificate in the PRC and valued on the market value basis

			Amount of Valuations
		Interest	in its existing state
		attributable to	attributable to the
		the Target	Target Group as at
Property		Group	30 April 2008
			RMB
1.	A parcel of land located at	100%	59,530,000
	Xiaomiaohe Shuangbai County
	Chuxiong Yi Autonomous Prefecture
	Yunnan Province
	The People’s Republic of China

Sub-total:

RMB 59,530,000

Group II – Property held by the Target Group for investment purpose under long-term title certificate in the PRC and valued on the market value basis

			Amount of Valuations
		Interest	in its existing state
		attributable to	attributable to the
		the Target	Target Group as at
Property		Group	30 April 2008
			RMB
2.	A parcel of land and a hotel development	100%	42,960,000
	to be named as雙柏煌城菀賓館erecting
	thereon and located at
	Xiaomiaohe Shuangbai County
	Chuxiong Yi Autonomous Prefecture
	Yunnan Province
	The People’s Republic of China

Sub-total:

RMB 42,960,000

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VALUATION REPORT ON THE ENLARGED GROUP

Group III – Properties occupied by the Target Group under operating leases in the PRC and valued on market value basis

Property

Amount of Valuations in its existing state attributable to the Target Group as at 30 April 2008 RMB

Unit 204, Tower A2 Haitong Commercial Centre No. 11 Xi San Huan Bei Lu Haidian Distict, Beijing The People’s Republic of China

No Commercial Value

Flat 107, Unit 2 Block 10 No. 20 Baita Road Kunming City Yunnan Province The People’s Republic of China

No Commercial Value

Units 1505-1515 Jiangong Building No. 36 Dongfeng Dong Lu Kunming City Yunnan Province The People’s Republic of China

No Commercial Value

Flat 102, Unit 1 Block 1 No. 5 Chui Xiao Xiang Jiao San Qiao Kunming City Yunnan Province The People’s Republic of China

No Commercial Value

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VALUATION REPORT ON THE ENLARGED GROUP

Property

Amount of Valuations in its existing state attributable to the Target Group as at 30 April 2008 RMB

Flat 202, Unit 1 Block 2 No. 7 Wanshou Lane Shangyi Street Kunming City Yunnan Province The People’s Republic of China

No Commercial Value

Sub-total:

NIL

Grand Total:

RMB 102,490,000

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VALUATION REPORT ON THE ENLARGED GROUP

APPENDIX V

VALUATION CERTIFICATE

Group I – Property held by the Target Group under long-term title certificate in the PRC and valued on the market value basis

Property Description and tenure
1. A parcel of land The property comprises a parcel of land located at Xiaomiaohe having a site area of approximately Shuangbai County 177,844.75 sq. m. with site formation work Chuxiong Yi undergoing on the land. Autonomous Prefecture We were given to understand that a factory Yunnan Province complex will be erected on the land for The People’s Republic industrial purpose and the total gross floor of China area of the development upon completion in around end of 2008. would be approximately 25,643 sq.m. The property is subject to a right to use the land till 25 July 2057 for industrial purpose.

Amount of valuations in existing state Particulars of attributable to occupancy the Target Group as at 30 April 2008 At the time of RMB59,530,000 inspection, the subject property is (see Note 3 below) in the process of site preparation works. Due to the nature of site preparation works in progress, we did not conduct any due diligence on the current occupation status of the subject property.

Notes:

The right to possess the land is held by the State and the rights to use the land has been transferred to 雲南神宇新能源有限公司 (Yunnan Shenyu New Energy Company Limited and hereinafter referred to “Yunnan Shenyu”) via the following ways:
(i) Pursuant to a Contract for the Grant of State-owned Land Use Rights No. (2007) 10 dated 2 April 2007, and made between the Land Resource Bureau of Shuangbai County, the land use rights of a parcel of land having a site area of approximately 177,846.6667 sq.m. was transferred to Yunnan Shenyu for a term of 50 years for industrial purpose at a consideration of RMB15,000,000; and
(ii) pursuant to a State-owned Land Use Rights Certificate known as Shuang Guo Yong (2007) Zi Di 247 Hao (雙國用 (2007)字第247號) dated 4 December 2007 and issued by the People’s Government of Shuangbai County, the subject property is a transferable land and has a land use term till 25 July 2057 for industrial purpose. The site area of the subject property is approximately 177,844.75 sq. m. as recorded under the State-owned Land Use Rights Certificate.
Pursuant to a Planning Permit for Using Construction Usage Land No. Di 08-015 (建設用地規劃許可證: 地08-015) dated 13 May 2008, Yunnan Shenyu has the right to develop the land of the property with a site area of approximately 177,844.75 sq. m. for construction of its production factory.
According to our on-site inspection and the information provided by the Company, we are given to understand the site preparation works of the property are considered as construction in progress items. According to the information provided by the company, the cost of the construction in progress of these items was approximately RMB10,892,000 and estimated cost to complete the development was approximately RMB37.7 million as at the Date of Valuation. In our valuation, the construction in progress items were reported at cost spent as at the Date of Valuation.
Pursuant to a copy of the Enterprise Legal Person Business Licence dated 2 January 2008, Yunnan Shenyu is a Limited Liability Company for an operational period commencing from 1 March 2006 to 1 March 2016.
According to the legal opinion as prepared by the PRC legal adviser Kai Peng Law Firm, the following opinions are noted:
(i) Yunnan Shenyu is a limited liability company incorporated in the PRC with a valid Enterprise Legal Person Business License; and
(ii) Yunnan Shenyu has obtained the rights to use the land and obtained the rights to erect improvements thereon. It has the right to occupy, use, lease, transfer or mortgage the property.

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APPENDIX V

Group II – Property held by the Target Group for investment purpose under long-term title certificate in the PRC and valued on the market value basis

Property Description and tenure
1. A parcel of land and a The property comprises a parcel of land hotel development to having a site area of approximately 87,025 be named as 雙柏煌城 sq. m. 菀賓館 erecting thereon and located at We were given to understand that the usage Xiaomiaohe Shuangbai of the future development would be for hotel County purpose and the total gross floor area of the Chuxiong Yi development upon completion in around end Autonomous of 2008 would be approximately 7,000 sq.m. Prefecture Yunnan Province The property is subject to a right to use the The People’s Republic land till 31 August 2056 for beverage and of China hotel purposes.

Amount of valuations in existing state Particulars of attributable to occupancy the Target Group as at 30 April 2008 At the time of RMB42,960,000 inspection, the subject property is (see Note 2 below) in the process of construction works. Due to the nature of site construction in progress, we did not conduct any due diligence on the current occupation status of the subject property.

Notes:

The right to possess the land is held by the State and the rights to use the land has been transferred to 雲南神宇新能源有限公司 (Yunnan Shenyu New Energy Company Limited and hereinafter referred to “Yunnan Shenyu”) via the following ways:
(i) Pursuant to a Contract for the Grant of State-owned Land Use Rights No. (2006) 27 dated 31 August 2006, and made between the Land Resource Bureau of Shuangbai County, the land use rights of a parcel of land having a site area of approximately 88,000 sq.m. was transferred to Yunnan Shenyu for a term of 50 years for composite purpose at a consideration of RMB2,800,000; and
(ii) pursuant to a State-owned Land Use Rights Certificate known as Shuang Guo Yong (2006) Zi Di 216 Hao (雙國用 (2006)字第216號) dated 1 September 2006 and issued by the People’s Government of Shuangbai County, the subject property is a transferable land and has a land use term till 31 August 2056 for beverage and hotel purposes. The site area of the subject property is approximately 87,025 sq. m. as recorded under the State-owned Land Use Rights Certificate.
According to our on-site inspection and the information provided by the Company, we are given to understand the buildings and structures being erected on the property are considered as construction in progress items. According to the information provided by the company, the cost of the construction in progress of these items was approximately RMB14,956,000 and estimated cost to complete the development was approximately RMB36 million as at the Date of Valuation. In our valuation, the construction in progress items were reported at cost spent as at the Date of Valuation.
Pursuant to a copy of the Enterprise Legal Person Business Licence dated 2 January 2008, Yunnan Shenyu is a Limited Liability Company for an operational period commencing from 1 March 2006 to 1 March 2016.
According to the legal opinion as prepared by the PRC legal adviser, Kai Peng Law Firm, the following opinions are noted:
(i) Yunnan Shenyu is a limited liability company incorporated in the PRC with a valid Enterprise Legal Person Business License; and
(ii) Yunnan Shenyu has obtained the rights to use the land and obtained the rights to erect improvements thereon. It has the right to occupy, use, lease, transfer or mortgage the property.

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APPENDIX V

Group III – Properties occupied by the Target Group under operating leases in the PRC and valued on market value basis

Property

Description and occupancy

Amount of valuations in its existing state attributable to the Target Group as at 30 April 2008

Unit 204, Tower A2 The property comprises an office unit on Level 2 of a 4-storeyed Haitong Commercial office building which was completed in around 1998. Centre No. 11 Xi San Huan According to the information available to us, the property has a Bei Lu lettable area of approximately 90 sq.m. Haidian Distict Beijing The property is rented to Beijing Shenhao New Energy Technology The People’s Republic Limited for a term of 5 years commencing from 1 March 2007 to of China 15 April 2012 at an annual rental of RMB 105,120 inclusive of management fee and winter heater charge.

No Commercial Value

The property is currently occupied by Beijing Shenhao New Energy Technology Limited for office purpose.

Notes:

The lessor of the property is 北京能通租賃公司 (translated as Beijing Nengtong Leasing Company).
The lessee of the property is 北京神浩新能源科技有限公司 (translated as Beijing Shenhao New Energy Technology Company Limited).

Property

Description and occupancy

Amount of valuations in its existing state attributable to the Target Group as at 30 April 2008

Flat 107, Unit 2 The property comprises a unit on the Level 1 of a 6-storeyed Block 10 building which was completed in around 1977. No. 20 Baita Road According to the information available to us, the property has an Kunming City gross floor area of approximately 65 sq.m for residential purpose. Yunnan Province The People’s The property is rented to Yunnan Shenyu New Energy Company Republic of China Limited for a term of one year commencing from 15 December 2007 to 14 December 2008 at a monthly rental of RMB900, payable semi-annually.

No Commercial Value

The property is currently occupied by the Yunnan Shenyu New Energy Company Limited for residential purpose.

Notes:

The lessor of the property is 李林 (translated as Li Lin).
The lessee of the property is Yunnan Shenyu New Energy Company Limited

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APPENDIX V

Amount of valuations in its existing state attributable to the Target Group as at 30 April 2008

Property Description and occupancy the Target Group as at 30 April 2008 5. Units 1505-1515 The property comprises 11 units on Level 15 of a mutli-storeyed No Commercial Value Jiangong Building office building which was completed in around 1997. No. 36 Dongfeng Dong Lu According to the information available to us, the property has a Kunming City gross floor area of approximately 592.57 sq.m for office purpose Yunnan Province plus 110 sq.m. for storage purpose. The People’s Republic of China The property is rented to Yunnan Shenyu New Energy Company Limited for a term of 3 years commencing from 15 June 2006 to 14 June 2009 at a monthly rental of RMB 15,150.00. The property is currently occupied by Yunnan Shenyu New Energy Company Limited for office and storage purposes.

Notes:

The lessor of the property is 黃文雄 (translated as Huang Wen Xiong).
The lessee of the property is Yunnan Shenyu New Energy Company Limited.

Property Description and occupancy 6. Flat 102, Unit 1 The property comprises a unit on the Level 1 of a 8-storeyed Block 1 composite building which was completed in around 1994. No. 5 Chui Xiao Xiang Jiao San Qiao According to the information available to us, the property has an Kunming City gross floor area of approximately 65.95 sq.m for residential Yunnan Province purpose. The People’s Republic of China The property is rented to Yunnan Shenyu New Energy Company Limited for a term of one year commencing from 1 June 2008 to 31 May 2009 at a monthly rental of RMB 1,600. The property is currently occupied by Yunnan Shenyu New Energy Company Limited for residential purpose.

Amount of valuations in its existing state attributable to the Target Group as at 30 April 2008

No Commercial Value

Notes:

The lessor of the property is 鄭雲山 (translated as Zheng Yun Shan).
The lessee of the property is Yunnan Shenyu New Energy Company Limited.

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APPENDIX V

Description and occupancy

Property

Flat 202, Unit 1 The property comprises a unit on the Level 2 of a 6-storeyed Block 2 building which was completed in around 1990. No. 7 Wanshou Lane Shangyi Street According to the information available to us, the property has an Kunming City gross floor area of approximately 56 sq.m. for residential purpose. Yunnan Province The People’s Republic The property is rented to Yunnan Shenyu New Energy Company of China Limited for a term of 1 years commencing from 1 September 2007 to 31 August 2008 at a monthly rental of RMB700, payable annually.

Amount of valuations in its existing state attributable to the Target Group as at 30 April 2008

No Commercial Value

The property is currently occupied by the Target Group for residential purpose.

Notes:

The lessor of the property is 鄒琨 (translated as Zou Kun).
The lessee of the property is Yunnan Shenyu New Energy Company Limited.

343

GENERAL INFORMATION

APPENDIX VI

1. RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Listing Rules for all the purpose of giving information with regard to the Company. The Directors collectively and individually accept full responsibility for the accuracy of the information contained in this circular and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief, opinions expressed in this circular have been arrived at after due and careful consideration and there are no other facts the omission of which would make any statement in this circular misleading.

2. SHARE CAPITAL

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

Authorised share capital: 20,000,000,000 Shares Issued and fully paid-up share capital: 5,551,625,600 Shares Conversion Shares to be issued upon the exercise of the Convertible Notes in full: 1,120,000,000 Shares 6,671,625,600	HK$ 2,000,000,000

	555,162,560 112,000,000
	667,162,560

All of the Shares in issue rank pari passu in all aspects, including all rights as to dividend, voting and interest in capital, among themselves and with all other Shares in issue on the date of issue.

The Conversion Shares shall rank pari passu with all the Shares in issue in all aspects, including all rights as to dividend, voting and interest in capital, among themselves and with all other Shares in issue on the date of issue.

344

GENERAL INFORMATION

APPENDIX VI

3. DIRECTORS INFORMATION

Executive directors and non-executive director

Mr. Ng Leung Ho , aged 56, is the Chairman and the founder of the Group. Mr. Ng is also the chairman and an executive director of Wonderful World Holdings Limited, the shares of which are listed on the Main Board of the Stock Exchange. He held directorship in various subsidiaries of the Company. He is also the chairman of Zhongke Nanotech Engineering Center Co., Ltd., the jointly controlled entity of the Company engaged in the business of Nano technology applications. Mr. Ng has more than 36 years of experience in the design, manufacture, and trading of men’s suits in Hong Kong and the PRC. Mr. Ng is currently a JP and a member of the Chinese People’s Political Consultative Conference and is a visiting professor at the Fujian Teachers University. Mr. Ng is responsible for the corporate strategic planning and formulation of corporate policies for the Group. In addition, Mr. Ng oversees the Group’s product development and industrialisation efforts in various areas of Nano technology, made possible through the application of research results obtained by of Zhongke Nanotech Engineering Center Co., Ltd.

Ms. Cao Chuan , aged 50, BEng, Doctoral Degree in Biology, deputy editor. She is an executive Director of the Company. She also serves as the deputy chairman and the chief executive officer of the Company. She is currently a postgraduate instructor for the biology-botany joint research project of Chinese Science Academy. She has accumulated more than 21 years of working experience in the field of scientific research, and was a freelance copywriter and a chief editor of a scientific journal. Various patents have been granted for her invention. She has been involved in the Sino-US scientific cultural exchange in the United State of America. She was also the chairperson of Beijing Senwang Technology Company Limited, a major supported entity located in the Beijing Zhongguancun scientific industrialisation plant and engaged in the field of genetic transcription for plants. She is well-acquainted with the operation, market development and financial management of Chinese forestry enterprise. She has comprehensive knowledge in plant fostering and the coordination and management of scientific experimental project, and also has an agile sense on the induction of new specie and purification. Ms. Cao is the general manager of Beijing WFC, a subsidiary of the Company engaged in the business in tree plantation and management, manufacture and distribution of forestry products. On 25 May 2007 Ms. Cao was appointed the chief executive officer and deputy chairman of the Company.

Ms. Lee Ming Hin , aged 52, is an executive Director of the Company. Ms. Lee has served the Group for more than 16 years and is the director of various subsidiaries of the Company. Prior to joining the Group, Ms. Lee had more than 14 years of experience in raw material procurement, sales and marketing in the apparel industry. Ms. Lee currently oversees the general administration, finance and personnel functions.

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GENERAL INFORMATION

Mr. Hu Xiaoming , aged 43, is an executive Director and joined the Group in 2004. He is responsible for overseeing the industrialisation of research results obtained from the Group’s interest in Nano-technology research. Mr. Hu obtained his Doctorate degree in Polymer Chemistry and Physics from the Department of Organic Silane, Institute of Chemistry, Chinese Academy of Science and further his post-doctoral studies in Chemistry in Tsing Hua University. Mr. Hu has worked as an associate researcher of the Institute of Chemistry, Chinese Academy of Science, and currently held the post of deputy general manager in Zhongke Engineering Center Co., Ltd., a joint venture company established by a subsidiary of the Company and the Chinese Academy of Science.

Mr. Cheung Wai Tak , aged 54, was appointed as an executive Director on 2 October 2007. Mr. Cheung has more than 20 years of working experience in the investment banking and accounting field. He is a Certified Public Accountant in the United States of America and a member of the Hong Kong Institute of Certified Public Accountants. He graduated with an MBA degree from the University of California at Berkeley, the United States of America in 1981. Mr. Cheung’s experience in the forestry industry dated back to 1994, when he was the initial management team of Sino Forest Corp, which is currently listed on the Toronto Stock Exchange.

Mr. John MacMillan Duncanson , aged 57, was appointed as a non-executive Director on 2 October 2007. Mr. Duncanson has worked for the past 32 years in the forest sector and more recently, in the investment industry as an analyst and a corporate banker. He is a registered professional forester, an ISO 10000 auditor and a financial analyst. He obtained his Bachelor of Science in Forestry degree from the University of Toronto, Canada in 1974. Mr. Duncanson is currently working as the President of Duncanson Investment Research Inc – Toronto (a consulting firm which specializes in independent market and resource analysis).

Independent non-executive directors

Mr. Lo Cheung Kin , aged 60, graduated from the Fujian Teachers University in 1975. Mr. Lo is a director of the companies under the Victorfield Group in Hong Kong, a private investment group engaged in property development, management and investment, construction, trading and securities business in Hong Kong and the PRC. Mr. Lo has more than 27 years of experience in corporate management, the tourism and hospitality industry, and property investment, development and management in the PRC. Mr. Lo is also an executive director of Buildmore International Limited, a company listed on the Stock Exchange.

Mr. Zou Zi Ping , aged 53, has extensive experience in the hotel industry in the PRC. He is currently the general manager of the Fuzhou Lakeside Hotel and the managing director of the Fuzhou Lakeside Hotel Management Company. Mr. Zou is also a visiting assistant professor of the Fujian Teachers University and Fujian Minjiang University.

Mr. Zhu Jian Hong , aged 42, is a member of the Chinese Institute of Certified Public Accountants. Mr. Zhu graduated from the Accountancy Department of the Shanghai University of Finance and Economics and has obtained over 18 years of experience in accountancy and financial management, including working as a lecturer of accountancy in Jimei Finance & Economics College in Xiamen Special Economics Zone and statutory auditor of the financial statements of a number of companies. Mr Zhu was also a member of the Finance Bureau of Xianyou County, Fujian Province, the PRC, where he held the responsibility of administering the accountancy and finance affairs at provisional levels.

346

GENERAL INFORMATION

APPENDIX VI

4. AUDIT COMMITTEE

The Company has established an audit committee in compliance with the Listing Rules. The audit committee of the Company presently comprises the three independent non-executive Directors, namely, Mr. Lo Cheung Kin, Mr. Zou Zi Ping and Mr. Zhu Jian Hong, whose information can be referred to p.346 of the circular.

5. DISCLOSURE OF INTERESTS

(a) Directors and chief executive’s interests or short position in the shares, underlying shares and debentures of the Company and its associated corporations

As at the Latest Practicable Date, the interests and short positions of the Directors or chief executive of the Company in the shares, underlying shares and debentures of the Company or any associated corporation (within the meaning of Part XV of the SFO) which is required to be (i) 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 the Directors or chief executive of the Company was taken or deemed to have under such provisions of the SFO); or (ii) entered in the register kept by the Company pursuant to section 352 of the SFO; or (iii) notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Companies were as follows:

					Total		Total
					interests		interests
					(excluding		(including
					underlying		underlying
					Shares of	Interests	Shares of
					the options)	in	the options)
					as % of	underlying	as % of
					the issued	Shares	issued
	Personal	Family	Corporate	Total	share	(share	share
	interests	interests	interests	interests	capital	options)	capital	Note
					(approximate)		(approximate)
Mr. Ng Leung Ho	8,000,000	–	960,000,000	968,000,000	17.44%	6,000,000	17.54%	1, 2
Ms. Cao Chuan	–	–	–	–	0%	10,000,000	0.18%	3
Ms. Lee Ming Hin	4,000,000	–	–	4,000,000	0.07%	6,000,000	0.18%	3
Mr. Hu Xiaoming	–	–	–	–	0%	3,000,000	0.05%	3
Mr. Cheung Wai Tak	–	–	–	–	0%	6,000,000	0.11%	4
Mr. John MacMillan
Duncanson	125,000	–	–	125,000	0.01%	3,000,000	0.06%	4
Mr. Zou Zi Ping	1,500,000	–	–	1,500,000	0.03%	–	0.03%	3
Mr. Lo Cheung Kin	300,000	–	–	300,000	0.01%	900,000	0.02%	3
Mr. Zhu Jian Hong	1,500,000	–	–	1,500,000	0.03%	–	0.03%	3

347

GENERAL INFORMATION

APPENDIX VI

Notes:

The interests in 960,000,000 Shares attributable to Mr. Ng Leung Ho was held by Golden Prince Group Limited, a company incorporated in the British Virgin Islands. The entire issued share capital of Golden Prince Group Limited is directly owned by Mr. Ng Leung Ho.
The interests in the underlying Shares attributable to Mr. Ng Leung Ho represent the share options to subscribe for 6,000,000 new Shares in the Company, exercisable at a price of HK$0.98 per Share and granted under the Company’s existing share option scheme, as adopted by the Shareholders in the Company’s annual general meeting held on 23 November 2001.
The interests in the underlying Shares attributable to these directors represent the share options to subscribe for new Shares in the Company, exercisable at a price of HK$0.98 per Share and granted under the Company’s existing share option scheme, as adopted by the Shareholders in the Company’s annual general meeting held on 23 November 2001.
The interests in the underlying Shares attributable to these directors represent the share options to subscribe for new Shares in the Company, exercisable at a price of HK$2.61 per Share and granted under the Company’s existing share option scheme, as adopted by the Shareholders in the Company’s annual general meeting held on 23 November 2001.

Save as disclosed above, none of the Directors and chief executive of the Company or their associates had any interest or short position in the shares, underlying shares or debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) as recorded in the register required to be maintained under section 352 of the SFO or as otherwise notified to the Company or the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Companies.

(b) Persons who have an interest or short position in the shares or underlying shares of the Company which is discloseable under Divisions 2 and 3 of Part XV of the SFO and substantial shareholders of the Company

As at the Latest Practicable Date, so far as is known to the Directors or chief executive of the Company, the following persons (other than the Directors and chief executive of the Company) has an interest or short position in the Shares and underlying Shares which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO or were required to be notified to the Company and the Stock Exchange pursuant to section 336 of the SFO, or, who is, directly or indirectly, interested in 10 per cent. or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any members of the Enlarged Group:

	Class of		Number	Percentage
Name	Shares	Capacity	of shares	of holding
				(approximate)
Golden Prince Group	Ordinary	Beneficial owner	960,000,000_(Note 1)_	17.29%
Limited
Atlantis Investment	Ordinary	Investment manager	536,000,000	9.65%
Management Ltd
Atlantis Investment	Underlying	Investment manager	833,333,333	15.01%
Management Ltd	Shares

348

GENERAL INFORMATION

APPENDIX VI

Notes:

The entire issued share capital of Golden Prince Group Limited is beneficially owned by Mr. Ng Leung Ho. Mr. Ng Leung Ho is the chairman and an executive director of the Company and also the sole director of Golden Prince Group Limited.

Save as disclosed above, as at the Latest Practicable Date, the register of substantial shareholders maintained under Section 336 of the SFO showed that the Company had not been notified of any substantial shareholders’ interest and short positions, being 5% or more of the Company’s issued share capital.

6. ADDITIONAL DISCLOSURE OF INTEREST

(1) As at the Latest Practicable Date, none of the Directors was materially interested in contract or arrangement subsisting which is significant in relation to the business of the EnlargedGroup.
(2) As at the Latest Practicable Date, none of the Director(s) or their respective associates was interested in competing businesses which are required to be disclosed pursuant to Rule 8.10 of the Listing Rules.
(3) In March, 2008, the Company has disposed of the entire issue share capital of Holt Hire Holdings Limited, a company incorporated in the British Virgin Islands with limited liability and a wholly-owned subsidiary of the Company, to Mr. Ng (the Chairman, an executive Director and a substantial Shareholder of the Company). The details of the disposal has been disclosed in the Company's announcement and circular of the Company dated 17 January 2008 and 5 February 2008 respectively. The disposal was completed on 25 March 2008. Save as disclosed, none of the Directors had any interest, either direct or indirect, in any assets which have been, since the date to which the latest published audited accounts of the Group were made up, acquired or disposed of by or leased to or are proposed to be acquired or disposed of by or leased to any member of the Enlarged Group.

7. MATERIAL ADVERSE CHANGE

As at the Latest Practicable Date, the Directors confirm that there was no material adverse change in the financial or trading position or outlook of the Group since 31 March 2007, being the date to which the latest published audited consolidated financial statements of the Group were made up.

8. DIRECTORS’ SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors entered or propose to enter into any service contract with any of the members of the Enlarged Group which is not expiring or determinable by the Company within one year without payment of compensation other than statutory compensation.

349

GENERAL INFORMATION

APPENDIX VI

9. EXPERTS’ QUALIFICATIONS AND CONSENTS

(a) The following are the qualifications of the experts who have provided their advice contained in this circular:

Name	Qualification
Kingston Corporate Finance Limited	a licensed corporation to carry on business
(“Kingston Corporate Finance”)	in type 6 (advising on corporate finance)
	regulated activity under the SFO
LCH (Asia-Pacific) Surveyors	Chartered Surveyors
Limited (“LCH”)
PÖyry Forest Industry Consulting	Independent Forestry Consultants
(“PÖyry”)
Shu Lun Pan Horwath Hong Kong	CPA
CPA Limited (“Horwath”)

(b) Each of Kingston Corporate Finance, LCH, PÖyry and Horwath has given and has not withdrawn its written consent to the issue of this circular with the inclusion of its letter and the reference to its name in the form and context in which it appears.
(c) As at the Latest Practicable Date, each of Kingston Corporate Finance, LCH, PÖyry and Horwath was not interested beneficially or otherwise in shares, options, warrants, derivatives and securities convertible into shares of any member of the Enlarged Group and did not have any right, whether legally enforceable or not, or option to subscribe for or to nominate persons to subscribe for any shares or shares in any of the members of the Enlarged Group nor did it have any interest, either direct or indirect, in any assets which have been, since the date to which the latest published audited accounts of the Group were made up, acquired or disposed of by or leased to or are proposed to be acquired or disposed of by or leased to any member of the Enlarged Group.

10. LITIGATION

As at the Latest Practicable Date, none of the members of the Enlarged Group was engaged in any litigation or arbitration of material importance and no litigation or claim of material importance was known to the Directors to be pending or threatened against any member of the Enlarged Group.

350

GENERAL INFORMATION

APPENDIX VI

11. MATERIAL CONTRACTS

Save as disclosed below, the Enlarged Group has not entered into any material contracts (not being contracts entered into in the ordinary course of business) within the two years immediately preceding the date of this circular which are or may be material:

i. the agreement dated 16 October 2006 entered into by Strong Lead Investment Limited (“Strong Lead”), a wholly owned subsidiary of the Company and FeiFei SenWang Resource Group Co., Ltd. (“FeiFei”) in relation to the acquisition by Strong Lead from FeiFei, a 30% of equity interest in Beijing WFC for a total consideration of HK$300,000,000;
ii. the placing agreement dated 16 April 2007 entered into by the Company and Kingston Securities Limited in relation to the placing of 500,000,000 warrants and its termination agreement dated 25 April 2007;
iii. a conditional subscription agreement dated 16 January 2007 entered into by the Company and Golden Prince Group Limited in relation to the subscription for 400,000,000 new Shares;
iv. A placing and subscription agreement dated 3 September 2007 entered into by the Company, Golden Prince Group Limited and Morgan Stanley & Co International Plc for the subscription and placing of 539,560,000 Shares of the Company;
v. the sale and purchase agreement dated 16 January 2008 in relation to the sale and purchase of the entire issued share capital of Holt Hire Holdings Limited to Mr. Ng.
vi. the Acquisition Agreement (including the supplemental agreements dated 23 November 2007, 17 December 2007 and 14 June 2008).

12. MISCELLANEOUS

(a) Having made reasonable enquiries and to the best knowledge of the Directors, as at the Latest Practicable Date, there was (i) no voting trust or other agreement or arrangement or understanding entered into by or binding upon any Shareholders; and (ii) no obligation or entitlement of any Shareholders, whereby he/she/it has or may have temporarily or permanently passed control over the exercise of the voting rights in respect of his/her/its Shares to a third party, either generally or on a case-by-case basis.
(b) Having made reasonable enquiries and to the best knowledge of the Directors, as at the Latest Practicable Date, there was no discrepancy between any Shareholder's beneficial shareholding interest in the Company as disclosed in this circular and the number of Shares in respect of which it will control or will be entitled to exercise control over the voting rights at the SGM.

351

GENERAL INFORMATION

APPENDIX VI

(c) The company secretary and the qualified accountant of the Company is Mr. Lau Che Yue, Stephen. Mr. Lau obtained his Master of Business (Information Technology) from RMIT University, Australia and Master of Business Administration from Heriot-Watt University, United Kingdom. He is a fellow of the Association of Chartered Certified Accountants and an associate of the Hong Kong Institute of Certified Public Accountants.
(d) The registered office of the Company is situated at Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda.
(e) The head office and principal place of business of the Company in Hong Kong is Units 3307–11, 33rd Floor, West Tower, Shun Tak Centre, 168-200 Connaught Road Central, Hong Kong.
(f) The Company’s Hong Kong branch share registrar is Tricor Tengis Limited of 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong.
(g) The English text of this circular and the accompanying form of proxy shall prevail over their respective Chinese text, in the case of inconsistency.

13. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection during normal business hours on any weekday (except Saturdays and public holidays) at the head office and principal place of business of the Company in Hong Kong at Units 3307–11, 33rd Floor, West Tower, Shun Tak Centre, 168-200 Connaught Road Central, Hong Kong, from the date of this circular, up to and including the date of the SGM:

(a) the memorandum of association and bye-laws of the Company;
(b) the material contracts referred to in the section headed “Material Contracts” in this appendix;
(c) the written consents referred to under the section headed “Experts and Consents” in this appendix;
(d) the annual reports of the Company for years ended 30th June 2006 and 31 March 2007 respectively;
(e) the accountants’ report from Shu Lun Pan Horwath on unaudited pro forma financial information of the Enlarged Group, the text of which is set out in Appendix IV to this circular;

352

GENERAL INFORMATION

APPENDIX VI

(f) the summary valuation reports on the assets proposed to be acquired by the Group, PÖyry Forest Industry Consulting and property interests of the Group from LCH (Asia-Pacific) Surveyors Limited, the text of which is set in Appendix IV and V respectively to this circular;
(g) the Acquisition Agreement (including the supplemental agreements dated 23 November 2007, 17 December 2007 and 14 June 2008);
(h) the PRC legal opinions issued by Kai Peng Law Firm（北京市凱鵬律師事務所）; and
(i) this circular.

353

NOTICE OF SGM

CHINA GRAND FORESTRY GREEN RESOURCES GROUP LIMITED 中國林大綠色資源集團有限公司

(Formerly known as “China Grand Forestry Resources Group Limited 中國林大資源集團有限公司[*] ”) (incorporated in Bermuda with limited liability)

(Stock code: 00910)

NOTICE OF SPECIAL GENERAL MEETING

NOTICE IS HEREBY GIVEN that the special general meeting (the “ SGM ”) of China Grand Forestry Green Resources Group Limited (the “ Company ”) will be held at Units 3307-11, 33/F., West Tower, Shun Tak Centre, 168-200 Connaught Road Central, Sheung Wan, Hong Kong on Tuesday, 19 August 2008 at 11:00 a.m. for the purpose of considering and, if thought fit, passing with or without amendment, the following ordinary resolution of the Company:

ORDINARY RESOLUTION

“ THAT
(A) the acquisition agreement (the “ Acquisition Agreement ”) dated 5 November 2007 (with the supplemental acquisition agreements dated 23 November 2007, 17 December 2007 and 14 June 2008 (together the “ Supplemental Acquisition Agreements ”)) entered into between the Company as purchaser and Forcemade Investments Limited as vendor (a copy of the Acquisition Agreement and the Supplemental Acquisition Agreements which superseded certain terms and conditions of the Acquisition Agreement have been produced to the meeting and marked “A” and “B” respectively and initialed by the chairman of the meeting for the purpose of identification) in relation to, among other matters, the acquisition of the entire issued share capital of Shenyu New Energy Group Limited (the “ Acquisition ”) and the transactions contemplated thereunder be and are hereby approved, ratified and confirmed;
(B) the terms and conditions of the Convertible Note (as defined hereinafter) to be executed by the Company and constituting the Convertible Note be and are hereby approved and subject to and conditional upon the Company obtaining all consents and approvals (if required) from The Stock Exchange of Hong Kong Limited (the “ Stock Exchange ”) for the issue of the Convertible Note, the issue of the convertible note in a maximum aggregate principal amount of HK$2,800,000,000 (the “ Convertible Note ”), the principal terms and conditions of which are set out or referred to in the circular of the Company dated 24 July 2008 (a copy of which has been produced to the meeting and marked “C” and initialed by the chairman of the meeting for the purpose of identification), pursuant to the terms and conditions of the Acquisition Agreement be and is hereby approved;
For identification purpose only

354

NOTICE OF SGM

(C) subject to and conditional upon (a) the granting of the Stock Exchange of the listing of, and permission to deal in, the Conversion Shares (as defined below); and (b) the passing of resolution numbered (B) above, the issue and allotment of such number of shares of HK$0.10 each in the share capital of the Company which may fall to be issued upon the exercise of the conversion rights attaching to the Convertible Note (the “ Conversion Shares ”) be and is hereby approved pursuant to and in accordance with the terms and conditions of the Convertible Note under the Special Mandate and the directors of the Company (the “ Directors ”) be and are hereby authorised to do all such acts and things as they consider necessary or expedient in connection with the issue of the Conversion Shares;
(D) the Directors be and are hereby authorised to execute such all other documents, do all other acts and things and take such action as may in the opinion of the Directors be necessary, desirable or expedient to implement and give effect to the Acquisition Agreement and any other transactions contemplated under the Acquisition Agreement.”

By Order of the Board China Grand Forestry Green Resources Group Limited Ng Leung Ho Chairman

Hong Kong, 24 July 2008

Registered Office: Head office and principal Clarendon House place of business in Hong Kong: 2 Church Street Unit 3307-11 Hamilton HM 11 33rd Floor, West Tower Bermuda Shun Tak Centre 168-200 Connaught Road Central Hong Kong

Notes:

A member entitled to attend and vote at the meeting convened by the above notice is entitled to appoint one or more proxies to attend and, subject to the provisions of the articles of association of the Company, to vote on his/her behalf. A proxy need not be a member of the Company.
A form of proxy for use at the SGM is enclosed with the circular of the Company dated 24 July 2008. In order to be valid, the form of proxy must be duly completed and signed in accordance with the instructions printed thereon and deposited together with a power of attorney or other authority, if any, under which it is signed, or a certified copy of such power or authority, at the branch share registrar and transfer office of the Company in Hong Kong, Tricor Tengis Limited, at 26/F., Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong not less than 48 hours before the time appointed for holding the SGM or any adjournment thereof. Completion and return of a form of proxy will not preclude a member from attending and voting in person at the SGM or any adjournment thereof, should you so wish.
In the case of joint holders of Shares, any one of such holders may vote at the SGM, either personally or by proxy, in respect of such Share as if he/she/it was solely entitled thereto, but if more than one of such joint holders are present at the SGM personally or by proxy, that one of the said persons so present whose name stands first on the register of members of the Company in respect of such Shares shall alone be entitled to vote in respect thereof.

355

AI assistant

C&D Property Management Group Co., Ltd — Proxy Solicitation & Information Statement 2008

50406_rns_2008-07-23_528b1d4d-b025-4fe0-814c-18203c998d5a.pdf

CHINA GRAND FORESTRY GREEN RESOURCES GROUP LIMITED 中國林大綠色資源集團有限公司

VERY SUBSTANTIAL ACQUISITION RELATING TO BIOMASS ENERGY BUSINESS

AND

NOTICE OF SPECIAL GENERAL MEETING

Financial Adviser to China Grand Forestry Green Resources Group Limited

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

CHINA GRAND FORESTRY GREEN RESOURCES GROUP LIMITED 中國林大綠色資源集團有限公司

VERY SUBSTANTIAL ACQUISITION RELATING TO BIOMASS ENERGY BUSINESS

AND

NOTICE OF SPECIAL GENERAL MEETING

INTRODUCTION

LETTER FROM THE BOARD

THE ACQUISITION

The Acquisition Agreement

Parties:

Assets to be acquired

LETTER FROM THE BOARD

Conditions

LETTER FROM THE BOARD

Consideration

Calculation of the Consideration

Manner of Payment of the Consideration

LETTER FROM THE BOARD

The Convertible Notes

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Valuation on the Shenyu New Energy Group

LETTER FROM THE BOARD

LETTER FROM THE BOARD

INFORMATION ON YUNNAN SHENYU NEW ENERGY AND SHUANGBAI SHENYU

Yunnan Shenyu New Energy

Shuangbai Shenyu

Jatropha Curcas L

Current Development Conditions and Schemes of Shenyu New Energy Group

LETTER FROM THE BOARD

Financial information of Shenyu New Energy Group

LETTER FROM THE BOARD

Business transactions between Shenyu New Energy Group and the Group

1) Acquisition of leasehold, interest in a forest land

LETTER FROM THE BOARD

2) Co-operative rental arrangement of forest land

MANAGEMENT DISCUSSION AND ANALYSIS OF THE RESULTS OF THE GROUP

1) For the year ended 30 June 2005

FINANCIAL HIGHLIGHTS

LETTER FROM THE BOARD

BUSINESS AND OPERATIONAL REVIEW

Selling and distribution expenses

Share of results of jointly-controlled entities

Other operating expenses

LETTER FROM THE BOARD

LIQUIDITY AND FINANCIAL RESOURCES

LETTER FROM THE BOARD

CAPITAL STRUCTURE, GEARING LEVERAGE AND USE OF PROCEEDS

EXPOSURE TO FLUCTUATION IN EXCHANGE RATE

MATERIAL ACQUISITIONS AND SIGNIFICANT INVESTMENTS HELD

LETTER FROM THE BOARD

PLEDGE OF ASSETS

CONTINGENT LIABILITIES

CAPITAL COMMITMENTS

EMPLOYEE

PROPOSED INVESTMENT IN FORESTRY BUSINESS

LETTER FROM THE BOARD

2) For the year ended 30 June 2006

FINANCIAL HIGHLIGHTS

DIVIDEND

BUSINESS AND OPERATIONAL REVIEW

The Ecological Forestry Business Segment

LETTER FROM THE BOARD

The Garment Business Segment

LETTER FROM THE BOARD

Investment in Nano-technology Business

Selling and distribution expenses

Other operating expenses

C&D Property Management Group Co., Ltd Proxy Solicitation & Information Statement 2008