THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

If you have sold or transferred all your shares in China Gas Holdings Limited (the “ Company ”), you should at once hand this circular and the accompanying form of proxy to the purchaser or the transferee or to the bank, licensed securities dealer or other agent through whom the sale or transfer was effected for transmission to the purchaser or the transferee.

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

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CHINA GAS HOLDINGS LIMITED 中國燃氣控股有限公司[*]

(Incorporated in Bermuda with limited liability) (Stock Code: 384)

MAJOR AND CONNECTED TRANSACTIONS:

(1) ACQUISITION OF THE ENTIRE ISSUED SHARE CAPITAL OF GREAT SUN INVESTMENTS LTD.; AND

(2) ACQUISITION OF EQUITY INTERESTS IN HANCHUAN JIAXU GAS CO. LTD., YUMENG JIAXU GAS CO. LTD., YINGCHENG JIAXU GAS CO. LTD. AND XIAOGAN JIAXU GAS CO. LTD.

Independent financial adviser to the independent board committee and independent shareholders of the Company

Grand Vinco Capital Limited

A notice convening a special general meeting of the Company to be held at 10:00 a.m. on 12 October 2004 at 16th Floor, AXA Centre, No. 151 Gloucester Road, Wanchai, Hong Kong is set out on pages 169 to 171 of this circular. Whether or not you are able to attend the special general meeting, you are requested to complete the accompanying form of proxy, in accordance with the instructions printed thereon and deposit the same at the offices of the Company’s branch share registrar in Hong Kong, Computershare Hong Kong Investor Services Limited at 46th Floor, Hopewell Centre, 183 Queen’s Road East, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for the holding of the special general meeting or any adjournment thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the special general meeting or any adjournment thereof should you so wish.

A letter from the independent board committee of the Company containing its recommendation to the independent shareholders of the Company is set out on page 25 of this circular. A letter of advice from the independent financial adviser to the independent board committee and the independent shareholders of the Company is set out on pages 26 to 34 of this circular.

24 September 2004

* For identification purpose only

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
The Great Sun Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	8
The JV Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	10
Source of funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	13
Shareholding structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	14
Information on Great Sun . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	15
Information on the Five Joint Ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	15
Gas projects operated by the Five Joint Ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	19
Reasons for the Great Sun Acquisition and the JV Acquisition . . . . . . . . . . . . . . . . . . . . . . . .	20
Financial effects of the Great Sun Acquisition and the JV Acquisition
on the Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	21
Financial and trading prospects of the Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	21
Listing Rules implication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	22
SGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	22
Procedures for demanding a poll at general meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	23
Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	23
Further information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	24
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	25
Letter from Grand Vinco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	26

		Page
Appendix I	– Financial information on the Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	35
Appendix II	– Accountants’ report on Great Sun. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	102
Appendix III	– Accountants’ report on Hanchuan Jiaxu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	109
Appendix IV	– Accountants’ report on Xiaogan Jiaxu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	119
Appendix V	– Accountants’ report on Yingcheng Jiaxu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	131
Appendix VI	– Accountants’ report on Yumeng Jiaxu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	141
Appendix VII	– Financial information on the Enlarged Group . . . . . . . . . . . . . . . . . . . . . . . . . .	151
Appendix VIII – General information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		156
Notice of the SGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		169

ii -

DEFINITIONS

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

“associates”	has the meaning ascribed to this term under the Listing
	Rules
“Beijing YLC”	北京裕隆倉燃氣技術有限公司(Beijing Yu Long Cang
	Gas Technology Co. Ltd.), a company established in the
	PRC with limited liability and the vendor under the Share
	Transfer Agreements
“Board”	the board of Directors
“Clever Decision”	Clever Decision Enterprises Limited, a company
	incorporated in the British Virgin Islands and a wholly
	owned subsidiary of the Company
“Clever Decision	the acquisition of 70% equity interests in Clever Decision
Acquisition”	by the Company from Profit View International Limited,
	further details of which are set out in the announcement of
	the Company dated 11 February 2004 and the circular of
	the Company dated 23 February 2004
“Company”	China Gas Holdings Limited, a company incorporated in
	Bermuda with limited liability and the issued Shares of
	which are listed on the main board of the Stock Exchange
“connected person”	has the meaning ascribed to this term under the Listing
	Rules
“Directors”	directors of the Company
“Enlarged Group”	the Group as enlarged immediately after completion of the
	Great Sun Acquisition and the JV Acquisition
“Famestar”	Famestar Investment Limited, a company incorporated in
	the British Virgin Islands and the vendor under the Great
	Sun Agreement
“Five Joint Ventures”	together, Hanchuan Jiaxu, Xiaogan Jiaxu, Yingcheng Jiaxu,
	Yumeng Jiaxu and Xiaogan Zhenrong

DEFINITIONS

“Grand Vinco” Grand Vinco Capital Limited, a licensed corporation to carry out type 1 (dealing in securities) and type 6 (advising on corporate finance) regulated activities under the SFO, the independent financial adviser to the Independent Board Committee and the Independent Shareholders
“Great Sun” Great Sun Investments Ltd. (嘉旭投資有限公司 ), a company incorporated in the British Virgin Islands
“Great Sun Acquisition”
the acquisition by the Company of the entire issued share capital of Great Sun and the entire shareholder’s loan owing by Great Sun to Famestar, from Famestar subject to and upon the terms and conditions of the Great Sun Agreement
“Great Sun Agreement” the sale and purchase agreement dated 19 August 2004 and entered into between Famestar and the Company in relation to, among other things, the sale and purchase of the entire issued share capital of Great Sun
“Group” the Company and its subsidiaries
“Hanchuan Agreement”
the share transfer agreement dated 19 August 2004 and entered into between Beijing YLC as vendor and Shenzhen Natural Gas as purchaser in relation to the acquisition of 10% equity interests in Hanchuan Jiaxu
“Hanchuan Jiaxu” 漢川嘉旭天然氣有限公司 (Hanchuan Jiaxu Gas Co. Ltd.), a Chinese-foreign equity joint venture established in the PRC, which is currently a 65% owned subsidiary of the Company and will become a wholly foreign owned enterprise and a wholly owned subsidiary of the Company upon completion of the Hanchuan Agreement and the Great Sun Agreement
“Hong Kong”

the Hong Kong Special Administrative Region of the PRC

“Huainan China Gas”
淮南中燃城市燃氣發展有限公司 (Huainan China Gas City Gas Development Company Limited)
“Independent Board Committee”
an independent board committee, comprising Mr. Zhao Yu Hua, Dr. Mao Er Wan and Ms. Wong Sin Yue, Cynthia, being all the independent non-executive Directors, to advise the Independent Shareholders as to the fairness and reasonableness of the Great Sun Acquisition and the JV Acquisition
2 -

DEFINITIONS

“Independent Shareholders other than Beijing YLC, Great Sun, Famestar Shareholders” and their respective associates and shareholders “Independent Third Party(ies)” a third party who is independent of and not connected with any of the directors, chief executive or substantial shareholders of the Company or any of its subsidiaries or any of their respective associates and who is not a connected person of the Company as defined under the Listing Rules

“JV Acquisition” the acquisition by Shenzhen Natural Gas of 10% equity interests in Hanchuan Jiaxu, Xiaogan Jiaxu, Yingcheng Jiaxu and Yumeng Jiaxu from Beijing YLC subject to and upon the terms and conditions of the Share Transfer Agreements

“Latest Practicable Date”	22 September 2004, being the latest practicable date prior
	to the printing of this circular for the purpose of ascertaining
	certain information contained in this circular
“Listing Rules”	the Rules Governing the Listing of Securities on the Stock
	Exchange
“Option(s)”	option(s) which have been granted under the Company’s
	share option scheme adopted on 6 February 2003, entitling
	the holder(s) thereof to subscribe for new Share(s)
“PRC”	the People’s Republic of China, which for the purpose of
	this circular, shall exclude Hong Kong, the Macau Special
	Administrative Region of the PRC and Taiwan
“Sale Loan”	the entire shareholder’s loan owing by Great Sun to Famestar
	as at completion of the Great Sun Agreement
“SFO”	the Securities and Futures Ordinance (Chapter 571 of the
	Laws of Hong Kong)
“SGM”	the special general meeting of the Company convened to
	be held on 12 October 2004 to consider and, if thought fit,
	to approve, among other things, the Great Sun Agreement,
	the Share Transfer Agreements and the transactions
	contemplated thereunder
“Share(s)”	share(s) of HK$0.01 each in the share capital of the
	Company
“Shareholder(s)”	holder(s) of the Share(s)

DEFINITIONS

“Share Transfer together, the Hanchuan Agreement, the Xiaogan Agreement, Agreements” the Yingcheng Agreement and the Yumeng Agreement
“Shenzhen Natural Gas” 中亞燃氣實業 (深圳 )有限公司 (Central Asia Natural Gas (Shenzhen) Company Limited), a wholly foreign owned enterprise established in the PRC and a wholly owned subsidiary of the Company
“Stock Exchange” The Stock Exchange of Hong Kong Limited “Tongbaohua” 北京通寶華油燃氣技術發展有限公司 (Beijing Tongbaohua Oil & Gas Technology Development Limited), a wholly foreign owned enterprise established in the PRC and a wholly owned subsidiary of the Company
“Xiaogan Agreement” the share transfer agreement dated 19 August 2004 and entered into between Beijing YLC as vendor and Shenzhen Natural Gas as purchaser in relation to the acquisition of 10% equity interests in Xiaogan Jiaxu
“Xiaogan Jiaxu” 孝感嘉旭天然氣有限公司 (Xiaogan Jiaxu Gas Co. Ltd.), a Chinese-foreign equity joint venture established in the PRC, which is currently a 65% owned subsidiary of the Company and will become a wholly foreign owned enterprise and a wholly owned subsidiary of the Company upon completion of the Xiaogan Agreement and the Great Sun Agreement
“Xiaogan Zhenrong” 孝感振戎天然氣有限公司 (Xiaogan Zhenrong Gas Co. Ltd.), a Chinese-foreign equity joint venture established in the PRC, which is currently owned as to 30% by the Group and will be owned as to 55% by the Group upon completion of the Great Sun Agreement
“Yingcheng Agreement” the share transfer agreement dated 19 August 2004 and entered into between Beijing YLC as vendor and Shenzhen Natural Gas as purchaser in relation to the acquisition of 10% equity interests in Yingcheng Jiaxu
“Yingcheng Jiaxu” 應城嘉旭天然氣有限公司 (Yingcheng Jiaxu Gas Co. Ltd.), a Chinese-foreign equity joint venture established in the PRC, which is currently a 65% owned subsidiary of the Company and will become a wholly foreign owned enterprise and a wholly owned subsidiary of the Company upon completion of the Yingcheng Agreement and the Great Sun Agreement
4 -

DEFINITIONS

“Yumeng Agreement” the share transfer agreement dated 19 August 2004 and entered into between Beijing YLC as vendor and Shenzhen Natural Gas as purchaser in relation to the acquisition of 10% equity interests in Yumeng Jiaxu “Yumeng Jiaxu” 雲夢嘉旭天然氣有限公司 (Yumeng Jiaxu Gas Co. Ltd.), a Chinese-foreign equity joint venture established in the PRC, which is currently a 65% owned subsidiary of the Company and will become a wholly foreign owned enterprise and a wholly owned subsidiary of the Company upon completion of the Yumeng Agreement and the Great Sun Agreement “HK$” Hong Kong dollars, the lawful currency for the time being of Hong Kong “RMB” Renminbi, the lawful currency for the time being of the PRC “US$” United States dollars, the lawful currency for the time being of the United States of America “%” per cent.

For the purpose of this circular, unless otherwise specified, conversions of Renminbi and United States dollars into Hong Kong dollars are based on the approximate exchange rates of RMB1.05 to HK$1.00 and US$1.00 to HK$7.80 respectively.

LETTER FROM THE BOARD

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CHINA GAS HOLDINGS LIMITED 中國燃氣控股有限公司[*]

(Incorporated in Bermuda with limited liability)

(Stock Code: 384)

Executive Directors:

Mr. Li Xiaoyun (Chairman) Mr. Xu Ying (Vice Chairman) Mr. Liu Ming Hui (Managing Director) Mr. Ma Jin Long Mr. Zhu Wei Wei

Non-executive Director:

Mr. Wu Bangjie

Independent non-executive Directors: Mr. Zhao Yu Hua Dr. Mao Er Wan Ms. Wong Sin Yue, Cynthia

Registered office:

Clarendon House 2 Church Street Hamilton HM 11 Bermuda

Head office and principal place of business in Hong Kong:

16th Floor AXA Centre No. 151 Gloucester Road Wanchai Hong Kong

24 September 2004

To the Shareholders

Dear Sir or Madam,

MAJOR AND CONNECTED TRANSACTIONS:

(1) ACQUISITION OF THE ENTIRE ISSUED SHARE CAPITAL OF GREAT SUN INVESTMENTS LTD.; AND

(2) ACQUISITION OF EQUITY INTERESTS IN HANCHUAN JIAXU GAS CO. LTD., YUMENG JIAXU GAS CO. LTD., YINGCHENG JIAXU GAS CO. LTD. AND XIAOGAN JIAXU GAS CO. LTD.

INTRODUCTION

The Company announced on 23 August 2004 that the Company entered into the Great Sun Agreement on 19 August 2004 with Famestar whereby Famstar agreed to dispose of and the Company agreed to acquire the entire issued share capital of Great Sun and the entire shareholder's loan owing by Great Sun

* For identification purpose only

LETTER FROM THE BOARD

to Famestar as at completion of the Great Sun Agreement, for an aggregate consideration of RMB81,600,000 (equivalent to approximately HK$77,714,000).

The Company also announced on the same date that Shenzhen Natural Gas, a wholly owned subsidiary of the Company, entered into the Share Transfer Agreements on 19 August 2004 with Beijing YLC in relation to the acquisition of further 10% equity interests in each of Hanchuan Jiaxu, Yumeng Jiaxu, Yingcheng Jiaxu and Xiaogan Jiaxu, all of which are 65% owned subsidiaries of the Company.

The Great Sun Acquisition and the JV Acquisition, when aggregated with the Clever Decision Acquisition, constitute major transactions on the part of the Company under Rule 14.06 of the Listing Rules.

Since Beijing YLC is a substantial shareholder of Hanchuan Jiaxu, Xiaogan Jiaxu, Yingcheng Jiaxu, Yumeng Jiaxu and Xiaogan Zhenrong, all being non-wholly owned subsidiaries of the Company, Beijing YLC is also regarded as a connected person of the Company as defined under the Listing Rules.

Accordingly, the Great Sun Acquisition and the JV Acquisition also constitute connected transactions on the part of the Company under Rule 14A.13 of the Listing Rules and will be subject to, among other things, the approval of the Independent Shareholders at the SGM by way of poll.

The Independent Board Committee comprising Mr. Zhao Yu Hua, Dr. Mao Er Wan and Ms. Wong Sin Yue, Cynthia, being all the independent non-executive Directors, will be formed to advise the Independent Shareholders as to the fairness and reasonableness of the Great Sun Acquisition and the JV Acquisition, and whether the Great Sun Acquisition and the JV Acquisition are in the interests of the Company and the Shareholders as a whole. An independent financial adviser will be appointed to advise the Independent Board Committee and the Independent Shareholders in this regard.

The purpose of this circular is to provide you with, among other things, details of the Great Sun Acquisition, the JV Acquisition, the advice of Grand Vinco to the Independent Board Committee and the Independent Shareholders and the recommendation of the Independent Board Committee to the Independent Shareholders in relation to the Great Sun Acquisition and the JV Acquisition, the accountants' reports on Great Sun, Hanchuan Jiaxu, Xiaogan Jiaxu, Yingcheng Jiaxu and Yumeng Jiaxu, the financial information of the Group and the notice of the SGM.

LETTER FROM THE BOARD

THE GREAT SUN ACQUISITION

On 19 August 2004, the Great Sun Agreement was entered into in respect of the Great Sun Acquisition.

The Great Sun Agreement

Date : 19 August 2004 Parties : (1) Vendor : Famestar (2) Purchaser : the Company
Subject assets : (1) 1,000 shares of US$1.00 each in the share capital of Great Sun, representing its entire issued share capital; and
(2) the entire shareholder’s loan owing by Great Sun to Famestar as at completion of the Great Sun Agreement. The outstanding amount of which as at 31 March 2004 was approximately RMB15,291,700 (equivalent to approximately HK$14,564,000).
Consideration : (1) The consideration for the sale and purchase of 1,000 shares of Great Sun is RMB66,308,300 (equivalent to approximately HK$63,151,000); and
(2) the consideration for the sale and purchase of the Sale Loan is RMB15,291,700 (equivalent to approximately HK$14,564,000).

The said consideration shall be payable by the Company to Famestar in cash upon completion of the Great Sun Agreement.

The terms and conditions of the Great Sun Agreement were determined after arm’s length negotiations between the parties and with reference to the unaudited net asset value of Great Sun as at 31 March 2004, the historical performance of Great Sun and the face value of the Sale Loan. The Directors (including the independent non-executive Directors) consider that the terms and conditions of the Great Sun Agreement are on normal commercial terms and are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

Information on Famestar

Famestar is an investment holding company established in the British Virgin Islands with limited liability. Famestar is wholly owned by an Independent Third Party.

LETTER FROM THE BOARD

Conditions

The Great Sun Agreement is conditional upon the following conditions having been fulfilled:

(i) the passing of the necessary resolution by the Independent Shareholders at the SGM to approve the Great Sun Agreement and the transactions contemplated thereunder;
(ii) all necessary approvals, consents and authorisations required to be obtained in relation to the Great Sun Agreement and the transactions contemplated thereunder having been obtained; and
(iii) the warranties, representations and undertakings given by Famestar remaining true and accurate in all respects.

As at the Latest Practicable Date, none of the conditions precedent have been fulfilled.

In the event that the conditions of the Great Sun Agreement have not been fulfilled in full (or as the case may be, waived by the Company) by 31 October 2004 or such later date as the Company may agree, the Great Sun Agreement shall cease and determine and none of the parties thereof shall have any obligations and liabilities under the Great Sun Agreement save for antecedent breaches of the provisions of the Great Sun Agreement.

Completion

Completion of the Great Sun Agreement is not conditional upon the completion of any of the Share Transfer Agreements and will take place on the third business day (or such later date as the Company may agree) after all the conditions of the Great Sun Agreement are fulfilled or waived.

LETTER FROM THE BOARD

THE JV ACQUISITION

On 19 August 2004, the Hanchuan Agreement, the Xiaogan Agreement, the Yingcheng Agreement and the Yumeng Agreement were entered into in respect of the JV Acquisition.

The Hanchuan Agreement

Date : 19 August 2004 Parties : (1) Vendor : Beijing YLC (2) Purchaser : Shenzhen Natural Gas
Subject assets : 10% equity interests in Hanchuan Jiaxu
Consideration : The consideration for the sale and purchase of 10% equity interests in Hanchuan Jiaxu is RMB3,730,000 (equivalent to approximately HK$3,552,000), of which:
(1) RMB373,000 (equivalent to approximately HK$355,000) shall be payable by Shenzhen Natural Gas within 10 business days after (i) the fulfilment of the conditions to the Hanchuan Agreement; and (ii) the delivery by Beijing YLC of all relevant documents for registration of the transfer; and
(2) RMB3,357,000 (equivalent to approximately HK$3,197,000) shall be payable by Shenzhen Natural Gas within 10 business days after completion of the Hanchuan Agreement.

The terms and conditions of the Hanchuan Agreement were determined after arm’s length negotiations between the parties and with reference to the unaudited net asset value of Hanchuan Jiaxu as at 31 March 2004 and the historical performance of Hanchuan Jiaxu. The Directors (including the independent non-executive Directors) consider that the terms and conditions of the Hanchuan Agreement are on normal commercial terms and are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

The Xiaogan Agreement

Date : 19 August 2004 Parties : (1) Vendor : Beijing YLC (2) Purchaser : Shenzhen Natural Gas Subject assets : 10% equity interests in Xiaogan Jiaxu

Consideration : The consideration for the sale and purchase of 10% equity interests in Xiaogan Jiaxu is RMB5,330,000 (equivalent to approximately HK$5,076,000), of which:
10 -

LETTER FROM THE BOARD

(1) RMB533,000 (equivalent to approximately HK$508,000) shall be payable by Shenzhen Natural Gas within 10 business days after (i) the fulfilment of the conditions to the Xiaogan Agreement; and (ii) the delivery by Beijing YLC of all relevant documents for registration of the transfer; and
(2) RMB4,797,000 (equivalent to approximately HK$4,569,000) shall be payable by Shenzhen Natural Gas within 10 business days after completion of the Xiaogan Agreement.

The terms and conditions of the Xiaogan Agreement were determined after arm’s length negotiations between the parties and with reference to the unaudited net asset value of Xiaogan Jiaxu as at 31 March 2004 and the historical performance of Xiaogan Jiaxu. The Directors (including the independent nonexecutive Directors) consider that the terms and conditions of the Xiaogan Agreement are on normal commercial terms and are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

The Yingcheng Agreement

Date	:	19 August 2004
Parties	:	(1) Vendor	:	Beijing YLC
		(2) Purchaser	:	Shenzhen Natural Gas
Subject assets	:	10% equity interests		in Yingcheng Jiaxu

Consideration : The consideration for the sale and purchase of 10% equity interests in Yingcheng Jiaxu is RMB5,330,000 (equivalent to approximately HK$5,076,000), of which:
(1) RMB533,000 (equivalent to approximately HK$508,000) shall be payable by Shenzhen Natural Gas within 10 business days after (i) the fulfilment of the conditions to the Yingcheng Agreement; and (ii) the delivery by Beijing YLC of all relevant documents for registration of the transfer; and
(2) RMB4,797,000 (equivalent to approximately HK$4,569,000) shall be payable by Shenzhen Natural Gas within 10 business days after completion of the Yingcheng Agreement.

The terms and conditions of the Yingcheng Agreement were determined after arm’s length negotiations between the parties and with reference to the unaudited net asset value of Yingcheng Jiaxu as at 31 March 2004 and the historical performance of Yingcheng Jiaxu. The Directors (including the independent non-executive Directors) consider that the terms and conditions of the Yingcheng Agreement are on normal commercial terms and are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

11 -

LETTER FROM THE BOARD

The Yumeng Agreement

Date : 19 August 2004 Parties : (1) Vendor : Beijing YLC (2) Purchaser : Shenzhen Natural Gas Subject assets : 10% equity interests in Yumeng Jiaxu

Consideration : The consideration for the sale and purchase of 10% equity interests in Yumeng Jiaxu is RMB3,310,000 (equivalent to approximately HK$3,152,000), of which:
(1) RMB331,000 (equivalent to approximately HK$315,000) shall be payable by Shenzhen Natural Gas within 10 business days after (i) the fulfilment of the conditions to the Yumeng Agreement; and (ii) the delivery by Beijing YLC of all relevant documents for registration of the transfer; and
(2) RMB2,979,000 (equivalent to approximately HK$2,837,000) shall be payable by Shenzhen Natural Gas within 10 business days after completion of the Yumeng Agreement.

The terms and conditions of the Yumeng Agreement were determined after arm’s length negotiations between the parties and with reference to the unaudited net asset value of Yumeng Jiaxu as at 31 March 2004 and the historical performance of Yumeng Jiaxu. The Directors (including the independent nonexecutive Directors) consider that the terms and conditions of the Yumeng Agreement are on normal commercial terms and are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

Information on Beijing YLC

Beijing YLC is a company established in the PRC with limited liability. Beijing YLC is principally engaged in the investment and development of natural gas technology, technology transfer, technology training and technology services. Beijing YLC is wholly owned by an Independent Third Party.

Since Beijing YLC is a substantial shareholder holding 10% equity interests in each of Hanchuan Jiaxu, Xiaogan Jiaxu, Yingcheng Jiaxu and Yumeng Jiaxu and 45% equity interests in Xiaogan Zhenrong, all being non-wholly owned subsidiaries of the Company, Beijing YLC is regarded as a connected person of the Company as defined under the Listing Rules. Save as being the substantial shareholder of Hanchuan Jiaxu, Xiaogan Jiaxu, Yingcheng Jiaxu, Yumeng Jiaxu and Xiaogan Zhenrong, Beijing YLC does not have any other relationship with any member of the Group.

12 -

LETTER FROM THE BOARD

Conditions

The Share Transfer Agreements are conditional upon the following conditions having been fulfilled:

(i) in respect of the Hanchuan Agreement, the passing of the necessary resolution by the Independent Shareholders at the SGM to approve the Hanchuan Agreement and the transactions contemplated thereunder;
(ii) in respect of the Xiaogan Agreement, the passing of the necessary resolution by the Independent Shareholders at the SGM to approve the Xiaogan Agreement and the transactions contemplated thereunder;
(iii) in respect of the Yingcheng Agreement, the passing of the necessary resolution by the Independent Shareholders at the SGM to approve the Yingcheng Agreement and the transactions contemplated thereunder;
(iv) in respect of the Yumeng Agreement, the passing of the necessary resolution by the Independent Shareholders at the SGM to approve the Yumeng Agreement and the transactions contemplated thereunder; and
(v) in respect of the Share Transfer Agreements, all necessary approvals, consents and authorisations required to be obtained in relation to the Share Transfer Agreements and the transactions contemplated thereunder having been obtained.

As at the Latest Practicable Date, none of the conditions precedent to the Share Transfer Agreements have been fulfilled. No long stop date is specified in the Share Transfer Agreements.

Completion

Subject to the fulfilment of the conditions of the Share Transfer Agreements, completion of the Share Transfer Agreements shall take place on the date on which the transfers contemplated under the Share Transfer Agreements are registered with the relevant government authorities. Completion of each Share Transfer Agreement is not conditional upon completion of other Share Transfer Agreements or the Great Sun Agreement.

Upon completion of the Share Transfer Agreements, Beijing YLC will cease to have any equity interests in Hanchuan Jiaxu, Xiaogan Jiaxu, Yingcheng Jiaxu and Yumeng Jiaxu but will continue to hold 45% equity interests in Xiaogan Zhenrong. Hanchuan Jiaxu, Xiaogan Jiaxu, Yingcheng Jiaxu and Yumeng Jiaxu will become wholly foreign owned enterprises and wholly owned subsidiaries of the Company.

SOURCE OF FUNDING

The consideration for the Great Sun Acquisition and the JV Acquisition will be financed by the Group’s internal resources.

13 -

LETTER FROM THE BOARD

SHAREHOLDING STRUCTURE

The charts below set out the shareholding structure of Great Sun and the Five Joint Ventures before and after completion of the Great Sun Acquisition and the JV Acquisition:

Before completion of the Great Sun Acquisition and the JV Acquisition

==> picture [340 x 191] intentionally omitted <==

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

The Company
100%
Clever Decision Famestar
100% 100%
Tongbaohua Great Sun Beijing YLC
65% 30% 25% 25% 10% 45%
Hanchuan Jiaxu Xiaogan Jiaxu Yingcheng Jiaxu Yumeng Jiaxu Xiaogan Zhenrong
----- End of picture text -----

After completion of the Great Sun Acquisition and the JV Acquisition

==> picture [346 x 263] intentionally omitted <==

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

The Company
100%
Clever Decision
100% 100% 100%
Tongbaohua
Beijing YLC
Shenzhen
65% Great Sun
Natural Gas
10% 25% 25% 45%
30%
Xiaogan
Hanchuan Jiaxu Xiaogan Jiaxu Yingcheng Jiaxu Yumeng Jiaxu Zhenrong
----- End of picture text -----

14 -

LETTER FROM THE BOARD

INFORMATION ON GREAT SUN

Great Sun is an investment holding company incorporated in the British Virgin Islands with limited liability. The principal asset of Great Sun is the holding of 25% equity interests in each of Hanchuan Jiaxu, Xiaogan Jiaxu, Yingcheng Jiaxu, Yumeng Jiaxu and Xiaogan Zhenrong.

Apart from the holding of 25% equity interests in each of Hanchuan Jiaxu, Xiaogan Jiaxu, Yingcheng Jiaxu, Yumeng Jiaxu and Xiaogan Zhenrong, Great Sun has not commenced any business for the period commencing from 16 October 2002 (the date of incorporation of Great Sun) to 31 March 2004. As at 31 March 2004, the unaudited net asset value of Great Sun was approximately HK$8,000.

INFORMATION ON THE FIVE JOINT VENTURES

Hanchuan Jiaxu

Hanchuan Jiaxu is a Chinese-foreign equity joint venture established in the PRC on 27 November 2002 and is principally engaged in the construction of natural gas pipeline network and the distribution and sale of natural gas in Hanchuan City, Hubei Province, the PRC. Hanchuan Jiaxu has a tenure of 30 years. Hanchuan Jiaxu will be converted into a wholly foreign owned enterprise upon completion of the Hanchuan Agreement.

The registered capital of Hanchuan Jiaxu is RMB7,000,000 (equivalent to approximately HK$6,667,000), which is contributed as to 65% (being RMB4,550,000, equivalent to approximately HK$4,333,000) by Tongbaohua, as to 25% (being RMB1,750,000, equivalent to approximately HK$1,667,000) by Great Sun and as to the remaining 10% (being RMB700,000, equivalent to approximately HK$667,000) by Beijing YLC.

As at the Latest Practicable Date, each of Tongbaohua, Great Sun and Beijing YLC has fully contributed towards the registered capital of Hanchuan Jiaxu in accordance with their respective capital contribution ratios. Save for the above capital contribution, none of Tongbaohua, Great Sun nor Beijing YLC has advanced any shareholder’s loan to Hanchuan Jiaxu.

The board of directors of Hanchuan Jiaxu currently consists of three directors, each of Tongbaohua, Great Sun and Beijing YLC is entitled to appoint one director. Upon completion of the Hanchuan Agreement, the existing director nominated by Beijing YLC will resign and the Group will appoint an additional representative to the board of directors of Hanchuan Jiaxu. Thereafter, all members of the board will be nominated by the Group.

Hanchuan Jiaxu was accounted for as a subsidiary of the Company in the audited consolidated financial statements of the Group for the year ended 31 March 2004. Based on the financial information of Hanchuan Jiaxu for the period commencing from 27 November 2002 to 31 March 2004 set out in Appendix III to this circular, the profits before and after taxation of Hanchuan Jiaxu were both approximately HK$15,045,000. As at 31 March 2004, the net asset value of Hanchuan Jiaxu was approximately HK$21,712,000.

15 -

LETTER FROM THE BOARD

Xiaogan Jiaxu

Xiaogan Jiaxu is a Chinese-foreign equity joint venture established in the PRC on 22 August 2003 and is principally engaged in the construction of natural gas pipeline network and the distribution and sale of natural gas in Xiaogan City, Hubei Province, the PRC. Xiaogan Jiaxu has a tenure of 30 years. Xiaogan Jiaxu will be converted into a wholly foreign owned enterprise upon completion of the Xiaogan Agreement.

The registered capital of Xiaogan Jiaxu is RMB10,000,000 (equivalent to approximately HK$9,524,000), which is contributed as to 65% (being RMB6,500,000, equivalent to approximately HK$6,190,000) by Tongbaohua, as to 25% (being RMB2,500,000, equivalent to approximately HK$2,381,000) by Great Sun and as to the remaining 10% (being RMB1,000,000, equivalent to approximately HK$952,000) by Beijing YLC.

As at the Latest Practicable Date, each of Tongbaohua, Great Sun and Beijing YLC has fully contributed towards the registered capital of Xiaogan Jiaxu in accordance with their respective capital contribution ratios. Save for the above capital contribution, none of Tongbaohua, Great Sun nor Beijing YLC has advanced any shareholder’s loan to Xiaogan Jiaxu.

The board of directors of Xiaogan Jiaxu currently consists of three directors, each of Tongbaohua, Great Sun and Beijing YLC is entitled to appoint one director. Upon completion of the Xiaogan Agreement, the existing director nominated by Beijing YLC will resign and the Group will appoint an additional representative to the board of directors of Xiaogan Jiaxu. Thereafter, all members of the board will be nominated by the Group.

Xiaogan Jiaxu was accounted for as a subsidiary of the Company in the audited consolidated financial statements of the Group for the year ended 31 March 2004. Based on the financial information of Xiaogan Jiaxu for the period commencing from 22 August 2003 to 31 March 2004 set out in Appendix IV to this circular, the profits before and after taxation of Xiaogan Jiaxu were both approximately HK$13,519,000. As at 31 March 2004, the net asset value of Xiaogan Jiaxu was approximately HK$23,043,000.

Yingcheng Jiaxu

Yingcheng Jiaxu is a Chinese-foreign equity joint venture established in the PRC on 27 November 2002 and is principally engaged in the construction of natural gas pipeline network and the distribution and sale of natural gas in Yingcheng City, Hubei Province, the PRC. Yingcheng Jiaxu has a tenure of 30 years. Yingcheng Jiaxu will be converted into a wholly foreign owned enterprise upon completion of the Yingcheng Agreement.

The registered capital of Yingcheng Jiaxu is RMB10,000,000 (equivalent to approximately HK$9,524,000), which is contributed as to 65% (being RMB6,500,000, equivalent to approximately HK$6,190,000) by Tongbaohua, as to 25% (being RMB2,500,000, equivalent to approximately HK$2,381,000) by Great Sun and as to the remaining 10% (being RMB1,000,000, equivalent to approximately HK$952,000) by Beijing YLC.

16 -

LETTER FROM THE BOARD

As at the Latest Practicable Date, each of Tongbaohua, Great Sun and Beijing YLC has fully contributed towards the registered capital of Yingcheng Jiaxu in accordance with their respective capital contribution ratios. Save for the above capital contribution, none of Tongbaohua, Great Sun nor Beijing YLC has advanced any shareholder’s loan to Yingcheng Jiaxu.

The board of directors of Yingcheng Jiaxu currently consists of three directors, each of Tongbaohua, Great Sun and Beijing YLC is entitled to appoint one director. Upon completion of the Yingcheng Agreement, the existing director nominated by Beijing YLC will resign and the Group will appoint an additional representative to the board of directors of Yingcheng Jiaxu. Thereafter, all members of the board will be nominated by the Group.

Yingcheng Jiaxu was accounted for as a subsidiary of the Company in the audited consolidated financial statements of the Group for the year ended 31 March 2004. Based on the financial information of Yingcheng Jiaxu for the period commencing from 27 November 2002 to 31 March 2004 set out in Appendix V to this circular, the profits before and after taxation of Yingcheng Jiaxu were both approximately HK$9,496,000. As at 31 March 2004, the net asset value of Yingcheng Jiaxu was approximately HK$19,020,000.

Yumeng Jiaxu

Yumeng Jiaxu is a Chinese-foreign equity joint venture established in the PRC on 27 November 2002 and is principally engaged in the construction of natural gas pipeline network and the distribution and sale of natural gas in Yumeng City, Hubei Province, the PRC. Yumeng Jiaxu has a tenure of 30 years. Yumeng Jiaxu will be converted into a wholly foreign owned enterprise upon completion of the Yumeng Agreement.

The registered capital of Yumeng Jiaxu is RMB6,200,000 (equivalent to approximately HK$5,905,000), which is contributed as to 65% (being RMB4,030,000, equivalent to approximately HK$3,838,000) by Tongbaohua, as to 25% (being RMB1,550,000, equivalent to approximately HK$1,476,000) by Great Sun and as to the remaining 10% (being RMB620,000, equivalent to approximately HK$590,000) by Beijing YLC.

As at the Latest Practicable Date, each of Tongbaohua, Great Sun and Beijing YLC has fully contributed towards the registered capital of Yumeng Jiaxu in accordance with their respective capital contribution ratios. Save for the above capital contribution, none of Tongbaohua, Great Sun nor Beijing YLC has advanced any shareholder’s loan to Yumeng Jiaxu.

The board of directors of Yumeng Jiaxu currently consists of three directors, each of Tongbaohua, Great Sun and Beijing YLC is entitled to appoint one director. Upon completion of the Yumeng Agreement, the existing director nominated by Beijing YLC will resign and the Group will appoint an additional representative to the board of directors of Yumeng Jiaxu. Thereafter, all members of the board will be nominated by the Group.

17 -

LETTER FROM THE BOARD

Yumeng Jiaxu was accounted for as a subsidiary of the Company in the audited consolidated financial statements of the Group for the year ended 31 March 2004. Based on the financial information of Yumeng Jiaxu for the period commencing from 27 November 2002 to 31 March 2004 set out in Appendix VI to this circular, the profits before and after taxation of Yumeng Jiaxu were both approximately HK$13,060,000. As at 31 March 2004, the net asset value of Yumeng Jiaxu was approximately HK$18,965,000.

Xiaogan Zhenrong

Xiaogan Zhenrong is a Chinese-foreign equity joint venture established in the PRC on 27 November 2002 and is principally engaged in the construction of main trunk gas pipeline in Changfu (常福 ) station, Wuhan of the “Zhong-Wu” (忠 -武 ) line connecting the natural gas network in Xiaogan City, Hanchuan City, Yingcheng City and Yumeng City, Hubei Province, the PRC, for the eastern transmission of Xichuan gas (川氣 ), and the distribution and sale of natural gas to Hanchuan Jiaxu, Xiaogan Jiaxu, Yingcheng Jiaxu and Yumeng Jiaxu which are then responsible for the construction of natural gas pipeline network and the distribution and sale of natural gas within the respective cities.

The registered capital of Xiaogan Zhenrong is RMB28,000,000 (equivalent to approximately HK$26,667,000), which is contributed as to 30% (being RMB8,400,000, equivalent to HK$8,000,000) by Tongbaohua, as to 25% (being RMB7,000,000, equivalent to approximately HK$6,667,000) by Great Sun and as to the remaining 45% (being RMB12,600,000, equivalent to HK$12,000,000) by Beijing YLC.

As at the Latest Practicable Date, each of Tongbaohua, Great Sun and Beijing YLC has fully contributed towards the registered capital of Xiaogan Zhenrong in accordance with their respective capital contribution ratios. Save for the above capital contribution, none of Tongbaohua, Great Sun nor Beijing YLC has advanced any shareholder’s loan to Xiaogan Zhenrong.

The board of directors of Xiaogan Zhenrong currently consists of three directors, one of whom is appointed by Tongbaohua, one of whom is appointed by Great Sun and one of whom is appointed by Beijing YLC. The chairman of the board of directors of Xiaogan Zhenrong is appointed by Tongbaohua. The composition of the board of directors of Xiaogan Zhenrong will remain unchanged after completion of the Great Sun Agreement.

Since the Group is able to control the composition of the board of directors of Xiaogan Zhenrong, Xiaogan Zhenrong was accounted for as a subsidiary of the Company in the audited consolidated financial statements of the Group for the year ended 31 March 2004. Based on the unaudited management accounts of Xiaogan Zhenrong for the period commencing from 27 November 2002 to 31 March 2004, the unaudited loss of Xiaogan Zhenrong was approximately HK$9,524,000. As at 31 March 2004, the unaudited net assets of Xiaogan Zhenrong was approximately HK$17,143,000.

18 -

LETTER FROM THE BOARD

GAS PROJECTS OPERATED BY THE FIVE JOINT VENTURES

Xiaogan Zhenrong is principally engaged in the construction of main trunk gas pipeline in Changfu (常福 ) station, Wuhan of the “Zhong-Wu” (忠 -武 ) line connecting the natural gas network in Xiaogan City, Hanchuan City, Yingcheng City and Yumeng City, Hubei Province, the PRC, for the eastern transmission of Xichuan gas (川氣 ), and the distribution and sale of natural gas to Hanchuan Jiaxu, Xiaogan Jiaxu, Yingcheng Jiaxu and Yumeng Jiaxu, which are then responsible for the construction of natural gas pipeline network and the distribution and sale of natural gas within the respective cities.

In November 2003, Hanchuan Jiaxu, Xiaogan Jiaxu, Yingcheng Jiaxu and Yumeng Jiaxu were granted exclusive rights by the respective local governments to operate gas project as the sole operator in the construction of gas pipelines and the distribution and supply of natural gas in the respective cities for a period of up to 30 years. No exclusive operation right has been granted to Xiaogan Zhenrong.

Xiaogan Zhenrong is responsible for the construction of natural gas pipeline passing through Hanjing (漢江 ), Han Beihe (漢北河 ) and Fuhe (府河 ). The total length of the pipeline is 145 kilometres and such pipeline is expected to be completed by the end of 2005. The annual gas transmission capacity of the pipeline will be 336,490,000 cubic metres, and with pressurised function, the annual gas transmission capacity will reach 700,000,000 cubic metres in the long run.

Before the establishment of Hanchuan Jiaxu, Xiaogan Jiaxu, Yingcheng Jiaxu and Yumeng Jiaxu, no natural gas pipeline has been constructed in Xiaogan City, Hanchuan City, Yingcheng City and Yumeng City, Hubei Province, the PRC. Most of the residents in these cities are petroleum gas and coal subscribers. Given the increasing awareness of environmental protection in the PRC, the Directors consider that the demand for natural gas in the PRC will be surging as natural gas is considered as an environmental friendly energy.

19 -

LETTER FROM THE BOARD

REASONS FOR THE GREAT SUN ACQUISITION AND THE JV ACQUISITION

The Group is principally engaged in investment in, among other things, natural gas/energy in the PRC.

In July 2003, the Company acquired 30% equity interests in Clever Decision for a consideration of HK$8,440,000.

As set out in the announcement of the Company dated 11 February 2004 and the circular of the Company dated 23 February 2004, the Company acquired a further 70% equity interests in Clever Decision and the shareholder’s loan owed by Clever Decision, for a consideration of RMB106,242,000 (equivalent to approximately HK$101,183,000).

As at the Latest Practicable Date, Clever Decision was a wholly owned subsidiary of the Company. The principal asset of Clever Decision is the holding of the entire equity interests in Tongbaohua, a wholly foreign owned enterprise established in the PRC. The principal asset of Tongbaohua is in turn the holding of 65% equity interests in each of Hanchuan Jiaxu, Xiaogan Jiaxu, Yingcheng Jiaxu and Yumeng Jiaxu, and 30% equity interests in Xiaogan Zhenrong.

After completion of the Great Sun Acquisition and the JV Acquisition, Hanchuan Jiaxu, Xiaogan Jiaxu, Yingcheng Jiaxu and Yumeng Jiaxu will become wholly owned subsidiaries of the Company, while Xiaogan Zhenrong will become a 55% owned subsidiary of the Company.

In view of the growing demand for natural gas and the results and performance of the Five Joint Ventures, the Directors believe that the Great Sun Acquisition and the JV Acquisition provide the Group with an opportunity to further increase its investment interests in the Five Joint Ventures with a view to further capitalising upon the growing natural gas market in the PRC.

20 -

LETTER FROM THE BOARD

FINANCIAL EFFECTS OF THE GREAT SUN ACQUISITION AND THE JV ACQUISITION ON THE GROUP

Earnings

For the year ended 31 March 2004, the Group recorded audited consolidated net profits before taxation of approximately HK$118,212,000, of which approximately HK$50,499,000 was contributed by the Five Joint Ventures. For the same period, the Group recorded audited consolidated net profits after taxation and minority interests of approximately HK$80,060,000, of which approximately HK$32,991,000 was contributed by the Five Joint Ventures. Given the track record, earnings ability and prospects of Great Sun and the Five Joint Ventures, the Directors consider the Great Sun Acquisition and the JV Acquisition could benefit the results of the Enlarged Group in future.

Net asset value

As at 31 March 2004, the audited consolidated net asset value of the Group amounted to approximately HK$502,674,000. Based on the unaudited pro forma statement of assets and liabilities of the Enlarged Group as set out in Appendix VII to this circular, the unaudited pro forma consolidated net asset value of the Enlarged Group immediately after completion of the Great Sun Acquisition and the JV Acquisition would also be approximately HK$502,674,000.

FINANCIAL AND TRADING PROSPECTS OF THE GROUP

The Group is principally engaged in investments in natural gas/energy in the PRC. For the financial year ended 31 March 2004, the Group has experienced a satisfactory performance by turning from a lossmaking company into a profitable company. During the financial year ended 31 March 2004, the Group has become one of the branded investors in the PRC’s natural gas market. The Directors are highly optimistic about the prospects of the Group’s business. The Group will continue to focus on investing in natural gas downstream business as well as other natural gas related business that will bring in steady income. The Group will continue to explore other business opportunities to further develop its business in the PRC. As at the Latest Practicable Date, no material investment nor capital assets acquisition opportunities have been identified yet. Should any such opportunities arise in the current financial year, the Group will finance such investments or acquisitions by the Group’s internal resources and/or bank borrowings.

The Directors consider the Great Sun Acquisition and the JV Acquisition would enable the Group to consolidate its control in the Five Joint Ventures, and the financial results of Hanchuan Jiaxu, Xiaogan Jiaxu, Yingcheng Jiaxu and Yumeng Jiaxu will then be fully consolidated into the Group’s results, which will have positive impact on the Group’s operational and financial prospects.

21 -

LETTER FROM THE BOARD

LISTING RULES IMPLICATION

The Great Sun Acquisition and the JV Acquisition, when aggregated with the Clever Decision Acquisition, constitute major transactions on the part of the Company under Rule 14.06 of the Listing Rules.

SGM

A notice convening a special general meeting of the Company to be held at 10:00 a.m. on 12 October 2004 at 16th Floor, AXA Centre, No. 151 Gloucester Road, Wanchai, Hong Kong is set out on pages 169 to 171 of this circular. Ordinary resolutions will be proposed at the SGM to approve the Great Sun Agreement, the Share Transfer Agreements and the transactions contemplated thereunder.

At the SGM, any connected person of the Company or Shareholder with a material interest in the Great Sun Acquisition and the JV Acquisition, and its associates, will abstain from voting in respect of the resolutions approving the same. To the best knowledge of the Directors, none of Famestar, Beijing YLC, Great Sun nor their respective associates and shareholders have any shareholding interests in the Company as at the Latest Practicable Date. As such, no Shareholders are required to abstain from voting at the SGM.

A form of proxy for use at the SGM is enclosed with this circular. Whether or not you are able to attend the SGM, you are requested to complete the accompanying form of proxy in accordance with the instructions printed thereon and deposit the same at the offices of the Company’s branch share registrar in Hong Kong, Computershare Hong Kong Investor Services Limited at 46th Floor, Hopewell Centre, 183 Queen’s Road East, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for the holding of the SGM or any adjournment thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the SGM or any adjournment thereof should you so wish.

22 -

LETTER FROM THE BOARD

PROCEDURES FOR DEMANDING A POLL AT GENERAL MEETING

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

(i) the chairman of such meeting; or
(ii) 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
(iii) any 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
(iv) any 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 in the Company 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 the shares conferring that right.

Unless a poll is duly demanded and the demand is not withdrawn, a declaration by the chairman that a resolution has been carried, or carried unanimously, or by a particular majority, or not carried by a particular majority, or lost, and an entry to that effect made in the minute book of the Company, shall be conclusive evidence of the fact without proof of the number or proportion of the votes recorded for or against the resolution.

In compliance with the Listing Rules, the Company will procure the chairman of the SGM to demand for a poll, pursuant to bye-law 66 of the bye-laws of the Company, for the ordinary resolutions to be proposed to approve the Great Sun Agreement, the Share Transfer Agreements and the transactions contemplated thereunder.

RECOMMENDATION

Grand Vinco has been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders with regard to the terms and conditions of the Great Sun Acquisition and the JV Acquisition. Grand Vinco considers that (i) the Great Sun Acquisition and the JV Acquisition are on normal commercial terms and in the ordinary and usual course of business of the Group; and (ii) the terms and conditions of the Great Sun Acquisition and the JV Acquisition are fair and reasonable and in the interests of the Company and the Shareholders as a whole. The text of the letter of advice from Grand Vinco containing its advice and the principal factors and reasons it has taken into consideration in arriving at its advice are set out on pages 26 to 34 of this circular.

23 -

LETTER FROM THE BOARD

Taking into consideration of the reasons set out in the paragraph headed “Reasons for the Great Sun Acquisition and the JV Acquisition” above, the Directors consider that (i) the Great Sun Acquisition and the JV Acquisition are on normal commercial terms and in the ordinary course of business of the Group; and (ii) the terms and conditions of the Great Sun Acquisition and the JV Acquisition are fair and reasonable and in the interests of the Company and the Shareholders as a whole. Accordingly, the Directors recommend the Independent Shareholders to vote in favour of the resolutions to be proposed at the SGM to approve the Great Sun Agreement, the Share Transfer Agreements and the transactions contemplated thereunder.

The Independent Board Committee, having taken into account the advice of Grand Vinco, consider that (i) the Great Sun Acquisition and the JV Acquisition are on normal commercial terms and in the ordinary course of business of the Group; and (ii) the terms and conditions of the Great Sun Acquisition and the JV Acquisition are fair and reasonable and in the interests of the Company and the Shareholders as a whole. Accordingly, the Independent Board Committee recommend the Independent Shareholders to vote in favour of the ordinary resolutions to be proposed at the SGM to approve the Great Sun Agreement, the Share Transfer Agreements and the transactions contemplated thereunder. The text of the letter from the Independent Board Committee is set out on page 25 of this circular.

FURTHER INFORMATION

Your attention is also drawn to the letter from Grand Vinco which contains its advice to the Independent Board Committee and the Independent Shareholders in connection with the Great Sun Acquisition and the JV Acquisition, the letter from the Independent Board Committee which sets out its recommendation to the Independent Shareholders in relation to the Great Sun Acquisition and the JV Acquisition, and the additional information set out in the Appendices to this circular.

Yours faithfully

For and on behalf of the Board China Gas Holdings Limited Liu Ming Hui Managing Director

24 -

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

The following is the text of a letter from the Independent Board Committee setting out its recommendation to the Independent Shareholders in relation to the Great Sun Acquisition and the JV Acquisition:

==> picture [23 x 46] intentionally omitted <==

==> picture [47 x 34] intentionally omitted <==

CHINA GAS HOLDINGS LIMITED 中國燃氣控股有限公司[*]

(Incorporated in Bermuda with limited liability)

(Stock Code: 384)

24 September 2004

To the Independent Shareholders

Dear Sir or Madam,

MAJOR AND CONNECTED TRANSACTIONS:

(1) ACQUISITION OF THE ENTIRE ISSUED SHARE CAPITAL OF GREAT SUN INVESTMENTS LTD.; AND

(2) ACQUISITION OF EQUITY INTERESTS IN HANCHUAN JIAXU GAS CO. LTD., YUMENG JIAXU GAS CO. LTD., YINGCHENG JIAXU GAS CO. LTD. AND XIAOGAN JIAXU GAS CO. LTD.

We have been appointed to advise you in respect of the Great Sun Acquisition and the JV Acquisition. Details of the Great Sun Acquisition and the JV Acquisition are set out in the letter from the Board on pages 6 to 24 of the circular (the “Circular”) of the Company dated 24 September 2004, of which this letter forms part. Capitalised terms used in this letter shall have the same meanings as those defined in the Circular unless specified otherwise.

We wish to draw your attention to the letter from the Board as set out on pages 6 to 24 of the Circular and the letter of advice from Grand Vinco as set out on pages 26 to 34 of the Circular.

Having taken into account the advice and recommendation of Grand Vinco, we consider that (i) the Great Sun Acquisition and the JV Acquisition are on normal commercial terms and in the ordinary course of business of the Group; and (ii) the terms and conditions of the Great Sun Acquisition and the JV Acquisition are fair and reasonable and in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend the Independent Shareholders to vote in favour of the resolutions to be proposed at the SGM to approve the Great Sun Agreement, the Share Transfer Agreements and the transactions contemplated thereunder.

Yours faithfully Independent Board Committee

Zhao Yu Hua

Mao Er Wan

Wong Sin Yue, Cynthia

* For identification purpose only

25 -

LETTER FROM GRAND VINCO

The following is the text of a letter of advice to the Independent Board Committee and the Independent Shareholders from Grand Vinco, the independent financial adviser, dated 24 September 2004 prepared for the purpose of incorporation in this circular:

Grand Vinco Capital Limited

Room 902, Far East Finance Centre

16 Harcourt Road, Hong Kong

24 September 2004

The Independent Board Committee and

the Independent Shareholders China Gas Holdings Limited Room 1601, 16th Floor AXA Centre 151 Gloucester Road Wanchai Hong Kong

Dear Sirs

MAJOR AND CONNECTED TRANSACTIONS

We refer to the announcement (the “Announcement”) issued by the Company dated 23 August 2004 in respect of the acquisition of the entire issued share capital of Great Sun Investment Ltd. and the acquisition of 10% equity interests in each of Hanchuan Jiaxu Gas Co. Ltd., Yumeng Jiaxu Gas Co. Ltd., Yingcheng Jiaxu Gas Co. Ltd. and Xiaogan Jiaxu Gas Co. Ltd. Details of the terms of the Great Sun Acquisition and the JV Acquisition (together the “Acquisitions”) are set out in the circular (the “Circular”) issued by the Company to the Shareholders dated 24 September 2004 of which this letter forms part. Capitalised terms used in this letter shall have the same meanings ascribed to them in the Circular unless the context otherwise requires.

The Great Sun Acquisition and the JV Acquisition, when aggregated with the Clever Decision Acquisition, constitute major transactions on the part of the Company under Rule 14.06 of the Listing Rules.

Since Famestar is the holding company of Great Sun, a substantial shareholder of Hanchuan Jiaxu, Yumeng Jiaxu, Yingcheng Jiaxu, Xiaogan Jiaxu and Xiaogan Zhenrong, all being non-wholly owned subsidiaries of the Company, Famestar is regarded as a connected person of the Company as defined under the Listing Rules. Since Beijing YLC is a substantial shareholder of Hanchuan Jiaxu, Xiaogan Jiaxu, Yingcheng Jiaxu, Yumeng Jiaxu and Xiaogan Zhenrong, all being non-wholly owned subsidiaries of the Company, Beijing YLC is also regarded as a connected person of the Company as defined under the Listing Rules. Accordingly, the Great Sun Acquisition and the JV Acquisition also constitute connected transactions on the part of the Company under Rule 14A.13 of the Listing Rules and will be subject to, among other things, the approval of the Independent Shareholders at the SGM by way of poll. The

26 -

LETTER FROM GRAND VINCO

Independent Board Committee comprising Mr. Zhao Yu Hua, Dr. Mao Er Wan and Ms. Wong Sin Yue, Cynthia, being all the independent non-executive Directors, has been formed to advise the Independent Shareholders as to the fairness and reasonableness of the Acquisitions and whether the Acquisitions is in the interests of the Company and the Shareholders as a whole.

We, Grand Vinco has been appointed as an independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in this regard. This letter contains our advice to the Independent Board Committee and the Independent Shareholders as to whether or not the Great Sun Agreement, the Share Transfer Agreements and the Acquisitions, are on normal commercial terms, in the ordinary and usual course of business, fair and reasonable and in the interest of the Company and the Shareholders as a whole.

In formulating our opinion and recommendation to the Independent Board Committee in relation to the Acquisitions, we have relied on the accuracy of the information and representations contained in the Circular which have been provided to us by the Directors and which the Directors consider to be complete and relevant. We are not aware that any statements, information and representations made or referred to in the Circular, for which the Directors are solely responsible, were untrue and incorrect in all respects at the time they were made and continued to be so as at the date of despatch of the Circular. We are also not aware that any statements of belief, opinion and intention made by the Directors in the Circular were not reasonably made after due and careful enquiry and are not based on honestly-held opinions. We have no reason to doubt the truth, accuracy and completeness of the information and representations provided to us by the Directors and we have been advised by the Directors that no material facts have been omitted from the information and representations provided in and referred to in the Circular.

We consider that we have received sufficient information to enable us to reach an informed view and to justify our reliance on the accuracy of the information and representations contained in the Circular and to provide a reasonable basis for our opinion and recommendation. We have no reason to suspect that any material information has been withheld by the Company or by the Directors. We have not, however, carried out any independent in-depth investigation into the affairs of the Company and its subsidiaries.

BACKGROUND

On 19 August 2004, the Company entered into the Great Sun Agreement with Famestar in relation to (i) the acquisition of the entire issued share capital of Great Sun; and (ii) the acquisition of the entire shareholder’s loan owing by Great Sun to Famestar as at completion of the Great Sun Agreement, for an aggregate consideration of RMB81,600,000 (equivalent to approximately HK$77,714,000).

On the same date, Shenzhen Natural Gas, a wholly owned subsidiary of the Company, entered into the Share Transfer Agreements with Beijing YLC in relation to the acquisition of 10% equity interests in each of Hanchuan Jiaxu, Yumeng Jiaxu, Yingcheng Jiaxu and Xiaogan Jiaxu, all of which are currently 65% owned subsidiaries of the Company.

Pursuant to the Hanchuan Agreement, Shenzhen Natural Gas agreed to acquire and Beijing YLC agreed to sell 10% equity interests in Hanchuan Jiaxu for a consideration of RMB3,730,000 (equivalent

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to approximately HK$3,552,000). Pursuant to the Xiaogan Agreement, Shenzhen Natural Gas agreed to acquire and Beijing YLC agreed to sell 10% equity interests in Xiaogan Jiaxu for a consideration of RMB5,330,000 (equivalent to approximately HK$5,076,000). Pursuant to the Yingcheng Agreement, Shenzhen Natural Gas agreed to acquire and Beijing YLC agreed to sell 10% equity interests in Yingcheng Jiaxu for a consideration of RMB5,330,000 (equivalent to approximately HK$5,076,000). Pursuant to the Yumeng Agreement, Shenzhen Natural Gas agreed to acquire and Beijing YLC agreed to sell 10% equity interests in Yumeng Jiaxu for a consideration of RMB3,310,000 (equivalent to approximately HK$3,152,000).

Upon completion of the Great Sun Acquisition and the JV Acquisition, Hanchuan Jiaxu, Yumeng Jiaxu, Yingcheng Jiaxu and Xiaogan Jiaxu will become wholly owned subsidiaries of the Company, while Xiaogan Zhenrong will become a 55% owned subsidiary of the Company.

The Great Sun Acquisition and the JV Acquisition, when aggregated with the Clever Decision Acquisition, constitute major transactions on the part of the Company under Rule 14.06 of the Listing Rules.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In arriving at our opinion and recommendation to the Independent Board Committee and the Independent Shareholders in relation to the Great Sun Acquisition and the JV Acquisition, we have considered the principal factors and reasons set out below:

1. Reasons for and benefits of the Acquisitions

The Group is principally engaged in investment in, among other things, natural gas/energy in the PRC. In July 2003, the Company acquired 30% equity interests in Clever Decision for a consideration of HK$8,440,000. As set out in the announcement of the Company dated 11 February 2004 and the circular of the Company dated 23 February 2004, the Company acquired a further 70% equity interests in Clever Decision and the shareholder’s loan owed by Clever Decision, for a consideration of RMB106,242,000 (equivalent to approximately HK$101,183,000).

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As at the Latest Practicable Date, Clever Decision was a wholly owned subsidiary of the Company. The principal asset of Clever Decision is the holding of the entire equity interests in Tongbaohua, a wholly foreign owned enterprise established in the PRC. The principal asset of Tongbaohua is in turn the holding of 65% equity interests in Hanchuan Jiaxu, Xiaogan Jiaxu, Yingcheng Jiaxu and Yumeng Jiaxu, and 30% equity interests in Xiaogan Zhenrong.

The Directors consider that the Great Sun Acquisition and the JV Acquisition offer the Group a good business opportunity to further invest in natural gas business which is in line with the Group’s objective of developing and investing in natural gas projects in the PRC. In view of the growing demand for natural gas and the results and performance of the Five Joint Ventures, the Directors believe that the Great Sun Acquisition and the JV Acquisition provide the Group with an opportunity to further increase its investment interests in the Five Joint Ventures with a view to further capitalising upon the growing natural gas market in the PRC.

Before the establishment of the Five Joint Ventures, Xiaogan City (孝感市 ), Hanchuan City (漢川市 ), Yumeng City (雲夢市 ) and Yingcheng City (應城市 ) (all located in the Hubei Province, the PRC) did not have installation of any natural gas pipelines. Since the residents in these cities mainly used liquefied petroleum gas and coal as daily fuel, the development of natural gas pipelines will have high market potential. We have been provided with the feasibility study reports prepared in September 2002 by 中國市政工程中南設計研究院 (China Municipal Engineering Central South Design Institute) on the potential usage of natural gas in these cities. Details of which were about the energy consumption situation in Xiaogan city, the prospect of the natural gas market and the risk factors existed in the city. The principal purpose of the study was to give the Company a background information in assessing the investment prospects in Xiaogan City. Based on these reports, the Directors projected that the natural gas pipelines will connect to a total of 249,000 households in these cities in 2009. Moreover, Xiaogan City is also the base for chemical salt business in China, with many large-scale chemical salt enterprises set up in the city. Based on these feasibility reports, the Directors projected that the long term demand for natural gas by these enterprises will reach seven hundred million cubic metres in 2009. We have discussed with the Directors of the Company about the information of the feasibility report. The Directors are of the view that the actual market situation of Xiaogan City is of no material difference to that as described in the feasibility study report while the Directors had revised the projected figures based on the latest market information. We are of the view that the feasibility report and the Directors’ projection provides a fair description of the market position in these cities.

By increasing the equity stake in the Five Joint Ventures, the Company is able to capture the potential revenue growth of the Five Joint Ventures and therefore, we are of the Opinion that the Great Sun Acquisition and the JV Acquisition will give potential contribution to the Group and are in the interests of the Company and the Shareholders as a whole.

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2. The Consideration

As set out in the “Letter from the Board” in the Circular, the Company has entered into the Great Sun Agreement with Famestar in respect of the Great Sun Acquisition and Shenzhen Natural Gas, a wholly-owned subsidiary of the Company, has entered into the Hanchuan Agreement, the Xiaogan Agreement, the Yingcheng Agreement and the Yumeng Agreement with Beijing YLC in respect of the JV Acquisition. A summary of the consideration payable by the Group under the Great Sun Agreement and the Share Transfer Agreements, is set out below:

Consideration

	Consideration
Great Sun Agreement Hanchuan Agreement Xiaogan Agreement Yingcheng Agreement Yumeng Agreement	RMB81,600,000 RMB3,730,000 RMB5,330,000 RMB5,330,000 RMB3,310,000 RMB99,300,000	(approximately HK$77,715,000) (approximately HK$3,552,000) (approximately HK$5,076,000) (approximately HK$5,076,000) (approximately HK$3,152,000)
		(approximatelyHK$94,571,000)

To assess the fairness and reasonableness of the consideration of the Great Sun Acquisition and the JV Acquisition, we have calculated the principal terms and ratio as follows:

		Annualised
		earnings
		for the year	Net assets
	Effective	ended 31 March	as at 31 March
Principal terms and ratio	interest acquired	2004	2004
		(HK$ million)	(HK$ million)
		(Note 1)	(Note 2)
Great Sun	100%	10.4	25.0
Hanchuan Jiaxu	35%	11.1	21.7
Xiaogan Jiaxu	35%	22.1	23.0
Yingcheng Jiaxu	35%	7.06	19.0
Yumeng Jiaxu	35%	9.71	19.0
Xiaogan Zhenrong	25%	(7.08)	17.1

Notes:

Annualised earnings were calculated by annualising the net profit extracted from the Accountants’ report on Great Sun under the section “Notes to the Financial Information – Note 7. Investment in Associates” as set out in Appendix II. Figures shown in Great Sun represent Great Sun’s interest in the Five Joint Ventures under equity accounting. Annualised earnings are used for calculating the price earning ratio as the Accountants’ report of Great Sun and the Five Joint Ventures covered different period of time due to different incorporation date of Great Sun and the Five Joint Ventures.
The value of net assets were extracted from the Accountants’ report on Great Sun under the section “Notes to the Financial Information – Note 7. Investment in Associates” as set out in Appendix II.
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The aggregate annualized net profit attributable to 35% of each of Hanchuan Jiaxu, Xiaogan Jiaxu, Yingcheng Jiaxu, Yumeng Jiaxu and 25% of Xiaogan Zhenrong, i.e. the subjects of the Great Sun Acquisition and the JV Acquisition was approximately HK$15.8 million (“Aggregate Net Profit”).
The aggregate net assets attributable to 35% of each of Hanchuan Jiaxu, Xiaogan Jiaxu, Yingcheng Jiaxu, Yumeng Jiaxu and 25% of Xiaogan Zhenrong, i.e. the subjects of the Great Sun Acquisition and the JV Acquisition was approximately HK$33.2 million (“Aggregate Net Assets”).
The price to earnings ratio of the Acquisitions is approximately 6.0 times, calculated by dividing the Consideration by the Aggregate Net Profit (“PER”).
The price to net asset ratio of the Acquisitions is approximately 2.86 times, calculated by dividing the Consideration by Aggregate Net Assets (“PNAV”).

Under the Great Sun Agreement, Great Sun indirectly transfers 25% interest of the Five Joint Ventures to the Company. Under the acquisition, the consideration payable to Great Sun will be around HK$78 million. In relation to the acquisition of equity interests of Hanchuan Jiaxu, Xiaogan Jiaxu, Yingcheng Jiaxu and Yumeng Jiaxu as a whole, the consideration payable for the JV Acquisition will be around HK$17 million. The Consideration is approximately of HK$95 million.

As shown above, in assessing the fairness and reasonableness of the consideration of the Great Sun Acquisition and the JV Acquisition, we have reviewed the audited accounts of Great Sun, Hanchuan Jiaxu, Xiaogan Jiaxu, Yingcheng Jiaxu, Yumeng Jiaxu for the period ended 31 March 2004, the annualised profit before and after taxation and extraordinary items for the year ended 31 March 2004 were used as the basis for the calculation of the PER. As at 31 March 2004, the net assets taken out from the audited accounts of Great Sun, Hanchuan Jiaxu, Xiaogan Jiaxu, Yingcheng Jiaxu, Yumeng Jiaxu for the period ended 31 March 2004 was used as the basis for the PNAV.

In assessing the fairness of the Consideration, we are of the view that the analysis of the PER and the PNAV of the companies with similar business in the PRC are appropriate market accepted valuation benchmarks. We have obtained a list of companies engaging in “Natural Gas” business from www.aastocks.com, one of the financial portals providing information of the listed companies in Hong Kong. We have also reviewed the business of these companies and ruled out those carry the name “Gas” but the actual principal business is not doing natural gas business. We have also ruled out those companies of which their business is not purely from “Natural Gas”, e.g. petroleum oil etc. We have found four companies with principal business in the investment and/or

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provision of gas in the PRC and are listed on the Stock Exchange which we consider are most appropriate for a fair and reasonable comparison. Details of which is set out below:

Comparable companies	PER (times)	PNAV (times)
	(Note 1)	(Note 1)
Panva Gas (#8132)	10.0	4.56
Tianjin Tianlian (#8290)	13.6	2.53
Xinao Gas (#2688)	16.7	2.68
Zhengzhou Gas (#8099)	15.5	2.64

Note:

The ratios are calculated based on the closing price of the shares of each of the listed companies as at the date of the Great Sun Agreement and the Share Transfer Agreements and their respective latest audited financial results.

Save for the comparable companies with a net loss for their latest financial figures, the PER of the Acquisitions by the Company of approximately 6.0 times falls below the PER range of 10.0 to 16.7 times of the comparable companies. The PNAV of the Acquisitions by the Company of approximately 2.86 times falls within the range of PNAV of the comparable companies from 2.53 to 4.56.

We were advised by the Directors that the terms of the Great Sun Agreement and the Share Transfer Agreements dated 19 August 2004 were agreed between the parties involved after arm’s length negotiations. Having taken into account the above, we consider that both ratios of the Great Sun Acquisition and the JV Acquisition in relation to the Great Sun Agreement and the Share Transfer Agreements were below and within the range when compared with the comparable companies in the gas industry. Based on the above comparison, we consider the consideration for the Acquisitions are fair and reasonable and in the interests of the Company and the Independent Shareholders as a whole.

3. Funding for the Consideration

As stated in the “Letter from the Board” of the Circular, the Consideration will be satisfied by cash in full and will be financed by internal resources of the Group. The Directors are of the view that the Group will have sufficient working capital to satisfy the cash payments approximately HK$77,715,000 towards Famestar, being RMB81,600,000 for the Great Sun Acquisition and the cash payments of approximately HK$16,856,000 towards Beijing YLC, being RMB17,700,000 for the JV Acquisition. The Directors confirm that there are no capital commitments for the Five Joint Ventures that may result in further cash outflow from the Group. We note that the Group had substantial bank balances and cash and net current assets as at 31 March 2004, which amounted to approximately HK$471,823,000 and HK$581,361,000 respectively. The Consideration would represent only about 20.0% and 16.3% of the bank balance and cash and net current assets respectively. Having taken into account the cash outflow from the subsequent acquisition in May 2004 with a consideration of approximately HK$20 million, the Group is currently still well posed in a strong cash position and having sufficient funding for the Acquisitions. We are of the view

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that the Great Sun Acquisition and the JV Acquisition would not have any material adverse effect on the Group’s working capital position.

Having taken into account the above, in particular the fact that the Great Sun Acquisition and the JV Acquisition in line with the stated business strategies of the Group, and we concur with the Directors’ view that the Great Sun Acquisition and the JV Acquisition and the Consideration are in the interests of the Company and the Independent Shareholders as a whole.

4. Financial effect of the Acquisitions on the Group

Earnings

For the year ended 31 March 2004, the Group recorded an audited consolidated net profits before and after taxation and minority interests of approximately HK$118,212,000 and HK$80,060,000 respectively. Given the potential earnings ability and business prospects as aforementioned of the Five Joint Ventures, the Directors consider the Great Sun Acquisition and the JV Acquisition could benefit the results of the Enlarged Group in future. Therefore, we are of the view that the Acquisitions is in the interests of the Company and the Shareholders as a whole.

Net asset value

As at 31 March 2004, the audited net asset value of the Group amounted to approximately HK$502,674,000. Based on the pro-forma statement of the unaudited adjusted consolidated assets and liabilities of the Enlarged Group as set out in Appendix VII to this circular, the unaudited proforma adjusted consolidated net asset value of the Enlarged Group would be approximately HK$502,674,000, same as the audited net asset value of the Group as at 31 March 2004. The unchange was due to the fact that the proposed acquired equity interests in Great Sun and the Five Joint Ventures were already included in the minority interests of the Group therefore only reclassification was made according. Given the zero impact in the unaudited pro-forma adjusted consolidated net asset value of the Enlarged Group and the potential positive contribution to the Group’s future business growth following completion of the Great Sun Acquisition and the JV Acquisition, we consider that the Great Sun Acquisition and the JV Acquisition will not have any material impact to the net asset value of the Group.

Working Capital

The cash consideration of the Acquisitions will be paid out from the internally generated financial resources of the Group. As at 31 March 2004, the Group had cash and bank balances and net current assets of approximately HK$471,823,000 and HK$581,361,000 respectively. The Directors confirm that there are no capital commitments for the Five Joint Ventures that may result in further cash outflow from the Group. Having taken into account the cash outflow from the subsequent acquisition in May 2004 with a consideration of approximately HK$20 million, the Group is currently still well posed in a strong cash position and having sufficient funding for the Acquisitions. Given that the Acquisitions represents a good opportunity to further expand the Group’s business and enhance the Group’s earning base, taking into account the increase in revenue resulting from future gas consumption in the cities aforementioned, which is expected to commence

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LETTER FROM GRAND VINCO

by the end of 2004 upon distribution and supply of natural gas through partially completed pipelines, we consider that the Great Sun Acquisition and the JV Acquisition will not have any material impact on the Group’s working capital position.

As a conclusion, we are of the view that the Great Sun Acquisition and the JV Acquisition would not have any material impact on the Group’s financial position.

RECOMMENDATION

Having considered the above principal factors and reasons, we are of the opinion that the Great Sun Acquisition and the JV Acquisition are in the interests of the Company and its Shareholders as a whole and the terms and conditions of the Great Sun Acquisition and the JV Acquisition are on normal commercial terms, in the ordinary and usual course of business, fair and reasonable so far as the Shareholders are concerned. Accordingly, we advise the Independent Board Committee to advise the Independent Shareholders to vote in favour of the ordinary resolutions to be proposed at the SGM to approve the Great Sun Agreement and the Share Transfer Agreement.

Yours faithfully For and on behalf of Grand Vinco Capital Limited Alister Chung Managing Director

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

1. SHARE CAPITAL

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

Authorised 9,000,000,000 Shares Issued and to be issued, fully paid or credited as fully paid 1,754,151,765 Shares in issue as at the Latest Practicable Date 1,754,151,765 Shares	HK$ 90,000,000 17,541,517.65
	17,541,517.65

As at the Latest Practicable Date, all the Shares in issue ranked equally in all respects among themselves in all respects, including but not limited to the right to receive all dividends, distributions or entitlements declared, paid or made in respect of the Shares.

The issued Shares are listed on the Stock Exchange. No part of the securities of the Company is listed or dealt in, nor is listing or permission to deal in the securities of the Company being or proposed to be sought, on any other stock exchange.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

2. THREE-YEAR SUMMARY

The following is a summary of the audited consolidated income statement of the Group for the three years ended 31 March 2002, 2003 and 2004 extracted from the audited financial statements of the Group for each of the three years ended 31 March 2004:

Consolidated Income Statement

Turnover Cost of sales Gross profit Other operating income Distribution costs Administrative expenses Amortisation of goodwill Depreciation and amortisation of property, plant and equipment Deficit on revaluation of investment properties Impairment loss reversed (recognised) in respect of property, plant and equipment Negative goodwill released to income statement Impairment loss recognised in respect of investments in securities Unrealised holding gain on other investments Impairment loss recognised in respect of properties held for development Profit (loss) from operations Finance costs Gain on disposal of subsidiaries Profit on disposal of discontinued operation Share of results of associates Profit (loss) before taxation Taxation Profit (loss) before minority interests Minority interests Net profit (loss) for the year Earnings (loss) per share Basic Diluted	2004 HK$’000 376,491 (208,081) 168,410 11,979 (7,649) (52,125) (1,959) (9,605) (180) 5,987 – – 370 – 115,228 (24,602) 20,017 7,569 – 118,212 (1,344) 116,868 (36,808) 80,060 6.15 cents 6.04 cents	2003 HK$’000 85,537 (64,238) 21,299 343 (3,733) (34,176) (654) (4,232) (4,123) (8,797) 3,488 (28,060) – – (58,645) (6,169) – – (11) (64,825) (1,861) (66,686) (2,987) (69,673) (6.68 cents) –	2002 HK$’000 4,827 (3,573) 1,254 509 (606) (6,943) – (403) (1,030) – – – 6,736 (6,900) (7,383) – – – – (7,383) 89 (7,294) – (7,294) (2.25 cents) –

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

3. SUMMARY OF AUDITED FINANCIAL STATEMENTS

The following is a summary of the audited consolidated income statement of the Group for the two years ended 31 March 2003 and 2004, the audited consolidated balance sheet of the Group, the audited balance sheet of the Company as at 31 March 2003 and 2004, the audited consolidated statement of changes in equity and audited consolidated cash flow statement of the Group for the two years ended 31 March 2003 and 2004 together with the accompanying notes extracted from the annual report of the Company for the year ended 31 March 2004:

Consolidated Income Statement

FOR THE YEAR ENDED MARCH 31, 2004

NOTES Turnover 4 Cost of sales Gross profit Other operating income 6 Distribution costs Administrative expenses Amortisation of goodwill Depreciation and amortisation of property, plant and equipment Deficit on revaluation of investment properties Impairment loss reversed (recognised) in respect of property, plant and equipment Negative goodwill released to income statement Impairment loss recognised in respect of investments in securities Unrealised holding gain on other investments Profit (loss) from operations 7 Finance costs 8 Gain on disposal of subsidiaries Profit on disposal of discontinued operation 5 Share of results of associates Profit (loss) before taxation Taxation 11 Profit (loss) before minority interests Minority interests Net profit (loss) for the year Earnings (loss) per share 12 Basic Diluted	2004 HK$’000 376,491 (208,081) 168,410 11,979 (7,649) (52,125) (1,959) (9,605) (180) 5,987 – – 370 115,228 (24,602) 20,017 7,569 – 118,212 (1,344) 116,868 (36,808) 80,060 6.15 cents 6.04 cents	2003 HK$’000 85,537 (64,238) 21,299 343 (3,733) (34,176) (654) (4,232) (4,123) (8,797) 3,488 (28,060) – (58,645) (6,169) – – (11) (64,825) (1,861) (66,686) (2,987) (69,673) (6.68 cents) –

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Consolidated Balance Sheet

AT MARCH 31, 2004

NOTES Non-current assets Investment properties 13 Property, plant and equipment 14 Properties held for development 15 Interests in associates 17 Investments in securities 18 Goodwill 19 Deposits for investments 20 Current assets Inventories 21 Amounts due from customers for contract work 22 Trade and other receivables 23 Amount due from an associate Investments in securities 18 Pledged bank deposits Bank balances and cash Current liabilities Trade and other payables 24 Amounts due to customers for contract work 22 Amounts due to minority shareholders of subsidiaries Taxation Bank and other borrowings – due within one year 25 Obligations under a hire purchase contract – due within one year 26 Net current assets	2004 HK$’000 9,620 237,469 36,200 – 5,490 107,133 12,381 408,293 12,714 49,861 384,788 – 14,800 – 471,823 933,986 72,315 343 985 381 278,489 112 352,625 581,361 989,654	2003 HK$’000 9,800 177,770 36,200 1,704 5,490 20,130 –
		251,094
		14,058 – 75,012 2,199 – 66,667 92,477
		250,413
		38,111 – 5,438 6,695 159,361 –
		209,605
		40,808
		291,902

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES Capital and reserves Share capital 27 Reserves Minority interests Non-current liabilities Bank and other borrowings – due after one year 25 Obligations under a hire purchase contract – due after one year 26 Convertible note 30 Convertible bonds 31	2004 HK$’000 15,578 487,096 502,674 91,121 313,230 185 46,800 35,644 395,859 989,654	2003 HK$’000 18,423 126,303
		144,726
		59,732
		87,444 – – –
		87,444
		291,902

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Balance Sheet

AT MARCH 31, 2004

NOTES Non-current assets Property, plant and equipment 14 Interests in subsidiaries 16 Investment in an associate 17 Investments in securities 18 Deposits for investments 20 Current assets Trade and other receivables Amount due from an associate Bank balances and cash Current liabilities Trade and other payables Bank and other borrowings – due within one year 25 Obligations under a hire purchase contract – due within one year 26 Net current assets (liabilities) Capital and reserves Share capital 27 Reserves 28 Non-current liabilities Bank and other borrowings – due after one year 25 Obligations under a hire purchase contract – due after one year 26 Amounts due to subsidiaries 29 Convertible note 30 Convertible bonds 31	2004 HK$’000 667 493,536 – 5,220 12,381 511,804 219 – 14,233 14,452 3,895 2,061 112 6,068 8,384 520,188 15,578 381,266 396,844 17,992 185 22,723 46,800 35,644 123,344 520,188	2003 HK$’000 – 281,748 1 5,220 – 286,969 2,444 858 709 4,011 4,122 56,996 – 61,118 (57,107) 229,862 18,423 126,278 144,701 82,549 – 2,612 – – 85,161 229,862

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Consolidated Statement of Changes in Equity

FOR THE YEAR ENDED MARCH 31, 2004

At April 1, 2002 Exchange gain on translation of operations outside Hong Kong and gain not recognised in the consolidated income statement Exercise of share options Private placement Issue of shares for acquisition of subsidiaries Conversion of preference shares Net loss for the year Transfer At March 31, 2003 Exchange gain on translation of operations outside Hong Kong and gain not recognised in the consolidated income statement Realised upon the disposal of a subsidiary Private placements Conversion of convertible bonds Conversion of preference shares Share issue expenses Expenses on issuing convertible bonds Proceeds of private placements received in advance Net profit for the year Transfer At March 31, 2004	Share capital HK$’000 110,753 – 10 334 787 (93,461) – – 18,423 – – 2,800 169 (5,814) – – – – – 15,578	Share premium account HK$’000 82,660 – 100 29,666 78,403 93,461 – – 284,290 – – 214,500 10,717 5,814 (9,432) (932) – – – 504,957	Other reserve HK$’000 – – – – – – – – – – – – – – – – 58,000 – – 58,000	Translation reserve HK$’000 – 1,175 – – – – – – 1,175 2,066 – – – – – – – – – 3,241	Special reserve HK$’000 1,602 – – – – – – – 1,602 – – – – – – – – – – 1,602	Statutory funds HK$’000 – – – – – – – 2,140 2,140 – (190) – – – – – – – 3,052 5,002	Accumu- lated losses HK$’000 (91,091) – – – – – (69,673) (2,140) (162,904) – 190 – – – – – – 80,060 (3,052) (85,706)	Total HK$’000 103,924 1,175 110 30,000 79,190 – (69,673) – 144,726 2,066 – 217,300 10,886 – (9,432) (932) 58,000 80,060 – 502,674

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Note: The special reserve of the Group represents the difference between the nominal value of the shares of the acquired subsidiaries and the nominal value of the Company’s shares issued for the acquisition at the time of the group reorganisation prior to the listing of the Company’s shares in 1995.

The statutory funds are reserves required by the relevant laws of the People’s Republic of China, other than Hong Kong (the “PRC”) applicable to the Group’s PRC subsidiaries.

Other reserve represents the advance payment from the subscriber for the private placement of which the shares have been issued and allotted after the balance sheet date.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Consolidated Cash Flow Statement

FOR THE YEAR ENDED MARCH 31, 2004

OPERATING ACTIVITIES Profit (loss) from operations Adjustments for: Deficit on revaluation of investment properties Impairment loss (reversed) recognised in respect of property, plant and equipment Impairment loss recognised in respect of investments in securities Unrealised holding gain on other investments Depreciation and amortisation of property, plant and equipment Amortisation of goodwill Negative goodwill released to income statement (Gain) loss on disposals of property, plant and equipment Loss on disposal of investments in securities Interest income Operating cash flows before movements in working capital Increase in other investments Increase in inventories Increase in amounts due from customers for contract work Increase in trade and other receivables Decrease (increase) in amount due from an associate Increase in amounts due to customers for contract work Increase in trade and other payables Increase in amounts due to minority shareholders of subsidiaries Decrease in amount due to former ultimate holding company Decrease in amount due to a former fellow subsidiary Cash used in operations Hong Kong Profits Tax paid PRC income tax paid NET CASH USED IN OPERATING ACTIVITIES	2004 HK$’000 115,228 180 (5,987) – (370) 9,605 1,959 – (173) – (425) 120,017 (14,430) (8,825) (49,861) (298,067) 2,199 343 70,649 2,395 – – (175,580) – (327) (175,907)	2003 HK$’000 (58,645) 4,123 8,797 28,060 – 4,232 654 (3,488) 170 16 (257) (16,338) – (7,288) – (46,077) (2,199) – 1,551 2,895 (1,049) (980) (69,485) (170) (195) (69,850)

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES INVESTING ACTIVITIES Interest received Investment in an associate Deposits paid for investments Decrease (increase) in pledged bank deposits Purchase of additional interest in a subsidiary Purchase of property, plant and equipment Proceeds from disposal of property, plant and equipment Proceeds from disposal of an associate Proceeds from disposals of investments in securities Purchase of subsidiaries, net of cash and cash equivalents acquired 33 Disposal of subsidiaries, net of cash and cash equivalents disposed of 34 NET CASH USED IN INVESTING ACTIVITIES FINANCING ACTIVITIES Interest paid Proceeds from issue of ordinary shares Proceeds from issue of convertible note Proceeds from issue of convertible bonds Share issue expenses Expenses on issuing convertible bonds Proceeds from exercise of share options New bank and other borrowings raised Repayments of bank and other borrowings Repayments of obligations under a hire purchase contract Capital injected by a minority shareholder Proceeds of private placements received in advance NET CASH FROM FINANCING ACTIVITIES NET INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR EFFECT OF FOREIGN EXCHANGE RATE CHANGES CASH AND CASH EQUIVALENTS AT END OF THE YEAR ANALYSIS OF THE BALANCES OF CASH AND CASH EQUIVALENTS Bank balances and cash	2004 HK$’000 425 – (12,381) 57,143 (571) (107,273) 9,909 1,704 – (111,623) 43,152 (119,515) (26,171) 217,300 46,800 46,530 (9,432) (932) – 640,976 (301,267) (53) 933 58,000 672,684 377,262 92,477 2,084 471,823 471,823	2003 HK$’000 257 (1) – (57,143) – (18,106) – – 134 (2,165) – (77,024) (6,169) 30,000 – – – – 110 222,571 (23,000) – – – 223,512 76,638 14,664 1,175 92,477 92,477

44 -

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Notes to the Financial Statements

FOR THE YEAR ENDED MARCH 31, 2004

1. GENERAL

The Company is incorporated in Bermuda as an exempted company with limited liability and its shares are listed on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”).

The Company acts as an investment holding company. Its subsidiaries are principally engaged in the operation of natural gas and petroleum business, property investment and financial and securities investment.

2. ADOPTION OF HONG KONG FINANCIAL REPORTING STANDARDS

In the current year, the Group has adopted, for the first time, the following Hong Kong Financial Reporting Standards (“HKFRSs”) issued by the Hong Kong Society of Accountants (“HKSA”), the term of HKFRS is inclusive of Statements of Standard Accounting Practice (“SSAP(s)”) and Interpretations approved by the HKSA:

SSAP 12 (Revised) Income Taxes SSAP 35 Government Grants

Income Taxes

In the current year, the Group has adopted SSAP 12 (Revised) Income Taxes. The principal effect of the implementation of SSAP 12 (Revised) is in relation to deferred tax. SSAP 12 (Revised) requires the adoption of a balance sheet liability method, whereby deferred tax is recognised in respect of all temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, with limited exceptions. In the absence of any specific transitional requirements in SSAP 12 (Revised), the new accounting policy has been applied retrospectively.

The adoption of the standard has had no material effect on the results for the current or prior accounting years.

Government Grants

In the current year, the Group has adopted SSAP 35 Government Grants. In accordance with SSAP 35, government grants are now recognised as income over the periods necessary to match them with the related costs. The Group has elected to apply the accounting provisions of SSAP 35 only to grants or portions becoming receivable or repayable after the adoption of the standard.

The adoption of the standard has had no material effect on the results for the current or prior accounting years. Accordingly, no prior period adjustment has been required.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

3. SIGNIFICANT ACCOUNTING POLICIES

The financial statements have been prepared under the historical cost convention as modified for revaluation of investment properties.

The financial statements have been prepared in accordance with accounting principles generally accepted in Hong Kong. The principal accounting policies adopted are as follows:

Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries made up to March 31 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 intercompany transactions and balances within the Group have been eliminated on consolidation.

Goodwill

Goodwill arising on consolidation represents the excess of the cost of acquisition over the Group’s interest in the fair value of the identifiable assets and liabilities of a subsidiary at the date of acquisition.

Goodwill is capitalised and amortised on a straight-line basis over its useful economic life. Goodwill arising on the acquisition of subsidiaries is presented separately in the balance sheet.

Negative goodwill

Negative goodwill represents the excess of the Group’s interest in the fair value of the identifiable assets and liabilities of a subsidiary at the date of acquisition over the cost of acquisition.

Negative goodwill is presented as a deduction from assets. To the extent that such negative goodwill is attributable to losses or expenses anticipated at the date of acquisition, it is released to income in the period in which those losses or expenses arise. The remaining negative goodwill is recognised as income on a straight-line basis over the remaining average useful life of the identifiable acquired depreciable assets. To the extent that such negative goodwill exceeds the aggregate fair value of the acquired identifiable nonmonetary assets, it is recognised in income immediately.

Investments in subsidiaries

Investments in subsidiaries are included in the Company’s balance sheet at cost less any identified impairment loss.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Revenue recognition

Gas connection revenue is recognised when the outcome of a contract can be estimated reliably and the stage of completion at the balance sheet date can be measured reliably. Revenue from gas connection contracts is recognised on the percentage of completion method, measured by reference to the value of work carried out during the year. When the outcome of a gas connection contract cannot be estimated reliably, revenue is recognised only to the extent of contract cost incurred that it is probable to be recoverable.

Sales of petroleum, natural gas and gas appliances are recognised when goods are delivered and title has passed.

Rental income under operating leases is recognised on a straight-line basis over the terms of the relevant leases.

Sale proceeds on trading of securities are recognised on a trade date basis when a sale and purchase contract is entered into.

Interest income is accrued on a time basis by reference to the principal outstanding and at the interest rate applicable.

Dividend income from investments is recognised when the shareholders’ rights to receive payment have been established.

Interests in associates

The consolidated income statement includes the Group’s share of the post-acquisition results of its associates for the year. In the consolidated balance sheet, interests in associates are stated at the Group’s share of the net assets of the associates plus the premium paid less any discount on acquisition in so far as it has not already been amortised to the income statement, less any identified impairment loss.

The results of associates are accounted for by the Company on the basis of dividends received and receivable during the year. In the Company’s balance sheet, investment in an associate is stated at cost, as reduced by any identified impairment loss.

Investment properties

Investment properties are completed properties which are held for their investment potential, any rental income being negotiated at arm’s length.

Investment properties are stated at their open market value based on independent professional valuations at the balance sheet date. Any revaluation increase or decrease arising on the revaluation of investment properties is credited or charged to the investment property revaluation reserve unless the balance of this reserve is insufficient to cover a revaluation decrease, in which case the excess of the revaluation decrease over the balance on the investment property revaluation reserve is charged to the income statement. Where a decrease has previously been charged to the income statement and a revaluation increase subsequently arises, this increase is credited to the income statement to the extent of the decrease previously charged.

On disposal of an investment property, the balance on the investment property revaluation reserve attributable to that property is transferred to the income statement.

No depreciation is provided on investment properties except where the unexpired term of the relevant lease is 20 years or less.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Properties held for development

Properties held for development are stated at the cost of acquisition to the Group together with any attributable expenses less provision for anticipated losses, where appropriate.

Property, plant and equipment

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

Depreciation is provided to write off the cost of items of property, plant and equipment over their estimated useful lives and after taking into account their estimated residual value, using the straight-line method, at the following rates per annum:

Land use rights	Over the shorter of the term of the lease or the
	operation period of the relevant company
Leasehold land	Over the remaining terms of the leases
Buildings	Over the shorter of the remaining terms of the leases
	or 50 years
Pipelines	Over the shorter of 30 years or the operation period
	of the relevant company
Machinery and equipment	10%
Furniture and fixtures	15% – 50%
Motor vehicles	25%

The gain or loss arising from disposal or retirement of an asset is determined as the difference between the sale proceed and the carrying amount of the asset and is recognised in the income statement.

Construction in progress

Construction in progress represents machinery and pipelines under construction and is stated at cost. Cost comprises direct and indirect costs of acquisition or construction. Completed items are transferred from construction in progress to proper categories of property, plant and equipment when they are ready for their intended use.

Investments in securities

Investments in securities are recognised on a trade-date basis and are initially measured at cost.

Investments other than held-to-maturity debt securities are classified as investment securities and other investments.

Investment securities, which are securities held for an identified long-term strategic purpose are measured at subsequent reporting dates at cost, as reduced by any impairment loss that is other than temporary.

Other investments are measured at fair value, with unrealised gains and losses included in net profit or loss for the year.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Construction contracts

When the outcome of a construction contract can be estimated reliably, contract costs are charged to the income statement by reference to the stage of completion of the contract activity at the balance sheet date, as measured by the proportion that costs incurred to date to estimated total costs for the contract.

When the outcome of a construction contract cannot be estimated reliably, contract costs are recognised as an expense in the period in which they are incurred.

When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately.

When a contract covers a number of assets, the construction of each asset is treated as a separate contract when separate proposals have been submitted for each asset, each asset has been separately negotiated and the costs and revenues of each asset can be separately identified. A group of contracts, performed concurrently or in a continuous sequence, is treated as a single construction contract when they were negotiated as a single package and are so closely inter-related that they constitute a single project with an overall profit margin.

Where contract costs incurred to date plus recognised profits less recognised losses exceed progress billings, the surplus is shown as amounts due from customers for contract work. For contracts where progress billings exceed contract costs incurred to date plus recognised profits less recognised losses, the surplus is shown as amounts due to customers for contract work. Amounts received before the contract work is performed are included in the balance sheet as a liability, as advances received. Amounts billed for work performed, but not yet paid by the customer, are included in the balance sheet within trade and other receivables.

Inventories

Inventories, including construction materials, gas appliances and gas for sales, petroleum, consumables and spare parts, are stated at the lower of cost and net realisable value. Cost is calculated using the weighted average method. Net realisable value represents the estimated selling price in the ordinary course of business less estimated costs to completion and the estimated costs necessary to make the sale.

Impairment

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

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

49 -

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Leases

Leases are classified as finance leases when the terms of the lease transfer substantially all the risk and rewards of ownership of the assets concern to the Group. Assets held under finance leases are capitalised at their fair value at the dates of acquisition. The corresponding liability to the lessor is included in the balance sheet as obligations under finance leases. The finance costs, which represent the difference between the total finance leases commitments and the fair value of the assets acquired, are charged to the income statement over the term of the relevant lease so as to produce a constant periodic rate of charge on the remaining balance of the obligations for each accounting period.

All other leases are classified as operating leases and the rentals are charged to the income statement on a straight-line basis over the relevant lease term.

Retirement benefit costs

Payments to the Mandatory Provident Fund Scheme (“MPF Scheme”) and other schemes are charged as an expense as they fall due.

Foreign currencies

Transactions in foreign currencies are initially recorded at the rates of exchange prevailing on the dates of the transactions or at the contracted settlement rate. Monetary assets and liabilities denominated in foreign currencies are re-translated at the rates prevailing on the balance sheet date. Profits and losses arising on exchange are included in net profit or loss for the year.

On consolidation, the assets and liabilities of the Group’s overseas operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the year. Exchange differences arising, if any, are classified as equity and transferred to the Group’s translation reserve. Such translation differences are recognised as income or as expenses in the period in which the operation is disposed of.

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 net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes income statement items that are never taxable or deductible.

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences, and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill (or negative 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 and associates, 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.

50 -

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

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

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

Government grants

Government grants are recognised as income over the periods necessary to match them with the related costs. Grants related to expense items are recognised in the same period as those expenses are charged in the income statement and are reported separately as “other operating income”.

4. TURNOVER

Turnover represents the net amounts received and receivable for goods sold, sales of piped gas and petroleum, income from trading of securities, gas connection fees, dividend income and rental income received and receivable by the Group for the year and is analysed as follows:

Gas connection fees Sales of petroleum Sales of piped gas Sales of goods Rental income Income from trading of securities Dividend income Others	2004 HK$’000 185,045 129,791 49,727 3,410 1,262 – 94 7,162 376,491	2003 HK$’000 2,838 58,140 15,975 3,658 2,263 134 2 2,527
		85,537

51 -

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

5. BUSINESS AND GEOGRAPHICAL SEGMENTS

Business segments

For management purposes, the Group is currently organised into five operating divisions – property investment, financial and securities investment, gas pipeline construction, sales of piped gas and petroleum. These principal operating activities are the basis on which the Group reports its primary segment information.

Segment information about these businesses is presented below:

2004

2004
Property investment HK$’000 REVENUE Turnover 1,262 SEGMENT RESULT (715) Unallocated corporate revenue Unallocated corporate expenses Profit from operations Finance costs Gain on disposal of subsidiaries – Profit on disposal of discontinued operation – Profit before taxation Taxation Profit before minority interests Minority interests Net profit for the year ASSETS Segment assets 45,966 Unallocated corporate assets Consolidated total assets LIABILITIES Segment liabilities 1,125 Unallocated corporate liabilities Consolidated total liabilities OTHER INFORMATION Additions to property, plant and equipment – Additions to property, plant and equipment (unallocated) Depreciation and amortisation – Depreciation and amortisation (unallocated) Deficit on revaluation of investment properties 180 Amortisation of goodwill –		Continuing operations			Others HK$’000 10,572 2,556 – – 9,087 1,857 – – – –	Discontinued operation Sales of petroleum HK$’000 129,791 (518) – 7,569 – – 14,955 5,213 – 1,462	Consolidated HK$’000 376,491 139,544 10,109 (34,425) 115,228 (24,602) 20,017 7,569 118,212 (1,344) 116,868 (36,808) 80,060 1,097,956 244,323 1,342,279 66,585 681,899 748,484 181,441 3,278 184,719 8,109 1,496 9,605 180 1,959
		Financial and securities investment HK$’000 94 54 – – 20,290 – – – – –	Gas pipeline construction HK$’000 185,045 130,015 – – 164,601 31,052 – – – –	Sales of piped gas HK$’000 49,727 8,152 20,017 – 858,012 32,551 166,486 2,896 – 497

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

2003

REVENUE Turnover SEGMENT RESULT Unallocated corporate revenue Unallocated corporate expenses Loss from operations Finance costs Share of results of associates Loss before taxation Taxation Loss before minority interests Minority interests Net loss for the year ASSETS Segment assets Interests in associates Unallocated corporate assets Consolidated total assets LIABILITIES Segment liabilities Unallocated corporate liabilities Consolidated total liabilities OTHER INFORMATION Additions to property, plant and equipment Additions to property, plant and equipment (unallocated) Depreciation and amortisation Depreciation and amortisation (unallocated) Deficit on revaluation of investment properties Amortisation of goodwill Impairment loss recognised in consolidated income statement Negative goodwill released to income statement (unallocated)		Continuing operations	Continuing operations	Continuing operations	Others HK$’000 6,185 612 – 5,032 – 2,277 – – – – –	Discontinued operation Sales of petroleum HK$’000 58,140 4,940 – 146,720 – 1,413 103,960 2,037 – 207 –	Consolidated HK$’000 85,537 (19,328) 343 (39,660) (58,645) (6,169) (11) (64,825) (1,861) (66,686) (2,987) (69,673) 367,752 1,704 132,051 501,507 14,171 282,878 297,049 131,642 49,072 180,714 3,407 825 4,232 4,123 654 28,060 3,488
	Property investment HK$’000 2,263 (3,836) – 55,986 – 351 – 258 4,123 – –	Financial and securities investment HK$’000 136 (28,423) – 5,501 – 11 – – – – 28,060	Gas pipeline construction HK$’000 2,838 1,947 – 47,063 – 3,050 722 – – – –	Sales of piped gas HK$’000 15,975 5,432 (11) 107,450 1,704 7,069 26,960 1,112 – 447 –

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Other Information

In December 2003, the Group entered into a sale agreement to dispose of a subsidiary, Zhengzhou Standard Petrochemical Co., Ltd. (“Zhengzhou Standard”), which carried out all of the Group’s sales of petroleum business. The disposal was effected in order to generate cash flow for the expansion of the Group’s other business. The disposal was completed on March 29, 2004, on which date control of Zhengzhou Standard passed to the acquirer.

The results of the sales of petroleum business for the year were included above as discontinued operation.

During the year, the sales of petroleum business contributed HK$129,791,000 (2003: HK$58,140,000) to the Group’s turnover and a loss of HK$518,000 (2003: a profit of HK$4,940,000) to the Group’s profit (loss) from operations. It also contributed HK$4,018,000 (2003: HK$9,212,000) to the Group’s net operating cash flows, paid HK$14,539,000 (2003: HK$8,403,000) in respect of investing activities and received HK$7,576,000 (2003: paid HK$571,000) in respect of financing activities.

The carrying amounts of the assets and liabilities of Zhengzhou Standard at the date of disposal, and at March 31, 2003, are follows:

Total assets Total liabilities	3.29.2004 HK$’000 187,002 148,154	3.31.2003 HK$’000 146,720

		46,635

A profit of HK$7,569,000 arose on the disposal of Zhengzhou Standard, being the proceeds of disposal less the carrying amount of the subsidiary’s net assets and attributable goodwill.

Geographical segments

The Group’s operations are located in Hong Kong and the PRC. The Group’s property investment, financial and securities investment divisions are located in Hong Kong. Sales of piped gas and petroleum and gas pipeline construction are carried out in the PRC.

The following table provides an analysis of the Group’s sales by geographical market, irrespective of the origin of the goods/services:

Hong Kong The PRC	Sales revenue by geographical market 2004 2003 HK$’000 HK$’000 1,356 1,482 375,135 84,055 376,491 85,537	Sales revenue by geographical market 2004 2003 HK$’000 HK$’000 1,356 1,482 375,135 84,055 376,491 85,537
		85,537

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

The following is an analysis of the carrying amount of segment assets, and additions to property, plant and equipment, analysed by the geographical area in which the assets are located:

Carrying amount of segment assets 2004 2003 HK$’000 HK$’000 Hong Kong 149,372 99,812 The PRC 1,192,907 401,695 1,342,279 501,507 6. OTHER OPERATING INCOME Interest income Subsidies of PRC governmental authorities Sundry income Gain on disposals of property, plant and equipment 7. PROFIT (LOSS) FROM OPERATIONS Profit (loss) from operations has been arrived at after charging (crediting): Auditors’ remuneration Depreciation and amortisation of property, plant and equipment on: Owned assets Asset held under a hire purchase contract Loss on disposals of property, plant and equipment Minimum lease payments for operating leases in respect of: – rented premises – equipment Staff costs: Directors’ emoluments_(note 9)_ Salaries and allowances of other staff Contributions to retirement benefit scheme contributions Less: amount capitalised in construction in progress Rental income from investment properties less outgoings of HK$76,000 (2003: HK$45,000)	Additions to property, plant and equipment 2004 2003 HK$’000 HK$’000 888 44,481 183,831 136,233 184,719 180,714 2004 2003 HK$’000 HK$’000 425 257 7,857 – 3,524 86 173 – 11,979 343 2004 2003 HK$’000 HK$’000 900 750	Additions to property, plant and equipment 2004 2003 HK$’000 HK$’000 888 44,481 183,831 136,233 184,719 180,714 2004 2003 HK$’000 HK$’000 425 257 7,857 – 3,524 86 173 – 11,979 343 2004 2003 HK$’000 HK$’000 900 750
	9,537 68	4,232 –
	9,605 – 788 351	4,232 170 870 340
	5,253 17,678 971 (608)	4,581 4,618 58 –
	23,294 (1,186)	9,257 (2,218)

55 -

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

8. FINANCE COSTS

Interest on: Bank loans and other borrowings wholly repayable within five years Bank loans not wholly repayable within five years Obligations under a hire purchase contract Convertible note Convertible bonds Less: Interest capitalised to construction in progress	2004 HK$’000 25,081 1,713 13 759 165 27,731 (3,129) 24,602	2003 HK$’000 5,773 396 – – –
		6,169 –
		6,169

9. DIRECTORS’ EMOLUMENTS

Directors’ fees – executive – non-executive – independent non-executive Other emoluments – executive – non-executive Total emoluments The emoluments of the directors were within the following bands:	2004 HK$’000 100 240 321 661 4,592 – 4,592 5,253	2003 HK$’000 33 118 103
		254
		2,492 1,835
		4,327
		4,581

	2004	2003
	No. of	No. of
	Directors	Directors
Nil to HK$1,000,000	9	17
HK$1,500,001 to HK$2,000,000	–	2
HK$2,000,001 to HK$2,500,000	2	–

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

10. EMPLOYEES’ EMOLUMENTS

Of the five individuals with the highest emoluments in the Group, two (2003: three) were directors of the Company. The emoluments of the remaining three (2003: two) individuals were as follows:

Salaries and other benefits Retirement benefit scheme contributions	2004 HK$’000 1,525 34 1,559	2003 HK$’000 574 20
		594

Emoluments of each of the three (2003: two) individuals were below HK$1,000,000.

11. TAXATION

The charge comprises: Overprovision for Hong Kong Profits Tax in the previous year PRC income tax for the year	2004 HK$’000 – (1,344) (1,344)	2003 HK$’000 18 (1,879)
		(1,861)

No provision for Hong Kong Profits Tax has been made in the financial statements as the Group had no assessable profit for the year.

Taxation arising in other jurisdiction is calculated at the rates prevailing in the relevant jurisdictions.

Certain subsidiaries operating in the PRC are eligible for tax holidays and concessions and were exempted from PRC income taxes for the year.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

The taxation for the year can be reconciled to the profit (loss) before taxation per the income statement as follows:

Profit (loss) before taxation Tax at the domestic income tax rate Tax effect of expenses not deductible for tax purpose Tax effect of income not taxable for tax purpose Overprovision in respect of prior years Tax effect of deferred tax asset not recognised Effect of tax exemption granted to certain PRC subsidiaries Others Taxation for the year	Hong Kong 2004 2003 HK$’000 % HK$’000 % (2,002) (69,768) (351) 17.5 (11,163) 16.0 712 7,698 (5,183) (474) – (18) 4,822 3,949 – – – (10) – (18)	PRC 2004 2003 HK$’000 % HK$’000 % 120,214 4,943 39,671 33.0 1,631 33.0 1,526 1,899 (2,447) (127) – – 263 25 (37,669) (1,549) – – 1,344 1,879	Total 2004 HK$’000 118,212 39,320 2,238 (7,630) – 5,085 (37,669) – 1,344	2003 HK$’000 (64,825) (9,532) 9,597 (601) (18) 3,974 (1,549) (10) 1,861

12. EARNINGS (LOSS) PER SHARE

The calculation of the basic and diluted earnings (loss) per share is based on the following data:

Earnings (loss) for the purpose of basic earnings (loss) per share Effect of dilutive potential ordinary shares: Interest on convertible note and convertible bonds Earnings (loss) for the purposes of diluted earnings (loss) per shares Weighted average number of ordinary shares for the purpose of basic earnings (loss) per share Effect of dilutive potential ordinary shares: Convertible note Convertible bonds Weighted average number of ordinary shares for the purpose of diluted earnings (loss) per share	2004 HK$’000 80,060 924 80,984 2004 ’000 1,300,959 17,518 21,973 1,340,450	2003 HK$’000 (69,673) – (69,673) 2003 ’000 1,043,403 – – 1,043,403

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

The computation of diluted earnings per share for the year ended March 31, 2004 does not assume the exercise of the Company’s outstanding share options as the exercise price of those options is higher than the average market price for shares for the year.

No diluted loss per share for the year ended March 31, 2003 is presented as the exercise of the potential dilutive ordinary shares would result in reduction in loss per share.

13. INVESTMENT PROPERTIES

Valuation At beginning of the year Deficit on revaluation At end of the year	THE 2004 HK$’000 9,800 (180) 9,620	GROUP 2003 HK$’000 13,923 (4,123)
		9,800

Investment properties were revalued at their open market value at March 31, 2004 by LCH (Asia-Pacific) Surveyors Limited, a firm of independent professionally qualified valuers, on an open market existing use basis. This valuation gave rise to a deficit on revaluation of HK$180,000 (2003: HK$4,123,000), which has been charged to the consolidated income statement.

All of the Group’s investment properties are rented out under operating leases.

The market value of investment properties shown above comprises:

Long lease in Hong Kong Medium-term lease in Hong Kong	2004 HK$’000 8,020 1,600 9,620	2003 HK$’000 8,020 1,780
		9,800

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

14. PROPERTY, PLANT AND EQUIPMENT

THE GROUP

Land use rights under medium- term leases in the PRC HK$’000 COST At April 1, 2003 29,310 Additions – Acquired on acquisition of subsidiaries – Reclassification – Disposal of subsidiaries (29,310) Disposals – At March 31, 2004 – DEPRECIATION, AMORTISATION AND IMPAIRMENT At April 1, 2003 275 Provided for the year 660 Impairment loss reversed in the income statement (Note below) – Eliminated on disposal of subsidiaries (935) Eliminated on disposals – At March 31, 2004 – NET BOOK VALUES At March 31, 2004 – At March 31, 2003 29,035 THE COMPANY	Leasehold land and buildings HK$’000 118,584 1,166 – – (58,862) (12,500) 48,388 13,625 4,446 (5,987) (4,742) (2,821) 4,521 43,867 104,959	Construction in Pipelines progress HK$’000 HK$’000 13,200 14,152 10,275 96,927 – 61,428 12,348 (12,348) – (25,916) – – 35,823 134,243 128 – 463 – – – – – – – 591 – 35,232 134,243 13,072 14,152	Machinery and equipment HK$’000 10,749 2,152 – – (800) – 12,101 726 1,439 – (103) – 2,062 10,039 10,023	Furniture and fixtures HK$’000 1,893 2,866 227 – (205) (61) 4,720 201 478 – (57) (4) 618 4,102 1,692	Motor vehicles HK$’000 5,579 6,890 2,788 – (3,822) – 11,435 742 2,119 – (1,412) – 1,449 9,986 4,837	Total HK$’000 193,467 120,276 64,443 – (118,915) (12,561)
						246,710
						15,697 9,605 (5,987) (7,249) (2,825)
						9,241
						237,469

						177,770

COST Acquired during the year and at March 31, 2004 DEPRECIATION Provided for the year and at March 31, 2004 NET BOOK VALUE At March 31, 2004	Motor vehicles HK$’000 815 148
	667

60 -

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

The net book value of leasehold land and buildings of the Group shown above comprises:

In Hong Kong Long lease Medium-term lease Outside Hong Kong Medium-term lease	2004 HK$’000 39,682 – 4,185 43,867	2003 HK$’000 34,577 9,679 60,703
		104,959

At March 31, 2004, interest capitalised in construction in progress amounted to HK$3,129,000 (2003: nil).

The net book value of property, plant and equipment includes an amount of HK$398,000 (2003: nil) in respect of an asset held under a hire purchase contract.

Note:

During the year, the directors determined that the impairment loss of HK$5,987,000 of certain leasehold land and buildings held by the subsidiaries were reversed, due to the increase in the recoverable amount after the change of the core business of the Group.

15. PROPERTIES HELD FOR DEVELOPMENT

Medium-term lease in Hong Kong – at cost Less: Impairment loss recognised	THE GROUP 2004 2003 HK$’000 HK$’000 43,100 43,100 (6,900) (6,900) 36,200 36,200	THE GROUP 2004 2003 HK$’000 HK$’000 43,100 43,100 (6,900) (6,900) 36,200 36,200
		36,200

Properties held for development were reassessed at their open market value at March 31, 2004 on an open market existing use basis. The directors of the Company consider that no further impairment loss (2003: nil) was required to be charged to the consolidated income statement.

61 -

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

16. INTERESTS IN SUBSIDIARIES

Unlisted shares, at cost Less: Impairment losses recognised Amounts due from subsidiaries Less: Allowance	THE COMPANY 2004 2003 HK$’000 HK$’000 325,689 129,504 (51,504) (51,504) 274,185 78,000 356,527 340,924 (137,176) (137,176) 219,351 203,748 493,536 281,748

The amounts due from subsidiaries are unsecured and interest-free. In the opinion of the directors, the amounts will not be repaid within twelve months from the balance sheet date. Accordingly, they are classified as non-current.

Particulars of the principal subsidiaries at March 31, 2004 are as follows:

			Paid up	Proportion of	Proportion of
	Place of		issued	nominal	value
	incorporation	Form of	share capital/	of issued capital/
or registration/		business	registered	registered capital
Name of subsidiary	operations	structure	capital	held by the	Company	Principal activities
				Directly Indirectly
				%	%
Faith Profit Limited	Hong Kong	Incorporated	Ordinary	100	–	Property holding
			HK$10,000
Hai Xia Finance Limited	Hong Kong	Incorporated	Ordinary	–	100	Securities investment
			HK$2
Iwai’s Holdings	Hong Kong	Incorporated	Ordinary	–	100	Investment holding,
(Hong Kong) Limited			HK$1,000			property investment
			Non-voting	–	–	and provision of
			deferred shares			management
			HK$1,000,000			services to group
			(Note 1)			companies
Iwai’s Investments Limited	The British	Incorporated	Ordinary	100	–	Investment holding
	Virgin		HK$10,000
	Islands
	(“BVI”)/
	Hong Kong

62 -

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

			Paid up	Proportion of	Proportion of
	Place of		issued	nominal	value
incorporation		Form of	share capital/	of issued capital/
or	registration/	business	registered	registered capital
Name of subsidiary	operations	structure	capital	held by the	Company	Principal activities
				Directly Indirectly
				%	%
Luckford Enterprise	Hong Kong	Incorporated	Ordinary	100	–	Property development
Limited			HK$10,000
Wellgem Asia Limited	Hong Kong	Incorporated	Ordinary	100	–	Property development
			HK$10,000
中亞燃氣實業（深圳）	PRC	Wholly	Registered	100	–	Investment holding
有限公司（「中亞燃氣」）		foreign-	US$29,800,000			and treasury
		owned
		enterprise
北京中燃翔科油氣	PRC	Sino-foreign	Registered	–	60	Trading of natural
技術有限公司		equity joint	RMB20,000,000			gas and gas pipeline
Beijing Zhongran Xiangke		venture				construction
Oil Gas Technology
Company Limited*
Elegant Cheer Limited	Hong Kong	Incorporated	Ordinary	–	100	Property holding
			HK$10,000
China Gas Corporate	Hong Kong	Incorporated	Ordinary	100	–	Provision of
Services Limited			HK$100			secretarial services
China Gas Development	BVI	Incorporated	Ordinary	100	–	Investment holding
Group Limited			US$100
China Natural Gas	BVI	Incorporated	Ordinary	100	–	Investment holding
Investment Limited			US$100
China City Gas Investment	Samoa	Incorporated	Ordinary	100	–	Investment holding
Limited			US$1
China City Gas Development	Samoa	Incorporated	Ordinary	100	–	Investment holding
Limited			US$1
武漢中燃投資有限公司	PRC	Limited	Registered	–	100	Investment
Wuhan China Natural Gas		liability	RMB69,980,000			holding
Investment Company		company
Limited*
益陽中燃城市燃氣	PRC	Sino-foreign	Registered	–	80	Trading of natural gas
發展有限公司		equity joint	RMB44,000,000			and gas pipeline
Yiyang Central Gas & City Gas		venture				construction
Development Co., Ltd.*

63 -

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

			Paid up	Proportion of	Proportion of
	Place of		issued	nominal	value
	incorporation	Form of	share capital/	of issued capital/
or registration/		business	registered	registered capital
Name of subsidiary	operations	structure	capital	held by the	Company	Principal activities
				Directly Indirectly
				%	%
蕪湖中燃城市燃氣	PRC	Sino-foreign	Registered	–	90	Trading of natural gas
發展有限公司		equity joint	RMB100,000,000			and gas pipeline
Wuhu City Natural Gas		venture				construction
Development Company
Limited*
北京中油翔科科技	PRC	Limited	Registered	–	80	Trading of natural gas
有限公司		liability	RMB2,000,000			and gas pipeline
		company				construction
唐山翔科燃氣有限公司	PRC	Limited	Registered	–	70	Trading of natural gas
		liability	RMB1,000,000			and gas pipeline
		company				construction
廊坊市翔科危險貨物	PRC	Limited	Registered	–	80	Trading of natural gas
運輸有限公司		liability	RMB500,000			and gas pipeline
		company				construction
廊坊市翔科油氣技術	PRC	Limited	Registered	–	51	Trading of natural gas
有限公司		liability	RMB2,680,000			and gas pipeline
		company				construction
宜昌中燃城市燃氣發展	PRC	Limited	Registered	–	70	Trading of natural gas
有限公司		liability	RMB70,000,000			and gas pipeline
Yichang Zhongran City Gas		company				construction
Development Limited*
城翔科燃氣有限公司	PRC	Limited	Registered	–	70	Trading of natural gas
		liability	RMB2,000,000			and gas pipeline
		company				construction
Clever Decision Enterprises	BVI	Incorporated	Ordinary	100	–	Investment
Limited			US$100			holding
北京通寶華油燃氣	PRC	Wholly foreign	Registered	–	100	Investment holding
技術發展有限公司		owned enterprise	RMB20,000,000
淮南中燃城市燃氣	PRC	Sino-foreign	Registered	–	70	Trading of natural
發展有限公司		equity joint	RMB72,000,000			gas and gas pipeline
Huainan China Gas City Gas		venture				construction
Development Co., Ltd.*

64 -

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

				Paid up	Proportion of	Proportion of
		Place of		issued	nominal value
	incorporation		Form of	share capital/	of issued capital/
	or	registration/	business	registered	registered capital
Name of subsidiary		operations	structure	capital	held by the Company		Principal activities
					Directly	Indirectly
					%	%
隨州中燃城市燃氣
發展有限公司		PRC	Sino-foreign	Registered	–	90	Trading of natural
Suizhou Central City Gas			equity joint	RMB35,000,000			gas and gas pipeline
Development Co., Ltd.*			venture				construction
孝感振戎天然氣有限公司		PRC	Sino-foreign	Registered	–	30	Trading of natural
Xiaogan Zhenrong Gas			equity joint	RMB28,000,000		(Note 2)	gas and gas pipeline
Co., Ltd.*			venture				construction
孝感嘉旭天然氣有限公司		PRC	Sino-foreign	Registered	–	65	Trading of natural
Xiaogan Jiaxu Gas Co., Ltd.*			equity joint	RMB10,000,000			gas and gas pipeline
			venture				construction
漢川嘉旭天然氣有限公司		PRC	Sino-foreign	Registered	–	65	Trading of natural
Hanchuen Jiaxu Gas			equity joint	RMB7,000,000			gas and gas pipeline
Co., Ltd.*			venture				construction
雲夢嘉旭天然氣有限公司		PRC	Sino-foreign	Registered	–	65	Trading of natural
Yumeng Jiaxu Gas Co., Ltd.*			equity joint	RMB6,200,000			gas and gas pipeline
			venture				construction
應城嘉旭天然氣有限公司		PRC	Sino-foreign	Registered	–	65	Trading of natural
Yingcheng Jiaxu Gas Co.,	Ltd.*		equity joint	RMB10,000,000			gas and gas pipeline
			venture				construction

English name is for identification purposes only.

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

Notes:

(1) The deferred shares, which are not held by the Group, practically carry no rights to dividends or to receive notice of or to attend or vote at any general meeting of the company or to participate in any distribution on winding up.
(2) The Group holds 30% interest in Xiaogan Zhenrong Gas Co. Ltd. (“Xiaogan Zhenrong”). However, the Group has contractual right to appoint two out of three directors on the board of directors of Xiaogan Zhenrong and has the power to govern its financial and operating policies. Accordingly, it is accounted for as a subsidiary.

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

65 -

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

17. INTERESTS IN ASSOCIATES/INVESTMENT IN AN ASSOCIATE

Share of net assets Unlisted shares, at cost	THE GROUP 2004 2003 HK$’000 HK$’000 – 1,704 THE COMPANY 2004 2003 HK$’000 HK$’000 – 1

During the year, the Group disposed of its 30% equity interest in 北京城南之光燃氣技術開發有限公司 .

At March 31, 2003, the Group also owned 49% equity interest in China Gas Development Group Limited (“China Gas Development”) which was an associate of the Group. During the year, the Company acquired the remaining 51% equity interest in China Gas Development. The details of the acquisition are set out in note 33.

66 -

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

18. INVESTMENTS IN SECURITIES

THE GROUP Equity securities held in Hong Kong Market value Carrying amount analysed for reporting purpose as: Current Non-current THE COMPANY Equity securities held in Hong Kong Market value Carrying amount analysed for reporting purpose as: Non-current	Investment securities 2004 2003 HK$’000 HK$’000 5,490 5,490 4,392 3,660 – – 5,490 5,490 5,490 5,490 5,220 5,220 4,176 3,480 5,220 5,220	Other investments 2004 2003 HK$’000 HK$’000 14,800 – 14,800 – 14,800 – – – 14,800 – – – – – – –	Total 2004 2003 HK$’000 HK$’000 20,290 5,490 19,192 3,660 14,800 – 5,490 5,490 20,290 5,490 5,220 5,220 4,176 3,480 5,220 5,220	Total 2004 2003 HK$’000 HK$’000 20,290 5,490 19,192 3,660 14,800 – 5,490 5,490 20,290 5,490 5,220 5,220 4,176 3,480 5,220 5,220

				3,660

				– 5,490
				5,490

				5,220

				3,480

				5,220

Note: The investment securities represent approximately 6.1% and 5.8% equity interests in Greater China Holdings Limited held by the Group and the Company, respectively.

67 -

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

19. GOODWILL

	THE GROUP
	HK$’000
COST
At April 1, 2003	20,784
Arising on acquisitions of subsidiaries during the year	93,501
Arising on acquisition of additional interest in a subsidiary	226
Eliminated on disposals of subsidiaries during the year	(5,470)
At March 31, 2004	109,041
AMORTISATION
At April 1, 2003	654
Charge for the year	1,959
Eliminated on disposals of subsidiaries during the year	(705)
At March 31, 2004	1,908
NET BOOK VALUES
At March 31, 2004	107,133
At March 31, 2003	20,130

The goodwill is amortised to the consolidated income statement on a straight-line basis over a period ranged from 11 to 20 years.

20. DEPOSITS FOR INVESTMENTS

THE GROUP AND THE COMPANY

(a) On March 12, 2004, the Company entered into a conditional Sales and Purchase Agreement (“S & P Agreement”) with an independent third party pursuant to which the third party has agreed to sell and the Company has agreed to acquire 100% equity interest in United Keen Investment Limited (“United Keen”) at a consideration of RMB12,000,000 (equivalent to HK$11,429,000). During the year, the Company has paid HK$6,667,000.
(b) On March 15, 2004, the Company entered into another conditional S & P Agreement with an independent third party pursuant to which the third party has agreed to sell and the Company has agreed to acquire 100% equity interest in Glorywish Investment Limited (“Glorywish”) at a consideration of RMB9,500,000 (equivalent to HK$9,048,000). During the year, the Company has paid HK$5,714,000.
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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

21. INVENTORIES

The following is an analysis of inventories at the reporting date: Construction materials Consumables and spare parts Natural gas Petroleum The balance represents finished goods and is stated at cost. AMOUNTS DUE FROM (TO) CUSTOMERS FOR CONTRACT WORK Contracts in progress at balance sheet date: Contract costs incurred plus recognised profits less recognised losses Less: progress billings Represented by: Due from customers included in current assets Due to customers included in current liabilities	THE GROUP 2004 2003 HK$’000 HK$’000 11,475 880 1,239 2,573 – 132 – 10,473 12,714 14,058 THE GROUP 2004 2003 HK$’000 HK$’000 57,369 – (7,851) – 49,518 – 49,861 – (343) – 49,518 –	THE GROUP 2004 2003 HK$’000 HK$’000 11,475 880 1,239 2,573 – 132 – 10,473 12,714 14,058 THE GROUP 2004 2003 HK$’000 HK$’000 57,369 – (7,851) – 49,518 – 49,861 – (343) – 49,518 –
		–

		– –
		–

22. AMOUNTS DUE FROM (TO) CUSTOMERS FOR CONTRACT WORK

At March 31, 2004 and 2003, there were no retention monies held by customers for contract work performed. At March 31, 2004, advances received from customers for contract work amounted to HK$7,296,000 (2003: nil) which were included in trade and other payables.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

23. TRADE AND OTHER RECEIVABLES

The Group allows an average credit period of 30 to 60 days to its trade customers.

The following is an aged analysis of trade and other receivables at the reporting date:

Not yet due Within credit period Overdue by: 0 – 30 days 31 – 60 days 61 – 90 days 91 – 120 days Over 180 days Trade receivables Deposits paid for construction materials Other receivables, deposits and prepayments Advance to a supplier – interest bearing_(Note)_ Advances to other suppliers – non-interest bearing Deposit paid to a minority shareholder of a subsidiary for acquisition of property, plant and equipment Amount due from a minority shareholder of a subsidiary	THE GROUP 2004 2003 HK$’000 HK$’000 73,111 – 20,463 3,066 2,198 436 2,519 290 2,568 1,331 514 1,793 1,910 1,565 103,283 8,481 179,433 38,095 63,419 10,939 – 8,524 – 8,973 37,066 – 1,587 – 384,788 75,012	THE GROUP 2004 2003 HK$’000 HK$’000 73,111 – 20,463 3,066 2,198 436 2,519 290 2,568 1,331 514 1,793 1,910 1,565 103,283 8,481 179,433 38,095 63,419 10,939 – 8,524 – 8,973 37,066 – 1,587 – 384,788 75,012
		8,481 38,095 10,939 8,524 8,973 – –
		75,012

Note: Advance to a supplier was interest bearing at commercial rate, unsecured and fully settled during the year.

24. TRADE AND OTHER PAYABLES

The following is an aged analysis of trade and other payables at the reporting date:

0 – 60 days 61 – 90 days 91 – 120 days 121 – 180 days Over 180 days Trade payables Other payables and accrued charges	THE GROUP 2004 2003 HK$’000 HK$’000 24,695 1,439 1,169 32 842 1,217 57 422 3,946 4,292 30,709 7,402 41,606 30,709 72,315 38,111	THE GROUP 2004 2003 HK$’000 HK$’000 24,695 1,439 1,169 32 842 1,217 57 422 3,946 4,292 30,709 7,402 41,606 30,709 72,315 38,111
		7,402 30,709
		38,111

70 -

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

25. BANK AND OTHER BORROWINGS

Bank loans Mortgage loan Loan from a financial institution_(Note a) Other unsecured loans(Note b) Loans from employees(Note c)_ Secured Unsecured The maturity profile of the above loans is as follows: On demand or within one year More than one year, but not exceeding two years More than two years, but not exceeding five years More than five years Less: Amount due within one year shown under current liabilities Amount due after one year	THE 2004 HK$’000 571,666 20,053 – – – 591,719 591,719 – 591,719 278,489 24,991 151,057 137,182 591,719 (278,489) 313,230	GROUP 2003 HK$’000 57,143 22,029 55,590 107,148 4,895 246,805 134,762 112,043 246,805 159,361 68,815 7,108 11,521 246,805 (159,361) 87,444	THE COMPANY 2004 2003 HK$’000 HK$’000 – – 20,053 22,029 – 55,590 – 61,926 – – 20,053 139,545 20,053 77,619 – 61,926 20,053 139,545 2,061 56,996 2,134 64,396 6,867 6,632 8,991 11,521 20,053 139,545 (2,061) (56,996) 17,992 82,549

Notes:

a. Loan from a financial institution was secured, interest-bearing at commercial rates and repaid on November 20, 2003.
b. Other loans were unsecured and fully repaid during the year. Included in other loans was a loan of HK$61,926,000 which was interest-free (the relevant fund arrangement fee of HK$2,917,000 was charged to consolidated income statement). The remaining balance of HK$45,222,000 bore interest at commercial rates.
c. Loans from employees represented advances from employees of a subsidiary.
71 -

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

26. OBLIGATIONS UNDER A HIRE PURCHASE CONTRACT

Amounts payable under a hire purchase contract: Within one year In the second to fifth year inclusive Less: Future finance charges Present value of lease obligations Less: Amount due for settlement within one year (shown under current liabilities)	THE GROUP AND THE COMPANY Present value Minimum of minimum lease payments lease payments 2004 2003 2004 2003 HK$’000 HK$’000 HK$’000 HK$’000 132 – 112 – 197 – 185 – 329 – 297 – (32) – – – 297 – 297 – (112) – 185 –	THE GROUP AND THE COMPANY Present value Minimum of minimum lease payments lease payments 2004 2003 2004 2003 HK$’000 HK$’000 HK$’000 HK$’000 132 – 112 – 197 – 185 – 329 – 297 – (32) – – – 297 – 297 – (112) – 185 –
		– –
		– –
		–

It is the Group’s policy to lease certain of its property, plant and equipment under hire purchase contract. The average lease term is 3 years. For the year ended March 31, 2004, the average effective borrowing rate was approximately 8% per annum. Interest rate is fixed at the contract date. The lease is on a fixed repayment basis and no arrangement has been entered into for contingent rental payments.

The Group’s obligations under a hire purchase contract are secured by the lessor’s charge over the leased asset.

72 -

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

27. SHARE CAPITAL

Convertible
Ordinary shares
preference shares
No. of shares
No. of shares
’000
’000
HK$0.01
HK$1
each
HK$’000
each
HK$’000
Authorised
9,000,000
90,000
124,902
124,902
Issued and fully paid:
At April 1, 2002
485,026
4,851
105,902
105,902
Issue of new ordinary shares
112,050
1,121
–
–
Conversion of preference
shares to ordinary shares
614,331
6,143
(99,604)
(99,604)
Exercise of share options
1,000
10
–
–
At March 31, 2003
1,212,407
12,125
6,298
6,298
Issue of new ordinary shares
(Notes a, b, c)
280,000
2,800
–
–
Conversion of convertible bonds
(Note d)
16,922
169
–
–
Conversion of preference
shares to ordinary shares
(Note e)
48,451
484
(6,298)
(6,298)
At March 31, 2004
1,557,780
15,578
–
–

Total
HK$’000
214,902
110,753
1,121
(93,461)
10
18,423
2,800
169
(5,814)
15,578

Notes:

(a) On October 9, 2003, arrangements were proposed to make for a private placement to independent investors of 70,000,000 ordinary shares of HK$0.01 each in the Company at a price of HK$0.72 per share, representing a discount of 10% to the closing market price of the Company’s shares on October 8, 2003. The net proceeds of approximately HK$50 million were applied as to approximately HK$44,000,000 for the repayment of the Group’s short term borrowings and the remaining balance as general working capital of the Group. The issue of 70,000,000 shares were issued under the general mandate granted to the directors at the annual general meeting of the Company held on August 27, 2003.
(b) On November 8, 2003, arrangements were made for a private placement to independent investors of 160,000,000 ordinary shares of HK$0.01 each in the Company held by Heng Fung Holdings Limited, a substantial shareholder of the Company, at a price of HK$0.84 per share, representing a discount of 22.94% to the closing market price of the Company’s shares on November 6, 2003, being the latest trading day before the date of the announcement issued by the Company on November 11, 2003.
73 -

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Pursuant to the conditional subscription agreement of the same date, Heng Fung Holdings Limited subscribed for 160,000,000 new ordinary shares of HK$0.01 each in the Company at a price of HK$0.84 per share. The net proceeds of approximately HK$130 million were applied as to approximately HK$78 million for the contribution of the enlarged registered capital of 中亞燃氣 , approximately HK$45 million for the repayments of the Group’s short term borrowings, approximately HK$4 million for the acquisition of natural gas project in Xiaogan and the remaining balance as general working capital of the Group. The new shares were issued under the general mandate granted to the directors at the special general meeting held on December 19, 2003.

(c) On January 21, 2004, arrangements were proposed to make for a private placement to a company in which was owned as to 24% by Mr. Zhu Wei Wei, an executive Director of the Company, and as to 76% by Mr. Huang Yong, a director of 中亞燃氣 , a subsidiary of the Company, of 50,000,000 ordinary shares of HK$0.01 each in the Company at a price of HK$0.65 per share, representing a discount of 9.72% to the closing market price of the Company’s shares on January 16, 2004, being the latest trading day before the date of the announcement issued by the Company on January 21, 2004. The net proceeds of approximately HK$32 million were applied for the repayments of the Group’s short term borrowings. The new shares were issued under the general mandate granted to the directors at the special general meeting held on March 4, 2004.
(d) During the year, the holder of convertible bonds has exercised the options to convert US$1,400,000 (approximately HK$10,886,000) convertible bonds into 16,922,000 ordinary shares of HK$0.01 each.
(e) During the year, the holders of preference shares have exercised the options to convert 6,298,000 Convertible Preference (“CP”) shares at HK$0.13 per share into 48,451,000 ordinary shares of HK$0.01 each.

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

The CP shares shall carry equal rights and rank pari passu with one another as follows:

(i) Holders of the CP shares issued during the year ended March 31, 1999 are entitled in priority to any dividend payable in respect of the ordinary shares of the Company at cumulative annual preferential dividend rates of 3 per cent. per annum on the principal amount of the CP shares which are specified in the subscription agreement dated February 12, 1999 and two supplement agreements dated February 15, 1999 and March 9, 1999 respectively. Subject to the Companies Act of Bermuda, the dividend is cumulative and payable semi-annually in arrears on March 31 and September 30 in each year during the conversion period which falls after the second anniversary from the date of issue of the CP shares and the first payment is due on September 30, 2001. No interest is payable for the first and second year in which the CP shares are outstanding. The conversion price of the CP shares is HK$0.13 each and the maturity date of the CP shares is March 30, 2004.
(ii) Dividend on CP shares issued on January 4, 2001 will only be payable commencing on the third year at 2.5 per cent. per annum on the principal amount of the respective CP shares outstanding. The conversion price of the CP shares is HK$0.20 each, subject to adjustments, and the maturity date of the CP shares is January 3, 2006.
(iii) The CP shares are convertible in multiples of 1,000,000 into ordinary shares of the Company.
(iv) The CP shares are also redeemable at the principal amounts on the maturity date or the earliest date permitted under the Companies Act of Bermuda, whichever is the later. The maturity date is the fifth anniversary of the issue date of the CP shares.
(v) The CP shares do not have any voting rights.
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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

28. RESERVES

THE COMPANY At April 1, 2002 Private placement Exercise of share options Issue of shares for acquisition of subsidiaries Conversion of preference shares Net loss for the year At March 31, 2003 Private placements Conversion of convertible bonds Conversion of preference shares Share issue expenses Expenses on issuing convertible bonds Proceeds of private placements received in advance (note 2 below) Net loss for the year At March 31, 2004	Share premium HK$’000 82,660 29,666 100 78,403 93,461 – 284,290 214,500 10,717 5,814 (9,432) (932) – – 504,957	Contributed surplus HK$’000 94,712 – – – – – 94,712 – – – – – – – 94,712	Other Accumulated reserve losses HK$’000 HK$’000 – (205,807) – – – – – – – – – (46,917) – (252,724) – – – – – – – – – – 58,000 – – (23,679) 58,000 (276,403)	Total HK$’000 (28,435) 29,666 100 78,403 93,461 (46,917) 126,278 214,500 10,717 5,814 (9,432) (932) 58,000 (23,679) 381,266

Notes:

(1) The contributed surplus of the Company represents the difference between the underlying net assets of the subsidiaries acquired by the Company as a result of the group reorganisation prior to the listing of the Company’s shares in 1995 and the nominal amount of the Company’s share capital issued as consideration for the acquisition.

Under the Companies Act 1981 of Bermuda (as amended), the contributed surplus account of the Company is available for distribution. However, the Company cannot declare or pay a dividend, or make a distribution out of contributed surplus if

(a) it is, or would after the payment be, unable to pay its liabilities as they become due; or
(b) the realisable value of its assets would thereby be less than the aggregate of its liabilities and its issued share capital and share premium accounts.
(2) The amount represents the advance payment from the subscriber for the private placement of which the shares have been issued and allotted after the balance sheet date.

At March 31, 2004 and 2003, the Company had no reserve available for distribution.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

29. AMOUNTS DUE TO SUBSIDIARIES

The amounts of the Company are unsecured, interest-free and have no fixed term of repayment. The subsidiaries have confirmed that repayment of the amounts will not be demanded within one year from the balance sheet date and accordingly, the amounts are classified as non-current.

30. CONVERTIBLE NOTE

THE GROUP AND THE COMPANY

Pursuant to an agreement dated on June 10, 2003, the Company has issued a convertible note (the “Note”) amounting to US$6 million to an independent third party, Eastern Linker Holdings Limited. The Note bears interest at the rate of 2% per annum on the outstanding principal amount of the Note. The conversion price is HK$2 per share and would be matured at 24 months from the date of the issue of the Note.

31. CONVERTIBLE BONDS

THE GROUP AND THE COMPANY

On October 29, 2003, the Company and Merrill Lynch International (“ML”) entered into a subscription agreement (“Agreement”) pursuant to which the Company will issue up to US$41 million 1.0 per cent unlisted and unsecured convertible bonds due 2008 in five tranches (“Bonds”) and ML will subscribe in an aggregate principal amount of US$6 million (“Tranche 1 Bonds”) under whereas the Agreement, the Company will grant to ML options to subscribe for additional four tranches of the Bonds in aggregate principal amount of up to US$35 million. Under the terms and conditions of the Bonds, ML may convert the Bonds at any time from and including the respective date of issue of the Bonds up to the day falling one week prior to October 30, 2008 (“Maturity Date”). The Bonds could be converted, at the option of ML, either at (i) HK$1.128 initially (subject to adjustments) or (ii) 90 percent of the average of any eight closing prices per share as selected by ML during the 30 consecutive business days immediately prior to the date on which a conversion notice of ML is received by the Company and such price shall not be less than the par value of the shares on the date of conversion.

Besides, the Company has also entered into a subscription letter on October 29, 2003 with ML pursuant to which the Company has granted to ML, the rights to subscribe for new shares of the Company (the “Letter”). Under the terms of the Letter, ML will have a right to subscribe for new shares up to 15% of the principal amount of each tranche of the Bonds issued divided by 0.94 with a subscription price of HK$1.128 per share (subject to adjustment). The subscription right are exercisable by ML at any time from and including the date of issue of the relevant tranche of the Bonds to and including the Maturity Date.

The Tranche 1 Bonds of US$6 million and Tranche 2 Bonds of US$7 million were issued to ML on November 13, 2003 and June 10, 2004, respectively.

The issue of Tranche 3 Bonds, Tranche 4 Bonds and Tranche 5 Bonds is subject to the approval from the shareholders of the Company. The proposed resolutions to approve the issue of these three Bonds and the shares to be issued upon conversion of such Bonds and the exercise of the related subscription rights were not passed by the shareholders at the Special General Meeting held on December 19, 2003.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

32. DEFERRED TAXATION

The following is the deferred tax liabilities and assets recognised and movements thereon during the current and prior reporting periods.

THE GROUP

At April 1, 2002 – as previously reported – adjustment on adoption of SSAP 12 (Revised) – as restated (Credit) charge to income statement for the year At March 31, 2003 (Credit) charge to income statement for the year Effect of change in tax rate At March 31, 2004	Accelerated tax depreciation HK$’000 – 319 319 (316) 3 (1) 1 3	Tax losses HK$’000 – (319) (319) 316 (3) 1 (1) (3)	Total HK$’000 – –
			– –
			– – –
			–

At March 31, 2004, the Group has estimated unused tax losses of HK$116,208,000 (2003: HK$87,857,000) available for offset against future profits. A deferred tax asset has been recognised in respect of HK$15,000 (2003: HK$18,000) of the tax losses. No deferred tax asset has been recognised for the remaining estimated tax losses of HK$116,193,000 (2003: HK$87,839,000) due to the uncertainty of future profits streams. Included in unrecognised estimated tax losses are losses of HK$2,003,000 (2003: HK$1,206,000) that will expire within 5 years. Other losses may be carried forward indefinitely.

THE COMPANY

At March 31, 2004, the Company has estimated unused tax losses of HK$47,538,000 (2003: HK$24,998,000) available for offset against future profits. No deferred tax asset has been recognised due to uncertainty of future profits streams. Losses may be carried forward indefinitely.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

33. ACQUISITION OF SUBSIDIARIES

During the year, the Group acquired 51% and 100% of China Gas Development and Clever Decision Enterprises Limited, respectively, at a total consideration of HK$118,173,000. These acquisitions have been accounted for by the purchase method of accounting and the goodwill arising as a result of these acquisitions was HK$93,501,000.

NET ASSETS ACQUIRED Property, plant and equipment Investment in an associate Inventories Trade and other receivables Pledged bank deposits Bank balances and cash Trade and other payables Amount due to a minority shareholder Taxation Bank and other borrowings Minority interests Goodwill Negative goodwill SATISFIED BY Cash consideration Issue of ordinary shares NET CASH OUTFLOW ARISING ON ACQUISITION Cash consideration paid Bank balances and cash acquired	2004 HK$’000 64,443 – – 26,007 – 6,550 (10,783) – – (38,095) (23,450) 24,672 93,501 – 118,173 118,173 – 118,173 (118,173) 6,550 (111,623)	2003 HK$’000 162,608 1,714 6,770 28,709 9,524 16,669 (33,891) (2,543) (4,853) (47,234) (56,745) 80,728 20,784 (3,488) 98,024 18,834 79,190 98,024 (18,834) 16,669 (2,165)

The subsidiaries acquired during the year contributed HK$60,536,000 (2003: HK$84,055,000) to the Group’s turnover, and a profit of HK$50,747,000 (2003: HK$2,242,000) to the Group’s profit (loss) from operations.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

34. DISPOSAL OF SUBSIDIARIES

During the year, the Group disposed of 55%, 93% and 93% of Zhengzhou Standard, 焦作中燃城市燃氣發展有限公司and 濟源中燃城市燃氣發展有限公司, respectively, at a total consideration of HK$107,350,000.

NET ASSETS DISPOSED OF Property, plant and equipment Goodwill Inventories Trade and other receivables Pledged bank deposits Bank balances and cash Trade and other payables Amount due to a minority shareholder Taxation Bank and other borrowings Minority interests Gain (loss) on disposals Total cash consideration Net cash flow arising on disposal: Cash consideration Bank balances and cash disposed of	2004 HK$’000 111,666 4,765 10,169 14,298 9,524 64,198 (48,788) (6,848) (7,331) (32,890) (38,999) 79,764 27,586 107,350 107,350 (64,198) 43,152	2003 HK$’000 – – – 2 – – – – – – – 2 (2) – – – –

The subsidiaries disposed of during the year contributed HK$129,791,000 to the Group’s turnover and a loss of HK$518,000 to the Group’s profit from operations.

The subsidiary disposed of during the year ended March 31, 2003 did not contribute any material effect on the Group’s turnover and the Group’s loss from operations.

35. MAJOR NON-CASH TRANSACTIONS

During the year, the Group established certain subsidiaries in the PRC, a minority shareholder of a subsidiary contributed the capital in the form of property, plant and equipment with carrying amount of HK$9,524,000 (2003: nil).

During the year, the Group entered into a finance lease arrangement in respect of an asset with a total capital value of the inception of the lease of HK$350,000 (2003: nil).

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

36. OPERATING LEASE ARRANGEMENTS

The Group and the Company as lessee

At the balance sheet date, the Group and the Company had commitment for future minimum lease payments under non-cancellable operating leases in respect of rented premises and petrol stations which fall due as follows:

Within one year In the second to fifth year inclusive Over five years	THE GROUP 2004 2003 HK$’000 HK$’000 727 1,572 1,788 2,299 – 17,724 2,515 21,595	THE COMPANY 2004 2003 HK$’000 – 75 – – – – – 75	THE COMPANY 2004 2003 HK$’000 – 75 – – – – – 75
			75

Operating lease payments represent rentals payable by the Group and the Company in respect of leasehold land and buildings. Leases for rented premises are negotiated for an average term of 2 years with fixed rental.

The Group as lessor

At the balance sheet date, the Group had contracted with tenants for the following future minimum lease payments under non-cancellable operating leases in respect of rented premises which fall due as follows:

Within one year In the second to fifth year inclusive	THE GROUP 2004 2003 HK$’000 HK$’000 684 1,473 18 815 702 2,288	THE GROUP 2004 2003 HK$’000 HK$’000 684 1,473 18 815 702 2,288
		2,288

Leases are negotiated for an average term of two years.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

37. CAPITAL COMMITMENTS

(i) On March 12, 2003, a subsidiary of the Company entered into an agreement with Suizhou Municipal Projects Company (“SMPC”) and Wuhan China Natural Gas Investment Company Limited (“Wuhan Natural Gas”) pursuant to which all parties have agreed to establish a Sino-foreign equity joint venture company (“Suizhou JV”) in the PRC which principally engages in the design, construction and operation of natural gas pipeline network and ancillary facilities as well as provision of piped natural gas in Suizhou. Pursuant to the terms of the agreement, the subsidiary will contribute HK$24,000,000 to Suizhou JV. Suizhou JV will be owned as to 49% by the Group, 10% by SMPC and 41% by Wuhan Natural Gas. Wuhan Natural Gas is, however, a wholly owned subsidiary of the Group. A summary of the terms of the agreement is set out in the announcement of the Company dated March 13, 2003. As at March 31, 2004, the outstanding capital commitment by the Group to Suizhou JV amounted to HK$18,340,000.
(ii) On March 12, 2004, the Company entered into a conditional S & P Agreement with an independent third party pursuant to which the third party agreed to sell and the Company has agreed to acquire 100% equity interest in United Keen at a consideration of RMB12,000,000 (equivalent to HK$11,429,000). The sole asset of United Keen is the 100% interest in Pizhou Zhongran City Gas Development Company Ltd., a company incorporated in the PRC which is principally engaged into a series of natural gas projects in Pizhou City of Jiangsu Province. During the year, the Company has paid HK$6,667,000. As at March 31, 2004, the outstanding capital commitment by the Company amounted to HK$4,762,000.
(iii) On March 15, 2004, the Company entered into a conditional S & P Agreement with an independent third party pursuant to which the third party agreed to sell and the Company has agreed to acquire 100% equity interest in Glorywish at a consideration of RMB9,500,000 (equivalent to HK$9,048,000). The sole asset of Glorywish is the 70% interest in Jinhua Zhongran City Gas Development Company Ltd. a company incorporated in the PRC which is principally engaged into a series of natural gas projects in Jihua City of Zhejiang Province. During the year, the Company has paid HK$5,714,000. As at March 31, 2004, the outstanding capital commitment by the Company amounted to HK$3,334,000.
(iv) On March 19, 2004, a wholly owned subsidiary of the Company signed a cooperation agreement with 河北省滄州經濟技術開發區管委會(Cangzhou Economic and Technology Development District Management Association, Hebei Province) and has obtained the exclusive operation right on natural gas business in Cangzhou economic and technology development district for a term of 30 years. The Group will invest HK$2,000,000 to set up a wholly foreign-owned enterprise, which principally engages in the design, construction and operation of natural gas pipeline network and ancillary facilities as well as provision of piped natural gas in Cangzhou Economic and Technology Development District , Hebei Province.
(v) On March 31, 2004, a wholly owned subsidiary of the Company signed a cooperation agreement with the People’s Government of Yangzhong, Jiangsu Province for the establishment of a wholly foreign-owned enterprise (“Yangzhong Zhongran”) in Yangzhong which principally engages in the design, construction and operation of natural gas pipeline network and ancillary facilities as well as provision of piped natural gas in Yangzhong. The registered capital of Yangzhong Zhongran will not be less than US$1,000,000 and the Group will own 100% equity interest.

Save as disclosed above, as at March 31, 2004, the Group has capital commitments in respect of the acquisition for property, plant and equipment and construction materials for property, plant and equipment contracted for but not provided in the financial statements amounting to HK$572,712,000 (2003: HK$38,655,000) and HK$561,696,000 (2003: HK$19,347,000), respectively.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

38. PLEDGE OF ASSETS

THE GROUP

At March 31, 2004, the Group has not pledged any bank deposits (2003: HK$66,667,000 pledged) and land use rights (2003: a net book value of HK$29,035,000 pledged) to secure banking facilities granted to the Group.

The Group pledged land and buildings having a net book value of HK$39,682,000 (2003: HK$44,256,000) and certain investments in subsidiaries to banks to secure loan facilities granted to the Group. The Group has not pledged any investment properties (2003: a net book value of HK$9,800,000 pledged), investments in securities (2003: a carrying amount of HK$5,490,000 pledged), or properties held for development (2003: a net book value of HK$36,200,000 pledged) for loan facilities granted to the Group.

39. CONTINGENT LIABILITIES

The Company has given guarantees to banks in respect of banking facilities utilised by a subsidiary amounted to HK$238,095,000 (2003: nil).

40. RETIREMENT BENEFITS SCHEMES

With effective from December 1, 2000, the Group has joined a Mandatory Provident Fund Scheme (“MPF Scheme”) for all employees in Hong Kong. The MPF Scheme is registered with the Mandatory Provident Fund Scheme Authority under the Mandatory Provident Fund Schemes Ordinance. The assets of the MPF Scheme are held separately from those of the Group in funds under the control of an independent trustee. Under the rule of the MPF Scheme, the employer and its employees are each required to make contributions to the scheme at rate specified in the rules. The only obligation of the Group with respect of MPF Scheme is to make the required contributions under the scheme. No forfeited contribution is available to reduce the contribution payable in the future years.

Employees located in the PRC are covered by the retirement and pension schemes defined by local practice and regulations and which are essentially defined contribution schemes.

The calculation of contributions for PRC eligible staff is based on certain percentage of the applicable payroll costs. The contribution to the MPF Scheme is calculated based on the rules set out in the MPF Ordinance which is 5% on the basic salary of the relevant employee subject to a specific ceiling.

During the year, the retirement benefit scheme contributions amounted to HK$971,000 (2003: HK$58,000).

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

41. SHARE OPTION SCHEMES

(a) Share Option Scheme adopted on October 2, 1995 (“Old Scheme”)

Under the terms of the Old Scheme which became effective on October 2, 1995 for the primary purpose of providing incentive to directors and eligible employees, the board of directors of the Company may offer to any directors or full time employees of the Company, or any of its subsidiaries, options to subscribe for shares in the Company at a price equal to the higher of the nominal value of the shares and 80 per cent. of the average of the closing prices of the shares on the Stock Exchange on the five trading days immediately preceding the date of the grant of the options, subject to a maximum of 10 per cents. of the issued share capital of the Company from time to time. No employee may be granted options which would enable him or her to subscribe for an aggregate of more than 25 per cent. of the aggregate number of shares under the Old Scheme. Upon acceptance of option, the grantee shall pay HK$1 to the Company as consideration.

The life of the Old Scheme was originally effective for 10 years until October 2, 2005. The Old Scheme was resolved by the shareholders of the Company to have been terminated on February 6, 2003. However, the options granted under the Old Scheme are still exercisable in accordance with the terms of the Old Scheme.

(b) Share Option Scheme adopted on February 6, 2003 (“New Scheme”)

The Company’s New Scheme was adopted by the shareholders pursuant to a resolution passed on February 6, 2003 for the primary purpose of providing incentives to any directors, any employees or any employee, partner or director of any business consultant, joint venture partner, financial adviser or legal adviser of the Group.

The total number of shares in respect of which options may be granted under the New Scheme is not permitted to exceed 10% of the shares of the Company in issue at the date of shareholders’ approval of the New Scheme (“Scheme Mandate Limit”) or, if such 10% limit is refreshed, at the date of shareholders’ approval of the renewal of the Scheme Mandate Limit. The maximum aggregate number of shares which may be issued upon the exercise of all outstanding options granted and yet to be exercised under the New Scheme and any other share options schemes, must not exceed 30% of the total number of shares of the Company in issue from time to time. The number of shares in respect of which options may be granted to any individual in any one year is not permitted to exceed 1% of the shares of the Company then in issue. Each grant of options to any director, chief executive or substantial shareholder must be approved by independent non-executive directors. Where any grant of options to substantial shareholder or an independent non-executive directors or any of their respective associate would result in the shares of the Company issued and to be issued upon exercise of options already granted and to be granted in excess of 0.1% of the Company’s issued share capital and with a value in excess of HK$5,000,000 in the 12-month period up to the date of grant must be approved in advance by the Company’s shareholders.

Options granted must be taken up within 28 days from the date of grant, upon payment of HK$10 per each grant. Options may be exercised at any time from the date to be determined by the board of directors to the tenth anniversary of the date of grant. The exercise price is determined by the directors of the Company, and will not be less than the higher of (i) the closing price of the Company’s shares on the date of grant; (ii) the average closing price of the shares for the five business days immediately preceding the date of grant and (iii) the nominal value of a share.

The life of the New Scheme is effective for 10 years from the date of adoption until February 6, 2013.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

The following table discloses details of the Company’s share options held by employees (including directors) and movements in such holding during the two years ended March 31, 2004:

				Number		Number		Number
			Exercise	of share	Exercised	of share	Granted	of share
Name			price	options at	during	options at	during	options at
of schemes	Date of grant	Exercisable period	per share	4.1.2002	the year	3.31.2003	the year	3.31.2004
			HK$
Directors
Old Scheme	2.10.1998	2.10.1998 to 2.9.2008	0.11	1,000,000	(1,000,000)	–	–	–
New Scheme	1.9.2004	9.1.2004 to 1.8.2014	0.80	–	–	–	33,240,711	33,240,711
Others
New Scheme	1.9.2004	9.1.2004 to 1.8.2014	0.80	–	–	–	88,000,000	88,000,000

The consideration received during the year from the directors and employees for taking up the options granted amounted to HK$1,000 (2003: nil).

The financial impact of share options granted is not recorded in the Company’s or the Group’s balance sheet until such time as the options are exercised, and no charge is recognised in the income statement in respect of the value of options granted in the year. Upon the exercise of the share options, the resulting shares issued are recorded by the Company as additional share capital at the nominal value of the shares, and the excess of the exercise price per share over the nominal value of the shares is recorded by the Company in the share premium account. Options which lapse or are cancelled prior to their exercise date are deleted from the register of outstanding options.

42. RELATED PARTY TRANSACTIONS

On March 30, 2004, the Company issued 50,000,000 ordinary shares of HK$0.01 each for a total consideration of HK$32,500,000 to a company, which was owned as to 24% by Mr. Zhu Wei Wei, an executive director of the Company, and as to 76% by Mr. Huang Yong, a director of 中亞燃氣 , a wholly owned subsidiary of the Company.

43. POST BALANCE SHEET EVENTS

(a) On May 19, 2004, 中亞燃氣 , a wholly owned subsidiary of the Company, entered into an agreement with a minority shareholder of Huainan China Gas City Gas Development Co., Ltd. in relation to the acquisition of the remaining 30% equity interests of a non-wholly owned subsidiary – Huainan China Gas City Gas Development Co., Ltd. at zero consideration. This transaction constitutes as a major and connected transaction which is subject to the approval by independent shareholders.
(b) On June 10, 2004, pursuant to an Agreement dated October 29, 2003 with ML, the Company has issued US$7 million, 1.0 per cent unlisted and unsecured convertible bonds due 2008 to ML.
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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

FINANCIAL SUMMARY

RESULTS TURNOVER (LOSS) PROFIT BEFORE TAXATION TAXATION (CHARGE) CREDIT (LOSS) PROFIT BEFORE MINORITY INTERESTS MINORITY INTERESTS NET (LOSS) PROFIT FOR THE YEAR ASSETS AND LIABILITIES TOTAL ASSETS TOTAL LIABILITIES MINORITY INTERESTS SHAREHOLDERS’ FUNDS	2000 HK$’000 10,966 (490) (157) (647) – (647) 2000 HK$’000 19,009 (3,014) – 15,995	For the year ended March 31, 2001 2002 2003 HK$’000 HK$’000 HK$’000 4,169 4,827 85,537 (5,172) (7,383) (64,825) – 89 (1,861) (5,172) (7,294) (66,686) – – (2,987) (5,172) (7,294) (69,673) At March 31, 2001 2002 2003 HK$’000 HK$’000 HK$’000 71,754 108,968 501,507 (4,569) (5,044) (297,049) – – (59,732) 67,185 103,924 144,726	2004 HK$’000 376,491 118,212 (1,344) 116,868 (36,808) 80,060 2004 HK$’000 1,342,279 (748,484) (91,121) 502,674

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

PARTICULARS OF MAJOR PROPERTIES

		Group’s
Location	Type	interest (%)	Lease term
Leasehold land and buildings
In Hong Kong:
No. 151 Gloucester Road,	Office premises	100	Long lease
16/F., AXA Centre
Wan Chai
Hong Kong
In the People’s Republic of China:
深圳市濱河大道5002號	Commercial	100	Medium term lease
聯合廣場B座1301室
Investment properties
20/F., and car parking spaces	Office premises	100	Long lease
Nos. 10 and 11 on 3/F
SUP Tower
No. 4 Mercury Street and
No. 75-83 King’s Road
North Point, Hong Kong
Properties held for development
No. 28-30 Kai Tak Road	Vacant land	100	Medium term lease
Kowloon City
Kowloon
Hong Kong
No. 16, 18 and 20 Baker Street	Vacant land	100	Medium term lease
Hung Hom
Kowloon
Hong Kong

86 -

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

4. SUMMARY OF AUDITED FINANCIAL STATEMENTS OF HUAINAN CHINA GAS

Pursuant to a share transfer agreement dated 19 May 2004 and entered into between Huainan City Gas Company as vendor and Shenzhen Natural Gas as purchaser, Shenzhen Natural Gas acquired a further 30% equity interests in Huainan China Gas, which, before the said acquisition, was a 70% owned subsidiary of the Company. Further details of the said acquisition were set out in the announcement of the Company dated 24 May 2004 and the circular of the Company dated 9 July 2004.

The following is a summary of the income statement of Huainan China Gas for the period from 11 September 2003 (the date of its establishment) to 31 March 2004, the balance sheet of Huainan China Gas as at 31 March 2004, the statement of changes in equity and the cash flow statement of Huainan China Gas for the period from 11 September 2003 to 31 March 2004 together with the accompanying notes extracted from the Accountants’ Report which was included in the circular of the Company dated 9 July 2004:

(A) FINANCIAL INFORMATION

Income Statement

Notes Turnover 2 Cost of sales Gross profit Other operating income 4 Distribution costs Administrative expenses Profit before taxation 5 Taxation 8 Net profit for the period	9.11.2003 to 3.31.2004 HK$’000 34,653 (9,900) 24,753 2,281 (856) (2,552) 23,626 – 23,626

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Balance Sheet

Balance Sheet
Notes Non-current asset Property, plant and equipment 9 Current assets Inventories Amounts due from customers for contract work 10 Trade and other receivables 11 Amount due from a shareholder Bank balances and cash Current liabilities Trade and other payables 12 Amount due to a shareholder Net current assets Capital and reserve Paid-in capital 13 Retained profit	At 3.31.2004 HK$’000 9,543
	4,162 13,599 39,529 1,587 8,489
	67,366
	4,369 914
	5,283
	62,083
	71,626

	48,000 23,626
	71,626

88 -

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Statement of Changes in Equity

Paid-in capital HK$’000 Capital contributions from shareholders 48,000 Net profit for the Relevant Period – At March 31, 2004 48,000 Cash Flow Statement OPERATING ACTIVITIES Profit before taxation Adjustments for: Depreciation Interest income Operating cash flows before movements in working capital Increase in inventories Increase in amounts due from customers for contract work Increase in trade and other receivables Increase in amount due from a shareholder Increase in trade and other payables Increase in amount due to a shareholder NET CASH USED IN OPERATING ACTIVITIES INVESTING ACTIVITIES Interest received Purchase of property, plant and equipment NET CASH USED IN INVESTING ACTIVITIES NET CASH FROM FINANCING ACTIVITY Capital contributions from shareholders CASH AND CASH EQUIVALENT AT END OF PERIOD Bank balances and cash	Retained profit HK$’000 – 23,626 23,626	Total HK$’000 48,000 23,626 71,626 9.11.2003 to 3.31.2004 HK$’000 23,626 35 (52) 23,609 (4,162) (13,599) (39,529) (1,587) 4,369 914 (29,985) 52 (9,578) (9,526) 48,000 8,489

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

(B) NOTES TO THE FINANCIAL INFORMATION

1. SIGNIFICANT ACCOUNTING POLICIES

The financial information has been prepared under the historical cost convention and in accordance with accounting principles generally accepted in Hong Kong. The principal accounting policies adopted are as follows:

Revenue recognition

Gas connection revenue is recognised when the outcome of a contract can be estimated reliably and the stage of completion at the balance sheet date can be measured reliably. Revenue from gas connection contracts is recognised on the percentage of completion method, measured by reference to the value of work carried out during the period. When the outcome of a gas connection contract cannot be estimated reliably, revenue is recognised only to the extent of contract cost incurred that it is probable to be recoverable.

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

Interest income is accrued on a time basis by reference to the principal outstanding and at the interest rate applicable.

Property, plant and equipment

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

Depreciation is provided to write off the cost of items of property, plant and equipment over their estimated useful lives and after taking into account their estimated residual values, using the straight-line method, at the following rates per annum:

Leasehold improvements	Over the remaining terms of the leases
Furniture and fixtures	15% – 50%
Machinery and equipment	10%
Motor vehicles	25%

Construction in progress

90 -

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Construction contracts

When the outcome of a construction contract cannot be estimated reliably, contract costs are recognised as an expense in the period in which they are incurred.

When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately.

When a contract covers a number of assets, the construction of each asset is treated as a separate contract when separate proposals have been submitted for each asset, each asset has been separately negotiated and the costs and revenue of each asset can be separately identified. A group of contracts, performed concurrently or in a continuous sequence, is treated as a single construction contract when they were negotiated as a single package and are so closely inter-related that they constitute a single project with an overall profit margin.

Inventories

Inventories, including construction materials, are stated at the lower of cost and net realisable value. Cost is calculated using the weighted average method. Net realisable value represents the estimated selling price in the ordinary course of business less estimated costs to completion and the estimated costs necessary to make the sale.

Impairment

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

91 -

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Retirement benefit costs

Payments to the retirement benefit schemes are charged as an expense as they fall due.

Foreign currencies

Huainan China Gas maintains its books and records in Renminbi (“RMB”).

Transactions in currencies other than RMB are initially recorded at the rates of exchange prevailing on the dates of the transactions or at the contracted settlement rate. Monetary assets and liabilities denominated in currencies other than RMB are re-translated at the rates prevailing on the balance sheet date. Profits and losses arising on exchange are included in net profit or loss for the period.

The financial information of Huainan China Gas has been translated into Hong Kong Dollars for presentation purpose. The basis of translation is as follows:

assets and liabilities for the balance sheet presented are translated at the closing rate existing at the date of balance sheet presented;
income and expense items for the period presented are translated at the exchange rates existing at the dates of the transactions or a rate that approximates the actual exchange rates;
equity items (except for paid-in capital and the net profit or loss for the period that is included in retained profit account) are translated at the closing rate existing at the date of each balance sheet presented; and
exchange differences resulting from translation are recognised directly in equity.

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 period. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes income statement items that are never taxable or deductible.

92 -

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

assets and liabilities are not recognised if the temporary difference arises from goodwill (or negative 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 and associates, except where Huainan China Gas 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.

Government grants

2. TURNOVER

Gas connection fees Sales of piped gas	9.11.2003 to 3.31.2004 HK$’000 31,270 3,383
	34,653

93 -

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

3. SEGMENT INFORMATION

Business segments

Huainan China Gas is primarily engaged in (i) the design, construction and operation of natural gas pipeline network and ancillary facilities, (ii) the provision of piped natural gas, (iii) the repairs and maintenance of natural gas equipment and facilities, and (iv) the expansion of existing natural gas facilities, in Huainan, Anhui Province, the PRC. The analysis by business segments is presented below:

For the period from September 11, 2003 to March 31, 2004 REVENUE Turnover SEGMENT RESULT Unallocated corporate revenue Profit before taxation Taxation Net profit for the period	Gas pipeline construction HK$’000 31,270 23,199	Sales of piped gas HK$’000 3,383 289	Total HK$’000 34,653

			23,488 138
			23,626 –
			23,626

94 -

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Gas Sales pipeline of piped construction gas HK$’000 HK$’000 At March 31, 2004 ASSETS Segment assets 35,618 28,404 Unallocated corporate assets LIABILITIES Segment liabilities 310 211 Unallocated corporate liabilities For the period from September 11, 2003 to March 31, 2004 OTHER INFORMATION Additions to property, plant and equipment – 8,322 Additions to property, plant and equipment (unallocated) Depreciation (unallocated) Geographical segments	Total HK$’000 64,022 12,887
	76,909

	521 4,762
	5,283

	8,322 1,256
	9,578

	35

All identifiable assets and customers of Huainan China Gas are located in the PRC. Accordingly, no analysis on geographical segments is presented.

95 -

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

4. OTHER OPERATING INCOME

Subsidies of PRC governmental authorities Interest income Sundry income 5. PROFIT BEFORE TAXATION Profit before taxation has been arrived at after charging: Auditors’ remuneration Depreciation Staff costs: Directors’ remuneration Other staff costs – Wages and salaries Less: amount capitalised in construction in progress – Retirement benefits scheme contributions	9.11.2003 to 3.31.2004 HK$’000 2,143 52 86 2,281 9.11.2003 to 3.31.2004 HK$’000 – 35 – 1,721 (67) 188 1,842

6. DIRECTORS’ REMUNERATION

No remuneration was paid to Huainan China Gas’s directors during the Relevant Period.

96 -

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

7. EMPLOYEES’ EMOLUMENTS

The emoluments of the five highest paid individuals paid by Huainan China Gas were as follows:

Salaries and other benefits Retirement benefits scheme contributions	9.11.2003 to 3.31.2004 HK$’000 55 1
	56

8. TAXATION

Pursuant to certain approval documents issued by the State Tax Bureau of the PRC, Huainan China Gas is entitled to exemption from PRC enterprise income tax for the first two years commencing from its first profit-making year of operation and thereafter and is entitled to a 50% PRC income tax reduction for the following three years.

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

9. PROPERTY, PLANT AND EQUIPMENT

Construction in Leasehold progress improvements *HK$’000* *HK$’000* COST Acquired during the period and at March 31, 2004 8,322 206 DEPRECIATION Provided for the period and at March 31, 2004 – 1 NET BOOK VALUE At March 31, 2004 8,322 205	Furniture and fixtures *HK$’000* 122 11 111	Machinery and equipment *HK$’000* 203 3 200	Motor vehicles *HK$’000* 725 20 705	Total *HK$’000* 9,578 35
				9,543

97 -

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

10. AMOUNTS DUE FROM CUSTOMERS FOR CONTRACT WORK

	3.31.2004
	HK$’000
Contracts in progress at balance sheet date:
Contract costs incurred plus recognised profits less
anticipated losses	13,728
Less: progress billings	(129)
	13,599

At March 31, 2004, there were no retention monies held by customers for contract work
performed. At March 31, 2004, advances received from customers for contract work amounted to
HK$233,000 which were included in trade and other payables.

11. TRADE AND OTHER RECEIVABLES

Huainan China Gas allows an average credit period of 30 to 60 days to trade customers.

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

Not yet due Within credit period Overdue by: 61 – 90 days Trade receivables Deposits paid for construction materials Other receivables, deposits and prepayments	3.31.2004 HK$’000 12,782 5,074 1
	17,857 14,502 7,170
	39,529

98 -

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

12. TRADE AND OTHER PAYABLES

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

0 – 30 days 61 – 90 days 91 – 120 days Other payables	3.31.2004 HK$’000 512 2 7
	521 3,848
	4,369

13. PAID-IN CAPITAL

	Paid-in
	capital
	HK$’000
Capital contributions from shareholders
and at March 31, 2004	48,000

Huainan China Gas was established with a registered capital of RMB72,000,000 (equivalent to HK$68,571,000).

Upon the establishment of Huainan China Gas, a shareholder contributed HK$2,267,000 to provide the initial capital to Huainan China Gas. According to the capital verification reports, the shareholders had contributed HK$15,156,000, HK$4,933,000, HK$10,476,000, HK$14,685,000 and HK$483,000 on September 18, 2003, January 7, 2004, January 9, 2004, January 13, 2004 and January 15, 2004, respectively, to provide additional working capital.

14. COMMITMENTS

Huainan China Gas has capital commitments in respect of the acquisition of property, plant and equipment contracted for but not provided in the financial statements amounting to HK$303,894,000.

99 -

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

15. RETIREMENT BENEFITS SCHEME

The employees of Huainan China Gas participate in a retirement benefit scheme organised by the municipal government whereby Huainan China Gas is required to make monthly contributions to the scheme at certain percentage of the applicable payroll costs for the Relevant Period. Huainan China Gas has no obligation for the payment of retirement and other post-retirement benefits of employees other than the monthly contributions described above. Huainan China Gas’s contributions to the retirement benefits scheme are charged to the income statement as they fall due.

16. RELATED PARTY BALANCES AND TRANSACTIONS

The amounts due from and to shareholders are unsecured, interest free and repayable on demand.

Huainan China Gas had the following related party transactions during the Relevant Period:

	9.11.2003
	to
	3.31.2004
	HK$’000
Purchase of construction materials	556

Note: The goods were purchased at market prices from a shareholder.

(C) DIRECTORS’ REMUNERATION

No remuneration has been paid or is payable to Huainan China Gas’s directors by Huainan China Gas during the Relevant Period.

(D) SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements of Huainan China Gas have been prepared in respect of any period subsequent to March 31, 2004.

100 -

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

5. UNAUDITED PRO FORMA STATEMENT OF ASSETS AND LIABILITIES OF THE GROUP

The following table is an unaudited pro forma statement of assets and liabilities of the Group which has been prepared, for illustration purpose only, as if the acquisition of 30% equity interests in Huainan China Gas had been completed on 31 March 2004, extracted from the circular of the Company dated 9 July 2004.

The unaudited pro forma consolidated statement of assets and liabilities is prepared to provide the unaudited pro forma financial information of the Group as a result of the acquisition of 30% equity interests in Huainan China Gas. As it has been prepared for illustration purpose only and because of its nature, it may not give a true picture of the financial position of the Group at any future date.

	The Group	Pro forma		Pro forma
	at 31 March 2004	adjustments	Note	balance
	HK$’000	HK$’000		HK$’000
Non-current Assets	408,293			408,293
Current Assets	933,986			933,986
Current Liabilities	(352,625)			(352,625)
	989,654			989,654
Capital and Reserves	502,674	7,088	1	509,762
Minority Interests	91,121	(7,088)	1	84,033
Non-current liabilities	395,859			395,859
	989,654			989,654

Notes:

Pursuant to the share transfer agreement dated 19 May 2004 and entered into between Huainan City Gas Company (“Huainan Natural Gas”) and Shenzhen Natural Gas, Huainan Natural Gas would transfer its 30% equity interests in Huainan China Gas to Shenzhen Natural Gas at nil consideration and Shenzhen Natural Gas will have to assume the capital contribution obligations of Huainan Natural Gas to Huainan China Gas. Since the assets and liabilities of Huainan China Gas were incorporated into the consolidated assets and liabilities of the Group as at 31 March 2004, the pro forma balance of assets and liabilities of the Group is the same as the Group’s total assets and liabilities as at 31 March 2004.

The pro forma adjustment represents the proposed acquisition of 30% minority interests in Huainan China Gas by the Group had been completed as at 31 March 2004.

The Directors consider that the related expenses incurred for the acquisition is insignificant to the Group’s net assets, accordingly, no adjustment was made.
101 -

ACCOUNTANTS’ REPORT ON GREAT SUN

APPENDIX II

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==> picture [95 x 39] intentionally omitted <==

September 24, 2004

The Directors

China Gas Holdings Limited

Dear Sirs,

We set out below our report on the financial information regarding Great Sun Investments Ltd. (“Great Sun”) for the period from October 16, 2002 (date of incorporation) to March 31, 2004 (the “Relevant Period”) for inclusion in the circular of China Gas Holdings Limited dated September 24, 2004 (the “Circular”).

Great Sun was incorporated in the British Virgin Islands on October 16, 2002 as a company with limited liability under the International Corporation Companies Act.

At the date of this report, Great Sun has the following associates:

	Place and			Proportion of
	date of	Place of	Registered	equity
Name of associate	registration	operation	capital	interest held	Principal activities
Hanchuan Jiaxu Gas	The People’s	PRC	RMB7,000,000	25%	Supply of natural
Co. Ltd.	Republic of				gas and gas pipeline
	China (“PRC”)				construction
	November 27, 2002
Xiaogan Jiaxu Gas Co. Ltd.	PRC	PRC	RMB10,000,000	25%	Supply of natural
	August 22, 2003				gas and gas pipeline
					construction
Xiaogan Zhenrong Gas	PRC	PRC	RMB28,000,000	25%	Supply of natural
Co. Ltd.	November 27, 2002				gas and gas pipeline
					construction
Yingcheng Jiaxu Gas Co. Ltd.	PRC	PRC	RMB10,000,000	25%	Supply of natural
	November 27, 2002				gas and gas pipeline
					construction
Yumeng Jiaxu Gas Co. Ltd.	PRC	PRC	RMB6,200,000	25%	Supply of natural
	November 27, 2002				gas and gas pipeline
					construction

102 -

ACCOUNTANTS’ REPORT ON GREAT SUN

APPENDIX II

We have acted as auditors of Great Sun for the Relevant Periods.

We have examined the audited financial statements of Great Sun for the Relevant Period (the “Underlying Financial Statements”) in accordance with the Auditing Guideline “Prospectuses and the Reporting Accountant” as recommended by the Hong Kong Institute of Certified Public Accountants.

The financial information of Great Sun set out in this report has been prepared from the Underlying Financial Statements.

The Underlying Financial Statements are the responsibility of the directors of Great Sun. The directors of China Gas Holdings Limited are responsible for the contents of the Circular in which this report is included. It is our responsibility to compile the financial information set out in this report from the Underlying Financial Statements, to form an independent opinion on the financial information and to report our opinion to you.

In our opinion, the financial information gives, for the purpose of this report, a true and fair view of the state of affairs of Great Sun as at March 31, 2004 and of the results of Great Sun for the Relevant Period.

(A) FINANCIAL INFORMATION

Income Statement

Notes Turnover Result before taxation 3 Taxation 6 Net result for the period	10.16.2002 to 3.31.2004 HK$’000 –

	– –
	–

103 -

ACCOUNTANTS’ REPORT ON GREAT SUN

APPENDIX II

Balance Sheet

Notes Non-current assets Investments in associates 7 Capital Share capital 8 Non-current liability Amount due to a shareholder 9 Statement of Changes in Equity Capital contribution from a shareholder and at March 31, 2004	At 3.31.2004 HK$’000 14,572

	8 14,564
	14,572

	Share capital HK$’000 8

104 -

ACCOUNTANTS’ REPORT ON GREAT SUN

APPENDIX II

(B) NOTES TO THE FINANCIAL INFORMATION

1. SIGNIFICANT ACCOUNTING POLICIES

The financial information has been prepared under the historical cost convention and in accordance with accounting principles generally accepted in Hong Kong.

Great Sun Investments Ltd. (“Great Sun”) does not maintain any bank account and all of its transactions are dealt with in the current account with a shareholder. Accordingly, no cash flow statement is presented.

The principal accounting policies adopted are as follows:

Interests in associates

The results of associates are accounted for by Great Sun on the basis of dividends received and receivable during the period. In Great Sun’s balance sheet, investments in associates are stated at cost, as reduced by any identified impairment loss.

Impairment

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

Taxation

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

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

105 -

ACCOUNTANTS’ REPORT ON GREAT SUN

APPENDIX II

2. SEGMENT INFORMATION

Business segments

Great Sun acts as an investment holding company. Accordingly, no analysis business segment is presented.

Geographical segments

All identifiable assets of Great Sun are located in the People’s Republic of China. Accordingly, no analysis on geographical segments is presented.

3. RESULT BEFORE TAXATION

Result before taxation has been arrived at after charging:

		10.16.2002
		to
		3.31.2004
		HK$’000
Auditors’	remuneration	–
Directors’	remuneration	–

Auditors’ remuneration is borne by Great Sun’s shareholder.

4. DIRECTORS’ REMUNERATION

No remuneration was paid to Great Sun’s directors during the Relevant Period.

5. EMPLOYEES’ EMOLUMENTS

No employees emoluments were paid during the Relevant Period.

6. TAXATION

No provision for Hong Kong Profits Tax has been made as Great Sun has no assessable profit for the Relevant Period.

No provision for deferred taxation has been recognised as the amount involved is insignificant.

106 -

ACCOUNTANTS’ REPORT ON GREAT SUN

APPENDIX II

7. INVESTMENTS IN ASSOCIATES

3.31.2004 HK$’000 Equity interests at cost – unlisted 14,572

The following details have been extracted from the management accounts of Great Sun’s significant associates.

Result for the period

					Xiaogan		Yingcheng		Yumeng
	Hanchuan Jiaxu	Xiaogan Jiaxu			Zhengrong		Jiaxu		Jiaxu
	Gas Co. Ltd.		Gas Co. Ltd.		Gas Co. Ltd.		Gas Co. Ltd.		Gas Co. Ltd.
	11.27.2002		8.22.2003		11.27.2002		11.27.2002		11.27.2002
	(date of		(date of		(date of		(date of		(date of
	establishment)	establishment)		establishment)		establishment)		establishment)
	to 3.31.2004		to 3.31.2004		to 3.31.2004		to 3.31.2004		to 3.31.2004
	HK$’000		HK$’000		HK$’000		HK$’000		HK$’000
Turnover	17,789		15,866		–		11,399		15,481

Profit (loss) from
ordinary activities
before taxation	15,045		13,519		(9,524)		9,496		13,060

Profit (loss) from
ordinary activities
before taxation
attributable to
Great Sun	3,761		3,380		(2,381)		2,374		3,265

Financial position
	3.31.2004		3.31.2004		3.31.2004		3.31.2004		3.31.2004
	HK$’000		HK$’000		HK$’000		HK$’000		HK$’000
Non-current assets	828		6,495		68,406		193		1,298
Current assets	52,575		47,633		27,003		20,912		20,292
Current liabilities	(3,120)		(2,514)		(78,266)		(2,085)		(2,625)
Non-current liabilities	(28,571)		(28,571)		–		–		–
Net assets	21,712		23,043		17,143		19,020		18,965

Net assets attributable
to Great Sun	5,428		5,761		4,286		4,755		4,741

107 -

ACCOUNTANTS’ REPORT ON GREAT SUN

APPENDIX II

8. SHARE CAPITAL

Authorised: 50,000 shares of US$1 each At October 16, 2002 (date of incorporation) and at March 31, 2004 Issued and fully paid: 1,000 shares of US$1 each At October 16, 2002 (date of incorporation) and at March 31, 2004	US$’000 50 1	HK$’000 Equivalent 390

		8

Great Sun was incorporated with an authorised share capital of US$50,000. At the time of incorporation, 1,000 shares of US$1 each were issued at par to the subscribers to provide the initial capital to Great Sun.

9. AMOUNT DUE TO A SHAREHOLDER

The amount is unsecured, non-interest bearing and has no fixed repayment terms. In the opinion of the directors, the amount will not be required to repay within the next year. Accordingly, the amount is shown as non-current.

(C) DIRECTORS’ REMUNERATION

No remuneration has been paid or is payable to Great Sun’s directors by Great Sun during the Relevant Period.

(D) SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements of Great Sun have been prepared in respect of any period subsequent to March 31, 2004.

Yours faithfully, Deloitte Touche Tohmatsu

Certified Public Accountants Hong Kong

108 -

ACCOUNTANTS’ REPORT ON HANCHUAN JIAXU

APPENDIX III

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==> picture [95 x 39] intentionally omitted <==

September 24, 2004

The Directors

China Gas Holdings Limited

Dear Sirs,

We set out below our report on the financial information regarding Hanchuan Jiaxu Gas Co. Ltd. (“Hanchuan Jiaxu Gas”) for the period from November 27, 2002 (date of establishment) to March 31, 2004 (the “Relevant Period”) for inclusion in the circular of China Gas Holdings Limited dated September 24, 2004 (the “Circular”).

Hanchuan Jiaxu Gas is a sino-foreign equity joint venture established in the People’s Republic of China (“PRC”) on November 27, 2002 with an operating period of thirty years. It is established to engage in (i) the design and construction of natural gas pipeline network and (ii) the provision of piped natural gas, in Hanchuan City, Hubei Province, the PRC. Hanchuan Jiaxu Gas commenced its business in March 2004.

No PRC audited financial statements of Hanchuan Jiaxu Gas have been issued for the Relevant Period. However, for the purpose of this report, we have carried out independent audit procedures in accordance with Statements of Auditing Standards issued by the Hong Kong Institute of Certified Public Accountants on the management accounts of Hanchuan Jiaxu Gas for the Relevant Period (the “Underlying Financial Statements”) which were prepared in accordance with accounting principles generally accepted in Hong Kong.

We have examined the Underlying Financial Statements in accordance with the Auditing Guideline “Prospectuses and the Reporting Accountant” as recommended by the Hong Kong Institute of Certified Public Accountants.

The financial information of Hanchuan Jiaxu Gas set out in this report has been prepared from the Underlying Financial Statements.

109 -

ACCOUNTANTS’ REPORT ON HANCHUAN JIAXU

APPENDIX III

The Underlying Financial Statements are the responsibility of the directors of Hanchuan Jiaxu Gas. The directors of China Gas Holdings Limited are responsible for the contents of the Circular in which this report is included. It is our responsibility to compile the financial information set out in this report from the Underlying Financial Statements, to form an independent opinion on the financial information and to report our opinion to you.

In our opinion, the financial information gives, for the purpose of this report, a true and fair view of the state of affairs of Hanchuan Jiaxu Gas as at March 31, 2004 and of the results and cash flows of Hanchuan Jiaxu Gas for the Relevant Period.

(A) FINANCIAL INFORMATION

Income Statement

Notes Turnover 2 Cost of sales/services Gross profit Administrative expenses Profit before taxation 4 Taxation 7 Net profit for the period	11.27.2002 to 3.31.2004 HK$’000 17,789 (2,650) 15,139 (94) 15,045 – 15,045

110 -

ACCOUNTANTS’ REPORT ON HANCHUAN JIAXU

APPENDIX III

Balance Sheet

Non-current assets Property, plant and equipment Current assets Trade receivables Amount due from a fellow subsidiary Bank balances and cash Current liabilities Trade and other payables Net current assets Capital and reserves Paid-in capital Retained profit Non-current liability Bank borrowing Statement of Changes in Equity Capital contributions from equity owners Net profit for the Relevant Period At March 31, 2004	Paid-in capital HK$’000 6,667 – 6,667	Notes 8 9 10 11 12 13 Retained profit HK$’000 – 15,045 15,045		At 3.31.2004 HK$’000 828
				17,623 6,381 28,571
				52,575 3,120
				49,455
				50,283

				6,667 15,045
				21,712 28,571
				50,283

				Total HK$’000 6,667 15,045
				21,712

111 -

ACCOUNTANTS’ REPORT ON HANCHUAN JIAXU

APPENDIX III

Cash Flow Statement

OPERATING ACTIVITIES
Profit before taxation
Adjustment for:
Depreciation
Operating profit before movements in working capital
Increase in trade receivables
Increase in amount due from a fellow subsidiary
Increase in trade and other payables
NET CASH FLOWS OF OPERATING ACTIVITIES
CASH FROM FINANCING ACTIVITY
New bank borrowing raised
CASH AND CASH EQUIVALENT AT END OF THE PERIOD
Bank balances and cash

11.27.2002
to
3.31.2004
HK$’000
15,045
1
15,046
(17,623)
(543)
3,120
–
28,571
28,571

(B) NOTES TO THE FINANCIAL INFORMATION

1. SIGNIFICANT ACCOUNTING POLICIES

Revenue recognition

Gas connection revenue is recognised when the outcome of a contract can be estimated reliably and the stage of completion at the balance sheet date can be measured reliably. Revenue from gas connection contracts is recognised on the percentage of completion method, measured by reference to the value of work carried out during the period. When the outcome of a gas connection contract cannot be estimated reliably, revenue is recognised only to the extent of contract cost incurred that it is probable to be recoverable.

Property, plant and equipment

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

112 -

ACCOUNTANTS’ REPORT ON HANCHUAN JIAXU

APPENDIX III

Depreciation is provided to write off the cost of items of property, plant and equipment over their estimated useful lives and after taking into account their estimated residual values, using the straight line method, at the following rates per annum:

Furniture and fixtures 15% – 50% Motor vehicles 25%

Construction contracts

When the outcome of a construction contract can be estimated reliably, contract costs are charged to the income statement by reference to the stage of completion of the contract activity at the balance sheet date, as measured by the proportion of costs incurred to date to estimated total costs for the contract.

When the outcome of a construction contract cannot be estimated reliably, contract costs are recognised as expenses in the period in which they are incurred.

When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately.

When a contract covers a number of assets, the construction of each asset is treated as a separate contract when separate proposals have been submitted for each asset, each asset has been separately negotiated and the costs and revenue of each asset can be separately identified. A group of contracts, performed concurrently or in a continuous sequence, is treated as a single construction contract when they were negotiated as a single package and are so closely inter-related that they constitute a single project with an overall profit margin.

Impairment

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

113 -

ACCOUNTANTS’ REPORT ON HANCHUAN JIAXU

APPENDIX III

Foreign currencies

Hanchuan Jiaxu Gas maintains its books and records in Renminbi (“RMB”).

The financial information of Hanchuan Jiaxu Gas has been translated into Hong Kong Dollars for presentation purpose. The basis of translation is as follows:

assets and liabilities for the balance sheet presented are translated at the closing rate existing at the date of balance sheet presented;
income and expense items for the period presented are translated at the exchange rates existing at the dates of the transactions or a rate that approximates the actual exchange rates;
paid-in capital and the net profit or loss for the period that is included in retained profit account are translated at the exchange rates existing at the dates of the transactions or a rate that approximates the actual exchange rates; and
exchange differences resulting from translation are recognised directly in equity.

Taxation

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

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

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ACCOUNTANTS’ REPORT ON HANCHUAN JIAXU

APPENDIX III

Operating leases

Rentals payable under operating leases are charged to the income statement on a straight line basis over the lease terms.

2. TURNOVER

The amount represents the gas connection fees received and receivable net of sales taxes for the Relevant Period and is analysed as follows:

Gas connection fees Less: sales taxes	11.27.2002 to 3.31.2004 HK$’000 18,339 (550) 17,789

3. SEGMENT INFORMATION

Business segments

Hanchuan Jiaxu Gas is primarily established to engage in (i) the design and construction of natural gas pipeline network and (ii) the provision of piped natural gas, in Hanchuan City, Hubei Province, the People’s Republic of China (“PRC”). During the Relevant Period, Hanchuan Jiaxu Gas has only commenced the business of gas pipeline construction. Accordingly, no analysis on business segments is presented.

Geographical segments

All identifiable assets and customers of Hanchuan Jiaxu Gas are located in the PRC. Accordingly, no analysis on geographical segments is presented.

4. PROFIT BEFORE TAXATION

Profit before taxation has been arrived at after charging:

Auditors’ remuneration Depreciation Staff costs: Directors’ remuneration Other staff costs – salaries and other benefits Operating lease rentals in respect of rented premises	11.27.2002 to 3.31.2004 HK$’000 – 1 – 39 39 8

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ACCOUNTANTS’ REPORT ON HANCHUAN JIAXU

APPENDIX III

5. DIRECTORS’ REMUNERATION

No remuneration was paid to Hanchuan Jiaxu Gas’s directors during the Relevant Period.

6. EMPLOYEES’ EMOLUMENTS

The emoluments of the five highest paid individuals paid by Hanchuan Jiaxu Gas were as follows:

	11.27.2002
	to
	3.31.2004
	HK$’000
Salaries and other benefits	39

7. TAXATION

Pursuant to certain approval documents issued by the State Tax Bureau of the PRC, Hanchuan Jiaxu Gas is entitled to exemption from PRC enterprise income tax for the first two years commencing from its first profit-making year of operation and thereafter is entitled to a 50% PRC income tax reduction for the following three years.

No provision for PRC enterprise income tax has been made in the financial statements as Hanchuan Jiaxu Gas was exempted from PRC enterprise income tax during the Relevant Period.

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

8. PROPERTY, PLANT AND EQUIPMENT

COST Acquired during the period and balance at March 31, 2004 DEPRECIATION Provided for the period and balance at March 31, 2004 NET BOOK VALUE At March 31, 2004	Construction in progress HK$’000 642 – 642	Furniture and fixtures HK$’000 6 – 6	Motor vehicles HK$’000 181 1 180	Total HK$’000 829 1
				828

9. TRADE RECEIVABLES

Hanchuan Jiaxu Gas allows the credit period in accordance with the relevant sale agreements with trade customers.

At the balance sheet date, the trade receivables are aged within 30 days.

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ACCOUNTANTS’ REPORT ON HANCHUAN JIAXU

APPENDIX III

10. AMOUNT DUE FROM A FELLOW SUBSIDIARY

The amount is unsecured, interest-free and repayable on demand.

11. TRADE AND OTHER PAYABLES

Trade payables Other payables At the balance sheet date, the trade payables are aged within 30 days.	3.31.2004 HK$’000 2,570 550
	3,120

12. PAID-IN CAPITAL

	Paid-in capital
	HK$’000
Capital contributions from equity owners and balance at March 31, 2004	6,667

Hanchuan Jiaxu Gas was established with a registered capital of RMB7,000,000 (equivalent to
HK$6,667,000).

Upon the establishment of Hanchuan Jiaxu Gas, two equity owners contributed HK$667,000 and HK$4,333,000 respectively to provide the initial capital to Hanchuan Jiaxu Gas. According to the capital verification report, an equity owner contributed HK$1,667,000 on December 2, 2003 to provide additional working capital.

13. BANK BORROWING

The amount is secured by a corporate guarantee issued by a fellow subsidiary and the equity interests in Hanchuan Jiaxu Gas entitled by its equity owners.

The maturity profile of the bank borrowing is as follows:

More than two years, but not exceeding five years More than five years	3.31.2004 HK$’000 19,047 9,524
	28,571

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ACCOUNTANTS’ REPORT ON HANCHUAN JIAXU

APPENDIX III

14. OTHER NON-CASH TRANSACTIONS

Prior to the set up of the bank accounts, all of the transactions of Hanchuan Jiaxu Gas were dealt with in the current account with a fellow subsidiary. A summary of non-cash transactions of Hanchuan Jiaxu Gas during the Relevant Period is as follows:

Purchase of property, plant and equipment Capital contributions from equity owners Net increase in amount due from a fellow subsidiary	11.27.2002 to 3.31.2004 HK$’000 (829) 6,667 5,838

15. OPERATING LEASES COMMITMENTS

At March 31, 2004, Hanchuan Jiaxu Gas had no commitments under non-cancellable operating leases.

16. ULTIMATE HOLDING COMPANY

At March 31, 2004, the ultimate holding company of Hanchuan Jiaxu Gas was China Gas Holdings Limited, a public company incorporated in Bermuda with its shares listed on The Stock Exchange of Hong Kong Limited.

(C) DIRECTORS’ REMUNERATION

No remuneration has been paid or is payable to Hanchuan Jiaxu Gas’s directors by Hanchuan Jiaxu Gas during the Relevant Period.

(D) SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements of Hanchuan Jiaxu Gas have been prepared in respect of any period subsequent to March 31, 2004.

Yours faithfully,

Deloitte Touche Tohmatsu

Certified Public Accountants Hong Kong

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ACCOUNTANTS’ REPORT ON XIAOGAN JIAXU

APPENDIX IV

==> picture [68 x 52] intentionally omitted <==

==> picture [95 x 39] intentionally omitted <==

September 24, 2004

The Directors

China Gas Holdings Limited

Dear Sirs,

We set out below our report on the financial information regarding Xiaogan Jiaxu Gas Co. Ltd. (“Xiaogan Jiaxu Gas”) for the period from August 22, 2003 (date of establishment) to March 31, 2004 (the “Relevant Period”) for inclusion in the circular of China Gas Holdings Limited dated September 24, 2004 (the “Circular”).

Xiaogan Jiaxu Gas is a sino-foreign equity joint venture established in the People’s Republic of China (the “PRC”) on August 22, 2003 with an operating period of thirty years. It is established to engage in (i) the design and construction of natural gas pipeline network, and (ii) the provision of piped natural gas, in Xiaogan City, Hubei Province, the PRC. Xiaogan Jiaxu Gas commenced its business in March 2004.

No PRC audited financial statements of Xiaogan Jiaxu Gas have been issued for the Relevant Period. However, for the purpose of this report, we have carried out independent audit procedures in accordance with Statements of Auditing Standards issued by the Hong Kong Institute of Certified Public Accountants on the management accounts of Xiaogan Jiaxu Gas for the Relevant Period (the “Underlying Financial Statements”) which were prepared in accordance with accounting principles generally accepted in Hong Kong.

The financial information of Xiaogan Jiaxu Gas set out in this report has been prepared from the Underlying Financial Statements.

The Underlying Financial Statements are the responsibility of the directors of Xiaogan Jiaxu Gas. The directors of China Gas Holdings Limited are responsible for the contents of the Circular in which this report is included. It is our responsibility to compile the financial information set out in this report from the Underlying Financial Statements, to form an independent opinion on the financial information and to report our opinion to you.

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ACCOUNTANTS’ REPORT ON XIAOGAN JIAXU

APPENDIX IV

In our opinion, the financial information gives, for the purpose of this report, a true and fair view of the state of affairs of Xiaogan Jiaxu Gas as at March 31, 2004 and of the results and cash flows of Xiaogan Jiaxu Gas for the Relevant Period.

(A) FINANCIAL INFORMATION

Income Statement

Notes Turnover 2 Cost of sales/services Gross profit Administrative expenses Profit before taxation 4 Taxation 7 Net profit for the period	8.22.2003 to 3.31.2004 HK$’000 15,866 (2,224) 13,642 (123) 13,519 – 13,519

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ACCOUNTANTS’ REPORT ON XIAOGAN JIAXU

APPENDIX IV

Balance Sheet

Notes Non-current assets Property, plant and equipment 8 Current assets Trade receivables 9 Amount due from a fellow subsidiary 10 Bank balances and cash Current liabilities Trade and other payables 11 Net current assets Capital and reserves Paid-in capital 12 Retained profit Non-current liability Bank borrowing 13	At 3.31.2004 HK$’000 6,495
	10,237 8,825 28,571
	47,633 2,514
	45,119
	51,614

	9,524 13,519
	23,043 28,571
	51,614

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ACCOUNTANTS’ REPORT ON XIAOGAN JIAXU

APPENDIX IV

Statement of Changes in Equity

Paid-in capital HK$’000 Capital contributions from equity owners 9,524 Net profit for the Relevant Period – At March 31, 2004 9,524 Cash Flow Statement OPERATING ACTIVITIES Profit before taxation Adjustment for: Depreciation Operating profit before movements in working capital Increase in trade receivables Increase in amount due from a fellow subsidiary Increase in trade and other payables NET CASH FLOWS OF OPERATING ACTIVITIES CASH FROM FINANCING ACTIVITY New bank borrowing raised CASH AND CASH EQUIVALENT AT END OF THE PERIOD Bank balances and cash	Retained profit HK$’000 – 13,519 13,519		Total HK$’000 9,524 13,519 23,043 8.22.2003 to 3.31.2004 HK$’000 13,519 1 13,520 (10,237) (5,797) 2,514 – 28,571 28,571

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ACCOUNTANTS’ REPORT ON XIAOGAN JIAXU

APPENDIX IV

(B) NOTES TO THE FINANCIAL INFORMATION

1. SIGNIFICANT ACCOUNTING POLICIES

Revenue recognition

Gas connection revenue is recognised when the outcome of a contract can be estimated reliably and the stage of completion at the balance sheet date can be measured reliably. Revenue from gas connection contracts is recognised on the percentage of completion method, measured by reference to the value of work carried out during the period. When the outcome of a gas connection contract cannot be estimated reliably, revenue is recognised only to the extent of contract cost incurred that it is probable to be recoverable.

Property, plant and equipment

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

Depreciation is provided to write off the cost of items of property, plant and equipment over their estimated useful lives and after taking into account their estimated residual values, using the straight line method, at the following rates per annum:

Furniture and fixtures 15% – 50% Motor vehicles 25%

Construction contracts

When the outcome of a construction contract can be estimated reliably, contract costs are charged to the income statement by reference to the stage of completion of the contract activity at the balance sheet date, as measured by the proportion of costs incurred to date to estimated total costs for the contract.

When the outcome of a construction contract cannot be estimated reliably, contract costs are recognised as expenses in the period in which they are incurred.

When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately.

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ACCOUNTANTS’ REPORT ON XIAOGAN JIAXU

APPENDIX IV

When a contract covers a number of assets, the construction of each asset is treated as a separate contract when separate proposals have been submitted for each asset, each asset has been separately negotiated and the costs and revenue of each asset can be separately identified. A group of contracts, performed concurrently or in a continuous sequence, is treated as a single construction contract when they were negotiated as a single package and are so closely inter-related that they constitute a single project with an overall profit margin.

Impairment

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

Foreign currencies

Xiaogan Jiaxu Gas maintains its books and records in Renminbi (“RMB”).

The financial information of Xiaogan Jiaxu Gas has been translated into Hong Kong Dollars for presentation purpose. The basis of translation is as follows:

assets and liabilities for the balance sheet presented are translated at the closing rate existing at the date of balance sheet presented;
income and expense items for the period presented are translated at the exchange rates existing at the dates of the transactions or a rate that approximates the actual exchange rates;
paid-in capital and the net profit or loss for the period that is included in retained profit account are translated at the exchange rates existing at the dates of the transactions or a rate that approximates the actual exchange rates; and
exchange differences resulting from translation are recognised directly in equity.
124 -

ACCOUNTANTS’ REPORT ON XIAOGAN JIAXU

APPENDIX IV

Taxation

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

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

Operating leases

Rentals payable under operating leases are charged to the income statement on a straight line basis over the lease terms.

2. TURNOVER

The amount represents the gas connection fees received and receivable net of sales taxes for the Relevant Period and is analysed as follows:

Gas connection fees Less: sales taxes	8.22.2003 to 3.31.2004 HK$’000 16,357 (491) 15,866

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ACCOUNTANTS’ REPORT ON XIAOGAN JIAXU

APPENDIX IV

3. SEGMENT INFORMATION

Business segments

Xiaogan Jiaxu Gas is primarily established to engage in (i) the design and construction of natural gas pipeline network, and (ii) the provision of piped natural gas, in Xiaogan City, Hubei Province, the People’s Republic of China (“PRC”). The analysis by business segments is presented below:

For the period from August 22, 2003 to March 31, 2004

REVENUE Turnover SEGMENT RESULT Unallocated corporate expenses Profit before taxation Taxation Net profit for the period At March 31, 2004 ASSETS Segment assets Unallocated corporate assets LIABILITIES Segment liabilities Unallocated corporate liabilities	Gas pipeline construction HK$’000 15,866 13,642 Gas pipeline construction HK$’000 10,237 1,914	Sales of piped gas HK$’000 – – Sales of piped gas HK$’000 6,309 600	Total HK$’000 15,866 13,642 (123) 13,519 – 13,519 Total HK$’000 16,546 37,582 54,128 2,514 28,571 31,085

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ACCOUNTANTS’ REPORT ON XIAOGAN JIAXU

APPENDIX IV

For the period from August 22, 2003 to March 31, 2004

Gas pipeline Sales of construction piped gas HK$’000 HK$’000 OTHER INFORMATION Additions to property, plant and equipment – 6,309 Additions to property, plant and equipment (unallocated) Depreciation (unallocated) Geographical segments	Total HK$’000 6,309 187
	6,496

	1

All identifiable assets and customers of Xiaogan Jiaxu Gas are located in the PRC. Accordingly, no analysis on geographical segments is presented.

4. PROFIT BEFORE TAXATION

Profit before taxation has been arrived at after charging:

Auditors’ remuneration Depreciation Staff costs: Directors’ remuneration Other staff costs - salaries and other benefits Operating lease rentals in respect of rented premises	8.22.2003 to 3.31.2004 HK$’000 – 1 – 43 43 14

5. DIRECTORS’ REMUNERATION

No remuneration was paid to Xiaogan Jiaxu Gas’s directors during the Relevant Period.

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ACCOUNTANTS’ REPORT ON XIAOGAN JIAXU

APPENDIX IV

6. EMPLOYEES’ EMOLUMENTS

The emoluments of the five highest paid individuals paid by Xiaogan Jiaxu Gas are as follows:

	8.22.2003
	to
	3.31.2004
	HK$’000
Salaries and other benefits	43

7. TAXATION

Pursuant to certain approval documents issued by the State Tax Bureau of the PRC, Xiaogan Jiaxu Gas is entitled to exemption from PRC enterprise income tax for the first two years commencing from its first profit-making year of operation and thereafter is entitled to a 50% PRC income tax reduction for the following three years.

No provision for PRC enterprise income tax has been made in the financial statements as Xiaogan Jiaxu Gas was exempted from PRC enterprise income tax during the Relevant Period.

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

8. PROPERTY, PLANT AND EQUIPMENT

COST Acquired during the period and balance at March 31, 2004 DEPRECIATION Provided for the period and balance at March 31, 2004 NET BOOK VALUE At March 31, 2004	Construction in progress HK$’000 6,309 – 6,309	Furniture and fixtures HK$’000 6 – 6	Motor vehicles HK$’000 181 1 180	Total HK$’000 6,496 1
				6,495

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ACCOUNTANTS’ REPORT ON XIAOGAN JIAXU

APPENDIX IV

9. TRADE RECEIVABLES

Xiaogan Jiaxu Gas allows the credit period in accordance with the relevant sale agreements with trade customers.

At the balance sheet date, the trade receivables are aged within 30 days.

10. AMOUNT DUE FROM A FELLOW SUBSIDIARY

The amount is unsecured, interest-free and repayable on demand.

11. TRADE AND OTHER PAYABLES

Trade payables Other payables At the balance sheet date, the trade payables are aged within 30 days. PAID-IN CAPITAL Capital contributions from equity owners and balance at March 31, 2004 Xiaogan Jiaxu Gas was established with a registered capital of RMB10,000,000 (equivalent to	3.31.2004 HK$’000 1,423 1,091
	2,514

	Paid-in capital HK$’000 9,524

	HK$9,524,000).

12. PAID-IN CAPITAL

Upon the establishment of Xiaogan Jiaxu Gas, an equity owner contributed HK$3,600,000 to provide the initial capital to Xiaogan Jiaxu Gas. According to the capital verification report, two equity owners contributed HK$3,543,000 and HK$2,381,000 on November 24, 2003 and December 2, 2003 respectively to provide additional working capital.

13. BANK BORROWING

The amount is secured by a corporate guarantee issued by a fellow subsidiary and the equity interests in Xiaogan Jiaxu Gas entitled by its equity owners.

The maturity profile of the bank borrowing is as follows:

More than two years, but not exceeding five years More than five years	3.31.2004 HK$’000 19,047 9,524
	28,571

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ACCOUNTANTS’ REPORT ON XIAOGAN JIAXU

APPENDIX IV

14. OTHER NON-CASH TRANSACTIONS

Prior to the set up of the bank accounts, all of the transactions of Xiaogan Jiaxu Gas were dealt with in the current account with a fellow subsidiary. A summary of non-cash transactions of Xiaogan Jiaxu Gas during the Relevant Period is as follows:

Purchase of property, plant and equipment Capital contributions from equity owners Net increase in amount due from a fellow subsidiary	8.22.2003 to 3.31.2004 HK$’000 (6,496) 9,524 3,028

15. OPERATING LEASES COMMITMENTS

At March 31, 2004, Xiaogan Jiaxu Gas had no commitments under non-cancellable operating leases.

16. ULTIMATE HOLDING COMPANY

At March 31, 2004, the ultimate holding company of Xiaogan Jiaxu Gas was China Gas Holdings Limited, a public company incorporated in Bermuda with its shares listed on The Stock Exchange of Hong Kong Limited.

(C) DIRECTORS’ REMUNERATION

No remuneration has been paid or is payable to Xiaogan Jiaxu Gas’s directors by Xiaogan Jiaxu Gas during the Relevant Period.

(D) SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements of Xiaogan Jiaxu Gas have been prepared in respect of any period subsequent to March 31, 2004.

Yours faithfully,

Deloitte Touche Tohmatsu

Certified Public Accountants Hong Kong

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ACCOUNTANTS’ REPORT ON YINGCHENG JIAXU

APPENDIX V

==> picture [68 x 52] intentionally omitted <==

==> picture [95 x 39] intentionally omitted <==

September 24, 2004

The Directors

China Gas Holdings Limited

Dear Sirs,

We set out below our report on the financial information regarding Yingcheng Jiaxu Gas Co. Ltd. (“Yingcheng Jiaxu Gas”) for the period from November 27, 2002 (date of establishment) to March 31, 2004 (the “Relevant Period”) for inclusion in the circular of China Gas Holdings Limited dated September 24, 2004 (the “Circular”).

Yingcheng Jiaxu Gas is a sino-foreign equity joint venture established in the People’s Republic of China (“PRC”) on November 27, 2002 with an operating period of thirty years. It is established to engage in (i) the design and construction of natural gas pipeline network and (ii) the provision of piped natural gas, in Yingcheng City, Hubei Province, the PRC. Yingcheng Jiaxu Gas commenced its business in March 2004.

No PRC audited financial statements of Yingcheng Jiaxu Gas have been issued for the Relevant Period. However, for the purpose of this report, we have carried out independent audit procedures in accordance with Statements of Auditing Standards issued by the Hong Kong Institute of Certified Public Accountants on the management accounts of Yingcheng Jiaxu Gas for the Relevant Period (the “Underlying Financial Statements”) which were prepared in accordance with accounting principles generally accepted in Hong Kong.

The financial information of Yingcheng Jiaxu Gas set out in this report has been prepared from the Underlying Financial Statements.

The Underlying Financial Statements are the responsibility of the directors of Yingcheng Jiaxu Gas. The directors of China Gas Holdings Limited are responsible for the contents of the Circular in which this report is included. It is our responsibility to compile the financial information set out in this report from the Underlying Financial Statements, to form an independent opinion on the financial information and to report our opinion to you.

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ACCOUNTANTS’ REPORT ON YINGCHENG JIAXU

APPENDIX V

In our opinion, the financial information gives, for the purpose of this report, a true and fair view of the state of affairs of Yingcheng Jiaxu Gas as at March 31, 2004 and of the results of Yingcheng Jiaxu Gas for the Relevant Period.

(A) FINANCIAL INFORMATION

Income Statement

Notes Turnover 2 Cost of sales/services Gross profit Administrative expenses Profit before taxation 4 Taxation 7 Net profit for the period	11.27.2002 to 3.31.2004 HK$’000 11,399 (1,732) 9,667 (171) 9,496 – 9,496

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ACCOUNTANTS’ REPORT ON YINGCHENG JIAXU

APPENDIX V

Balance Sheet

Notes Non-current assets Property, plant and equipment 8 Current assets Trade receivables 9 Amount due from a fellow subsidiary 10 Current liabilities Trade and other payables 11 Net current assets Capital and reserves Paid-in capital 12 Retained profit	At 3.31.2004 HK$’000 193
	11,752 9,160
	20,912 2,085
	18,827
	19,020

	9,524 9,496
	19,020

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ACCOUNTANTS’ REPORT ON YINGCHENG JIAXU

APPENDIX V

Statement of Changes in Equity

Capital contributions from equity owners Net profit for the Relevant Period At March 31, 2004	Paid-in capital HK$’000 9,524 – 9,524	Retained profit HK$’000 – 9,496 9,496	Total HK$’000 9,524 9,496
			19,020

(B) NOTES TO THE FINANCIAL INFORMATION

1. SIGNIFICANT ACCOUNTING POLICIES

The financial information has been prepared under the historical cost convention and in accordance with accounting principles generally accepted in Hong Kong.

All of the transactions of Yingcheng Jiaxu Gas Co. Ltd. (“Yingcheng Jiaxu Gas”) are dealt with in the current account with a fellow subsidiary. Accordingly, no cash flow statement is presented.

The principal accounting policies adopted are as follows:

Revenue recognition

Gas connection revenue is recognised when the outcome of a contract can be estimated reliably and the stage of completion at the balance sheet date can be measured reliably. Revenue from gas connection contracts is recognised on the percentage of completion method, measured by reference to the value of work carried out during the period. When the outcome of a gas connection contract cannot be estimated reliably, revenue is recognised only to the extent of contract cost incurred that it is probable to be recoverable.

Property, plant and equipment

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

Depreciation is provided to write off the cost of items of property, plant and equipment over their estimated useful lives and after taking into account their estimated residual values, using the straight line method, at the following rates per annum:

Furniture and fixtures	15% – 50%
Motor vehicles	25%

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ACCOUNTANTS’ REPORT ON YINGCHENG JIAXU

APPENDIX V

Construction contracts

When the outcome of a construction contract can be estimated reliably, contract costs are charged to the income statement by reference to the stage of completion of the contract activity at the balance sheet date, as measured by the proportion of costs incurred to date to estimated total costs for the contract.

When the outcome of a construction contract cannot be estimated reliably, contract costs are recognised as expenses in the period in which they are incurred.

When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately.

When a contract covers a number of assets, the construction of each asset is treated as a separate contract when separate proposals have been submitted for each asset, each asset has been separately negotiated and the costs and revenue of each asset can be separately identified. A group of contracts, performed concurrently or in a continuous sequence, is treated as a single construction contract when they were negotiated as a single package and are so closely inter-related that they constitute a single project with an overall profit margin.

Impairment

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

Foreign currencies

Yangcheng Jiaxu Gas maintains its books and records in Renminbi (“RMB”).

135 -

ACCOUNTANTS’ REPORT ON YINGCHENG JIAXU

APPENDIX V

The financial information of Yingcheng Jiaxu Gas has been translated into Hong Kong Dollars for presentation purpose. The basis of translation is as follows:

assets and liabilities for the balance sheet presented are translated at the closing rate existing at the date of balance sheet presented;
income and expense items for the period presented are translated at the exchange rates existing at the dates of the transactions or a rate that approximates the actual exchange rates;
paid-in capital and the net profit or loss for the period that is included in retained profit account are translated at the exchange rates existing at the dates of the transactions or a rate that approximates the actual exchange rates; and
exchange differences resulting from translation are recognised directly in equity.

Taxation

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

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

Operating leases

Rentals payable under operating leases are charged to the income statement on a straight line basis over the lease terms.

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ACCOUNTANTS’ REPORT ON YINGCHENG JIAXU

APPENDIX V

2. TURNOVER

The amount represents the gas connection fees received and receivable net of sales taxes for the Relevant Period and is analysed as follows:

Gas connection fees Less: sales taxes	11.27.2002 to 3.31.2004 HK$’000 11,752 (353) 11,399

3. SEGMENT INFORMATION

Business segments

Yingcheng Jiaxu Gas is primarily established to engage in (i) the design and construction of natural gas pipeline network and (ii) the provision of piped natural gas, in Yingcheng City, Hubei Province, the PRC. During the Relevant Period, Ying Cheng Jiaxu Gas has only commenced the business of gas pipeline construction. Accordingly, no analysis on business segments is presented.

Geographical segments

All identifiable assets and customers of Yingcheng Jiaxu Gas are located in the PRC. Accordingly, no analysis on geographical segments is presented.

4. PROFIT BEFORE TAXATION

Profit before taxation has been arrived at after charging:

Auditors’ remuneration Depreciation Staff costs: Directors’ remuneration Other staff costs – salaries and other benefits Operating lease rentals in respect of rented premises	11.27.2002 to 3.31.2004 HK$’000 – 1 – 42 42 20

5. DIRECTORS’ REMUNERATION

No remuneration was paid to Yingcheng Jiaxu Gas’s directors during the Relevant Period.

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ACCOUNTANTS’ REPORT ON YINGCHENG JIAXU

APPENDIX V

6. EMPLOYEES’ EMOLUMENTS

The emoluments of the five highest paid individuals paid by Yingcheng Jiaxu Gas were as follows:

	11.27.2002
	to
	3.31.2004
	HK$’000
Salaries and other benefits	42

7. TAXATION

Pursuant to certain approval documents issued by the State Tax Bureau of the PRC, Yingcheng Jiaxu Gas is entitled to exemption from PRC enterprise income tax for the first two years commencing from its first profit-making year of operation and thereafter is entitled to a 50% PRC income tax reduction for the following three years.

No provision for PRC enterprise income tax has been made in the financial statements as Yingcheng Jiaxu Gas was exempted from PRC enterprise income tax during the Relevant Period.

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

8. PROPERTY, PLANT AND EQUIPMENT

COST Acquired during the period and balance at March 31, 2004 DEPRECIATION Provided for the period and balance at March 31, 2004 NET BOOK VALUE At March 31, 2004	Construction in progress HK$’000 6 – 6	Furniture and fixtures HK$’000 7 – 7	Motor vehicles HK$’000 181 1 180	Total HK$’000 194 1
				193

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ACCOUNTANTS’ REPORT ON YINGCHENG JIAXU

APPENDIX V

9. TRADE RECEIVABLES

Yingcheng Jiaxu Gas allows the credit period in accordance with the relevant sale agreements with trade customers.

At the balance sheet date, the trade receivables are aged within 30 days.

10. AMOUNT DUE FROM A FELLOW SUBSIDIARY

The amount is unsecured, interest-free and repayable on demand.

11. TRADE AND OTHER PAYABLES

Trade payables Other payables At the balance sheet date, the trade payables are aged within 30 days.	3.31.2004 HK$’000 1,732 353
	2,085

12. PAID-IN CAPITAL

Capital contributions from equity owners and balance at March 31, 2004	Paid-in capital HK$’000 9,524

Yingcheng Jiaxu Gas was established with a registered capital of RMB10,000,000 (equivalent to HK$9,524,000).

Upon the establishment of Yingcheng Jiaxu Gas, two equity owners contributed HK$952,000 and HK$6,190,000 respectively to provide the initial capital to Yingcheng Jiaxu Gas. According to the capital verification report, an equity owner contributed HK$2,382,000 on December 2, 2003 to provide additional working capital.

13. OPERATING LEASES COMMITMENTS

At March 31, 2004, Yingcheng Jiaxu Gas had no commitments under non-cancellable operating leases.

14. ULTIMATE HOLDING COMPANY

At March 31, 2004, the ultimate holding company of Yingcheng Jiaxu Gas was China Gas Holdings Limited, a public company incorporated in Bermuda with its shares listed on The Stock Exchange of Hong Kong Limited.

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ACCOUNTANTS’ REPORT ON YINGCHENG JIAXU

APPENDIX V

(C) DIRECTORS’ REMUNERATION

No remuneration has been paid or is payable to Yingcheng Jiaxu Gas’s directors by Yingcheng Jiaxu Gas during the Relevant Period.

(D) SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements of Yingcheng Jiaxu Gas have been prepared in respect of any period subsequent to March 31, 2004.

Yours faithfully, Deloitte Touche Tohmatsu Certified Public Accountants Hong Kong

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ACCOUNTANTS’ REPORT ON YUMENG JIAXU

APPENDIX VI

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September 24, 2004

The Directors

China Gas Holdings Limited

Dear Sirs,

We set out below our report on the financial information regarding Yumeng Jiaxu Gas Co. Ltd. (“Yumeng Jiaxu Company”) for the period from November 27, 2002 (date of establishment) to March 31, 2004 (the “Relevant Period”) for inclusion in the circular of China Gas Holdings Limited dated September 24, 2004 (the “Circular”).

Yumeng Jiaxu Gas is a sino-foreign equity joint venture established in the People’s Republic of China (“PRC”) on November 27, 2002 with an operating period of thirty years. It is established to engage in (i) the design and construction of natural gas pipeline network and (ii) the provision of piped natural gas, in Yumeng City, Hubei Province, the PRC. Yumeng Jiaxu Gas commenced its business in March 2004.

No PRC audited financial statements of Yumeng Jiaxu Gas have been issued for the Relevant Period. However, for the purpose of this report, we have carried out independent audit procedures in accordance with Statements of Auditing Standards issued by the Hong Kong Institute of Certified Public Accountants on the management accounts of Yumeng Jiaxu Gas for the Relevant Period (the “Underlying Financial Statements”) which were prepared in accordance with accounting principles generally accepted in Hong Kong.

The financial information of Yumeng Jiaxu Gas set out in this report has been prepared from the Underlying Financial Statements.

The Underlying Financial Statements are the responsibility of the directors of Yumeng Jiaxu Gas. The directors of China Gas Holdings Limited are responsible for the contents of the Circular in which this report is included. It is our responsibility to compile the financial information set out in this report from the Underlying Financial Statements, to form an independent opinion on the financial information and to report our opinion to you.

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ACCOUNTANTS’ REPORT ON YUMENG JIAXU

APPENDIX VI

In our opinion, the financial information gives, for the purpose of this report, a true and fair view of the state of affairs of Yumeng Jiaxu Gas as at March 31, 2004 and of the results of Yumeng Jiaxu Gas for the Relevant Period.

(A) FINANCIAL INFORMATION

Income Statement

Notes Turnover 2 Cost of sales/services Gross profit Administrative expenses Profit before taxation 4 Taxation 7 Net profit for the period	11.27.2002 to 3.31.2004 HK$’000 15,481 (2,284) 13,197 (137) 13,060 – 13,060

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ACCOUNTANTS’ REPORT ON YUMENG JIAXU

APPENDIX VI

Balance Sheet

Notes Non-current assets Property, plant and equipment 8 Current assets Trade receivables 9 Amount due from a fellow subsidiary 10 Current liabilities Trade and other payables 11 Net current assets Capital and reserves Paid-in capital 12 Retained profit	At 3.31.2004 HK$’000 1,298
	14,718 5,574
	20,292 2,625
	17,667
	18,965

	5,905 13,060
	18,965

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ACCOUNTANTS’ REPORT ON YUMENG JIAXU

APPENDIX VI

Statement of Changes in Equity

Capital contributions from equity owners Net profit for the Relevant Period At March 31, 2004	Paid-in capital HK$’000 5,905 – 5,905	Retained profit HK$’000 – 13,060 13,060	Total HK$’000 5,905 13,060
			18,965

(B) NOTES TO THE FINANCIAL INFORMATION

1. SIGNIFICANT ACCOUNTING POLICIES

The financial information has been prepared under the historical cost convention and in accordance with accounting principles generally accepted in Hong Kong.

All of the transactions of Yumeng Jiaxu Gas Co. Ltd. (“Yumeng Jiaxu Gas”) are dealt with in the current account with a fellow subsidiary. Accordingly, no cash flow statement is presented.

The principal accounting policies adopted are as follows:

Revenue recognition

Gas connection revenue is recognised when the outcome of a contract can be estimated reliably and the stage of completion at the balance sheet date can be measured reliably. Revenue from gas connection contracts is recognised on the percentage of completion method, measured by reference to the value of work carried out during the period. When the outcome of a gas connection contract cannot be estimated reliably, revenue is recognised only to the extent of contract cost incurred that it is probable to be recoverable.

Property, plant and equipment

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

Depreciation is provided to write off the cost of items of property, plant and equipment over their estimated useful lives and after taking into account their estimated residual values, using the straight line method, at the following rates per annum:

Furniture and fixtures	15% – 50%
Motor vehicles	25%

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ACCOUNTANTS’ REPORT ON YUMENG JIAXU

APPENDIX VI

Construction contracts

When the outcome of a construction contract can be estimated reliably, contract costs are charged to the income statement by reference to the stage of completion of the contract activity at the balance sheet date, as measured by the proportion of costs incurred to date to estimated total costs for the contract.

When the outcome of a construction contract cannot be estimated reliably, contract costs are recognised as expenses in the period in which they are incurred.

When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately.

When a contract covers a number of assets, the construction of each asset is treated as a separate contract when separate proposals have been submitted for each asset, each asset has been separately negotiated and the costs and revenue of each asset can be separately identified. A group of contracts, performed concurrently or in a continuous sequence, is treated as a single construction contract when they were negotiated as a single package and are so closely inter-related that they constitute a single project with an overall profit margin.

Impairment

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

Foreign currencies

Yumeng Jiaxu Gas maintains its books and records in Renminbi (“RMB”).

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ACCOUNTANTS’ REPORT ON YUMENG JIAXU

APPENDIX VI

The financial information of Yumeng Jiaxu Gas has been translated into Hong Kong Dollars for presentation purpose. The basis of translation is as follows:

assets and liabilities for the balance sheet presented are translated at the closing rate existing at the date of balance sheet presented;
income and expense items for the period presented are translated at the exchange rates existing at the dates of the transactions or a rate that approximates the actual exchange rates;
paid-in capital and the net profit or loss for the period that is included in retained profit account are translated at the exchange rates existing at the dates of the transactions or a rate that approximates the actual exchange rates; and
exchange differences resulting from translation are recognised directly in equity.

Taxation

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

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

Operating leases

Rentals payable under operating leases are charged to the income statement on a straight line basis over the lease terms.

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ACCOUNTANTS’ REPORT ON YUMENG JIAXU

APPENDIX VI

2. TURNOVER

The amount represents the gas connection fees received and receivable net of sales taxes for the Relevant Period and is analysed as follows:

Gas connection fees Less: sales taxes	11.27.2002 to 3.31.2004 HK$’000 15,960 (479) 15,481

3. SEGMENT INFORMATION

Business segments

Yumeng Jiaxu Gas is primarily established to engage in (i) the design and construction of natural gas pipeline network and (ii) the provision of piped natural gas, in Yumeng City, Hubei Province, the People’s Republic of China (“PRC”). During the Relevant Period, Yumeng Jiaxu Gas has only commenced the business of gas pipeline construction. Accordingly, no analysis on business segments is presented.

Geographical segments

All identifiable assets and customers of Yumeng Jiaxu Gas are located in the PRC. Accordingly, no analysis on geographical segments is presented.

4. PROFIT BEFORE TAXATION

Profit before taxation has been arrived at after charging:

Auditors’ remuneration Depreciation Staff costs: Directors’ remuneration Other staff costs – salaries and other benefits Operating lease rentals in respect of rented premises	11.27.2002 to 3.31.2004 HK$’000 – 1 – 50 50 10

5. DIRECTORS’ REMUNERATION

No remuneration was paid to Yumeng Jiaxu Gas’s directors during the Relevant Period.

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ACCOUNTANTS’ REPORT ON YUMENG JIAXU

APPENDIX VI

6. EMPLOYEES’ EMOLUMENTS

The emoluments of the five highest paid individuals paid by Yumeng Jiaxu Gas were as follows:

	11.27.2002
	to
	3.31.2004
	HK$’000
Salaries and other benefits	50

7. TAXATION

Pursuant to certain approval documents issued by the State Tax Bureau of the PRC, Yumeng Jiaxu Gas is entitled to exemption from PRC enterprise income tax for the first two years commencing from its first profit-making year of operation and thereafter is entitled to a 50% PRC income tax reduction for the following three years.

No provision for PRC enterprise income tax has been made in the financial statements as Yumeng Jiaxu Gas was exempted from PRC enterprise income tax during the Relevant Period.

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

8. PROPERTY, PLANT AND EQUIPMENT

COST Acquired during the period and balance at March 31, 2004 DEPRECIATION Provided for the period and balance at March 31, 2004 NET BOOK VALUE At March 31, 2004	Construction in progress HK$’000 1,111 – 1,111	Furniture and fixtures HK$’000 7 – 7	Motor vehicles HK$’000 181 1 180	Total HK$’000 1,299 1
				1,298

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ACCOUNTANTS’ REPORT ON YUMENG JIAXU

APPENDIX VI

9. TRADE RECEIVABLES

Yumeng Jiaxu Gas allows the credit period in accordance with the relevant sale agreements with trade customers.

At the balance sheet date, the trade receivables are aged within 30 days.

10. AMOUNT DUE FROM A FELLOW SUBSIDIARY

The amount is unsecured, interest-free and repayable on demand.

11. TRADE AND OTHER PAYABLES

Trade payables Other payable At the balance sheet date, the trade payables are aged within 30 days.	31.3.2004 HK$’000 2,146 479
	2,625

12. PAID-IN CAPITAL

Capital contributions from equity owners and balance at March 31, 2004	Paid-in capital HK$’000 5,905

Yumeng Jiaxu Gas was established with a registered capital of RMB6,200,000 (equivalent to HK$5,905,000).

Upon the establishment of Yumeng Jiaxu Gas, two equity owners contributed HK$591,000 and HK$3,838,000 respectively to provide the initial capital to Yumeng Jiaxu Gas. According to the capital verification report, an equity owner contributed HK$1,476,000 on December 2, 2003 to provide additional working capital.

13. OPERATING LEASES COMMITMENTS

At March 31, 2004, Yumeng Jiaxu Gas had no commitments under non-cancellable operating leases.

14. ULTIMATE HOLDING COMPANY

At March 31, 2004, the ultimate holding company of Yumeng Jiaxu Gas was China Gas Holdings Limited, a public company incorporated in Bermuda with its shares listed on The Stock Exchange of Hong Kong Limited.

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ACCOUNTANTS’ REPORT ON YUMENG JIAXU

APPENDIX VI

(C) DIRECTORS’ REMUNERATION

No remuneration has been paid or is payable to Yumeng Jiaxu Gas’s directors by Yumeng Jiaxu Gas during the Relevant Period.

(D) SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements of Yumeng Jiaxu Gas have been prepared in respect of any period subsequent to March 31, 2004.

Yours faithfully, Deloitte Touche Tohmatsu Certified Public Accountants Hong Kong

150 -

APPENDIX VII FINANCIAL INFORMATION ON THE ENLARGED GROUP

1. UNAUDITED PRO FORMA STATEMENT OF ASSETS AND LIABILITIES OF THE ENLARGED GROUP

(a) Unaudited pro forma statement of assets and liabilities of the Enlarged Group

The following table is an unaudited pro forma statement of assets and liabilities of the Enlarged Group which has been prepared, for illustration purpose only, as if the proposed acquisition of 10% equity interests in Hanchuan Jiaxu, Yumeng Jiaxu, Yingcheng Jiaxu, and Xiaogan Jiaxu and 100% equity interests in Great Sun had been completed on 31 March 2004 and based on the audited consolidated balance sheet of the Group as at 31 March 2004, extracted from the annual report of the Company for the year ended 31 March 2004 as set out in Appendix I to this circular.

The unaudited pro forma consolidated statement of assets and liabilities is prepared to provide the unaudited pro forma financial information of the Enlarged Group as a result of the Great Sun Acquisition and the JV Acquisition. As it has been prepared for illustration purpose only and because of its nature, it may not give a true picture of the financial position of the Enlarged Group at any future date.

Non-current Assets Current Assets Current Liabilities Capital and Reserves Minority Interests Non-current liabilities	The Group at 31 March 2004 HK$’000 408,293 933,986 (352,625) 989,654 502,674 91,121 395,859 989,654	Great Sun at 31 March Pro forma 2004 adjustments HK$’000 HK$’000 14,572 46,754 – (94,571) (14,564) 14,564 8 8 (8) – (33,245) – 8	*Notes* 2, 3, 4 2, 3 2 2 2, 3	Pro forma balance HK$’000 469,619 839,415 (352,625) 956,409 502,674 57,876 395,859 956,409

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FINANCIAL INFORMATION ON THE ENLARGED GROUP

APPENDIX VII

Notes:

Since Hanchuan Jiaxu, Yumeng Jiaxu, Yingcheng Jiaxu, Xiaogan Jiaxu and Xiaogan Zhengrong (the “Five Joint Ventures”) were subsidiaries of the Company, the assets and liabilities of the Five Joint Ventures were incorporated into the consolidated assets and liabilities of the Group as at 31 March 2004.
The adjustment reflects the proposed acquisition of 100% equity interests in Great Sun and a shareholder loan of RMB15,291,700 (equivalent to approximately HK$14,564,000) of Great Sun at a consideration of RMB81,600,000 (equivalent to approximately HK$77,714,000). Since Great Sun owned 25% interest in the Five Joint Ventures of approximately HK$24,971,000 which were included in the minority interests of the Group as at 31 March 2004, the proposed acquisition indirectly acquired the 25% minority interest and reclassification was made accordingly.
The adjustment reflects the proposed acquisition of 10% equity interests in Hanchuan Jiaxu, Yumeng Jiaxu, Yingcheng Jiaxu and Xiaogan Jiaxu at a total consideration of RMB17,700,000 (equivalent to approximately HK$16,857,000). Since Hanchuan Jiaxu, Yumeng Jiaxu, Yingcheng Jiaxu and Xiaogan Jiaxu were subsidiaries of the Group as at 31 March 2004, the 10% equity interests in those companies of approximately HK$8,274,000 were included in the minority interests of the Group as at 31 March 2004, reclassification was made to reflect the acquisition accordingly.
Goodwill arising from the acquisition of Great Sun and Hanchuan Jiaxu, Yumeng Jiaxu, Yingcheng Jiaxu and Xiaogan Jiaxu amounts to approximately HK$52,743,000 and HK$8,583,000 respectively.
The directors consider that the related expenses incurred for the Great Sun Acquisition and the JV Acquisition is insignificant to the Group’s net assets, accordingly, no adjustment was made.
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APPENDIX VII FINANCIAL INFORMATION ON THE ENLARGED GROUP

(b) Report on unaudited pro forma statement of assets and liabilities of the Enlarged Group

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September 24, 2004

The Directors China Gas Holdings Limited

Dear Sirs,

We report on the pro forma financial information (“Pro Forma Financial Information”) of China Gas Holdings Limited (the “Company”) and its subsidiaries (collectively referred to as the “Group”) and the 25% equity interests in Xiaogan Zhengrong Gas Co. Ltd. and the remaining 35% equity interests in Hanchuan Jiaxu Gas Co. Ltd., Yumeng Jiaxu Gas Co. Ltd., Yingcheng Jiaxu Gas Co. Ltd. and Xiaogan Jiaxu Gas Co. Ltd. (“PRC subsidiaries” and together with the Group hereinafter referred to as the “Enlarged Group”) set out in Section 1 (a) of Appendix VII of the circular dated September 24, 2004 (the “Circular”) in connection with the major and connected transactions in respect of (1) the acquisition of the entire issued share capital of Great Sun Investments Ltd. and (2) the acquisition of equity interests in Hanchuan Jiaxu Gas Co. Ltd., Yumeng Jiaxu Gas Co. Ltd., Yingcheng Jiaxu Gas Co. Ltd. and Xiaogan Jiaxu Gas Co. Ltd. (the “Acquisition”), which has been prepared, as if the Acquisition had been completed as at March 31, 2004 for illustrative purpose only, to provide information about how the Acquisition might have affected the relevant financial information presented.

Responsibilities

It is the responsibility solely of the directors of the Company to prepare the 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”).

It is our responsibility to form an opinion, as required by paragraph 4.29 of the Listing Rules, on the Pro Forma Financial Information and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the Pro Forma Financial Information beyond that owed to those to whom those reports were addressed by us at the dates of their issue.

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APPENDIX VII FINANCIAL INFORMATION ON THE ENLARGED GROUP

Basis of opinion

We conducted our work with reference to the Statements of Investment Circular Reporting Standards and Bulletin 1998/8 ‘Reporting on pro forma financial information pursuant to the Listing Rules’ issued by the Auditing Practices Board in the United Kingdom, where applicable. Our work, which involved no independent examination of any of the underlying financial information, consisted primarily of comparing the unadjusted financial information with the source documents, considering the evidence supporting the adjustments and discussing the Pro Forma Financial Information with the directors of the Company.

Our work did not constitute an audit or a review in accordance with Statements of Auditing Standards issued by the Hong Kong Institute of Certified Public Accountants, and accordingly, we do not express such assurance on the Pro Forma Financial Information.

The Pro Forma Financial Information has been prepared on the basis set out in Section 1 (a) of Appendix VII of the Circular for illustrative purposes only and, because of its nature, it may not be indicative of the financial position of:

the Enlarged Group had the Acquisition been completed at March 31, 2004; or
the Enlarged Group at any future date.

Opinion

In our opinion:

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

Yours faithfully,

Deloitte Touche Tohmatsu

Certified Public Accountants Hong Kong

154 -

APPENDIX VII FINANCIAL INFORMATION ON THE ENLARGED GROUP

2. INDEBTEDNESS

As at the close of business on 31 July 2004, being the latest practicable date for the purpose of this indebtedness statement prior to the printing of this circular, the Enlarged Group has outstanding borrowings of approximately HK$852.4 million, comprising bank loans of approximately HK$723.8 million, mortgage loan of approximately HK$19.4 million, other loans of approximately HK$7.6 million, obligations under a hire purchase contract of approximately HK$0.3 million, convertible note of approximately HK$46.8 million and convertible bonds of approximately HK$54.5 million. The Enlarged Group’s bank loans, mortgage loan and obligations under a hire purchase contract were secured by certain property, plant and equipment of the Enlarged Group with net book value of HK$227.8 million and certain investments in subsidiaries of the Company.

Save as aforesaid or as otherwise disclosed herein, and apart from intra-group liabilities, none of the companies in the Enlarged Group had outstanding at the close of business on 31 July 2004 any mortgages, charges or debentures, loan capital issued and outstanding or agreed to be issued, bank overdrafts, loans, debt securities or other similar indebtedness or any hire purchase commitments, liabilities under acceptance or acceptable credits or any guarantees or other material contingent liabilities.

For the purpose of the above indebtedness statement, foreign currency amounts have been translated into Hong Kong dollars at the approximate rates of exchange prevailing at the close of business on 31 July 2004.

The Directors are not aware of any material changes in the Enlarged Group’s indebtedness and contingent liabilities at the close of business on 31 July 2004.

3. WORKING CAPITAL

Taking into account the internal resources of the Enlarged Group and the availability of banking facilities from various financial institutions, the Directors are of the opinion that the Enlarged Group will have sufficient working capital for its present requirements.

4. MATERIAL CHANGE

The Directors are not aware of any material adverse change in the financial and trading position of the Enlarged Group since 31 March 2004, the date to which the latest audited financial statements of the Enlarged Group were made up.

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GENERAL INFORMATION

APPENDIX VIII

1. RESPONSIBILITY STATEMENT

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

2. DISCLOSURE OF INTERESTS

(a) Director’s interests and short positions in the securities of the Company and its associated corporations

As at the Latest Practicable Date, the interests and short positions of the Directors and the chief executive of the Company in the shares, underlying shares or debentures of the Company and its associated corporations (within the meaning of Part XV of the SFO) (i) which were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests or short positions which they were taken or deemed to have under such provisions of the SFO); or (ii) which were required, pursuant to section 352 of the SFO, to be entered in the register referred to therein; or (iii) which were required to be notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Companies contained in the Listing Rules, were as follows:

(A) Shares

			Approximate
	Number or		percentage or
	attributable number		attributable
	of Shares held		percentage of
Name	or short positions	Nature of interests	shareholding
Liu Ming Hui	385,000,000 (L)	Personal	21.95%
L: Long Position

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GENERAL INFORMATION

APPENDIX VIII

(B) Options

	Number and		Number of
	description of		underlying
Name	equity derivatives	Nature of interests	Shares
Liu Ming Hui	5,000,000 Options	Personal	5,000,000
	(Note)
Li Xiaoyun	5,000,000 Options	Personal	5,000,000
	(Note)
Xu Ying	5,000,000 Options	Personal	5,000,000
	(Note)
Ma Jin Long	9,240,711 Options	Personal	9,240,711
	(Note)
Zhu Wei Wei	4,000,000 Options	Personal	4,000,000
	(Note)
Wu Bangjie	2,000,000 Options	Personal	2,000,000
	(Note)
Mao Er Wan	1,000,000 Options	Personal	1,000,000
	(Note)
Wong Sin Yue,	1,000,000 Options	Personal	1,000,000
Cynthia	(Note)
Zhao Yu Hua	1,000,000 Options	Personal	1,000,000
	(Note)

Note: The Options were granted under the share option scheme adopted by the Company on 6 February 2003 and entitled the holders thereof to subscribe for Shares at an exercise price of HK$0.80 per Share during the period from 1 September 2004 to 8 January 2014.

Save as disclosed above, as at the Latest Practicable Date, none of the Directors nor the chief executive of the Company had or was deemed to have any interests or short positions in the shares, underlying shares or debentures of the Company and its associated corporations (within the meaning of Part XV of the SFO) (i) which were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests or short positions which they were taken or deemed to have under such provisions of the SFO); or (ii) which were required, pursuant to section 352 of the SFO, to be entered in the register referred to therein; or (iii) which were required to be notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Companies contained in the Listing Rules.

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GENERAL INFORMATION

APPENDIX VIII

(b) Persons who have an interest or short position which is discloseable under Divisions 2 and 3 of Part XV of the SFO

So far as is known to the Directors and the chief executive of the Company, as at the Latest Practicable Date, the following persons (not being Directors or chief executive of the Company) had, or were deemed to have, interests or short positions in the Shares or underlying Shares which would fall to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO:

	Number or	Approximate
	attributable	percentage
	number of	or attributable
	Shares held	percentage of
Name of Shareholder	or short position	shareholding
		(%)
Xu Xau Lan	390,000,000 (L)	22.23
	(Note 1)
Heng Fung Holdings Limited	160,002,000 (L)	9.12
	160,000,000 (S)	9.12
	(Note 2)
Hai Xia Finance Holdings Limited	150,000,003 (L)	8.55
	150,000,003 (S)	8.55

L: Long Position

S: Short Position

Notes:

These 390,000,000 Shares represents the 385,000,000 Shares beneficially owned by, or agreed to be acquired by, Mr. Liu Ming Hui, an executive Director, and the 5,000,000 Shares which fall to be allotted and issued upon exercise of the Options granted to Mr. Liu Ming Hui under the share option scheme adopted by the Company on 6 February 2003. Ms. Xu Xau Lan is the spouse of Mr. Liu Ming Hui.
These Shares were held as to 159,759,000 Shares by Heng Fung Holdings Limited and as to 243,000 Shares by Sure World Capital Limited, a wholly owned subsidiary of Heng Fung Holdings Limited.

Pursuant to a sale and purchase agreement dated 16 January 2004 and entered into between Heng Fung Holdings Limited and its subsidiaries (together the “Heng Fung Group”) as vendor and Mr. Liu Ming Hui as purchaser, Heng Fung Group has agreed to sell and Mr. Liu Ming Hui has agreed to acquire an aggregate of 250,000,000 Shares in cash at an aggregate consideration of HK$180,000,000. As at the Latest Practicable Date, the sale and purchase of 90,000,000 Shares has been completed.

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GENERAL INFORMATION

APPENDIX VIII

(c) Substantial shareholders of other members of the Group

So far as is known to the Directors and the chief executive of the Company, as at the Latest Practicable Date, the following persons (not being Directors or chief executive of the Company) were directly or indirectly interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any member of the Group:

		Percentage of
Name of subsidiary	Name of shareholder	shareholding
		(%)
Yichang China Gas &	Yichang City Natural Gas	30
City Gas Company Limited	Company Limited
Wuhu City Natural Gas	Anhui Province Wuhu City Natural Gas	10
Development Company Limited	Head Company
Yiyang Central Gas & City Gas	Yiyang City Construction, Investments and	20
Development Company Limited	Development Company Limited
Xiaogan Jiaxu	Great Sun	25
	Beijing YLC	10
Hanchuan Jiaxu	Great Sun	25
	Beijing YLC	10
Yumeng Jiaxu	Great Sun	25
	Beijing YLC	10
Yingcheng Jiaxu	Great Sun	25
	Beijing YLC	10
Xiaogan Zhenrong	Great Sun	25
	Beijing YLC	45
Beijing Xiangke Jiahua Oil &	北京中燃偉業投資有限公司	40
Gas Technology Company Limited	(Beijing Central Gas Wei Yip Investment Co. Ltd.)

Save as disclosed above, as at the Latest Practicable Date, the Directors and the chief executive of the Company were not aware of any other person (other than the Directors and the chief executive of the Company) who had, or was deemed to have, interests or short positions in the Shares or underlying Shares (including any interests in options in respect of such capital), which would fall to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO, or who was directly or indirectly interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any member of the Group.

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GENERAL INFORMATION

APPENDIX VIII

As at the Latest Practicable Date, none of the Directors was a director or employee of a company which had, or was deemed to have, an interest or short position in the Shares or underlying Shares which would fall to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO.

3. MATERIAL CONTRACTS

The following contracts (not being contracts in the ordinary course of business) have been entered into by the Company or any of its subsidiaries within the two years immediately preceding the date of this circular and are or may be material:

(a) the sale and purchase agreement dated 12 November 2002 and entered into between Yuan Yang, an Independent Third Party, as vendor and Fun Track Worldwide Inc., a wholly owned subsidiary of the Company, as purchaser in relation to the sale and purchase of 57% of the issued share capital of China City Gas Construction Investment Company Limited at an aggregate consideration of US$57.00. China City Gas Construction Investment Company Limited is a joint venture partner of 焦作中燃城市燃氣發展有限公司 (Jiaozuo City Gas Development Co., Ltd.) and is responsible for the contribution of 93.20% of its registered capital. Upon completion of such acquisition, the Group would make a total investment of HK$42,499,200 in Jiaozuo City Gas Development Co., Ltd.;
(b) the joint venture agreement dated 6 December 2002 and entered into between Shenzhen Natural Gas, Wuhan China Natural Gas Investment Company Limited and Yichang City Natural Gas Company Limited in relation to the establishment of Yichang China Gas & City Gas Company Limited. Yichang City Natural Gas Company Limited was an Independent Third Party at the time of entering into the joint venture agreement and Shenzhen Natural Gas and Wuhan China Natural Gas Investment Company Limited are wholly owned subsidiaries of the Company. Pursuant to the joint venture agreement, the Group would make a total investment in the sum of RMB49,000,000 (equivalent to approximately HK$46,667,000) to Yichang China Gas & City Gas Company Limited;
(c) the cancellation agreement dated 6 December 2002 and entered into between Hai Xia Finance Holdings Limited and the Company in relation to the cancellation of the proposed investment in the gas project to be launched in Yichang, Hubei Province, the PRC. Hai Xia Finance Holdings Limited is a Shareholder holding approximately 8.55% of the issued share capital of the Company as at the Latest Practicable Date. On 13 June 2002, China Gas Development Group Limited (the “ Samoa Company ”), a company incorporated in Samoa with limited liability and a wholly owned subsidiary of 中國天然氣發展集團有限公司 (China Gas Development Group Limited (“ China Gas Development ”), entered into three heads of agreements (the “ Heads of Agreements ”) in relation to the investments in natural gas projects in Suizhou, Yichang and Shiyan in Hubei Province, the PRC. The issued share capital of China Gas Development was at that time owned as to 49% by the Company and as to 51% by Hai Xia Finance Holdings Limited. Pursuant to the cancellation agreement, Hai Xia Finance Holdings Limited (in its capacity as the owner of 51% equity interests in China Gas Development which in turned owned the entire issued share capital of the Samoa Company) agreed to waive all its rights and benefits under the Heads of Agreements in
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relation to the proposed investment in the gas project in Yichang. According to the cancellation agreement, the Group is entitled to manage, operate and develop the natural gas project in Yichang on its own or with other investing parties. In addition, Hai Xia Finance Holdings Limited agreed not to claim against the Group for any loss or damages incurred as a result of such cancellation;

(d) the sale and purchase agreement dated 17 December 2002 and entered into between Ji Xiangjun, an Independent Third Party, as vendor and West Region International Limited, a wholly owned subsidiary of the Company, as purchaser in relation to the sale and purchase of 57% of the issued share capital of China City Gas Construction Development Company Limited at an aggregate consideration of US$57.00. China City Gas Construction Development Company Limited is a joint venture partner of 濟源中燃城市燃氣發展有限公司 (Jiyuan City Gas Development Co., Ltd.) and is responsible for the contribution of 92.90% of its registered capital. Upon completion of such acquisition, the Group would make a total investment of HK$20,122,140 to Jiyuan City Gas Development Co., Ltd.;
(e) the joint venture agreement dated 12 March 2003 as supplemented by a supplemental agreement dated 12 March 2003 and entered into between China Natural Gas Construction Limited, Wuhan China Natural Gas Investment Company Limited and Suizhou Municipal Projects Company, in relation to the establishment of 隨州中燃城市燃氣發展有限公司 (Suizhou Central City Gas Development Company Limited). Suizhou Municipal Projects Company was an Independent Third Party at the time of entering into the joint venture agreement and China Natural Gas Construction Limited and Wuhan China Natural Gas Investment Company Limited are wholly owned subsidiaries of the Company. Pursuant to the joint venture agreement, the Group would make a total investment in the sum of RMB25,200,000 (equivalent to HK$24,000,000) to Suizhou Central City Gas Development Company Limited;
(f) the cancellation agreement dated 12 March 2003 and entered into between Hai Xia Finance Holdings Limited and the Company in relation to the cancellation of the proposed investment by China Gas Development in the gas project to be launched in Suizhou, Hubei Province, the PRC. On 13 June 2002, Samoa Company entered into the Heads of Agreements in relation to the investments in natural gas projects in Suizhou, Yichang and Shiyan in Hubei Province, the PRC. The issued share capital of China Gas Development was at that time owned as to 49% by the Company and as to 51% by Hai Xia Finance Holdings Limited. Pursuant to the cancellation agreement, Hai Xia Finance Holdings Limited (in its capacity as the owner of 51% equity interests in China Gas Development which in turn owned the entire issued share capital of the Samoa Company) agreed to waive all its rights and benefits under the Heads of Agreements in relation to the proposed investment in the gas project in Suizhou. According to the cancellation agreement, the Group is entitled to manage, operate and develop the natural gas project in Suizhou on its own or with other investing parties. In addition, Hai Xia Finance Holdings Limited agreed not to claim against the Group for any loss or damages incurred as a result of such cancellation;
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(g) the sale and purchase agreement dated 10 June 2003 and entered into between Hai Xia Finance Holdings Limited as vendor and the Company as purchaser in relation to the acquisition of 51% of the issued share capital of China Gas Development at an aggregate consideration of US$51.00 (equivalent to approximately HK$398). Upon completion of this sale and purchase agreement, China Gas Development became a wholly owned subsidiary of the Company;
(h) the joint venture agreement dated 10 June 2003 and entered into between Shenzhen Natural Gas, China Gas Development and 淮南市燃氣總公司 (Huainan City Gas Company) (“ Huainan Natural Gas ”) in relation to the establishment of Huainan China Gas. Huainan Natural Gas was an Independent Third Party at the time of entering into the joint venture agreement and Shenzhen Natural Gas and China Gas Development are wholly owned subsidiaries of the Company. Pursuant to the joint venture agreement, the Group would make a total investment of RMB50,400,000 (equivalent to approximately HK$48,000,000) to Huainan China Gas;
(i) a subscription agreement dated 10 June 2003 and entered into between Eastern Linker Holdings Limited, an Independent Third Party, and the Company in relation to the subscription by Eastern Linker Holdings Limited of convertible note issued by the Company in the principal amount of US$6,000,000 (equivalent to HK$46,800,000);
(j) the joint venture agreement dated 25 June 2003 and entered into between Shenzhen Natural Gas, China Natural Gas Development Holdings Limited and 安徽省蕪湖市燃氣總公司 (Anhui Province Wuhu City Natural Gas Head Company) in relation to the establishment of 蕪湖中燃城市燃氣發展有限公司 (Wuhu City Natural Gas Development Company Limited). Anhui Province Wuhu City Natural Gas Head Company was an Independent Third Party at the time of entered into the joint venture agreement and Shenzhen Natural Gas and China Natural Gas Development Holdings Limited are wholly owned subsidiaries of the Company. Pursuant to the joint venture agreement, the Group would make a total investment of RMB90,000,000 to Wuhu City Natural Gas Development Company Limited;
(k) a sale and purchase agreement dated 3 July 2003 and entered into between Ren Weiguoa, an Independent Third Party, as vendor and the Company as purchaser in relation to the acquisition of 30% of the issued share capital of Clever Decision, at an aggregate consideration of HK$8,440,000;
(l) the subscription agreement dated 9 October 2003 and entered into between the Company and Mr. Chen Li Hui, an Independent Third Party, in relation to the subscription of 30,000,000 Shares at an aggregate subscription price of HK$21,600,000 (equivalent to HK$0.72 per Share);
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(m) the subscription agreement dated 9 October 2003 and entered into between the Company and Madam Wu Nan Hui, an Independent Third Party, in relation to the subscription of 40,000,000 Shares at an aggregate subscription price of HK$28,800,000 (equivalent to HK$0.72 per Share);
(n) the joint venture agreement dated 16 October 2003 and entered into between China City Gas Enterprises Limited, Shenzhen Natural Gas and 益陽市城市建設投資開發有限責任公司 (Yiyang City Construction, Investments and Development Company Limited) in relation to the establishment of 益陽中燃城市燃氣發展有限公司 (Yiyang Central Gas & City Gas Development Company Limited). Yiyang City Construction, Investments and Development Company Limited was an Independent Third Party at the time of entering into the joint venture agreement and China City Gas Enterprises Limited and Shenzhen Natural Gas are wholly owned subsidiaries of the Company. Pursuant to the joint venture agreement, the Group would make a total investment of the sum of RMB35,200,000 (equivalent to approximately HK$33,524,000) to Yiyang Central Gas & City Gas Development Company Limited;
(o) the two agreements dated 29 October 2003 and entered into between the Company and Merrill Lynch International, an Independent Third Party, relating to, among other things, the subscription of convertible bonds issued by the Company with an aggregate principal amount of up to US$41,000,000 (equivalent to HK$319,800,000);
(p) the placing and subscription agreement dated 8 November 2003 and entered into between the Company, Heng Fung Holdings Limited and DBS Vickers (Hong Kong) Limited in relation to the placing of an aggregate of 160,000,000 Shares by DBS Vickers (Hong Kong) Limited and the subscription of an aggregate of 160,000,000 Shares by Heng Fung Holdings Limited at an aggregate subscription price of HK$134,400,000 (equivalent to HK$0.84 per Share). DBS Vickers (Hong Kong) Limited is an Independent Third Party. Heng Fung Holdings Limited is a Shareholder holding approximately 9.12% of the issued share capital of the Company as at the Latest Practicable Date;
(q) the sale and purchase agreement dated 18 December 2003 and entered into between the Company as vendor and He Xiao Yang, an Independent Third Party, as purchaser in relation to the disposal of the entire issued share capital of Energy Valley Investment Limited for an aggregate consideration of HK$60,000,000;
(r) the subscription agreement dated 16 January 2004 and entered into between the Company, Dragon Media Enterprises Limited, Mr. Zhu Wei Wei and Mr. Huang Yong in relation to the subscription of 50,000,000 Shares at an aggregate subscription price of HK$32,500,000 (equivalent to HK$0.65 per Share). The issued share capital of Dragon Media Enterprises Limited is owned as to 24% by Mr. Zhu Wei Wei and as to 76% by Mr. Huang Yong. Mr. Zhu Wei Wei is an executive Director and Mr. Huang Yong is a director of Shenzhen Natural Gas;
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(s) the subscription agreement dated 16 January 2004 and entered into between the Company and Mr. Liu Ming Hui, an executive Director, in relation to the subscription of 130,000,000 Shares at an aggregate subscription price of HK$84,500,000 (equivalent to HK$0.65 per Share);
(t) the sale and purchase agreement dated 9 February 2004 and entered into between Profit View International Limited, an Independent Third Party, as vendor and the Company as purchaser in relation to the acquisition of 70% of the issued share capital of Clever Decision and the shareholder’s loan owed by Clever Decision to Profit View International Limited, at an aggregate consideration of RMB106,242,000 (equivalent to approximately HK$101,183,000);
(u) a sale and purchase agreement dated 27 February 2004 and entered into between West Region International Limited, a wholly owned subsidiary of the Company, as vendor and 韋毓雲 , an Independent Third Party, as purchaser in relation to the disposal of 57% of the issued share capital of China City Gas Construction Development Company Limited for an aggregate consideration of HK$7,000,000;
(v) a sale and purchase agreement dated 27 February 2004 and entered into between Fun Track Worldwide Inc., a wholly owned subsidiary of the Company, as vendor and 尚爾東 , an Independent Third Party, as purchaser in relation to the disposal of 57% of the issued share capital of China City Gas Construction Investment Company Limited and the shareholder’s loan owed by China City Gas Construction Investment Company Limited to Fun Track Worldwide Inc., for an aggregate consideration of HK$40,350,131;
(w) a sale and purchase agreement dated 12 March 2004 and entered into between Chen Jianjun, an Independent Third Party, as vendor and the Company as purchaser in relation to the acquisition of the entire issued share capital of United Keen Investment Limited, at an aggregate consideration of RMB12,000,000 (equivalent to approximately HK$11,429,000);
(x) a sale and purchase agreement dated 15 March 2004 and entered into between Yan Rujie, an Independent Third Party, as vendor and the Company as purchaser in relation to the acquisition of the entire issued share capital of Glorywish Investment Limited, at an aggregate consideration of RMB9,500,000 (equivalent to approximately HK$9,048,000);
(y) a cooperation agreement dated 19 March 2004 and entered into between China City Gas Investments Limited, a wholly owned subsidiary of the Company, and 河北省滄州經濟技術開發區管委會 (Cangzhou Economic and Technology Development District Management Association, Hebei Province), an Independent Third Party, for the exclusive operation right in Cangzhou Economic and Technology Development District for a term of 30 years. Pursuant to the cooperation agreement, the Group would invest HK$2,000,000 for the setting up of Cangzhou Zhongran City Gas Development Company Limited;
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(z) a cooperation agreement dated 31 March 2004 and entered into between China Natural Gas Construction Holdings Limited, a wholly owned subsidiary of the Company, and the People’s Government of Yangzhong, Jiangsu Province, an Independent Third Party, for the setting up of Yangzhong Zhongran City Gas Development Company Limited. Pursuant to the cooperation agreement, the Group would contribute US$1,000,000 (equivalent to approximately HK$7,800,000) towards the registered capital of Yangzhong Zhongran City Gas Development Company Limited;
(aa) a cooperation agreement dated 15 May 2004 and entered into between the Company and 北京市燃氣集團有限責任公司 (Beijing Gas Group Company Limited), an Independent Third Party, for the joint investments and operation of the natural gas project in six districts (counties) of Changping district, Daxing district, Shunyi district, Tongzhou district, Fangshan district, Yanqing district, Beijing, in the PRC. No specific investment amount is set out in this cooperation agreement. The parties shall enter into further agreement to set out their respective investment amount if any investment opportunities shall have been identified in the future. As at the Latest Practicable Date, no further agreements have been entered into between the parties yet;
(bb) the share transfer agreement dated 19 May 2004 and entered into between Huainan Natural Gas as vendor and Shenzhen Natural Gas as purchaser in relation to the acquisition of 30% equity interests in Huainan China Gas for an aggregate consideration of RMB21,600,000 (equivalent to approximately HK$20,571,000);
(cc) a joint venture agreement dated 2 June 2004 and entered into between Huainan China Gas and 安徽省壽縣建設投資公司 (Anhui Province Shouxian Construction Investment Co.), an Independent Third Party, in relation to the establishment of Shouxian Zhongran City Gas Development Company Limited. Pursuant to the joint venture agreement, the Group would contribute RMB2,700,000 (equivalent to approximately HK$2,571,000) towards the registered capital of Shouxian Zhongran City Gas Development Company Limited;
(dd) a share transfer agreement dated 27 July 2004 and entered into between Suizhou Municipal Projects Company (隨州市市政工程總公司 ), an Independent Third Party, as vendor and Shenzhen Natural Gas as purchaser in relation to the acquisition of 10% equity interests in Suizhou Zhongran City Gas Development Limited (隨州中燃城市燃氣發展有限公司 ) for an aggregate consideration of RMB3,500,000 (equivalent to approximately HK$3,333,000);
(ee) the Great Sun Agreement; and
(ff) the Share Transfer Agreements.

4. DIRECTORS’ SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors had any existing or proposed service contract with any member of the Group (excluding contracts expiring or determinable by the employer within one year without payment of compensations (other than statutory compensation)).

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5. EXPERTS

The following are the qualifications of the experts who have given opinions or advice which are contained in this circular:

Qualification

Name Qualification Grand Vinco a licensed corporation to carry out type 1 (dealing in securities) and type 6 (advising on corporate finance) regulated activities under the SFO Deloitte Touche Tohmatsu Certified Public Accountants

Each of Grand Vinco and Deloitte Touche Tohmatsu has given and has not withdrawn its written consent to the issue of this circular with the inclusion herein of its letter or reports and references to its name in the form and context in which it appears.

As at the Latest Practicable Date, none of Grand Vinco nor Deloitte Touche Tohmatsu had any shareholding in any member of the Group or any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group.

6. LITIGATION

As at the Latest Practicable Date, no member of the Group is engaged in any litigation, arbitration or claim of material importance and no litigation, arbitration or claim of material importance is known to the Directors to be pending or threatened against any member of the Group.

7. COMPETING INTERESTS

As at the Latest Practicable Date, none of the Directors nor their respective associates had any business which competes or is likely to compete, either directly or indirectly, with the business of the Group.

8. MISCELLANEOUS

(a) As at the Latest Practicable Date, the Directors were not aware of any material adverse change in the financial or trading position of the Group since 31 March 2004, the date to which the latest published audited consolidated financial statements of the Group were made up;
(b) There is no contract or arrangement entered into by any member of the Group subsisting at the Latest Practicable Date in which any Director is materially interested and which is significant to the business of the Group;
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(c) As at the Latest Practicable Date, none of Grand Vinco, Deloitte Touche Tohmatsu nor any Directors had any direct or indirect interest in any assets which had been acquired, disposed of by or leased to, or which were proposed to be acquired, disposed of by or leased to, any member of the Group since 31 March 2004, the date to which the latest published audited consolidated financial statements of the Group were made up;
(d) The company secretary of the Company is Ms. Yang Yan Tung Doris, ACS, ACIS ;
(e) The qualified accountant of the Company appointed pursuant to Rule 3.24 of the Listing Rules is Mr. Li Wai Hung, FCCA ;
(f) The registered office of the Company is at Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda; and
(g) The head office and principal place of business of the Company in Hong Kong is at 16th Floor, AXA Centre, No. 151 Gloucester Road, Wanchai, Hong Kong.

9. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be made available for inspection during normal business hours at the office of Michael Li & Co. at 14th Floor, Printing House, 6 Duddell Street, Central, Hong Kong from the date of this circular up to and including 11 October 2004 and at the SGM:

(a) the memorandum of association and bye-laws of the Company;
(b) the material contracts referred to in the paragraph headed “Material Contracts” in this appendix;
(c) the annual reports of the Company for the two financial years ended 31 March 2004;
(d) the letter from the Independent Board Committee to the Independent Shareholders, the text of which is set out on page 25 of this circular;
(e) the letter of advice from Grand Vinco to the Independent Board Committee and the Independent Shareholders, the text of which is set out on pages 26 to 34 of this circular;
(f) the consent letters from Grand Vinco and Deloitte Touche Tohmatsu referred to in the paragraph headed “Experts” in this Appendix;
(g) the accountants’ report from Deloitte Touche Tohmatsu on Great Sun, the text of which is set out in Appendix II to this circular;
(h) the accountants’ report from Deloitte Touche Tohmatsu on Hanchuan Jiaxu, the text of which is set out in Appendix III to this circular;
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(i) the accountants’ report from Deloitte Touche Tohmatsu on Xiaogan Jiaxu, the text of which is set out in Appendix IV to this circular;
(j) the accountants’ report from Deloitte Touche Tohmatsu on Yingcheng Jiaxu, the text of which is set out in Appendix V to this circular;
(k) the accountants’ report from Deloitte Touche Tohmatsu on Yumeng Jiaxu, the text of which is set out in Appendix VI to this circular;
(l) the circular of the Company dated 30 June 2003;
(m) a statement signed by Deloitte Touche Tohmatsu setting out their opinion on the unaudited pro forma statement of assets and liabilities of the Enlarged Group as set out in Appendix VII to this circular; and
(n) the circular of the Company dated 9 July 2004.
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NOTICE OF THE SGM

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==> picture [47 x 34] intentionally omitted <==

CHINA GAS HOLDINGS LIMITED 中國燃氣控股有限公司[*]

(Incorporated in Bermuda with limited liability) (Stock Code: 384)

NOTICE OF SPECIAL GENERAL MEETING

NOTICE IS HEREBY GIVEN that a special general meeting of China Gas Holdings Limited (the “Company”) will be held at 10:00 a.m. on 12 October 2004 at 16th Floor, AXA Centre, No. 151 Gloucester Road, Wanchai, Hong Kong for the purpose of considering and, if thought fit, passing the following resolutions as ordinary resolutions:

ORDINARY RESOLUTIONS

“ THAT the sale and purchase agreement (the “ Great Sun Agreement ”, a copy of which has been produced at the meeting marked “ A ” and signed by the chairman of the meeting for the purpose of identification) dated 19 August 2004 and entered into between Famestar Investment Limited (“ Famestar ”) as vendor and the Company as purchaser, whereby Famestar agreed to dispose of and the Company agreed to acquire (i) the entire issued share capital of Great Sun Investments Ltd. (嘉旭投資有限公司) (“ Great Sun ”); and (ii) all obligations, liabilities and debts owing or incurred by Great Sun to Famestar on or at any time prior to completion of the Great Sun Agreement, and the transactions contemplated thereunder, be and are hereby approved and that the board of directors of the Company (the “ Board ”) be and is hereby authorised to take such action as may in the opinion of the Board be necessary or desirable to give effect to the Great Sun Agreement.”
“ THAT the share transfer agreement (the “ Hanchuan Agreement ”, a copy of which has been produced at the meeting marked “ B ” and signed by the chairman of the meeting for the purpose of identification) dated 19 August 2004 and entered into between 北京裕隆倉燃氣技術有限公司 (Beijing Yu Long Cang Gas Technology Co. Ltd.) (“ Beijing YLC ”) as vendor and 中亞燃氣實業 (深圳 )有限公司 (Central Asia Natural Gas (Shenzhen) Company Limited (“ Shenzhen Natural Gas ”) as purchaser, whereby Beijing YLC agreed to dispose of and Shenzhen Natural Gas agreed to acquire 10% equity interests in 漢川嘉旭天然氣有限公司 (Hanchuan Jiaxu Gas Co. Ltd.), and the transactions contemplated thereunder, be and are hereby approved and that the Board be and is hereby authorised to take such action as may in the opinion of the Board be necessary or desirable to give effect to the Hanchuan Agreement.”

* For identification purpose only

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NOTICE OF THE SGM

“ THAT the share transfer agreement (the “ Xiaogan Agreement ”, a copy of which has been produced at the meeting marked “ C ” and signed by the chairman of the meeting for the purpose of identification) dated 19 August 2004 and entered into between Beijing YLC as vendor and Shenzhen Natural Gas as purchaser, whereby Beijing YLC agreed to dispose of and Shenzhen Natural Gas agreed to acquire 10% equity interests in 孝感嘉旭天然氣有限公司 (Xiaogan Jiaxu Gas Co. Ltd.), and the transactions contemplated thereunder, be and are hereby approved and that the Board be and is hereby authorised to take such action as may in the opinion of the Board be necessary or desirable to give effect to the Xiaogan Agreement.”
“ THAT the share transfer agreement (the “ Yingcheng Agreement ”, a copy of which has been produced at the meeting marked “ D ” and signed by the chairman of the meeting for the purpose of identification) dated 19 August 2004 and entered into between Beijing YLC as vendor and Shenzhen Natural Gas as purchaser, whereby Beijing YLC agreed to dispose of and Shenzhen Natural Gas agreed to acquire 10% equity interests in 應城嘉旭天然氣有限公司 (Yingcheng Jiaxu Gas Co. Ltd.), and the transactions contemplated thereunder, be and are hereby approved and that the Board be and is hereby authorised to take such action as may in the opinion of the Board be necessary or desirable to give effect to the Yingcheng Agreement.”
“ THAT the share transfer agreement (the “ Yumeng Agreement ”, a copy of which has been produced at the meeting marked “ E ” and signed by the chairman of the meeting for the purpose of identification) dated 19 August 2004 and entered into between Beijing YLC as vendor and Shenzhen Natural Gas as purchaser, whereby Beijing YLC agreed to dispose of and Shenzhen Natural Gas agreed to acquire 10% equity interests in 雲夢嘉旭天然氣有限公司 (Yumeng Jiaxu Gas Co. Ltd.), and the transactions contemplated thereunder, be and are hereby approved and that the Board be and is hereby authorised to take such action as may in the opinion of the Board be necessary or desirable to give effect to the Yumeng Agreement.”

By order of the Board China Gas Holdings Limited Liu Ming Hui Managing Director

Hong Kong, 24 September 2004

Registered office:

Clarendon House 2 Church Street Hamilton HM 11 Bermuda

Head office and principal place of business in Hong Kong:

16th Floor AXA Centre No. 151 Gloucester Road Wanchai Hong Kong

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NOTICE OF THE SGM

Notes:

A member of the Company entitled to attend and vote at the meeting convened by the above notice is entitled to appoint one or more proxy to attend and, subject to the provisions of the bye-laws of the Company, to vote on his behalf. A proxy need not be a member of the Company but must be present in person at the meeting to represent the member. If more than one proxy is so appointed, the appointment shall specify the number and class of shares in respect of which each such proxy is so appointed.
A form of proxy for use at the meeting is enclosed. 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 notarially certified copy of such power or authority, at the offices of the Company’s branch share registrar in Hong Kong, Computershare Hong Kong Investor Services Limited at 46th Floor, Hopewell Centre, 183 Queen’s Road East, Hong Kong not less than 48 hours before the time appointed for holding the meeting or any adjournment thereof. Completion and return of a form of proxy will not preclude a member from attending in person and voting at the above meeting or any adjournment thereof, should he so wish.
In the case of joint holders of shares, any one of such holders may vote at the meeting, either personally or by proxy, in respect of such shares as if he was solely entitled thereto, but if more than one of such joint holders are present at the meeting personally or by proxy, that one of the said persons so present whose name stands first in the register of members of the Company in respect of such shares shall alone be entitled to vote in respect thereof.
Pursuant to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, voting on the above ordinary resolutions will be taken by way of poll.
171 -

AI assistant

China Literature Limited — Proxy Solicitation & Information Statement 2004

49460_rns_2004-09-24_199e5f24-0567-4a24-8c78-c9338a6d0676.pdf

CHINA GAS HOLDINGS LIMITED 中國燃氣控股有限公司[*]

Grand Vinco Capital Limited

CONTENTS

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

CHINA GAS HOLDINGS LIMITED 中國燃氣控股有限公司[*]

MAJOR AND CONNECTED TRANSACTIONS:

(1) ACQUISITION OF THE ENTIRE ISSUED SHARE CAPITAL OF GREAT SUN INVESTMENTS LTD.; AND

(2) ACQUISITION OF EQUITY INTERESTS IN HANCHUAN JIAXU GAS CO. LTD., YUMENG JIAXU GAS CO. LTD., YINGCHENG JIAXU GAS CO. LTD. AND XIAOGAN JIAXU GAS CO. LTD.

INTRODUCTION

THE GREAT SUN ACQUISITION

The Great Sun Agreement

Information on Famestar

LETTER FROM THE BOARD

Conditions

Completion

THE JV ACQUISITION

The Hanchuan Agreement

The Xiaogan Agreement

The Yingcheng Agreement

The Yumeng Agreement

Information on Beijing YLC

Conditions

Completion

SOURCE OF FUNDING

SHAREHOLDING STRUCTURE

Before completion of the Great Sun Acquisition and the JV Acquisition

After completion of the Great Sun Acquisition and the JV Acquisition

INFORMATION ON GREAT SUN

INFORMATION ON THE FIVE JOINT VENTURES

Hanchuan Jiaxu

LETTER FROM THE BOARD

Xiaogan Jiaxu

Yingcheng Jiaxu

LETTER FROM THE BOARD

Yumeng Jiaxu

LETTER FROM THE BOARD

Xiaogan Zhenrong

GAS PROJECTS OPERATED BY THE FIVE JOINT VENTURES

REASONS FOR THE GREAT SUN ACQUISITION AND THE JV ACQUISITION

FINANCIAL EFFECTS OF THE GREAT SUN ACQUISITION AND THE JV ACQUISITION ON THE GROUP

Earnings

Net asset value

FINANCIAL AND TRADING PROSPECTS OF THE GROUP

LISTING RULES IMPLICATION

SGM

PROCEDURES FOR DEMANDING A POLL AT GENERAL MEETING

RECOMMENDATION

LETTER FROM THE BOARD

FURTHER INFORMATION

Yours faithfully

CHINA GAS HOLDINGS LIMITED 中國燃氣控股有限公司[*]

MAJOR AND CONNECTED TRANSACTIONS:

(1) ACQUISITION OF THE ENTIRE ISSUED SHARE CAPITAL OF GREAT SUN INVESTMENTS LTD.; AND

(2) ACQUISITION OF EQUITY INTERESTS IN HANCHUAN JIAXU GAS CO. LTD., YUMENG JIAXU GAS CO. LTD., YINGCHENG JIAXU GAS CO. LTD. AND XIAOGAN JIAXU GAS CO. LTD.

Grand Vinco Capital Limited

MAJOR AND CONNECTED TRANSACTIONS

LETTER FROM GRAND VINCO

BACKGROUND

LETTER FROM GRAND VINCO

PRINCIPAL FACTORS AND REASONS CONSIDERED

1. Reasons for and benefits of the Acquisitions

LETTER FROM GRAND VINCO

2. The Consideration

Consideration

3. Funding for the Consideration

LETTER FROM GRAND VINCO

4. Financial effect of the Acquisitions on the Group

Earnings

Net asset value

Working Capital

LETTER FROM GRAND VINCO

RECOMMENDATION

China Literature Limited Proxy Solicitation & Information Statement 2004