Chinasoft International Limited - Proxy Solicitation & Information Statement 2005

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

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

The Stock Exchange of Hong Kong Limited takes no responsibility for the contents of this circular, makes no representation as to its accuracy or completeness and expressly disclaims any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular. This circular is for information purposes only and does not constitute an invitation or offer to acquire, purchase or subscribe for the securities of the Company.

==> picture [233 x 49] intentionally omitted <==

(Incorporated in Hong Kong with limited liability) Website: http://www.melco.hk.cn

(Stock Code: 200)

MAJOR AND CONNECTED TRANSACTION ACQUISITION OF THE REMAINING INTEREST IN THE LAND AND DISCLOSEABLE TRANSACTION INJECTION OF INTEREST IN THE LAND INTO THE JOINT VENTURE GROUP

Financial Adviser to Melco International Development Limited

==> picture [19 x 18] intentionally omitted <==

==> picture [18 x 18] intentionally omitted <==

==> picture [19 x 18] intentionally omitted <==

==> picture [18 x 18] intentionally omitted <==

(A wholly owned subsidiary of Value Convergence Holdings Limited)

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

A letter from the Independent Board Committee containing its advice and recommendation to the Independent Shareholders concerning the Connected Transaction is set out on pages 28 to 29 of this circular. A letter from Sun Hung Kai International Limited, the Independent Financial Adviser to the Independent Board Committee, is set out on pages 30 to 47 of this circular.

A notice convening an extraordinary general meeting (“EGM”) of the Company to be held at 3:30 p.m. on Friday, 17th June 2005 at 38th Floor, The Centrium, 60 Wyndham Street, Central, Hong Kong, is set out on pages 128 to 129 of this circular. A proxy form is also enclosed. Whether or not you intend to attend and vote at the EGM, please complete and return the enclosed proxy form in accordance with the instructions printed thereon to the Company’s registered office, 38th Floor, The Centrium, 60 Wyndham Street, Central, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for holding of the EGM or any adjournment thereof. Completion and return of the proxy form will not preclude you from attending and voting in person at the EGM or any adjourned meeting should you so wish.

2nd June 2005

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7
The Connected Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	8
Background of the Third Agreement and establishment of the JV Group . . . . . . . . . .	8
Principal terms of the Third Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	10
Basis of determination of the consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	10
Financing sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	12
Fund raising exercises carried out by the Company in the past twelve months . . . . .	14
Conditions of the Third Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	15
Completion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	16
Changes to the shareholding structure of the Company as a result
of the issue of the Consideration Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	17
The Great Wonders Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	18
Principal terms of the Great Wonders Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	18
Basis of determination of the consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	18
Financing sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	18
Completion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	18
Conditions of the Great Wonders Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	18
Effect on interest held in the Hospitality Business by the Group . . . . . . . . . . . . . . . . . . . . . . .	19
Information of the Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	20
Information on Melco Entertainment and the Hospitality Business . . . . . . . . . . . . . . .	20
Information on Great Wonders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	21
Information on STDM and the Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	22
Reasons and benefits for entering into the Third Agreement and
the Great Wonders Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	23
Implications under the Listing Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	25
Extraordinary general meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	26
Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	26
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	27
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	28
Letter from Sun Hung Kai . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	30
Appendix I – Financial information of the Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	48
Appendix II – Accountants’ report of Great Wonders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	96
Appendix III – Property valuation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	102
Appendix IV – Unaudited pro forma financial information on the Enlarged Group. . . . . .	108
Appendix V – General information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	116
Notice of extraordinary general meeting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	128

DEFINITIONS

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

“associate” has the same meaning as ascribed to it in the Listing Rules “Better Joy” Better Joy Overseas Limited, a company owned as to 77% by Mr. Lawrence Ho and as to 23% by Dr. Stanley Ho

“Board”

the board of Directors

“Company” Melco International Development Limited, a company incorporated in Hong Kong, the securities of which are listed on the Stock Exchange

“connected person” has the same meaning as ascribed to it in the Listing Rules “Connected Transaction” the Third Agreement and all transactions contemplated thereunder including the allotment and issue of the Consideration Shares by the Company to STDM “Convertible Bonds” the First Convertible Bond and the Second Convertible Bond

“Consideration Shares” 22,222,222 new Shares to be allotted and issued (credited as fully paid) at HK$9.00 per Share (originally 11,111,111 Original Shares at an issue price of HK$18.00 per Original Share) to STDM under the Third Agreement as part settlement of the consideration thereunder
“Director(s)” the director(s) of the Company
“Dr. Stanley Ho” Dr. Ho Hung Sun, Stanley, the Chairman and an Executive Director of the Company

“EGM”

an extraordinary general meeting of the Company to be convened on Friday, 17th June 2005 for the purpose of considering and approving the Connected Transaction

“Enlarged Group”

the Group as enlarged immediately after completion of the Connected Transaction

“First Convertible Bond”
a redeemable HK$100 million 5-year convertible bond carrying a right to subscribe for the new Shares at HK$2.00 per Share (originally at HK$4.00 per Original Share) issued by the Company to STDM on 9th November 2004 pursuant to the First Agreement

– 1 –

DEFINITIONS

“First Agreement”
“Greater China region”
“Great Wonders”
“Great Wonders Agreement”
“Group”
“Hong Kong”
“Hospitality Business”
“HK$”
“Independent Board Committee”
“Independent Financial Adviser” or “Sun Hung Kai”
“Independent Shareholders”

an agreement dated 8th September 2004 entered into between STDM and the Company regarding the acquisition of 50% equity interests in Great Wonders by the Company from STDM for a consideration of HK$100 million

such territorial regions covering the People’s Republic of China, Hong Kong, Macau and Taiwan

Great Wonders, Investments, Limited, a non wholly-owned subsidiary of the Company within the JV Group. As at the date of this circular, the respective attributable interests in Great Wonders owned by the Company and PBL are 42% and 28% respectively and the remaining 30% is owned by STDM

an agreement dated 17th March 2005 entered into between the Company and Melco Entertainment regarding the acquisition by Melco Entertainment from the Company of 30% equity interests in Great Wonders, to be acquired from STDM pursuant to the Third Agreement, for a consideration of HK$400 million

the Company and its subsidiaries from time to time

the Hong Kong Special Administrative Region of the PRC

all businesses pursued or to be pursued by Great Wonders in relation to the development and operation of a luxury hotel housing a casino and an electronic gaming machine lounge on the Land

Hong Kong dollars, the lawful currency of Hong Kong

the independent board committee of the Company comprising the Independent Non-executive Directors, namely Sir Roger Lobo, Mr. Robert Kwan and Dr. Lo Ka Shui, to advise the Independent Shareholders in respect of the Connected Transaction

Sun Hung Kai International Limited, the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in connection with the Connected Transaction

Shareholders other than Dr. Stanley Ho and his associates, namely Madam Lucina Laam King Ying, Mr. Lawrence Ho, Lasting Legend and Better Joy

– 2 –

DEFINITIONS

“Independent Third Party(ies)”
independent third party(ies) not connected with the Company and its subsidiaries, the controlling shareholder, directors, chief executive or substantial shareholders of the Company and its subsidiaries, or an associate of any of them under the Listing Rules
“JV Group” the joint venture group of companies established pursuant to the Subscription Agreement and the Shareholders Deed for pursuance of gaming, entertainment and hospitality businesses in the Asia Pacific region (excluding Australia and New Zealand) and the Greater China Region, which comprise Melco PBL Holdings, Melco Entertainment, Great Wonders, Mocha Slot as well as such other subsidiaries of Melco PBL Holdings, if any, from time to time
“Lasting Legend”
Lasting Legend Limited, a company wholly owned by Mr. Lawrence Ho
“Land”
a parcel of land with an area of 5,230 square meters located at Baixa da Taipa, Macau, described with the Land Registry Office of Macau under the no 21407, folio 125 of the Book B49.
“Land Acquisition Agreements” the First Agreement, the Second Agreement and the Third Agreement
“Latest Practicable Date” 30th May 2005, being the latest practicable date prior to the printing of this circular for ascertaining certain information contained herein
“Letter of Confirmation”
the confirmation letter dated 11th November 2004 issued by SJM to Great Wonders (and counter-signed by Great Wonders) in relation to the proposed execution of the Proposed Lease Agreement between SJM and Great Wonders
“Listing Rules”
The Rules Governing the Listing of Securities on the Stock Exchange
“Macau”

the Macau Special Administrative Region of the PRC

“Melco Entertainment”
Melco Entertainment Limited, a non wholly-owned subsidiary of the Company within the JV Group. As at the date of this circular, Melco Entertainment holds 80% equity interests in Mocha Slot and 70% equity interests in Great Wonders
“Melco Leisure”
Melco Leisure and Entertainment Group Limited, a wholly-owned subsidiary of the Company, used for the purpose of holding the relevant equity interests of the Company in the JV Group companies

– 3 –

DEFINITIONS

“Melco PBL Holdings” Melco PBL Holdings Limited, the principal holding company within the JV Group and a jointly controlled company of the Company and PBL
“Mr. Lawrence Ho” Mr. Ho, Lawrence Yau Lung, the Managing Director and Executive Director of the Company and son of Dr. Stanley Ho
“Mocha Slot” Mocha Slot Group Limited, a non-wholly owned subsidiary of the Company within the JV Group. As at the date of this circular, the respective attributable interests in Mocha Slot owned by the Company and PBL are 48% and 32% respectively and the remaining 20% is owned by Dr. Stanley Ho
“MOP$” pataca, the lawful currency of Macau “Original Share(s)” ordinary share(s) of HK$1.00 each in the then share capital of the Company immediately before the Share Subdivision taking effect
“PBL” Publishing and Broadcasting Limited, a company incorporated under the laws of Australia, the securities of which are listed on the Australian Stock Exchange or if the context so requires, refer to PBL Asia
“PBL Asia” PBL Asia Investments Limited, a wholly owned subsidiary of PBL, used for the purpose of holding the relevant equity interests of PBL in the JV Group companies
“Placing” the top-up placing of 75,900,000 Original Shares at a price of HK$5.20 per Original Share on 15th October 2004 as disclosed in the announcement of the Company dated 15th October 2004
“PRC” People’s Republic of China and for the purpose of this circular, excludes Hong Kong, Macau and Taiwan
“Proposed Lease Agreement” the proposed lease agreement to be entered into between SJM and Great Wonders, in respect of a proposed lease by SJM from Great Wonders for an area of approximately 18,000 square meters at the hotel to be developed on the Land for the purpose of operating a casino with not less than 160 gaming tables
“Second Agreement” an agreement entered into between STDM and the Company on 11th November 2004 regarding the acquisition of an additional 20% equity interests in Great Wonders by the Company from STDM for a consideration of HK$56 million

– 4 –

DEFINITIONS

“Second Convertible Bond” a redeemable HK$56 million 5-year convertible bond carrying a right to subscribe for the new Shares at HK$4.10 per Share (originally at HK$8.20 per Original Share) issued by the Company to STDM on 8th February 2005 pursuant to the Second Agreement.
“Share(s)” ordinary share(s) of HK$0.50 each in the share capital of the Company after the Share Subdivision becoming effective on 19th May 2005
“Share Subdivision” the subdivision of every one Original Share of HK$1.00 each in the then issued and unissued share capital of the Company into two Shares of HK$0.50 each. As disclosed in the announcement of the Company dated 18th May 2005, the Share Subdivision has become effective on 19th May 2005
“Shareholder(s)” holder(s) of Share(s)
“Shareholders Deed” the shareholders deed dated 8th March 2005 entered into amongst, the Company, Melco Leisure, PBL, PBL Asia and Melco PBL Holdings for the purpose of regulating the respective rights and obligations of the shareholders of the JV Group
“SFO” Securities and Futures Ordinance (Chapter 571, the Laws of Hong Kong)
“SJM” Sociedade de Jogos de Macau, S.A., a company incorporated under the laws of Macau
“STDM” Sociedade de Turismo e Diversoes de Macau, S.A.R.L. a company incorporated under the laws of Macau
“Stock Exchange” The Stock Exchange of Hong Kong Limited
“Subscription Agreement” the subscription agreement dated 23rd December 2004 entered into amongst the Company, Melco PBL Holdings, PBL and PBL Asia in relation to the establishment of the JV Group. Information of this Subscription Agreement is set out in the announcement and circular of the Company respectively dated 23rd December 2004 and 5th January 2005
“Third Agreement” an agreement dated 17th March 2005 entered into between STDM and the Company regarding the acquisition of 30% equity interests in Great Wonders by the Company from STDM for a consideration of HK$400 million

“US$” United States dollars, the lawful currency of the United States of America

– 5 –

DEFINITIONS

“Value Convergence”

Value Convergence Holdings Limited, a company incorporated in Hong Kong, the securities of which are listed on the Growth Enterprise Market operated by the Stock Exchange (Stock code: 8101) and a 64.65% owned subsidiary of the Company

“%” per cent.

For the purpose of this circular, the amount in US$ and MOP$ are respectively translated into HK$ at the following exchange rates:

US$1.00: HK$7.78 MOP$1.03:HK$1.00.

– 6 –

LETTER FROM THE BOARD

==> picture [233 x 49] intentionally omitted <==

(Incorporated in Hong Kong with limited liability) Website: http://www.melco.hk.cn (Stock Code: 200)

Executive Directors: Dr. Stanley Ho (Chairman) Mr. Lawrence Ho (Managing Director) Mr. Tsui Che Yin, Frank

Non-executive Directors: Mr. Ng Ching Wo Mr. Ho Cheuk Yuet

Registered office, head office and principal place of business: Penthouse 38th Floor The Centrium 60 Wyndham Street Central Hong Kong

Independent Non-executive Directors:

Sir Roger Lobo Mr. Robert Kwan Dr. Lo Ka Shui

2nd June 2005

To the Shareholders

Dear Sir or Madam,

MAJOR AND CONNECTED TRANSACTION ACQUISITION OF THE REMAINING INTEREST IN THE LAND AND DISCLOSEABLE TRANSACTION INJECTION OF INTEREST IN THE LAND INTO THE JOINT VENTURE GROUP

INTRODUCTION

By the announcement of the Company dated 22nd March 2005, the Board announced that on 17th March 2005, the Company has entered into two separate conditional agreements, namely the Third Agreement and the Great Wonders Agreement, with STDM and Melco Entertainment respectively for the purposes of acquiring the remaining 30% equity interests in Great Wonders (which represents 30% interest in the Land) held by STDM and injecting such interest into the JV Group.

In the said announcement of 22nd March 2005, it was stated that based on the preliminary valuation of the Land for hotel use of not less than HK$1,100 million as at 17th March 2005, the Connected Transaction might constitute a very substantial acquisition transaction of the Company under Rule 14.08 of the Listing Rules by reason of the fact that the asset ratio as specified in Rule 14.07 of the Listing

– 7 –

LETTER FROM THE BOARD

Rules might be 100% or more in case the ultimate valuation of the Land exceeds HK$1,100 million. Since according to the valuation report as contained in Appendix III to this circular, the open market value of the Land for hotel use as at 17th March 2005 was equal to and did not exceed HK$1,100 million, the Company will issue an announcement upon dispatch of this circular, to re-classify the Connected Transaction as a major transaction of the Company under the Listing Rules.

The purpose of this circular is to set out (i) further information on the Third Agreement and all transactions contemplated thereunder including the allotment and issue of the Consideration Shares; (ii) the principal terms of the Great Wonders Agreement; (iii) the valuation report of the Land; (iv) the recommendation from the Independent Board Committee in respect of the Connected Transaction; (v) a letter of advice from the Independent Financial Adviser to the Independent Board Committee in respect of the Connected Transaction; and (vi) the notice convening the EGM at which relevant resolution(s) will be proposed to the Independent Shareholders to consider and if thought fit, approve (by way of poll) the Connected Transaction.

THE CONNECTED TRANSACTION

Background of the Third Agreement and establishment of the JV Group

As disclosed in the announcement and circular of the Company respectively dated 13th September 2004 and 11th October 2004, the Company has entered into the First Agreement with STDM to acquire 50% equity interests in Great Wonders from STDM for a consideration of HK$100 million. Subsequent to the completion of the First Agreement, and by the announcement and circular of the Company respectively dated 23rd November 2004 and 5th January 2005, the Company entered into the Second Agreement with STDM to acquire an additional 20% equity interests in Great Wonders from STDM for a consideration of HK$56 million. Immediately following the completions of the First Agreement and the Second Agreement, Great Wonders was owned as to 70% by the Company (with the same subsequently transferred to Melco Entertainment upon formation of the JV Group pursuant to the Subscription Agreement) and 30% by STDM.

– 8 –

LETTER FROM THE BOARD

Pursuant to the completion of the Subscription Agreement in respect of the formation of the JV Group, as disclosed in the announcements and circular of the Company respectively dated 23rd November 2004, 23rd December 2004 and 5th January 2005, which took place on 8th March 2005, the JV Group has been formed and the existing structure of which is as follow:

==> picture [212 x 287] intentionally omitted <==

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

PBL The Company
100% 100%
PBL Asia Melco Leisure
50% 50%
Melco PBL Holdings
(Note 1)
100%
Melco PBL International
Limited
(Note 2)
80%
Melco Entertainment
(Note 3) 20%
80% 70% (Note 4)
Great Wonders
Mocha Slot
(Hospitality Business)
----- End of picture text -----

Notes:

Pursuant to the Subscription Agreement, PBL Asia has made the capital contribution of US$163 million (equivalent to HK$1,270 million) to Melco PBL Holdings, which is the principal holding company of the JV Group.
Melco PBL International Limited is an intermediary company newly formed pursuant to the Subscription Agreement.
Pursuant to the terms of the Shareholders Deed, Melco Leisure held 20% direct interest in Melco Entertainment and hence, the total attributable interest held by the Company in Melco Entertainment is 60%. In addition, since the Company continues to retain the control of the composition of the board of directors of Melco Entertainment, Melco Entertainment, Great Wonders and Mocha Slot are non wholly-owned subsidiaries of the Company.
As at the date of this circular, the respective attributable interests in Great Wonders owned by the Company and PBL are 42% and 28% respectively and the remaining 30% equity interests in Great Wonders are owned by STDM.

In order to rationalize the shareholding structure for the purpose of strengthening the cooperation between the Company and PBL in the Hospitality Business, the Company has entered into the Third Agreement and the Great Wonders Agreement, with STDM and Melco Entertainment respectively on 17th March 2005, in relation to acquiring the remaining interest of the Land held by STDM and injecting the same into the JV Group.

– 9 –

LETTER FROM THE BOARD

Principal terms of the Third Agreement

Date : 17th March 2005 Parties : STDM, as vendor The Company, as purchaser Melco Entertainment, as existing holder of 70% equity interests in Great Wonders Interest to be acquired : 30% equity interests in Great Wonders held by STDM Consideration : HK$400 million Term of payment : (i) HK$200 million in cash; and

(ii) HK$200 million by way of allotment and issue of the Consideration Shares.

Please refer to the paragraph headed “Financing Sources” below for the financing source and settlement of the consideration under the Third Agreement.

Basis of determination of the consideration

As at the Latest Practicable Date, application has been made by Great Wonders to the Macau Government for the concession of the Land for the purpose of developing a luxury hotel thereon in pursuance of the Hospitality Business. As mentioned in the paragraph headed “Information on STDM and the Land” below, the Land for residential use was previously granted to a joint venture company established by, inter alia, STDM and an Independent Third Party. This joint venture company had applied to the Macau Government to give up or renounce the rights and obligations relating to the Land for residential use in order to enable Great Wonders to apply to the Macau Government for a new concession relating to the Land for hotel use. After Great Wonders making the relevant application, Great Wonders was informed by the Macau Government that it would commence processing of the application after expiry of the original grant of the Land for residential use to the said joint venture, which was 6th March 2005. As such, the respective valuations of the Land in respect of the First Agreement and the Second Agreement as contained in the circulars of the Company respectively dated 11th October 2004 and 5th January 2005 were conducted on the basis of residential use. After the original grant of the Land for residential use had expired on 6th March 2005, the application for the new concession of the Land for hotel use made by Great Wonders is currently under review by the Macau Government and to the best of the Directors’ knowledge, belief and information having made all reasonable enquiries, the Macau Government shall have no objection to the change of usage of the Land from residential to hotel. As such, the Company considers that it is now appropriate to have the valuation of the Land re-assessed on the basis of hotel use.

– 10 –

LETTER FROM THE BOARD

According to the valuation report as contained in Appendix III to this circular, Savills (Hong Kong) Limited (formerly known as FPDSavills (Hong Kong) Limited), an independent valuer, revaluated the Land on a hotel use basis at HK$1,100 million as at 17th March 2005.

The consideration of HK$400 million was arrived at after arm’s length negotiations between the Company and STDM with reference to said amount of valuation, and in this regard the consideration of HK$400 million for 30% equity interests in Great Wonders represents an approximately 21.21% premium over HK$330 million, being 30% of the valuation of the Land for hotel use at HK$1,100 million as at 17th March 2005. Despite the fact that the 30% equity interests in Great Wonders is to be acquired at a premium by the Company pursuant to the Third Agreement if such acquisition is viewed as an isolated transaction, the Land Acquisition Agreements, if all completed, shall have the ultimate effect of vesting the entire equity interests in Great Wonders and the Land in the Company. The aggregate consideration of HK$556 million paid or payable by the Company under the Land Acquisition Agreements represents an approximately 49.45% discount to HK$1,100 million, being the valuation of the Land for hotel use as at 17th March 2005. Since the grant of the new concession of the Land will be subject to a payment of land premium by Great Wonders to the Macau Government and although the Macau Government is still in the process of assessing the amount of such premium, based on the negotiations with the Macau Government so far, it is estimated by the Company that the land premium payable by Great Wonders upon the grant of the new concession of the Land shall be approximately MOP$230 million (equivalent to approximately HK$223 million). If taken into account this estimated land premium, the total costs for acquiring the Land shall be HK$779 million, which represents an approximately 29.18% discount to HK$1,100 million, being the valuation of the Land for hotel use as at 17th March 2005. The Directors consider that it is fair and reasonable to take into account the aggregate consideration paid or payable pursuant to the Land Acquisition Agreements for the entire piece of the Land for the purposes of developing the Land in cooperation with PBL.

In determining the consideration under the Third Agreement, the Directors also noted that:

by referring to the valuation of the Land for residential use of HK$366 million as at 10th December 2004 conducted by Jones Lang LaSalle Limited, an independent valuer, as disclosed in the circular of the Company dated 5th January 2005, the consideration of HK$400 million for 30% interest in the Land represents an approximately 264.30% premium over HK$109.8 million, being 30% of the valuation of the Land for residential use of HK$366 million as at 10th December 2004 according to the said valuation report;
the aggregate consideration of HK$556 million paid or payable by the Company under the Land Acquisition Agreements represents an approximately 51.91% premium over HK$366 million, being the valuation of the Land for residential use as at 10th December 2004;
the amount of HK$100 million previously paid by the Company for 50% equity interests in Great Wonders pursuant to the First Agreement represented an approximately 30.56% discount to HK$144 million, being 50% of the valuation of the Land for residential use of HK$288 million as at 5th August 2004 as disclosed in the circular of the Company dated 11th October 2004; and

– 11 –

LETTER FROM THE BOARD

the amount of HK$56 million previously paid by the Company for additional 20% equity interests in Great Wonders pursuant to the Second Agreement represented an approximately 23.50% discount to HK$73.2 million, being 20% of the valuation of the Land for residential use of HK$366 million as at 10th December 2004.

According to Savills (Hong Kong) Limited, the main reasons for the substantial increase in the valuation of the Land of HK$1,100 million as at 17th March 2005 as compared with the previous valuation of HK$366 million conducted by Jones Lang LaSalle Limited as at 10th December 2004, include the following:

(i) change of use of the Land from residential to hotel

Great Wonders is in the process of obtaining a grant of new concession of the Land which involves the change of use from residential to hotel use with casino facilities. The basis of valuation carried out by Savills (Hong Kong) Limited is thus different from Jones Lang LaSalle Limited. As advised by the Company, Savills (Hong Kong) Limited has assessed the value of the Land based on different development conditions, namely an international standard luxury hotel with casino. In addition, due to the change of usage of the Land from residential to hotel, there is a change in the proposed gross floor area of the Land from the previous 52,300 sq.m. as stated in the previous valuations conducted by Jones Lang LaSalle Limited to 76,407 sq.m. as stated in the present valuation contained in the valuation report in Appendix III to this circular.

(ii) continuing rise in the property market in Macau

The continuing rise in the property market in Macau, in particular, the value of hotel property also leads to the increase in the valuation of the Land.

Notwithstanding that the consideration payable by the Company under the Third Agreement is considerably higher than the respective considerations paid under the First Agreement and the Second Agreement, the Directors consider the amount of consideration is fair and reasonable taking into account (i) the abovementioned valuation of the Land for hotel use at HK$1,100 million as at 17th March 2005 and (ii) the confidence of the Directors in the potential prospects of the Hospitality Business and the fact that the acquisition of 30% equity interests in Great Wonders under the Third Agreement and the injection of such interests into the JV Group under the Great Wonders Agreement will serve the purposes of rationalizing the shareholding structure in the JV Group and strengthening the cooperation between the Company and PBL in pursuing the Hospitality Business as mentioned in the paragraph headed “Reasons and benefits for entering into the Third Agreement and the Great Wonders Agreement” below.

Financing sources

The consideration of HK$400 million for the acquisition under the Third Agreement will be satisfied by the Company, as to HK$200 million, by way of cash payment upon completion and as to the balance of HK$200 million, by way of issue of the Consideration Shares, representing 22,222,222 new Shares at an issue price of HK$9.00 per Share (originally 11,111,111 Original Shares at an issue price of HK$18.00 per Original Share) to STDM upon completion or the actual date of the grant of the concession of the Land by the Macau Government to Great Wonders, whichever is later.

– 12 –

LETTER FROM THE BOARD

The cash consideration of HK$200 million payable by the Company to STDM will be financed from the internal resources of the Company. As it is contemplated that the completion of Third Agreement will occur simultaneously with the completion of the Great Wonders Agreement, it is expected that the Company will receive the same amount of sales proceeds from Melco Entertainment upon the relevant completion date.

(i) a premium of approximately 0.17% over the average closing price of HK$17.97 per Original Share for the five trading days up to and including 17th March 2005, being the last trading day of Original Shares immediately before the date of the said announcement of the Company;
(ii) a premium of approximately 1.12% over the closing price of HK$8.9 per Share on the Latest Practicable Date;
(iii) a premium of approximately 579% over the net asset value per Original Share of approximately HK$2.65, based on the audited consolidated net assets of the Company as at 31st December 2004 and the number of then Original Shares in issue; and
(iv) a premium of approximately 455.56% over the unaudited pro forma adjusted consolidated net assets per Original Share of HK$3.24 based on the unaudited proforma consolidated net assets of the Enlarged Group of approximately HK$1,854.5 million as set out in Appendix IV to this Circular and 1,144,660,762 Shares (originally 572,330,381 Original Shares) which had been in issue and issuable, comprising 1,122,438,540 Shares (originally 561,219,270 Original Shares) in issue as at the Latest Practicable Date and 22,222,222 Consideration Shares (originally 11,111,111 Original Shares) to be issued.

Based on the respective closing prices per Original Share of HK$18.00 on 17th March 2005 and HK$8.9 per Share on the Latest Practicable Date, the Consideration Shares had a respective market values of approximately HK$200 million and HK$197.78 million.

The Consideration Shares represent approximately 1.98% of all existing issued Shares and approximately 1.94% of the enlarged issued share capital of the Company immediately after the allotment and issue of the Consideration Shares (assuming no other Shares are issued prior to the date of issue of the Consideration Shares). The proposed allotment and issue of the Consideration Shares will be subject to the approval by the Independent Shareholders (by way of poll) at the EGM. Application has been made to the Listing Committee for the listing of, and permission to deal in, the Consideration Shares.

The Consideration Shares, when allotted and issued, shall rank pari passu in all respects with the Shares in issue on the date of allotment and issue of the Consideration Shares including the right to all dividends, distribution and other payments made or to be made, the record date for which falls on or after the date of such allotment and issue. There are no restrictions on the subsequent sale of the Consideration Shares by STDM.

– 13 –

LETTER FROM THE BOARD

Fund raising exercises carried out by the Company in the past twelve months

Save for the following fund raising exercises, the Company has not undertaken any fund raising exercise over the past twelve months:

(i) as part of the Group reorganization as disclosed in two announcements and circular of the Company respectively dated 23rd March 2004, 1st April 2004 and 23rd April 2004, the Company acquired 80% equity interests in Mocha Slot on 9th June 2004 for a total consideration of HK$398 million (comprising HK$353 million for 80% equity interests in Mocha Slot which was settled by way of issue of a total of 153,478,261 Original Shares at the then issue price of HK$2.3 per Original Share and HK$45 million for a shareholder’s loan of the same face value previously granted by Better Joy to Mocha Slot which was settled by way of issue of two convertible notes by the Company to Better Joy in the aggregate sum of HK$45 million with a conversion right to convert the same into 19,565,216 Original Shares at a conversion price of HK$2.3 per Original Share). On 11th April 2005, Better Joy exercised the said conversion right in full resulting in a total of 19,565,216 Original Shares issued to Better Joy;
(ii) as disclosed in the announcement and circular of the Company respectively dated 13th September 2004 and 11th October 2004, the Company has entered into the First Agreement with STDM pursuant to which the Company has agreed to acquire 50% equity interests in Great Wonders from STDM for a consideration of HK$100 million, which would be settled by way of issue of the First Convertible Bond to STDM with the principal amount of HK$100 million with a conversion right to convert the same into 50,000,000 Shares at a conversion price of HK$2.0 per Share (originally 25,000,000 Original Shares at a conversion price of HK$4.0 per Original Share). After obtaining the Independent Shareholders’ approval (by way of poll) of the First Agreement, the First Convertible Bond and the issue and allotment of Shares upon conversion of the First Convertible Bond at the extraordinary general meeting of the Company held on 2nd November 2004, the Company issued the First Convertible Bond to STDM on 9th November 2004;
(iii) as disclosed in the announcement and circular of the Company respectively dated 23rd November 2004 and 5th January 2005, the Company has entered into the Second Agreement with STDM pursuant to which the Company has agreed to acquire additional 20% equity interests in Great Wonders from STDM for a consideration of HK$56 million, which would be settled by way of issue of the Second Convertible Bond to STDM with the principal amount of HK$56 million with a conversion right to convert the same into 13,658,536 Shares at a conversion price of HK$4.1 per Share (originally 6,829,268 Original Shares at a conversion price of HK$8.2 per Original Share). After obtaining the Independent Shareholders’ approval (by way of poll) of the Second Agreement, the Second Convertible Bond and the issue and allotment of Shares upon conversion of the Second Convertible Bond at the extraordinary general meeting of the Company held on 20th January 2005, the Company issued the Second Convertible Bond to STDM on 8th February 2005; and

– 14 –

LETTER FROM THE BOARD

(iv) as disclosed in the announcement of the Company dated 15th October 2004, the Company has carried out a top-up placing of 75,900,000 Original Shares at a placing price of HK$5.2 per Original Share on 15th October 2004. The net proceeds generated from the Placing were approximately HK$377 million, out of which approximately HK$94 million was earmarked for the expansion of the business of Mocha Slot, as to approximately HK$207 million for the development of the Hospitality Business and as to the remaining approximately HK$75 million as working capital for the Group. As at the Latest Practicable Date, the Company has utilized a total sum of approximately HK$30.5 million mainly for acquisition of hardware and systems for the business of Mocha Slot and a total sum of approximately HK$56.4 million, mainly for engaging the independent professionals, including architects, surveyors and contractors, in relation to the relevant application for the concession of the Land and the Hospitality Business. It is the present intention of the Company to utilize the net proceeds of Placing according to the intended application thereof as disclosed in the announcement dated 15th October 2004. To the extent that the net proceeds from Placing are not immediately required for the above purposes, the Company has placed such funds in short-term deposits with banks and/ or financial institutions.
(v) as disclosed in the announcement of the Company dated 17th May 2005, the Company has carried out another top-up placing of 70,000,000 Original Shares at a placing price of HK$18.25 per Original Share. The net proceeds generated from such top-up placing were approximately HK$1,239 million and the entire sum of which was earmarked to finance the construction and development of the proposed integrated entertainment resort to be located at the Cotai Strip, Macau, details of which are disclosed in the announcement of the Company dated 13th May 2005. As at the Latest Practicable Date, the Company has not utilized any amount from the proceeds of this top-up placing. To the extent that the net proceeds from this top-up placing are not immediately required for the above purposes, the Company has placed such funds in short-term deposits with banks and/ or financial institutions.

Conditions of the Third Agreement

Conditions precedent

Completion of the Third Agreement, is conditional on

(i) the Independent Shareholders having approved, by way of poll, the transactions contemplated under the Third Agreement including the allotment and issue of the Consideration Shares at the EGM; and
(ii) all necessary authorizations pursuant to the Listing Rules, including but not limited to the Listing Committee granting the listing of, and permission to deal in, the Consideration Shares, having been obtained.

Unless the Company and STDM otherwise agree, if the conditions precedent set out above are not fulfilled on or before 30th June 2005, STDM may, by notice to the Company and Melco Entertainment to terminate the Third Agreement and in which case, the Third Agreement shall forthwith cease to have

– 15 –

LETTER FROM THE BOARD

effect and no party thereunder shall have further liability under the Third Agreement (provided that such termination shall be without prejudice to any rights or remedies of the parties which shall have accrued prior to such termination).

The completion of the Third Agreement is not conditional upon the completion of the Great Wonders Agreement. However, it is contemplated that the Company will procure Melco Entertainment to proceed with the completion of the Great Wonders Agreement at the same time of the completion of the Third Agreement.

Condition subsequent

If the concession of the Land is not granted to Great Wonders on or before 1st September 2005, the Company shall have the right to re-sell STDM’s 30% equity interests in Great Wonders to STDM and in such event, STDM shall be obliged to re-purchase 30% equity interests in Great Wonders for the consideration previously paid by the Company.

Pursuant to the First Agreement and the Second Agreement as disclosed in the announcements and circulars of the Company respectively dated 13th September 2004, 11th October 2004, 23rd November 2004 and 5th January 2005, if the concession of the Land is not granted to Great Wonders on or before 1st September 2005, the Company shall have the right to terminate the First Convertible Bond and the Second Convertible Bond and forthwith transfer the altogether 70% equity interests in Great Wonders back to STDM.

To the best of the Directors’ knowledge, information and belief, the concession of the Land will be granted on or before 1st September 2005. The Company will make separate announcement in case the Land, for whatever reasons, is not granted by that date.

Completion

Completion of the Third Agreement shall take place as soon as practicable and in any event not later than 21 days after fulfillment of the conditions precedent of the Third Agreement.

– 16 –

LETTER FROM THE BOARD

Changes to the shareholding structure of the Company as a result of the issue of the Consideration Shares

Better Joy (Note 1) Mr. Lawrence Ho (Note 2) Shun Tak Shipping Company Limited_(Note 3) Dr. Stanley Ho (Note 4) Madam Lucina Laam King Ying STDM (Note 5)_ Others (Public) Total	Issued Shares as at the Latest Practicable Date Number of Shares % 288,532,606 25.71 120,941,636 10.77 78,166,294 6.96 30,047,734 2.68 444,574 0.04 – – 604,305,696 53.84 1,122,438,540 100.00	Upon conversion of the First Convertible Bond in full Number of Shares % 288,532,606 24.61 120,941,636 10.32 78,166,294 6.67 30,047,734 2.56 444,574 0.04 50,000,000 4.26 604,305,696 51.54 1,172,438,540 100.00	Upon conversion of the Second Convertible Bond in full Number of Shares % 288,532,606 25.40 120,941,636 10.65 78,166,294 6.88 30,047,734 2.64 444,574 0.04 13,658,536 1.20 604,305,696 53.19 1,136,097,076 100.00	Upon allotment and issue of the Consideration Shares Number of Shares % 288,532,606 25.21 120,941,636 10.57 78,166,294 6.83 30,047,734 2.63 444,574 0.04 22,222,222 1.94 604,305,696 52.79 1,144,660,762 100.00	Upon conversion of the Convertible Bonds in full and allotment and issue of the Consideration Shares Number of Shares % 288,532,606 23.88 120,941,636 10.01 78,166,294 6.47 30,047,734 2.49 444,574 0.04 85,880,758 7.11 604,305,696 50.01 1,208,319,298 100.00	Upon conversion of the Convertible Bonds in full and allotment and issue of the Consideration Shares Number of Shares % 288,532,606 23.88 120,941,636 10.01 78,166,294 6.47 30,047,734 2.49 444,574 0.04 85,880,758 7.11 604,305,696 50.01 1,208,319,298 100.00
						100.00

Notes:

Better Joy is owned as to 77% by Mr. Lawrence Ho and as to 23% by Dr. Stanley Ho.
Interest of Mr. Lawrence Ho includes his personal interest and interest held through Lasting Legend, a company controlled and wholly owned by him.
Interest of Shun Tak Shipping Company Limited includes interest held by itself and its wholly-owned subsidiaries.
Interest of Dr. Stanley Ho includes his personal interest and interest held through three companies controlled and wholly-owned by him, namely, Sharikat Investments Limited, Dareset Limited and Lanceford Company Limited.
The First Convertible Bond and the Second Convertible Bond have respectively been issued by the Company to STDM on 9th November 2004 and 8th February 2005 pursuant to the First Agreement and Second Agreement respectively. Upon full conversion of the respective First Convertible Bond and the Second Convertible Bond, there will be an additional 50,000,000 Shares (original 25,000,000 Original Shares) and 13,658,536 Shares (originally 6,829,268 Original Shares) respectively in issue. As at the date of this circular, STDM has not exercised any conversion rights attached to the First Convertible Bond or the Second Convertible Bond.

As illustrated in the above table, the allotment and issue of the Consideration Shares will not result in any change of control of the Company.

– 17 –

LETTER FROM THE BOARD

THE GREAT WONDERS AGREEMENT

Principal terms of the Great Wonders Agreement

Date : 17th March 2005 Parties : The Company, as vendor Melco Entertainment, as purchaser Interest to be injected into the JV Group : 30% equity interests in Great Wonders Consideration : HK$400 million in cash Term of payment : HK$ 400 million, payable upon completion provided that if the concession of the Land has not yet been granted on or before the relevant completion date, then half of the said consideration, namely, HK$200 million will be payable upon the actual date of grant of the concession of the Land by the Macau Government to Great Wonders.

Basis of determination of the consideration

The basis of determination of the consideration under the Great Wonders Agreement is consistent with the basis adopted under the Third Agreement and hence, the consideration of HK$400 million is identical with the amount of consideration payable by the Company to STDM under the Third Agreement.

Financing sources

The whole consideration of HK$400 million for the acquisition under the Great Wonders Agreement will be satisfied by Melco Entertainment in cash with the same financed from the internal resources of the JV Group, namely the capital contribution of US$163 million (equivalent to HK$1,270 million) previously made by PBL Asia pursuant to the Subscription Agreement.

Completion

It is contemplated that the completion of the Great Wonders Agreement shall take place simultaneously with the completion of the Third Agreement.

Conditions of the Great Wonders Agreement

The completion of the Great Wonders Agreement is conditional upon the fulfillment of the conditions precedent of the Third Agreement and the completion thereof as mentioned in the paragraph headed “Conditions of the Third Agreement” above.

– 18 –

LETTER FROM THE BOARD

If the condition subsequent mentioned in the paragraph headed “Conditions of the Third Agreement” above cannot be fulfilled and in the event that the Company has decided to re-sell the 30% equity interests in Great Wonders to STDM, in such case, the Company will procure Melco Entertainment to resell such interests to the Company for the consideration previously paid by Melco Entertainment.

EFFECT ON INTEREST HELD IN THE HOSPITALITY BUSINESS BY THE GROUP

Upon completion of the Third Agreement and the Great Wonders Agreement:

(i) the respective attributable interests in Great Wonders owned by the Company and PBL will be increased from 42% and 28% respectively to 60% and 40% respectively; and
(ii) STDM will cease to hold any interest in Great Wonders and the joint venture established between STDM and the Company (substituted by Melco Entertainment subsequently upon the formation of the JV Group) pursuant to the First Agreement and the Second Agreement shall be terminated and cease to have further force and effect.

The respective interests of 60% and 40% held by the Company and PBL in Great Wonders upon completion of the Third Agreement and the Great Wonders Agreement are consistent with the shareholding structure of other joint venture companies within the JV Group indirectly held by the Company and PBL for the purpose of pursuing the Hospitality Business and other gaming business in Greater China region. After completion of the Great Wonders Agreement, Great Wonders will remain as a non wholly-owned subsidiary of the Company within the JV Group. Set out below is the corporate chart of the JV Group immediately after completion of the Third Agreement and the Great Wonders Agreement:

==> picture [203 x 287] intentionally omitted <==

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

PBL The Company
100% 100%
PBL Asia Melco Leisure
50%
50%
Melco PBL Holdings
100%
Melco PBL International
Limited
80%
Melco Entertainment
20%
80% 100%
Great Wonders
Mocha Slot
(Hospitality Business)
----- End of picture text -----

– 19 –

LETTER FROM THE BOARD

According to the paragraph headed “I. Unaudited pro forma statement of assets and liabilities of the Enlarged Group” as contained in Appendix IV to this circular, upon completion of the Second Agreement, the Third Agreement and the Great Wonders Agreement the net asset value of the Group will increase from approximately HK$2.65 per Original Share (based on the audited consolidated net assets of the Company of approximately HK$1,225 million as at 31st December 2004 and the number of then Original Shares in issue) to approximately HK$3.24 per Original Share (based on the unaudited proforma consolidated net assets of the Enlarged Group of approximately HK$1,854.5 million as set out in Appendix IV to this Circular and 1,144,660,762 Shares (originally 572,330,381 Original Shares) which had been in issue and issuable, comprising 1,122,438,540 Shares (originally 561,219,270 Original Shares) in issue as at the Latest Practicable Date and 22,222,222 new Shares (originally 11,111,111 Original Shares) as Consideration Shares to be issued. Reference should be made to the said paragraph contained in Appendix IV to this circular for the effect of the increase in attributable interests of Great Wonders held by the Company on the assets and liabilities of the Company and the underlying assumptions on preparing the said statement.

INFORMATION OF THE GROUP

Currently, the Group’s business is broadly divided into four divisions, namely, (i) leisure and entertainment division; (ii) investment banking and financial services division; (iii) technology division; and (iv) property investment division. The leisure and entertainment division of the Group comprises the pursuance of the gaming business and the Hospitality Business through the JV Group and the operation of two floating restaurants, namely, Jumbo and Tai Pak, in Aberdeen, Hong Kong.

Information on Melco Entertainment and the Hospitability Business

Melco Entertainment is a non wholly-owned subsidiary of the Company within the JV Group and is the immediate holding company of 70% equity interests in Great Wonders as at the date of this circular. The Hospitality Business is concerned with the business pursued or to be pursued by Great Wonders, which has applied for the concession of the Land, for developing a luxury hotel housing a casino and an electronic gaming machine lounge. It is contemplated that upon completion of the hotel, the casino will be operated by SJM and the electronic gaming machine lounge will be managed by Mocha Slot (subject to the approvals of the Macau government authorities). On 11th November 2004, SJM issued a Letter of Confirmation to Great Wonders (which was counter-signed by Great Wonders), regarding a confirmation given by SJM to enter into the Proposed Lease Agreement upon (i) the successful grant of the concession of the Land to Great Wonders and (ii) obtaining of the relevant approvals by SJM from the Macau government authorities, in respect of a proposed lease by SJM from Great Wonders for an area of approximately 18,000 square meters at the hotel to be developed on the Land for the purpose of operating a casino with not less than 160 gaming tables. According to the Letter of Confirmation and subject to the terms of the Proposed Lease Agreement, the expected duration of the lease shall be a period from the commencement of business of the hotel to the expiry of SJM’s concession to operate casinos in Macau on 31st March 2020 and as the proposed monthly rental, Great Wonders shall receive an amount equal to the aggregate of (i) 40% of the gross monthly revenue generated from 60 gaming tables and (ii) such percentage to be further agreed between SJM and Great Wonders (but in any case not less than 30%) of the gross monthly revenue generated from the remaining gaming tables. To the best of the Company’s knowledge and belief, the Letter of Confirmation is a validly binding document between the Company and SJM. Save as disclosed above and since the hotel has not been developed, no concrete term of the Proposed Lease Agreement has been reached between the Company and SJM as at the date of this circular.

– 20 –

LETTER FROM THE BOARD

SJM is a company incorporated under the laws of Macau and is majority owned by STDM with Dr. Stanley Ho as its managing director. SJM has been selected by the Macau government authorities as one of the three concessionaries to engage in casino gaming operations in Macau from 1st April 2002 to 31st March 2020. By reason of the fact that Dr. Stanley Ho, who is the Chairman and Executive Director of the Company, has an equity interest in, as well as being a director of, SJM and STDM respectively, SJM is considered as a connected person under the Listing Rules. Accordingly, upon (i) completion of the hotel development on the Land and (ii) fulfillment of the conditions as set out in the Letter of Confirmation, namely, the successful grant of the concession of the Land to Great Wonders and obtaining of the relevant approvals by SJM from the Macau government authorities, the proposed execution of the Proposed Lease Agreement may constitute a possible non-exempt continuing connected transaction of the Company under Chapter 14A of the Listing Rules and if such circumstances arise, the Company will comply with the relevant requirements of the Listing Rules as to reporting, announcement and the Independent Shareholders’ approval (by way of poll) (as the case may be).

Apart from the Hospitality Business, subject to the completion of those transactions as disclosed in the announcement of the Company dated 13th May 2005, Melco Entertainment will, via Melco Hotels and Resorts (Macau) Limited, construct and develop an integrated entertainment resort on a piece of land to be granted by the Macau Government at Cotai Strip, Macau and such project will include the construction and development of :

one five star hotel and two four star hotels;
subject to obtaining the necessary Macau regulatory approvals, an underwater casino to be operated by SJM showcasing tropical marine life with approximately 50 premium player market gaming tables and 400 mass market gaming tables and an electronic gaming machine lounge with approximately 3,000 electronic gaming machines to be operated by SJM and managed by Mocha Slot Management Limited, a wholly-owned subsidiary of Mocha Slot established in Macau;
two blocks of service apartments; and
retail shopping spaces, a performance hall, car parking facilities and other supporting infrastructures.

Information on Great Wonders

Great Wonders was a company initially established by STDM on 15th September 2004 pursuant to the First Agreement. As a result of the completions of the First Agreement and the Second Agreement and the formation of the JV Group pursuant to the Subscription Agreement, Great Wonders became a non wholly-owned subsidiary of the Company within the JV Group and in which the Company has an attributable interest of 42% (which will be increased to 60% subject to the completions of the Third Agreement and the Great Wonders Agreement.) Currently, except for applying the concession of the Land for developing a luxury hotel; the signing of the Letter of Confirmation with SJM and the entering into of a development contract with an independent contractor to develop the hotel on the Land (as mentioned in the paragraph headed “Information on STDM and the Land” below), Great Wonders does not carry out any other business and thus it does not have any contribution to the Group. Also, as the concession of the

– 21 –

LETTER FROM THE BOARD

Land has not yet been granted, Great Wonders only has a net asset value of MOP$1 million (equivalent to approximately HK$0.97 million) representing its issued share capital as at the Latest Practicable Date. Subject to the grant of the concession of the Land by the Macau Government, the sole asset of Great Wonders will be the Land. Pursuant to the abovementioned development contract entered into by Great Wonders, the total investment amount for development of the hotel on the Land is approximately HK$1,448 million. As at 31st March 2005, Great Wonders had outstanding capital commitment for the development of the luxury hotel on the Land amounting to approximately HK$1,417 million.

As disclosed in the announcement of the Company dated 15th October 2004 regarding the Placing, the Company expected to apply the net proceeds of the Placing of approximately HK$377 million, as to HK$94 million for expansion of the business of Mocha Slot, as to HK$207 million for the development of the Hospitality Business and as to the remaining HK$75 million as working capital for the Group. As at the Latest Practicable Date, the Company has utilized a total sum of approximately HK$30.5 million mainly for acquisition of hardware and systems for the business of Mocha Slot and a total sum of approximately HK$56.4 million, mainly for engaging the independent professionals, including architects, surveyors and contractors, in relation to the relevant application for the concession of the Land and the Hospitality Business. It is the present intention of the Company to utilize the net proceeds of Placing according to the intended application thereof as disclosed in the announcement dated 15th October 2004.

The Company will use its best endeavours to ensure that throughout the holding of its investment in the gaming ventures and business through the JV Group, the operation of the JV Group will comply with the applicable laws in the relevant jurisdictions. Shareholders are reminded that, in accordance with the Stock Exchange’s guidelines on gambling business, that if the operation of the JV Group does not comply with applicable laws in the relevant jurisdictions, the Stock Exchange may, depending on the circumstances of the case, direct the Company to take remedial action, and/ or may suspend dealings in, or may cancel the listing of, Shares under Rule 6.01 of the Listing Rules. As the Group’s business includes financial services, information technology and other leisure and entertainment business, if the Company cannot take the requisite remedial action in the circumstance aforementioned, it is the Company’s intention to maintain active trading and listing status of Shares by divesting its investment in the JV Group.

INFORMATION ON STDM AND THE LAND

STDM is a company engaged in a wide range of businesses including gaming and hospitality businesses in Macau. The Land is a parcel of land with an area of 5,230 square meters located at Baixa da Taipa, Macau, described with the Land Registry Office of Macau under the no 21407, folio 125 of the Book B49. The Land is currently vacant and formerly owned by a joint venture company, which was held as to 50% by an Independent Third Party, as to 25% by STDM and as to 25% by a company of which STDM is a substantial shareholder (as defined under the Listing Rules.) for residential use. This joint venture company had applied to the Macau Government to give up or renounce the rights and obligations relating to the Land for residential use in order to enable Great Wonders to apply to the Macau Government for a new concession relating to the Land for hotel use. Save for the payment of premium and compliance with usual development conditions on the Land, the Directors do not anticipate any specific conditions imposed on the new concession of the Land. The consideration payable by STDM to this joint venture company for such renunciation is HK$200 million and will be paid by installments by 1st September 2005. As disclosed in the circular of the Company relating to the Second Agreement dated 5th January 2005, the Land for residential use was valuated at HK$366 million by Jones Lang LaSalle Limited, an

– 22 –

LETTER FROM THE BOARD

independent valuer as at 10th December 2004. It is expected that the concession of the Land to Great Wonders will be granted on or before 1st September 2005. Great Wonders has entered into a development contract with an independent contractor to develop the hotel on the Land with a total investment amount of approximately HK$1,448 million, which was arrived at after arm’s length negotiations between the relevant parties and by reference to the estimation of the total investment costs for the project prepared by Levett & Bailey Chatered Quantity Surveyors Limited, an independent quantity surveyor engaged by Great Wonders for assessing the estimated market costs for developing a luxury hotel on the Land. In addition, the possible land premium payable by Great Wonders in relation to the new grant of the concession of the Land is estimated to be approximately MOP$230 million (equivalent to approximately HK$223 million). Taking into account of the respective attributable interests of 60% and 40% in Great Wonders held by the Company and PBL respectively (assuming the Third Agreement and the Great Wonders Agreement have been completed), the estimated capital commitment for developing the hotel on the Land to be shared between the Company and PBL will be approximately HK$868.80 million and HK$579.20 million according to their respective shareholding and the possible land premium to be shared between the Company and PBL will be approximately HK$133.80 million and HK$89.20 million respectively. As disclosed in the announcement of the Company regarding the Placing on 15th October 2004, the Company expected to apply approximately HK$207 million raised from the Placing in the Hospitality Business. The Company will consider various financing methods including debts/equity financing to fund the remaining balance of its share of the relevant capital commitment for the development of the Land and the land premium.

REASONS AND BENEFITS FOR ENTERING INTO THE THIRD AGREEMENT AND THE GREAT WONDERS AGREEMENT

(i) at the time when the Company entered into the First Agreement regarding the acquisition of 50% equity interests in Great Wonders from STDM, it had the intention to jointly develop the Land with STDM with a view to tapping into the continuing growth of the leisure, entertainment and gaming businesses in Macau;
(ii) in contemplation of the establishment of the JV Group with PBL, the Directors considered that it would be in the best interest of the Company and the Shareholders to increase the Company’s shareholdings in Great Wonders upon the same time as the formation of the JV Group for the purpose of minimizing the relevant dilution effect thereon that would be brought by the formation of the JV Group and as such, the Company entered into the Second Agreement regarding the acquisition of an additional 20% equity interests in Great Wonders from STDM; and
(iii) after formation of the JV Group, the Directors and the directors of Melco PBL Holdings consider there will be a commercial advantage in rationalizing the shareholding structure of Great Wonders via a complete buyout of STDM’s equity interests therein thereby enhancing its operational efficiency and strengthening the cooperation between the Company and PBL

– 23 –

LETTER FROM THE BOARD

in pursuing the Hospitality Business, in particular, fulfilling the terms and spirit of the Subscription Agreement and the Shareholders Deed to have all gaming, entertainment and hospitality ventures and businesses in the Greater China region effectively owned as to 60% by the Company and 40% by PBL through the JV Group. As a result and with the financial support by the JV Group, the Company entered into the Third Agreement regarding the acquisition of the remaining 30% equity interests in Great Wonders from STDM.

The acquisitions of interests in Great Wonders from September 2004 to date are arm’s length transactions between the Company and STDM agreed at different times according to the Company’s business needs and circumstances, and reflect the pace of development of the Company’s gaming, leisure and entertainment business in Macau.

In respect of the future prospects of the Hospitality Business and gaming business in Macau, the Directors hold an optimistic view based on the reasons and belief that:

due to the proximity of Macau to the PRC, Macau will be able to capture the economic benefit generated by the continuous economic growth and increase in per capita annual disposable income of urban households in the PRC as disclosed in the China Statistical Yearbook 2004, which in turn translates into a vast long-term opportunity for the gaming and hospitality businesses;
the relaxation of travel restrictions for individual travelers from the PRC since mid-2003 has proved to be a new driver for the PRC tourists. According to the Statistics and Census Service of the Macau Government, in the first nine months of 2004, the PRC visitors to Macau increased 83% on a year on year basis and accounted for 57% of total visitors, up from 45% in 2003;
also, because of the proximity of Macau to Hong Kong, the gaming and hospitality businesses in Macau are likely to benefit from the Disneyland to be opened in Hong Kong by the end of 2005, which is expected to attract many visitors from the PRC and the other parts of the world.

The Directors consider that a complete buyout of STDM’s interests in Great Wonders will enable the JV Group to consolidate the entire results, assets and liabilities of Great Wonders and hence, the Hospitality Business and based on the above belief in the potential business prospects in Macau, the Directors are of the view that a higher effective interest in Great Wonders obtained by the Company pursuant to the Third Agreement and the Great Wonders Agreement will contribute to the improvement of return for the Shareholders.

In addition, since the transactions under the Third Agreement and the Great Wonders Agreement are intended to be a back-to-back arrangement with substantial similar terms and given the fact that on the one hand, part of the consideration of HK$200 million payable by the Company to STDM under the Third Agreement will be satisfied by way of issue of the Consideration Shares and on the other hand, the entire consideration of HK$400 million receivable by the Company from Melco Entertainment under the Great Wonders Agreement will be satisfied by way of cash financed from the internal resources of the JV Group, the Directors consider that the overall effect of the two transactions will result in an increase in

– 24 –

LETTER FROM THE BOARD

the cash resources available to the Company and is in the interest of the Company. It is currently intended by the Company that such additional cash resources will be applied as general working capital of the Group. Save for the above, the Directors consider that the two transactions shall have no material financial impact on the Group and there shall neither be any gain nor loss accrued to the Company as a result of these transactions.

As at 31st December 2004, the total outstanding borrowings of the Group was approximately HK$183.2 million and total asset of the Group was approximately HK$1,584.8 million and shareholders’ funds was approximately HK$1,225.5 million. Gearing ratio, expressed as a percentage of total borrowings over shareholders’ funds, was approximately 15% as at 31st December 2004. With reference to the pro forma consolidated net asset and the total outstanding borrowings of the Enlarged Group as set out in Appendix IV to this circular, which amounted to approximately HK$1,854.5 million and HK$239.2 million respectively, the gearing ratio of the Group will reduce to approximately 12.9% after completion of the Third Agreement and the Great Wonders Agreement.

The Directors consider that the terms of the Third Agreement, the payment terms and consideration are fair and reasonable and that they are arrived at after arm’s length negotiations taking into account (i) the valuation of the Land for hotel use of HK$1,100 million as at 17th March 2005 and (ii) the confidence of the Directors in the potential prospects of the Hospitality Business mentioned above and are upon normal commercial terms and in the interest of the Independent Shareholders as a whole. The Directors and the directors of Melco PBL Holdings also consider that the terms of the Great Wonders Agreement, the payment terms and the consideration are fair and reasonable and that they are arrived at after arm’s length negotiations and are upon normal commercial terms and in the interest of the Shareholders as a whole.

IMPLICATIONS UNDER THE LISTING RULES

The Third Agreement

STDM is a connected person for the purpose of the Listing Rules by virtue of the fact that Dr. Stanley Ho, who is the Chairman and Executive Director of the Company, has an equity interest in, as well as being a director of, STDM. As a result, and based on the valuation of the Land for hotel use of HK$1,100 million as at 17th March 2005, the Land Acquisition Agreements and the issue of the Consideration Shares constitute a major and non-exempt connected transaction of the Company under Rule 14.08 and Rule 14A.16(5) of the Listing Rules respectively (by virtue of the fact that the some of the relevant percentage ratios as specified in Rule 14.07 of the Listing Rules are more than 25% but less than 100% and the purchase consideration payable to STDM pursuant to the Land Acquisition Agreements exceeds HK$10,000,000) and are subject to the requirements of reporting, announcement and approval by the Independent Shareholders (by way of poll) at the EGM as set out in Chapter 14A of the Listing Rules.

Dr. Stanley Ho, who beneficially owns approximately 2.68% shareholding interest in the Company, and his associates, including Madam Lucina Laam King Ying, Mr. Lawrence Ho, Better Joy and Lasting Legend, will abstain from voting on the relevant resolution(s) regarding the Connected Transaction at the EGM.

– 25 –

LETTER FROM THE BOARD

As at the Latest Practicable Date, the total number of issued shares of the Company were 1,122,438,540 Shares and were held as to approximately 2.68% by Dr. Stanley Ho, approximately 0.04% by Madam Lucina Laam King Ying, approximately 0.48% by Mr. Lawrence Ho personally, approximately 10.29% by Lasting Legend, approximately 25.71% by Better Joy and approximately 6.96% by Shun Tak Shipping Company Limited (a company in which Dr. Stanley Ho holds 27.78% shareholding interest and is a director). Based on the interest of Dr. Stanley Ho in Shun Tak Shipping Company Limited, Shun Tak Shipping Company Limited is not an associate of Dr. Stanley Ho under the definitions of the Listing Rules. Accordingly, Shun Tak Shipping Company Limited is not required to abstain from voting on the relevant resolution(s) regarding the Connected Transaction at the EGM.

The Great Wonders Agreement

The injection of 30% equity interests in Great Wonders under the Great Wonders Agreement is treated as a deemed disposal of 12% equity interests in Great Wonders for a deemed consideration of HK$160 million by the Company to Melco Entertainment (based on the consideration of HK$400 million payable by the Company to STDM for the 30% equity interests in Great Wonders) under the Listing Rules, which constitutes a discloseable transaction of the Company under Rule 14.06 of the Listing Rules and is subject to the requirements of reporting, announcement and issue of this circular as set out in Chapter 14 of the Listing Rules.

EXTRAORDINARY GENERAL MEETING

A notice convening the EGM to be held at 3:30 p.m. on Friday, 17th June 2005 at 38th Floor, The Centrium, 60 Wyndham Street, Central, Hong Kong is set out on pages 128 to 129 of this circular at which ordinary resolution(s) will be proposed and, if thought fit, passed by the Independent Shareholders (by way of poll), to approve the Connected Transaction.

The Independent Board Committee comprising the three Independent Non-executive Directors namely, Sir Roger Lobo, Mr. Robert Kwan and Dr. Lo Ka Shui, has been appointed to advise the Independent Shareholders on whether or not the Connected Transaction is fair and reasonable and in the interests of the Independent Shareholders as a whole. Sun Hung Kai has been appointed as the Independent Financial Adviser to advise the Independent Board Committee in respect of the Connected Transaction.

A proxy form for use by the Shareholders at the EGM is enclosed. Whether or not you are available to attend the EGM in person, you are requested to complete the accompanying proxy form in accordance with the instructions printed thereon and return the same to the registered office of the Company at 38th Floor, The Centrium, 60 Wyndham Street, Central, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for holding of the EGM or any adjournment thereof. Completion and return of a proxy form will not preclude you from attending and voting in person at the EGM or any adjourned meeting should you so wish.

RECOMMENDATION

Your attention is drawn to (i) the letter from the Independent Board Committee set out on pages 28 and 29 of this circular which contains the recommendations of the Independent Board Committee to the Independent Shareholders concerning the Connected Transaction; and (ii) the letter from Sun Hung Kai

– 26 –

LETTER FROM THE BOARD

to the Independent Board Committee set out on pages 30 to 47 of this circular containing its advice to the Independent Board Committee in this regard.

The Independent Board Committee, having taking into account the advice from Sun Hung Kai in relation to the Connected Transaction, considers that the Connected Transaction is fair and reasonable so far as the Independent Shareholders are concerned and that the Connected Transaction is in the interest of the Company and the Shareholders as a whole. Accordingly, the Independent Board Committee recommends the Independent Shareholders to vote in favour of the relevant resolution(s) to be proposed at the EGM to approve the Connected Transaction.

The Board considers that the terms of the Great Wonders Agreement are entered into after arm’s length negotiation between parties thereto and the terms thereof are fair and reasonable and in the interest of the Group and of the Shareholders as a whole.

GENERAL

As at the date of this circular, the Board comprises three Executive Directors, namely, Dr. Stanley Ho, Mr. Lawrence Ho and Mr. Frank Tsui, two Non-executive Directors, namely, Mr. Ng Ching Wo and Mr. Ho Cheuk Yuet and three Independent Non-executive Directors, namely, Sir Roger Lobo, Mr. Robert Kwan and Dr. Lo Ka Shui.

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

By Order of the Board Melco International Development Limited Ho, Lawrence Yau Lung Managing Director

– 27 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

==> picture [233 x 49] intentionally omitted <==

(Incorporated in Hong Kong with limited liability) Website: http://www.melco.hk.cn (Stock Code: 200)

Penthouse 38th Floor The Centrium 60 Wyndham Street Central Hong Kong 2nd June 2005

To the Independent Shareholders

Dear Sir or Madam,

MAJOR AND CONNECTED TRANSACTION ACQUISITION OF THE REMAINING INTEREST IN THE LAND

We have been appointed as members of the Independent Board Committee to advise you in connection with the Connected Transaction, details of which are set out in the “Letter from the Board” in the circular dated 2nd June 2005, of which this letter forms part. Terms used in this letter have the same meanings as defined in the said circular unless the context otherwise requires.

In forming our opinion on the Connected Transaction, we have discussed with Savills (Hong Kong) Limited (“Savills”) and Sun Hung Kai in relation to the valuation of the Land. We noted that the residual method was the primary method adopted for valuing the Land. In our discussion, we have:

(a) critically discussed and assessed the assumptions made by Savills as disclosed in their valuation report of the Land as set out in Appendix III to this circular and the material effect that any variation of those assumptions may have on the valuation figure;
(b) critically discussed the effect of any material conditions affecting the status of the legal titles to the Land as disclosed in the legal opinion from the Macau legal advisers obtained in respect of the Land;
(c) in particular, in relation to the Land, discussed: (i) its valuation which is based on the expected gross development value of this completed development on the basis that it has a hotel and a casino; and (ii) the exact stage at which its development has reached; and

– 28 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

(d) discussed the known relevant local taxes which might be charged in respect of the Land and their effect, if applicable, on the calculation of the notional profit of the Land and their consequent effect on the valuation figure.

Based on our discussion, we are of the view that the residual method being adopted for the valuation of the Land is acceptable.

We wish to draw your attention to the letter of advice from Sun Hung Kai as set out on pages 30 to 47 of this circular, which contains its advice and recommendation to us as to whether or not the Connected Transaction is fair and reasonable and in the interests of the Independent Shareholders as a whole, as well as the principal factors and reasons for its advice and recommendation.

Having considered, amongst other matters, the factors and reasons considered by, the opinion, advice and recommendations of, Sun Hung Kai as stated in its aforementioned letter of advice, we are of the opinion that the Connected Transaction is fair and reasonable so far as the Independent Shareholders are concerned and the Connected Transaction is in the interests of the Company and the Independent Shareholders as a whole. We therefore recommend the Independent Shareholders to vote in favour of the relevant resolution(s) to be proposed at the EGM to approve the Connected Transaction.

Yours faithfully, For and on behalf of the Independent Board Committee Sir Roger Lobo Robert Kwan Dr. Lo Ka Shui Independent Non-executive Directors

– 29 –

LETTER FROM SUN HUNG KAI

The following is the text of the letter of advice from Sun Hung Kai to the Independent Board Committee and the Independent Shareholders for the purpose of incorporation into this circular.

2nd June 2005

To the Independent Board Committee and the Independent Shareholders Melco International Development Limited 38th Floor, The Centrium 60 Wyndham Street Central Hong Kong

Dear Sirs,

MAJOR AND CONNECTED TRANSACTION ACQUISITION OF THE REMAINING INTEREST IN THE LAND

INTRODUCTION

We refer to our engagement under which Sun Hung Kai International Limited (“Sun Hung Kai”) has been appointed as the independent financial advisor to advise the Independent Board Committee and the Independent Shareholders in relation to the terms of the Connected Transaction. Terms defined in the circular of the Company to the Shareholders dated 2nd June 2005 (the “Circular”), of which this letter forms part, bear the same meanings herein unless the context otherwise requires.

On 17th March 2005, the Company entered into the Third Agreement with STDM, pursuant to which the Company will buy and STDM will sell the remaining 30% equity interests in Great Wonders held by STDM, for a consideration of HK$400 million. The Third Agreement is conditional upon the approval by the Independent Shareholders (by way of poll) at the EGM and all necessary authorizations pursuant to the Listing Rules, including but not limited to the Listing Committee granting the listing of, and permission to deal in, the Consideration Shares, having been obtained on or before 30th June 2005. If this condition is not fulfilled on or before 30th June 2005, unless the parties otherwise agree, STDM may, by notice to the Company and Melco Entertainment to terminate the Third Agreement and the obligations of the parties thereunder.

STDM is a connected person for the purpose of the Listing Rules by virtue of the fact that Dr. Stanley Ho, who is the Chairman of the Company and an executive Director, has an equity interest in, as well as being a director of, STDM. As a result, and based on the valuation of the Land for hotel use of HK$1,100 million as at 17th March 2005, the Land Acquisition Agreements and the issue of the Consideration Shares constitute a major and non-exempt connected transaction of the Company under Rule 14.08 and Rule 14A.16(5) of the Listing Rules respectively (by virtue of the fact that some of the relevant percentage ratios as specified in Rule 14.07 of the Listing Rules are more than 25% but less than 100% and the purchase consideration payable to STDM pursuant to the Land Acquisition Agreements

– 30 –

LETTER FROM SUN HUNG KAI

exceeds HK$10,000,000) and are subject to the requirements of reporting, announcement and approval by the Independent Shareholders (by way of poll) at the EGM as set out in Chapter 14A of the Listing Rules.

The Independent Board Committee comprising Sir Roger Lobo, Mr. Robert Kwan and Dr. Lo Ka Shui, being all the independent non-executive Directors, has been formed to advise the Independent Shareholders as to the fairness and reasonableness of the Connected Transaction and whether the Connected Transaction is in the interests of the Company and the Shareholders as a whole. Our role as the independent financial adviser to the Independent Board Committee and the Independent Shareholders is to give our opinion as to whether the terms of the Connected Transaction are fair and reasonable so far as the Independent Shareholders are concerned.

In formulating our recommendations, we have relied on the accuracy of the information and representations contained in the Circular, which have been provided by the Directors and have assumed that all information and representations made or referred to in the Circular are true and accurate in all material respects. We have no reason to doubt the truth, accuracy and completeness of the information and representations provided to us by the Directors and have been advised by the Directors that no material facts have been omitted from the information provided and referred to in the Circular. Except for relying to a certain extent on the information and representations made by the Company contained in the Circular, we have conducted independent research on certain statistics in relation to the tourism industry and the operating environment of Great Wonders in Macau. We consider that we have reviewed sufficient information to reach an informed view and to justify relying on the accuracy of the information contained in the Circular and to provide a reasonable basis for our advice. We have not, however, conducted any independent investigation into the business and affairs or the future prospects of the Group and STDM.

PRINCIPAL FACTORS TAKEN INTO ACCOUNT

In formulating our opinion on the terms of the Connected Transaction, we have considered the following principal factors and reasons:

1. Information on Great Wonders and the Land

As stated in the letter from the Board, Great Wonders was a company initially established by STDM on 15th September 2004 pursuant to the First Agreement. As a result of the completions of the First Agreement and the Second Agreement and the formation of the JV Group pursuant to the Subscription Agreement, Great Wonders became a non wholly-owned subsidiary of the Company within the JV Group and in which the Company has an attributable interests of 42% (which will be increased to 60% subject to the completions of the Third Agreement and the Great Wonders Agreement.) Currently, except for (i) applying the concession of the Land for developing a luxury hotel; (ii) the signing of the Letter of Confirmation with SJM; and (iii) the entering into of a development contract with an independent

– 31 –

LETTER FROM SUN HUNG KAI

contractor to develop the hotel on the Land as mentioned below, Great Wonders does not carry out any other business and thus it does not have any contribution to the Group. Also, as the concession of the Land has not yet been granted, Great Wonders only has a net asset value of MOP$ 1 million (equivalent to approximately HK$0.97 million) representing its issued share capital as at the Latest Practicable Date. Subject to the grant of the concession of the Land by the Macau Government, the sole asset of Great Wonders will be the Land. Pursuant to the abovementioned development contract entered into by Great Wonders, the total investment amount for development of the hotel on the Land is approximately HK$1,448 million. As at 31st March 2005, Great Wonders had outstanding capital commitment for the development of the luxury hotel on the Land amounting to approximately HK$1,417 million.

The Land is a parcel of land with an area of 5,230 square meters located at Baixa da Taipa, Macau, described with the Land Registry Office of Macau under the no 21407, folio 125 of the Book B49. The Land is currently vacant and formerly owned by a joint venture company, which was held as to 50% by an Independent Third Party, as to 25% by STDM and as to 25% by a company of which STDM is a substantial shareholder (as defined under the Listing Rules) for residential use. This joint venture company had applied to the Macau Government to give up or renounce the rights and obligations relating to the Land for residential use in order to enable Great Wonders to apply to the Macau Government for a new concession relating to the Land for hotel use. Save for the payment of premium and compliance with usual development conditions on the Land, the Directors do not anticipate any specific conditions imposed on the new concession of the Land. The consideration payable by STDM to this joint venture company for such renunciation is HK$200 million and will be paid by installments by 1st September 2005. As disclosed in the circular of the Company relating to the Second Agreement dated 5th January 2005, the Land for residential use was valuated at HK$366 million by Jones Lang LaSalle Limited, an independent valuer as at 10th December 2004. To the best of the Directors’ knowledge, information and belief, the concession of the Land to Great Wonders would be granted on or before 1st September 2005. The Company will make separate announcement in case the Land, for whatever reason, is not granted by that date.

Great Wonders has entered into a development contract with an independent contractor to develop the hotel on the Land with a total investment amount of approximately HK$1,448 million, which was arrived at after arm’s length negotiations between the relevant parties and by reference to the estimation of the total investment costs for the project prepared by Levett & Bailey Chartered Quantity Surveyors Limited, an independent quantity surveyor engaged by Great Wonders for assessing the estimated market costs for developing a luxury hotel on the Land. In addition, the possible land premium payable by Great Wonders in relation to the new grant of the concession of the Land is estimated to be approximately MOP$230 million (equivalent to approximately HK$223 million). Taking into account of the respective attributable interests of 60% and 40% in Great Wonders held by the Company and PBL respectively (assuming the Third Agreement and the Great Wonders Agreement have been completed), the estimated capital commitment for developing the hotel on the Land to be shared between the Company and PBL will be approximately HK$868.80 million and HK$579.20 million according to their respective shareholdings and the estimated land premium to be shared between the Company and PBL will be approximately HK$133.80 million and HK$89.20 million respectively. As disclosed in the announcement of the Company regarding the Placing on 15th October 2004, the Company expected to apply approximately HK$207 million raised from the Placing in the Hospitality Business. The Company will consider various financing methods including debts/equity financing to fund the remaining balance of its share of the relevant capital commitment for the development of the Land and the land premium.

– 32 –

LETTER FROM SUN HUNG KAI

Independent Shareholders are advised to refer to the letter from the Board for the conditions precedent of the Third Agreement and should note that under the terms of the Third Agreement, if the concession of the Land is not granted to Great Wonders on or before 1st September 2005, the Company shall have the right to re-sell STDM’s 30% equity interests in Great Wonders to STDM. In such event, (i) STDM shall be obliged to re-purchase the 30% equity interests in Great Wonders from the Company; (ii) STDM shall repay the cash consideration previously paid by the Company; and (iii) the Company’s obligation to issue Consideration Shares to STDM shall cease and terminate immediately. In the event that the Company has decided to re-sell the 30% equity interests in Great Wonders to STDM, in such case, the Company will procure Melco Entertainment to re-sell such interests to the Company for the consideration previously paid by Melco Entertainment.

2. Reasons and benefits for entering into the Third Agreement and the Great Wonders Agreement

(a) Business of the Group

As stated in the letter from the Board, currently, the Group’s business is broadly divided into four divisions, namely (i) leisure and entertainment division; (ii) investment banking and financial services division; (iii) technology division; and (iv) property investment division. The leisure and entertainment division of the Group comprises the pursuance of the gaming business and the Hospitality Business through the JV Group and the operation of two floating restaurants, namely, Jumbo and Tai Pak, in Aberdeen, Hong Kong.

(b) Future prospects of the Hospitality Business and gaming business in Macau

Base on the Directors’ reasons and belief on future prospects of the Hospitality Business and gaming business in Macau as set out in the letter from the Board, and our analysis on the tourism industry and operating environment of Great Wonders in Macau as set out under the paragraph headed “3. Operating environment of Great Wonders” below, we concur with the Directors to hold an optimistic view in respect of the future prospects of the Hospitality Business and gaming business in Macau.

(c) Complete buyout of STDM’s interests in Great Wonders by the JV Group

Subject to the completions of the Third Agreement and the Great Wonders Agreement, the respective attributable interests in Great Wonders owned by the Company and PBL will be increased from 42% and 28% respectively to 60% and 40% respectively and STDM will cease to have any equity interest in Great Wonders. It is stated in the letter from the Board that the Directors consider that a complete buyout of STDM’s interests in Great Wonders will enable the JV Group to consolidate the entire results, assets and liabilities of Great Wonders and hence, the Hospitality Business and based on the above belief in the potential business prospects in Macau, the Directors are of the view that a higher effective interest in Great Wonders obtained by the Company pursuant to the Third Agreement and the Great Wonders Agreement will contribute to the improvement of return for the Shareholders.

With reference to the annual report of the Company for the financial year 2004, revenues derived from leisure and entertainment business for each of the two years ended 31st December 2004 were approximately HK$54.9 million and approximately HK$123.0 million, respectively, represented an annual growth rate of approximately 124%. In view of the fact that the Group’s leisure and entertainment

– 33 –

LETTER FROM SUN HUNG KAI

business experienced rapid growth during the preceding year and the Directors’ belief in the future prospect of the Hospitality Business and gaming business in Macau, we concur with the Directors’ view that a higher effective interest in Great Wonders obtained by the Company pursuant to the Third Agreement and the Great Wonders Agreement will potentially contribute to the improvement of return for the Shareholders barring any unforeseen adverse circumstances.

(d) Acquisition of the entire issued share capital of Great Wonders by various tranches

As state in the letter from the Board, the Directors consider that the main reasons for the acquisition of the entire issued share capital of Great Wonders by various tranches (rather than by an one-off transaction) are as follows:

(i) at the time when the Company entered into the First Agreement regarding the acquisition of 50% equity interests in Great Wonders from STDM, it had the intention to jointly develop the Land with STDM with a view to tapping into the continuing growth of the leisure, entertainment and gaming businesses in Macau;
(ii) in contemplation of the establishment of the JV Group with PBL, the Directors considered that it would be in the best interest of the Company and the Shareholders to increase the Company’s shareholdings in Great Wonders upon the same time as the formation of the JV Group for the purpose of minimizing the relevant dilution effect thereon that would be brought by the formation of the JV Group and as such, the Company entered into the Second Agreement regarding the acquisition of an additional 20% equity interests in Great Wonders from STDM; and
(iii) after formation of the JV Group, the Directors and the directors of Melco PBL Holdings consider there will be a commercial advantage in rationalizing the shareholding structure of Great Wonders via a complete buyout of STDM’s equity interests therein thereby enhancing its operational efficiency and strengthening the cooperation between the Company and PBL in pursuing the Hospitality Business, in particular, fulfilling the terms and spirit of the Subscription Agreement and the Shareholders Deed to have all gaming, entertainment and hospitality ventures and businesses in the Greater China region effectively owned as to 60% by the Company and 40% by PBL through the JV Group. As a result and with the financial support by the JV Group, the Company entered into the Third Agreement regarding the acquisition of the remaining 30% equity interests in Great Wonders from STDM.

We believe that the entering into leisure, entertainment and gaming business in Macau could bring in investment opportunities but also risk to the Shareholders. For details of uncertainties associated with the investment in the Land and the Hospitality Business in Macau, please refer to the paragraph headed “6. Risks associated with the investment in the Land and the Hospitality Business” below. Accordingly, we believe that it was prudent for the Company to jointly develop the leisure, entertainment and gaming business in Macau with STDM or PBL so as to diversify its core business.

We concur with the Directors that there will be a commercial advantage in rationalizing the shareholding structure of Great Wonders via a complete buyout of STDM’s equity interests therein as it will allow the Company and PBL, via the JV Group to manage Great Wonders’ business operation more

– 34 –

LETTER FROM SUN HUNG KAI

efficiently without involving other party. We also concur with the Directors that the acquisition of Great Wonders can enhance the business relationship between the Group and PBL. In view of the capital contribution of US$163 million (equivalent to approximately HK$1,270 million) by PBL Asia to Melco PBL Holdings and PBL is a well-established operator of casino and the securities of PBL are listed on the Australian Stock Exchange, we consider the acquisition of Great Wonders can enhance the business relationship between the Group and PBL.

Taking into account (i) the potential risk and return on the investment in the Land and the Hospitality Business and (ii) the commercial advantage in relation to the acquisition of the entire issued share capital of Great Wonders, we consider the reasons for the acquisition of the entire issued share capital of Great Wonders by various tranches (rather than by an one-off transaction) provided by the Directors are fair and reasonable and the acquisition is in the interest of the Company and its Shareholders as a whole.

(e) Overall effect of the Third Agreement and the Great Wonders Agreement

The following table highlights the principal terms and conditions of the Third Agreement and the Great Wonders Agreement:

Third Agreement

Great Wonders Agreement

Parties STDM, as vendor The Company, as vendor The Company, as purchaser Melco Entertainment, as purchaser Interest to be acquired 30% equity interests in 30% equity interests in Great Wonders Great Wonders Consideration HK$400 million HK$400 million Term of payment (i) HK$200 million in cash HK$400 million in cash, payable payable upon completion of the upon completion of the Great Third Agreement and (ii) HK$200 Wonders Agreement, provided that million by way of allotment and if the concession of the Land has issue of the Consideration Shares not yet been granted on or before upon completion of the Third the relevant completion date, then Agreement or the actual date of half of the said consideration, the grant of the concession of the namely, HK$200 million will be Land by the Macau Government payable upon the actual date of grant to Great Wonders, whichever is of the concession of the Land by the the later. Macau Government to Great

HK$400 million in cash, payable upon completion of the Great Wonders Agreement, provided that if the concession of the Land has not yet been granted on or before the relevant completion date, then half of the said consideration, namely, HK$200 million will be payable upon the actual date of grant of the concession of the Land by the Macau Government to Great Wonders.

– 35 –

LETTER FROM SUN HUNG KAI

Third Agreement

Great Wonders Agreement

Conditions precedent

Completion of the Third Agreement is conditional on (i) the Independent Shareholders having approved, by way of poll, the transactions contemplated under the Third Agreement including the allotment and issue of the Consideration Shares at the EGM; and (ii) all necessary authorizations pursuant to the Listing Rules, including but not limited to the Listing Committee granting the listing of, and permission to deal in, the Consideration Shares, having been obtained.

Completion of the Great Wonders Agreement is conditional upon the fulfillment of the conditions precedent of the Third Agreement and the completion thereof.

Right to re-sell

If the concession of Land is not granted to Great Wonders on or before 1st September 2005, the Company shall have the right to re-sell STDM’s 30% shareholding in Great Wonders to STDM.

If the concession of Land is not granted to Great Wonders on or before 1st September 2005, and in the event that the Company has decided to re-sell the 30% equity interests in Great Wonders to STDM, in such case, the Company will procure Melco Entertainment to re-sell such interests to the Company for the consideration previously paid by Melco Entertainment.

As illustrated in the above table, the transactions under the Third Agreement and the Great Wonders Agreement are intended to be a back-to-back arrangement with substantial similar terms in relation to the (i) subject matter, namely 30% equity interests in Great Wonders; (ii) conditions precedent; (iii) the right to re-sell; and (iv) the amount of the consideration. Given the fact that on the one hand, part of the consideration of HK$200 million payable by the Company to STDM under the Third Agreement will be satisfied by way of issue of the Consideration Shares and on the other hand, the entire consideration of HK$400 million receivable by the Company from Melco Entertainment under the Great Wonders Agreement will be satisfied by way of cash financed from the internal resources of the JV Group, the overall effect of the two transactions will result in a net cash of HK$200 million provided by Melco Entertainment to the Company. For details of the overall financial effect of the Third Agreement and the Great Wonders Agreement to the Enlarged Group after completion of the Third Agreement and the Great Wonders Agreement, please refer to the section headed “Unaudited pro forma financial information on the Enlarged Group” as set out in Appendix IV to the Circular and the paragraph headed “7. Effect on the financial position of the Group” below.

– 36 –

LETTER FROM SUN HUNG KAI

As stated in the letter from the Board, the respective interests of 60% and 40% held by the Company and PBL in Great Wonders upon completion of the Third Agreement and the Great Wonders Agreement are in consistent with the shareholding structure of other joint venture companies within the JV Group indirectly held by the Company and PBL for the purpose of pursuing the Hospitality Business and other gaming business. After completion of the Great Wonders Agreement, Great Wonders will remain as a non wholly-owned subsidiary of the Company within the JV Group. In addition, the overall effect of the Third Agreement and the Great Wonders Agreement will increase the net asset value of the Enlarged Group as shown in the section headed “Unaudited pro forma financial information on the Enlarged Group” as set out in Appendix IV of the Circular. Therefore, we concur that the overall effect of the Third Agreement and the Great Wonders Agreement is in the interest of the Company and the Shareholders as a whole.

3. Operating environment of Great Wonders

As stated in the letter from the Board, the Directors hold an optimistic view on the future prospects of the Hospitality Business and gaming business in Macau. In order to assess the operating environment of Great Wonders, we have investigated the tourism industry in Macau by visitor arrivals during the period from 2002 to 2004.

Chart 1: Visitor arrivals in Macau during 2002 to 2004

==> picture [341 x 218] intentionally omitted <==

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

Number
3,000,000
Total Visitors
2,500,000
2,000,000
1,500,000 PRC Visitors
1,000,000
Hong Kong Visitors
500,000
0 Period
2002 Q1 2002 Q2 2002 Q3 2002 Q4 2003 Q1 2003 Q2 2003 Q3 2003 Q4 2004 Q1 2004 Q2 2004 Q3 2004 Q4
----- End of picture text -----

Source: Statistics and Census Service, Government of Macau Special Administrative Region

As shown in Chart 1 above, total number of visitors increased from approximately 11.5 million in 2002 to approximately 16.7 million in 2004, represented a compound annual growth rate of approximately 20% during the period. Total number of visitor arrivals in 2004 rose approximately 40% as compared with the year 2003. Furthermore, total number of visitors from mainland China and Hong Kong rose approximately 66% and 9%, respectively, in 2004 as compared with the year 2003. For each of the three years ended 31st December 2004, visitors from mainland China accounted for approximately 37%, 48% and 57%, respectively, of total number of visitor arrivals in Macau during the same period. The increase in influx of visitors from mainland China may be due to the relaxation of travel restrictions for individual

– 37 –

LETTER FROM SUN HUNG KAI

travelers from the PRC since mid-2003 and the continuous economic growth according to the information of National Bureau of Statistics of China. Since visitors from the PRC and Hong Kong accounted for a major proportion of total number of visitor arrivals during the period from 2002 to 2004 as shown in Chart 1 above, therefore, we agree that the proximity of Macau to the PRC and Hong Kong and the economic environment in the PRC and Hong Kong can bring in opportunities and prospects of the Hospitality Business and gaming business in Macau. We are of the view that the relaxation of travel restrictions for individual travelers from the PRC enhances the tourism industry as well as casinos and hotels business in Macau and provide a favourable operating environment for Great Wonders. Therefore, in considering the potential business prospects in Macau as abovementioned and as stated in the letter from the Board, a higher effective interest in Great Wonders allows the Company to further tapping into the growth potential as reflected in the current market trend of the leisure, entertainment and gaming business in Macau which is in the best interest of the Company and the Shareholders as a whole.

4. Basis of consideration

The consideration of HK$400 million for 30% equity interests in Great Wonders was arrived at after arm’s length negotiations between the Company and STDM with reference to (i) valuation of the Land at HK$1,100 million (the “Valuation”) revaluated by Savills (Hong Kong) Limited (formerly known as FPDSavills (Hong Kong) Limited), an independent valuer, on a hotel use basis as at 17th March 2005 (the “Valuation Date”), and (ii) the favourable operating environment of Great Wonders as described in the paragraph headed “3. Operating environment of Great Wonders” above.

(a) Comparison of values

In determining the consideration under the Third Agreement, the Directors note that:

by referring to the valuation of the Land for residential use of HK$366 million as at 10th December 2004 conducted by Jones Lang LaSalle Limited, an independent valuer, as disclosed in the circular of the Company dated 5th January 2005, the consideration of HK$400 million for 30% interest in the Land represents an approximately 264.30% premium over HK$109.8 million, being 30% of the valuation of the Land for residential use of HK$366 million as at 10th December 2004 according to the said valuation report;
the aggregate consideration of HK$556 million paid or payable by the Company under the Land Acquisition Agreements represents an approximately 51.91% premium over HK$366 million, being the valuation of the Land for residential use as at 10th December 2004;
the amount of HK$100 million previously paid by the Company for 50% equity interests in Great Wonders pursuant to the First Agreement represented an approximately 30.56% discount to HK$144 million, being 50% of the valuation of the Land for residential use of HK$288 million as at 5th August 2004 as disclosed in the circular of the Company dated 11th October 2004; and
the amount of HK$56 million previously paid by the Company for additional 20% equity interests in Great Wonders pursuant to the Second Agreement represented an approximately 23.50% discount to HK$73.2 million, being 20% of the valuation of the Land for residential use of HK$366 million as at 10th December 2004.

– 38 –

LETTER FROM SUN HUNG KAI

We note that the consideration previously paid by the Company for the 50% and 20% equity interests in Great Wonders pursuant to the First Agreement and the Second Agreement respectively which represented a discount of approximately 30.56% and 23.50%, respectively, to the aforesaid percentages of the valuations of the Land on a residential use basis as at 5th August 2004 and 10th December 2004, respectively as abovementioned.

In considering the fairness and reasonableness of the consideration of HK$400 million for 30% equity interests in Great Wonders, we note from the letter of the Board that the consideration of HK$400 million for 30% equity interests in Great Wonders represents an approximately 21.21% premium over HK$330 million, being 30% of the Valuation. Despite the fact that the 30% equity interests in Great Wonders is to be acquired at a premium by the Company pursuant to the Third Agreement if such acquisition is viewed as an isolated transaction, the Land Acquisition Agreements, if all completed, shall have the ultimate effect of vesting the entire equity interests in Great Wonders and the Land in the Company. The aggregate consideration of HK$556 million paid or payable by the Company under the Land Acquisition Agreements represents an approximately 49.45% discount to the Valuation. Since the grant of the new concession of the Land will be subject to a payment of land premium by Great Wonders to the Macau Government and although the Macau Government is still in the process of assessing the amount of such premium, based on the negotiations with the Macau Government so far, it is estimated by the Company that the land premium payable by Great Wonders upon the grant of the new concession of the Land shall be approximately MOP$230 million (equivalent to approximately HK$223 million). If taken into account this estimated land premium, the total costs for acquiring the Land shall be HK$779 million, which represents an approximately 29.18% discount to the Valuation. The Directors consider that it is fair and reasonable to take into account the aggregate consideration paid or payable pursuant to the Land Acquisition Agreements for the entire piece of the Land for the purposes of developing the Land in cooperation with PBL.

We have discussed with the Directors who hold the view that the 21.21% premium over HK$330 million, being 30% of the Valuation is justifiable due to the fact that the joint venture company established by, inter alia, STDM and an Independent Third Party had applied to the Macau Government to give up or renounce the rights and obligations relating to the Land for residential use in order to enable Great Wonders to apply to the Macau Government for a new concession relating to the Land for hotel use and that the Directors are of confidence in the potential prospects of the Hospitality Business. In addition, pursuant to the Third Agreement, the Company had been granted the right to re-sell the 30% equity interests in Great Wonders to STDM at the same consideration originally paid by the Company if the concession of the Land was not granted on or before 1st September 2005.

Accordingly, we concur with the Directors’ view that it is fair and reasonable to take into account the aggregate consideration paid or payable pursuant to the Land Acquisition Agreements for the entire piece of the Land. Upon such basis, we are of the view that the consideration under the Third Agreement arrived at after arm’s length negotiation between the parties thereto and is fair and reasonable to the Company and the Shareholders as a whole.

(b) Valuation on hotel use basis

As stated in the letter from the Board, as at the Latest Practicable Date, application has been made by Great Wonders to the Macau Government for the concession of the Land for the purpose of developing

– 39 –

LETTER FROM SUN HUNG KAI

a luxury hotel thereon in pursuance of the Hospitality Business. The Land for residential use was previously granted to a joint venture company established by, inter alia, STDM and an Independent Third Party. This joint venture company had applied to the Macau Government to give up or renounce the rights and obligations relating to the Land for residential use in order to enable Great Wonders to apply to the Macau Government for a new concession relating to the Land for hotel use. After Great Wonders making the relevant application, Great Wonders was informed by the Macau Government that it would commence processing of the application after expiry of the original grant of the Land for residential use to the said joint venture, which was 6th March 2005. As such, the respective valuations of the Land in respect of the First Agreement and the Second Agreement as contained in the circulars of the Company respectively dated 11th October 2004 and 5th January 2005 were conducted on the basis of residential use. After the original grant of the Land for residential use had expired on 6th March 2005, the application for the new concession of the Land for hotel use made by Great Wonders is currently under review by the Macau Government. To the best of the Directors’ knowledge, belief, information and having made all reasonable enquiries, save for the payment of premium and compliance with usual development conditions on the Land, the Directors do not anticipate any specific conditions imposed on the new concession of the Land and, the Macau Government shall have no objection to the change of usage of the Land from residential to hotel. C&C Advogados, the legal advisors of Macau to the Company, has advised the Company that it is expected that such new lease will be granted in due time by the Macau Government, subject to the payment of a premium and compliance with development conditions. As such, the Company considers that it is now appropriate to have the valuation of the Land re-assessed on the basis of hotel use.

As stated in the letter from the Board, Savills (Hong Kong) Limited has assessed the value of the Land based on different development conditions, inter alia, an international standard luxury hotel with casino. In view of the fact that the previous land grant (for residential use) of the Land has expired and Great Wonders is in the process of applying the conversion of the Land for hotel use, Savills (Hong Kong) Limited is of the view that valuation based on residential use is not relevant to the valuation of the Land. Under the current development proposal of the Land for hotel use by the Company and based on the view of Savills (Hong Kong) Limited as aforesaid, we are of the view that, valuation on the Land based on residential use carries no relevance in determining the fairness and reasonableness of the consideration of the Third Agreement.

(c) Valuation basis and assumptions

Based on our discussion with Savills (Hong Kong) Limited, we noted that for the Valuation, Savills (Hong Kong) Limited has confirmed that they have relied to a very considerable extent on the information provided by the Company and its legal advisers on Macau laws, C&C Advogados, regarding title of the Land, land tenure and premium arrangement for the land grant.

According to the valuation report set out in Appendix III of the Circular, Savills (Hong Kong) Limited has valued the property interest by residual method of valuation. They have employed the residual method of valuation in which the open market value of the property concerned is firstly established assuming newly completed based on the details of the development proposal provided to them as at the Valuation Date (i.e. gross development value of the property). Although there have been some hotel transactions in Macau recently, they are of different size, quality, market positioning and facilities as compared with the property. Savills (Hong Kong) Limited therefore did not rely on comparison method

– 40 –

LETTER FROM SUN HUNG KAI

in the assessment of gross development value. As confirmed by Savills (Hong Kong) Limited, the residual method of valuation is generally acknowledged as being a less reliable valuation method. The residual method is essentially a means of valuing land by reference to its development potential by deducting costs and developer’s profit from its estimated completed development value. It relies upon a series of assumptions by the valuer which produce an arithmetical calculation of the expected current sale value as at the valuation date of the property being developed or held for development or redevelopment. Please refer to notes (xi) and (xii) as set out in the valuation certificate in Appendix III of the Circular for details of this method.

In arriving at the Valuation, Savills (Hong Kong) Limited has made a number of assumptions, which include inter alia, (i) all consents, approvals and licenses from the relevant government authorities have been or will be granted without onerous conditions or delay; (ii) no structural survey has been made; (iii) no site investigation has been carried out to determine the suitability of the ground conditions or the services for any property development thereon; (iv) the owner of the property interests has enforceable title to the property interests; (v) the open market values for the hotel and casino portions of the property, assuming full completion under the development proposal as described, as at the Valuation Date, are HK$1,588,800,000 and HK$1,494,000,000 respectively; (vi) the total construction costs incurred as at the Valuation Date were HK$47,354,000, whilst the total unexpended construction costs as at the Valuation Date were HK$1,248,600,000; and (vii) the future professional fees, future interest charges, developer’s profit and contingency adopted in the residual valuation are approximately HK$74,900,000, HK$57,800,000, HK$462,400,000 and HK$55,300,000 respectively. For details of the assumptions on the Valuation, please refer to the valuation report on the Land as set out in Appendix III to the Circular.

We understand that Savills (Hong Kong) Limited has discussed with management of the Company about, among other things, the main reasons for the substantial increase in the Valuation as compared with the previous valuation of HK$366 million conducted by Jones Lang LaSalle Limited as at 10th December 2004, which include (i) change of use of the Land from residential to hotel; and (ii) the continuing rise in the property market in Macau, in particular, the value of hotel property.

In order to comply with note 1(b) to Rule 13.80 of the Listing Rules, we have searched through the websites of Macau Government and several independent valuers in relation to the property market in Macau. Although we cannot find any comparable market transactions for the Land, however according to a research report dated August 2004 and prepared by an independent valuer, we have noted that there was a 27.6% increase in property price in 2003 in Macau for new units that were completed since 2000. Nevertheless, the finding is not adequate for us to form a view to justify the substantial increase in the Valuation as compared with the previous valuation of HK$366 million conducted by Jones Lang LaSalle Limited as at 10th December 2004. It is mainly attributable to the reasons as set out below:

(i) The abovementioned report focused on overall property market in Macau, not specifically studied for hotel or residential market in Macau.
(ii) The report studied for the change in property market price in year 2003, which did not cover the Valuation Date, nor any other dates of previous valuations on the Land based on residential use.
(iii) The report studied for new units that were completed since 2000, however, the subject property on the Land is still under development.

– 41 –

LETTER FROM SUN HUNG KAI

In the course of our discussions with Savills (Hong Kong) Limited, nothing material has come to our attention that would lead us to believe that the Valuation was not prepared on a reasonable basis nor reflected estimates and assumptions which have not been arrived at after due and careful consideration.

Furthermore, we note that Savills (Hong Kong) Limited has confirmed that the valuation of the Land was conducted in compliance with the Guidance Notes on the Valuation of Property Assets published by the Hong Kong Institute of Surveyors, the relevant provisions of the Companies Ordinance and Chapter 5 of Listing Rules, and therefore, we consider that it is reasonable to take the view of the valuation on the basis of hotel use prepared by Savills (Hong Kong) Limited.

(d) Conclusion on the Valuation

Having considered that (i) the basis of the Valuation by Savills (Hong Kong) Limited; and (ii) the major assumptions adopted in the Valuation as set out in Appendix III to the Circular, we have no reasons to doubt the fairness and appropriateness of the assumptions, methodology and basis of valuation adopted by Savills (Hong Kong) Limited in arriving at the Valuation.

Having considered that (i) the aggregate consideration of HK$556 million paid or payable by the Company under the Land Acquisition Agreements represents an approximately 49.45% discount to the Valuation; (ii) the total costs for acquiring the Land (including the estimated land premium of approximately MOP $230 million) (equivalent to approximately HK$223 million) paid or payable by the Company amounted to approximately HK$779 million represents an approximately 29.18% discount to the Valuation and (iii) the consideration of HK$400 million for 30% equity interests in Great Wonders was arrived at after arm’s length negotiations between the Company and STDM even though it represents a premium of approximately 21.21% for 30% on the Valuation based on the reasons as stated in the paragraph headed “4(a) Comparison of values” above, we consider that the consideration is fair and reasonable in so far as the Company and the Independent Shareholders generally are concerned.

5. Financing sources

The cash consideration of HK$200 million payable by the Company to STDM will be financed from the internal resources of the Company. The Directors have confirmed that the Company has sufficient internal resources for the cash consideration of HK$200 million payable by the Company to STDM pursuant to the Third Agreement. As it is contemplated that the completion of Third Agreement will occur simultaneously with the completion of the Great Wonders Agreement, the Directors are of the view that the cash consideration of HK$400 million will be payable by Melco Entertainment to the Company.

We have reviewed the cash position of the Company, including its bank statements, and are satisfied with the Directors’ confirmation that the Company has sufficient internal resources for the cash consideration of HK$200 million payable by the Company pursuant to the Third Agreement.

– 42 –

LETTER FROM SUN HUNG KAI

The Company has shown us evidence such as bank statements in relation to its existing internal resources of HK$200 million. In addition, since the transactions under the Third Agreement and the Great Wonders Agreement are intended to be a back-to-back arrangement, and the entire consideration of HK$400 million receivable by the Company from Melco Entertainment under the Great Wonders Agreement will be satisfied by way of cash with the same financed from the internal resources of the JV Group, namely the capital contribution of US$163 million (equivalent to approximately HK$1,270 million) previously made by PBL Asia pursuant to the Subscription Agreement. Based on the above, in particular the cash position of the Group, we are satisfied that the Group has adequate financing resources to satisfy the consideration under the Third Agreement and the Great Wonders Agreement.

The issue price of each Consideration Share prior to the Share Subdivision is identical to the closing price of HK$18.00 per Original Share as quoted on the Stock Exchange on 17th March 2005, being the last trading day (the “Last Trading Day”) of the Original Shares immediately before the release of the announcement of the Company dated 22nd March 2005 regarding the Connected Transaction and the Great Wonders Agreement. Chart 2 below shows the issue price of HK$18.00 per Original Share as compared to the daily closing prices of the Original Shares as quoted on the Stock Exchange from 18th March 2004 to the Last Trading Day (the “Relevant Period”).

Chart 2: The closing price and the trading volume of the Original Share for the Relevant Period

==> picture [389 x 239] intentionally omitted <==

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

Turnover Closing price
(in million HK$) (in HK$)
1,000 20
900
800
15
700
600
500 10
400
300
5
200
100
0 0
2004/3/18 2004/4/1 2004/5/3 2004/6/1 2004/7/2 2004/8/2 2004/9/1 2004/10/4 2004/11/1 2004/12/1 2005/1/3 2005/2/1 2004/3/1 2005/3/17
----- End of picture text -----

Source: Bloomberg

As set out in Chart 2 above, closing prices of the Original Shares were below HK$18.00 on most of the trading days during the Relevant Period. It is noted that all the closing prices of the Original Shares on trading days during the period from 18th March 2004 up to and including 8th September 2004 (being the date of the First Agreement) were traded at prices equal to or below HK$2.675. Closing prices of the Original Shares on trading days during the period from 9th September 2004 up to and including

– 43 –

LETTER FROM SUN HUNG KAI

11th November 2004 (being the date of the Second Agreement) were between HK$2.65 and HK$11.40. Closing prices of the Original Shares on trading days during the period from 12th November 2004 up to and including the Last Trading Day were between HK$9.85 and HK$18.00 (save for twelve trading days on which closing prices of the Original Shares were between HK$18.05 to HK$19.70)

The issue price of each Consideration Share prior to the Share Subdivision represents:

no premium or discount to the closing price of HK$18.00 per Original Share as quoted on the Stock Exchange on the Last Trading Day;
a premium of approximately 0.17% to the average closing price of approximately HK$17.97 per Original Share as quoted on the Stock Exchange for the five consecutive trading days up to and including the Last Trading Day;
a premium of approximately 1.18% to the average closing price of approximately HK$17.79 per Original Share as quoted on the Stock Exchange for the ten consecutive trading days up to and including the Last Trading Day;
a premium of approximately 50.63% over the average closing price of approximately HK$11.95 per Original Share as quoted on the Stock Exchange from 1st September 2004 up to and including the Last Trading Day;
a premium of approximately 138.10% over the average closing price of approximately HK$7.56 per Original Share as quoted on the Stock Exchange during the Relevant Period;
a premium of approximately 579.25% over the net asset value of approximately HK$2.65 per Original Share, based on the audited consolidated net assets of the Company of approximately HK$1,225.5 million as at 31st December 2004 and the number of then Original Shares in issue;
a premium of approximately 455.56% over the unaudited pro forma adjusted consolidated net assets per Original Share of HK$3.24 based on the unaudited pro forma consolidated net assets of the Enlarged Group of approximately HK$1,854.5 million as set out in Appendix IV to this Circular and 1,144,660,762 Shares (originally 572,330,381 Original Shares) which had been in issue and issuable, comprising 1,122,438,540 Shares (originally 561,219,270 Original Shares) in issue as at the Latest Practicable Date and 22,222,222 Consideration Shares (originally 11,111,111 Original Shares) to be issued; and
a premium of approximately 1.12% over the closing price of the then Original Shares of HK$17.8 (equivalent to the closing price of the Shares of HK$8.90) on the Latest Practicable Date.

Although there are various alternatives for financing the consideration payable to STDM, in view of the fact that the net asset value of the Group will increase from approximately HK$2.65 per Original Share (based on the audited consolidated net assets of the Company of approximately HK$1,225.5 million as at 31st December 2004 and the number of then Original Shares in issue) to approximately

– 44 –

LETTER FROM SUN HUNG KAI

HK$3.24 per Original Share (based on the unaudited proforma consolidated net assets of the Enlarged Group of approximately HK$1,854.5 million as set out in Appendix IV to this Circular and 1,144,660,762 Shares (originally 572,330,381 Original Shares) which had been in issue and issuable, comprising 1,122,438,540 Shares (originally 561,219,270 Original Shares) in issue as at the Latest Practicable Date and 22,222,222 Consideration Shares (originally 11,111,111 Original Shares) to be issued, we consider that the consideration including both cash and Consideration Shares pursuant to the Third Agreement is in the interest of the Company and the Shareholders a whole.

Based on the respective closing prices per Original Share of HK$18.00 on the Last Trading Day and HK$8.90 per Share on the Latest Practicable Date, the Consideration Shares had a respective market values of approximately HK$200.0 million and HK$197.8 million.

Taking into account the fact that the issue price of each Consideration Share is above the closing prices of then Original Shares on most of the trading days during the Relevant Period and the premiums represented by the issue price of each Consideration Share as stated above, we consider that the issue price of each Consideration Share is fair and reasonable in so far as the Shareholders generally are concerned.

6. Risks associated with the investment in the Land and the Hospitality Business

Notwithstanding the potential significant benefits brought along from the Connected Transaction, we consider that there are uncertainties associated with the investment in the Land and the Hospitality Business in Macau and these uncertainties and risks include the followings:

(a) The Group may not be able to fund the payment of the outstanding investment cost on the hotel as mentioned in the paragraph headed “1. Information on Great Wonders and the Land” above and other future development costs. In such event, the Group may issue additional share capital or debt securities for financing. If the Group issues additional share capital in future, the shareholding interests for existing Shareholders may be diluted. If the Group issues debt securities in future, the gearing ratio on the Group may be increased and the cost of capital for further financing in future may be increased.
(b) The time as to when the Group can and will launch the Hospitality Business is subject to change. Therefore, the Hospitality Business may not be carried on schedule as expected and profit contribution by Great Wonders to the Group may not be realized as the Company has currently expected.
(c) Keen competition in the hospitality industry arising from potential new players in Macau may affect the operating results of the Group. Should the number of competitors in the hospitality industry in Macau increase in future, the operating results of the Hospitality Business may be adversely affected.

Accordingly, we would like to point out that there are potential risks and benefits associated with the investment in the Land and the Hospitality Business. The Hospitality Business may or may not perform as projected, which will significantly affect the Group’s financial performance. The Connected Transaction will, therefore, further change in the risk profile of the Group’s businesses, which may or

– 45 –

LETTER FROM SUN HUNG KAI

may not accord with the risk/return preferences of individual Shareholders. Individual Shareholders should evaluate the potential risks and benefits associated with the investment in the Land and the Hospitality Business carefully. In view of the fact that the Directors hold an optimistic view in respect of the future prospects of the Hospitality Business and gaming business in Macau and terms of consideration on the Land are made after reasonable care and enquiry by the Directors, we consider that the decision on the investment in Hospitality Business is made by the Directors in the best interest of the Company and Shareholders as a whole.

7. Effect on the financial position of the Group

(a) Indebtedness and gearing ratio

As at 31st December 2004, the Group had total outstanding borrowings of approximately HK$183.2 million, comprising unsecured bank borrowings and overdrafts of approximately HK$15.0 million, convertible notes of approximately HK$145.0 and loan of HK$23.2 from related parties. As at 31st December 2004, total asset of the Group was approximately HK$1,584.8 million and shareholders’ funds was approximately HK$1,225.5 million. Gearing ratio, expressed as a percentage of total borrowings over shareholders’ funds, was approximately 15% as at 31st December 2004. As no borrowing will be incurred or convertible securities will be issued pursuant to the Third Agreement, there is no change on indebtedness of the Group immediately after entering into the Third Agreement. On the other hand, the issue and allotment of the Consideration Shares increases shareholders’ funds by HK$200 million. With reference to the pro forma consolidated net asset and the total outstanding borrowings of the Enlarged Group as set out in Appendix IV to the Circular amounted to approximately HK$1,854.5 million and approximately HK$239.2 million, respectively, the gearing ratio of the Group will reduce to approximately 13% after completion of the Third Agreement and the Great Wonders Agreement.

(b) Net asset value

It is stated in the 2004 annual report of the Company that the net asset value of the Group amounted to approximately HK$1,225.5 million. Based on the then Original Shares in issue of 463,244,000 Shares, the net asset value of the Group as at 31st December 2004 was approximately HK$2.65 per Original Share. After completion of the Third Agreement and the Great Wonders Agreement, the unaudited pro forma consolidated net assets of the Enlarged Group was approximately HK$1,854.5 million as set out in Appendix IV to this Circular. Taking into account of the Consideration Shares to be issued, the net asset value per Original Share of the Group will increase from approximately HK$2.65 to approximately HK$3.24.

8. Dilution effect on the interests of Independent Shareholders

A table showing the changes in the shareholding of the Company as a result of the issue of the Consideration Shares is set out on page 17 under the paragraph headed “Changes to the shareholding structure of the Company as a result of the issue of the Consideration Shares” in the letter from the Board. The Consideration Shares represent approximately 1.98% of all existing issued Shares and approximately 1.94% of the enlarged issued share capital of the Company immediately after the allotment and issue of the Consideration Shares (assuming no additional new Shares (except for the Consideration Shares) would be issued immediately after the Latest Practicable Date and up to the date of issue of the Consideration Shares).

– 46 –

LETTER FROM SUN HUNG KAI

The shareholding interests of public Shareholders will be reduced from approximately 53.84% as at the Latest Practicable Date to approximately 50.01% upon conversion of the Convertible Bonds in full and allotment and issue of the Consideration Shares. Given the issue price of the Consideration Shares prior to the Share Subdivision represents a premium of approximately 579.25% over the net asset value per Original Share of approximately HK$2.65, based on the audited net asset value of the Group as at 31st December 2004 and the number of then Original Shares in issue and benefits brought to the Group by the Connected Transaction as discussed in the paragraph headed “2. Reasons and benefits for entering into the Third Agreement and the Great Wonders Agreement” above, we consider that the potential dilution of public Shareholders from approximately 53.84% as at the Latest Practicable Date to utmost approximately 50.01% to be acceptable. We consider that the overall financial impacts on the issue of Consideration Shares in relation to gearing ratio and net asset value are favourable to the Shareholders, therefore, the potential dilution of shareholding interest for public Shareholders is offset by the abovementioned financial impacts to the Group and is in the best interests of the Company and Shareholders as a whole.

RECOMMENDATION

Having taken into account the above factors and reasons, we consider that the terms of the Connected Transaction, are fair and reasonable as far as the interests of the Independent Shareholders are concerned and are in the interests of the Company and its Shareholders as a whole. Accordingly, we recommend the Independent Board Committee to advise the Independent Shareholders to vote at the EGM in favour of the resolutions in relation to the Connected Transaction.

Yours faithfully, For and on behalf of

Sun Hung Kai International Limited Eric Shum Director

– 47 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

1. THREE-YEAR FINANCIAL SUMMARY

Set out below is a summary of the audited consolidated income statements of the Group for each of the three years ended 31st December 2004 as extracted from the Company’s audited financial statements for each of the three years ended 31st December 2004.

Consolidated Profit and Loss Account

For the year ended 31st December 2004

Note
Turnover
2
Other revenues
2
Other (loss)/income
3
Cost of inventories sold
Staff costs (including directors’ emoluments)
10
Depreciation of fixed assets
Amortisation of trading rights
Amortisation of goodwill
Gain on disposal of investment properties
14(d)
Commission expense
Other operating expenses
31(d)
Total operating expenses
Operating profit/(loss)
4
Finance costs
5
Profit/(loss) before taxation
Taxation
6
Profit/(loss) after taxation
Minority interests
Profit/(loss) attributable to shareholders
7
Dividends
8
Basic earnings/(loss) per share (HK cents)
9
Fully diluted earnings/(loss) per share (HK cents)
9

2004
2003
2002
HK$’000
HK$’000
HK$’000
408,076
165,263
82,838
8,102
4,267
4,084
(2,113)
10,186
–
(157,183)
(36,703)
(24,159)
(107,120)
(76,499)
(55,747)
(17,683)
(16,154)
(5,927)
(507)
(464)
–
–
(2,614)
–
57,176
–
–
(50,607)
(26,088)
–
(61,809)
(51,968)
(39,219)
(337,733)
(210,490)
(125,052)
-------------- -------------- --------------
76,332
(30,774)
(38,130)
(4,199)
(2,007)
–
72,133
(32,781)
(38,130)
(2,490)
(1,201)
–
69,643
(33,982)
(38,130)
(4,486)
7,648
2,534
65,157
(26,334)
(35,596)
8,451
–
–
20.06
(15.89)
(27.1)
18.33
N/A
N/A

– 48 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

2. AUDITED FINANCIAL INFORMATION

Set out below are the audited consolidated income statements of the Group for each of the two years ended 31st December 2004 and the consolidated balance sheets as at 31st December 2003 and 31st December 2004 together with the relevant notes thereto as extracted from the Group’s audited financial statements set out in the Company’s annual report for the year ended 31st December 2004.

Consolidated Profit and Loss Account

For the year ended 31st December 2004

Note Turnover 2 Other revenues 2 Other (loss)/income 3 Cost of inventories sold Staff costs (including directors’ emoluments) 10 Depreciation of fixed assets Amortisation of trading rights Amortisation of goodwill Gain on disposal of investment properties 14(d) Commission expense Other operating expenses 31(d) Total operating expenses Operating profit/(loss) 4 Finance costs 5 Profit/(loss) before taxation Taxation 6 Profit/(loss) after taxation Minority interests Profit/(loss) attributable to shareholders 7 Dividends 8 Basic earnings/(loss) per share (HK cents) 9 Fully diluted earnings/(loss) per share (HK cents) 9	2004 HK$’000 408,076 8,102 (2,113) (157,183) (107,120) (17,683) (507) – 57,176 (50,607) (61,809) (337,733) -------------- 76,332 (4,199) 72,133 (2,490) 69,643 (4,486) 65,157 8,451 20.06 18.33	2003 HK$’000 165,263 4,267 10,186 (36,703) (76,499) (16,154) (464) (2,614) – (26,088) (51,968) (210,490) -------------- (30,774) (2,007) (32,781) (1,201) (33,982) 7,648 (26,334) – (15.89) N/A

– 49 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated Balance Sheet

As at 31st December 2004

Note(s) Non-current assets Goodwill 12 Trading rights 13 Fixed assets 14 Investment in a jointly controlled entity 16 Investment securities 17 Pledged bank deposits 29 Long term deposits Other non-current assets Current assets Amount due from a jointly controlled entity 16 Inventories 18 Trade receivables 19, 31(b) Prepayments, deposits and other receivables 31(a), 31(b) Other investments 20 Amounts due from related companies 21 Tax recoverable Certificate of deposit Bank balances and cash Current liabilities Trade payables 22 Accrued liabilities and other payables 31(c) Taxation payable Finance lease payable 23 Short-term bank borrowings, unsecured Convertible notes due within one year 24 Net current assets Total assets less current liabilities Financed by: Share capital 25 Reserves 27 Shareholders’ funds Minority interests Non-current liabilities Rental deposits Convertible notes 24 Shareholders’ loan 31(d)(viii) Deferred tax liabilities 6	2004 HK$’000 389,937 2,786 204,174 100,000 27,754 177 14,780 547 740,155 -------------- 25,145 3,768 337,014 40,919 40,641 1,119 – 1,100 394,966 844,672 -------------- 60,462 35,153 1,888 817 15,000 22,500 135,820 -------------- 708,852 -------------- 1,449,007 463,244 762,233 1,225,477 75,616 – 122,500 23,158 2,256 1,449,007	2003 HK$’000 19,705 3,293 187,916 – 20,637 304 4,219 4,542
		240,616 -------------- – 4,137 236,390 9,150 40,638 429 387 – 142,771
		433,902 -------------- 110,538 39,575 – – – –
		150,113 --------------
		283,789 --------------
		524,405

		221,997 238,725
		460,722 62,952 407 – – 324
		524,405

– 50 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Balance Sheet

As at 31st December 2004

Note Non-current assets Fixed assets 14 Interest in subsidiaries 15 Investment in jointly controlled entity 16 Current assets Prepayments, deposits and other receivables Bank balances and cash Current liabilities Accrued liabilities and other payables Convertible notes due within one year 24 Net current assets Total assets less current liabilities Financed by: Share capital 25 Reserves 27 Shareholders’ funds Non-current liabilities Convertible notes 24	2004 HK$’000 – 918,761 100,000 1,018,761 -------------- 124 279,287 279,411 -------------- 1,108 22,500 23,608 -------------- 255,803 -------------- 1,274,564 463,244 688,820 1,152,064 122,500 1,274,564	2003 HK$’000 – 389,624 –
		389,624 -------------- 673 15,440
		16,113 -------------- 3,742 –
		3,742 --------------
		12,371 --------------
		401,995

		221,997 179,998
		401,995 –
		401,995

– 51 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated Statement of Changes in Equity

For the year ended 31st December 2004

Note(s) Total equity as at 1st January Surplus on revaluation of properties, not recognised in the profit and loss account 27 Profit/(loss) for the year 27 Realisation of investment properties revaluation reserve upon disposal 27 Issue of rights shares, including share premium 25, 27 Issue of shares, including share premium 25, 27 Share issue expenses 27 Exercise of share options 25, 27 Dividends paid 8, 27 Total equity as at 31st December	2004 HK$’000 460,722 – 65,157 (56,176) – 759,191 (16,576) 16,935 (3,776) 1,225,477	2003 HK$’000 376,124 3,734 (26,334) – 105,333 – (2,441) 4,306 – 460,722

– 52 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated Cash Flow Statement

For the year ended 31st December 2004

Note(s) Net cash used in operation 28(a) Hong Kong profits tax refund/(paid) Net cash outflow from operating activities Investing activities Purchase of subsidiaries in 2003 28(c)(ii) Purchase of subsidiaries in 2004 28(c)(i) Direct expenses incurred for acquisition of additional interests of subsidiaries in Technology segment 28(d) Proceeds from partial disposal of investment in a subsidiary Interest income from authorised financial institutions Dividend income Purchase of fixed assets Decrease/(increase) in pledged bank deposits Proceeds from disposal of investment property Proceeds from disposal of other fixed assets Purchase of investment securities Purchases of other investments less proceeds from subsequent disposals Disposal of other investments acquired in previous years Increase in amount due from a jointly controlled entity Increase in long term deposits Decrease/(increase) in other non-current assets Net cash inflow/(outflow) from investing activities Net cash outflow before financing Financing activities Proceeds from exercise of share options 28(b) Proceeds from issue of rights shares 28(b) Proceeds from issue of shares 28(b) Share issuance expenses 28(b) Interest paid Repayment of finance lease 28(b) Repayment of bank loan 28(b) Short-term bank borrowings, net 28(b) Dividend paid Repayment of former shareholders’ loans 28(b) Increase in shareholders’ loan 28(b) Net cash inflow/(outflow) from financing Increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of year Cash and cash equivalents at the end of year Analysis of balances of cash and cash equivalents Bank balances and cash Time deposits with original maturity of less than three months when acquired	2004 HK$’000 (154,349) 849 (153,500) -------------- – 10,265 (250) – 446 938 (49,770) 127 83,000 2,168 (4,000) (2,112) – (25,145) (10,561) 405 5,511 -------------- (147,989) -------------- 16,935 – 394,680 (16,576) (4,199) (482) – 15,000 (3,776) (24,556) 23,158 400,184 -------------- 252,195 142,771 394,966 136,719 258,247 394,966	2003 HK$’000 (43,931) (877) (44,808) -------------- 22,142 – – 4,200 712 200 (8,366) (184) – 326 (19,837) (30,452) 4,000 – – (3,247) (30,506) -------------- (75,314) -------------- 4,306 105,333 – (2,441) (2,007) – (106,335) – – – – (1,144) -------------- (76,458) 219,229 142,771 125,770 17,001 142,771

– 53 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Notes to the Accounts

1. Principal accounting policies

The principal accounting policies adopted in the preparation of these accounts are set out below:

(a) Basis of preparation

The accounts have been prepared in accordance with accounting principles generally accepted in Hong Kong and comply with accounting standards issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”). They have been prepared under the historical cost convention except the other investments and the investment properties which are carried at fair value as described below.

The HKICPA has issued a number of new and revised Hong Kong Financial Reporting Standards and Hong Kong Accounting Standards (“New HKFRSs”) which are effective for accounting period beginning on or after 1st January 2005. The Group has not early adopted these New HKFRSs in the accounts for the year ended 31st December 2004 except for Hong Kong Financial Reporting Standard No. 3 “Business Combination” (“HKFRS 3”), Hong Kong Accounting Standard No. 36 “Impairment of Assets” (“HKAS 36”) and Hong Kong Accounting Standard No. 38 “Intangible Assets” (“HKAS 38”). The Group has already commenced an assessment of the impact of the remaining new HKFRSs but is not yet in a position to state whether these new HKFRSs would have a significant impact on its results of operations and financial position.

The early adoption of HKFRS 3 has resulted in a prospective change in the accounting policy for goodwill and negative goodwill. Up to 31st December 2003, goodwill was amortised using the straightline method over its estimated useful life of 10 years. Where an indication of impairment exists, the carrying amount of goodwill is assessed and written down immediately to its recoverable amount. With the adoption of HKFRS 3, the Group has ceased to amortise goodwill from 1st January 2004 and accumulated amortisation as at 31st December 2003 has been eliminated with a corresponding decrease in the cost of goodwill. From 1st January 2004 onwards, goodwill is tested annually for impairment, as well as when there are indications of impairment. The Group has reassessed the useful lives of its other intangible assets and no adjustment has resulted from this reassessment.

Up to 31st December 2003, negative goodwill is presented in the same balance sheet classification as goodwill. To the extent that negative goodwill relates to expectations of future losses and expenses that are identified in the Group’s plan for the acquisition and can be measured reliably, but which do not represent identifiable liabilities at the date of acquisition, that portion of negative goodwill is recognised in the profit and loss account when the future losses and expenses are recognised. Any remaining negative goodwill, not exceeding the fair values of the non-monetary assets acquired, is recognised in the profit and loss account over the remaining weighted average useful life of those assets; negative goodwill in excess of the fair values of those non-monetary assets is recognised in the profit and loss account immediately. From 1st January 2004 onwards, negative goodwill is recognised immediately to the profit and loss account after assessment of the identifiable assets, liabilities and contingent liabilities of the business combination.

The effect of adopting these new policies is set out in Note 1(f) below.

The early adoption of HKAS 36 and HKAS 38 have no material impact to the accounts of the Group.

The principal accounting policies below have taken into account the adoption of the new standards.

(b) Consolidation

The consolidated accounts include the accounts of the Company and its subsidiaries made up to 31st December. The results of subsidiaries acquired or disposed of during the year are included in the consolidated profit and loss account 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 are eliminated on consolidation.

Minority interests represent the interests of outside shareholders in the operating results and net assets of subsidiaries.

– 54 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

1 Principal accounting policies (Continued)

(c) Subsidiaries

Subsidiaries are those entities in which the Company, directly or indirectly, controls the composition of the board of directors, controls more than half of the voting power or holds more than half of the issued share capital.

In the Company’s balance sheet, investments in subsidiaries are stated at cost less accumulated impairment losses. The results of subsidiaries are accounted for by the Company on the basis of dividends received and receivable.

(d) Jointly controlled entity

A jointly controlled entity is a contractual arrangement whereby the Group and other parties undertake an economic activity which is subject to joint control and none of the participating parties has unilateral control over the economic activity. The consolidated balance sheet includes the Group’s share of net assets of the jointly controlled entity and goodwill/negative goodwill on acquisition.

In the Company’s balance sheet, the investments in jointly controlled entity are stated at cost less provision for impairment losses. The results of the jointly controlled entity are accounted for by the Company on the basis of dividends received and receivable.

(e) Revenue recognition

Revenue from leasing of electronic gaming machines and provision of ancillary management services to the lessees is recognised on an accrual basis in accordance with the contractual terms of the respective leasing agreements.

Revenue from the provision of catering services, technology consultation services, management fees and investment banking and financial services; and underwriting commission income are recognised when the services are rendered.

Revenue from sales of computer hardware and software are recognised over the period of the contract based on the percentage of completion method, which is measured by reference to the costs incurred to date as a percentage of total estimated costs for each contract.

Revenue from the sale of other products is recognised on the transfer of risks and rewards of ownership, which generally coincides with the time when the goods are delivered to customers and title has passed.

All transactions related to securities trading, futures and options contracts dealings and the related commission income are recorded in the accounts based on trade dates. Accordingly, only those transactions whose trade dates fall within the accounting period have been taken into account.

Operating lease rental income is recognised on a straight-line basis over the lease terms.

Interest income from authorised financial institutions are recognised on a time proportion basis, taking into account the principal amounts outstanding and the interest rates applicable.

Dividend income is recognised when the right to receive payment is established.

(f) Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the identifiable assets, liabilities and contingent liabilities of the acquired subsidiaries at the date of acquisition.

Prior to 1st January 2004, goodwill on acquisition is amortised using the straight-line method over its estimated useful life of 10 years. Where an indication of impairment exists, the carrying amount of goodwill is assessed and written down immediately to its recoverable amount.

On 1st January 2004, the Group has early adopted HKFRS 3 issued by HKICPA. All changes in the accounting policies have been made prospectively. There was no impact on opening retained earnings at 1st January 2004 from the adoption of HKFRS 3. Goodwill amortisation of approximately HK$22,633,000 was not charged for the year ended 31st December 2004 upon the adoption of HKFRS 3. Instead, goodwill will be tested at least annually for impairment.

– 55 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

1 Principal accounting policies (Continued)
(f) Goodwill (Continued)

Goodwill is allocated to cash-generating units for the purpose of impairment testing. Each of those cashgenerating units represents the Group’s primary reporting segment. An impairment loss is recognised for the amount by which the goodwill’s carrying amount exceeds its recoverable amount.

Negative goodwill represents the excess of the fair value of the Group’s share of the net identifiable assets, liabilities and contingent liabilities acquired over the cost of acquisition. As a result of the early adoption of HKFRS 3, the negative goodwill will be recognised to the profit and loss account.

(g) Trading rights

Trading rights, representing rights to trade on The Stock Exchange of Hong Kong Limited (“SEHK”) and Hong Kong Futures Exchange Limited (“HKFE”). They are stated at cost and amortised using the straightline method over its estimated useful life of 10 years from 6th March 2000, the effective day of the merger of the SEHK, HKFE and Hong Kong Securities Clearing Company Limited.

Trading rights are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the trading rights’ carrying amount exceeds its recoverable amount. The recoverable amount is the higher of its fair value less costs to sell and value in use. For the purposes of assessing impairment, trading rights are grouped at the lowest levels for which these are separately identifiable cashflows (cash generating units).

(h) Fixed assets

(i) Investment properties

Investment properties are interests in land and buildings in respect of which construction work and development have been completed and which are held for their investment potential and rental income being negotiated at arm’s length.

Investment properties are not depreciated and are stated at their open market values on the basis of annual professional valuations performed at the end of each financial year. Changes in the value of investment properties are dealt with as movements in the investment property revaluation reserve. If the total of the reserve is insufficient to cover a deficit, on a portfolio basis, the excess of the deficit is charged to the profit and loss account. Any subsequent revaluation surplus is credited to the profit and loss account to the extent of the deficit previously charged.

Upon the disposal of an investment property, the relevant portion of the revaluation reserve realised in respect of previous valuations is released from the investment properties revaluation reserve to the profit and loss account.

(ii) Construction in progress

Construction in progress are investments in restaurant and vessels on which construction and renovation work has not been completed. The construction in progress are carried at cost which includes development and construction expenditure incurred and other direct costs attributable to the development less any accumulated impairment losses. On completion, the construction in progress are transferred to the respective categories of fixed assets at cost less accumulated impairment losses.

(iii) Other fixed assets

Other fixed assets are stated at cost less accumulated depreciation and accumulated impairment losses.

– 56 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

1 Principal accounting policies (Continued)
(h) Fixed assets (Continued)
- (iv) Depreciation

Investment properties held on leases with unexpired periods of 20 years or less are depreciated over the remaining portion of the leases.

Leasehold land of other properties is depreciated over the period of the lease while other fixed assets are depreciated at rates sufficient to write off their cost less accumulated impairment losses over their estimated useful lives on a straight- line basis. The principal annual rates are as follows:

Restaurants, vessels, ferries and pontoons 5% to 10% Long term leasehold land over the lease terms Long term leasehold buildings 2.5% Leasehold improvements 20% or over the lease terms, whichever is shorter Furniture, fixtures and equipment 10% to 20% Machinery 10% Motor vehicle 20%

Improvements are capitalised and depreciated over their expected useful lives to the Group.

(v) Impairment and gain or loss on sale

At each balance sheet date, both internal and external sources of information are considered to assess whether there is any indication that the tangible and intangible assets are impaired. If any such indication exists, the recoverable amount of the asset is estimated and where relevant, an impairment loss is recognised to reduce the asset to its recoverable amount. Such impairment losses are recognised in the profit and loss account except where the asset is carried at valuation and the impairment loss does not exceed the revaluation surplus for that same asset, in which case it is treated as a revaluation decrease.

The gain or loss on disposal of a fixed asset other than investment properties is the difference between the net sales proceeds and the carrying amount of the relevant asset, and is recognised in the profit and loss account.

(i) Investments in securities

(i) Investment securities

Investment securities are stated at cost less any impairment losses.

The carrying amounts of individual investments are reviewed at each balance sheet date to assess whether the fair values have declined below the carrying amounts. When a decline other than temporary has occurred, the carrying amount of such securities will be reduced to its fair value. The impairment loss is recognised as an expense in the profit and loss account. This impairment loss is written back to the profit and loss account when the circumstances and events that led to the write-downs or write-offs cease to exist and there is persuasive evidence that the new circumstances and events will persist for the foreseeable future.

(ii) Other investments

Other investments are carried at fair value. At each balance sheet date, the net unrealised gains or losses arising from the changes in fair value of other investments are recognised in the profit and loss account. Profits or losses on disposal of other investments, representing the difference between the net sales proceeds and the carrying amounts, are recognised in the profit and loss account as they arise.

– 57 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

1 Principal accounting policies (Continued)

(j)

Inventories

Stocks are stated at the lower of cost and net realisable value. Cost, calculated on the first-in, first-out basis, comprises all costs of purchase, cost of conversion and other costs incurred in bringing the inventories to their present location and condition. Net realisable value is determined on the basis of anticipated sales proceeds less estimated selling expenses.

(k) Contracts in progress

Contract revenue and contract costs are recognised based on the percentage of completion method as detailed in note 1(e). When the outcome of a contract cannot be estimated reliably, contract revenue is recognised only to the extent of contract costs incurred that it is probable will be recoverable. When it is probable total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately.

The aggregate of the cost incurred and the profit/loss recognised on each contract is compared against the progress billings up to the year-end. Where costs incurred and recognised profits (less recognised losses) exceed progress billings, the balance is shown as due from customers on contracts, under current assets. Where progress billings exceed costs incurred plus recognised profits (less recognised losses), the balance is shown as due to customers on contracts, under current liabilities. Costs incurred in the period in connection with future activity on a contract are excluded and shown as work-in-progress included in inventories.

Amounts due from customers on contracts are included in prepayments, deposits and other receivables.

(l) Trade receivables

Impairment losses are made against trade receivable to the extent they are considered to be doubtful. Trade receivables in the balance sheet are stated net of such impairment losses.

(m) Cash and cash equivalents

Cash and cash equivalents are carried in the balance sheet at cost. For the purposes of the cash flow statement, cash and cash equivalents comprise cash on hand, deposits held at call with banks, cash investments with a maturity of three months or less from date of investment and bank overdrafts.

(n) Provisions

Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. Where the Group expects a provision to be reimbursed, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain.

(o)

Employee benefits

(i) Pension obligations

The Group operates a mandatory provident fund and a defined contribution scheme, the assets of which are held in separate trustee-administered funds. The mandatory provident fund is funded by the Group and the employee. The defined contribution scheme is funded by the Group.

The Group’s contributions to both retirement benefits schemes are expensed as incurred. The Group’s mandatory contributions to the mandatory provident fund are vested immediately. The Group’s contributions to the defined contribution scheme are reduced by contributions forfeited by those employees who leave the scheme prior to vesting fully in the contributions.

– 58 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

1 Principal accounting policies (Continued)

(o) Employee benefits (Continued)
(ii) Employee leave and long service payment entitlements

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

Employee entitlements to sick leave and maternity leave are not recognised until the time such leave is taken.

(iii) Profit sharing and bonus plans

The expected costs of profit sharing and bonus payments are recognised as a liability when the Group has a present legal or constructive obligation as a result of services rendered by employees and a reliable estimate of the obligation can be made.

Liabilities for profit sharing and bonus plans are expected to be settled within 12 months and are measured at the amounts expected to be paid when they are settled.

(p) Deferred taxation

Deferred taxation is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the accounts. Taxation rates enacted or substantively enacted by the balance sheet date are used to determine deferred taxation. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

Deferred taxation is provided on temporary differences arising on investments in subsidiaries except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future.

(q) Contingent liabilities and contingent assets

A contingent liability is a possible obligation that arises from past events and whose existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Group. It can also be a present obligation arising from past events that is not recognised because it is not probable that outflow of economic resources will be required or the amount of obligation cannot be measured reliably.

A contingent liability is not recognised but is disclosed in the notes to the accounts. When a change in the probability of an outflow occurs so that outflow is probable, it will then be recognised as a provision.

A contingent asset is a possible asset that arises from past events and whose existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Group.

A contingent asset is not recognised but is disclosed in the notes to the accounts, when necessary, when an inflow of economic benefits is probable. When inflow is virtually certain, an asset is recognised.

(r) Borrowing costs

Borrowing costs that are directly attributable to the acquisition of an asset that necessarily takes a substantial period of time to get ready for its intended use are capitalised as part of the cost of acquisition. All other borrowing costs are charged to the profit and loss account in the year in which they are incurred.

– 59 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

1 Principal accounting policies (Continued)

(s) Assets under leases

(i) Finance leases (where the Group is a lessee)

Leases that substantially transfer to the Group all the risks and rewards of ownership of assets are accounted for as finance leases. Finance leases are capitalised at the inception of the lease at the lower of the fair value of the leased assets or the present value of the minimum lease payments. Each lease payment is allocated between the capital and finance charges so as to achieve a constant rate on the capital balances outstanding. The corresponding rental obligations, net of finance charges, are included in long-term liabilities. The finance charges are charged to the profit and loss account over the lease periods.

Assets held under finance leases are depreciated over their estimated useful lives.

(ii) Operating leases (where the Group is a lessee)

Leases where substantially all the risks and rewards of ownership of assets remain with the leasing company are accounted for as operating leases. Payments made under operating leases net of any incentives received from the leasing company are charged to the profit and loss account on a straight-line basis over the lease periods.

(iii) Operating leases (where the Group is a lessor)

Assets leased out under operating leases are included in fixed assets in the balance sheet. They are depreciated over their expected useful lives on a basis consistent with similar owned fixed assets. The basis of revenue recognition for leasing income is set out in note 1(e) to the accounts.

(t) Translation of foreign currencies

Transactions in foreign currencies are translated into Hong Kong dollars at exchange rates ruling at the transaction dates. Monetary assets and liabilities expressed in foreign currencies at the balance sheet date are translated at rates of exchange ruling at the balance sheet date. Exchange differences arising in these cases are dealt with in the profit and loss account.

The balance sheet of subsidiaries expressed in foreign currencies are translated in Hong Kong dollars at the rates of exchange ruling at the balance sheet date whilst the profit and loss account is translated at an average rate. Exchange differences in this case are dealt with as a movement in reserves.

(u) Segregated accounts

Segregated accounts maintained by the Group to hold clients’ monies are treated as off- balance sheet items. As at 31st December 2004, the Group maintained segregated accounts with HKFE Clearing Corporation Limited (“HKCC”) and the authorised financial institutions in conjunction with its futures and brokerage businesses as a result of its normal financial services business transactions with amounts of HK$1,390,000 (2003: HK$6,116,000) and HK$232,532,000 (2003: HK$249,349,000), respectively, which are not otherwise dealt with in the accounts.

(v) Legal reserve

All entities incorporated in Macau are required to set aside a minimum of 10% of the entity’s profit after taxation to the legal reserve until the balance of the legal reserve reaches a level equivalent to 50% of the entity’s share capital in accordance with the provisions of the Macau Commercial Code. Such legal reserve represents an amount set aside from the profit and loss account and is not available for distribution to the shareholders of the entity.

The appropriation of legal reserve is recorded in accounts in the period in which it is approved by the board.

– 60 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

1 Principal accounting policies (Continued)

(w) Segment reporting

In accordance with the Group’s internal financial reporting, the Group has determined that business segments be presented as the primary reporting format and geographical segments as the secondary reporting format.

Unallocated costs represent corporate expenses. Segment assets comprise all current and non-current assets and exclude investment properties and investment securities. Segment liabilities comprise all operating liabilities and exclude items such as taxation, deferred taxation, shareholder’s loan and convertible notes. Capital expenditure comprises additions to fixed assets including additions resulting from acquisitions through purchases of subsidiaries.

In respect of geographical segment reporting, sales are based on the country in which the customer is located and total assets and capital expenditure are where the assets are located.

2. Turnover, revenue and segment information

The Group’s business can be principally segregated to four segments during the year:

The leisure and entertainment segment, which mainly comprises (a) leasing of electronic gaming machines and provision of ancillary management services to casino operators in Macau and (b) provision of catering services.

The technology segment, which mainly comprises (a) provision of gaming technology consultation services in Macau and (b) development and sale of financial trading and settlement systems in Asia.

The investment banking and financial services segment (operated through Value Convergence Holdings Limited), which mainly comprises (a) provision of corporate finance advisory service, initial public offerings and mergers and acquisition advisory services; and (b) broking and dealing for clients in securities, futures and options contracts.

The property and other investments segment, which mainly comprises property investments, other investments and related activities. One of the investment properties of this segment was disposed of during the year at a gain of approximately HK$57 million.

Revenues recognised during the year are as follows:

Turnover – Leisure and entertainment segment – Technology segment – Investment banking and financial services segment – Property and other investments segment_(Note) Other revenue Dividend income Management fee from a jointly controlled entity (Note 31d(xi)) Others Total revenues _Note:	2004 HK$’000 123,007 154,799 126,404 3,866 408,076 --------------- 938 6,671 493 8,102 --------------- 416,178	2003 HK$’000 54,861 29,203 75,504 5,695
		165,263 --------------- 200 – 4,067
		4,267 ---------------
		169,530

Certain comparative figures have been reclassified to conform with current year’s presentation.

– 61 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

2. Turnover, revenue and segment information (Continued)

Primary reporting format – business segments

Year ended/As at 31st December 2004 Investment Property banking and and Leisure and financial other entertainment Technology services investments HK$’000 HK$’000 HK$’000 HK$’000 Revenues Segment turnover 123,431 169,440 128,634 3,866 Inter-segment sales (424) (14,641) (2,230) – 123,007 154,799 126,404 3,866 Segment results 5,636 14,504 14,783 65,334 Unallocated costs Operating profit Segment assets 598,842 57,226 433,372 290,633 Investment in jointly controlled entity – – – 100,000 Unallocated assets Total assets Segment liabilities 24,325 22,497 62,675 1,935 Unallocated liabilities Total liabilities Other segment information: Depreciation of fixed assets 11,519 591 4,390 1,183 Amortisation of trading rights – – 507 – Reversal of impairment of investment securities – – – (3,117) Negative goodwill – 1,204 – – Capital expenditures 114,520 422 669 1,098 Goodwill 361,427 8,805 – – Impairment of doubtful receivables – 323 1,587 –	Group HK$’000 425,371 (17,295)
	408,076

	100,257 (23,925)
	76,332

	1,380,073 100,000 104,754
	1,584,827

	111,432 172,302
	283,734

	17,683 507 (3,117) 1,204 116,709 370,232 1,910

– 62 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

2. Turnover, revenue and segment information (Continued)

Year ended/As at 31st December 2003 Investment banking and Property and Leisure and financial other entertainment Technology services investments HK$’000 HK$’000 HK$’000 HK$’000 Revenues Segment turnover 55,143 29,506 75,504 5,695 Inter-segment sales (282) (303) – – 54,861 29,203 75,504 5,695 Segment results (11,713) (9,413) 3,005 2,258 Unallocated costs Operating loss Segment assets 33,596 25,662 389,105 46,131 Unallocated assets Total assets Segment liabilities 8,246 23,323 113,443 5,508 Unallocated liabilities Total liabilities Other segment information: Depreciation of fixed assets 4,324 6,277 3,615 1,938 Amortisation of trading rights – – 464 – Amortisation of goodwill – – 2,614 – Capital expenditures 312 12,980 11,359 2,192 Impairment of assets – 3,080 – 1,200 Impairment of doubtful receivables – 122 1,934 –	Group HK$’000 165,848 (585)
	165,263

	(15,863) (14,911)
	(30,774)

	494,494 180,024
	674,518

	150,520 324
	150,844

	16,154 464 2,614 26,843 4,280 2,056

– 63 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

2. Turnover, revenue and segment information (Continued)

Secondary reporting format – geographical segments

Turnover HK$’000 Hong Kong 209,327 The People’s Republic of China excluding Hong Kong and Macau (“PRC”) 263 Macau 198,486 408,076 Unallocated costs Operating profit Investment in a jointly controlled entity Investment Securities Total assets Turnover HK$’000 Hong Kong 144,901 The PRC – United Kingdom – Macau 20,362 165,263 Unallocated costs Operating loss Investment securities Total assets 3 Other (loss)/income Realised (loss)/gain on trading of other investments Unrealised gain on holding of other investments Total	Year ended 31st December 2004/ As at 31st December 2004 Segment Total results assets HK$’000 HK$’000 79,519 1,236,304 (2,502) 2,333 23,240 218,436 100,257 1,457,073 (23,925) 76,332 100,000 27,754 1,584,827 Year ended 31st December 2003/ As at 31st December 2003 Segment Total results assets HK$’000 HK$’000 (15,715) 631,548 (501) 614 – 992 353 20,727 (15,863) 653,881 (14,911) (30,774) 20,637 674,518 2004 HK$’000 (3,425) 1,312 (2,113)	Capital expenditure HK$’000 23,551 963 92,195
		116,709

		Capital expenditure HK$’000 24,504 564 – 1,775
		26,843

		2003 HK$’000 9,228 958
		10,186

– 64 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

4 Operating profit/(loss)

Operating profit/(loss) is stated after crediting and charging the following:

Crediting Rental income Gross Outgoings Net of outgoings Gain on disposal of investment properties Gain on disposal of other fixed assets Reversal of impairment of investment securities Negative goodwill Charging Loss on disposal of other fixed assets Impairment of fixed assets Impairment of investment securities Impairment of doubtful receivables Operating leases in respect of land and buildings Auditors’ remuneration Finance costs Interest on bank loans and overdrafts wholly repayable within five years Interest expense on finance lease Interest on a shareholder’s loan_(Note 31(d)(viii)) Interest on former shareholders’ loans Interest on convertible notes(Note 31(d)(ix))_ Others	2004 HK$’000 4,178 (82) 4,096 56,176 1,400 3,117 1,204 – – – 1,910 9,342 2,298 2004 HK$’000 3,043 27 23 95 1,011 – 4,199	2003 HK$’000 5,467 (84)
		5,383
		– – – –

		478 3,080 1,200 2,056 6,009 674

		2003 HK$’000 1,967 – – – – 40
		2,007

5 Finance costs

6 Taxation

Hong Kong profits tax has been provided at the rate of 17.5% (2003: 17.5%) on the estimated assessable profit for the year. Taxation on overseas profits has been calculated on the estimated assessable profit for the year at the rates of taxation prevailing in the countries in which the Group operates.

The amount of taxation charged to the consolidated profit and loss account represents:

Current taxation: – Hong Kong profits tax – (Over)/under provisions in prior years Deferred taxation relating to the origination and reversal of timing differences Taxation charges	2004 HK$’000 1,668 (848) 1,670 2,490	2003 HK$’000 354 523 324
		1,201

– 65 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

6 Taxation (Continued)

The taxation on the Group’s profit/(loss) before taxation differs from the theoretical amount that would arise using the Hong Kong taxation rate as follows:

Profit/(loss) before taxation Calculated at a taxation rate of 17.5% (2003: 17.5%) Effect of different taxation rates in Macau Income not assessable for taxation purposes Expenses not deductible for taxation purposes Utilisation of previously unrecognised tax losses (Over)/under provision of current taxation in prior years Unrecognised deferred tax assets arising from estimated tax losses Taxation charge	2004 HK$’000 72,133 12,623 (392) (9,463) 89 (5,536) (848) 6,017 2,490	2003 HK$’000 (32,781)
		(5,737) 5 – 457 (71) 523 6,024
		1,201

Deferred income tax assets are recognised to the extent that realisation of the related tax benefit through the future taxable profits is probable.

The major components of the net deferred tax liabilities provided for at the balance sheet date are as follows:

As at 1st January Acquisition of subsidiary_(note 28(c)(i))_ Charged to profit and loss account	Group 2004 HK$’000 324 262 1,670 2,256	2003 HK$’000 – – 324
		324

The movement in deferred tax liabilities during the year is as follows:

At 1st January Acquisition of subsidiary (note 28(c)(i)) Charged/(credited) to profit and loss account At 31st December	Accelerated tax depreciation 2004 2003 HK$’000 HK$’000 – – 262 – 1,994 – 2,256 –	Others 2004 2003 HK$’000 HK$’000 324 – – – (324) 324 – 324	Total 2004 2003 HK$’000 HK$’000 324 – 262 – 1,670 324 2,256 324	Total 2004 2003 HK$’000 HK$’000 324 – 262 – 1,670 324 2,256 324
				324

– 66 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

6 Taxation (Continued)

The major components of the net deferred liabilities/(assets) not provided for at the balance sheet date are as follows:

Accelerated depreciation allowances Tax losses Accelerated depreciation allowances Tax losses	Group 2004 2003 HK$’000 HK$’000 2,998 3,147 (63,095) (78,101) (60,097) (74,954) Company 2004 2003 HK$’000 HK$’000 – – (2,076) (2,513) (2,076) (2,513)	2003 HK$’000 3,147 (78,101)
		(74,954)

		(2,513)

The above tax losses of the Group and the Company were available for carry forward but subject to the approval of the Hong Kong Inland Revenue Department and the tax bureau in Macau. These tax losses have no expiry date.

7 Profit/(loss) attributable to shareholders

The profit/(loss) attributable to shareholders is dealt with in the accounts of the company to the extent of a loss of HK$5,705,000 (2003: loss of HK$8,685,000).

8 Dividends

Interim dividends – HK$0.01 (2003: Nil) per ordinary share Final dividends – Proposed HK$0.01 (2003: Nil) per ordinary share_(Note)_	2004 HK$’000 3,776 4,675 8,451	2003 HK$’000 – –
		–

Note: At a board of directors meeting held on 7th April 2005, the directors proposed a final dividend of HK$0.01 per ordinary share of the year 2004. This proposed dividend has not been reflected as a dividend payable in the accounts and will be reflected as an appropriation for the year ending 31st December 2005.

9 Earnings/(loss) per share

The calculations of basic earnings/(loss) per share are based on (i) the Group’s net profit/(loss) attributable to shareholders of HK$65,157,000 (2003: loss of HK$26,334,000), and (ii) 324,834,445 (2003: 165,762,626) weighted average ordinary shares in issue during the year.

The calculations of diluted earnings per share for the year ended 31st December 2004 are based on (i) the adjusted net profit attributable to shareholders of approximately HK$65,991,000 which is the net profit attributable to the shareholders for the year adjusted for interest expense of approximately HK$834,000, and (ii) 324,834,445 ordinary shares which is the weighted average number of ordinary shares in issue during the year plus the weighted average of 16,340,475 ordinary shares deemed to be issued at no consideration if all outstanding share options with dilutive effect on basic earnings/(loss) per share had been exercised and the weighted average number of 18,799,001 ordinary shares deemed to be issued if all the convertible notes have been converted into ordinary shares since their issuance.

The diluted loss per share for the year ended 31st December 2003 has not been presented as the conversion of potential ordinary shares would have anti-dilutive effect to the basic loss per share.

– 67 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

10 Staff costs (including directors’ emoluments)

Wages, salaries and staff welfare Unutilised annual leave Termination benefits Social security costs Provision for long service payment Pension costs – defined contribution plans Forfeiture of pension contribution	2004 HK$’000 103,210 (17) 810 54 (118) 3,390 (209) 107,120	2003 HK$’000 73,336 1,086 1,175 – (27) 3,056 (2,127)
		76,499

11 Directors’ and five highest paid individuals’ emoluments

(a) Directors’ emoluments

The aggregate amounts of emoluments payable to directors (including ex-director) of the Company during the year are as follows:

Fees Executive Directors Independent Non-executive Directors Non-executive Directors Other emoluments: Basic salaries, housing allowances, other allowances and benefits in kind Executive Directors Independent Non-executive Directors Non-executive Directors Retirement benefits scheme contributions Executive Directors Independent Non-executive Directors Non-executive Directors	2004 HK$’000 10 869 109 988 -------------- 3,628 – – 24 – – 3,652 -------------- 4,640	2003 HK$’000 10 854 87
		951 -------------- 3,557 – – 27 – –
		3,584 --------------
		4,535

During the year, 3,600,000 (2003: nil) share options were granted to directors of the Company in respect of their services provided to the Group, further details of which are set out in note 26 to the accounts. No value in respect of the share options granted during the year has been charged to the profit and loss account, or is otherwise included in the above directors’ emoluments disclosure.

– 68 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

11 Directors’ and five highest paid individuals’ emoluments (Continued)

(a) Directors’ emoluments (Continued)

During the year, one new Independent Non-executive Director has been appointed and one Independent Non-executive Director has been re-designated as Non-executive Director. None of the three existing Independent Non-executive Directors received any emoluments except for director fees of approximately HK$300,000 (2003: HK$300,000), HK$300,000 (2003: HK$300,000) and HK$62,000 (2003: nil), which were paid to each of the three Independent Non-executive Directors respectively during the year ended 31st December 2004. The director fee paid to the Independent Non-executive Director re-designated was approximately HK$207,000 (2003: HK$254,000).

During the year, one Non-executive Director had resigned and one Independent Non-executive Director has been re-designated as Non-executive Director. None of the two existing Non-executive Directors received any emoluments except for director fees of approximately HK$50,000 (2003: HK$50,000) and HK$46,000 (2003: nil), which were paid to each of the two Non-executive Directors respectively during the year ended 31st December 2004. The director fee paid to the Non-executive Director resigned was approximately HK$13,000 (2003: HK$37,000).

One (2003: One) Executive Director of the Company received director fee of approximately HK$10,000 (2003: HK$10,000). Another two (2003: two) Executive Directors received emoluments of approximately HK$1,729,000 (2003: HK$1,729,000) and HK$1,899,000 (2003: HK$1,729,000) during the year ended 31st December 2004. One Executive Director has been re-designated as Non-executive Director for the year ended 31st December 2003, for which the emolument paid to the Executive Director re-designated was approximately HK$99,000.

All these emoluments were included in the Directors’ emoluments as disclosed above.

The emoluments of the directors (including ex-director) fell within the following bands:

		Number	of directors
		2004	2003
Emolument bands
HK$nil	– HK$1,000,000	7	6
HK$1,500,001	– HK$2,000,000	2	2

(b) Five highest paid individuals

The five individuals whose emoluments were the highest in the Group for the year include two (2003: two) directors whose emoluments are reflected in the analysis presented above. The emoluments payable to the remaining three (2003: three) individuals during the year are as follows:

Basic salaries, housing allowances, other allowances and benefits in kind Retirement benefits scheme contributions The emoluments fell within the following bands: Emolument bands HK$1,000,001 – HK$1,500,000 HK$1,500,001 – HK$2,000,000 HK$2,500,001 – HK$3,000,000 HK$3,000,001 – HK$3,500,000 HK$4,000,001 – HK$4,500,000	2004 HK$’000 7,407 35 7,442 2004 1 – 1 1 –	2003 HK$’000 7,602 28
		7,630

		2003 1 1 – – 1

(c) During the year, no (2003: nil) directors or the above highest paid individuals waived or agreed to waive any emoluments. No (2003: nil) emoluments have been paid to the directors of the Company or the above highest paid individuals as an inducement to join or upon joining the Group, or as compensation for loss of office.

– 69 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

12 Goodwill

Year ended 31st December 2004
Opening net book amount_(Note)
Acquisition of Mocha Slot Group Limited
(“Mocha Slot”)(Note 28(c)(i))
Goodwill arising from acquisition of additional
interests of subsidiaries in Technology segment(Note 28(d))_
Closing net book amount
At 31st December 2004
Cost
Accumulated impairment
Net book amount
At 31st December 2003
Cost
Accumulated amortisation
Net book amount

HK$’000
19,705
361,427
8,805
389,937
389,937
–
389,937
22,319
(2,614)
19,705

Note:

Upon adoption of HKFRS 3, cost and accumulated amortisation of goodwill are offset by the same amount of approximately HK$2,614,000 and the net amount of approximately HK$19,705,000 was stated as the cost of goodwill.

Goodwill was presented together with the trading rights as intangible assets as at 31st December 2003. As a result of the adoption of HKFRS3, goodwill and trading rights are presented separately in the balance sheet and amortization charges were also reclassified to provide a better presentation of the results of the Group.

13 Trading rights

Year ended 31st December 2004 Opening net book amount Amortisation charge Closing net book amount At 31st December 2004 Cost Accumulated amortisation Net book amount At 31st December 2003 Cost Accumulated amortisation Net book amount	HK$’000 3,293 (507) 2,786 3,757 (971) 2,786 3,757 (464) 3,293

– 70 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

14 Fixed assets

Fixed assets
Cost or valuation At 1st January 2004 Acquisition of subsidiaries (Note 28(c)(i)) Additions Transfers Written off Disposals At 31st December 2004 Accumulated depreciation At 1st January 2004 Charge for the year Written off Disposals At 31st December 2004 Net book value At 31st December 2004 At 31st December 2003	Investment properties HK$’000 159,000 – – – – (82,000) 77,000 -------------- – – – – – -------------- 77,000 159,000	Restaurant vessels, ferries and pontoons HK$’000 43,665 – 7,475 11,545 – (135) 62,550 -------------- 34,970 1,989 – (17) 36,942 -------------- 25,608 8,695	Group Leasehold Furniture, land and Leasehold fixtures and buildings improvements equipment HK$’000 HK$’000 HK$’000 614 7,477 90,585 – 3,829 16,983 – 6,093 9,262 – 134 (134) – – (17,763) (474) – (2,367) 140 17,533 96,566 -------------- -------------- -------------- 189 2,091 76,175 5 4,060 7,944 – – (17,763) (142) – (2,049) 52 6,151 64,307 -------------- -------------- -------------- 88 11,382 32,259 425 5,386 14,410	Gaming machine HK$’000 – 43,637 17,137 – – – 60,774 -------------- – 3,659 – – 3,659 -------------- 57,115 –	Motor Construction vehicle in progress HK$’000 HK$’000 – – – – 263 12,030 – (11,545) – – – – 263 485 -------------- -------------- – – 26 – – – – – 26 – -------------- -------------- 237 485 – –	Total HK$’000 301,341 64,449 52,260 – (17,763) (84,976)
						315,311 -------------- 113,425 17,683 (17,763) (2,208)
						111,137 --------------
						204,174

						187,916

(a) The analysis of the cost or valuation at 31st December 2004 of the above assets is as follows:

At cost At valuation	Investment properties HK$’000 – 77,000 77,000	Restaurant vessels, ferries and pontoons HK$’000 62,550 – 62,550	Leasehold land and Leasehold buildings improvements HK$’000 HK$’000 140 17,533 – – 140 17,533	Group Furniture, fixtures and equipment HK$’000 96,566 – 96,566	Gaming machine HK$’000 60,774 – 60,774	Motor vehicle HK$’000 263 – 263	Construction in progress HK$’000 485 – 485	Total HK$’000 238,311 77,000
								315,311

The analysis of the cost or valuation at 31st December 2003 of the above assets is as follows:

At cost At valuation	Investment properties HK$’000 – 159,000 159,000	Restaurant vessels, ferries and pontoons HK$’000 43,665 – 43,665	Leasehold land and Leasehold buildings improvements HK$’000 HK$’000 614 7,477 – – 614 7,477	Furniture, fixtures and equipment HK$’000 90,585 – 90,585	Gaming machine HK$’000 – – –	Motor vehicle HK$’000 – – –	Construction in progress HK$’000 – – –	Total HK$’000 142,341 159,000
								301,341

– 71 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

14 Fixed assets (Continued)
(b) At 31st December 2004, the net book value of fixed assets for the Group under finance lease amounted to HK$2,120,000 (2003: Nil).
(c) The Group’s investment properties and leasehold land and buildings are located in Hong Kong and are held under long term leases.
(d) The Group’s investment properties comprising: 509 car parking spaces located on the lower basement, basement and G/F to 5/F of Jumbo Court Public Carpark, 3 Welfare Road, Aberdeen, Hong Kong, were revalued on an open market, existing tenancy basis by FPDSavills, an independent firm of professional valuers, as at 31st December 2004 at HK$77,000,000 (2003: HK$77,000,000). During the year, the investment properties of a residential building located at 5 Tung Shan Terrace, Stubbs Road, Hong Kong were disposed to a third party at a consideration of HK$83 million and gain on disposal of investment properties amounted to HK$57,176,000 was realised and recorded to the profit and loss account.
(e) The investment properties are leased to third parties under operating leases arrangements, with leases negotiated for terms ranging from 1 to 3 years. As at 31st December 2004, the Group had future aggregate minimum leases receivables under non-cancellable operating leases as follows:

Not later than one year Later than one year and not later than five years	Group 2004 HK$’000 2,107 387 2,494	2003 HK$’000 3,396 1,953
		5,349

(f) At 31st December 2004, the investment properties with net book value of HK$77,000,000 (2003: HK$82,000,000) were pledged as security for one of the subsidiaries of the Group as banking facilities.

Cost At 1st January 2004 and 31st December 2004 Accumulated depreciation At 1st January 2004 Charge for the year At 31st December 2004 Net book value At 31st December 2004 At 31st December 2003	Company Furniture, fixtures and equipment HK$’000 6 ------------ 6 –
	– ------------
	–

	–

– 72 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

15 Investments in subsidiaries

Investments at cost: Unlisted shares_(note a) Provision for impairment Due from subsidiaries(note b) Provision for amounts due from subsidiaries Due to subsidiaries(note b)_	Company 2004 2003 HK$’000 HK$’000 29,394 390 – (390 29,394 – 1,272,191 707,864 (315,235) (308,742 (67,589) (9,498 918,761 389,624	Company 2004 2003 HK$’000 HK$’000 29,394 390 – (390 29,394 – 1,272,191 707,864 (315,235) (308,742 (67,589) (9,498 918,761 389,624
		– 707,864 (308,742 (9,498
		389,624

Note:

(a) Details of principal subsidiaries are set out in Note 32 to the accounts.
(b) Included in amounts due from subsidiaries are i) loans to a subsidiary of HK$218.9 million which are unsecured, interest bearing at prime rate minus two per cent per annum or HIBOR plus 1.25 – 2 per cent per annum and repayable upon written notice given from the Company; ii) loans to a subsidiary of HK$93.1 million which are unsecured, interest bearing at four per cent per annum and have no fixed terms of repayment. Other amounts due from/(to) subsidiaries are unsecured, interest free and have no fixed terms of repayment.

16 Investment in a jointly controlled entity

Unlisted shares, at cost_(Note a and b) Prepayment to Sociedade de Turismo e Diversões de Macau, S.A.R.L. (“STDM”)(Note b)_	Group and Company 2004 2003 HK$’000 HK$’000 485 – 99,515 – 100,000 –	Group and Company 2004 2003 HK$’000 HK$’000 485 – 99,515 – 100,000 –
		–

The following is the	details of the jointly controlled entity:	details of the jointly controlled entity:
		Principal		Percentage of
	Place of	activities and	Particulars of	interest in
Name	incorporation	place of operation	issued shares held	ownership
Great Wonders,	Macau	Provision of hotel	10,000 ordinary	50%
Investment,		management and	shares of
Limited		entertainment complex	MOP100 each
(“Great Wonders”)		in Macau

(b) On 8th September 2004, the Company entered into an agreement (“First agreement”) with STDM to acquire 50% equity interests of Great Wonders at a consideration of HK$100 million. The consideration was satisfied by issuing the convertible bond (see Note 24(b)). Great Wonders has applied to the Macau Government for the concession of a parcel of land located in Taipa, Macau (the “Land”) and to develop the Land into a six-star hotel and entertainment complex (pending government approval) with one of the largest casino and electronic gaming machine areas. Unless the concession of the Land is granted to Great Wonders on or before 1st September 2005, the Company has the right to terminate the convertible bond and the convertible bond will cease to be payable immediately. The Company shall forthwith transfer the 50% equity interest in Great Wonders back to STDM.

– 73 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

16 Investment in a jointly controlled entity (Continued)

Following the acquisition under the First Agreement, the Company entered into another agreement (“Second Agreement”) with STDM on 11th November 2004 pursuant to which the Company acquired an additional 20% issued share capital of Great Wonders from STDM at a consideration of HK$56 million. The consideration was satisfied by issuing the convertible bond. The Second Agreement was approved by the independent shareholders of the Company at its extraordinary general meeting held on 20th January 2005 and no adjustment was made to the accounts as at 31st December 2004.

Subsequent to the further acquisition of interest in Great Wonders under the Second Agreement, the Company entered into the third agreement (“Third Agreement”) with STDM on 17th March 2005 pursuant to which the Company will acquire and STDM will sell the remaining 30% equity interests in Great Wonders held by STDM at a consideration of HK$400 million. Completion of the Third Agreement is conditional on the approval of the independent shareholders of the Company at an extraordinary meeting.

17 Investment securities

Unlisted equity investments, at cost Unlisted debt investment, at cost Impairment losses Listed equity investment in Hong Kong, at cost Impairment losses Total Inventories Food and beverages Consumable stores Merchandise Work in progress	Group 2004 HK$’000 26,499 4,000 (2,745) 27,754 -------------- 4,250 (4,250) 27,754 Group 2004 HK$’000 2,389 98 1,281 – 3,768	2003 HK$’000 26,499 – (5,862)
		20,637 -------------- 4,250 (4,250)
		20,637

		2003 HK$’000 2,268 52 1,776 41
		4,137

18 Inventories

At 31st December 2004, no inventory was carried at net realisable value (2003: nil).

19 Trade receivables

Trade receivables (excluding receivables balance arising from margin clients securities transactions) Impairment of doubtful receivables Trade receivables arising from margin clients securities transactions_(Note b)_	Group 2004 HK$’000 171,681 (323) 171,358 165,656 337,014	2003 HK$’000 99,144 –
		99,144 137,246
		236,390

– 74 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

19 Trade receivables (Continued)

The aging analysis of trade receivables (excluding the receivables balance arising from margin clients securities transactions) is as follows:

Within 30 days 31-90 days Over 90 days	2004 HK$’000 157,881 10,624 3,176 171,681	2003 HK$’000 94,499 3,376 1,269
		99,144

(a) The Group’s Leisure and entertainment segment and the Property and other investments segment are largely operated on cash on delivery or payment in advance terms, except for those well-established customers to whom credit terms of 30 to 90 days would be granted.
(b) Trade receivable arising from the ordinary course of business of broking in securities and equity options transactions and dealing in futures and options in the investment banking and financial services segment as at 31st December 2004 amounted to approximately HK$306,189,000 (2003: HK$235,922,000). The settlement terms of the trade receivables arising from the ordinary course of business of broking in securities and equity options transactions are usually two trading days after the trade date of the those transactions; and the trade receivables arising from the ordinary course of business of dealing in futures and options contracts transactions are generally due on demand.

Loans to margin clients are secured by client’s pledged securities, repayable on demand and bear interest at commercial rates. No aging analysis on margin client’s receivables is disclosed as, in the opinion of the Directors, an aging analysis is not meaningful in view of the nature of the business of securities margin financing.

(c) Other trade receivables on the Group’s Technology segment are due immediately from date of billing but the Group and the Company will generally grant a normal credit period of 30 days on average to its customers.

20 Other investments

Equity securities listed in Hong Kong, at market value 21 Amounts due from related companies STDM_(note a) Gold Carousel Investment Limited (“GCIL”)(note b)_	Group 2004 HK$’000 40,641 2004 HK$’000 519 600 1,119	2003 HK$’000 40,638

		2003 HK$’000 429 –
		429

Notes:

(a) The amount due from STDM, a related company of which Dr. Stanley Ho and Madam Winnie Ho Yuen Ki are director and ex-director and/or have direct and/or indirect beneficial interests, represented receivables in respect of the sales of souvenirs by the Group (note 31(d)(iv)).
(b) The amount due from GCIL, a related company of which Dr. Stanley Ho is a director, represented receivables in respect of the management services provided by one of the subsidiaries of the Group (note 31(d)(vii)).

– 75 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

22 Trade payables

Trade payables Within 30 days 31-90 days Over 90 days Trade payables arising from the ordinary course of business of dealing in securities transactions_(Note)_	Group 2004 HK$’000 14,313 4,459 5,224 23,996 36,466 60,462	2003 HK$’000 6,562 3,416 396
		10,374 100,164
		110,538

Note:

The settlement terms of trade payables arising from the ordinary course of business of dealing in securities transactions for the Investment banking and financial services segment are usually two trading days after trade date. These trade payables are repayable on demand. Therefore, no aging analysis is disclosed as, in the opinion of the Directors, an aging analysis is not meaningful in view of all these accounts payable are promptly settled two trading days after trade date.

23 Finance lease payable

Finance lease liability – minimum lease payments: Within one year Future finance charges on finance lease Present value of finance lease payable The present value of finance lease payable was as follows: Within one year	2004 HK$’000 837 (20) 817 817	2003 HK$’000 – –
		–

		–

– 76 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

24 Convertible notes

Convertible note due 30th June 2005 (“2005 Convertible Note”) at par_(Note a) Convertible note due 30th June 2006 (“2006 Convertible Note”) at par(Note a) Convertible note due 8th November 2009 (“2009 Convertible Note”) at par(Note b)_ Subtotal Less: current portion Long-term portion	2004 HK$’000 22,500 22,500 100,000 145,000 (22,500) 122,500	2003 HK$’000 – – –
		– –
		–

Note:

(a) On 9th June 2004 (“1st Date of Issuance”), the Company issued at par the 2005 Convertible Note and 2006 Convertible Note with principal amount of HK$22,500,000 and HK$22,500,000 respectively, which are interest-bearing at 4% per annum. The convertible notes were issued to partially replace the shareholders’ loans of Mocha Slot acquired by the Company during the year.

The 2005 Convertible Note and 2006 Convertible Note are convertible into fully paid ordinary shares of HK$1 each of the Company at an initial conversion price of HK$2.3 per share since the 1st Date of Issuance until, and including, the day immediately before 30th June 2005 and 30th June 2006 respectively.

(b) On 9th November 2004 (“2nd Date of Issuance”), the Company issued at par the 2009 Convertible Note with principal amount of HK$100,000,000, which is interest-bearing at 4% per annum. The convertible note was issued for the purpose of developing the Land which will consist of a six star hotel with casino and electronic gaming machine lounge (see Note 16(b)).

The 2009 Convertible Note is convertible into fully paid ordinary shares of HK$1 each of the Company at an initial conversion price of HK$4.0 per share convertible in the period commencing 3 years from the 2nd Date of Issuance until, and including, the day immediately before 8th November 2009.

– 77 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

25 Share capital

At 1st January 2003 and at 1st January 2004 Increase in authorised ordinary share capital_(note a) At 31st December 2004 At 1st January 2003, ordinary shares of HK$1 each Issue of rights shares(note b) Exercise of share options(note 26) At 31st December 2003, ordinary shares of HK$1 each At 1st January 2004, ordinary shares of HK$1 each Issue of shares(note c) Exercise of share options(note 26)_ At 31st December 2004, ordinary shares of HK$1 each	Authorised Ordinary shares of HK$1 each No. of shares Amount ’000 HK$’000 480,000 480,000 220,000 220,000 700,000 700,000 Issued and fully paid Ordinary shares of HK$1 each No. of shares Amount ’000 HK$’000 145,287 145,287 72,644 72,644 4,066 4,066 221,997 221,997 221,997 221,997 229,378 229,378 11,869 11,869 463,244 463,244	Authorised Ordinary shares of HK$1 each No. of shares Amount ’000 HK$’000 480,000 480,000 220,000 220,000 700,000 700,000 Issued and fully paid Ordinary shares of HK$1 each No. of shares Amount ’000 HK$’000 145,287 145,287 72,644 72,644 4,066 4,066 221,997 221,997 221,997 221,997 229,378 229,378 11,869 11,869 463,244 463,244
		221,997

		221,997 229,378 11,869
		463,244

Note:

(a) By an ordinary resolution passed on 20th May 2004, the authorised ordinary share capital of the Company was increased from HK$480,000,000 to HK$700,000,000 by the creation of 220,000,000 new shares of HK$1 each.
(b) In September 2003, the company issued 75,643,567 rights shares of HK$1 each at a price of HK$1.45 per rights share on the basis of one rights share for every two ordinary shares in issue. Proceeds of approximately HK$105.3 million before issuance expenses were raised.
(c) On 9th June 2004, 153,478,261 ordinary shares of HK$1 each were issued at a price of HK$2.375 per share for a total consideration of HK$364,511,000 before related expenses for the acquisition of Mocha Slot during the year (see Note 28(c)(i) for details).

In addition, on 29th October 2004, 75,900,000 ordinary shares of HK$1 each were issued at a price of HK$5.2 per share by way of placement for a total consideration of HK$394,680,000 before related expenses for the purpose of funding its operations under Leisure and entertainment segment.

(d) On 7th April 2005, the board of directors of the Company proposed that each of the existing issued and unissued shares of HK$1 each in the share capital be subdivided into two subdivided shares of HK$0.5 each.

– 78 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

26 Share option

(a) Share option scheme of the Company

The Company operates a share option scheme (the “Scheme”) for the purpose of providing incentives and rewards to eligible participants who contribute to the success of the Group’s operations. Eligible participants of the Scheme included the Company’s directors, including independent non-executive directors, executives, employees, consultants, professionals and other advisers of the Group. The Scheme became effective on 8th March 2002 following its approval by the Company’s shareholders at an extraordinary general meeting on the same date and, unless otherwise cancelled or amended, will remain in force for 10 years from that date.

The maximum number of share of the Company which may be issued upon the exercise of all outstanding options granted and yet to be exercised under the Scheme must not exceed 30% of the total issued share capital of the Company from time to time. The total number of shares which may be issued upon the exercise of all options to be granted under the Scheme shall not in aggregate exceed 10% of the total number of the Company’s shares in issue as at 19th November 2003, which was the date when scheme mandate limit of the Scheme was last refreshed, i.e. 22,199,700 shares of HK$1.00 each. The Company may seek approval of the Company’s shareholders in a general meeting for refreshing the 10% limit under the Scheme save that the total number of shares of the Company which may be issued upon the exercise of all options to be granted under the Scheme under the limit as “refreshed” may not exceed 10% of the total number of the shares of the Company in issue as at the date of approval of the limit. The maximum number of shares issuable under share options to each eligible participant in the Scheme within any 12month period, is limited to 1% of the shares of the Company in issue at any time. Any further grant of share options in excess of this limit is subject to shareholders’ approval in a general meeting.

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

The offer of a grant of share options may be accepted within 14 days from the date of the offer, upon payment of a nominal consideration of HK$1 in total by the grantee. The exercise period of the share options granted is determinable by the directors, and commences after a certain vesting period and ends on a date which is not later than the expiry date of the Scheme.

The exercise price of the share options is determinable by the directors, but may not be less than the higher of: (i) the closing price of the Company’s share on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) on the date of the offer of the share options; (ii) the average Stock Exchange closing price of the Company’s shares for the five days immediately preceding the date of the offer; and (iii) the nominal value of the Company’s shares on the date of the offer of the share options.

Share options do not confer rights on the holders to dividends or to vote at shareholders’ meetings.

– 79 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

26 Share option (Continued)

(a) Share option schemes of the Company (Continued)

The following share options were outstanding under the Scheme during the year ended 31st December 2004:

Category of participant Directors4,5 Directors6 Sub-total Employees Employees7 Employees8 Employees9 Sub-total Others10 Others11 Others12 Sub-total Total	At 1st January 2004 5,448,918 – 5,448,918 750,002 3,457,670 – – 4,207,672 4,440,172 – – 4,440,172 14,096,762	Granted during the year – 3,600,000 3,600,000 – – 8,170,000 3,900,000 12,070,000 – 1,000,000 4,500,000 5,500,000 21,170,000	Share price Exercised At at date Exercise during the 31st December Date of grant of grant of price of share year 2004 of share options 1 share options options 3 (5,432,612 ) 16,306 8th March 2002 HK$0.82 2 HK$1.00 2 – 3,600,000 19th February 2004 HK$2.35 HK$2.405 (5,432,612 ) 3,616,306 (750,002 ) – 8th March 2002 HK$0.82 2 HK$1.00 2 (1,230,000 ) 2,227,670 13th September 2002 HK$1.1067 2 HK$1.1067 2 – 8,170,000 19th February 2004 HK$2.35 HK$2.405 (1,966,000 ) 1,934,000 17th September 2004 HK$3.375 HK$3.375 (3,946,002 ) 12,331,670 (2,490,172 ) 1,950,000 13th September 2002 HK$1.1067 2 HK$1.1067 2 – 1,000,000 19th February 2004 HK$2.35 HK$2.405 – 4,500,000 17th September 2004 HK$3.375 HK$3.375 (2,490,172 ) 7,450,000 (11,868,786 ) 23,397,976

Notes:

1 The vesting period of the share options is from the date of grant until the commencement of the exercise period.
2 The number of share options granted, the share price at grant date and the exercise price of the share options were adjusted upon completion of the rights issue in 24th September 2003.
3 As at 31st December 2004, the Company had 23,397,976 share options outstanding under the Scheme. The exercise in full of the outstanding share options would, under the present capital structure of the Company, result in the issue of 23,397,976 additional ordinary shares of the Company and additional share capital of approximately HK$23,398,000 and share premium of approximately HK$33,668,000 before issue expenses.
4 Mr. Peter So, who exercised 1,816,306 physically settled options on 19th February 2004, resigned on 1st April 2004.
5 As at 31st December 2004, 16,306 physically settled options may be exercised during the period from 8th September 2002 to 7th March 2012.

– 80 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

26 Share option (Continued)
(a) Share option schemes of the Company (Continued)

Notes: (Continued)

6 Among 3,600,000 physically settled options as at 31st December 2004, 1,800,000 physically settled options may be exercised during the period from 19th February 2005 to 7th March 2012 and 1,800,000 physically settled options may be exercised during the period from 19th February 2006 to 7th March 2012.
7 Among 2,227,670 physically settled options as at 31st December 2004, 1,113,835 physically settled options may be exercised during the period from 13th September 2002 to 7th March 2012 and 1,113,835 physically settled options may be exercised during the period from 13th March 2003 to 7th March 2012.
8 Among 8,170,000 physically settled options as at 31st December 2004, 4,060,000 physically settled options may be exercised during the period from 19th February 2005 to 7th March 2012 and 4,110,000 physically settled options may be exercised during the period from 19th February 2006 to 7th March 2012.
9 Among 1,934,000 physically settled options as at 31st December 2004, 400,000 physically settled options may be exercised during the period from 1st December 2004 to 7th March 2012, 600,000 physically settled options may be exercised during the period from 17th March 2005 to 7th March 2012, 594,000 physically settled options may be exercised during the period from 17th September 2005 to 7th March 2012, 175,000 physically settled options may be exercised during the period from 17th September 2006 to 7th March 2012 and 165,000 physically settled options may be exercised during the period from 17th March 2008 to 7th March 2012.
10 Among 1,950,000 physically settled options as at 31st December 2004, 974,999 physically settled options may be exercised during the period from 13th September 2003 to 7th March 2012 and 975,001 physically settled options may be exercised during the period from 13th September 2004 to 7th March 2012.
11 Among 1,000,000 physically settled options as at 31st December 2004, 500,000 physically settled options may be exercised during the period from 19th February 2005 to 7th March 2012 and 500,000 physically settled options may be exercised during the period from 19th February 2006 to 7th March 2012.
12 Among 4,500,000 physically settled options as at 31st December 2004, 2,250,000 physically settled options may be exercised during the period from 17th March 2005 to 7th March 2012 and 2,250,000 physically settled options may be exercised during the period from 17th September 2005 to 7th March 2012.

– 81 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

26 Share option (Continued)
(b) Share options schemes of Value Convergence Holdings Limited (“Value Convergence”), subsidiary of the Company
- (i) Pre-IPO share options plan

As at 31st December 2004, options to subscribe for an aggregate of 5,868,698 underlying Shares granted on 6th April 2001 (“Pre-IPO Share Options”) pursuant to the Pre-IPO Share Options plan adopted by Value Convergence on 14th March 2001 (“Pre-IPO Share Options Plan”) at an exercise price of HK$3.6 per share (after adjustment arising from the issue of rights and bonus shares and capital reorganisation on 5th February 2003 and 28th May 2003 respectively) were outstanding, which represents 2.5% (2003: 4.1%) of the shares of Value Convergence in issue as at 31st December 2004. The exercise price represents a discount of 30% of the adjusted IPO offer price. The Pre-IPO Share Options have duration of approximately 4.5 years from the date of grant, i.e. between 6th April 2001 to 8th October 2005. According to the Pre-IPO Share Options Plan, any Pre-IPO Share Options granted shall lapse upon the expiration of 3 months after the relevant grantee ceases to be employed by the Value Convergence Group. The following are details of the outstanding Pre-IPO Share Options as at 31st December 2004 (after adjustments arising from the issue of rights and bonus shares and capital reorganisation on 5th February 2003 and 28th May 2003 respectively):

	As at 31st December 2004	As at 31st December 2004	As at 31st December 2003	As at 31st December 2003
		No. of underlying		No. of underlying
		Shares to be		Shares to be
		issued upon		issued upon
		the exercise of		the exercise of
	Total no. of	the Pre-IPO	Total no.	the Pre-IPO
	grantees	Share Options	of grantees	Share Options
Categories of grantees
Directors of the Company	3	4,606,510	5	8,478,020
Employees	3	1,262,188	3	1,262,188
Total	6	5,868,698	8	9,740,208

During the year ended 31st December 2004, certain Pre-IPO Share Options to subscribe for a total of 3,871,510 underlying shares (after adjustments arising from the issue of rights and bonus shares and capital reorganisation on 5th February 2003 and 28th May 2003 respectively) which had been granted to two directors lapsed as the relevant directors failed to exercise the same within 3 months after the relevant directors ceased to be the directors of Value Convergence. Since the date of the grant of the Pre-IPO Share Options up to 31st December 2004 and 31st December 2003, none of the Pre-IPO Share Options were exercised or cancelled. Movements in the number of Pre-IPO Share Options outstanding during the year are as follows (after adjustments arising from the issue of rights and bonus shares and capital reorganisation on 5th February 2003 and 28th May 2003 respectively):

At beginning of the year Lapsed during the year At end of the year	Number of Pre-IPO Share Options 2004 2003 9,740,208 9,740,208 (3,871,510) – 5,868,698 9,740,208	Number of Pre-IPO Share Options 2004 2003 9,740,208 9,740,208 (3,871,510) – 5,868,698 9,740,208
		9,740,208

– 82 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

26 Share option (Continued)
(b) Share options schemes of Value Convergence Holdings Limited (“Value Convergence”), subsidiary of the Company (Continued)
- (ii) Share options scheme

The Share Options Scheme (“Share Options Scheme”) was adopted by Value Convergence on 29th November 2001 (which superseded the previous share options scheme of Value Convergence adopted on 14th March 2001).

As at 31st December 2004, options to subscribe for an aggregate of 4,188,718 and 23,160,565 underlying shares granted on 9th July 2002 and 25th March 2004 (“Share Options”) pursuant to the Share Options Scheme at an exercise price of HK$1.0 per share (after adjustments arising from the issue of rights and bonus shares and capital reorganisation on 5th February 2003 and 28th May 2003 respectively) and HK$0.64 per share respectively were outstanding, which represents 11.5% (2003: 1.8%) of the shares of Value Convergence in issue as at 31st December 2004. The adjusted closing price of Value Convergence’s shares immediately before 9th July 2002 and the closing price of the Value Convergence’s shares immediately before 25th March 2004 were HK$0.65 and HK$0.64 per share respectively. The Share Options have duration of 10 years from the date of grant, i.e. between 9th July 2002 to 8th July 2012 and between 25th March 2004 to 24th March 2014 respectively. Accordingly to the Share Options Scheme, any Share Options granted shall lapse upon the expiration of 3 months after the relevant grantee ceases to be employed (if applicable) by the Value Convergence Group. The following are details of the outstanding Share Options as at 31st December 2004 (after adjustments arising from the issue of rights and bonus shares and capital reorganisation on 5th February 2003 and 28th May 2003 respectively):

Exercise price per Categories of grantees share HK$ Directors of the Company 1.0 Employees 1.0 Employees 0.64 Other eligible persons 1.0 Total	As at 31st December 2004 No. of underlying Shares to be issued upon the exercise Total no. of of the grantees Share Options 2 982,114 22 1,782,539 58 23,160,565 6 1,424,065 88 27,349,283	As at 31st December 2003 No. of underlying Shares to be issued upon the exercise Total no. of the of grantees Share Options 3 1,473,171 26 1,821,823 – – 5 933,008 34 4,228,002	As at 31st December 2003 No. of underlying Shares to be issued upon the exercise Total no. of the of grantees Share Options 3 1,473,171 26 1,821,823 – – 5 933,008 34 4,228,002
			4,228,002

During the year ended 31st December 2004, certain Share Options to subscribe for a total of 39,284 underlying shares (after adjustments arising from the issue of rights and bonus shares and capital reorganisation on 5th February 2003 and 28th May 2003 respectively) which had been granted to four employees lapsed as the relevant employees failed to exercise the same within 3 months after the relevant employees ceased to be the employees of Value Convergence. Since the date of the grant of the Share Options up to 31st December 2004 and 31st December 2003, none of the Share Options were exercised or cancelled. Movements in the number of Share Options outstanding during the year are as follows (after adjustments arising from the issue of rights and bonus shares and capital reorganisation on 5th February 2003 and 28th May 2003 respectively):

At beginning of the year Share Options granted during the year Lapsed during the year At end of the year	Number of Share Options 2004 2003 4,228,002 4,861,465 23,160,565 – (39,284) (633,463) 27,349,283 4,228,002	Number of Share Options 2004 2003 4,228,002 4,861,465 23,160,565 – (39,284) (633,463) 27,349,283 4,228,002
		4,228,002

– 83 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

27 Reserves

At 1st January 2003 Surplus on revaluation of investment properties Revaluation surplus attributable to minority shareholders Loss for the year Issue of rights shares Share issuance expenses Exercise of share options At 31st December 2003 and 1st January 2004 Issue of shares Reserve realised upon disposal of investment properties Share issue expenses Exercise of share options Retained earnings transferred to legal reserve Profit for the year Dividends paid At 31st December 2004	Share premium HK$’000 19,189 – – – 32,689 (2,441) 240 49,677 529,813 – (16,576) 5,066 – – – 567,980	Investment properties revaluation reserve HK$’000 79,214 4,000 (266) – – – – 82,948 – (56,176) – – – – – 26,772	Group Capital reserve Legal (Note) reserve HK$’000 HK$’000 357,785 – – – – – – – – – – – – – 357,785 – – – – – – – – – – 254 – – (3,776) – 354,009 254	Accumulated losses HK$’000 (225,351) – – (26,334) – – – (251,685) – – – – (254) 65,157 – (186,782)	Total HK$’000 230,837 4,000 (266) (26,334) 32,689 (2,441) 240 238,725 529,813 (56,176) (16,576) 5,066 – 65,157 (3,776) 762,233

At 1st January 2003 Issue of rights shares Share issue expenses Exercise of share options Loss for the year At 31st December 2003 and 1st January 2004 Issue of shares Share issue expenses Exercise of share options Loss for the year Dividends paid At 31st December 2004	Share premium HK$’000 19,189 32,689 (2,441) 240 – 49,677 529,813 (16,576) 5,066 – – 567,980	Company Capital reserve Accumulated (Note) losses HK$’000 HK$’000 357,785 (218,779) – – – – – – – (8,685) 357,785 (227,464) – – – – – – – (5,705) (3,776) – 354,009 (233,169)	Total HK$’000 158,195 32,689 (2,441) 240 (8,685) 179,998 529,813 (16,576) 5,066 (5,705) (3,776) 688,820

– 84 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

27 Reserves (Continued)

Note:

Pursuant to a scheme of capital reduction, which became effective on 29th June 1993, the Supreme Court of Hong Kong approved the cancellation of the Company’s share premium account which, on that date, was stated at HK$127,274,212. By virtue of the same court’s sanction, the issued and fully paid share capital of the Company was also reduced by HK$230,510,521 through a reduction in the nominal value of the share capital of the Company. The credits arising from the cancellation of the share premium account and the reduction of the share capital account, in the aggregate amount of HK$357,784,733 were transferred to a capital reserve account. The capital reserve account is distributable to the shareholders of the Company if there is not outstanding any debt or claim against the Company which was in existence on the effective date of the capital reduction. In view of the fact that the Company receives no claim, demand, action or proceedings in respect of any such debt or claim since June 1993 and in view of the fact that any such debt or claim has been statute-barred under Hong Kong law and irrecoverable against the Company, the Company is of the view that the reserve is distributable to the Company’s shareholders.

28 Consolidated cash flow statement

(a) Reconciliation of operating profit/(loss) to net cash used in operations

Operating profit/(loss) Realised loss/(gain) on trading of other investments Unrealised gain on holding of other investments Depreciation of fixed assets Amortisation of trading rights Amortisation of goodwill Gain on partial disposal of investment in a subsidiary (Gain)/loss on disposal of fixed assets Gain on disposal of investment property Exchange loss Impairment of fixed assets Impairment of investment securities Reversal of impairment of investment securities Interest income from authorised financial institutions Negative goodwill Dividend income Operating profit/(loss) before working capital changes Decrease/(increase) in inventories Increase in accounts receivables (Increase)/decrease in prepayments, deposits and other receivables (Increase)/decrease in amount due from related companies (Decrease)/increase in accounts payables Decrease in rental deposits (Decrease)/increase in accrued liabilities and other payables Net cash used in operations	2004 HK$’000 76,332 3,425 (1,312) 17,683 507 – – (1,400) (57,176) – – – (3,117) (446) (1,204) (938) 32,354 369 (94,792) (24,204) (690) (50,196) (407) (16,783) (154,349)	2003 HK$’000 (30,774) (9,228) (958) 16,154 464 2,614 (149) 478 – 48 3,080 1,200 – (712) – (200) (17,983) (749) (119,225) 7,168 1,978 58,626 (70) 26,324 (43,931)

– 85 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

28 Consolidated cash flow statement (Continued)

(b) Analysis of changes in financing during the year

Share capital including premium 2004 2003 HK$’000 HK$’000 At 1st January 271,674 164,476 Minority interests’ profit/(loss) – – Revaluation surplus attributable to minority interests – – Acquisition of subsidiaries attributable to minority interests – – Decrease in minority interests resulting from acquisition of subsidiaries from minority shareholders – – Partial disposal of investment in subsidiaries attributable to minority interests – – Cash (outflows)/inflows from financing/net short-term loan borrowing/repayment 395,039 107,198 Acquisition of a subsidiary settled by issuance of shares 364,511 – Bank borrowings of subsidiaries acquired – – Finance lease of subsidiaries acquired – – Former shareholders’ loan of subsidiaries acquired – – Decrease in former shareholders’ loan by convertible notes issued – – At 31st December 1,031,224 271,674	Share capital including premium 2004 2003 HK$’000 HK$’000 At 1st January 271,674 164,476 Minority interests’ profit/(loss) – – Revaluation surplus attributable to minority interests – – Acquisition of subsidiaries attributable to minority interests – – Decrease in minority interests resulting from acquisition of subsidiaries from minority shareholders – – Partial disposal of investment in subsidiaries attributable to minority interests – – Cash (outflows)/inflows from financing/net short-term loan borrowing/repayment 395,039 107,198 Acquisition of a subsidiary settled by issuance of shares 364,511 – Bank borrowings of subsidiaries acquired – – Finance lease of subsidiaries acquired – – Former shareholders’ loan of subsidiaries acquired – – Decrease in former shareholders’ loan by convertible notes issued – – At 31st December 1,031,224 271,674	Share capital including premium 2004 2003 HK$’000 HK$’000 At 1st January 271,674 164,476 Minority interests’ profit/(loss) – – Revaluation surplus attributable to minority interests – – Acquisition of subsidiaries attributable to minority interests – – Decrease in minority interests resulting from acquisition of subsidiaries from minority shareholders – – Partial disposal of investment in subsidiaries attributable to minority interests – – Cash (outflows)/inflows from financing/net short-term loan borrowing/repayment 395,039 107,198 Acquisition of a subsidiary settled by issuance of shares 364,511 – Bank borrowings of subsidiaries acquired – – Finance lease of subsidiaries acquired – – Former shareholders’ loan of subsidiaries acquired – – Decrease in former shareholders’ loan by convertible notes issued – – At 31st December 1,031,224 271,674	Minority interests Shareholders’ loan 2004 2003 2004 2003 HK$’000 HK$’000 HK$’000 HK$’000 62,952 24,258 – – 4,486 (7,648) – – – 266 – – 9,502 42,025 – – (1,324) – – – – 4,051 – – – – 23,158 – – – – – – – – – – – – – – – – – – – – –	Minority interests Shareholders’ loan 2004 2003 2004 2003 HK$’000 HK$’000 HK$’000 HK$’000 62,952 24,258 – – 4,486 (7,648) – – – 266 – – 9,502 42,025 – – (1,324) – – – – 4,051 – – – – 23,158 – – – – – – – – – – – – – – – – – – – – –	Minority interests Shareholders’ loan 2004 2003 2004 2003 HK$’000 HK$’000 HK$’000 HK$’000 62,952 24,258 – – 4,486 (7,648) – – – 266 – – 9,502 42,025 – – (1,324) – – – – 4,051 – – – – 23,158 – – – – – – – – – – – – – – – – – – – – –	Minority interests Shareholders’ loan 2004 2003 2004 2003 HK$’000 HK$’000 HK$’000 HK$’000 62,952 24,258 – – 4,486 (7,648) – – – 266 – – 9,502 42,025 – – (1,324) – – – – 4,051 – – – – 23,158 – – – – – – – – – – – – – – – – – – – – –	Former shareholders’ loan 2004 2003 HK$’000 HK$’000 – – – – – – – – – – – – (24,556) – – – – – – – 69,556 – (45,000) –	Former shareholders’ loan 2004 2003 HK$’000 HK$’000 – – – – – – – – – – – – (24,556) – – – – – – – 69,556 – (45,000) –	Short term Bank loan bank borrowings 2004 2003 2004 2003 HK$’000 HK$’000 HK$’000 HK$’000 – – – – – – – – – – – – – – – – – – – – – – – – – (106,335) 15,000 – – – – – – 106,335 – – – – – – – – – – – – – –	Short term Bank loan bank borrowings 2004 2003 2004 2003 HK$’000 HK$’000 HK$’000 HK$’000 – – – – – – – – – – – – – – – – – – – – – – – – – (106,335) 15,000 – – – – – – 106,335 – – – – – – – – – – – – – –	Short term Bank loan bank borrowings 2004 2003 2004 2003 HK$’000 HK$’000 HK$’000 HK$’000 – – – – – – – – – – – – – – – – – – – – – – – – – (106,335) 15,000 – – – – – – 106,335 – – – – – – – – – – – – – –	Short term Bank loan bank borrowings 2004 2003 2004 2003 HK$’000 HK$’000 HK$’000 HK$’000 – – – – – – – – – – – – – – – – – – – – – – – – – (106,335) 15,000 – – – – – – 106,335 – – – – – – – – – – – – – –	Finance lease payable 2004 2003 HK$’000 HK$’000 – – – – – – – – – – – – (482) – – – – – 1,299 – – – – –	Finance lease payable 2004 2003 HK$’000 HK$’000 – – – – – – – – – – – – (482) – – – – – 1,299 – – – – –
	1,031,224	271,674	75,616	62,952	23,158	–	–	–	–	–	15,000	–	817	–

– 86 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

28 Consolidated cash flow statement (Continued)

(c) Acquisitions and major non-cash transaction

(i) Acquisition of Mocha Slot for the year ended 31st December 2004

On 9th June 2004, the Group completed the acquisition of 80% of the issued share capital of Mocha Slot which is engaged in the leasing of electronic gaming machines and provision of ancillary management services to SJM in Macau. The purchase consideration was settled by issuance of new shares of the Company (Note 25(b)). The fair value of the net identifiable assets of Mocha Slot at the date of acquisition was approximately HK$4,737,000. Direct costs related to the acquisition amounted to approximately HK$706,000 and were fully settled in cash. The resulting goodwill was approximately HK$361,427,000.

The fair value of the assets and liabilities arising from the acquisition of Mocha Slot are as follows:

Fixed assets_(note 14)
Accounts receivables
Bank balances and cash
Other current assets
Shareholders’ loans
Deferred tax liabilities
Other current liabilities
Fair value of net identifiable assets acquired
Minority interests
The Company’s share of the fair value of net
identifiable assets acquired
Purchase consideration – settled by issuance of new shares
Direct costs related to the acquisition – settled by cash
Total costs of acquisition
Less: the Company’s share of the fair value of net
identifiable assets acquired
Goodwill arising from acquisition of Mocha Slot(Note 12)_
Payment of direct costs related to the acquisition
Bank balance and cash acquired
Net cash inflow from acquisition of Mocha Slot

2004
HK$’000
64,449
5,832
10,971
7,569
(69,556)
(262)
(14,266)
4,737
(947)
3,790
364,511
706
365,217
3,790
361,427
(706)
10,971
10,265

– 87 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

28 Consolidated cash flow statement (Continued)
(c) Acquisitions and major non-cash transaction (Continued)
- (ii) Acquisition of Value Convergence Holdings Limited for the year ended 31st December 2003

Net assets acquired Fixed asset Intangible assets Other long-term assets Trade and other receivables Bank balances and cash Trade and other payables Bank borrowings Minority shareholders’ interests Fair value of net identifiable assets acquired Goodwill arising from acquisition of Value Convergence Holdings Limited Total costs of acquisition Satisfied by Cash	2003 HK$’000 18,477 25,478 6,534 118,428 122,900 (43,297) (106,335) (42,025) 100,160 598 100,758 100,758

Analysis of the net cash inflow in respect of the acquisition of Value Convergence Holdings	Analysis of the net cash inflow in respect of the acquisition of Value Convergence Holdings
Limited:
	2003
	HK$’000
Cash consideration	(100,758)
Bank balances and cash in hand acquired	122,900
Net cash inflow in respect of the
acquisition of Value Convergence Holdings Limited	22,142

(d) On 31st May 2004, the Company completed the acquisition of additional interests of subsidiaries in Technology segment from its subsidiary, Value Convergence Holdings Limited at a consideration of HK$27,900,000 and direct expenses of HK$325,000. Balance of approximately HK$8,805,000, which represents Value Convergence Holdings Limited minority interests on the gain on disposal of the Technology segment and the direct expenses, was recognised as the goodwill on the acquisition.
(e) On 1st June 2004 and 16th December 2004, the Company completed the acquisition of an additional 10% and 12.5% equity interest respectively in Elixir Group Limited from the other minority shareholders in aggregate consideration of HK$217,000. Negative goodwill amounting to approximately HK$1,204,000, which represented the surplus of the net assets value of Elixir Group Limited to the consideration, was directly credited to the profit and loss account.

29 Pledge of assets

As at 31st December 2004, the Group’s bank deposits amounting to HK$177,000 (2003: HK$184,000) were pledged for tendering of contracts with the Macau government by a subsidiary of the Group. As at 31st December 2003, the Group’s bank deposits amounting to HK$120,000 were pledged to secure a letter of guarantee to the extent of HK$120,000 granted by a bank to the utilities companies in lieu of cash.

– 88 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

30 Commitments

(a) Capital commitments

At 31st December 2004, the Group had contracted commitments in respect of renovation project as follows:


	2004	2003
	HK$’000	HK$’000
Contracted but not provided for	437	4,547

(b) Commitments under operating leases

The Group leases certain of its office properties and furniture under operating lease arrangements. At 31st December 2004, the Group had future aggregate minimum lease payments under non-cancellable operating leases as follows:

Not later than one year Later than one year and not later than five years	Group 2004 HK$’000 19,620 46,835 66,455	2003 HK$’000 4,853 4,958
		9,811

(c) Future operating lease arrangements

At 31st December 2004, the Group had entered into lease arrangements with SJM and the other lessee for leasing of its owned gaming machines. In addition to a fixed monthly rent of HK$7,767 (equivalent to MOP8,000) per month for one of the lease arrangements, the Group will be entitled to lease receipts calculated at an agreed percentage of net win from each gaming machine leased on an accrual basis in accordance with the respective lease arrangements. The future aggregate minimum lease receipts under such non-cancelable operating lease arrangements at 31st December 2004 are as follows:

Not later than one year Later than one year and not later than five years Later than five years	Group 2004 HK$’000 280 1,118 1,150 2,548	2003 HK$’000 – – –
		–

– 89 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

31 Related party transactions

Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions or vice versa. Parties are also considered to be related if they are subject to common control or common significant influence.

(a) The amount due from an investee company is unsecured, interest free and have no fixed terms of repayment.
(b) The trade receivables include amounts due from related companies in relation to sales of computer hardware and software of approximately HK$14,876,000 (2003: HK$1,808,000).

The trade receivables include amounts due from SJM in relation to the leasing of gaming machines and provision of ancillary management services of approximately HK$8,462,000 (2003: Nil).

The prepayments, deposits and other receivables include amounts due from customers on contracts in relation to sales of computer hardware and software to related companies of approximately HK$1,044,000 (2003: HK$1,702,000)

Contract costs incurred plus attributable profits Less: Progress billings to date	Group 2004 HK$’000 50,521 (49,477) 1,044	2003 HK$’000 5,683 (3,981)
		1,702

(c) The accruals and other payables include deposits received from related companies in relation to sales of computer hardware and software of approximately HK$367,735,000 (2003: HK$10,180,000).

(d) Significant related party transactions, which were carried out in the normal course of the Group’s business are as follows:


		2004	2003
	Notes	*HK$’000*	HK$’000
Catering income received from directors
and related companies	(i)	4,306	2,486
Insurance premiums paid to a related company	(ii)	1,004	1,173
Management fees paid to a related company	(iii)	276	569
Souvenirs sold to a related company	(iv)	681	418
Brokerage commission income earned
from certain directors of the Group
or their relatives	(v)	243	106
Sales of computer hardware and software
to related companies	(vi)	81,644	15,634
Management fees received from
a related company	(vii)	600	–
Interest expense on loan from a shareholder	(viii)	23	–
Interest expense on convertible notes
to related parties	(ix)	1,011	–
Income from leasing of gaming machines
and provision of ancillary management
services to a related company	(x)	44,890	–
Management fees received from a
jointly controlled entity	(xi)	6,671	–

– 90 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

31 Related party transactions (Continued)

Notes:

(i) The Group received catering income in respect of restaurant operations from certain directors and related companies for services provided at a discount ranging between 15% and 40%.
(ii) The Group paid insurance premiums to Jardine Shun Tak Insurance Brokers Limited, an associate of Shun Tak Holdings Limited (“STHL”), to insure the properties and employees of the Group under the terms and conditions applicable to customers of comparable standing. Dr. Stanley Ho and Madam Winnie Ho Yuen Ki, a director and an ex-director of the Company, are also a director and an ex-director and/or have direct and/or indirect beneficial interests in STHL.
(iii) The Group paid management fees to Shun Tak Property Management Limited (“STPML”), a subsidiary of STHL; on a reimbursement basis for building management expenditure paid by STPML on behalf of the Group.
(iv) The sales of souvenirs to STDM, a related company of which Dr. Stanley Ho and Madam Winnie Ho Yuen Ki are director and ex-director, respectively, and/or have direct and/or indirect beneficial interests, were made according to the published prices and conditions offered to customers of the Group, except that a longer credit period was normally granted. The balance due from STDM at 31st December 2004 was HK$519,000 (2003: HK$429,000) (Note 21).
(v) Brokerage commission income earned from transactions with related parties was at prices and terms no less than those transacted with other third party customers of the Group.
(vi) Service fees charged and computer hardware and software sold to related companies were conducted in the normal course of business at prices and terms no less than those charged to and contracted with other third party customers of the Group.
(vii) The management fee to GCIL, a related company of which Dr. Stanley Ho is the director, was determined on the base agreed between the Group and GCIL (see Note 21).
(viii) Interest expense on loan from a minority shareholder of a subsidiary of the Group was charged at 4 per cent per annum. The loan was unsecured and repayable on demand.
(ix) Interest expense on convertible notes to related parties was charged at 4 per cent per annum (see Note 24).
(x) The amount represents income from leasing of gaming machines and provision of ancillary management services to SJM.
(xi) The management fee from the jointly controlled entity (Note 2) was determined on the base agreed between the Group and the jointly controlled entity. The amount due from the jointly controlled entity is unsecured, interest free and have no fixed terms of repayment.

– 91 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

32 Principal subsidiaries

The following is a list of the principal subsidiaries at 31st December 2004:

		Principal
		activities and	Particulars of	Effective
	Place of	place of	issued share	interest
Name	incorporation	operation	capital	held
Melco Leisure and	British Virgin	Investment	1 ordinary	100%
Entertainment Group	Islands	holding in	share of US$1
Limited (formerly known		Hong Kong
as Palmsville
Developments Limited)1
Mocha Slot Group	British Virgin	Leasing gaming	100 ordinary	80%
Limited2, 3	Islands	machines and	shares of US$1
		provision of	each
		ancillary
		management
		services to the
		lessees of its
		gaming machines
		in Macau
Mocha Slot	Macau	Provision of	2 ordinary	80%
Management		consultancy	shares of
Limited2, 3		service for	MOP24,000
		entertainment	and MOP1,000
		business and	each
		system
		management
		in Macau
Aberdeen Restaurant	Hong Kong	Restaurant	8,060 A shares	86.68%
Enterprises Limited2, 4		operations and	of HK$1,000
		property	each and
		investment in	33,930 B
		Hong Kong	shares of
			HK$500 each
Tai Pak Sea-Food	Hong Kong	Catering,	5 founders’	84.76%
Restaurant Limited2, 4		restaurant	shares of
		vessel holding	HK$100 each
		and letting	and 13,495
		in Hong Kong	ordinary shares
			of HK$100 each
Jumbo Catering	Hong Kong	Provision of	220 ordinary	86.68%
Management		management	shares of
Limited2, 4		services in	HK$5,000
		Hong Kong
iAsia Online Systems	British Virgin	Provision of	1 ordinary share	100%
Limited2	Islands	online trading	of US$1
		software in
		Hong Kong
Elixir Group Limited2	Hong Kong	Provision of	833,333 ordinary	100%
		hardware and	shares of
		software in	HK$1 each
		Hong Kong

– 92 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

32 Principal subsidiaries (Continued)

		Principal
		activities and	Particulars of	Effective
	Place of	place of	issued share	interest
Name	incorporation	operation	capital	held
Elixir Group (Macau)	Macau	Provision of	2 ordinary	100%
Limited2		hardware and	shares of
		software in	MOP450,000
		Macau	and
			MOP50,000
			each
Melco Financial	British Virgin	Investment	1 ordinary share	100%
Group Limited	Islands	holding in	of US$1
(formerly known		Hong Kong
as Melco Finance
and Technology
Limited)1
Value Convergence	Hong Kong	Investment	238,154,999	67.57%
Holdings Limited2		holding in	ordinary shares
		Hong Kong	of HK$0.1 each
VC Brokerage	Hong Kong	Provision of	230,000,000	67.57%
Limited (Formerly		brokerage and	ordinary shares
known as VC CEF		securities	of HK$1 each
Brokerage Limited)2		margin financing
		services in
		Hong Kong
VC Futures	Hong Kong	Provision of	30,000,000	67.57%
Limited (Formerly		futures and	ordinary
known as VC CEF		options	shares of
Futures Limited)2		contracts	HK$1 each
		dealing services
		in Hong Kong
VC Capital Limited	Hong Kong	Provision of	20,000,000	67.57%
(Formerly known		corporate	ordinary
as VC CEF Capital		finance	shares of
Limited)2		and advisory	HK$1 each
		services in
		Hong Kong
VC Capital	PRC	Provision of	HK$1,000,000	67.57%
(Shenzhen) Limited		consultancy
(Formerly known as		services in the
VC CFN Capital		PRC
(Shenzhen) Limited)2
VC Securities	Hong Kong	Provision of	2 ordinary	67.57%
Investments Limited		security	shares of HK$1
(Formerly known as		investment	each
VC CFN		service to group
Investments Limited)2		companies in
		Hong Kong
VC Asset Management	Hong Kong	Provision of	500,000	67.57%
Limited (Formerly		asset	ordinary
known as VC CFN		management	shares of
Asset Management		services to	HK$1 each
Limited)2		clients in
		Hong Kong

– 93 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

32 Principal subsidiaries (Continued)

		Principal
		activities and	Particulars of	Effective
	Place of	place of	issued share	interest
Name	incorporation	operation	capital	held
VC Investment	British Virgin	Investment	1 ordinary	67.57%
Management Limited	Islands	holding	share of
(Formerly known		in Hong Kong	US$1
as Panorama
Invest Limited)2
VC Finance	Hong Kong	Money lending	1,000,000	67.57%
Limited (Formerly		in Hong Kong	ordinary
known as VC			shares of
CFN Finance			HK$1 each
Limited)2
VC Research	Hong Kong	Provision of	500,000	67.57%
Limited (Formerly		research	ordinary
known as VC		services in	shares of
CFN Research		Hong Kong	HK$1 each
Limited)2
VC Financial	Macau	Provision of	2 ordinary	67.57%
Advisory		financial	shares of
(Macau)		consultancy	MOP24,000
Limited2		and related	and
		services	MOP1,000
		in Macau	each
VC Services	Hong Kong	Provision of	10,000	67.57%
Limited (Formerly		management	ordinary shares
known as iAsia		services to	of HK$1 each
Services Limited)2		group companies
		in Hong Kong
Melco Services	British Virgin	Investment	1 ordinary	100%
Limited1	Islands	holding in	share of US$1
		Hong Kong
Proven Success Limited1	British Virgin	Investment	1 ordinary	100%
	Islands	holding in	share of
		Hong Kong	US$1
Zonic Technology Limited2	British Virgin	Investment	1 ordinary	100%
	Islands	holding in	share of
		Hong Kong	US$1

1 Share held directly by the Company 2 Share held indirectly by the Company 3 Acquired by the Group during the year (note 28(c)(i))
4 Audited by auditors other than PricewaterhouseCoopers

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

– 94 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

33 Contingent liabilities

As at 31st December 2004, the Group had provided a corporate guarantee for a subsidiary, VC Brokerage Limited, amounting to HK$70 million (2003: HK$50 million) to a bank in respect of banking facilities granted to the subsidiary .

34 Post balance sheet events

On 23rd November 2004, the Company entered into a Heads of Agreement (“Heads of Agreement”) with Publishing and Broadcasting Limited (“PBL”) and PBL Asia Investments Limited (“PBL Asia”), a wholly-owned subsidiary of PBL, to establish a joint venture group for pursuance of gaming and hospitality businesses (“JV Group”). The Heads of Agreement was superseded by a Subscription Agreement (“Subscription Agreement”) entered into between the parties on 23rd December 2004. Under the Subscription Agreement, the Company contributed its interests in Mocha Slot Group and 70% interests of Great Wonders to the JV Group while PBL contributed HK$1.27 billion (equivalent to US$ 163 million) cash to the JV Group. The Subscription Agreement was completed on 8th March 2005.

On 17th March 2005, the Company entered into an agreement (“Great Wonders Agreement”) with Melco Entertainment Limited (“Melco Entertainment”), a non wholly-owned subsidiary within the JV Group, pursuant to which Melco Entertainment will buy and the Company will sell 30% equity interests in Great Wonders to be acquired from STDM for a consideration of HK$400 million, which is identical to the amount of consideration payable by the Company to STDM under the Third Agreement (see note 16). The completion of the Great Wonders Agreement is conditional upon the completion of the Third Agreement and it is contemplated that the completions of the Third Agreement and the Great Wonders Agreement shall occur simultaneously.

35 Approval of accounts

The accounts were approved by the board of directors on 7th April 2005.

– 95 –

ACCOUNTANTS’ REPORT OF GREAT WONDERS

APPENDIX II

==> picture [92 x 36] intentionally omitted <==

2nd June 2005

The Directors

Melco International Development Limited

Dear Sirs,

We set out below our report on the financial information relating to Great Wonders, Investments, Limited (“Great Wonders” or the “Company”) for the period from 15th September 2004 (“Date of Establishment”) to 31st December 2004 for inclusion in the circular of Melco International Development Limited (“Melco”) dated 2nd June 2005 (the “Circular”) in connection with the proposed acquisition of the remaining interest in the land and injection of interest in the land into the joint venture group of companies which headed by Melco PBL Holdings Limited.

Great Wonders was established in Macau on 15th September 2004 as a limited liability company. Great Wonders is principally engaged in investment in hotel development.

No revenue/expense was generated/incurred by Great Wonders since the Date of Establishment and up to 31st December 2004. No audited accounts have been prepared for Great Wonders since its Date of Establishment. The financial information of Great Wonders as at 31st December 2004, set out in Section I to III (the “Financial Information”) of this report, has been prepared based on the management accounts and in accordance with accounting principles generally accepted in Hong Kong.

We have examined the management accounts of Great Wonders as at 31st December 2004 and have carried out such additional procedures as are necessary in accordance with the Auditing Guidelines “Prospectuses and the Reporting Accountant” issued by the Hong Kong Institute of Certified Public Accountants.

The directors of the Great Wonders are responsible for the preparation of the management accounts and Financial Information which give a true and fair view. In preparing the management accounts, it is fundamental that appropriate accounting polices are selected and applied consistently. It is our responsibility to form an independent opinion, based on our examination, on the Financial Information and to report our opinion.

In our opinion, the Financial Information for the purpose of this report, gives a true and fair view of the state of affairs of Great Wonders as at 31st December 2004.

– 96 –

ACCOUNTANTS’ REPORT OF GREAT WONDERS

APPENDIX II

I. BALANCE SHEET

The following is the balance sheet of Great Wonders as at 31st December 2004:

Note Non-current assets Construction in progress 4 Current assets Amount due from a shareholder 5 Current liabilities Amounts due to affiliate companies 5 Net current liabilities Total assets less current liabilities Financed by: Share capital 6	MOP’000 25,950 -------------------- 1,000 25,950
	(24,950 --------------------
	1,000

	1,000

II. STATEMENT OF CHANGES IN EQUITY

The following is the statement of changes in equity of Great Wonders for the period from 15th September 2004 (Date of Establishment) to 31st December 2004:

Note As at 15th September 2004 (Date of Establishment) Issuance of new shares 6 As at 31st December 2004	MOP’000 – 1,000
	1,000

– 97 –

ACCOUNTANTS’ REPORT OF GREAT WONDERS

APPENDIX II

III. NOTES TO THE FINANCIAL INFORMATION

1 Principal accounting policies

The principal accounting policies adopted in the preparation of these accounts are set out below:

(a) Basis of preparation

The accounts have been prepared under the historical cost convention and in accordance with accounting principles generally accepted in Hong Kong and comply with accounting standards issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”).

At 31st December 2004, the Company’s current liabilities exceeded its current assets by approximately MOP24,950,000. The accounts have been prepared on a going concern basis which assumes the continued financial support from its shareholding company, Melco International Development Limited (“Melco”), is available to the Company. Melco has indicated its intention and has the ability to provide such necessary financial support to the Company for a period of at least twelve months from the date of this report.

No profit and loss account has been prepared as no revenue/cost was generated/ incurred during the period. All the administrative costs for the period from 15th September 2004 (date of incorporation) to 31st December 2004 were borne by its shareholding companies.

A statement of cash flows has not been prepared because the Company has no turnover during the period. Such exemption is granted under the provisions of SSAP 15 (revised) “Cash Flow Statements” issued by the HKICPA.

The HKICPA has issued a number of new and revised Hong Kong Financial Reporting Standards and Hong Kong Accounting Standards (“new HKFRSs”) which are effective for accounting periods beginning on or after 1st January 2005. The Company has not early adopted these new HKFRSs in the accounts for the period ended 31st December 2004. The Company has already commenced an assessment of the impact of these new HKFRSs but is not yet in a position to state whether these new HKFRSs would have a significant impact on its results of operations and financial position.

– 98 –

ACCOUNTANTS’ REPORT OF GREAT WONDERS

APPENDIX II

(b) Construction in progress

Construction in progress represents the construction costs of the hotel properties on which construction work has not been completed at the period end and which, upon completion, management intends to hold for its own use. Construction in progress is carried at cost which includes development and construction expenditure incurred less any accumulated impairment losses. On completion, the hotel is transferred to fixed assets at cost less accumulated impairment losses.

At each balance sheet date, both internal and external sources of information are considered to assess whether there is any indication that construction in progress is impaired. If any such indication exists, the recoverable amount of the asset is estimated and where relevant, an impairment loss is recognised to reduce the asset to its recoverable amount. Such impairment losses are recognised in the profit and loss account.

(c) Deferred taxation

Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

2 Taxation and deferred taxation

No provision for Hong Kong and overseas profits tax has been made in the accounts as the Company has no assessable profit for the period.

There were no significant unprovided deferred tax assets/liabilities as at 31st December 2004.

3 Directors’ emoluments

None of the directors received or will receive any fees or emoluments in respect of their services to the Company during the period.

– 99 –

ACCOUNTANTS’ REPORT OF GREAT WONDERS

APPENDIX II

4 Construction in progress

			MOP’000
Cost
Additions during the period and at	31st December	2004	25,950

5 Amount due from a shareholder and amounts due to affiliates companies

The amount due from a shareholder represents amount of issued shares capital receivable from Sociedade de Turismo e Diversoes de Macau, S.A.R.L. (“STDM”).

The amount due from a shareholder and amounts due to affiliates companies are unsecured, interest-free and have no fixed terms of repayment.

6 Share capital

	MOP’000
Authorised, issued and fully paid:
10,000 ordinary shares of MOP100 each	1,000

The Company was incorporated on 15th September 2004 with an authorised share capital of MOP1,000,000 divided into 10,000 shares of MOP100 each. Upon incorporation, 10,000 ordinary shares of MOP100 each were issued at par for cash.

7 Related party transactions

Parties are considered to be related to the Company if the Company has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decision or vice versa. Parties are also considered to be related if they are subject to common control or common significant influence.

Significant related party transactions, which were carried out in the normal course of business are as follows:

	MOP’000
Project specified expenses charged by related companies	6,884

The above transactions were charged based on terms mutually agreed between relevant parties and were included in the construction in progress.

– 100 –

ACCOUNTANTS’ REPORT OF GREAT WONDERS

APPENDIX II

8 Capital commitment

The Company had the following capital commitments for property, plant and equipment as at 31st December 2004:

MOP’000

Contracted but not provided for 1,494,000

9 Subsequent events

a) The Company has applied to the Macau Government for the concession of a parcel of land located in Taipa, Macau (the “Land”) and to develop the Land into a six-star hotel and entertainment complex (pending government approval) with one of the largest casino and electronic gaming machine areas. Up to the date of this report, the concession of the Land has not been granted to Company.
b) The shareholding companies, Melco and STDM, entered into agreements on 11th November 2004 (“Second Agreement”) and 17th March 2005 (“Third Agreement”) pursuant to which Melco acquired an additional 20% and 30% issued share capital of the Great Wonders from STDM at a consideration of HK$56 million (equivalent to MOP57.79 million) and HK$400 million (equivalent to MOP412.8 million) respectively. The Second Agreement was approved by the independent shareholders of the Company at its extraordinary general meeting held on 20th January 2005. Completion of the Third Agreement is conditional on the approval of the independent shareholders of the Company at an extraordinary meeting. Upon the completion of the share transfers, Great Wonders will become a subsidiary of Melco.

10 Subsequent accounts

No audited accounts have been prepared for Great Wonders in respect of any period subsequent to 31st December 2004.

Yours faithfully,

PricewaterhouseCoopers Certified Public Accountants

– 101 –

PROPERTY VALUATION

APPENDIX III

The following is the text of a letter and valuation certificate issued by Savills (Hong Kong) Limited, an independent property valuer, prepared for the purpose of incorporation in this circular in connection with its valuation of the property interests held by the Company as at 17th March 2005.

==> picture [87 x 87] intentionally omitted <==

Valuation Department E: [email protected] DL: (852) 2801 6100 F: (852) 2530 0756 23/F Two Exchange Square Central, Hong Kong

EA LICENCE: C-002450 T: (852) 2842 4400 savills.com

The Directors

Melco International Development Limited

Penthouse 38/F The Centrium 60 Wyndham Street Central Hong Kong

1st April 2005

Dear Sirs,

A Development Site known as Site A1, Baixa da Taipa – Lote BT17, Taipa, Macau

In accordance with your instructions to value the property interests owned by Great Wonders, Investments, Limited in Macau, we confirm that we have made relevant enquiries and obtained such information as we consider necessary for the purpose of providing you with our opinion of the open market value of the property interests as at 17th March 2005 (the “Valuation Date”).

Our valuation is our opinion of the open market value which we would define as intended to mean “the best price at which the sale of an interest in property would have been completed unconditionally for cash consideration on the date of valuation assuming:

(a) a willing seller;
(b) that, prior to the date of valuation, there had been a reasonable period (having regard to the nature of the property and the state of the market) for the proper marketing of the interest, for the agreement of price and terms and for the completion of the sale;
(c) that the state of the market, levels of values and other circumstances were, on any earlier assumed date of exchange of contracts, the same as on the date of valuation;

– 102 –

PROPERTY VALUATION

APPENDIX III

(d) that no account is taken of any additional bid by a purchaser with a special interest; and
(e) that both parties to the transaction had acted knowledgeably, prudently and without compulsion.”

Our valuation has been made on the assumption that the owner sells the property interests on the open market without the effect of any deferred term contract, leaseback, joint venture, management agreement or any similar arrangement which would serve to affect the value of the property interests. In addition, no account has been taken of any option or right of pre-emption concerning or affecting the sale of the property, and no allowance is made for the property to be sold to a single party and / or as a portfolio or portfolios.

No allowance has been made in our valuation for any charges, mortgages or amounts owing on the property or for any expenses or taxation which may be incurred in effecting a sale. Unless otherwise stated, it is assumed that the property is free from encumbrances, restrictions and outgoings of an onerous nature which could affect its value.

Our valuation has been prepared in accordance with the Guidance Notes on the Valuation of Property Assets published by the Hong Kong Institute of Surveyors, the relevant provisions of the Companies Ordinance and Chapter 5 of Listing Rules published by the Stock Exchange of Hong Kong and its Practice Note 12.

We have valued the property interest by residual method of valuation. We have employed the residual method of valuation in which the open market value of the property concerned is firstly established assuming newly completed based on the details of the development proposal provided to us as at the Valuation Date (i.e. gross development value of the property). Although there have been some hotel transactions in Macau recently, they are of different size, quality, market positioning and facilities as compared with the property. We therefore do not rely on comparison method in the assessment of gross development value. The total unexpended cost of development including construction costs, professional fees and other associated expenditure, together with an allowance for interest expense, developer’s profit and contingency are estimated and deducted from the established gross development value of the property. The resultant residue figure is then adjusted back to the Valuation Date to arrive at the open market value of the property concerned in its existing state.

We have assumed that all consents, approvals and licenses from the relevant government authorities have been or will be granted without onerous conditions or delay for the property.

All documents disclosed in certificate, if any, are for reference only and no responsibility is assumed for any legal matter concerning the legal title to the property interests set out in the certificate.

We have carried out an external inspection to the property. However, no structural survey has been made and we are therefore unable to report the property is free from rot, infestation or any other defects. No tests were carried out on any of the services.

No site investigation has been carried out to determine the suitability of the ground conditions or the services for any property development thereon. Our valuation is carried out on the assumptions that these aspects are satisfactory.

– 103 –

PROPERTY VALUATION

APPENDIX III

Other special assumptions of the property, if any, have been stated in the footnotes of the valuation certificate of the property.

We have caused land searches to be made at the Land Registry against the property. We have not, however, perused the original documents to verify ownership or to ascertain the existence of any lease amendments which may not appear on the copies handed to us.

We have assumed that the owner of the property interests has enforceable title to the property interests, and have free and uninterrupted rights to use the property for the whole of the respective unexpired terms granted subject to payment of nominal annual Land Use Rights Fees and that all requisite land premium / purchase consideration payable have been fully settled.

Having examined all relevant documentation, we have relied to a very considerable extent on the information provided by the Client and its legal advisers on Macau laws, C & C Advogados, regarding title of the property, land tenure and premium arrangement for the land grant. We have accepted advice given to us on such matters as the identification of the property, land tenure and development conditions, premium arrangement for the land grant, particulars of occupancy, site area, indicative cost estimate of the proposed hotel development, translated document together with all other relevant matters. Except otherwise stated, all dimensions, measurements and areas included in the valuation certificate are based on information contained in the document provided to us by the Client and are therefore approximate. We have no reason to doubt the truth and accuracy of the information provided to us by the Client and its Macau legal advisers, and have been advised by the Client that no material facts have been omitted from the information provided and have no reason to suspect that any material information has been withheld.

We have also had regard to relevant construction costs based on data published by professional quantity surveyors and cost estimates provided by local cost consultants in the course of the assessment.

We have not verified and make no representation that the property, including any plant and equipment therein, is millennium compliant, or that the value of the property is not adversely affected in any way by any part of them not being millennium compliant within the meaning of BSI definition of Year 2000 compliance.

Our valuation certificate is attached.

Yours faithfully, For and on behalf of

Savills (Hong Kong) Limited

David W. I. Cheung Franco P L Liu MRICS, MHKIS, RPS, CREA, MCIArb MREP BSc (Hons), MHKIS Director Associate Director Valuation and Consultancy Valuation and Consultancy

Note: Mr David W I Cheung and Mr Franco P L Liu are chartered surveyors with over 10 years and 6 years property valuation experience in Macau respectively.

– 104 –

PROPERTY VALUATION

APPENDIX III

VALUATION CERTIFICATE

Property

A Development Site known as Site A1, Baixa da Taipa – Lote BT17, Taipa, Macau

Description and Tenure

The subject property comprises a site with an area of about 5,230 sq.m. (56,295.20 sq.ft.). It is situated on the south-western side of Avenida Dr. Sun Yat Sen and bounded by Rua de Hong Chau, Rua de Nam Keng and Avenida Kwong Tung. It is adjacent to Hung Fat Garden and Hyatt Regency Macau.

The property which is under construction will be built into a 36-storey hotel towers, known as Park Hyatt Hotel, resting on 3- levels of basements, with casino facilities.

Particular of Occupancy

The property is under construction. As advised by the Company, the casino portion of the property is scheduled to be completed by two phases i.e. May 2006 and August 2006 respectively whereas the hotel portion of the property is scheduled to be completed by March 2007.

Open Market Value in its existing state as at 17th March 2005

HK$1,100,000,000

The total gross floor area of the proposed hotel development with casino facilities is approximately 76,407 sq.m. (822,437 sq.ft.) and the breakdown gross floor area is as follows:

Hotel portion: Casino portion: Total:	52,292 sq.m. 24,115 sq.m. 76,407 sq.m.	562,866 sq.ft 259,571 sq.ft.
		822,437 sq.ft.

The property was held under a Concessao Por Arrendamento (租賃批地 ) for a term of 25 years commencing on 7th March 1980.

The tenure of the previous land grant has expired and application for a new land lease is in progress.

As stated in Note (iii)(2) below, the existing lease term has expired in March 2005. According to a letter from the Public Works Department of the Macau Government dated 20th April 2005, the application for surrender and regrant of the subject property from Nova Taipa Urbanizacoes Lda and Great Wonders Investments Limited is in progress. The Public Works Department of the Macau Government is in the process of drafting a new land grant and assessing the land premium.

– 105 –

PROPERTY VALUATION

APPENDIX III

Notes:

(i) The registered owner of the property under Conservatoria do Registo Predial is Nova Taipa Urbanizacoes Lda vide 3626 L˚F28A fls registered on 16th December 1989.
(ii) According to the recent title search, no material encumbrance is registered against the property.
(iii) C & C Advogados (the Macau legal advisers) have stated in their legal opinion, inter alia, that:
1) Title

We have investigated the Property records and we hereby certify that, until the submission to the Public Works Department of the relevant application, Nova Taipa Urbanizacoes Lda’s (the “Company” ’s) rights to the Property were sound.

Furthermore, up to the date of this certificate, to our knowledge, Great Wonders provided all the documents requested by the Public Works Department of Macau regarding the granting of the new concession.

We do not know of any circumstances that might lead to the title being defective or not good or restricted in any adverse way – as the non-fulfilment of the expired covenants would not normally affect (under Macau practice) the covenants for the new lease.

2) Lease Term

The existing lease term has expired in March 2005. Given the specific circumstances of this case it is not possible to have it extended. Instead it was necessary to have a new lease, and that has already been applied by both Nova Taipa Urbanizacoes Lda on (14th of July 2004) and by Great Wonders Investments Limited (on 15th November 2004), the latter requesting the use for the construction of a 6 star hotel with casino.

It is expected that such new lease will be granted in due time by the Macau Government, subject to the payment of a premium and compliance with development conditions. We are given to understand that the Department of Public Works, from the Macau Government, has approved by letter n.o211/6036.03/DSODEP/2005 the new architectural plans submitted for the Property and the usage inherent to those plans (Hotel and Casino).

3) Land Premium

The premium of the previous leasehold has been fully settled. The premium for the new lease that will replace it has not been assessed by the Government yet.

The development has not been completed under the development covenants which have expired. The Company rights over the Property are assignable, subject to the approval of the Macau Government, and such approval is in line with the common practice in Macau.

We were given to understand that such approval had already been requested by Nova Taipa Urbanizacoes Lda on 14th July 2004 but not granted yet.

(iv) As a new lease has not been granted, the development and use of the property is currently governed under a Building Alignment Plan No. 2004A033 which contains, inter alia, the following salient terms:
a) Use : non-industrial b) Building height restriction : below 160 m N.M.M.
(v) In the course of our valuations, we assumed that the proposed development of the Property will comply with the new Government lease and any amendments thereof as well as all other statutory requirements and all premium (if any) for land exchange has been paid by the owner.
(vi) The premium for land exchange of the property is estimated to be approximately MOP230,000,000 (equivalent to approximately HK$223,300,971). The said estimated amount was provided by the Company based on negotiations with the Macau Government so far and has not been finalized yet.
(vii) In the course of our valuations, the casino portion is assumed to be leased out and the rental is assessed with reference to the prevailing market level in respect of casino in Macau SAR.
(viii) The open market values for the hotel and casino portions of the property, assuming full completion under the development proposal as described, as at the Valuation Date, are HK$1,588,800,000 and HK$1,494,000,000 respectively.

– 106 –

PROPERTY VALUATION

APPENDIX III

(ix) According to the Qualified Quantity Surveyors’ Report, the total construction costs incurred as at the Valuation Date was HK$47,354,000; whilst the total unexpended construction costs as at the Valuation Date were HK$1,248,600,000.
(x) The future professional fees, future interest charges, developer’s profit and contingency adopted in the residual valuation are approximately HK$74,900,000, HK$57,800,000, HK$462,400,000 and HK$55,300,000 respectively.
(xi) Warning Statement:

This Valuation arrived has not been determined by reference to comparable market transactions which is the most reliable method for valuing property assets and the most common method used for valuing properties in Hong Kong. In contrast, because of the lack of comparable market transactions in the locality in which the property is situated, this Valuation has used the residual method which is generally acknowledged as being a less reliable valuation method. The residual method is essentially a means of valuing land by reference to its development potential by deducting costs and developer’s profit from its estimated completed development value. It relies upon a series of assumptions by the valuer which produce an arithmetical calculation of the expected current sale value as at the Valuation Date of the property being developed or held for development or redevelopment. Where the property is located in a relatively under-developed market those assumptions are often based on imperfect market evidence. A range of values may be attributable to the property depending upon the assumptions made. While the valuer has exercised its professional judgement in arriving at the value, investors are urged to consider carefully the nature of such assumptions which are disclosed in the valuation report and should exercise caution in interpreting the valuation report.

(xii) In note (xi) above, it is stated that there is a lack of comparable market transactions in the locality in which the property is situated. Although there are hotel transactions in Macau recently, comparable market transactions of similar size and functional breakdown, including gross floor area in hotel and casino, cannot be found. We therefore cannot rely on comparison method for assessment. Also as stated in note (xi) above, a series of assumptions were relied upon by the valuer in assessing the valuation using the residual method. Such assumptions include professional fees, future interest charges, developer’s profit and contingency, details of which have been disclosed in note (x) above.

– 107 –

APPENDIX IV UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

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

The following is a summary of the unaudited pro forma statement of assets and liabilities (the “Pro Forma Statement”) of the Enlarged Group. It is based on the audited consolidated balance sheet of the Group as at 31st December 2004, adjusted to reflect the completion of the acquisition of the 100% equity interest in Great Wonders under the Land Acquisition Agreements as if the concession of the Land had been transferred to Great Wonders and the acquisition of the 100% equity interest in Great Wonders under the Land Acquisition Agreements had been completed on 31st December 2004. The accounting policy adopted on preparation of the Pro Forma Statement of the Enlarged Group was consistent with the accounting policies of the Group for the year ended 31st December 2004. The pro forma adjustments were directly attributable to the transaction and based on the assumption made by management as detailed in the notes of this Pro Forma Statement. It is prepared for the purpose of illustrating how the transactions might have affected the financial position of the Group as at 31st December 2004. As it is prepared for illustrative purpose only and, because of its nature, may not give a true picture of the financial position of the Enlarged Group as at 31st December 2004 or any future date.

– 108 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

APPENDIX IV

Non-current assets Fixed assets Investment securities Intangible assets Goodwill Investment in a jointly controlled entity Pledged bank deposit Long term deposits Other non-current assets Current assets Amount due from a jointly controlled entity Inventories Trade receivables Prepayments, deposits and other receivable Other investments Amount due from related companies Certificate of deposit Bank balances and cash Current liabilities Trade payables Accrued liabilities and other payable Taxation payable Finance lease payable Bank loans and overdrafts Convertible notes due within one year Net current assets/(liabilities) Total assets less current liabilities Non-current liabilities Convertible notes due after one year Shareholders’ loan Deferred tax liabilities Minority interests Net assets	Pro forma Pro forma adjustments for adjustments for the completion the acquisition of the acquisition of the remaining of 70% equity 30% equity interest in Great interest in Great The Group Wonders(1)&(2) Wonders(3)&(4) HK$’000 HK$’000 HK$’000 204,174 1,125,145 – 27,754 – – 2,786 – – 389,937 – 107,031 100,000 (100,000) – 177 – – 14,780 – – 547 – – 25,145 (25,145) – 3,768 – – 337,014 – – 40,919 – – 40,641 – – 1,119 969 – 1,100 – – 394,966 – (200,000) 844,672 (24,176) (200,000) -------------- -------------- -------------- 60,462 – – 35,153 156,100 66,900 1,888 – – 817 – – 15,000 – – 22,500 – – 135,820 156,100 66,900 -------------- -------------- -------------- 708,852 (180,276) (266,900) -------------- -------------- -------------- 1,449,007 844,869 (159,869) -------------- -------------- -------------- 122,500 56,000 – 23,158 – – 2,256 – – 1,301,093 788,869 (159,869) -------------- -------------- -------------- 75,616 330,291 (330,291) 1,225,477 458,578 170,422	Enlarged Group HK$’000 1,329,319 27,754 2,786 496,968 – 177 14,780 547 – 3,768 337,014 40,919 40,641 2,088 1,100 194,966
		620,496 -------------- 60,462 258,153 1,888 817 15,000 22,500
		358,820 -------------- 261,676 --------------
		2,134,007 -------------- 178,500 23,158 2,256
		1,930,093 -------------- 75,616
		1,854,477

Notes:

(1) The accounts of Great Wonders as shown in Appendix II to this circular were translated to Hong Kong Dollars by using exchange rate of MOP1.03 to HK$1.

– 109 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

APPENDIX IV

(2) a) These represent the adjustments in relation to completion of the acquisition of 70% equity interest in Great Wonders. Apart from the 50% equity interest in Great Wonders which was acquired in October 2004, the Group acquired an additional of 20% equity interests in Great Wonders by the issuance of the Second Convertible Bond with nominal value of HK$56,000,000, which was disclosed in the circular despatched to the Shareholders dated 5th January 2005 and approved on 20th January 2005. The total equity interests of Great Wonders held by the Group increased to 70% immediately after the acquisition.
b) It was assumed that the concession of the Land has been successfully granted to Great Wonders as at 31st December 2004. Purchase accounting will be applied to the Company as it was assumed that the Company has obtained the control on Great Wonders, which including the Land, upon the completion of the acquisition to a total of 70% of the equity interests of Great Wonders. As a result, the accounts of Great Wonders were consolidated to the Group’s accounts.
c) The net assets of the business acquired and considerations given are measured at fair value on the date of exchange for business combination. According to the Group’s legal advisor in Macau, C&C Advocates, the new lease will be granted in due course by the Macau Government to Great Wonders subject to the payment of a premium and compliance with development condition after the expiry of the lease previously held by the former lessee, Nova Taipa Urbanizacoes Lda. Hence, 17th March 2005, which was the latest practical date after the expiry of the lease under the name of Nova Taipa Urbanizacoes Lda on 6th March 2005, was used as a reference date to measure the fair value of the net assets of the business acquired and considerations given for the purpose of preparing the Pro Forma Statement.

Land premium was required to be paid to Macau Government in relation to the grant of the new concession of the Land for hotel use. The Land premium is estimated to be approximately MOP 230,000,000 (equivalent to approximately HK$223,000,000) as mentioned in Note vi of Appendix III and the portion needed to be paid by the Group is 70% of HK$223,000,000, which is equal to HK$156,100,000.

d) The identifiable assets and liabilities of Great Wonders comprised the Land and other assets and liabilities. The respective fair values were estimated as follows:
i) Land

For the purpose of the Pro Forma Statement, the valuation of the Land based on a valuation of hotel together with casinos net of the total development cost as at 17th March 2005 is used. According to the valuation report by an independent property valuer, Savills (Hong Kong) Limited, as contained in Appendix III to this Circular, the valuation of the Land is approximately HK$1,100,000,000 as at 17th March 2005.

ii) Other assets and liabilities

It was also assumed that the fair values of other assets and liabilities were equal to their net carrying amount as at 31st December 2004, which amounted to approximately HK$969,000.

As a result, the fair value of all the identifiable assets and liabilities of Great Wonders was approximately HK$1,100,969,000.
e) The fair value of the Convertible Bonds issued for the acquisitions of 70% equity interest was assumed to be approximately HK$585,000,000 as at 17th March 2005. The fair value of the Convertible Bonds comprises the value of 4% interest bearing bonds and the fair value of call options. The fair value of the 4% interest bearing bonds was calculated by discounting the future cash flows and the fair value of the call options was calculated by Black-Scholes option pricing model. For the purpose of the Pro Forma Statement, the liability portion of the Convertible Bonds will remain the same as their nominal values of HK$156,000,000. The difference between the fair value of the Convertible Bonds and nominal value of the Convertible Bonds of HK$429,000,000 will be credited to the equity of the Company.
f) Based on the above assumption and as a result of the purchase accounting, the fixed assets will be increased by an amount of HK$1,125,145,000, being the fair value of the Land of HK$1,100,000,000 and construction in progress of HK$25,145,000. Other adjustments in applying purchase accounting to the assets and liabilities included:
i) elimination of the prepayment for the 50% equity interest in Great Wonders of HK$100,000,000;
ii) elimination of current accounts between Great Wonders and the Group of HK$25,145,000;

– 110 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

APPENDIX IV

iii) recognition of HK$969,000 due from a shareholder of Great Wonders;
iv) recognition of HK$156,100,000 Land premium payable;
v) recognition of the liability portion of the fair value of the Second Convertible Bond of HK$56,000,000; and
vi) recognition of a minority interest, being 30% of the fair values of the net assets of Great Wonders of HK$330,291,000.
(3) These represent the adjustments in relation to the further acquisition of 30% equity interests in Great Wonders at a consideration of HK$400,000,000 which was satisfied by HK$200,000,000 cash consideration and by issuance of HK$200,000,000 equivalent Consideration Shares. It was assumed that the fair value of the Consideration Shares issued for the acquisition was approximately HK$200,000,000 as at 17th March 2005.

As a result of the further acquisition, the bank balances and cash were decreased and the share capital was increased by HK$200,000,000 respectively. Land premium of HK$66,900,000, which is the remaining 30% of the total Land premium of HK$223,000,000, should be recorded as the Group’s liability. The minority interest of HK$330,291,000 as mentioned in note 2f above was released from the minority interest account.

(4) A total goodwill of HK$107,031,000, which represents the excess of the fair value of total considerations of HK$1,208,000,000, being the total of the fair value of the Convertible Bonds of HK$585,000,000, fair value of the Consideration Shares and cash of HK$400,000,000 and the Land premium payable of HK$223,000,000, and the fair value of the identifiable assets and liabilities of Great Wonders of HK$1,100,969,000 was recognised to the balance sheet.

The amount of goodwill will vary and depend on the net fair value of the identifiable assets and liabilities of Great Wonders and fair value of the total considerations given at the date of completion of acquisition of Great Wonders.

(5) The above pro forma adjustments did not include the adjustments for the establishment of the joint venture group, Melco PBL Holdings Limited, the details of which were disclosed in the circular despatched to the Shareholders dated 5th January 2005.
(6) The Hong Kong Institute of Certified Public Accountants has issued a number of new Hong Kong Financial Reporting Standards and Hong Kong Accounting Standards (“New Accounting Standards”), which are effective for accounting periods beginning on or after 1st January 2005. The New Accounting Standards may result in changes in future as to how the results and financial position are prepared and presented.

II. UNAUDITED PRO FORMA ADJUSTED CONSOLIDATED NET TANGIBLE ASSETS

(a) Group

The following is the statement of net tangible assets of the Group as at 31st December 2004. The consolidated net assets and the intangible assets figures are extracted from the consolidated financial statements of the Group set out in Appendix I of the Circular.

Group

Less: Total Consolidated intangible assets Audited consolidated net assets of (including goodwill) net tangible assets the Group as at of the Group as at of the Group as at 31st December 2004 31st December 2004 31st December 2004 (Note 1) HK$’000 HK$’000 HK$’000

1,225,477 (392,723) 832,754

– 111 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

APPENDIX IV

(b) Enlarged Group

The statement of unaudited pro forma adjusted net tangible assets has been prepared to show the effect of the net tangible assets of the Enlarged Group as at 31st December 2004 as if the completion of the granting of the Land concession and the acquisition of the 100% equity interest in Great Wonders under the Land Acquisition Agreements had occurred on 31st December 2004.

The unaudited pro forma adjusted net tangible assets of the Enlarged Group have been prepared for illustrative purpose only and, because of its nature, it may not give a true picture of the financial position of the Enlarged Group as at 31st December 2004 or any future date.

	Less: Pro forma total
Unaudited pro forma	intangible assets
consolidated net assets	(including goodwill)
of the Enlarged	of Enlarged Group	Unaudited pro forma
Group as at	after completion of	net tangible assets
31st December 2004	the transactions	of the Enlarged Group
	(Note 1)
HK$’000	HK$’000	HK$’000
1,854,477	(499,754)	1,354,723

Note 1: The total intangible assets included the intangible assets and the goodwill balances of the Group and the Enlarged Group as disclosed in Part I of Appendix IV. The intangible assets and goodwill of the Group were HK$2,786,000 and HK$389,937,000 respectively and hence the total intangible assets were HK$392,723,000. The intangible assets and goodwill of the Enlarged Group were HK$2,786,000 and HK$496,968,000 respectively and hence the total intangible assets were HK$499,754,000.

III. INDEBTEDNESS

(a) Borrowings

As at the close of business on 31st March 2005, being the latest practicable date for the purpose of ascertaining certain information relating to this indebtedness statement, the Group had total outstanding borrowings of approximately HK$295.4 million, comprising unsecured bank borrowings and overdrafts of approximately HK$61 million, secured bank borrowings of approximately HK$10 million convertible notes of approximately HK$201 million and loan of approximately HK$23.4 million from a related party. All of the unsecured and secured bank borrowings and overdrafts amounting to approximately HK$71 million were due within one year. Approximately HK$22.5 million of the total convertible notes were due within one year and the remaining convertible notes amounting to HK$178.5 million were due after one year. The loan of approximately HK$23.4 million from a related party was charged at 4 percent per annum, unsecured and repayable on demand.

There were no borrowings outstanding for Great Wonders as at 31st March 2005.

– 112 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

APPENDIX IV

(b) Contingent liabilities

As at 31st March 2005, the Group and Great Wonders did not have any material contingent liabilities.

(c) Capital commitments

As at 31st March 2005, Great Wonders had unexpended capital commitment for a hotel and casino development project amounting to approximately HK$1,417 million. There was no material capital commitment for the Group (excluding Great Wonders) as at 31st March 2005.

Save as aforesaid or otherwise disclosed herein, and apart from intra-group liabilities and normal trade payable, the Group and Great Wonders did not have any mortgages, debentures, loan capital, bank loans and overdrafts, debt securities or other similar indebtedness, finance lease or hire purchase commitment, liabilities under acceptances or acceptance credit, or any guarantees or other contingent liabilities outstanding at the close of business on 31st March 2005.

IV. FINANCIAL AND TRADING PROSPECTS OF THE ENLARGED GROUP

Looking ahead, the Board is optimistic about the prospects of the gaming, hospitality and entertainment businesses in Macau, as it is expected that the tourism industry in Macau will continue to expand in the coming years due to the relaxation of the rules governing the entry of visitors from the PRC to Macau under the individual travel scheme, which was introduced by the PRC Government in July 2003 to allow travellers from mainland PRC to visit Macau on an individual basis.

According to the Statistic and Census Service of the Government of Macau, tourist arrivals in the year 2004 rose approximately 40% as compared with the year 2003. Given the increased attractions of various gaming, entertainment and leisure facilities and the increasing number of tourists from the PRC, the Directors are of the view that the future prospects of the gaming business and the Hospitality Business as well as other gaming ventures operated or to be operated by the JV Group are promising.

V. WORKING CAPITAL

As at the Latest Practicable Date, the Directors of the Company were of the opinion that, based on the expected cash flows, and taking into account the internal resources of the Enlarged Group, and assuming that the banking facilities of the Enlarged Group will not be withdrawn, the Enlarged Group will have sufficient working capital for its present requirements in the absence of unforeseen circumstances.

– 113 –

APPENDIX IV UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

VI. LETTER FROM THE REPORTING ACCOUNTANTS ON THE UNAUDITED PRO FORMA FINANCIAL INFORMATION

==> picture [110 x 53] intentionally omitted <==

==> picture [86 x 34] intentionally omitted <==

2nd June 2005

The Directors

Melco International Development Limited

Dear Sirs

We report on the unaudited pro forma financial information of Melco International Development Limited (the “Company”) and its subsidiaries (hereinafter collectively referred to as the “Group”) set out on pages 108 to 112 under the headings of “I. Unaudited Pro Forma Statement of Assets and Liabilities of the Enlarged Group” and “II. Unaudited Pro Forma Adjusted Consolidated Net Tangible Assets” in Appendix IV of the Company’s circular dated 2nd June 2005 in connection with a major transaction regarding acquisition of the remaining interest in the land and discloseable transaction regarding injection of interest in the land into the joint venture group, Melco PBL Holdings Limited (“Major Transactions”). The unaudited pro forma financial information has been prepared by the directors of the Company, for illustrative purposes only, to provide information about how the Major Transactions might have affected the relevant financial information of the Group as at 31st December 2004.

Responsibilities

It is the responsibility solely of the directors of the Company to prepare the unaudited pro forma financial information in accordance with paragraph 13 of Appendix 1B and 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 unaudited pro forma financial information and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the unaudited pro forma financial information beyond that owed to those to whom those reports were addressed by us at the dates of their issue.

– 114 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

APPENDIX IV

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 unaudited pro forma financial information with the directors of the Company.

Our work does not constitute an audit or review in accordance with Statements of Auditing Standards issued by the Hong Kong Institute of Certified Public Accountants, and accordingly, we do not express any such assurance on the unaudited pro forma financial information.

The unaudited pro forma financial information has been prepared on the bases set out in Section I of Appendix IV for illustrative purpose only and, because of its nature, it may not be indicative of the financial position of the Group at any future date.

Opinion

In our opinion:

a) the unaudited pro forma financial information has been properly compiled by the directors of the Company on the basis stated;
b) such basis is consistent with the accounting policies of the Group, and
c) the adjustments are appropriate for the purposes of the unaudited pro forma financial information as disclosed pursuant to paragraph 4.29 of the Listing Rules.

Yours faithfully,

PricewaterhouseCoopers Certified Public Accountants Hong Kong

– 115 –

GENERAL INFORMATION

APPENDIX V

1. RESPONSIBILITY STATEMENT

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

2. PARTICULARS OF DIRECTORS

Name Address Executive Directors Dr. Stanley Ho, G.B.S. No. 1 Repulse Bay Road Hong Kong Mr. Lawrence Ho 35 Black’s Link Hong Kong Mr. Frank Tsui 13A, Block 4 Braemar Hill Mansions 21 Braemar Hill Road Hong Kong Non-executive Directors Mr. Ng Ching Wo 13B, Elegant Garden 11 Conduit Road Mid-levels Hong Kong Mr. Ho Cheuk Yuet 12A, Kenville Building 32 Kennedy Road Hong Kong Independent non-executive Directors Sir Roger Lobo, C.B.E., LL.D., J.P. Woodland Heights E1, 2 Wongneichung Gap Road Happy Valley Hong Kong Mr. Robert Kwan, M.A. (CANTAB), F.C.A., Flat 4A, MacDonnell House F.C.P.A., C.P.A., J.P. 6-8 MacDonnell Road Hong Kong Dr. Lo Ka Shui, G.B.S., J.P. Unit 2A, Serenity Place 22 Mount Cameron Road The Peak Hong Kong

– 116 –

GENERAL INFORMATION

APPENDIX V

3. SHARE CAPITAL

The authorized and issued share capital of the Company as at the Latest Practicable Date were, and immediately following the allotment and issue of the Consideration Shares (assuming no new Shares have been issued whether pursuant to the exercise of the conversion rights attached to the First Convertible Bond and the Second Convertible Bond issued by the Company for acquisition of an aggregate of 70% equity interests in Great Wonders as disclosed in the announcements and circulars of the Company respectively dated 13th September 2004, 11th October 2004, 23rd November 2004 and 5th January 2005 or exercise of any outstanding share options, subsequent to the Latest Practicable Date) are:

As at the Latest Practicable Date

Authorised 1,400,000,000 Shares of HK$0.50 each in the share capital of the Company Issued and fully paid up and to be issued 1,122,438,540 Shares in issue as at the Latest Practicable Date 22,222,222 Shares to be allotted and issued as Consideration Shares_(Note)_ 1,144,660,762 Shares	HK$ 700,000,000

	561,219,270 11,111,111
	572,330,381

Notes : The Consideration Shares to be allotted and issued pursuant to the Third Agreement will rank pari passu in all respects with each other and with the then issued Shares including rights to dividends, voting and return of capital.

– 117 –

GENERAL INFORMATION

APPENDIX V

4. DISCLOSURE OF DIRECTORS’ AND SHAREHOLDERS’ INTERESTS

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

(i) Interests in Shares and underlying Shares

			Number of	Approximate
		Number of	underlying	percentage of
	Nature of	issued Shares	Shares	the total number
Name of Director	interest	interested	interested	of issued Shares
				(Note 1)
Dr. Stanley Ho	Corporate	7,298,456	63,658,536	6.32%
		(Note 2)	(Note 3)
	Personal	22,749,278	–	2.03%
Mr. Lawrence Ho	Corporate	404,041,630	–	36.00%
		(Notes 4 & 5)
	Personal	5,432,612	–	0.48%
Mr. Frank Tsui	Personal	5,400,000	–	0.48%
Mr. Ho Cheuk Yuet	Personal	3,632,612	–	0.32%
Dr. Lo Ka Shui	Personal	2,000,000	–	0.18%

Notes:

As at the Latest Practicable Date, the total number of issued shares of the Company were 1,122,438,540 Shares.
Dr. Stanley Ho is taken to be interested in 7,298,456 Shares as a result of him being beneficially interested in the entire issued share capital of each of Sharikat Investments Limited, Dareset Limited and Lanceford Company Limited which in turn hold an aggregate of approximately 0.65% of the issued share capital of the Company.
Two convertible notes respectively for the principal amounts of HK$100 million and HK$56 million carrying the respectively rights to subscribe for new Shares at an initial conversion price of HK$4.00 and HK$8.2 respectively were issued by the Company to STDM on 9th November 2004 and 8th February 2005 respectively pursuant to the First Agreement and the Second Agreement as disclosed in the announcements and the circulars of the Company respectively dated 13rd September 2004, 11th October 2004, 23rd November 2004 and 5th January 2005. As at the Latest Practicable Date, the total outstanding principal amount of the said convertible notes was HK$156 million. Due to the Share Subdivision, the said conversion prices of HK$4.00 and HK$8.2 have been adjusted to HK$2.00 and HK$4.1 respectively. If STDM exercises the conversion rights attached to the said convertible notes in full, a total of 63,658,536 Shares will be issued to STDM. As Dr. Stanley Ho’s direct and corporate interests in STDM is in excess of 30%, under the SFO, he is deemed to be interested in these 63,658,536 underlying Shares.
Mr. Lawrence Ho is taken to be interested in 115,509,024 Shares as a result of him being beneficially interested in the entire issued share capital of Lasting Legend which in turn holds approximately 10.29% of the issued share capital of the Company. Mr. Lawrence Ho is also taken to be interested in 288,532,606 Shares as a result of him being beneficially interested in 77% of issued share capital of Better Joy which in turn holds approximately 25.71% of the issued share capital of the Company.

– 118 –

GENERAL INFORMATION

APPENDIX V

Dr. Stanley Ho and Mr. Lawrence Ho are beneficially interested in 23% and 77% of issued share capital of Better Joy respectively. If their indirect shareholding interests in the Shares through Better Joy are taken into account, Dr. Stanley Ho and Mr. Lawrence Ho were effectively interested in 8.59% and 30.57% respectively of the issued share capital of the Company.

Two convertible notes respectively due 2005 and 2006 were issued by the Company to Better Joy on 9th June 2004 pursuant to the Mocha Acquisition Agreements as disclosed in the announcement and the circular of the Company respectively dated 19th March 2004 and 23rd April 2004. The total principal amount of the said convertible notes was HK$45 million. On 11th April 2005, Better Joy exercised the conversion rights attached to the said convertible notes in full at the conversion price of HK$2.30 per Original Share resulting in a total of 19,565,216 Original Shares (equivalent to 39,130,432 Shares) issued to Better Joy.

(ii) Interests in equity derivatives of the Company

				Number of underlying
	Date of grant of			Shares comprised
	the share options	Expiry date of	Exercise Price per	in the share
Name of Director	by the Company	the share options	underlying Share	options outstanding
			(HK$)
Mr. Lawrence Ho	19thFebruary 2004	7thMarch 2012	1.2025	1,800,000
Mr. Frank Tsui	8thMarch 2002	7thMarch 2012	0.50	32,612
	19thFebruary 2004	7thMarch 2012	1.2025	1,800,000

(iii) Interests in shares of Value Convergence

			Approximate
		Number of issued	percentage of the
		shares of	total number of
	Nature of	Value Convergence	issued shares of
Name of Director	interest	interested	Value Convergence
			(Note 1)
Dr. Stanley Ho	Corporate	7,384,651	2.97%
		(Note 2)
Mr. Lawrence Ho	Corporate	4,232,627	1.70%
		(Note 3)

Notes:

As at the Latest Practicable Date, the total number of issued shares of Value Convergence was 248,941,226 shares.
Dr. Stanley Ho is taken to be interested in 7,384,651 shares of Value Convergence as a result of him being beneficially interested in 65% of the issued share capital of Bailey Development Limited which in turn holds approximately 2.97% of the issued share capital of Value Convergence.
Mr. Lawrence Ho is taken to be interested in 4,232,627 shares of Value Convergence as a result of him being beneficially interested in the entire issued share capital of Golden Mate Co., Ltd. which in turn holds approximately 1.70% of the issued share capital of Value Convergence.

– 119 –

GENERAL INFORMATION

APPENDIX V

(iv) Interests in equity derivatives of Value Convergence

			Approximate
		Number of underlying	percentage of the
		shares of	total number of
	Nature of	Value Convergence	issued shares of
Name of Director	interest	interested	Value Convergence
Dr. Stanley Ho	Personal	735,000	0.30%
		(Note 1)
Mr. Lawrence Ho	Personal	1,226,057	0.49%
		(Note 2)

Notes:

The personal interest of Dr. Stanley Ho represents his derivative interest in Value Convergence comprising the physically settled options which were granted on 6th April 2001 and may be exercised during the period from 6th April 2001 to 8th October 2005 at an exercise price of HK$3.60 per Value Convergence’s share.
The personal interest of Mr. Lawrence Ho represents his derivative interest in Value Convergence comprising the physically settled options as follows:–
(a) 735,000 physically settled options which were granted on 6th April 2001 and may be exercised during the period from 6th April 2001 to 8th October 2005 at an exercise price of HK$3.60 per Value Convergence’s share; and
(b) 491,057 physically settled options which were granted on 9th July 2002 and may be exercised during the period from 9th July 2002 to 8th July 2012 at an exercise price of HK$1.00 per Value Convergence’s share.

Save as disclosed herein, as at the Latest Practicable Date:

(i) none of the Directors or chief executives of the Company or their respective associates had any interests or short positions in the Shares, underlying Shares and debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) which (a) were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they were taken or deemed to have under such provisions of the SFO), or (b) were required, pursuant to section 352 of the SFO, to be entered in the register referred to therein, or (c) were required, pursuant to the Model Code for Securities Transactions by Directors of Listed Companies contained in the Listing Rules to be notified to the Company and the Stock Exchange.
(ii) none of the Directors had any direct or indirect interest in any assets which had been, since 31st December 2004, being the date to which the latest published audited financial statements of the Group were made up, acquired or disposed of by or leased to any member of the Group or were proposed to be acquired or disposed of by or leased to any member of the Group;

– 120 –

GENERAL INFORMATION

APPENDIX V

(iii) none of the Directors was materially interested in any contract or arrangement entered into by any member of the Group subsisting at the date of this circular which was significant in relation to the business of the Group; and
(iv) none of the Directors had service contract with the Company or any of its subsidiaries not terminable by the employing company within one year without payment of compensation (other than statutory compensation).

5. SHAREHOLDERS WITH NOTIFIABLE INTERESTS

As at the Latest Practicable Date, the interests and short positions of substantial shareholders of the Company and other persons in the Shares, underlying Shares and debentures of the Company which (a) were required to be notified to the Company and the Stock Exchange pursuant to Divisions 2 and 3 of Part XV of the SFO; or (b) were required, pursuant to section 336 of the SFO, to be entered in the register referred to therein; or (c) were directly or indirectly, interested in ten per cent. or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of the Company were as follows:

			Number of	Approximate
		Number of	underlying	percentage of the
	Nature of	issued Shares	Shares	total number of
Name	interest	interested	interested	issued Shares
				(Note 1)
Better Joy	Corporate	288,532,606	–	25.71%
		(Notes 2 & 6)
Lasting Legend	Corporate	115,509,024	–	10.29%
		(Note 2)
Dr. Stanley Ho	Corporate	7,298,456	63,658,536	6.32%
		(Note 3)	(Note 4)
	Personal	22,749,278	–	2.03%
Mr. Lawrence Ho	Corporate	404,041,630	–	36.00%
		(Notes 5 & 6)
	Personal	5,432,612	–	0.48%
STDM	Corporate	–	63,658,536	5.67%
			(Notes 4 & 7)
Shun Tak Shipping	Corporate	78,166,294	–	6.96%
Company Limited
JP Morgan Chase & Co.	Corporate	97,248,000	–	8.66%

– 121 –

GENERAL INFORMATION

APPENDIX V

Notes:

As at the Latest Practicable Date, the total number of issued shares of the Company are 1,122,438,540 Shares.
The Shares held by Better Joy and Lasting Legend also represent the corporate interest of Mr. Lawrence Ho in the Company.
Dr. Stanley Ho is taken to be interested in 7,298,456 Shares as a result of him being beneficially interested in the entire issued share capital of each of Sharikat Investments Limited, Dareset Limited and Lanceford Company Limited which in turn hold an aggregate of approximately 0.65% of the issued share capital of the Company.
Two convertible notes respectively for the principal amounts of HK$100 million and HK$56 million carrying the respectively rights to subscribe for new Shares at an initial conversion price of HK$4.00 and HK$8.2 respectively were issued by the Company to STDM on 9th November 2004 and 8th February 2005 respectively pursuant to the First Agreement and the Second Agreement as disclosed in the announcements and the circulars of the Company respectively dated 13th September 2004, 11th October 2004, 23rd November 2004 and 5th January 2005. As at the Latest Practicable Date, the total outstanding principal amount of the said convertible notes was HK$156 million. Due to the Share Subdivision, the said conversion prices of HK$4.00 and HK$8.2 have been adjusted to HK$2.00 and HK$4.1 respectively. If STDM exercises the conversion rights attached to the said convertible notes in full, a total of 63,658,536 Shares will be issued to STDM. As Dr. Stanley Ho’s direct and corporate interests in STDM is in excess of 30%, under the SFO, he is deemed to be interested in these 63,658,536 underlying Shares.
Mr. Lawrence Ho is taken to be interested in 115,509,024 Shares as a result of him being beneficially interested in the entire issued share capital of Lasting Legend which in turn holds approximately 10.29% of the issued share capital of the Company. Mr. Lawrence Ho is also taken to be interested in 288,532,606 Shares as a result of him being beneficially interested in 77% of issued share capital of Better Joy which in turn holds approximately 25.71% of the issued share capital of the Company.
Dr. Stanley Ho and Mr. Lawrence Ho are beneficially interested in 23% and 77% of issued share capital of Better Joy respectively. If their indirect shareholding interests in the Shares through Better Joy are taken into account, Dr. Stanley Ho and Mr. Lawrence Ho were effectively interested in 8.59% and 30.57% respectively of the issued share capital of the Company.
Two convertible notes respectively due 2005 and 2006 were issued by the Company to Better Joy on 9th June 2004 pursuant to the Mocha Acquisition Agreements as disclosed in the announcement and the circular of the Company respectively dated 19th March 2004 and 23rd April 2004. The total principal amount of the said convertible notes was HK$45 million. On 11th April 2005, Better Joy exercised the conversion rights attached to the said convertible notes in full at the conversion price of HK$2.30 per Original Share resulting in a total of 19,565,216 Original Shares (equivalent to 39,130,432 Shares) issued to Better Joy.
The underlying Shares held by STDM also represent the corporate interest of Dr. Stanley Ho in the Company.

Save as disclosed herein, so far as the Directors were aware, as at the Latest Practicable Date, no other persons had interests or short positions in the Shares, underlying Shares and debentures of the Company which were required to be notified to the Company and the Stock Exchange pursuant to Divisions 2 and 3 of Part XV of the SFO, nor were there any other persons, required, pursuant to section 336 of the SFO, to be entered in the register referred to therein, or directly or indirectly, interested in ten per cent. or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of the Company.

6. MATERIAL ADVERSE CHANGE

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 31st December 2004, being the date to which the latest published audited financial statements of the Group were made up.

– 122 –

GENERAL INFORMATION

APPENDIX V

7. QUALIFICATION AND CONSENT OF EXPERT

(i) The following is the qualification of the experts who has given opinion or advice which is contained in the circular.

Name

Qualification

Sun Hung Kai

A deemed licensed corporation under transitional arrangement within the meaning of the SFO to carry out types 1, 4, 6 and 9 regulated activities under the SFO

PricewaterhouseCoopers

Certified Public Accountants

Savills (Hong Kong) Limited

Chartered Surveyors

C&C Advogados

Macau legal adviser

(ii) As at the Latest Practicable Date, none of Sun Hung Kai, PricewaterhouseCoopers, Savills (Hong Kong) Limited and C&C Advogados have 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.
(iii) As at the Latest Practicable Date, none of Sun Hung Kai, PricewaterhouseCoopers, Savills (Hong Kong) Limited and C&C Advogados have any interest, direct or indirect, in any assets which have been, since 31st December 2004 (being the date to which the latest published audited accounts of the Group were made up), acquired or disposed of by or leased to any member of the Group, or are proposed to be acquired or disposed of by or leased to any member of the Group.
(iv) Each of Sun Hung Kai, PricewaterhouseCoopers, Savills (Hong Kong) Limited and C&C Advogados has given, and has not withdrawn, its written consent to the issue of this circular, with inclusion of their respective documents including the letter of the Independent Financial Adviser set out in the section headed “Letter from Sun Hung Kai”, the accountants’ report prepared by PricewaterhouseCoopers set out in Appendix II to this circular and the valuation report prepared by Savills (Hong Kong) Limited set out in Appendix III to this circular and the references to its name included herein in the form and context in which they respectively appear.

– 123 –

GENERAL INFORMATION

APPENDIX V

8. PROCEDURES FOR DEMANDING A POLL BY SHAREHOLDERS

Article 74 of the articles of association of the Company provides that at any general meeting a resolution put to the vote of the meeting shall be decided by a show of hands unless a poll is (before or on the declaration of the result of the show of hands or on the withdrawal of any other demand for a poll) demanded:

(i) by the chairman of the meeting; or
(ii) by at least three members present in person or by proxy for the time being entitled to vote at the meeting; or
(iii) by any member or members present in person or by proxy and representing not less than one-tenth of the total voting rights of all the members having the right to vote at the meeting; or
(iv) by a member or members present in person 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.

9. MATERIAL CONTRACTS

Apart from the Land Acquisition Agreements and the Great Wonders Agreement, during the two years immediately preceding the date of this circular, the following contracts, not being contracts entered into in the ordinary course of business, have been entered into by the Group:

(i) the underwriting agreement dated 11th August 2003 entered into between the Company and Kim Eng Securities (Hong Kong) Limited in relation to the issue of 72,643,567 rights shares of HK$1.00 each at HK$1.45 per rights shares of the Company on the basis of one rights share for every two shares of the Company then in issue on 29th August 2003;
(ii) the sale and purchase agreement dated 19th March 2004 entered into between the Company (as purchaser), Better Joy (as vendor) and Mr. Lawrence Ho (as warrantor), pursuant to which Better Joy has agreed to sell, and the Company has agreed to purchase or procure the purchase of 65% of the then issued share capital of Mocha Slot;
(iii) the sale and purchase agreement dated 19th March 2004 entered into between the Company (as purchaser) and Chang Tan (as vendor), pursuant to which Chang Tan has agreed to sell, and the Company has agreed to purchase or procure the purchase of 8% of the then issued share capital of Mocha Slot;
(iv) the sale and purchase agreement dated 19th March 2004 entered into between the Company (as purchaser) and Chang Wang (as vendor), pursuant to which Chang Wang has agreed to sell, and the Company has agreed to purchase or procure the purchase of 7% of the then issued share capital of Mocha Slot;

– 124 –

GENERAL INFORMATION

APPENDIX V

(v) the sale and purchase agreement dated 19th March 2004 entered into between the Company (as purchaser) and Value Convergence (as vendor), pursuant to which Value Convergence has agreed to sell, and the Company has agreed to purchase or procure the purchase of the entire issued share capital of iAsia Technology Limited;
(vi) the memorandum of agreement for sale and purchase dated 23rd April 2004 entered into between Double Crown Limited, a wholly-owned subsidiary of the Company (as vendor) and Grandford Properties Limited (as purchaser), in relation to the sale of a property, namely, all that piece of ground situated at Tung Shan Terrace, Stubbs Road, Hong Kong and registered in the Land Registry as The Remaining Portion of Inland Lot No.2937 together with the messuages erections and buildings thereon known as “Art Court” No.5 Tung Shan Terrace;
(vii) the placing and subscription agreement dated 15th October 2004 entered into between the Company, Better Joy (as vendor) and Deutsche Bank AG, Hong Kong Branch (as placing agent), in relation to the top-up placing of 75,900,000 Original Shares at a price of not less than HK$4.95 and not more than HK$5.30;
(viii) the contract dated 24th November 2004 entered into between Great Wonders (as employer) and Paul Y. Construction Company, Limited, an Independent Third Party, (as contractor) in relation to the development of the luxury hotel on the Land for an estimated total development costs of approximately HK$1,448 million;
(ix) the subscription agreement dated 23rd December 2004 entered into amongst the Company, Melco PBL Holdings, PBL and PBL Asia in relation to the establishment of the joint venture group for pursuance of gaming, entertainment and hospitality businesses in asia;
(x) the assignment and subscription agreement dated 11th May 2005 entered into amongst the Company (as issuer of convertible loan notes due 2010 in a principal amount of HK$1,175 million), Great Respect Limited (as assignor) (“Great Respect”) and Melco Entertainment (as assignee), in relation to (i) the purchase and assignment of the 49.2% interest held by Great Respect in a joint venture (the “Joint Venture”) previously established between Melco Leisure and Great Respect pursuant to a memorandum of agreement dated 28th October 2004, to Melco Entertainment for a cash consideration of HK$1,175 million; and (ii) the subscription by Great Respect of the convertible loan notes due 2010 in the principal amount of HK$1,175 million to be issued by the Company;
(xi) the transfer and assignment deed dated 11th May 2005 entered into between Melco Leisure and Melco Entertainment, in relation to the transfer of (i) Melco Leisure’s 50.8% interest in the Joint Venture (as mentioned in sub-paragraph (x) above) and (ii) Melco Leisure’s interest in Melco Hotels and Resorts (Macau) Limited, to Melco Entertainment. Details of this transfer and assignment deed and the assignment and subscription agreement as mentioned in sub-paragraph (x) above are contained in the announcement of the Company dated 13th May 2005; and

– 125 –

GENERAL INFORMATION

APPENDIX V

(xii) the placing, underwriting and subscription agreement dated 17th May 2005 entered into between the Company, Better Joy (as vendor) and Credit Suisse First Boston (Hong Kong) Limited (as placing agent), in relation to the top-up placing of 70,000,000 Original Shares (or 140,000,000 Shares) at a price of HK$18.25 per Original Share (or HK$9.125 per Share).

10. COMPETING INTERESTS

Dr. Stanley Ho, the Chairman and Executive Director of the Company, has an equity interest in, as well as being a director of STDM and SJM. As part of the businesses of STDM and SJM include gaming, hospitality, food and beverage and property businesses in Macau, there is a possibility that such part of businesses of STDM and SJM may compete with the gaming, hospitality, food and beverage and property businesses of the Group. Save as disclosed, as at the date of this circular, none of the Directors and their respective associates had any business or interest in a business which competes or may compete with the business of the Group.

11. LITIGATION

As at the Latest Practicable Date, save as aforesaid or otherwise disclosed herein, neither the Company nor any of its subsidiaries is engaged in any litigation or arbitration of material importance and no litigation or claim of material importance is known to the Directors to be pending or threatened against the Company or any of its subsidiaries.

12. SERVICE CONTRACTS

There is no existing or proposed service contracts between any of the directors of the Company and any of its subsidiaries, other than contracts expiring or determinable by the employer within one year without payment of compensation (other than statutory compensation).

13. MISCELLANEOUS

(i) The registered office of the Company is 38th Floor, The Centrium, 60 Wyndham Street, Central, Hong Kong.
(ii) The secretary of the Company is Mr. Samuel Tsang, a solicitor admitted in Hong Kong, England and Wales and Australia.
(iii) The chief financial officer of the Company is Mr. Clarence Chung, a Fellow of the Hong Kong Institute of Certified Public Accountants and a fellow member of the Association of Chartered Certified Accountants; and a member of the Society of Management Accountants of Canada.
(iv) The share registrars and transfer office of the Company in Hong Kong are Standard Registrars Limited at Ground Floor, Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong

– 126 –

GENERAL INFORMATION

APPENDIX V

(v) In the event of inconsistency, the English text of this circular shall prevail over the Chinese text.

14. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection at the registered office of the Company at 38th Floor, The Centrium, 60 Wyndham Street, Central, Hong Kong, during normal business hours on any weekday, except Saturday, Sunday and public holidays, from the date hereof up to and including 17th June 2005:

(i) the memorandum and articles of association of the Company;
(ii) the letter dated 2nd June 2005 from the Independent Board Committee, the text of which is set out on pages 28 and 29 of this circular;
(iii) the letter of advice dated 2nd June 2005 from Sun Hung Kai to the Independent Board Committee, the text of which is set out on pages 30 to 47 of this circular;
(iv) the accountants’ report of Great Wonders received from PricewaterhouseCoopers, the text of which is set out in Appendix II to this circular;
(v) the valuation report on the Land received from Savills (Hong Kong) Limited, the text of which is set out in Appendix III to this circular;
(vi) the respective written consents of Sun Hung Kai, PricewaterhouseCoopers, Savills (Hong Kong) Limited and C&C Advogados as referred to in the paragraph headed “Qualification and consent of Experts” in this appendix;
(vii) the material contracts referred to in the section headed “Material Contracts” in this Appendix;
(viii) the Land Acquisition Agreements;
(ix) the Great Wonders Agreement;
(x) the circulars of the Company respectively dated 23rd April 2004, 14th May 2004, 27th August 2004, 11th October 2004, 5th January 2005 and 29th April 2005 regarding proposed group reorganization, assets acquisition involving issue of consideration shares and convertible notes and increase in authorized share capital; sale of property; connected transaction in respect of service arrangement with SJM; discloseable and connected transaction in respect of the First Agreement; establishment of the JV Group and major and connected transaction in respect of the Second Agreement and; continuing connected transaction and connected transactions in respect of service arrangements with SJM and Macha Slot, respectively; and
(xi) annual reports 2003 and 2004 of the Company.

– 127 –

NOTICE OF EXTRAORDINARY GENERAL MEETING

==> picture [233 x 49] intentionally omitted <==

(Incorporated in Hong Kong with limited liability) Website: http://www.melco.hk.cn (Stock Code: 200)

NOTICE IS HEREBY GIVEN (the “Notice”) that an extraordinary general meeting (the “Meeting”) of Melco International Development Limited (the “Company”) will be held at 38th Floor, The Centrium, 60 Wyndham Street, Central, Hong Kong, on Friday, 17th June 2005 at 3:30 p.m. for the purpose of considering and, if thought fit, passing (with or without amendments) the following as ordinary resolutions of the Company:-

ORDINARY RESOLUTIONS

“THAT the Third Agreement and all transactions contemplated thereunder, including, inter alia, the allotment and issue of the Consideration Shares (all capitalized terms stated herein are defined in the circular dated 2nd June 2005 despatched to the shareholders of the Company) be and are hereby approved, ratified and confirmed and the directors of the Company be and are hereby authorized to do all things and execute all documents as they may consider necessary, expedient or desirable to effect and implement the terms of the Third Agreement and all transactions contemplated thereunder, including, inter alia, the allotment and issue of the Consideration Shares.”
“THAT the Great Wonders Agreement and all transactions contemplated thereunder (all capitalized terms stated herein are defined in the circular dated 2nd June 2005 despatched to the shareholders of the Company) be and are hereby approved, ratified and confirmed and the directors of the Company and (as the case may be) Melco Entertainment Limited, be and are hereby authorized to do all things and execute all documents as they may consider necessary, expedient or desirable to effect and implement the terms of the Great Wonders Agreement and all transactions contemplated thereunder.”

By order of the Board Melco International Development Limited Samuel Tsang Company Secretary

Hong Kong, 2nd June 2005

Registered Office: 38th Floor The Centrium 60 Wyndham Street Central Hong Kong

– 128 –

NOTICE OF EXTRAORDINARY GENERAL MEETING

Notes:

Any member of the Company entitled to attend and vote at the Meeting may appoint one or more than one proxy to attend and to vote in his stead. A proxy need not be a member of the Company.
Where there are joint registered holders of any share, any one of such persons may vote at the Meeting, either personally or by proxy, in respect of such share of the Company as if he were solely entitled thereto; but if more than one of such joint holders be present at the Meeting personally or by proxy, that one of the said persons so present whose name stands first on the register of members of the Company in respect of such share shall alone be entitled to vote in respect thereof.
In order to be valid, the proxy form duly completed and signed in accordance with the instructions printed thereon together with the power of attorney or other authority, if any, under which it is signed or a notarially certified copy thereof must be delivered to the registered office of the Company at 38th Floor, The Centrium, 60 Wyndham Street, Central, Hong Kong, not less than 48 hours before the time appointed for holding the Meeting or any adjournment thereof.
Whether or not you propose to attend the Meeting in person, you are strongly urged to complete and return the proxy form in accordance with the instructions printed thereon. Completion and return of the proxy form will not preclude you from attending the Meeting and voting in person if you so wish. In the event that you attend the Meeting after having lodged the proxy form, it will be deemed to have been revoked.

– 129 –

AI assistant

Chinasoft International Limited — Proxy Solicitation & Information Statement 2005

49152_rns_2005-06-02_fc64fefc-46c6-4889-8225-53b15946e816.pdf

MAJOR AND CONNECTED TRANSACTION ACQUISITION OF THE REMAINING INTEREST IN THE LAND AND DISCLOSEABLE TRANSACTION INJECTION OF INTEREST IN THE LAND INTO THE JOINT VENTURE GROUP

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

MAJOR AND CONNECTED TRANSACTION ACQUISITION OF THE REMAINING INTEREST IN THE LAND AND DISCLOSEABLE TRANSACTION INJECTION OF INTEREST IN THE LAND INTO THE JOINT VENTURE GROUP

INTRODUCTION

LETTER FROM THE BOARD

THE CONNECTED TRANSACTION

Background of the Third Agreement and establishment of the JV Group

Principal terms of the Third Agreement

Basis of determination of the consideration

LETTER FROM THE BOARD

(i) change of use of the Land from residential to hotel

Financing sources

LETTER FROM THE BOARD

Fund raising exercises carried out by the Company in the past twelve months

LETTER FROM THE BOARD

Conditions of the Third Agreement

Conditions precedent

LETTER FROM THE BOARD

Condition subsequent

Completion

LETTER FROM THE BOARD

Changes to the shareholding structure of the Company as a result of the issue of the Consideration Shares

THE GREAT WONDERS AGREEMENT

Principal terms of the Great Wonders Agreement

Basis of determination of the consideration

Financing sources

Completion

Conditions of the Great Wonders Agreement

EFFECT ON INTEREST HELD IN THE HOSPITALITY BUSINESS BY THE GROUP

LETTER FROM THE BOARD

INFORMATION OF THE GROUP

Information on Melco Entertainment and the Hospitability Business

LETTER FROM THE BOARD

Information on Great Wonders

LETTER FROM THE BOARD

INFORMATION ON STDM AND THE LAND

LETTER FROM THE BOARD

REASONS AND BENEFITS FOR ENTERING INTO THE THIRD AGREEMENT AND THE GREAT WONDERS AGREEMENT

LETTER FROM THE BOARD

IMPLICATIONS UNDER THE LISTING RULES

The Third Agreement

LETTER FROM THE BOARD

The Great Wonders Agreement

EXTRAORDINARY GENERAL MEETING

RECOMMENDATION

LETTER FROM THE BOARD

GENERAL

MAJOR AND CONNECTED TRANSACTION ACQUISITION OF THE REMAINING INTEREST IN THE LAND

MAJOR AND CONNECTED TRANSACTION ACQUISITION OF THE REMAINING INTEREST IN THE LAND

INTRODUCTION

PRINCIPAL FACTORS TAKEN INTO ACCOUNT

1. Information on Great Wonders and the Land

LETTER FROM SUN HUNG KAI

2. Reasons and benefits for entering into the Third Agreement and the Great Wonders Agreement

(a) Business of the Group

(b) Future prospects of the Hospitality Business and gaming business in Macau

(c) Complete buyout of STDM’s interests in Great Wonders by the JV Group

(d) Acquisition of the entire issued share capital of Great Wonders by various tranches

LETTER FROM SUN HUNG KAI

(e) Overall effect of the Third Agreement and the Great Wonders Agreement

Third Agreement

Great Wonders Agreement

LETTER FROM SUN HUNG KAI

Third Agreement

Great Wonders Agreement

3. Operating environment of Great Wonders

4. Basis of consideration

(a) Comparison of values

(b) Valuation on hotel use basis

LETTER FROM SUN HUNG KAI

(c) Valuation basis and assumptions

LETTER FROM SUN HUNG KAI

Chinasoft International Limited Proxy Solicitation & Information Statement 2005