Chinney Alliance Group Limited - Proxy Solicitation & Information Statement 2006

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

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

This circular does not constitute an offer of, nor is it calculated to invite offers for, shares of the Company.

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

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(Stock Code: 385)

PROPOSED CAPITAL REDUCTION

PROPOSED OPEN OFFER OF NEW SHARES ON THE BASIS OF THREE OFFER SHARES FOR EVERY TWO NEW SHARES HELD AND APPLICATION FOR WHITEWASH WAIVER

Financial adviser to Chinney Alliance Group Limited

Independent financial adviser to the Independent Board Committee and the Independent Shareholders

A letter from the Independent Board Committee is set out on pages 24 to 25 of this circular. A letter from Veda Capital, the Independent Financial Adviser, containing its advice to the Independent Board Committee and the Independent Shareholders is set out on pages 26 to 40 of this circular.

A notice convening the SGM to be held at Chater Room III, Function Room Level, The Ritz-Carlton Hong Kong, 3 Connaught Road Central, Hong Kong on Tuesday, 3 October 2006 at 3:30 p.m. is set out on pages 175 to 178 of this circular. Whether or not you are able to attend the meeting in person, please complete and return the accompanying form of proxy in accordance with the instructions printed thereon to the Company’s Hong Kong branch share registrar, Tengis Limited at 26/F, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong as soon as practicable but in any event not less than 48 hours before the time appointed for the holding of the meeting. Completion and return of the accompanying from of proxy will not preclude you from attending and voting at the meeting should you so wish.

Shareholders should note that the Underwriter may, by notice in writing to CAG, at any time before 4:00 p.m. on the second business day after the latest date for acceptance of the Offer Shares or such later date as the Company may decide, terminate the Underwriting Agreement on the occurrence of certain events. These events are set out in the section headed “Termination of the Underwriting Agreement” on pages 15 to 16 of this circular. If the Underwriter exercises such right, the obligations of the Underwriter under the Underwriting Agreement shall cease and the Open Offer will not proceed.

8 September 2006

Page

Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Expected timetable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		6
Letter from the	Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	8
Letter from the	Independent Board Committee. . . . . . . . . . . . . . . . . . . . . . . . . . .	24
Letter from Veda Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		26
Appendix I	– Financial information of the CAG Group. . . . . . . . . . . . . .	41
Appendix II	– Unaudited pro forma financial information
	of the CAG Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	105
Appendix III	– Accountants’ report of the Contracting Group
	and pro forma financial information
	of the Enlarged Group. . . . . . . . . . . . . . . . . . . . . . . . . . .	109
Appendix IV	– General information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	158
Notice of SGM	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	175

– i –

DEFINITIONS

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

“Acquisition” the acquisition by Chinney Alliance Trading (BVI) Limited of the entire issued share capital of Shun Cheong Investments Limited pursuant to a sale and purchase agreement dated 26 January 2006 entered among Shun Cheong Holdings Limited (“Shun Cheong”), Chinney Alliance Trading (BVI) Limited and CAG for the sale and purchase of the entire issued share capital in Shun Cheong Investments Limited

“Announcement” the announcement dated 21 August 2006 made by the Company in relation to the Capital Reduction, Open Offer and the Whitewash Waiver
“Application Form(s)” the application form for use by the Qualifying Shareholders to apply for the Offer Shares
“associate(s)” has the meaning ascribed thereto under the Listing Rules
“Board” the board of Directors “business day” a day on which licensed banks in Hong Kong are generally open for business (excluding Saturday, Sunday and public holidays)
“CAG” or the “Company” Chinney Alliance Group Limited, a company incorporated in Bermuda with limited liability whose shares are listed on the Main Board of the Stock Exchange (Stock Code: 385)
“CAG Group” CAG and its subsidiaries “Capital Reduction” the proposed reduction of the nominal value of the issued share capital of the Company from HK$0.25 per Existing Share to HK$0.10 per New Share
“CCASS” the Central Clearing and Settlement System established and operated by HKSCC
“China” or “PRC” The People’s Republic of China and for the sole purpose of this circular shall exclude Hong Kong, Macau and Taiwan

– 1 –

DEFINITIONS

“Chinney” Chinney Investments, Limited, a Company incorporated in Hong Kong with limited liability whose shares are listed on the Main Board of the Stock Exchange (Stock Code: 216)

“Companies Act” The Companies Act 1981 of Bermuda (as amended)
“Companies Ordinance” the Companies Ordinance (Chapter 32 of the Laws of Hong Kong)
“connected person(s)” has the meaning ascribed thereto under the Listing Rules
“Contracting Group”
Shun Cheong Investments Limited and its certain subsidiaries engaging in building related contracting services for both public and private sectors, together with any investments held by Shun Cheong Investments Limited and/or its subsidiaries
“Director(s)”

the director(s) of CAG

“Dr. Wong”
Dr. James Sai-Wing Wong, Chairman of Chinney and CAG, as well as a director of and having beneficial interest in Chinney Holdings Limited, a private company that holds 306,959,324 shares in Chinney, representing a 55.67% interest in the issued share capital of Chinney

“EIL” or the “Underwriter” Enhancement Investments Limited, a company incorporated in the British Virgin Islands and is beneficially held by Dr. Wong solely, the underwriter of the Open Offer

“Enlarged Group” The CAG Group after completion of the Acquisition
“Excess Application Form(s)”
the excess application form(s) for use by the Qualifying Shareholders to apply for the excess Offer Shares not initially taken up under the Open Offer
“Excluded Shareholders”
Overseas Shareholders who are persons to whom, in the Directors’ opinion, the Offer Shares may not be offered without compliance with registration and/or other legal or regulatory requirements of a jurisdiction or jurisdictions outside of Hong Kong
“Executive”

the Executive Director of the Corporate Finance Division of the Securities and Futures Commission or any of its delegate

– 2 –

DEFINITIONS

“Existing Share(s)”
existing share(s) of HK$0.25 each in the share capital of CAG
“HKSCC”

Hong Kong Securities Clearing Company Limited

“Hong Kong”
Hong Kong Special Administrative Region of the PRC
“Independent Board Committee”
an independent committee of the Board comprising Mr. William Gage McAfee, Mr. David Chung-Shing Wu and Mr. Vincent Tian-Quan Mo, all being the independent non-executive Directors who are not involved in or have no interest in the Open Offer and the Whitewash Waiver, are appointed to consider and make recommendations to the Independent Shareholders on the Open Offer and the Whitewash Waiver
“Independent Shareholders”
Shareholders other than the Underwriter, parties acting in concert with it, including Multi-Investment, the Directors (excluding the Independent Board Committee) and chief executive of the Company and their respective associates as well as other parties who are interested or involved in the Open Offer, or the underwriting of the Open Offer, and the Whitewash Waiver
“Last Trading Day”
18 August 2006, being the last trading day prior to the suspension of trading in the Existing Shares prior to the publication of the Announcement
“Latest Practicable Date”
6 September 2006, being the latest practicable date prior to the printing of this circular for ascertaining certain information contained herein
“Listing Rules”
the Rules Governing the Listing of Securities on the Stock Exchange
“Macau”
Macau Special Administrative Region of the PRC
“Multi-Investment”
Multi-Investment Group Limited, a company incorporated in the British Virgin Islands with limited liability, a substantial shareholder of the Company which beneficially owns 46,158,319 Existing Shares at the Latest Practicable Date and an indirect wholly-owned subsidiary of Chinney

“New Share(s)” or “Share(s)” share(s) of HK$0.10 each immediately following the Capital Reduction becoming effective

– 3 –

DEFINITIONS

“Offer Share(s)”	the New Share(s) proposed to be offered to the
	Qualifying Shareholders for subscription pursuant to the
	Open Offer
“Open Offer”	the proposed issue of the Offer Shares at the Subscription
	Price by way of an open offer to the Qualifying
	Shareholders on the terms pursuant to the Prospectus
	Documents and summarized in this circular
“Overseas Shareholders”	the Shareholders whose names appear on the register of
	members of CAG on the Record Date and whose
	addresses are in places outside of Hong Kong
“Posting Date”	6 October 2006 or such other date as the Underwriter may
	agree in writing with the Company for the despatch of the
	Prospectus Documents
“Prospectus”	the Open Offer prospectus
“Prospectus Documents”	the Prospectus, the Application Form and the Excess
	Application Form
“Qualifying Shareholders”	the Shareholders other than the Excluded Shareholders
	whose names appear on the register of members of CAG
	as at the close of business on the Record Date
“Record Date”	Tuesday, 3 October 2006, being the date by reference to
	which entitlements to the Open Offer will be determined
“Registrar”	Tengis Limited, CAG’s Hong Kong branch share registrar
	located at 26/F, Tesbury Centre, 28 Queen’s Road East,
	Wanchai, Hong Kong
“Securities and Futures	Securities and Futures Commission of Hong Kong
Commission”
“SFO”	the Securities and Futures Ordinance (Chapter 571 of the
	Laws of Hong Kong)
“SGM”	the special general meeting of CAG to be convened and
	held for seeking approvals from the (i) Shareholders for
	the Capital Reduction and (ii) Independent Shareholders
	for the Open Offer and the Whitewash Waiver
“Share Option(s)”	the share option(s) granted under the Share Option
	Scheme

– 4 –

DEFINITIONS

“Share Option Scheme” the share option scheme of the Company as approved on 24 September 1993 and amended on 28 June 2001 by the Shareholders that carrying the right to subscribe the Existing Shares in cash, which expired on 23 September 2003.

“Shareholder(s)”

shareholder(s) of CAG

“Stock Exchange”

The Stock Exchange of Hong Kong Limited

“Subscription Price” the subscription price of HK$0.25 per Offer Share under the Open Offer
“Takeovers Code”
The Hong Kong Code on Takeovers and Mergers
“Underwriting Agreement” the underwriting agreement dated 18 August 2006 entered into between CAG and the Underwriter in relation to the Open Offer
“Underwritten Shares” the 168,722,220 Offer Shares underwritten by EIL pursuant to the Underwriting Agreement
“Veda Capital” or “Independent Veda Capital Limited, a licensed corporation to carry out Financial Adviser” type 6 regulated activities (advising on corporate finance) under the SFO
“Whitewash Waiver” waiver of the obligation of the Underwriter and parties acting in concert with it, including Multi-Investment and Mr. Frank Kwok-Kit Chu to make a mandatory offer for all the Existing Shares not already owned by the Underwriter and parties acting in concert with it under Note 1 on Dispensations from Rule 26 of the Takeovers Code
“HK$”

Hong Kong dollars, the lawful currency of Hong Kong

– 5 –

2006

EXPECTED TIMETABLE

Publication of notice in Bermuda . . . . . . . . . . . . . . . . . . . . . . . . . . . . Friday, 15 September Last day of dealings in the Existing Shares on a cum-entitlement basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Friday, 22 September First day of dealings in the Existing Shares on an ex-entitlement basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Monday, 25 September Latest time for lodging transfers of the Existing Shares accompanied by the relevant title documents in order to qualify for the Open Offer . . . . . . . . . . . . . . . . . . . . . . . . . . 4:30 p.m. on Tuesday, 26 September Register of members closed (both days inclusive) . . . . . . . . . . . . Wednesday, 27 September to Tuesday, 3 October Latest time for lodging forms of proxy for the SGM (48 hours prior to SGM) . . . . . . . . . . . . . . . . . . . . . . . . . 3:30 p.m. on Sunday, 1 October Record Date for the Open Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tuesday, 3 October SGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3:30 p.m. on Tuesday, 3 October Effective date of the Capital Reduction . . . . . . . . . . . . . . . . . . . . . . . Wednesday, 4 October Announcement of result of SGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wednesday, 4 October First day of free exchange of share certificates for the Existing Shares for new certificates for the New Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wednesday, 4 October Despatch of the Prospectus Documents . . . . . . . . . . . . . . . . . . . . . . . . . . Friday, 6 October Latest time for payment for and acceptance of the Offer Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4:00 p.m. on Friday, 20 October Latest time for the Open Offer to become unconditional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4:00 p.m. on Monday, 23 October Announcement of results of the Open Offer . . . . . . . . . . . . . . . . . . . . Thursday, 26 October

– 6 –

2006

EXPECTED TIMETABLE

Despatch of refund cheques in respect of wholly

or partially unsuccessful excess applications . . . . . . . . . . . . . . . . . . Thursday, 26 October

Share certificates of the Offer Shares to be posted . . . . . . . . . . . . . . . Thursday, 26 October

Dealing in the Offer Shares commences . . . . . . . . . . . . . . . . . . . . . . . Tuesday, 31 October

Last day for free exchange of Existing Share certificates

for New Share certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Friday, 3 November

Notes:

All times in this circular refer to Hong Kong time.
Dates or deadlines specified in this circular for events in the timetable for (or otherwise in relation to) the Open Offer are indicative only and may be extended or varied by agreement between the Company and the Underwriter. Any consequential changes to the anticipated timetable will be published by way of press announcements or notified to Shareholders as appropriate.

EFFECT OF BAD WEATHER ON THE LATEST TIME FOR ACCEPTANCE OF AND PAYMENT FOR THE OPEN OFFER

The latest time for acceptance of and payment for the Open Offer will not take place if there is:

a tropical cyclone warning signal number 8 or above, or
a “black” rainstorm warning
(i) in force in Hong Kong at any local time before 12:00 noon and no longer in force after 12:00 noon on Friday, 20 October 2006. Instead the latest time of acceptance of and payment for the Open Offer will be extended to 5:00 p.m. on the same Business Day;
(ii) in force in Hong Kong at any local time between 12:00 noon and 4:00 p.m. on Friday, 20 October 2006. Instead the latest time of acceptance of and payment for the Open Offer will be rescheduled to 4:00 p.m. on the following Business Day which does not have either of those warnings in force at any time between 9:00 a.m. and 4:00 p.m..

If the latest time for acceptance of and payment for the Open Offer does not take place on Friday, 20 October 2006, the dates mentioned in this section headed “Expected timetable” in this circular may be affected. A press announcement will be made by the Company in such event.

– 7 –

LETTER FROM THE BOARD

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(Stock Code: 385)

Executive Directors: James Sai-Wing Wong (Chairman) Stephen Sek-Kee Yu Frank Kwok-Kit Chu

Non-Executive Director: Herman Man-Hei Fung

Independent Non-Executive Directors: William Gage McAfee David Chung-Shing Wu Vincent Tian-Quan Mo

Registered Office: Clarendon House Church Street Hamilton HM11 Bermuda

Principal place of business in Hong Kong: 18th Floor 77 Des Voeux Road Central Hong Kong

8 September 2006

To the Shareholders and option holders (for information only)

Dear Sir/Madam,

PROPOSED CAPITAL REDUCTION

PROPOSED OPEN OFFER OF NEW SHARES ON THE BASIS OF THREE OFFER SHARES FOR EVERY TWO NEW SHARES HELD AND APPLICATION FOR WHITEWASH WAIVER

INTRODUCTION

It was announced on 21 August 2006 that the Board proposed the Capital Reduction, Open Offer and the Whitewash Waiver.

Conditional upon the Capital Reduction becoming effective, CAG proposes to raise approximately HK$59.4 million before expenses by issuing 237,959,698 Offer Shares at a price of HK$0.25 per Offer Share by way of the Open Offer, payable in full on application, on the basis of three Offer Shares for every two New Shares held on the Record Date. The Open Offer is subject to the approval by the Independent Shareholders by poll at the SGM.

The estimated net proceeds from the Open Offer is approximately HK$57 million and will be used in the CAG Group’s existing businesses and for the CAG Group’s general working capital needs.

– 8 –

LETTER FROM THE BOARD

The Independent Board Committee which comprised Mr. William Gage McAfee, Mr. David Chung-Shing Wu and Mr. Vincent Tian-Quan Mo, all being the independent nonexecutive Directors who are not involved in or have no interest in the Open Offer and the Whitewash Waiver, has been established to advise the Independent Shareholders in relation to the Open Offer and the Whitewash Waiver. Veda Capital has been appointed as the Independent Financial Adviser to advise the Independent Board Committee in this respect. Mr. Herman Man-Hei Fung is a non-executive Director of CAG. He is considered not independent as he is also on the board of Multi-Investment and Chinney, an existing substantial Shareholder that holds approximately 29.10% interest in CAG. Mr. Herman Man-Hei Fung, therefore, will not sit on the Independent Board Committee. The purpose of this circular is to provide you with further information regarding, among other things, the proposed Capital Reduction, Open Offer, the application for the Whitewash Waiver, the financial and other information of the CAG Group, the advice of the Independent Financial Adviser to the Independent Board Committee in respect of the Open Offer and the Whitewash Waiver, the recommendation of the Independent Board Committee to the Independent Shareholders and the notice of the SGM, which shall be convened for the purpose of considering and, if thought fit, approving the resolutions in relation to the aforesaid proposals.

The Open Offer will not be available to the Excluded Shareholders.

CAPITAL REDUCTION

Effects of the Capital Reduction

The Directors propose to put forward a Capital Reduction proposal to Shareholders for consideration:

(a) the reduction of the nominal value of each Existing Share in issue from HK$0.25 to HK$0.10 by the cancellation of HK$0.15 from the paid-up capital on each Existing Share;
(b) the credit of HK$23,795,969.85 arising from the Capital Reduction on the basis of 158,639,799 Existing Shares in issue will be credited to the contributed surplus account of the Company; and
(c) the Company’s existing authorised share capital of HK$250,000,000, divided into 1,000,000,000 Existing Shares of HK$0.25 each, be cancelled and be restored to HK$250,000,000, divided into 2,500,000,000 New Shares of HK$0.10 each.

As at the Latest Practicable Date, the authorized share capital of the Company was HK$250,000,000 divided into 1,000,000,000 Existing Shares and the issued share capital of the Company was HK$39,659,949.75 divided into 158,639,799 Existing Shares. Upon the Capital Reduction becoming effective, the issued share capital of the Company will be HK$15,863,979.90 divided into 158,639,799 New Shares.

– 9 –

LETTER FROM THE BOARD

The Company currently has outstanding Share Options entitling the holders to subscribe for an aggregate of 1,600,000 Existing Shares at HK$1.75 per Existing Share. These Share Options expire in July 2009. Apart from the Share Options, CAG has no derivatives, options, warrants and conversion rights or other similar rights which are convertible or exchangeable into Existing Shares as at the Latest Practicable Date.

Based on 158,639,799 Existing Shares in issue as at the Latest Practicable Date, the Capital Reduction will cause the paid-up capital of the Company to be reduced by HK$23,795,969.85. This amount will be credited to the contributed surplus account of the Company. The Capital Reduction does not affect CAG Group’s financial position, net assets or gearing ratios.

The Existing Shares are currently traded in board lots of 10,000 Existing Shares. Assuming the Capital Reduction becomes effective, the board lots for the trading of the New Shares will remain at 10,000 New Shares. The New Shares, when issued, will rank pari passu in all respects with each other.

Conditions of the Capital Reduction

The Capital Reduction is conditional upon the following:

(a) the passing of the relevant resolution by the Shareholders as a special resolution at the SGM to approve the Capital Reduction;
(b) the Listing Committee of the Stock Exchange granting the listing of, and permission to deal in, the New Shares to be issued; and
(c) compliance with the relevant procedural requirements under the Companies Act to effect the Capital Reduction, which include the publication of a press notice in an appointed newspaper in Bermuda advertising the Capital Reduction and the filing of a memorandum of reduction of share capital with the Registrar of Companies in Bermuda.

Assuming all the conditions are fulfilled, the Capital Reduction will become effective on Wednesday, 4 October 2006. Application will be made to the Stock Exchange for the listing of, and permission to deal in, the New Shares.

Reason for the Capital Reduction

Prior to the announcement of the Capital Reduction, the share price for the Existing Shares has occasionally traded below the par value of HK$0.25. As at the Last Trading Day prior to the Announcement, the closing price of the Existing Share was HK$0.24. In order to give CAG the flexibility to raise equity capital from the stock market, the Directors believe it is in the best interest of the Company to lower the par value of the Company’s shares from HK$0.25 to HK$0.10.

– 10 –

LETTER FROM THE BOARD

Free exchange of New Share certificates and trading arrangement

Subject to the Capital Reduction becoming effective, Shareholders may, during a specified period, exchange certificates for the Existing Shares with the Company’s branch registrar in Hong Kong, Tengis Limited at 26/F, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong, for exchange, at the expense of the Company, for certificates for the New Shares. Thereafter, certificates for Existing Shares will be accepted for exchange only on payment of a fee of HK$2.50 (or such higher amount as may from time to time be allowed by the Stock Exchange) for each new certificate issued for New Shares. Nevertheless, certificates for Existing Shares will continue to be valid and may be exchanged for certificates for New Shares at any time at the expense of Shareholders.

THE OPEN OFFER

Issue statistics

Basis of the Open Offer : Three Offer Shares for every two New Shares held on Record Date Number of Existing Shares : 158,639,799 Existing Shares in issue as of the Latest Practicable Date Number of Offer Shares : 237,959,698 Offer Shares Number of New Shares in issue : 396,599,497 New Shares immediately following the completion of the Open Offer Number of Offer Shares : 69,237,478 Offer Shares undertaken to be taken up by Multi-Investment Number of Offer Shares : 168,722,220 Offer Shares underwritten by EIL Subscription Price : HK$0.25 per Offer Share payable in full on application

Qualifying Shareholders

The Company will send the Prospectus Documents to the Qualifying Shareholders and the Prospectus, for information only, to the Excluded Shareholders. To qualify for the Open Offer, Qualifying Shareholders must be registered as members of the Company on the register of members of the Company on the Record Date and not be Excluded Shareholders. So long as the Excluded Shareholders are Independent Shareholders, they are entitled to cast their vote on the ordinary resolutions in relation to the Open Offer and the Whitewash Waiver at the SGM in addition to the special resolution in relation to the Capital Reduction.

– 11 –

LETTER FROM THE BOARD

In order to be registered as members of CAG on the Record Date, Qualifying Shareholders must lodge any transfer of Existing Shares (with the relevant share certificates) for registration with the Registrar by 4:30 p.m. on Tuesday, 26 September 2006. The branch share registrar of CAG in Hong Kong is Tengis Limited at 26/F, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong.

The invitation to apply for the Offer Shares will not be transferable, and there will be no nil-paid entitlements available for trading on the Stock Exchange. Fractional entitlements of Offer Shares will not be allotted and will be aggregated. All Offer Shares arising from the aggregation of such fractional entitlements and all Offer Shares to which the Excluded Shareholders would otherwise be entitled had they been Qualifying Shareholders will be made available for subscription by the Qualifying Shareholders by means of the Excess Application Forms.

Closure of register of members

The register of members of CAG will be closed from Wednesday, 27 September 2006 to Tuesday, 3 October 2006 (both days inclusive) to determine the eligibility of the Qualifying Shareholders to the Open Offer. No transfer of Existing Shares will be registered during this period.

The Subscription Price

The Subscription Price of HK$0.25 per Offer Share, payable in full on application, represents:

(i) a premium of approximately 4.2% to the closing price of HK$0.24 per New Share (assuming the Capital Reduction becoming effective) as quoted on the Stock Exchange on the Last Trading Day;
(ii) a premium of approximately 1.6% to the theoretical ex-entitlement price of approximately HK$0.246 per New Share based on the aforesaid closing price per New Share;
(iii) a premium of approximately 0.8% to the average closing price of approximately HK$0.248 per New Share (assuming the Capital Reduction becoming effective) as quoted on the Stock Exchange for the last 10 consecutive trading days up to and including the Last Trading Day;
(iv) a discount of approximately 74.7% to the audited net asset value per New Share (assuming the Capital Reduction becoming effective) of approximately HK$0.99 as at 31 December 2005 extracted from the latest audited financial statements of the Company as at 31 December 2005;
(v) a premium of approximately 3.3% to the closing price of approximately HK$0.242 per New Share (assuming the Capital Reduction becoming effective) as quoted on the Stock Exchange on the Latest Practicable Date.

– 12 –

LETTER FROM THE BOARD

The Subscription Price was determined by reference to prevailing market prices of the Existing Shares. The Board considers that the Subscription Price is fair and reasonable and the discount of the Subscription Price to CAG’s net asset per share should encourage Qualifying Shareholders to participate in the Open Offer and accordingly the future growth of the CAG Group.

Status of the Offer Shares

The Offer Shares, when allotted and issued, will rank pari passu in all respects with the New Shares in issue on the date of allotment and issue of the Offer Shares. Holders of the Offer Shares will be entitled to receive all future dividends and distributions which are declared, made or paid in respect thereof on or after the date of allotment and issue of such Offer Shares.

Certificates for the Offer Shares and refund cheques

Subject to fulfillment of the conditions of the Open Offer, share certificates for the Offer Shares are expected to be posted on or before Thursday, 26 October 2006 to those Qualifying Shareholders who have validly applied and paid for the Offer Shares by ordinary post and at their own risk. Refund cheques in respect of wholly or partially unsuccessful applications for excess Offer Shares are also expected to be posted on or before Thursday, 26 October 2006, by ordinary post at their own risk.

Rights of the Excluded Shareholders

The Company is in the process of ascertaining the feasibility of extending the Open Offer to the Overseas Shareholders from the legal advisers of the relevant jurisdictions, details of which will be disclosed in the Prospectus which is expected to be depatched on or before Friday, 6 October 2006.

The Prospectus Documents are not expected to be registered under the applicable securities legislation of any jurisdiction other than Hong Kong and Bermuda. The Excluded Shareholders will not be entitled to take part in the Open Offer.

The Company will send the Prospectus to the Excluded Shareholders for their information only. The Company will not send the Application Forms and the Excess Application Forms to the Excluded Shareholders. However, so long as the Excluded Shareholders are Independent Shareholders, they are entitled to cast their votes on the resolutions in relation to the Capital Reduction, Open Offer and the Whitewash Waiver at the SGM.

Application for excess Offer Shares

Qualifying Shareholders may apply (using Excess Application Forms) for entitlements of the Excluded Shareholders and any Offer Shares not initially subscribed by the Qualifying Shareholders. Qualifying Shareholders who hold their Shares under nominee companies should note that CAG will regard the nominee company as a single shareholder. As such, Qualifying

– 13 –

LETTER FROM THE BOARD

Shareholders should note that the aforesaid arrangement in relation to the allocation of the excess Offer Shares may not be extended pro rata to beneficial owners individually. Qualifying Shareholders whose Shares are held by nominee companies are advised to consider making arrangements to register their Shares in the name of the beneficial owners prior to the Record Date.

The Directors will allocate excess Offer Shares at their discretion on a fair and equitable basis. Shareholders or potential investors should note that the number of excess Offer Shares which may be allocated to them may be different where they make application for excess Offer Shares by different means, such as making applications under their own names as against through nominee companies who hold the Shares for them. Shareholders and investors should consult their professional advisers if they are in any doubt as to whether they should register their shareholding in their own names and apply for the excess Offer Shares themselves.

Independent Shareholders’ approval at the SGM

Pursuant to Rule 7.24(5) of the Listing Rules, the Open Offer will be subject to, among others, the approval of the Independent Shareholders by way of poll at the SGM. MultiInvestment, the Directors (excluding the Independent Board Committee), the chief executive of CAG and any of their associates will abstain from voting on the resolutions in relation to the Open Offer and the Whitewash Waiver.

Application for listing

CAG will apply to the Listing Committee of the Stock Exchange for the listing of, and permission to deal in, the Offer Shares.

Arrangements will be made to enable the Offer Shares to be admitted to CCASS. Subject to the granting of the listing of, and permission to deal in, the Offer Shares on the Stock Exchange, the Offer Shares will be accepted as eligible securities by HKSCC for deposit, clearance and settlement in CCASS with effect from the commencement date for dealings in the Offer Shares on the Stock Exchange or such other date as determined by HKSCC. Settlement of transactions between participants of the Stock Exchange on any trading day is required to take place in CCASS on the second trading day thereafter. All activities under CCASS are subject to the General Rules of CCASS and CCASS Operational Procedures in effect from time to time.

Shareholders should seek the advice of their stockbroker or other professional adviser for details of those settlement arrangements and how such arrangements will affect their rights and interests.

Dealings in the Offer Shares will be subject to the payment of the applicable stamp duty and any other applicable fees and charges in Hong Kong.

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LETTER FROM THE BOARD

Undertaking by Multi-Investment

As at the Latest Practicable Date, Multi-Investment holds 46,158,319 Existing Shares, representing approximately 29.10% of CAG’s issued share capital. By a letter dated 18 August 2006, Multi-Investment has undertaken to CAG that it will subscribe for the 69,237,478 Offer Shares that it is entitled to subscribe for under the Open Offer.

The Underwriting Agreement

Date : 18 August 2006 Underwriter : EIL, a private company of which Dr. Wong is the sole beneficial owner

Number of Offer Shares : 168,722,220 Offer Shares at the Subscription Price underwritten by the of HK$0.25 per Offer Share Underwriter
Underwriting commission : 2.0% of the total Subscription Price for the Offer Shares underwritten by the Underwriter, which is determined after arms’ length negotiation between the Company and the Underwriter and accords with the market rate

Dr. Wong has confirmed that he has made arrangements to provide adequate financial support to the Underwriter for the latter to fully fulfil its duties and obligations as an underwriter under the Underwriting Agreement.

Termination of the Underwriting Agreement

The Underwriting Agreement contains provisions granting the Underwriter the right to terminate the obligation of an underwriter thereunder on the occurrence of certain events. The Underwriter may, by notice in writing to CAG, at any time before 4:00 p.m. on the second business day after the latest date for acceptance of the Offer Shares or such later date as the Company may decide, terminate the Underwriting Agreement, if:

(1) any of the following events occur which would, in the absolute opinion of the Underwriter, materially and adversely affect the business, financial or trading position or prospects of the CAG Group as a whole or the success of the Open Offer or it would otherwise be inadvisable for CAG or the Underwriter to proceed with the Open Offer:
(a) the introduction of any new law or regulation or any change in existing law or regulation or any material change in the judicial interpretation or application thereof or other occurrence of any nature whatsoever; or

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LETTER FROM THE BOARD

(b) the occurrence of any event, development or change (whether or not local, national or international or forming part of a series of events or changes occurring or continuing before, on and/or after the date of the Underwriting Agreement and including an event or change in relation to or a development of an existing state of affairs) of a political, military, financial, regulatory, economic, currency or other nature (whether or not unique with any of the forgoing or in the nature of any local, national, or international, outbreak or escalation of hostilities or armed conflict) resulting in a material adverse change in, or which might reasonably be expected to result in a material adverse change in political, economic or stock market conditions; or
(c) the imposition of any moratorium, suspension or material restriction on trading in securities generally or the Company’s securities on the Stock Exchange occurring due to exceptional financial circumstances; or
(d) any material adverse change in market conditions, taxation or exchange control or combination of circumstances in Hong Kong and China (including without limitation suspension or material restriction on trading in the securities of CAG); or
(2) the Underwriter shall receive notice of, or shall otherwise become aware of, the fact that any of the representations or warranties contained in the Underwriting Agreement was, when given, untrue or inaccurate or would be untrue or inaccurate and the Underwriter shall, in its absolute opinion, determine that any such untrue representation or warranty represents or is likely to represent a material adverse change in the business, financial or trading position or prospects of the CAG Group taken as a whole or is otherwise likely to have a materially prejudicial effect on the Open Offer; or
(3) any change occurs in the circumstances of CAG or any member of the CAG Group which would materially and adversely affect the business, financial or trading position or prospects of the CAG Group as a whole; or
(4) there shall occur any event, or series of events, beyond the control of the Underwriter (including, without limitation, acts of government, strike, lock-outs, fire, explosion, flooding, civil commotion, acts of war, acts of terrorism or acts of God) which, in the absolute opinion of the Underwriter, have or would have the effect of making any part of the Underwriting Agreement incapable of performance in accordance with its terms or which prevents the processing of applications and/or payments pursuant to the Open Offer or pursuant to the underwriting thereof or which have or is likely to have a material prejudicial effect on the Open Offer.

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LETTER FROM THE BOARD

Conditions of the Open Offer

The Open Offer shall be conditional upon the following:

(1) the Capital Reduction becoming effective;
(2) the passing by the Independent Shareholder on a poll at the SGM of an ordinary resolution to approve the Open Offer;
(3) the Executive granting the Whitewash Waiver to the Underwriter and parties acting in concert with it and the satisfaction of all conditions (if any) attached to the Whitewash Waiver;
(4) the passing by the Independent Shareholders on a poll at the SGM of an ordinary resolution to approve the Whitewash Waiver;
(5) the Listing Committee of the Stock Exchange granting and not having withdrawn or revoked listing of and permission to deal in the Offer Shares (in their fully paid forms);
(6) the filing and registration of all documents relating to the Open Offer with the Companies Registry in Hong Kong on or before the Posting Date;
(7) the filing with the Registrar of Companies in Bermuda of the Prospectus Documents;
(8) delivery by the Company to the Underwriter on the date of the Underwriting Agreement of the undertaking letter duly executed by Multi-Investment;
(9) the posting of the Prospectus Documents to Qualifying Shareholders on or before the posting date as defined therein; and
(10) compliance by Multi-Investment with all its undertakings and obligations under the undertaking letter as described in the section headed “Undertaking by MultiInvestment” in this circular.

Neither the Company nor the Underwriter may waive any of the above conditions. Completion of the subscription of the Underwritten Shares by the Underwriter shall take place on or before the third business day after the last day of acceptance of the Open Offer and is currently expected to be Wednesday, 25 October 2006.

If the conditions to the Open Offer are not satisfied by the Underwriter, the Underwriting Agreement shall terminate and (save in respect of any rights or obligations which may accrue under the Underwriting Agreement prior to such termination) no party shall have any claim against the other party for costs, damages, compensation or otherwise.

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LETTER FROM THE BOARD

The Open Offer and the related Whitewash Waiver shall be made conditional upon approval by the Independent Shareholders by way of poll at the SGM on which the Underwriter, parties acting in concert with it, including Multi-Investment, as well as the Directors (excluding the Independent Board Committee), the chief executive of the Company and their respective associates will abstain from voting on the resolutions approving the Open Offer and the Whitewash Waiver.

Shareholding changes of CAG

The shareholding structure of the Company immediately before and after the completion of the Open Offer is set out below:

Chinney (via Multi- Investment) Directors Dr. James Sai-Wing Wong (via EIL) Mr. Frank Kwok-Kit Chu Dr. Wong and parties acting in concert with him Public Shareholders Total	Shareholding as at the Latest Practicable Date Existing Shares % 46,158,319 29.10 – – 96,080 0.06	Shareholding as at the Latest Practicable Date Existing Shares % 46,158,319 29.10 – – 96,080 0.06	Shareholding immediately following completion of the Open Offer (assuming full subscription by Qualifying Shareholders) New Shares % 115,395,797 29.10 – – 240,200 0.06	Shareholding immediately following completion of the Open Offer (assuming full subscription by Qualifying Shareholders) New Shares % 115,395,797 29.10 – – 240,200 0.06	Shareholding immediately following completion of the Open Offer (assuming nil subscription by Qualifying Shareholders) New Shares % 115,395,797 29.10 168,722,220 42.54 96,080 0.02	Shareholding immediately following completion of the Open Offer (assuming nil subscription by Qualifying Shareholders) New Shares % 115,395,797 29.10 168,722,220 42.54 96,080 0.02
	46,254,399 112,385,400	29.16 70.84	115,635,997 280,963,500	29.16 70.84	284,214,097 112,385,400	71.66 28.34
	158,639,799	100.00	396,599,497	100.00	396,599,497	100.00

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LETTER FROM THE BOARD

Information on Multi-Investment, Chinney and CAG Group

Multi-Investment is an investment holding company, and an indirect wholly-owned subsidiary of Chinney. Other than the holding of 46,158,319 Existing Shares, Multi-Investment is not engaged in any other business activities.

Chinney is principally engaged in property development and investment in the PRC and Hong Kong, superstructure construction work, foundation piling, garment manufacturing, general trading and other investments. Apart from its 29.10% interest in CAG, Chinney currently has approximately 61.88% equity interest in Hon Kwok Land Investment Company, Limited, a company engaged primarily in property development and investments in the PRC and Hong Kong and is listed on the Stock Exchange.

The CAG Group is principally engaged in the trading in plastics and chemicals, industrial products and equipment as well as in building related contracting services for both public and private sectors in Hong Kong and Macau.

The Share Options

As at the Latest Practicable Date, the Company has outstanding and exercisable Share Options convertible into an aggregate of 1,600,000 Existing Shares at exercise price of HK$1.75 per Existing Share. Pursuant to the terms of the Share Option Scheme, the proposed Capital Reduction, the Open Offer and the application for Whitewash Waiver (collectively the “Capital Reorganisation”) will result in an increase in the number of shares to be subscribed for and a decrease in the exercise price per New Share in relation to the outstanding Share Options granted but not yet exercised under the Share Option Scheme. Assuming no new Existing Shares are issued prior to the SGM and upon completion of the Capital Reduction and the Open Offer, the Company will have outstanding Share Options entitling the holders thereof to subscribe for up to an aggregate of 4,000,000 New Shares at the exercise price of HK$0.70 per New Share immediately after completion of the Capital Reorganisation as reviewed and certified by the auditors of CAG in compliance with the Note to Rule 17.03(13).

Save for the Share Options as disclosed herein, as at the Latest Practicable Date, there are no other outstanding convertible note, share option, warrant, derivative or other securities convertible into or exchangeable for the Existing Shares.

Reasons for the Open Offer and use of proceeds

The estimated net proceeds from the Open Offer are approximately HK$57 million, after paying professional fees, underwriting commission and printing expenses totaling approximately HK$2.4 million. The Directors intend to utilize the above net proceeds in the CAG Group’s existing businesses and for the CAG Group’s working capital needs. The Board considers that the Open Offer provides a good opportunity for the CAG Group to strengthen its capital base and to enhance its financial position. In addition, since the Open Offer will allow the Qualifying Shareholders to maintain their respective pro rata

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LETTER FROM THE BOARD

shareholdings in CAG, the Board considers that it is in the interests of the Company and its Shareholders as a whole to raise capital through the Open Offer.

Fund raising activities of CAG during the past 12 months

CAG has not effected any capital raising activities by way of placing, rights issue or open offer of the Existing Shares in the past 12 months immediately before the date of this circular.

Warning of risks of dealings in the Existing Shares and New Shares

If the Underwriter terminates the Underwriting Agreement, or if the conditions of the Underwriting Agreement have not been fulfilled in accordance with the terms thereof, the Open Offer will not proceed. Shareholders and potential investors are advised to exercise due caution when dealing in the Existing Shares and/or the New Shares.

Shareholders should note that the Existing Shares will be dealt with on an ex-entitlement basis commencing from Monday, 25 September 2006 and that dealings in such Existing Shares will take place while the conditions to which the Underwriting Agreement is subject remain unfulfilled. Any Shareholders or other persons dealing in such Existing Shares up to the date on which all conditions to which the Open Offer is subject are fulfilled (which is expected to be Monday, 23 October 2006) will accordingly bear the risk that the Open Offer cannot become unconditional and may not proceed. Shareholders and potential investors contemplating to deal in the Shares and who are in any doubt about their position are recommended to consult their professional advisers.

The Whitewash Waiver

As at the Latest Practicable Date, Multi-Investment, an indirect wholly-owned subsidiary of Chinney, is beneficially interested in 46,158,319 Existing Shares, representing approximately 29.10% of CAG’s existing issued share capital. Chinney Holdings Limited, a private company in which Dr. Wong has control, currently has 55.67% interest in Chinney. In the event that EIL, as the Underwriter which does not currently hold any Existing Shares, is required to take up all the 168,722,220 Underwritten Shares proposed to be offered to Shareholders other than Multi-Investment under the Open Offer, Dr. Wong will become interested in a total of 168,722,220 New Shares, representing approximately 42.54% of CAG’s issued share capital as enlarged by the Open Offer. This interest, together with 115,395,797 New Shares held by Multi-Investment and 96,080 New Shares held by Mr. Frank Kwok-Kit Chu, a Director, following the Open Offer will make Dr. Wong and parties acting in concert with him hold an aggregate of 284,214,097 New Shares, representing approximately 71.66% of the issued share capital of CAG as enlarged by the Open Offer (assuming no outstanding Share Options are exercised on or before the Record Date).

There were no dealings in the Existing Shares by the Underwriter and parties acting in concert with it for the past 6 months prior to the date of the Announcement and they have undertaken not to deal in the Existing Shares until the date of the SGM.

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LETTER FROM THE BOARD

It is one of the conditions of the Underwriting Agreement that the Whitewash Waiver be obtained. If the Whitewash Waiver is not approved by Independent Shareholders or granted by the Executive, the Underwriting Agreement will not become unconditional and the Open Offer will not proceed.

Investors should be aware that if the Whitewash Waiver is granted to the Underwriter and parties acting in concert with it, they may not be required to make further a mandatory general offer pursuant to the Takeovers Code if their shareholdings in CAG become greater than 50% as a result of the fulfillment of the Underwriter’s underwriting commitment.

EIL has no current plan to introduce any major changes in the business of the Company, including redeployment of the fixed assets of CAG. EIL has no intention to change the continued employment of the employees of the CAG Group.

SGM

Set out on pages 175 to 178 of this circular is a notice convening the SGM to be held at Chater Room III, Function Room Level, The Ritz-Carlton Hong Kong, 3 Connaught Road Central, Hong Kong on Tuesday, 3 October 2006 at 3:30 p.m. at which the relevant resolutions will be proposed to the Shareholders to consider and, if thought fit, approve the Capital Reduction as a special resolution, the Open Offer and the Whitewash Waiver as ordinary resolutions.

The Open Offer and the related Whitewash Waiver shall be made conditional upon approval by the Independent Shareholders by way of poll at the SGM on which the Underwriter, parties acting in concert with it, including Multi-Investment and Mr. Frank Kwok-Kit Chu, as well as the Directors (excluding the Independent Board Committee), the chief executive of the Company and their respective associates will abstain from voting on the resolutions approving the Open Offer and the Whitewash Waiver.

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LETTER FROM THE BOARD

A form of proxy for use at the SGM is enclosed with this circular. Whether or not you are able to attend the SGM in person, you are requested to complete and return the form of proxy in accordance with the instructions printed thereon to the Company’s Hong Kong branch share registrar, Tengis Limited at 26/F, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong as soon as possible but in any event not later than 48 hours before the time appointed for holding the SGM or any adjournment thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the SGM or any adjournment thereof if you so wish.

Right to demand a poll

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

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

A demand by a person as proxy for a Shareholder or in the case of a Shareholder being a corporation by its duly authorised representative shall be deemed to be the same as a demand by a Shareholder.

Recommendation

The Directors believe that the Capital Reduction is in the interests of the Company and the Shareholders as a whole, and accordingly, recommend the Shareholders to vote in favour of the special resolution relating to the Capital Reduction as set out in the notice of SGM.

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LETTER FROM THE BOARD

In relation to the Open Offer and the Whitewash Waiver, the Independent Financial Adviser considers that the terms of the Open Offer and the Whitewash Waiver are fair and reasonable so far as the Company and the Independent Shareholders are concerned. The Independent Board Committee, having taken into account the advice of the Independent Financial Adviser, considers that the terms of the Open Offer and the Whitewash Waiver are fair and reasonable so far as the Company and the Independent Shareholders are concerned. Accordingly, the Independent Board Committee recommends the Independent Shareholders to vote in favour of the resolutions to approve the Open Offer and the Whitewash Waiver to be proposed at the SGM.

Your attention is drawn to the letter from the Independent Board Committee on pages 24 to 25 and the letter from Veda Capital set out on pages 26 to 40 of this circular.

Additional information

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

Yours faithfully, For and on behalf of the Board Chinney Alliance Group Limited James Sai-Wing Wong Chairman

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

==> picture [328 x 47] intentionally omitted <==

(Stock Code: 385)

8 September 2006

To the Independent Shareholders

Dear Sir/Madam,

PROPOSED CAPITAL REDUCTION

PROPOSED OPEN OFFER OF NEW SHARES ON THE BASIS OF THREE OFFER SHARES FOR EVERY TWO NEW SHARES HELD AND APPLICATION FOR WHITEWASH WAIVER

We refer to the circular of the Company dated 8 September 2006 (the “Circular”) of which this letter forms part. Unless the context specifies otherwise, capitalized terms used herein have the same meanings as defined in the Circular.

We have been appointed by the Board as the Independent Board Committee to advise the Independent Shareholders as to whether the terms of the Open Offer and the Whitewash Waiver are fair and reasonable insofar as the Independent Shareholders are concerned and whether the Open Offer and the Whitewash Waiver are in the interests of the Company and the Independent Shareholders as a whole. Veda Capital has been appointed to advise you and us in this respect.

We wish to draw your attention to the letter from the Board and the letter from Veda Capital to the Independent Board Committee and the Independent Shareholders which contains its advice to us in relation to the Open Offer and the Whitewash Waiver as set out in the Circular.

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

Having taken into account the principal reasons and factors considered by, and the advice of Veda Capital as set out in its letter of advice on pages 26 to 40 of the Circular, we are of the opinion that the Open Offer and the Whitewash Waiver are in the interests of the Company and the Independent Shareholders and the terms of which are fair and reasonable insofar as the Company and the Independent Shareholders are concerned. Accordingly, we recommend the Independent Shareholders to vote in favour of the resolutions to be proposed at the SGM to approve the Open Offer and the Whitewash Waiver.

William Gage McAfee

Yours faithfully, Independent Board Committee of Chinney Alliance Group Limited David Chung-Shing Wu

Vincent Tian-Quan Mo

– 25 –

LETTER FROM VEDA CAPITAL

The following is the full text of a letter of advice from Veda Capital to the Independent Board Committee and the Independent Shareholders in relation to the Open Offer and the Whitewash Waiver, which has been prepared for the purpose of inclusion in the Circular.

Veda Capital Limited

Suite 11-12, 13/F, Nam Fung Tower

173 Des Voeux Road Central, Hong Kong

8 September 2006

To the Independent Board Committee and the Independent Shareholders of Chinney Alliance Group Limited

Dear Sirs,

PROPOSED OPEN OFFER OF NEW SHARES ON THE BASIS OF THREE OFFER SHARES FOR EVERY TWO NEW SHARES HELD AND APPLICATION FOR WHITEWASH WAIVER

INTRODUCTION

We refer to our appointment as the independent financial adviser to the Independent Board Committee and the Independent Shareholders in relation to the Open Offer and the Whitewash Waiver, details of which are set out in the letter from the Board (the “Board Letter”) contained in this circular (the “Circular”) dated 8 September 2006 issued by CAG, of which this letter forms part. Capitalised terms used in this letter shall have the same meanings as defined in the Circular unless the context requires otherwise.

On 21 August 2006, the Board announced that, conditional upon the Capital Reduction becoming effective, CAG proposes to raise approximately HK$59.4 million before expenses by issuing 237,959,698 Offer Shares at a price of HK$0.25 per Offer Share by way of the Open Offer, on the basis of three Offer Shares for every two New Shares held on the Record Date by the Qualifying Shareholders. The Open Offer is subject to the approval by the Independent Shareholders by poll at the SGM.

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LETTER FROM VEDA CAPITAL

required to take up all the 168,722,220 Underwritten Shares offered to, but not taken up by, Shareholders other than Multi-Investment under the Open Offer, Dr. Wong, through EIL, will become interested in a total of 168,722,220 New Shares, representing approximately 42.54% of CAG’s issued share capital as enlarged by the Open Offer. This interest, together with 115,395,797 New Shares held by Chinney through Multi-Investment, and 96,080 New Shares held by Mr. Frank Kwok-Kit Chu, a Director, following the Open Offer will make Dr. Wong and parties acting in concert with him hold an aggregate of 284,214,097 New Shares, representing approximately 71.66% of CAG’s issued share capital as enlarged by the Open Offer.

Under Rule 26 of the Takeovers Code, the fulfillment of EIL’s underwriting commitment, and the taking up by Multi-Investment, being the party acting in concert with it, of its entitlements under the Open Offer together with any excess Offer Shares not initially taken up by Qualifying Shareholders under the Open Offer, may trigger a mandatory general offer by EIL and parties acting in concert with it, including Multi-Investment and Mr. Frank Kwok-Kit Chu for all Shares other than those already owned by EIL and parties acting in concert with it. An application has been made to the Executive by EIL for the Whitewash Waiver. The Executive has agreed to grant the Whitewash Waiver subject to the approval of the Independent Shareholders taken by way of a poll at the SGM.

The Independent Board Committee, comprising the independent non-executive Directors, namely Mr. William Gage McAfee, Mr. David Chung-Shing Wu and Mr. Vincent Tian-Quan Mo, which is not involved in or has no interest in the Open Offer and the Whitewash Waiver and thus being independent, has been established to advise the Independent Shareholders in respect of the Open Offer and the Whitewash Waiver. Veda Capital has been appointed by CAG to advise the Independent Board Committee and the Independent Shareholders as to whether the terms and conditions of the Open Offer and the Whitewash Waiver are fair and reasonable so far as the Independent Shareholders are concerned and whether the Open Offer and the Whitewash Waiver are in the interests of CAG and the Independent Shareholders as a whole.

BASIS OF OUR ADVICE

In arriving at our recommendation, we have relied on the information including but not limited to the published information of the CAG Group, including CAG’s annual report for the year ended 31 December 2005 (the “2005 Annual Report”) and the Announcement, and have assumed that any representations made to us are true, accurate and complete. We have also relied on the statements, information, opinions contained or referred to in the Circular and all information, representations provided to us by the Directors and management of CAG. We have assumed that all information, representations and opinions contained or referred to in the Circular and all information, representations and opinions which have been provided by the Directors and management of CAG for which are solely responsible, are true and accurate at the time when they were made and will continue to be accurate as at date of the Circular.

The Directors have collectively and individually accepted full responsibility for the accuracy of the information contained in the Circular and have confirmed, having made all reasonable enquiries, which to the best of their knowledge and belief, there are no other facts

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LETTER FROM VEDA CAPITAL

the omission of which would make any statement in the Circular misleading. We consider that we have been provided with sufficient information to reach an informed view and to provide a reasonable basis for our opinion. We have not, however, conducted any independent in-depth investigation into the business and affairs of CAG, or its subsidiaries or associated companies.

We have not considered the tax consequences on the Qualifying Shareholders arising from the subscription for, holding of or dealing in the Offer Shares or otherwise, since these are particular to their own circumstances. We will not accept responsibility for any tax effect on, or liabilities of, any person resulting from the subscription for, holding of or dealing in the Offer Shares or the exercise of any rights attaching thereto or otherwise. In particular, Qualifying Shareholders subject to overseas taxes or Hong Kong taxation on securities dealings should consider their own tax positions with regard to the Open Offer and, if in any doubt, should consult their own professional advisers.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In assessing the Open Offer and the Whitewash Waiver and in giving our recommendation to the Independent Board Committee and the Independent Shareholders, we have taken into account the following principal factors and reasons:

Financial and business highlights of the CAG Group

The CAG Group is principally engaged in the trading of plastics and chemicals, industrial products and equipment as well as in building related contracting services for both public and private sectors in Hong Kong and Macau.

For the year ended 31 December 2005, the CAG Group recorded a turnover of approximately HK$1,015 million, representing a slight decrease of approximately 2.78% from the turnover of the previous year of approximately HK$1,044 million. Net profit of the CAG Group decreased approximately 73.23% to approximately 3.4 million for the year ended 31 December 2005 and the drop, according to the 2005 Annual Report, was mainly due to losses of approximately HK$8.7 million suffered in sharing the results of Shun Cheong Holdings Limited (“Shun Cheong”), a then 29.93% owned associate of CAG (as at 31 December 2005), and higher finance costs in a rising interest rate environment. The profit included a revaluation surplus on the CAG Group’s properties net of deferred tax of HK$7.5 million.

In November 2005, the CAG Group completed the disposal of the home electrical appliance business. The discontinued operation reported a turnover of approximately HK$13 million and a net loss of approximately HK$2.0 million for the year ended 31 December 2005. As stated in the 2005 Annual Report, the high exchange rate of Euros, intense market competition and the consumers’ preference to spend on “brown” goods such as television, mobiles and digital cameras than on “white” goods such as air-conditioners and washers have eroded the profitability and prospect of the home electrical appliance business over the years.

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LETTER FROM VEDA CAPITAL

In March 2006, the CAG Group completed the acquisition of the entire issued share capital of Shun Cheong Investments Limited (“SCI”), a subsidiary of Shun Cheong, engaging in the provision of multi-disciplinary building services, comprising electrical engineering, water pumping and fire service, air-conditioning installation, trading of electrical and mechanical engineering materials as well as building related maintenance services.

In April 2006, CAG disposed of 32,000,000 shares in Shun Cheong, representing approximately 27.6% interest in the issued share capital of Shun Cheong for a cash consideration of HK$9.6 million. In July 2006, CAG accepted the cash offer for the shares of Shun Cheong and disposed of the remaining 2,697,500 shares of Shun Cheong at a cash consideration of approximately HK$0.8 million. As at the Latest Practicable Date, CAG did does not have any shareholding interest in Shun Cheong.

Reasons for the Open Offer and the use of proceeds

The Board considers that the Open Offer provides a good opportunity for the CAG Group to strengthen its capital base and to enhance its financial position while allowing the Qualifying Shareholders to maintain their respective pro rata shareholdings in CAG. The estimated net proceeds from the Open Offer are approximately HK$57 million, after paying professional fees, underwriting commission and printing expenses totaling approximately HK$2.4 million. The Directors intend to utilize the above net proceeds in the existing businesses of the CAG Group and for working capital needs.

Terms of the Open Offer

The Open Offer is on the basis of three Offer Shares for every two New Shares held on the Record Date at the Subscription Price of HK$0.25 per Offer Share, payable in full on application, represents:

(i) a premium of approximately 4.2% to the closing price of HK$0.24 per New Share (assuming the Capital Reduction becoming effective) as quoted on the Stock Exchange on the Last Trading Day;
(ii) a premium of approximately 0.8% to the average closing price of approximately HK$0.248 per New Share (assuming the Capital Reduction becoming effective) as quoted on the Stock Exchange for the last ten consecutive trading days up to and including the Last Trading Day;
(iii) a premium of approximately 1.6% to the theoretical ex-entitlement price of approximately HK$0.246 per New Share based on the closing price of HK$0.24 per New Share (assuming the Capital Reduction becoming effective) as quoted on the Stock Exchange on the Last Trading Day;
(iv) a discount of approximately 74.7% to the audited net asset value per Existing Share of approximately HK$0.99 as at 31 December 2005 as extracted from the latest audited financial statements of CAG as at 31 December 2005; and
(v) a premium of approximately 3.3% to the closing price of HK$0.242 per New Share (assuming the Capital Reduction becoming effective) as quoted on the Stock Exchange on the Latest Practicable Date.

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LETTER FROM VEDA CAPITAL

The Subscription Price was determined by reference to prevailing market prices of the Existing Shares. The Board considers that the Subscription Price is fair and reasonable and the discount of the Subscription Price to CAG’s net asset per Existing Share should encourage Qualifying Shareholders to participate in the Open Offer and accordingly the future growth of the CAG Group.

(a) Review on share prices and historical closing prices

The average daily closing price, the highest closing price, the lowest closing price and the average daily trading volume of the Existing Shares as quoted on the Stock Exchange in each of the months during the period commencing from 19 August 2005 (being the commencement of the one-year period preceding the Last Trading Day, as we consider a one-year period provides a broad and sufficient time basis for assessing price performance of the Existing Shares) up to and including the Latest Practicable Date (the “Review Period”) are shown as follows:

					% of average
					daily trading
	Average			Average	volume of the
	daily	Highest	Lowest	daily trading	month to the
	closing	closing	closing	volume of	Existing Shares
Month	price	price	price	the month1	in issue2
	(HK$)	(HK$)	(HK$)	(Shares)
2005
August (from 19 August
2005 onwards)	0.378	0.435	0.365	310,178	0.196%
September	0.395	0.420	0.365	293,403	0.185%
October	0.333	0.365	0.305	75,816	0.048%
November	0.306	0.335	0.295	130,391	0.082%
December	0.305	0.320	0.280	25,620	0.016%
2006
January	0.294	0.310	0.285	77,956	0.049%
February	0.302	0.315	0.290	101,598	0.064%
March	0.313	0.335	0.295	154,257	0.097%
April	0.329	0.400	0.270	322,612	0.203%
May	0.273	0.300	0.260	253,461	0.160%
June	0.244	0.265	0.230	21,640	0.014%
July	0.263	0.270	0.245	11,472	0.007%
August (up to and including
the Last Trading Day)	0.248	0.255	0.235	39,534	0.025%
August (since the day that
the Existing Shares
resumed trading)	0.243	0.250	0.238	155,851	0.098%
September (up to and
including the Latest
Practicable Date)	0.241	0.242	0.240	164,300	0.104%

Source: the Stock Exchange web-site (www.hkex.com.hk)

– 30 –

LETTER FROM VEDA CAPITAL

Notes:

Average daily trading volume was calculated including any days when trading of the Existing Shares was suspended. The trading of the Existing Shares was suspended during the days of 27 January, 1 February, 2 February, 13 April and 21 August of 2006.
CAG has 158,639,799 Existing Shares in issue as at the Latest Practicable Date.

The Subscription Price is lower than all the monthly highest closing price of the Existing Shares during the Review Period. The Subscription Price is below the monthly average daily closing price throughout the Review Period except for June and August 2006. The Subscription Price is also lower than all the monthly lowest closing price of the Existing Shares during the Review Period except for the months of June, July and August 2006.

We also reviewed the historical closing price of the New Shares (assuming the Capital Reduction becoming effective) versus the Subscription Price during the Review Period. The following chart illustrates the historical closing price of the New Shares (assuming the Capital Reorganisation becoming effective) versus the Subscription Price during the Review Period:

==> picture [400 x 276] intentionally omitted <==

As shown in the above chart, assuming the Capital Reduction becoming effective, the closing price of the New Shares ranged from HK$0.23 per New Share to HK$0.435 per New Share during the Review Period. During the Review Period, the New Shares were mostly traded above the Subscription Price of HK$0.25 per Offer Share except during 31 trading days between 13 June 2006 and the Latest Practicable Date (as illustrated in the shaded area in the graph above). The Subscription Price of HK$0.25 per Offer Share represents a discount of approximately 17.02% to the average closing price of approximately HK$0.301 per New Share during the Review Period.

– 31 –

LETTER FROM VEDA CAPITAL

(b) Review on the trading volume of the Shares

The following chart illustrates the historical trading volume of the Shares as quoted on the Stock Exchange during the Review Period:

==> picture [419 x 255] intentionally omitted <==

As shown in the “Percentage of average daily trading volume of the month to the Shares in issue” of the table in the subsection (a) headed “Review on share prices and historical closing prices” above, we noted the liquidity of the Existing Shares has been low throughout the Review Period. The chart above in this subsection further shows that the liquidity of the Existing Shares was particularly low between June 2006 and August 2006 (up to the Last Trading Day), with an average daily trading volume ranging from 11,472 Existing Shares to 39,534 Existing Shares, or approximately 0.007% to 0.025% of CAG’s issued share capital of 158,639,799 Existing Shares. After publication of the Announcement and up to the Latest Practicable Date, the average daily trading volume increase to approximately 158,451 Shares, or approximately 0.1% of CAG’s Existing Shares in issue.

In view of the relatively low liquidity of the Existing Shares on the Stock Exchange, we consider open offers and rights issues will be more practicable means for CAG to raise funds as compared to placing of new Shares. Meanwhile, an open offer will have better time and cost efficiency over rights issue as it will not have a trading period for nil-paid entitlements. As such, we consider the Open Offer will be in the interests of CAG and Shareholders as a whole when considering equity fund raising.

– 32 –

LETTER FROM VEDA CAPITAL

In assessing the fairness of the Subscription Price, we consider a broader comparison of open offers of ordinary shares of other listed companies	to provide a more general reference for the pricing of the Open Offer. To the best of our knowledge, we have identified and reviewed 22 open offers	(the “Comparables”) of the companies that are listed on the Stock Exchange, which despatched the prospectuses/circulars of the respective open	offers during the Review Period. Details of the Comparables are summarized in the following table:	Closing price as	at the last Premium/	trading day (discount)	Company name Date of Subscription before the date Discount I Discount II III Dilution Underwriting	(Stock code) announcement Offer ratio price of announcement (Note 1) (Note 2) (Note 3) (Note 4) commission	(HK$) (HK$)	GreaterChina Technology Group Limited 13 July 2006 3 for 2 0.015 0.045 66.67% 44.44% (82.14%) 60% 2.50%	(8032)	Kiu Hung International Holdings Limited (381) 6 July 2006 7 for 20 0.05 0.17 70.59% 64.03% 11.11% 26% 2.50%	Carico Holdings Limited (729) 7 June 2006 1 for 1 0.120 0.248 51.61% 34.78% (3.47%) 50% 1.50%	Skyfame Realty (Holdings) Limited (59) 7 June 2006 13 for 40 0.900 1.25 28.00% 22.40% 291.30% 25% 2.00%	FX Creation International Holdings Limited 26 May 2006 1 for 2 0.060 0.29 79.31% 71.83% 135.29% 33% 2.50%	(8136)	Pacific Plywood Holdings Limited (767) 18 May 2006 1 for 1 0.025 0.23 89.13% 80.39% (92.33%) 50% 2.50%	China Nan Feng Group Limited (979) 28 April 2006 3 for 1 0.600 1.66 63.86% 30.64% 4,185.71% 75% 2.00%	Haywood Investment Limited (905) 27 April 2006 1 for 2 0.070 0.083 15.66% 11.39% 6.06% 33% Nil	China National Resources Development 26 April 2006 1 for 2 0.060 0.084 28.6% 21.10% Not 33% 2.50%	Holdings Limited (661) available	Great Wall Cybertech Limited (689) 21 April 2006 9 for 5 0.06 1.00 94.00% Not Not 64% 2.50%	available available	Heng Tai Consumables Group Limited (197) 1 March 2006 2 for 5 0.750 1.43 47.60% 39.50% 10.30% 29% 2.50%	SYSCAN Technology Holdings Limited (8083) 28 February 2006 3 for 1 0.030 0.073 58.90% 26.83% (78.87%) 75% 1.00%	Uni-Bio Science Group Limited (690) 15 February 2006 2 for 1 0.500 0.61 19.00% 18.20% 19.00% 67% 2.00%	Earnest Investment Holdings Limited (339) 23 February 2006 8 for 1 0.100 1.08 90.70% 52.40% (96.80%) 89% 1.50%	Fortuna International Holdings Limited (530) 27 January 2006 2 for 1 0.010 0.1 90.00% 75.00% (92.00%) 67% 1.00%	South Sea Petroleum Holdings Limited (76) 27 January 2006 1 for 2 0.200 0.34 41.18% 31.03% (52.83%) 33% 2.50%	TCL Communication Technology Holdings 22 December 2005 1 for 1 0.200 0.25 20% 11% (94.00%) 50% 2.50%	Limited (2618)	Satellite Devices Corporation (8172) 25 November 2005 3 for 1 0.065 0.075 13.30% 3.70% Not 75% 2.50%	available	EPRO Limited (8086) 17 November 2005 1 for 2 0.130 0.16 18.75% 13.33% 165.31% 33% HK$1,000

– 33 –

LETTER FROM VEDA CAPITAL

Closing price as	at the last Premium/	trading day (discount)	Company name Date of Subscription before the date Discount I Discount II III Dilution Underwriting	(Stock code) announcement Offer ratio price of announcement (Note 1) (Note 2) (Note 3) (Note 4) commission	(HK$) (HK$)	Foundation Group Limited (1182) 18 October 2005 3 for 1 0.023 0.1 77.00% 45.63% (80.00%) 75% 1.00%	United Power Investment Limited (674) 29 August 2005 1 for 1 0.150 0.46 67.39% 50.82% (32.74%) 50% 1.50%	Carico Holdings Limited (729) 5 August 2005 3 for 1 0.100 0.248 60.00% 27.54% 67.21% 75% 1.50%	Highest 94.00% 80.39% 89%	Lowest 13.30% 3.70% 25%	Mean 54.15% 36.95% 53%	Highest 4,185.71%	premium	Lowest 6.06%	premium	Average 543.48%	premium	Highest (96.80%)	discount	Lowest (3.47%)	discount	Average (70.52%)	Discount	CAG 21 August 2006 3 for 2 0.25 0.24 Premium of Premium of (74.7%) 60% 2%	4.2% 1.6%	Source: www.hkex.com.hk and the respective announcements, circulars and prospectuses containing details of the Comparables	Notes:	1. The discount of the subscription price to the closing price per share on the last trading day prior to the announcements in relation to the respective open offers.	2. The discount of the subscription price to the theoretical ex-entitlement price per share based on the closing price per share on the last trading day prior to the announcements	in relation to the respective open offers.	3. The premium/discount of the subscription price over/to the latest available net asset value per share at the time of the respective open offers.	4. Maximum dilution effect of each open offer.

– 34 –

LETTER FROM VEDA CAPITAL

We are mindful of the fact that pricing of an open offer may vary under different stock market conditions as well as among companies with different financial standing and business performance (including loss making companies and profit making companies). Nevertheless, we consider that a broader comparison of open offers announced recently would provide a more general reference for the reasonableness of the pricing of the Open Offer.

We found that the subscription prices for the Comparables were all set at discounts to their respective closing price of the Shares on the last trading day prior to the release of the relevant announcements and ranged from approximately 13.30% to 94.00% with a mean of approximately 54.15% while the Subscription Price represents a slight premium of approximately 4.2% to the closing price per Existing Share on the Last Trading Day. The discounts of the subscription price of the Comparables to the theoretical ex-rights price on the last trading day prior to the announcement ranged from approximately 3.70% to 80.39% with a mean of approximately 36.85% while the Subscription Price represents a slight premium of approximately 1.6% to the theoretical ex-rights price per Offer Share based on the closing price per Existing Share on the Last Trading Day. It seems common among the Comparables that the subscription prices of open offers are priced at discounts to the prevailing market prices of the relevant shares but not at premiums. We consider that with the Subscription Price set at a slight premium which almost equaled to the market price of the New Shares (assuming the Capital Reduction becoming effective) is beneficial to CAG since the capital base could be enlarged accordingly without subject to any discount pricing.

We have compared the subscription price of the open offers of the Comparables to the latest available net asset per share of the Comparables at the time of the respective open offers. We note that the subscription price of the open offers of 10 (the “NAV Discount Comparables”) out of the 22 Comparables were traded at discounts to the respective net asset per share of the Comparables. The discounts of the NAV Discount Comparables ranged from a minimum of approximately 3.47% to a maximum of approximately 96.80%. The average discount of the NAV Discount Comparables was approximately 70.52%. The discount of approximately 74.7% represented by the Subscription Price to the audited net asset value per Existing Share of approximately HK$0.99 as at 31 December 2005 is within the range of discounts of the NAV Discount Comparables and falls very close to the average discount of the NAV Discount Comparables. We concur with the Directors that the Subscription Price is fair and reasonable and the discount of the Subscription Price to CAG’s net asset per Existing Share should encourage Qualifying Shareholders to participate in the Open Offer and accordingly the future growth of the CAG Group.

Moreover, taking into account that (i) the Open Offer enables the Qualifying Shareholders to maintain their proportionate interests in CAG should they wish to do so and provides an equal opportunity among the Qualifying Shareholders to share future developments that may be brought about from the expansion of the CAG Group’s business; and (ii) although the shareholdings interest of those Qualifying Shareholders who do not take up their entitlements under the Open Offer will be diluted, they have been given a fair chance to participate in the Open Offer, we consider that the Subscription Price is fair and reasonable so far as the Qualifying Shareholders are concerned.

– 35 –

LETTER FROM VEDA CAPITAL

Alternatives to the Open Offer

As advised by the Directors, they have considered alternative means for CAG to raise funds other than the Open Offer, including but not limited to, debt financing, placing of new shares and rights issue. The Directors believe that taking additional borrowings or other debt financing would increase the CAG Group’s interest expenses in view of the recent increasing trend of interest rate and the CAG Group’s high gearing ratio. We concur with the Directors that bank borrowing and other debt financing will adversely affect the CAG Group’s balance sheet and increase the gearing ratio.

Apart from debt financing, common means of equity financing include placing of new shares, open offer and rights issue. The Directors consider that placing of new shares by its nature excludes existing Shareholders and dilutes their interest in CAG without providing them with an opportunity to share the future benefits of CAG that may be brought about by the expansion of the CAG Group’s business. While rights issue and open offer both can raise funds and allow the Qualifying Shareholders to maintain their existing shareholdings in CAG and participate in the future growth and development of CAG, CAG opts for the latter as it does not require time for trading of nil-paid entitlements on the Stock Exchange, and is more time and cost effective. In view of the time and cost efficiency, we concur with the Directors that the Open Offer is a better fund raising method for CAG.

Potential dilution effect on the shareholding interests of the Independent Shareholders

The attributable interest of the Qualifying Shareholders in terms of percentage shareholding in CAG who take up their entitlements in full under the Open Offer will remain unchanged upon completion of the Open Offer. Qualifying Shareholders who do not subscribe for their provisional entitlements under the Open Offer will have their shareholding interests diluted by a maximum of 60%.

On the other hand, Qualifying Shareholders should note that they may apply for any unsold entitlements of the Excluded Shareholders and any Offer Shares not taken up by the Qualifying Shareholders. Therefore, Qualifying Shareholders who are attracted by the prospects of the CAG Group and wish to increase their shareholding in CAG may increase their attributable interests in CAG at the Subscription Price.

In order to assess the fairness and reasonableness of the dilution effect of the Open Offer on the shareholding interests of the Independent Shareholders, we have made comparisons with other open offers of the Comparables. From the Comparables as set out in subsection headed “Comparisons with other open offers” above, we note that the dilutions of the respective open offers of the Comparables ranged form 25% to 89% with an average dilution of 53%. Although the dilution of the Open Offer is more than the average dilution of the Comparables, it still falls within the range of the dilutions of the Comparables.

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LETTER FROM VEDA CAPITAL

In view of the above and after taking into consideration the reasons and benefits of the Open Offer, together with the opportunity for Qualifying Shareholders to maintain their proportionate interests in CAG, the opportunity of applying for excess Offer Shares and the fact that the dilution of the Open Offers falls within the range of the dilutions of the Comparables, we consider that the potential dilution effect of the Open Offer is acceptable.

Financial effects of the Open Offer

(i) Effect on net tangible assets

A statement of unaudited pro forma statement of adjusted consolidated net tangible assets of the CAG Group based on the audited net tangible assets of the CAG Group as at 31 December 2005 adjusted for the effect of the Capital Reduction and the Open Offer on the net tangible assets of the CAG Group is set out in Appendix II to the Circular (the “Statement”).

The audited consolidated net tangible assets of the CAG Group were approximately HK$157.47 million as at 31 December 2005. Based on 158,639,799 Existing Shares in issue, the net tangible asset value per share was approximately HK$0.9926. Based on the Statement, upon completion of the Capital Reduction and the Open Offer, the unaudited pro forma adjusted consolidated net tangible assets of the CAG Group would increase by approximately 36.2% to approximately HK$214.47 million while the unaudited pro forma adjusted consolidated net tangible assets per share of the CAG Group would decrease by approximately 45.52% to approximately HK$0.5408 (based on 396,599,497 New Shares in issue immediately following the completion of the Open Offer).

In light of the enhancement on the unaudited pro forma adjusted consolidated net tangible assets and the lowering of the gearing level (details of which will be discussed in the sub-section headed “Effect on gearing ratio” that follows) of the CAG Group as a result of the Open Offer, we are of the opinion that the Open Offer is in the interests of CAG and the Shareholders as a whole. The decrease in the unaudited pro forma adjusted consolidated net tangible assets per share is an inevitable consequence of the Subscription Price being set at a discount to the net asset value per share. However, considering that the Qualifying Shareholders are having an equal opportunity to take up the Offer Shares in accordance with their provisional entitlements under the Open Offer and the Open Offer will enlarge the capital base of CAG so as to facilitate any future development of the CAG Group, we are of the view that the overall increase in the CAG Group’s unaudited pro forma adjusted consolidated net tangible assets to be favorable to CAG as a whole.

(ii) Effect on gearing ratio

The CAG Group’s gearing ratio (being total liabilities/total equity) was approximately 178.5% as at 31 December 2005. As a result of the increase in the net asset value of the CAG Group immediately after the Open Offer, CAG’s gearing ratio will be reduced to approximately 131.1% immediately after the Open Offer. We consider the reduced gearing ratio provides CAG with more financial flexibility and hence is in the interests of CAG and the Shareholders.

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LETTER FROM VEDA CAPITAL

(iii) Effect on liquidity

Total current assets and total current liability of the CAG Group as at 31 December 2005 were reported as approximately 377.77 million and approximately 279.22 million respectively. Accordingly, the current ratio (being current assets/ current liabilities) as at 31 December 2005 was about 1.35 times. The net proceeds from the Open Offer is expected to enhance its current asset value by approximately HK$57 million and thus improve the current ratio to approximately 1.56 times. Hence, the financial capability of CAG to look for expanded business opportunities will be enhanced accordingly.

The Open Offer will enhance the working capital position with no adverse impact on the gearing level of the CAG Group. Therefore, we concur with the Directors’ view that the Open Offer is in the interests of CAG and the Shareholders as a whole.

Underwriting arrangement

As at the Latest Practicable Date, Multi-Investment holds 46,158,319 Existing Shares, representing approximately 29.10% of CAG’s issued share capital. By a letter dated 18 August 2006, Multi-Investment has undertaken to CAG that it will subscribe for 69,237,478 Offer Shares that it entitled to subscribe for under the Open Offer. Pursuant to the Undertaking, EIL, as the Underwriter, has agreed to underwrite 168,722,220 Offer Shares under the Open Offer.

From the Comparables as set out in subsection headed “Comparisons with other open offers” above, we note that the commissions of the respective underwriters ranged form 1% to 2.5%, save for one of the Comparables which agreed to nil underwriting commission and another one with a fix underwriting fee of HK$1,000. We consider that the commission charged by the Underwriter of 2.0% in the Open Offer is within the range of underwriting commissions of the Comparables and is reasonable to CAG.

Subject to the fulfillment of the conditions contained in the Underwriting Agreement, it should also be noted that the Open Offer would not proceed if the Underwriter exercise its termination rights under the Underwriting Agreement. Details of the provisions granting the Underwriter such termination rights are included in the Board Letter. We consider such provision are in normal commercial terms and in line with the normal market practice.

– 38 –

LETTER FROM VEDA CAPITAL

THE WHITEWASH WAIVER

As at the Latest Practicable Date, Multi-Investment, as an indirect wholly-owned subsidiary of Chinney, is beneficially interested in 46,158,319 Existing Shares, representing approximately 29.10% of CAG’s existing issued share capital. Chinney Holdings Limited, a private company in which Dr. Wong has control, currently has 55.67% interest in Chinney. In the event that EIL, as the Underwriter, which does not currently hold any Existing Shares, is required to take up all the 168,722,220 Underwritten Shares proposed to be offered to Shareholders other than Multi-Investment under the Open Offer, Dr. Wong will become interested in a total of 168,722,220 New Shares, representing approximately 42.54% of CAG’s issued share capital as enlarged by the Open Offer. This interest, together with 115,395,797 New Shares held by Multi-Investment and 96,080 New Shares held by Mr. Frank Kwok-Kit Chu, a Director, following the Open Offer will make Dr. Wong and parties acting in concert with him hold an aggregate of 284,214,097 New Shares, representing approximately 71.66% of the issued share capital of CAG as enlarged by the Open Offer. There were no dealing in the Existing Shares by EIL and parties acting in concert with it for the past 6 months prior to the date of the Announcement.

Under Rule 26 of the Takeovers Code, the fulfillment of EIL’s underwriting commitment, and the taking up by parties acting in concert with it of their entitlements under the Open Offer together with any excess Offer Shares not initially taken up by Qualifying Shareholders under the Open Offer, may trigger a mandatory general offer by EIL and parties acting in concert with it, including Multi-Investment, for all Shares other than those already owned by EIL and parties acting in concert with it. However, EIL has applied to the Executive for the Whitewash Waiver under Note 1 on dispensations from Rule 26 of the Takeovers Code and the Executive has indicated that subject to the approval of the Whitewash Waiver by the Independent Shareholders at the EGM by way of a poll, he will waive the obligation of EIL and parties acting in concert with it to make a general offer which might result from the Open Offer. As stated in the Board Letter, the Open Offer is conditional upon, among other things, the Executive granting the Whitewash Waiver to EIL and parties acting in concert with it.

Based on our analysis of the terms and conditions of the Open Offer as set out above, we consider that the Open Offer is in the interests of CAG and the Shareholders taken as a whole. If the Whitewash Waiver is not granted by the Executive or if the Whitewash Waiver is not approved by the Independent Shareholders at the SGM, the Open Offer will not proceed and CAG will lose all the benefits that are expected to be brought by the completion of the Open Offer. Accordingly, we are in the opinion that for the purpose of implementing the Open Offer as discussed above, the approval of the Whitewash Waiver by the Independent Shareholders at the SGM is in the interests of CAG and the Shareholders as a whole and are fair and reasonable.

Shareholders should note if the Whitewash Waiver is granted to EIL and parties acting in concert with it, they may not be required to make a further mandatory general offer pursuant to the Takeovers Code if their shareholdings in CAG become greater than 50% as a result of the fulfillment of EIL’s underwriting commitment.

– 39 –

LETTER FROM VEDA CAPITAL

RECOMMENDATION

Taking into consideration of the above mentioned principal factors and reasons, we consider that, on balance, the terms of the Open Offer and the Whitewash Waiver are fair and reasonable so far as the Independent Shareholders are concerned and the Open Offer is in the interests of CAG and the Independent Shareholders as a whole. Accordingly, we recommend the Independent Shareholders, as well as the Independent Board Committee to advise the Independent Shareholders, to vote in favour of the relevant ordinary resolutions to be proposed at the SGM to approve the Open Offer and the Whitewash Waiver.

Yours faithfully, For and on behalf of Veda Capital Limited Hans Wong Julisa Fong Managing Director Director

– 40 –

APPENDIX I FINANCIAL INFORMATION OF THE CAG GROUP

1. THREE-YEAR FINANCIAL SUMMARY

Set out below is a summary of the financial information extracted from the audited financial statements of the CAG Group for the three years ended 31 December 2003, 2004 and 2005. The auditors’ reports as set out in the annual reports of the CAG Group for each of the three years ended 31 December 2003, 2004 and 2005 were unqualified and there are no extraordinary items or exceptional items affecting the consolidated financial statements of the Company for the three years ended 31 December 2003, 2004 and 2005.

2005 HK$’000 1,015,001	2004 HK’000 (Restated) 1,044,491	2004 HK’000 (Restated) 1,044,491
9,093 (3,681) 5,412 (1,960)	15,907 (3,028) 12,879 61	(22,957 (2,932
		(25,889 (1,511
3,452	12,940
3,411 41	12,720 220	(27,818 418
3,452 2.15 cents 3.39 cents N/A –

Note: The calculation of earnings/(loss) per share amounts is based on the net profit/(loss) for the year attributable to equity holders of the parent, and the weighted average number of ordinary shares in issue during the year.

There have been no dilutive effect on the basic earnings/(loss) per share for the three years ended 31 December 2005, 2004 and 2003 as the exercise prices of the outstanding share options were higher than the average market price of the Company’s shares during the years.

– 41 –

APPENDIX I

FINANCIAL INFORMATION OF THE CAG GROUP

The calculations of basic earnings/(loss) per share are based on:

Earnings/(loss) Profit/(loss) attributable to equity holders of the parent From continuing operations From a discontinued operation Profit/(loss) attributable to equity holders of the parent Shares Weighted average number of shares in issue during the year	2005 HK$’000 5,371 (1,960) 3,411 2005 158,639,799	2004 2003 HK$’000 HK$’000 (Restated) (Restated) 12,659 (26,307) 61 (1,511) 12,720 (27,818) Number of shares 2004 2003 (Restated) (Restated) 153,215,142 132,239,799

– 42 –

APPENDIX I FINANCIAL INFORMATION OF THE CAG GROUP

2. AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE CAG GROUP FOR THE YEAR ENDED 31 DECEMBER 2005

Set out below is the audited consolidated financial statements of the CAG Group for the two years ended 31 December 2005 as extracted from the 2005 annual report of the Company. Reference to pages numbers in the audited financial statements of the CAG Group is to the page number of the 2005 annual report of the Company.

Consolidated Income Statement

Year ended 31 December 2005

Notes CONTINUING OPERATIONS TURNOVER 5 Cost of sales/services Gross profit Other revenue and gain 5 Selling and distribution costs Administrative expenses Other operating income/(expenses), net Surplus arising from revaluation of land and buildings 14 Fair value adjustment on properties held for resale 21 Provision for impairment of goodwill 16 Provision for impairment of interest in an associate Finance costs 6 Share of losses of associates Profit before tax 7 Tax 10 Profit for the year from continuing operations DISCONTINUED OPERATION (Loss)/profit for the year 12 PROFIT FOR THE YEAR	2005 HK$’000 1,015,001 (927,465)	2004 HK$’000 (Restated) 1,044,491 (930,580) 113,911 4,064 (20,488) (67,009) (6,456) 5,598 – (1,634) (1,400) (6,059) (4,620) 15,907 (3,028) 12,879 61 12,940
	87,536 6,662 (15,324) (62,965) 4,903 5,261 2,914 – – (10,754) (9,140) 9,093 (3,681) 5,412 (1,960)	113,911 4,064 (20,488 (67,009 (6,456 5,598 – (1,634 (1,400 (6,059 (4,620
		15,907 (3,028
		12,879 61
	3,452

– 43 –

FINANCIAL INFORMATION OF THE CAG GROUP

APPENDIX I

Notes ATTRIBUTABLE TO: Equity holders of the parent 11 Minority interests EARNINGS PER SHARE ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT 13 Basic – From continuing and discontinued operations – From continuing operations Diluted	2005 HK$’000 3,411 41 3,452 2.15 cents 3.39 cents N/A	2004 HK$’000 (Restated) 12,720 220 12,940 8.30 cents 8.26 cents N/A

– 44 –

APPENDIX I FINANCIAL INFORMATION OF THE CAG GROUP

Consolidated Balance Sheet

31 December 2005

Notes NON-CURRENT ASSETS Property, plant and equipment 14 Investment properties 15 Goodwill 16 Interests in associates 18 Available-for-sale equity investment/long term investments 19 Deferred tax assets 33 Other assets 20 Retention monies receivable over one year Total non-current assets CURRENT ASSETS Properties held for resale 21 Inventories 22 Construction contracts 23 Trade and retention monies receivables 24 Amounts due from related companies 25 Prepayments, deposits and other receivables Equity investments at fair value through profit or loss/short term investments 26 Tax recoverable Cash and cash equivalents 27 Total current assets CURRENT LIABILITIES Trade and bills payables 28 Trust receipt loans 29 Amounts due to related companies 25 Other payables and accruals 32 Tax payable Interest-bearing bank loan and overdrafts 29, 30 Total current liabilities NET CURRENT ASSETS TOTAL ASSETS LESS CURRENT LIABILITIES	2005 HK$’000 23,852 13,049 – 19,139 – 809 282 3,672	2004 HK$’000 36,545 – – 28,279 – 1,404 1,220 2,816
	60,803 – 91,071 5,458 188,771 2,724 7,974 9,330 2,340 70,102 377,770 62,768 155,903 203 30,266 920 29,162 279,222 98,548	70,264
		3,036 118,363 5,134 236,577 3,244 7,784 11,986 – 62,778
		448,902
		81,422 189,584 315 41,886 5,541 39,960
		358,708
		90,194
	159,351	160,458

– 45 –

APPENDIX I

FINANCIAL INFORMATION OF THE CAG GROUP

Notes NON-CURRENT LIABILITIES Interest-bearing bank loan 29, 30 Provision 31 Deferred tax liabilities 33 Total non-current liabilities Net assets EQUITY Equity attributable to equity holders of the parent Issued capital 34 Reserves 36 Minority interests Total equity	2005 HK$’000 – 1,119 764 1,883 157,468 39,660 117,808 157,468 – 157,468	2004 HK$’000 3,750 1,376 1,059
		6,185
		154,273

		39,660 112,701
		152,361 1,912
		154,273

– 46 –

APPENDIX I FINANCIAL INFORMATION OF THE CAG GROUP

Consolidated Statement of Changes in Equity

Year ended 31 December 2005

		Attributable to equity holders of the parent	Attributable to equity holders of the parent	Attributable to equity holders of the parent	Attributable to equity holders of the parent	Attributable to equity holders of the parent
Issued share capital HK$’000 33,060 – – – – – 6,600 – 39,660 – – – – – – – – –	Share premium account HK$’000 562,724 – – – – – 6,600 (338) 568,986 – – – – – (568,986) – – –	Capital reserve Contributed surplus Land and buildings revaluation reserve Exchange fluctuation reserve Retained profits/ (accumulated losses) HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 236,500 – – 11 (707,361) – – – 18 – – – 1,827 – – – – 1,827 18 – – – – – 12,720 – – 1,827 18 12,720 – – – – – – – – – – 236,500 – 1,827 29 (694,641) – – – (103) – – – 1,873 – – – – 1,873 (103) – – – – – 3,411 – – 1,873 (103) 3,411 (236,500) 97,151 – – 708,335 – – (3,700) (74) 3,700 – – – – – – – – – –					Total HK$’000 124,934 18 1,827 1,845 12,720 14,565 13,200 (338) 152,361 (103) 1,873 1,770 3,411 5,181 – (74) – –	Minority interests HK$’000 1,692 – – – 220 220 – – 1,912 (5) – (5) 41 36 – (876) (888) (184)	Total equity HK$’000 126,626 18 1,827
									1,845 12,940
									14,785 13,200 (338)
									154,273 (108) 1,873
									1,765 3,452
									5,217 – (950) (888) (184)
39,660	–	–	97,151	–	(148)	20,805	157,468	–	157,468

– 47 –

APPENDIX I FINANCIAL INFORMATION OF THE CAG GROUP

Consolidated Cash Flow Statement

Year ended 31 December 2005

Notes CASH FLOWS FROM OPERATING ACTIVITIES Profit/(loss) before tax: From continuing operations From a discontinued operation 12 Adjustments for: Share of losses of associates Finance costs 6 Surplus arising from revaluation of land and buildings 14 Fair value adjustment on properties held for resale 21 Amortisation of goodwill 7 Depreciation 7 Provision for impairment of goodwill Provision for impairment of interest in an associate Provision for impairment of other assets 7 Provision/(write-back of provision) for bad and doubtful debts 7 Provision/(write-back of provision) for obsolete inventories 7 Gain on disposal of items of property, plant and equipment Gain on disposal of subsidiaries 5 Gain on disposal of equity investments at fair value through profit or loss Fair value losses on equity investments at fair value through profit or loss 7 Unrealised holding losses on short term investments 7 Interest income 5 Operating profit before working capital changes Increase in retention monies receivable over one year Decrease/(increase) in inventories and construction contracts Decrease/(increase) in trade and retention monies receivables Decrease/(increase) in amounts due from related companies, net Decrease/(increase) in prepayments, deposits and other receivables Increase/(decrease) in trade and bills payables, other payables and accruals, and provision Cash generated from/(used in) operations Interest received Interest paid Hong Kong profits tax paid, net Overseas taxes paid Net cash inflow/(outflow) from operating activities	2005 HK$’000 9,093 (1,960) 9,140 11,059 (5,261) (2,914) – 1,475 – – 938 (5,484) 2,790 (32) (1,128) (16) 2,656 – (1,317)	2004 HK$’000 (Restated) 15,907 (26) 4,620 6,621 (5,826) – 125 2,302 1,634 1,400 – 5,245 (83) (24) – – – 1,352 (161) 33,086 (1,991) (12,021) (66,193) (2,160) 3,257 1,898 (44,124) 161 (6,621) (1,946) (119) (52,649)
	19,039 (1,447) 18,826 47,058 408 (820) (19,938) 63,126 1,317 (11,059) (7,131) (368) 45,885	33,086 (1,991 (12,021 (66,193 (2,160 3,257 1,898
		(44,124 161 (6,621 (1,946 (119
		(52,649

– 48 –

FINANCIAL INFORMATION OF THE CAG GROUP

APPENDIX I

Notes CASH FLOWS FROM INVESTING ACTIVITIES Purchases of items of property, plant and equipment 14 Proceeds from disposal of items of property, plant and equipment Proceeds from disposal of equity investments at fair value through profit or loss Disposal of subsidiaries 37 Net cash inflow/(outflow) from investing activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issue of new shares 34 Share issue expenses 34 Increase/(decrease) in trust receipt loans Dividend paid to a minority shareholder Loan repayment to a minority shareholder New bank loans Repayment of bank loans Net cash (outflow)/inflow from financing activities NET INCREASE IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at beginning of year Effect of foreign exchange rate changes, net CASH AND CASH EQUIVALENTS AT END OF YEAR ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS Cash and bank balances 27 Non-pledged time deposits with original maturity of less than three months when acquired 27 Bank overdrafts 30	2005 HK$’000 (573) 206 1,184 5,158	2004 HK$’000 (Restated) (295) 63 – 8 (224) 13,200 (338) 57,533 – – 10,000 (6,737) 73,658 20,785 7,028 5 27,818 33,486 29,292 (34,960) 27,818
	5,975 – – (33,681) (888) (184) 5,000 (5,000) (34,753) 17,107 27,818 (235)	(224
		13,200 (338 57,533 – – 10,000 (6,737
		73,658
		20,785 7,028 5
	44,690
	14,268 55,834 (25,412)	33,486 29,292 (34,960
	44,690

– 49 –

APPENDIX I FINANCIAL INFORMATION OF THE CAG GROUP

Balance Sheet

31 December 2005

Notes NON-CURRENT ASSETS Property, plant and equipment 14 Interests in subsidiaries 17 Interest in an associate 18 Other assets 20 Total non-current assets CURRENT ASSETS Equity investments at fair value through profit or loss/short term investments 26 Amounts due from subsidiaries 17 Prepayments, deposits and other receivables Cash and cash equivalents 27 Total current assets CURRENT LIABILITIES Other payables and accruals 32 Interest-bearing bank loan 29, 30 Total current liabilities NET CURRENT ASSETS TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Interest-bearing bank loan 29, 30 Net assets EQUITY Issued capital 34 Reserves 36(b) Total equity	2005 HK$’000 16 98,042 17,599 282	2004 HK$’000 30 88,896 26,248 1,220
	115,939 9,330 11,985 271 7,046 28,632 3,488 3,750 7,238 21,394 137,333 –	116,394
		11,986 11,090 526 8,642
		32,244
		3,077 5,000
		8,077
		24,167
		140,561 3,750
	137,333	136,811

	39,660 97,673	39,660 97,151
	137,333	136,811

– 50 –

APPENDIX I FINANCIAL INFORMATION OF THE CAG GROUP

NOTES TO THE FINANCIAL STATEMENTS

31 December 2005

1. CORPORATE INFORMATION

During the year, the Group was involved in the following principal activities:

trading and manufacturing of plastic and chemical products
distribution and installation of building supplies, electrical and mechanical products
wholesaling of electrical appliances, engineering contracting business in the air-conditioning industry and the provision of maintenance services
investment holding

In June 2005, the Group discontinued its wholesaling of electrical appliances business. Further details regarding the discontinued operation are set out in note 12 to the financial statements.

2.1. BASIS OF PREPARATION

These financial statements have been prepared in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”) (which also include Hong Kong Accounting Standards (“HKASs”) and Interpretations) issued by the Hong Kong Institute of Certified Public Accountants, accounting principles generally accepted in Hong Kong and the disclosure requirements of the Hong Kong Companies Ordinance. They have been prepared under the historical cost convention, except for investment properties, certain land and buildings and equity investments, which have been measured at fair value. These financial statements are presented in Hong Kong dollars (“HK$”) and all values are rounded to the nearest thousand except when otherwise indicated.

Basis of consolidation

The consolidated financial statements include the financial statements of the Company and its subsidiaries for the year ended 31 December 2005. The results of subsidiaries are consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date that such control ceases. All significant intercompany transactions and balances within the Group are eliminated on consolidation.

Minority interests represent the interests of outside shareholders in the results and net assets of the Company’s subsidiaries.

2.2. IMPACT OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS

The following new and revised HKFRSs affect the Group and are adopted for the first time for the current year’s financial statements:

HKAS	1	Presentation of Financial Statements
HKAS	2	Inventories
HKAS	7	Cash Flow Statements
HKAS	8	Accounting Policies, Changes in Accounting Estimates and Errors
HKAS	10	Events after the Balance Sheet Date
HKAS	11	Construction contracts
HKAS	12	Income Taxes
HKAS	14	Segment Reporting
HKAS	16	Property, Plant and Equipment
HKAS	17	Leases
HKAS	18	Revenue
HKAS	19	Employee Benefits
HKAS	21	The Effects of Changes in Foreign Exchange Rates
HKAS	23	Borrowing Costs

– 51 –

FINANCIAL INFORMATION OF THE CAG GROUP

APPENDIX I

HKAS 24	Related Party Disclosures
HKAS 27	Consolidated and Separate Financial Statements
HKAS 28	Investments in Associates
HKAS 32	Financial Instruments: Disclosure and Presentation
HKAS 33	Earnings per Share
HKAS 36	Impairment of Assets
HKAS 37	Provisions, Contingent Liabilities and Contingent Assets
HKAS 38	Intangible Assets
HKAS 39	Financial Instruments: Recognition and Measurement
HKAS 39 Amendment	Transition and Initial Recognition of Financial Assets
	and Financial Liabilities
HKAS 40	Investment Property
HKFRS 2	Share-based Payment
HKFRS 3	Business Combinations
HKFRS 5	Non-current Assets Held for Sale and Discontinued Operations
HK(SIC)-Int 21	Income Taxes – Recovery of Revalued Non-depreciable Assets
HK-Int 4	Leases – Determination of the Length of Lease Term in respect
	of Hong Kong Land Leases

The adoption of HKASs 2, 7, 8, 10, 11, 12, 14, 16, 18, 19, 21, 23, 27, 28, 33, 37, 38, 40, HK(SIC)- Int 21 and HK-Int 4 has had no material impact on the accounting policies of the Group and the Company and the methods of computation in the Group’s and the Company’s financial statements.

HKAS 1 has affected the presentation of minority interests on the face of the consolidated balance sheet, consolidated income statement, consolidated statement of changes in equity and other disclosures. In addition, in prior periods, the Group’s share of tax attributable to associates was presented as a component of the Group’s total tax charge/(credit) in the consolidated income statement. Upon the adoption of HKAS 1, the Group’s share of the post-acquisition results of associates is presented net of the Group’s share of tax attributable to associates.

HKAS 24 has expanded the definition of related parties and affected the Group’s related party disclosures.

The impact of adopting the other HKFRSs is summarised as follows:

(a) HKAS 17 – Leases

In prior years, leasehold land and buildings held for own use were stated at cost or valuation less accumulated depreciation and any impairment losses.

Upon the adoption of HKAS 17, the Group’s leasehold interest in land and buildings should be separated into leasehold land and leasehold buildings and to be accounted for separately. Leasehold land is classified as an operating lease, because the title of the land is not expected to pass to the Group by the end of the lease term, while leasehold buildings continue to be classified as part of property, plant and equipment.

In accordance with HKAS 17, since the Group’s lease payments cannot be allocated reliably between the land and building elements, the entire lease payments are included in the cost of the land and buildings as a finance lease in property, plant and equipment.

The adoption of HKAS 17 has no effect on the consolidated income statement and the consolidated balance sheet for the years ended 31 December 2005 and 2004.

– 52 –

FINANCIAL INFORMATION OF THE CAG GROUP

APPENDIX I

(b) HKAS 32 and HKAS 39 – Financial Instruments

Equity securities

In prior years, the Group classified its investments in equity securities for trading purposes as short term investments, and were stated at their fair values on an individual basis with gains and losses recognised in the income statement. Upon the adoption of HKAS 39, these securities held by the Group at 1 January 2005 in the amount of HK$11,986,000 are designated as financial assets at fair value through profit or loss under the transitional provisions of HKAS 39 and accordingly are stated at fair value with gains or losses being recognised in the income statement.

The adoption of HKAS 39 has not resulted in any change in the measurement of these equity securities. Comparative amounts have been reclassified for presentation purposes.

(c) HKFRS 2 – Share-based Payment

Upon the adoption of HKFRS 2, when employees (including directors) render services as consideration for equity instruments (“equity-settled transactions”), the cost of the equity-settled transactions with employees is measured by reference to the fair value at the date at which the instruments are granted.

The main impact of HKFRS 2 on the Group is the recognition of the cost of these transactions and a corresponding entry to equity for employee share options. The revised accounting policy for share-based payment transactions is described in more detail in note 3.1 “Summary of significant accounting policies” below.

The Group has adopted the transitional provisions of HKFRS 2 under which the new measurement policies have not been applied to options granted to employees on or before 7 November 2002.

As the Group did not have any employee share options which were granted after 7 November 2002, the adoption of HKFRS 2 has had no impact on the accumulated losses as at 31 December 2003 and at 31 December 2004.

(d) HKFRS 3 – Business Combinations and HKAS 36 – Impairment of Assets

In prior years, goodwill arising on acquisitions prior to 1 January 2001 was eliminated against the consolidated capital reserve, in the year of acquisition and was not recognised in the income statement until disposal or impairment of the acquired business.

Goodwill arising on acquisitions on or after 1 January 2001 was capitalised and amortised on the straight-line basis over its estimated useful life and was subject to impairment testing when there was any indication of impairment.

The adoption of HKFRS 3 and HKAS 36 has resulted in the Group ceasing annual goodwill amortisation and commencing testing for impairment at the cash-generating unit level annually (or more frequently if events or changes in circumstances indicate that the carrying value may be impaired).

Any excess of the Group’s interest in the net fair value of the acquirees’ identifiable assets, liabilities and contingent liabilities over the cost of the acquisition of subsidiaries (previously referred to as negative goodwill), after reassessment, is recognised immediately in the income statement.

The transitional provisions of HKFRS 3 have required the Group to eliminate at 1 January 2005 the carrying amounts of accumulated amortisation with a corresponding adjustment to the cost of goodwill. Goodwill previously eliminated against the consolidated capital reserve remains eliminated against this reserve and is not recognised in the income statement when all or part of the business to which the goodwill relates is disposed of or when a cash-generating unit to which the goodwill relates becomes impaired.

The adoption of HKFRS 3 has no impact on the Group’s income statement and consolidated capital reserve since the Group has no remaining goodwill as at 31 December 2004.

– 53 –

FINANCIAL INFORMATION OF THE CAG GROUP

APPENDIX I

(e) HKFRS 5 – Non-current Assets Held for Sale and Discontinued Operations

The Group has applied HKFRS 5 prospectively in accordance with the transitional provisions of HKFRS 5, which has resulted in a change in accounting policy on the recognition of a discontinued operation. Under the previous SSAP 33 “Discontinuing Operations”, the Group would recognise a discontinued operation at the earlier of:

the date the Group enters into a binding sale agreement; and
the date the board of directors have approved and announced a formal disposal plan.

HKFRS 5 requires a component of the Group to be classified as discontinued when the criteria to be classified as held for sale have been met or it has been disposed of. An item is classified as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. Such a component represents a separate major line of business or geographical area of operations, is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations or is a subsidiary acquired exclusively with a view to resale. The principal impact of this change in accounting policy is that a discontinued operation is recognised by the Group at a later point than it would be under SSAP 33 due to the stricter criteria in HKFRS 5.

2.3. IMPACT OF ISSUED BUT NOT YET EFFECTIVE HONG KONG FINANCIAL REPORTING STANDARDS

The Group has not applied the following new and revised HKFRSs, that have been issued but are not yet effective, in these financial statements. Unless otherwise stated, these HKFRSs are effective for annual periods beginning on or after 1 January 2006:

HKAS 1 Amendment	Capital Disclosures
HKAS 19 Amendment	Actuarial Gains and Losses, Group Plans and Disclosures
HKAS 39 Amendment	Cash Flow Hedge Accounting of Forecast Intragroup Transactions
HKAS 39 Amendment	The Fair Value Option
HKAS 39 & HKFRS 4	Financial Guarantee Contracts
Amendments
HKFRSs 1 & 6 Amendments	First-time Adoption of Hong Kong Financial Reporting Standards
	and Exploration for and Evaluation of Mineral Resources
HKFRS 6	Exploration for and Evaluation of Mineral Resources
HKFRS 7	Financial Instruments: Disclosures
HK(IFRIC)-Int 4	Determining whether an Arrangement contains a Lease
HK(IFRIC)-Int 5	Rights to Interests arising from Decommissioning, Restoration
	and Environmental Rehabilitation Funds
HK(IFRIC)-Int 6	Liabilities arising from Participating in a Special Market
	– Waste Electrical and Electronic Equipment

The HKAS 1 Amendment shall be applied for annual periods beginning on or after 1 January 2007. The revised standard will affect the disclosures about qualitative information about the Group’s objective, policies and processes for managing capital; quantitative data about what the Company regards as capital; and compliance with any capital requirements and the consequences of any non-compliance.

HKFRS 7 will replace HKAS 32 and has modified the disclosure requirements of HKAS 32 relating to financial instruments. This HKFRS shall be applied for annual periods beginning on or after 1 January 2007.

In accordance with the amendments to HKAS 39 regarding financial guarantee contracts, financial guarantee contracts are initially recognised at fair value and are subsequently measured at the higher of (i) the amount determined in accordance with HKAS 37 and (ii) the amount initially recognised, less, when appropriate, cumulative amortisation recognised in accordance with HKAS 18.

The HKAS 19 Amendment, HKAS 39 Amendment regarding cash flow hedge accounting of forecast intragroup transactions, HKFRSs 1 and 6 Amendments, HKFRS 6, HK(IFRIC)-Int 5 and HK(IFRIC)-Int 6 do not apply to the activities of the Group. HK(IFRIC)-Int 6 shall be applied for annual periods beginning on or after 1 December 2005.

Except as stated above, the Group expects that the adoption of the other pronouncements listed above will not have any significant impact on the Group’s financial statements in the period of initial application.

– 54 –

APPENDIX I FINANCIAL INFORMATION OF THE CAG GROUP

3.1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Subsidiaries

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

The results of subsidiaries are included in the Company’s income statement to the extent of dividends received and receivable. The Company’s interests in subsidiaries are stated at cost less any impairment losses.

Associates

An associate is an entity, not being a subsidiary, in which the Group has a long term interest of generally not less than 20% of the equity voting rights and over which it is in a position to exercise significant influence.

The Group’s share of the post-acquisition results and reserves of associates is included in the consolidated income statement and consolidated reserves, respectively. The Group’s interests in associates are stated in the consolidated balance sheet at the Group’s share of net assets under the equity method of accounting, less any impairment losses. Goodwill arising from the acquisition of associates, which was not previously eliminated against the consolidated reserves, is included as part of the Group’s interests in associates.

The results of associates are included in the Company’s income statement to the extent of dividends received and receivable. The Company’s interest in an associate is treated as a non-current asset and is stated at cost less any impairment losses.

Goodwill

Goodwill arising on the acquisition of subsidiaries and associates represents the excess of the cost of the business combination over the Group’s interest in the net fair value of the acquirees’ identifiable assets acquired, and liabilities and contingent liabilities assumed as at the date of acquisition.

Goodwill on acquisitions for which the agreement date is on or after 1 January 2005

Goodwill arising on acquisition is initially recognised in the consolidated balance sheet as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. In the case of associates, goodwill is included in the carrying amount thereof, rather than as a separately identified asset on the consolidated balance sheet.

The carrying amount of goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.

For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the Group are assigned to those units or groups of units. Each unit or group of units to which the goodwill is so allocated:

represents the lowest level within the Group at which the goodwill is monitored for internal management purposes; and
is not larger than a segment based on either the Group’s primary or the Group’s secondary reporting format determined in accordance with HKAS 14 “Segment Reporting”.

Impairment is determined by assessing the recoverable amount of the cash-generating unit (group of cash-generating units), to which the goodwill relates. Where the recoverable amount of the cash-generating unit (group of cash-generating units) is less than the carrying amount, an impairment loss is recognised.

Where goodwill forms part of a cash-generating unit (group of cash-generating units) and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained.

– 55 –

FINANCIAL INFORMATION OF THE CAG GROUP

APPENDIX I

An impairment loss recognised for goodwill is not reversed in a subsequent period.

Goodwill previously eliminated against the consolidated reserves

Prior to the adoption of SSAP 30 “Business Combinations” in 2001, goodwill arising on acquisition was eliminated against the consolidated reserves in the year of acquisition. On the adoption of HKFRS 3, such goodwill remains eliminated against the consolidated reserves and is not recognised in profit or loss when all or part of the business to which the goodwill relates is disposed of or when a cash-generating unit to which the goodwill relates becomes impaired.

Impairment of assets

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

An impairment loss is recognised only if the carrying amount of an asset exceeds its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss is charged to the income statement in the period in which it arises, unless the asset is carried at a revalued amount, in which case the impairment loss is accounted for in accordance with the relevant accounting policy for that revalued asset.

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

Property, plant and equipment and depreciation

Property, plant and equipment are stated at cost or valuation less accumulated depreciation and any impairment losses. The cost of an item of property, plant and equipment comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditure incurred after items of property, plant and equipment have been put into operation, such as repairs and maintenance, is normally charged to the income statement in the period in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property, plant and equipment and the cost of the item can be measured reliably, the expenditure is capitalised as an additional cost of that asset or as a replacement.

Valuations are performed frequently enough to ensure that the fair value of a revalued asset does not differ materially from its carrying amount. Changes in the values of property, plant and equipment are dealt with as movements in the asset revaluation reserve. If the total of this reserve is insufficient to cover a deficit, on an individual asset basis, the excess of the deficit is charged to the income statement. Any subsequent revaluation surplus is credited to the income statement to the extent of the deficit previously charged. On disposal of a revalued asset, the relevant portion of the asset revaluation reserve realised in respect of previous valuations is transferred to retained profits as a movement in reserves.

– 56 –

APPENDIX I FINANCIAL INFORMATION OF THE CAG GROUP

Depreciation is calculated on the straight-line basis to write off the cost or valuation of each item of property, plant and equipment to its residual value over its estimated useful life. The principal annual rates used for this purpose are as follows:

Land and buildings 2% – 3% Leasehold improvements Over the lease terms or 20% – 33[1] ⁄3% Furniture, fixtures and equipment 10% – 33[1] ⁄3% Motor vehicles 15% – 25%

Where parts of an item of property, plant and equipment have different useful lives, the cost or valuation of that item is allocated on a reasonable basis among the parts and each part is depreciated separately.

Residual values, useful lives and the depreciation method are reviewed, and adjusted if appropriate, at each balance sheet date.

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

Investment properties

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

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

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

For a transfer from investment properties to owner-occupied properties or inventories, the deemed cost of property for subsequent accounting is its fair value at the date of change in use. If a property occupied by the Group as an owner-occupied property becomes an investment property, the Group accounts for such property in accordance with the policy stated under “Property, plant and equipment and depreciation” up to the date of change in use, and any difference at that date between the carrying amount and the fair value of the property is accounted for as a revaluation in accordance with the policy stated under “Property, plant and equipment and depreciation” above. For a transfer from properties held for resale to investment properties, any difference between the fair value of the property at that date and its previous carrying amount is recognised in the income statement.

Leases

Leases that transfer substantially all the rewards and risks of ownership of assets to the Group, other than legal title, are accounted for as finance leases. At the inception of a finance lease, the cost of the leased asset is capitalised at the present value of the minimum lease payments and recorded together with the obligation, excluding the interest element, to reflect the purchase and financing. Assets held under capitalised finance leases are included in property, plant and equipment, and depreciated over the shorter of the lease terms and the estimated useful lives of the assets. The finance costs of such leases are charged to the income statement so as to provide a constant periodic rate of charge over the lease terms.

Assets acquired through hire purchase contracts of a financing nature are accounted for as finance leases, but are depreciated over their estimated useful lives.

– 57 –

APPENDIX I FINANCIAL INFORMATION OF THE CAG GROUP

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

Investments and other financial assets

Applicable to the year ended 31 December 2004:

Long term investments

Long term investments in listed and unlisted equity securities, intended to be held for a continuing strategic or long term purpose, are classified as investment securities and are stated at cost less any impairment losses, on an individual investment basis.

When a decline in the fair value of a security below its carrying amount has occurred, unless there is evidence that the decline is temporary, the carrying amount of the security is reduced to its fair value, as estimated by the directors. The amount of the impairment is charged to the income statement account for the period in which it arises. When the circumstances and events which led to the impairment in value cease to exist and there is persuasive evidence that the new circumstances and events will persist in the foreseeable future, the amount of the impairment previously charged is credited to the income statement to the extent of the amount previously charged.

Short term investments

Short term investments are investments in equity securities held for trading purposes and are classified as other investments. Listed securities are stated at their fair values on the basis of their quoted market prices at the balance sheet date on an individual investment basis. Unlisted securities are stated at their fair values estimated by the directors having regard to information known to them and to market conditions existing at the balance sheet date, on an individual investment basis. The gains or losses arising from changes in the fair value of a security are credited or charged to the income statement for the period in which they arise.

Applicable to the year ended 31 December 2005:

Financial assets in the scope of HKAS 39 are classified as either financial assets at fair value through profit or loss, loans and receivables, and available-for-sale financial assets, as appropriate. When financial assets are recognised initially, they are measured at fair value, plus, in the case of investments not at fair value through profit or loss, directly attributable transaction costs. The Group determines the classification of its financial assets after initial recognition and, where allowed and appropriate, re-evaluates this designation at the balance sheet date.

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

Financial assets at fair value through profit or loss

Financial assets classified as held for trading are included in the category “financial assets at fair value through profit or loss”. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term. Derivatives are also classified as held for trading unless they are designated as effective hedging instruments. Gains or losses on investments held for trading are recognised in the income statement.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are carried at amortised cost using the effective interest method. Gains and losses are recognised in the income statement when the loans and receivables are derecognised or impaired, as well as through the amortisation process.

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APPENDIX I

FINANCIAL INFORMATION OF THE CAG GROUP

Available-for-sale financial assets

Available-for-sale financial assets are those non-derivative financial assets in listed and unlisted equity securities that are designated as available-for-sale or are not classified in any of the other two categories. After initial recognition, available-for-sale financial assets are measured at fair value, with gains or losses being recognised as a separate component of equity until the investment is derecognised or until the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is included in the income statement.

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

Fair value

The fair value of investments that are actively traded in organised financial markets is determined by reference to quoted market bid prices at the close of business at the balance sheet date. For investments where there is no active market, fair value is determined using valuation techniques. Such techniques include using recent arm’s length market transactions; reference to the current market value of another instrument, which is substantially the same; a discounted cash flow analysis and option pricing models.

Impairment of financial assets (applicable to the year ended 31 December 2005)

The Group assesses at each balance sheet date whether there is any objective evidence that a financial asset or a group of financial assets is impaired.

Assets carried at amortised cost

If there is objective evidence that an impairment loss on loans and receivables carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (i.e., the effective interest rate computed at initial recognition). The carrying amount of the asset is reduced either directly or through the use of an allowance account. The amount of the impairment loss is recognised in profit or loss.

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

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed. Any subsequent reversal of an impairment loss is recognised in the income statement, to the extent that the carrying value of the asset does not exceed its amortised cost at the reversal date.

Assets carried at cost

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

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APPENDIX I

FINANCIAL INFORMATION OF THE CAG GROUP

Available-for-sale financial assets

If an available-for-sale asset is impaired, an amount comprising the difference between its cost (net of any principal payment and amortisation) and its current fair value, less any impairment loss previously recognised in profit or loss, is transferred from equity to the income statement. Impairment losses on equity instruments classified as available for sale are not reversed through profit or loss.

Derecognition of financial assets (applicable to the year ended 31 December 2005)

A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised where:

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

Where the Group has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.

Where continuing involvement takes the form of a written and/or purchased option (including a cash-settled option or similar provision) on the transferred asset, the extent of the Group’s continuing involvement is the amount of the transferred asset that the Group may repurchase, except in the case of a written put option (including a cash-settled option or similar provision) on an asset measured at fair value, where the extent of the Group’s continuing involvement is limited to the lower of the fair value of the transferred asset and the option exercise price.

Interest-bearing loans and borrowings

All loans and borrowings are initially recognised at the fair value of the consideration received less directly attributable transaction costs.

After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method.

Gains and losses are recognised in net profit or loss when the liabilities are derecognised as well as through the amortisation process.

Derecognition of financial liabilities (applicable to the year ended 31 December 2005)

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

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

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APPENDIX I FINANCIAL INFORMATION OF THE CAG GROUP

Derivative financial instruments (applicable to the year ended 31 December 2005)

The Group uses derivative financial instruments such as forward currency contracts to hedge its risks associated with foreign currency fluctuations. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative.

Any gains or losses arising from changes in fair value on derivatives that do not qualify for hedge accounting are taken directly to net profit or loss for the year.

The fair value of forward currency contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles.

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined on the first-in, first-out or the weighted average basis and in the case of work in progress and finished goods, comprises direct materials, direct labour and an appropriate proportion of overheads. Net realisable value is based on estimated selling prices less any estimated costs to be incurred to completion and disposal.

Construction contracts

Contract revenue comprises the agreed contract amount and appropriate amounts from variation orders, claims and incentive payments. Contract costs incurred comprise direct materials, the costs of subcontracting, direct labour and an appropriate proportion of variable and fixed construction overheads.

Revenue from fixed price construction contracts is recognised on the percentage of completion method, measured by reference to the proportion of costs incurred to date to the estimated total cost of the relevant contract.

Revenue from cost plus construction contracts is recognised on the percentage of completion method, by reference to the recoverable costs incurred during the year plus the related fee earned, measured by the proportion of costs incurred to date to the estimated total cost of the relevant contract.

Provision is made for foreseeable losses as soon as they are anticipated by management.

Where contract costs incurred to date plus recognised profits less recognised losses exceed progress billings, the surplus is treated as an amount due from contract customers.

Where progress billings exceed contract costs incurred to date plus recognised profits less recognised losses, the surplus is treated as an amount due to contract customers.

Contracts for services

Contract revenue on the rendering of services comprises the agreed contract amount. Costs of rendering services comprise labour and other costs of personnel directly engaged in providing the services and attributable overheads.

Revenue from the rendering of services is recognised based on the percentage of completion of the transaction, provided that the revenue, the costs incurred and the estimated costs to completion can be measured reliably. The percentage of completion is established by reference to the costs incurred to date as compared to the total costs to be incurred under the transaction.

Provision is made for foreseeable losses as soon as they are anticipated by management.

Where contract costs incurred to date plus recognised profits less recognised losses exceed progress billings, the surplus is treated as an amount due from contract customers.

Where progress billings exceed contract costs incurred to date plus recognised profits less recognised losses, the surplus is treated as an amount due to contract customers.

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FINANCIAL INFORMATION OF THE CAG GROUP

APPENDIX I

Provisions

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

When the effect of discounting is material, the amount recognised for a provision is the present value at the balance sheet date of the future expenditures expected to be required to settle the obligation. The increase in the discounted present value amount arising from the passage of time is included in finance costs in the income statement.

Revenue recognition

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

(a) from the sale of goods, when the significant risks and rewards of ownership have been transferred to the buyer, provided that the Group maintains neither managerial involvement to the degree usually associated with ownership, nor effective control over the goods sold;
(b) from construction contracts, on the percentage of completion basis as further explained in the accounting policy for “Construction contracts” above;
(c) from the rendering of services, on the completion of the transactions;
(d) rental income, on a time proportion basis over the lease terms;
(e) interest income, on an accrual basis using the effective interest method by applying the rate that discounts the estimated future cash receipts through the expected life of the financial instrument to the net carrying amount of the financial asset; and
(f) dividend income, when the shareholders’ right to receive payment has been established.

Income tax

Income tax comprises current and deferred tax. Income tax is recognised in the income statement, or in equity if it relates to items that are recognised in the same or a different period directly in equity.

Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities.

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

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

where the deferred tax liability arises from goodwill or the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
in respect of taxable temporary differences associated with investments in subsidiaries and associates, except where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

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APPENDIX I FINANCIAL INFORMATION OF THE CAG GROUP

Deferred tax assets are recognised for all deductible temporary differences, carryforward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carryforward of unused tax credits and unused tax losses can be utilised except:

where the deferred tax asset relating to the deductible temporary differences arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
in respect of deductible temporary differences associated with investments in subsidiaries and associates, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.

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

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date.

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

Foreign currencies

These financial statements are presented in Hong Kong dollars, which is the Company’s functional and presentation currency. Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Foreign currency transactions are initially recorded using the functional currency rates ruling at the date of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rates of exchange ruling at the balance sheet date. All differences are taken to profit or loss. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.

The functional currencies of certain overseas subsidiaries and associates are currencies other than the Hong Kong dollar. As at the balance sheet date, the assets and liabilities of these entities are translated into the presentation currency of the Company at exchange rates ruling at the balance sheet date and, their income statements are translated into Hong Kong dollars at the weighted average exchange rates for the year. The resulting exchange differences are included in a separate component of equity, namely the exchange fluctuation reserve. On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in the income statement.

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

Related parties

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

(a) the party, directly or indirectly through one or more intermediaries, (i) controls, is controlled by, or is under common control with, the Group; (ii) has an interest in the Group that gives it significant influence over the Group; or (iii) has joint control over the Group;
(b) the party is an associate;
(c) the party is a jointly-controlled entity;

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FINANCIAL INFORMATION OF THE CAG GROUP

APPENDIX I

(d) the party is a member of the key management personnel of the Company or its parent;
(e) the party is a close member of the family of any individual referred to in (a) or (d);
(f) the party is an entity that is controlled, jointly controlled or significantly influenced by or for which significant voting power in such entity resides with, directly or indirectly, any individual referred to in (d) or (e); or
(g) the party is a post-employment benefit plan for the benefit of employees of the Group, or of any entity that is a related party of the Group.

Employee benefits

Paid leave carried forward

The Group provides paid annual leave to its employees under their employment contracts on a calendar year basis. Under certain circumstances, such leave which remains untaken as at the balance sheet date is permitted to be carried forward and utilised by the respective employees in the following year. An accrual is made at the balance sheet date for the expected future cost of such paid leave earned during the year by the employees and carried forward.

Employment Ordinance long service payments

Certain of the Group’s employees have completed the required number of years of service to the Group in order to be eligible for long service payments under the Hong Kong Employment Ordinance in the event of the termination of their employment. The Group is liable to make such payments in the event that such a termination of employment meets the circumstances specified in the Employment Ordinance.

A provision is recognised in respect of probable future long service payments expected to be made. The provision is based on the best estimate of the probable future payments which have been earned by the employees from their service to the Group to the balance sheet date, net of employer’s contributions and accrued benefits derived therefrom under the Group’s pension schemes.

Pension schemes

The Group operates defined contribution Mandatory Provident Fund retirement benefits schemes (the “MPF Schemes”) under the Mandatory Provident Fund Schemes Ordinance, for those employees who are eligible to participate in the MPF Schemes. Contributions are made based on a percentage of the employees’ basic salaries and are charged to the income statement as they become payable in accordance with the rules of the MPF Schemes. The Group’s employer contributions vest fully with the employees when contributed into the MPF Schemes, except for the Group’s employer voluntary contributions, which are refunded to the Group when the employee leaves employment prior to the contributions vesting fully, in accordance with the rules of the MPF Schemes.

The employees of the Group’s subsidiaries which operate in Mainland China are required to participate in a central pension scheme operated by the local municipal government. These subsidiaries are required to contribute certain percentages of their payroll costs to the central pension scheme. The contributions are charged to the income statement as they become payable in accordance with the rules of the central pension scheme.

Prior to the MPF Schemes becoming effective, the Group operated defined contribution provident fund schemes (the “Provident Funds”) under the Occupational Retirement Schemes Ordinance for those employees who were eligible to participate. The Provident Funds operated in a similar way to the MPF Schemes, except that when an employee left the Provident Funds prior to his/her interest in the Group’s employer contributions vesting fully, the ongoing contributions payable by the Group were reduced by the relevant amount of forfeited contributions. Upon implementation of the MPF Schemes, the Provident Funds have been frozen and no further contributions have been made by the Group or the eligible employees after that date. The eligible employees are entitled to receive their funds in accordance with the rules of the Provident Funds when they leave the Group.

The assets of both types of scheme are held separately from those of the Group in independently administered funds.

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APPENDIX I

FINANCIAL INFORMATION OF THE CAG GROUP

Share-based payment transactions

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

The cost of equity-settled transactions with employees is measured by reference to the fair value at the date at which they are granted. The fair value is determined by using a valuation model. In valuing equity-settled transactions, no account is taken of any performance conditions, other than conditions linked to the price of the shares of the Company (“market conditions”), if applicable.

The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (the “vesting date”). The cumulative expense recognised for equity-settled transactions at each balance sheet date until the vesting date reflects the extent to which the vesting period has expired and the Group’s best estimate of the number of equity instruments that will ultimately vest. The charge or credit to the income statement for a period represents the movement in the cumulative expense recognised as at the beginning and end of that period.

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

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

Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the cancelled and new awards are treated as if they were a modification of the original award, as described in the previous paragraph.

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

The Group has adopted the transitional provisions of HKFRS 2 under which the new measurement policies have not been applied to options granted to employees on or before 7 November 2002.

Cash and cash equivalents

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

For the purpose of the balance sheet, cash and cash equivalents comprise cash on hand and at banks, including term deposits, and assets similar in nature to cash, which are not restricted as to use.

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APPENDIX I FINANCIAL INFORMATION OF THE CAG GROUP

3.2. SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES

Judgements

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

Operating lease commitments – Group as lessor

The Group has entered into commercial property leases on its investment property portfolio. The Group has determined that it retains all the significant risks and rewards of ownership of these properties which are leased out on operating leases.

Classification between investment properties and owner-occupied properties

The Group determines whether a property qualifies as an investment property and has developed criteria in making that judgement. Investment property is a property held to earn rentals or for capital appreciation or both. Therefore, the Group considers whether a property generates cash flows largely independently of the other assets held by the Group.

Some properties comprise a portion that is held to earn rentals or for capital appreciation and another portion that is held for use in the production or supply of goods or services or for administrative purposes. If these portions could be sold separately (or leased out separately under a finance lease), the Group accounts for the portions separately. If the portions could not be sold separately, the property is an investment property only if an insignificant portion is held for use in the production or supply of goods or services or for administrative purposes.

Judgement is made on an individual property basis to determine whether ancillary services are so significant that a property does not qualify as investment property.

Estimation uncertainty

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

The Group tests annually whether property, plant and equipment has suffered any impairment, in accordance with the accounting policy stated in note 3.1. The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of estimates such as the future revenue and discount rates.

4. SEGMENT INFORMATION

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

The Group’s operating businesses are structured and managed separately, according to the nature of their operations and the products and services they provide. Each of the Group’s business segments represents a strategic business unit that offers products and services which are subject to risks and returns that are different from those of other business segments. Summary details of the business segments are as follows:

the plastic and chemical products segment consists of importing, marketing and distributing plastic and chemical products;
the building supplies, electrical and mechanical products segment consists of importing, marketing, distributing and installing building supplies, electrical and mechanical products;
the air-conditioning business segment consists of importing, marketing, distributing and installing air-conditioning products; and
the electrical appliances business segment consists of importing, marketing and distributing electrical appliances.

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APPENDIX I FINANCIAL INFORMATION OF THE CAG GROUP

In determining the Group’s geographical segments, revenues are attributed to the segments based on the location of the customers, and assets are attributed to the segments based on the location of the assets.

Intersegment sales and transfers are transacted with reference to the selling prices used for sales made to third parties at the then prevailing market prices.

(a) Business segments

The following tables present revenue, profit/(loss) and certain asset, liability and expenditure information for the Group’s business segments for the years ended 31 December 2005 and 2004.

		Continuing	Continuing	operations	operations			Discontinued operation	Discontinued operation
Plastic and chemical products 2005 2004 HK$’000 HK$’000 883,594 862,649 2,093 1,533		Building supplies, electrical and mechanical products 2005 2004 HK$’000 HK$’000 51,968 116,012 335 1,404		Air-conditioning business 2005 2004 HK$’000 HK$’000 79,439 65,830 61 25		Total 2005 2004 HK$’000 HK$’000 (Restated) 1,015,001 1,044,491 2,489 2,962		Electrical appliances business 2005 2004 HK$’000 HK$’000 13,031 28,612 – –		Consolidated 2005 2004 HK$’000 HK$’000 (Restated) 1,028,032 1,073,103 2,489 2,962
885,687	864,182	52,303	117,416	79,500	65,855	1,017,490	1,047,453	13,031	28,612	1,030,521	1,076,065

33,527 5,185 2,914	39,104 2,218 –	(5,427) 76 –	(7,149) 3,380 –	1,920 – –	1,495 – –	30,020 5,261 2,914	33,450 5,598 –	(2,149) – –	(407) 228 –	27,871 5,261 2,914	33,043 5,826 –
41,626	41,322	(5,351)	(3,769)	1,920	1,495	38,195	39,048	(2,149)	(179)	36,046	38,869

						4,173 (10,725) (2,656) – – – (10,754) (9,140)	1,102 (9,178) – (1,352) (1,634) (1,400) (6,059) (4,620)	494 – – – – – (305) –	715 – – – – – (562) –	4,667 (10,725) (2,656) – – – (11,059) (9,140)	1,817 (9,178 – (1,352 (1,634 (1,400 (6,621 (4,620
						9,093 (3,681)	15,907 (3,028)	(1,960) –	(26) 87	7,133 (3,681)	15,881 (2,941
						5,412	12,879	(1,960)	61	3,452	12,940

						5,371 41	12,659 220	(1,960) –	61 –	3,411 41	12,720 220
						5,412	12,879	(1,960)	61	3,452	12,940

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FINANCIAL INFORMATION OF THE CAG GROUP

APPENDIX I

Continuing operations			Discontinued operation	Discontinued operation	Consolidated 2005 2004 HK$’000 HK$’000 (Restated) 373,929 432,091 19,139 28,279 20,093 23,836 25,412 34,960 438,573 519,166 90,739 121,880 164,954 208,053 25,412 34,960 281,105 364,893 573 295 1,475 2,302 (5,261) (5,826) (2,914) –	Consolidated 2005 2004 HK$’000 HK$’000 (Restated) 373,929 432,091 19,139 28,279 20,093 23,836 25,412 34,960 438,573 519,166 90,739 121,880 164,954 208,053 25,412 34,960 281,105 364,893 573 295 1,475 2,302 (5,261) (5,826) (2,914) –
Plastic and chemical products Building supplies, electrical and mechanical products Air-conditioning business Eliminations 2005 2004 2005 2004 2005 2004 2005 2004 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (Restated) (Restated) 325,321 363,543 19,384 22,628 35,014 32,799 (5,790) (5,120) – – 23,419 31,082 1,993 – – – 48,691 75,474 26,050 27,235 21,788 21,814 (5,790) (5,120) – – 23,419 31,082 1,993 – – – 128 52 326 197 115 42 – – 624 1,285 588 695 47 62 – – (5,185) (2,218) (76) (3,380) – – – – (2,914) – – – – – – –	Total 2005 2004 HK$’000 HK$’000 373,929 413,850 19,139 28,279 20,093 23,836 25,412 31,082 438,573 497,047 90,739 119,403 164,954 203,590 25,412 31,082 281,105 354,075 569 291 1,259 2,042 (5,261) (5,598) (2,914) –		Electrical appliances business 2005 2004 HK$’000 HK$’000 – 18,241 – – – – – 3,878 – 22,119 – 2,477 – 4,463 – 3,878 – 10,818 4 4 216 260 – (228) – –
	438,573	497,047	–	22,119	438,573	519,166

	90,739 164,954 25,412	119,403 203,590 31,082	– – –	2,477 4,463 3,878	90,739 164,954 25,412	121,880 208,053 34,960
	281,105	354,075	–	10,818	281,105	364,893

	569 1,259 (5,261) (2,914)	291 2,042 (5,598) –	4 216 – –	4 260 (228) –	573 1,475 (5,261) (2,914)	295 2,302 (5,826) –

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APPENDIX I

FINANCIAL INFORMATION OF THE CAG GROUP

(b) Geographical segments

The following table presents revenue and certain asset and expenditure information for the Group’s geographical segments for the years ended 31 December 2005 and 2004.

		Continuing operations	Discontinued operation Hong Kong 2005 2004 HK$’000 HK$’000 13,031 28,612 – – 13,031 28,612 – 18,241 – 3,878 – 22,119 4 4	Consolidated 2005 2004 HK$’000 HK$’000 1,028,032 1,073,103 2,489 2,962 1,030,521 1,076,065 413,161 484,206 25,412 34,960 438,573 519,166 573 295
Hong 2005 HK$’000 972,534 2,489 975,023 404,391 25,412 532	Kong 2004 HK$’000 981,285 2,962 984,247 435,876 31,082 268	Mainland China 2005 2004 HK$’000 HK$’000 42,467 63,206 – – 42,467 63,206 8,770 30,089 – – 37 23	Hong 2005 HK$’000 13,031 – 13,031 – – – 4
				1,076,065

				484,206 34,960
				519,166

				295

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APPENDIX I

FINANCIAL INFORMATION OF THE CAG GROUP

5. TURNOVER, OTHER REVENUE AND GAIN

Turnover represents the net invoiced value of services rendered and goods sold, after allowances for returns and trade discounts, and an appropriate proportion of contract revenue of construction contracts during the year.

An analysis of the Group’s turnover, other revenue and gain is as follows:

Continuing operations	Continuing operations	Discontinued operation	Discontinued operation	Total	Total
2005 HK$’000 964,281 50,720	2004 HK$’000 1,008,511 35,980	2005 HK$’000 11,834 1,197	2004 HK$’000 19,299 9,313	2005 HK$’000 976,115 51,917	2004 HK$’000 1,027,810 45,293
1,015,001	1,044,491	13,031	28,612	1,028,032	1,073,103

1,317 2,489 152 1,576 5,534 1,128	161 2,962 170 771 4,064 –	– – 391 103 494 –	– – 541 174 715 –	1,317 2,489 543 1,679 6,028 1,128	161 2,962 711 945
					4,779 –
6,662	4,064	494	715	7,156	4,779

6. FINANCE COSTS

Interest on bank loans and overdrafts wholly repayable within five years	Continuing operations 2005 2004 HK$’000 HK$’000 10,754 6,059	Discontinued operation 2005 2004 HK$’000 HK$’000 305 562	Total
			2005 2004 HK$’000 HK$’000 11,059 6,621

No interest was capitalised by the Group in the current or the prior years.

– 70 –

FINANCIAL INFORMATION OF THE CAG GROUP

APPENDIX I

7. PROFIT BEFORE TAX

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

Continuing operations	Continuing operations	Discontinued operation	Discontinued operation	Total 2005 2004 HK$’000 HK$’000 1,100 1,121 69 (84) 1,169 1,037 44,208 49,435 2,582 2,784 (181) (90) 2,401 2,694 46,609 52,129 – 125 886,737 908,228 50,724 42,979 1,475 2,302 4,247 4,303 (5,484) 5,245 2,790 (83) 938 – 2,656 – – 1,352 (2,703) (2,302)	Total 2005 2004 HK$’000 HK$’000 1,100 1,121 69 (84) 1,169 1,037 44,208 49,435 2,582 2,784 (181) (90) 2,401 2,694 46,609 52,129 – 125 886,737 908,228 50,724 42,979 1,475 2,302 4,247 4,303 (5,484) 5,245 2,790 (83) 938 – 2,656 – – 1,352 (2,703) (2,302)
2005 HK$’000 1,100 69 1,169 41,556 2,433 (140) 2,293 43,849	2004 HK$’000 1,021 (79) 942 44,722 2,497 (84) 2,413 47,135	2005 HK$’000 – – – 2,652 149 (41) 108 2,760	2004 HK$’000 100 (5) 95 4,713 287 (6) 281 4,994	2005 HK$’000 1,100 69 1,169 44,208 2,582 (181) 2,401 46,609	2004 HK$’000 1,121 (84
					1,037
					49,435 2,784 (90
					2,694
					52,129
– 878,293 49,172 1,259 3,519 (5,502) 4,351 938 2,656 – (2,703)	125 895,681 34,899 2,042 3,634 5,231 (264) – – 1,352 (2,316)	– 8,444 1,552 216 728 18 (1,561) – – – –	– 12,547 8,080 260 669 14 181 – – – 14	– 886,737 50,724 1,475 4,247 (5,484) 2,790 938 2,656 – (2,703)

– 71 –

APPENDIX I

FINANCIAL INFORMATION OF THE CAG GROUP

The staff costs include directors’ remuneration as further detailed in note 8 below. As at 31 December 2005, the Group had no forfeited contributions available to reduce its contributions to the pension schemes in future years (2004: Nil).
These expenses/(income) are included in “Other operating income/(expenses), net” on the face of the consolidated income statement.

8. DIRECTORS’ REMUNERATION

Directors’ remuneration for the year, disclosed pursuant to the Listing Rules and Section 161 of the Companies Ordinance, is as follows:

Fees Other emoluments: Salaries, allowances and benefits in kind Performance related bonuses Pension scheme contributions	Group 2005 2004 HK$’000 HK$’000 150 171	Group 2005 2004 HK$’000 HK$’000 150 171
	4,206 1,088 317 5,611	4,164 1,600 317
		6,081
	5,761	6,252

(a) Independent non-executive directors

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

Mr. William Gage McAfee Mr. David Chung-Shing Wu Mr. Vincent Tian-Quan Mo Mr. Aubrey Kwok-Sing Li	2005 HK$’000 50 50 50 – 150	2004 HK$’000 50 50 50 21
		171

There were no other emoluments payable to the independent non-executive directors during the year (2004: Nil).

– 72 –

APPENDIX I

FINANCIAL INFORMATION OF THE CAG GROUP

(b) Executive directors and a non-executive director

Fees HK$’000 – – – –	Salaries, allowances and benefits in kind HK$’000 – 1,646 1,910 650	Performance related bonuses HK$’000 – – 1,000 88	Pension scheme contributions HK$’000 – 149 108 60	Total remuneration HK$’000 – 1,795 3,018 798
– –	4,206 –	1,088 –	317 –	5,611 –
–	4,206	1,088	317	5,611

– – – – – – –	– 1,646 1,868 650 4,164 – –	– – 1,600 – 1,600 – –	– 149 108 60 317 – –	– 1,795 3,576 710
				6,081 – –
–	4,164	1,600	317	6,081

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

During the year, no share options were granted to the directors in respect of their services to the Group. Further details of the share option scheme and the directors’ options remaining outstanding under the scheme at the balance sheet date are set out in note 35 to the financial statements.

– 73 –

APPENDIX I FINANCIAL INFORMATION OF THE CAG GROUP

9. FIVE HIGHEST PAID EMPLOYEES

The five highest paid employees of the Group included two (2004: two) directors, details of whose remuneration are set out in note 8 above. The details of the remuneration of the remaining three (2004: three) non-director, highest paid employees for the year are as follows:

Basic salaries, housing allowances and other benefits in kind Bonuses paid and payable Pension scheme contributions	Group 2005 2004 HK$’000 HK$’000 2,898 2,667 1,800 2,200 135 129 4,833 4,996	Group 2005 2004 HK$’000 HK$’000 2,898 2,667 1,800 2,200 135 129 4,833 4,996
		4,996

The number of the above non-director, highest paid employees whose remuneration fell within the following bands is as follows:

Nil to HK$1,000,000 HK$1,000,001 to HK$1,500,000 HK$1,500,001 to HK$2,000,000 HK$2,000,001 to HK$2,500,000	Number of employees 2005 2004 – 1 1 – 1 1 1 1 3 3	Number of employees 2005 2004 – 1 1 – 1 1 1 1 3 3
		3

During the year, no share options were granted to the non-director, highest paid employees in respect of their services to the Group. Further details of the share option scheme and the options remaining outstanding under the scheme at the balance sheet date are included in the disclosures in note 35 to the financial statements.

10. TAX

Hong Kong profits tax has been provided at the rate of 17.5% (2004: 17.5%) on the estimated assessable profits arising in Hong Kong during the year. Taxes on profits assessable elsewhere have been calculated at the rates of tax prevailing in the countries in which the Group operates, based on existing legislation, interpretations and practices in respect thereof.

Group: Current – Hong Kong Charge for the year Under/(over) provision in prior years Current – Elsewhere Deferred (note 33) Total tax charge for the year	Continuing operations	Continuing operations	Discontinued operation	Discontinued operation	Total	Total
	2005 HK$’000 1,927 37 358 1,359	2004 HK$’000 (Restated) 4,201 (2,319) 1,078 68	2005 HK$’000 – – – –	2004 HK$’000 (Restated) – – – (87)	2005 HK$’000 1,927 37 358 1,359	2004 HK$’000 (Restated 4,201 (2,319 1,078 (19
	3,681	3,028	–	(87)	3,681	2,941

– 74 –

APPENDIX I FINANCIAL INFORMATION OF THE CAG GROUP

A reconciliation of the tax expense applicable to profit before tax using the statutory rate in Hong Kong to the tax expense for the year is as follows:

Profit before tax (including profit/(loss) from a discontinued operation)
Tax at Hong Kong profits tax rate of 17.5% (2004: 17.5%)
Effect of different rates for companies operating in other jurisdictions
Under/(over) provision in prior years
Income not subject to tax
Expenses not deductible for tax
Deferred tax (assets)/liabilities not (recognised)/provided for
Tax losses utilised from previous periods
Tax losses not recognised
Losses attributable to associates
Others
Tax expense for the year
Tax credit attributable to a discontinued operation (note 12)
Tax charge attributable to continuing operations reported in the
consolidated income statement

Group
2005
2004
HK$’000
HK$’000
(Restated)
7,133
15,881
1,248
2,779
(439)
189
37
(2,319)
(1,891)
(1,113)
1,071
1,928
36
(609)
(173)
(534)
2,181
1,852
1,599
809
12
(41)
3,681
2,941
–
87
3,681
3,028

The share of tax credit attributable to an associate amounting to HK$116,000 (2004: share of tax charge of HK$1,078,000) is included in “Share of losses of associates” on the face of the consolidated income statement.

11. NET PROFIT FROM ORDINARY ACTIVITIES ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT

The net profit from ordinary activities attributable to equity holders of the parent for the year ended 31 December 2005 dealt with in the financial statements of the Company, was HK$522,000 (2004: HK$5,541,000 (note 36(b)).

– 75 –

APPENDIX I FINANCIAL INFORMATION OF THE CAG GROUP

12. DISCONTINUED OPERATION

The Group discontinued the wholesaling of electrical appliances business in June 2005 as such business has not been performing in the past few years. The remaining stocks were sold to the new distributor and all staff were retrenched in June 2005. As at 31 December 2005, no assets or liabilities of the Group are attributable to this discontinued operation.

The results attributable to the discontinued operation for the year are presented below:

Turnover Cost of sales/services Gross profit Other revenue and gain Selling and distribution costs Administrative expenses Other operating expenses Surplus arising from revaluation of land and buildings Finance costs Loss before tax Tax credit (Loss)/profit for the year	2005 HK$’000 13,031 (9,996)	2004 HK$’000 28,612 (20,627)
	3,035 494 (1,116) (4,039) (29) – (305) (1,960) –	7,985 715 (1,975) (6,389) (28) 228 (562)
		(26) 87
	(1,960)	61

The net cash flows attributable to the discontinued operation are as follows:

Net cash inflow from operating activities Net cash inflow/(outflow) from financing activities Net cash inflow (LOSS)/EARNINGS PER SHARE – Basic – Diluted	2005 HK$’000 4,040 537 4,577 (1.24 cents) N/A	2004 HK$’000 2,127 (659)
		1,468

		0.04 cent N/A

The calculations of basic (loss)/earnings per share from the discontinued operation are based on:

	2005	2004
		(Restated)
(Loss)/profit attributable to equity holders of the parent
from the discontinued operation	HK$(1,960,000)	HK$61,000
Weighted average number of shares in issue during the year
used in the basic (loss)/earnings per share calculation	158,639,799	153,215,142

– 76 –

APPENDIX I FINANCIAL INFORMATION OF THE CAG GROUP

13. EARNINGS PER SHARE ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT

The calculation of earnings per share amounts is based on the net profit for the year attributable to equity holders of the parent, and the weighted average number of ordinary shares in issue during the year.

There have been no dilutive effect on the basic earnings per share for the years ended 31 December 2005 and 31 December 2004 as the exercise prices of the outstanding share options were higher than the average market price of the Company’s shares during both years.

The calculations of basic earnings/(loss) per share are based on:

Earnings Profit/(loss) attributable to equity holders of the parent From continuing operations From a discontinued operation Profit attributable to equity holders of the parent Shares Weighted average number of shares in issue during the year	2005 2004 HK$’000 HK$’000 (Restated) 5,371 12,659 (1,960) 61 3,411 12,720 Number of shares 2005 2004 HK$’000 HK$’000 (Restated) 158,639,799 153,215,142	2004 HK$’000 (Restated) 12,659 61
		12,720

– 77 –

APPENDIX I FINANCIAL INFORMATION OF THE CAG GROUP

14. PROPERTY, PLANT AND EQUIPMENT

Group

Land and buildings Leasehold improvement HK$’000 HK$’000 35,108 4,061 (149) (3,452) 34,959 609	Land and buildings Leasehold improvement HK$’000 HK$’000 35,108 4,061 (149) (3,452) 34,959 609	Furniture, fixtures and equipment HK$’000 16,424 (15,708) 716	Motor vehicles HK$’000 1,499 (1,238) 261	Total HK$’000 57,092 (20,547) 36,545 36,545 573 (174) 1,873 5,261 (1,475) (11,705) (7,099) 53 23,852 34,525 (10,673) 23,852 12,322 22,203 34,525
34,959 – – 1,873 5,261 (629) (11,500) (7,099) –	609 2 (121) – – (252) – – 1	716 303 (16) – – (406) (182) – 50	261 268 (37) – – (188) (23) – 2	36,545 573 (174 1,873 5,261 (1,475 (11,705 (7,099 53
22,865	239	465	283
23,031 (166)	2,938 (2,699)	7,868 (7,403)	688 (405)	34,525 (10,673
22,865	239	465	283
828 22,203	2,938 –	7,868 –	688 –	12,322 22,203
23,031	2,938	7,868	688

– 78 –

APPENDIX I

FINANCIAL INFORMATION OF THE CAG GROUP

Land and buildings Leasehold improvement HK$’000 HK$’000 29,328 4,061 (1,338) (3,195) 27,990 866	Land and buildings Leasehold improvement HK$’000 HK$’000 29,328 4,061 (1,338) (3,195) 27,990 866	Furniture, fixtures and equipment HK$’000 16,507 (14,758) 1,749	Motor vehicles HK$’000 1,737 (1,404) 333	Total HK$’000 51,633 (20,695) 30,938 30,938 295 (39) 1,827 5,826 (2,302) 36,545 57,092 (20,547) 36,545 22,812 34,280 57,092
27,990 – – 1,827 5,826 (684)	866 – – – – (257)	1,749 196 (7) – – (1,222)	333 99 (32) – – (139)	30,938 295 (39 1,827 5,826 (2,302
34,959	609	716	261
35,108 (149)	4,061 (3,452)	16,424 (15,708)	1,499 (1,238)	57,092 (20,547
34,959	609	716	261
828 34,280	4,061 –	16,424 –	1,499 –	22,812 34,280
35,108	4,061	16,424	1,499

Before the Group’s disposal of its equity interest in JMT, the land and buildings owned by JMT were revalued on 26 October 2005 by independent professionally qualified valuers, at an open market value of HK$11,500,000 based on their existing use. Revaluation surplus of HK$1,873,000, resulting from the above valuation, has been credited to the land and building revaluation reserve.

The Group’s land and buildings, except for a property located outside Hong Kong with a net carrying value of HK$663,000 as at 31 December 2005, were revalued individually on 31 December 2005 by Savills Valuation and Professional Services Limited, independent professionally qualified valuers, at an open market value of HK$22,203,000 based on their existing use. Revaluation surplus of HK$5,261,000, resulting from the above valuations, has been credited to the income statement.

Had these land and buildings been carried at historical cost less accumulated depreciation, their carrying amounts would have been approximately HK$26,123,000 (2004: HK$48,281,000).

– 79 –

APPENDIX I FINANCIAL INFORMATION OF THE CAG GROUP

The net carrying value of land and buildings pledged to secure banking facilities granted to the Group amounted to HK$19,300,000 (2004: HK$24,280,000) (see note 29).

Company

31 December 2005
At 31 December 2004 and 1 January 2005:
Cost
Accumulated depreciation
Net carrying amount
At 1 January 2005, net of accumulated depreciation
Additions
Depreciation provided during the year
At 31 December 2005, net of accumulated depreciation
At 31 December 2005:
Cost
Accumulated depreciation
Net carrying amount
Company
31 December 2004
At 1 January 2004:
Cost
Accumulated depreciation
Net carrying amount
At 1 January 2004, net of accumulated depreciation
Additions
Depreciation provided during the year
At 31 December 2004, net of accumulated depreciation
At 31 December 2004:
Cost
Accumulated depreciation
Net carrying amount

Furniture,
fixtures and
equipment
HK$’000
280
(250)
30
30
7
(21)
16
287
(271)
16
Furniture,
fixtures and
equipment
HK$’000
269
(202)
67
67
11
(48)
30
280
(250)
30

– 80 –

APPENDIX I FINANCIAL INFORMATION OF THE CAG GROUP

15. INVESTMENT PROPERTIES

At beginning of year Transfer from property, plant and equipment (note 14) Transfer from properties held for resale (note 21) At 31 December, at valuation	Group 2005 2004 HK$’000 HK$’000 – – 7,099 – 5,950 – 13,049 –	Group 2005 2004 HK$’000 HK$’000 – – 7,099 – 5,950 – 13,049 –
		–

The Group’s investment properties were revalued on 31 December 2005 by Savills Valuation and Professional Services Limited, independent professionally qualified valuers, on an open market, existing use basis. Certain investment properties are leased to third parties under operating leases, further summary details of which are included in note 39(a) to the financial statements.

– 81 –

APPENDIX I FINANCIAL INFORMATION OF THE CAG GROUP

16. GOODWILL

Group

31 December 2005
At 1 January 2005:
Cost as previously reported
Effect of adopting HKFRS 3 (note 2.2(d))
Cost as restated
Accumulated amortisation and impairment as previously reported
Effect of adopting HKFRS 3 (note 2.2(d))
Accumulated impairment as restated
Net carrying amount
Cost at 1 January 2005, net of accumulated impairment and cost and
carrying amount at 31 December 2005
At 31 December 2005:
Cost
Accumulated impairment
Net carrying amount
31 December 2004
At 1 January 2004:
Cost
Accumulated amortisation and impairment
Net carrying amount
Cost at 1 January 2004, net of accumulated amortisation and impairment
Amortisation provided during the year
Impairment during the year
At 31 December 2004
At 31 December 2004:
Cost
Accumulated amortisation and impairment
Net carrying amount

Goodwill
HK$’000
2,498
(864)
1,634
(2,498)
864
(1,634)
–
–
1,634
(1,634)
–
2,498
(739)
1,759
1,759
(125)
(1,634)
–
2,498
(2,498)
–

In the prior year, goodwill not previously eliminated against the consolidated reserves was amortised on the straight-line basis over its estimate useful life of ten years.

– 82 –

APPENDIX I FINANCIAL INFORMATION OF THE CAG GROUP

17. INTERESTS IN SUBSIDIARIES

Unlisted shares, at cost Due from subsidiaries Due to subsidiaries Provision for impairment	Company 2005 2004 HK$’000 HK$’000 185,600 185,600 783,217 775,405 (9,538) (1,529) 959,279 959,476 (861,237) (870,580) 98,042 88,896	Company 2005 2004 HK$’000 HK$’000 185,600 185,600 783,217 775,405 (9,538) (1,529) 959,279 959,476 (861,237) (870,580) 98,042 88,896
	959,279 (861,237)	959,476 (870,580
	98,042

The balances with subsidiaries are unsecured, interest-free and have no fixed terms of repayment, except for amounts due from subsidiaries of HK$11,985,000 (2004: HK$11,090,000) included in current assets in the balance sheet are repayable within twelve months.

The carrying amounts of these amounts due from/to subsidiaries approximate to their fair values.

Particulars of the principal subsidiaries at the balance sheet date are as follows:

	Place of
	incorporation/	Nominal value of	Percentage	of	equity
	registration and	issued/registered	interest attributable to
Name	operation	capital	the Group			Principal activities
			Direct	Indirect
Best Treasure Limited	British Virgin	Ordinary US$1	–		100%	Investment holding
	Islands
Chinney Alliance	Hong Kong	Ordinary HK$2	–		100%	Treasury function
Corporate Treasury
Limited
Chinney Alliance	Hong Kong	Ordinary	–		100%	Distribution and
Engineering Limited		HK$10,000				installation of
						mechanical, electrical
						and building supplies
						products
Chinney Alliance Trading	British Virgin	Ordinary	100%		–	Investment holding
(BVI) Limited	Islands	HK$360,001
DMT-Jacobson Holdings	British Virgin	Ordinary	–		100%	Investment holding
Limited	Islands	US$2,000,000
DMT International	Hong Kong	Ordinary	–		100%	Agency trading of
Hong Kong Limited		HK$1,000;				industrial materials
		Non-voting
		deferred
		HK$5,156,700
Gina Enterprises Limited	Hong Kong	Ordinary HK$2	–		100%	Property holding

– 83 –

FINANCIAL INFORMATION OF THE CAG GROUP

APPENDIX I

	Place of
	incorporation/	Nominal value of	Percentage	of	equity
	registration and	issued/registered	interest attributable to
Name	operation	capital	the Group			Principal activities
			Direct	Indirect
Jackson Mercantile	Hong Kong	Ordinary	–		–	Investment holding and
Trading Company		HK$2,000;				wholesaling of
Limited**		Non-voting				electrical appliances
		deferred
		HK$5,000,000
Jacobson van den Berg	Hong Kong	Ordinary	–		100%	Trading of electrical and
(China) Limited*		HK$1,000,000				mechanical products
Jacobson van den Berg	Hong Kong	Ordinary	–		100%	Investment holding and
(Hong Kong) Limited		HK$1,000;				agency trading of
		Non-voting				industrial products
		deferred
		HK$35,486,600
Lei Kee Development	Hong Kong	Ordinary HK$2	–		100%	Property holding
Company Limited
Tegan Holdings Limited	Hong Kong	Ordinary HK$2	–		100%	Property holding
Westco Chinney Limited*	Hong Kong	Ordinary	–		100%	Sale and installation of
		HK$3,000,000				air-conditioning system
Dongguan Dharmala PVC	People’s Republic	HK$8,000,000	–		–	Manufacture of industrial
Compounding	of China					products
Limited*#	(“PRC”)

Not audited by Ernst & Young Hong Kong or other Ernst & Young International member firms.
** During the year, the Group disposed its entire equity interest in Jackson Mercantile Trading Company Limited, a wholly-owned subsidiary of the Group, for a consideration of HK$7,800,000.
This subsidiary was indirectly held by the Company through DMT PVC Compounding Ltd. (“DMT PVC”), a 70% owned subsidiary of the Group. During the year, the Group disposed a 30% equity interest in DMT PVC for a consideration of HK$888,000 and designated the remaining 40% equity interest as equity investments at fair value through profit or loss.

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

– 84 –

APPENDIX I FINANCIAL INFORMATION OF THE CAG GROUP

18. INTERESTS IN ASSOCIATES

Listed shares, at cost Share of net assets Goodwill on acquisition Provision for impairment of goodwill Provision for impairment	Group 2005 2004 HK$’000 HK$’000 – – 26,339 35,479 2,298 2,298 (2,298) (2,298) (7,200) (7,200) 19,139 28,279	Company 2005 2004 HK$’000 HK$’000 87,723 87,723 – – – – – – (70,124) (61,475) 17,599 26,248

The market value of the shares of a listed associate of the Group held at 31 December 2005 was HK$10,409,250 (2004: HK$7,633,000).

Particulars of the associates at the balance sheet date are as follows:

		Place of		Nominal	Percentage
		incorporation/	Particulars of	value of	of equity
		registration	issued/	issued/	interest
		and	registered	registered	attributable	Principal
Name		operation	capital held	capital	to the Group	activities
Jiangxi Kaitong		People’s	Registered	RMB50,000,000	24.9%	Manufacture of
New Materials		Republic	capital of			stainless steel
Company		of China	RMB12,450,000			and plastic
Limited*#		(“PRC”)				compound
						pipes
(“Jiangxi
Kaitong”)
Shun	Cheong	Bermuda/Hong	Ordinary	Ordinary	29.9%	Investment
Holdings		Kong	shares of	HK$1,159,304		holding and
Limited (“Shun			HK$346,975			provision of
Cheong”)						multi-
						disciplinary
						building
						services

Not audited by Ernst & Young Hong Kong or other Ernst & Young International member firms.
This associate is a sino-foreign joint venture with a duration of business of 15 years which commenced from 11 October 2000.

The voting power held and the profit sharing arrangement in relation to the associates are both the same as the equity interests shown above.

The financial year end for Jiangxi Kaitong and Shun Cheong are 31 December and 31 March, respectively. The Group’s financial statements have taken into account the results of Shun Cheong between 1 October 2004 to 30 September 2005. There were no material transactions between the Group and Shun Cheong during the period from 1 October 2005 to 31 December 2005.

Financial information as extracted from the most recent published financial statements and a circular of the Group’s major associate is set out below.

– 85 –

APPENDIX I FINANCIAL INFORMATION OF THE CAG GROUP

Shun Cheong Holdings Limited

Consolidated income statement

	Six months	ended
	30 September
	2005	2004
		(Unaudited
		and
	(Audited)	restated)
	HK$’000	HK$’000
Turnover	245,488	249,407

Loss attributable to equity holders of the parent	(7,613)	(12,446)

Consolidated balance sheet
	30 September	31 March
	2005	2005
		(Audited
		and
	(Audited)	restated)
	HK$’000	HK$’000
Non-current assets	21,776	22,107
Current assets	308,259	329,002
Current liabilities	(246,435)	(259,552)
Non-current liabilities	(6,926)	(6,926)
Minority interests	(17,873)	(18,217)
Net assets	58,801	66,414

19. AVAILABLE-FOR-SALE EQUITY INVESTMENT/LONG TERM INVESTMENTS

Investment securities: Unlisted equity investments, at cost Convertible loan notes Provision for impairment	Group 2005 2004 HK$’000 HK$’000 – 95,415 – 89,148 – (184,563) – –

The above investments consist of investments in equity securities which were designated as available-for-sale financial assets on 1 January 2005.

At 31 December 2004, included in the unlisted equity investments was an interest in Dharmala Agrifood Asia Pte Limited (“DAAL”), a company incorporated in Singapore, stated at a carrying value of nil comprising the cost of the Group’s equity investment of HK$95,415,000, representing a 19.73% interest in DAAL and an interest in convertible loan notes of HK$89,148,000, net of a provision of HK$184,563,000. In the opinion of the directors, the above provision was required to cover the impairment in DAAL, as the major subsidiaries of DAAL had either been declared bankrupt by their creditors or had financial difficulties in repaying outstanding bank loans.

The Group’s investment in DAAL’s equity securities and convertible loan notes were fully written off against the provision for impairment during the year.

– 86 –

FINANCIAL INFORMATION OF THE CAG GROUP

APPENDIX I

20. OTHER ASSETS

Club memberships, at cost Provision for impairment	Group 2005 2004 HK$’000 HK$’000 1,220 1,220 (938) – 282 1,220	Company 2005 2004 HK$’000 HK$’000 1,220 1,220 (938) – 282 1,220	Company 2005 2004 HK$’000 HK$’000 1,220 1,220 (938) – 282 1,220
			1,220

21. PROPERTIES HELD FOR RESALE

Carrying amount at 1 January Fair value adjustment upon reclassification to investment properties Transfer to investment properties (note 15) Carrying amount at 31 December	Group 2005 2004 HK$’000 HK$’000 3,036 3,036 2,914 – (5,950) – – 3,036	Group 2005 2004 HK$’000 HK$’000 3,036 3,036 2,914 – (5,950) – – 3,036
		3,036

22. INVENTORIES

Raw materials Finished goods 23. CONSTRUCTION CONTRACTS Gross amount due from contract customers Gross amount due to contract customers included in other payables and accruals (note 32) Contract costs incurred plus recognised profits less recognised losses to date Less: Progress billings	Group 2005 2004 HK$’000 HK$’000 79,121 99,845 11,950 18,518 91,071 118,363 Group 2005 2004 HK$’000 HK$’000 5,458 5,134 (1,412) (4,209 4,046 925	Group 2005 2004 HK$’000 HK$’000 79,121 99,845 11,950 18,518 91,071 118,363 Group 2005 2004 HK$’000 HK$’000 5,458 5,134 (1,412) (4,209 4,046 925
		925

	135,818 (131,772)	113,840 (112,915
	4,046	925

– 87 –

APPENDIX I FINANCIAL INFORMATION OF THE CAG GROUP

At 31 December 2005, retentions held by customers for contract works included in retention monies receivables over one year and trade and retention monies receivables of the Group amounted to approximately HK$3,672,000 (2004: HK$2,816,000) and HK$1,781,000 (2004: HK$2,120,000) (note 24), respectively.

No advances were received from customers for contract works in both years.

24. TRADE AND RETENTION MONIES RECEIVABLES

Trade receivables Retention monies receivables within one year	Group 2005 2004 HK$’000 HK$’000 186,990 234,457 1,781 2,120 188,771 236,577	Group 2005 2004 HK$’000 HK$’000 186,990 234,457 1,781 2,120 188,771 236,577
		236,577

The Group grants a credit period to its customers ranging from cash on delivery to 60 days. A longer credit period may be allowed to customers with good business relationships. In view of the aforementioned and the fact that the Group’s trade receivables relate to a large number of diversified customers, there is no significant concentration of credit risk. Trade receivables are non-interest-bearing.

An aged analysis of the trade receivables as at the balance sheet date, based on payment due date, is as follows:

Current to 30 days 31 to 60 days 61 to 90 days Over 90 days	Group 2005 2004 HK$’000 HK$’000 132,927 169,093 20,118 30,899 11,377 16,521 22,568 17,944 186,990 234,457	Group 2005 2004 HK$’000 HK$’000 132,927 169,093 20,118 30,899 11,377 16,521 22,568 17,944 186,990 234,457
		234,457

Included in the Group’s trade receivables are amounts due from an associate of the Group of approximately HK$2,003,000 (2004: HK$310,000), which are repayable on similar credit terms to those offered to other customers of the Group.

25. AMOUNTS DUE FROM/TO RELATED COMPANIES

The amount due from related companies disclosed pursuant to Section 161B of the Companies Ordinance is as follows:

Hon Kwok Land Investment (Shenzhen) Limited Shun Cheong Electrical Engineering Company Limited	Maximum outstanding during the year HK$’000 3,053 341	Group 2005 HK$’000 2,541 183 2,724	2004 HK$’000 3,021 223
			3,244

– 88 –

APPENDIX I FINANCIAL INFORMATION OF THE CAG GROUP

Hon Kwok Land Investment (Shenzhen) Limited, is a wholly-owned subsidiary of Hon Kwok Land Investment Company Limited, which is a subsidiary of the Company’s major shareholder.

Mr. Stephen Sek-Kee Yu, is a common director of the Company and Shun Cheong Electrical Engineering Company Limited.

The balances with the related companies are unsecured, interest-free and have no fixed terms of repayment.

The carrying amounts of balances with related companies approximate to their fair values.

26. EQUITY INVESTMENTS AT FAIR VALUE THOUGH PROFIT OR LOSS/SHORT TERM INVESTMENTS

									Group and	Company
									2005	2004
									HK$’000	HK$’000
Listed	equity	investments	in	Hong	Kong,	at	market	value	9,330	11,986

The above equity investments at 31 December 2005 were classified as held for trading.

In November 2005, the Group disposed the remaining 40% equity interest in DMT PVC (the “Investment”) for a consideration of HK$1,184,000. The Investment having a carrying value of HK$1,168,000 was designated as an equity investment at fair value through profit or loss upon the Group’s disposal of a 30% equity interest in DMT PVC during the year.

The market value of the Group’s short term investments at the date of approval of these financial statements was approximately HK$9,595,000.

27. CASH AND CASH EQUIVALENTS

Cash and bank balances Time deposits Cash and cash equivalents	Group 2005 2004 HK$’000 HK$’000 14,268 33,486 55,834 29,292 70,102 62,778	Company 2005 2004 HK$’000 HK$’000 654 637 6,392 8,005 7,046 8,642	Company 2005 2004 HK$’000 HK$’000 654 637 6,392 8,005 7,046 8,642
			8,642

Cash at banks earns interest at floating rates based on daily bank deposit rates. Short term time deposits are made for varying periods of between one day and one month depending on the immediate cash requirements of the Group, and earn interest at the respective short term time deposit rates. The carrying amounts of the cash and bank balances and the time deposits approximate to their fair values.

28. TRADE AND BILLS PAYABLES

Trade payables Bills payable	Group 2005 2004 HK$’000 HK$’000 45,194 57,077 17,574 24,345 62,768 81,422	Group 2005 2004 HK$’000 HK$’000 45,194 57,077 17,574 24,345 62,768 81,422
		81,422

– 89 –

APPENDIX I FINANCIAL INFORMATION OF THE CAG GROUP

An aged analysis of the trade payables as at the balance sheet date, based on the invoice date, is as follows:

Current to 30 days 31 to 60 days 61 to 90 days Over 90 days	Group 2005 2004 HK$’000 HK$’000 36,120 52,183 3,039 1,408 1,097 384 4,938 3,102 45,194 57,077	Group 2005 2004 HK$’000 HK$’000 36,120 52,183 3,039 1,408 1,097 384 4,938 3,102 45,194 57,077
		57,077

The trade payables are non-interest-bearing and are normally settled within terms of 60 to 120 days.

29. BANKING FACILITIES

At 31 December 2005, the Company and the Group had certain banking facilities which were secured by certain land and buildings with an aggregate carrying value of HK$19,300,000 (2004: HK$24,280,000) (note 14).

30. INTEREST-BEARING BANK LOAN AND OVERDRAFTS

Group 2005 2004 HK$’000 HK$’000 25,412 34,960 3,750 5,000	Group 2005 2004 HK$’000 HK$’000 25,412 34,960 3,750 5,000	Company 2005 2004 HK$’000 HK$’000 – – 3,750 5,000	Company 2005 2004 HK$’000 HK$’000 – – 3,750 5,000
29,162 –	39,960 3,750	3,750 –	5,000
			3,750
29,162	43,710	3,750	8,750

The maturity of the above bank loan and overdrafts is as follows:

Group 2005 2004 HK$’000 HK$’000 25,412 34,960	Group 2005 2004 HK$’000 HK$’000 25,412 34,960	Company 2005 2004 HK$’000 HK$’000 – –	Company 2005 2004 HK$’000 HK$’000 – –
3,750 – 3,750 (3,750)	5,000 3,750 8,750 (5,000)	3,750 – 3,750 (3,750)	5,000 3,750
			8,750 (5,000
–	3,750	–	3,750

– 90 –

APPENDIX I FINANCIAL INFORMATION OF THE CAG GROUP

The bank overdrafts and bank loan of the Group and of the Company as set out above bear interest at floating interest rates.

Other interest rate information:

				Carrying	amounts	Fair
				2005	2004	2005	2004
				HK$’000	HK$’000	HK$’000	HK$’000
Floating	rate	bank	loan	–	3,750	–	3,549

The carrying amounts of the Group’s and the Company’s current borrowings approximate to their fair values. The carrying amounts and fair values of the Group’s and the Company’s non-current borrowings are stated as above.

31. PROVISION

Group

At beginning of year Write-back of overprovision in the prior year Provision for the year Amounts utilised during the year At 31 December Portion classified as current liabilities Long term portion	Long service payment 2005 2004 HK$’000 HK$’000 1,376 1,650 (157) – 73 27 (173) (301	Long service payment 2005 2004 HK$’000 HK$’000 1,376 1,650 (157) – 73 27 (173) (301
	1,119 –	1,376 –
	1,119	1,376

The Group provides for probable future long service payments expected to be made to employees under the Hong Kong Employment Ordinance, as further explained under the heading “Employee benefits” in note 3.1 to the financial statements. The provision is based on the best estimate of the probable future payments which have been earned by the employees from their service to the Group to the balance sheet date.

32. OTHER PAYABLES AND ACCRUALS

Gross amount due to contract customers (note 23) Other payables and accruals	Group 2005 2004 HK$’000 HK$’000 1,412 4,209 28,854 37,677 30,266 41,886	Company 2005 2004 HK$’000 HK$’000 – – 3,488 3,077 3,488 3,077	Company 2005 2004 HK$’000 HK$’000 – – 3,488 3,077 3,488 3,077
			3,077

Other payables and accruals are unsecured, interest-free and are repayable on demand.

– 91 –

APPENDIX I FINANCIAL INFORMATION OF THE CAG GROUP

33. DEFERRED TAX

The movements in deferred tax liabilities and assets during the year are as follows:

Deferred tax liabilities

Group

At beginning of year Deferred tax charged/(credited) to the income statement during the year – Continuing operations (note 10) – Discontinued operation (note 12) Disposal of a subsidiary (note 37) Gross deferred tax liabilities At 31 December Deferred tax assets Group At beginning of year Deferred tax credited/(charged) to the income statement during the year (note 10) Gross deferred tax assets At 31 December Net deferred tax assets At 31 December	Fair value adjustments arising from acquisition of a subsidiary 2005 2004 HK$’000 HK$’000 1,059 1,084 – (25) – – (1,059) – – 1,059 Decelerated tax depreciation 2005 2004 HK$’000 HK$’000 779 823 (56) (44) 723 779	Revaluation of investment properties 2005 2004 HK$’000 HK$’000 – – 764 – – – – – 764 – Revaluation of land and buildings 2005 2004 HK$’000 HK$’000 – – 86 – 86 –	Others 2005 2004 HK$’000 HK$’000 – 87 – – – (87) – – – – Provision for bad debts and inventories 2005 2004 HK$’000 HK$’000 625 674 (625) (49) – 625	Total 2005 2004 HK$’000 HK$’000 1,059 1,171 764 (25) – (87) (1,059) – 764 1,059 Total 2005 2004 HK$’000 HK$’000 1,404 1,497 (595) (93) 809 1,404 45 345	Total 2005 2004 HK$’000 HK$’000 1,059 1,171 764 (25) – (87) (1,059) – 764 1,059 Total 2005 2004 HK$’000 HK$’000 1,404 1,497 (595) (93) 809 1,404 45 345
					1,404

					345

The Group has tax losses arising in Hong Kong of approximately HK$200,000,000 (2004: HK$193,000,000) that are available indefinitely for offsetting against future taxable profits of the companies in which the losses arose. Deferred tax assets have not been recognised in respect of these losses as they have arisen in subsidiaries that have been loss-making for some time.

– 92 –

APPENDIX I FINANCIAL INFORMATION OF THE CAG GROUP

34. SHARE CAPITAL

Authorised: 1,000,000,000 (2004: 25,000,000,000) ordinary shares of HK$0.25 (2004: HK$0.01) each Issued and fully paid: 158,639,799 (2004: 3,965,994,984) ordinary shares of HK$0.25 (2004: HK$0.01) each At 1 January 2004 Shares issued At 31 December 2004 At 1 January 2005 Effect of Share Consolidation arising from the Capital Reorganisation At 31 December 2005	Company 2005 2004 HK$’000 HK$’000 250,000 250,000 39,660 39,660 Number of shares HK$’000 3,305,994,984 33,060 660,000,000 6,600 3,965,994,984 39,660	Company 2005 2004 HK$’000 HK$’000 250,000 250,000 39,660 39,660 Number of shares HK$’000 3,305,994,984 33,060 660,000,000 6,600 3,965,994,984 39,660

		39,660

		HK$’000 33,060 6,600
		39,660

	3,965,994,984 (3,807,355,185)	39,660 –
	158,639,799	39,660

As announced on 13 April 2005, the Company proposed a capital reorganisation involving the cancellation of the capital reserve and share premium accounts as well as the consolidation of shares into larger denomination (the “Capital Reorganisation”). The Capital Reorganisation was approved by the shareholders of the Company by way of a special resolution and took effect on 6 June 2005 as follows:

(a) the entire amount of HK$236,500,000 standing to the credit of the capital reserve account of the Company as at 31 December 2004 was cancelled and the credit arising therefrom was applied towards the partial elimination of the accumulated losses of the Company as at 31 December 2004 in the amount of HK$708,335,000;
(b) the entire amount of HK$568,986,000 standing to the credit of the share premium account of the Company as at 31 December 2004 was cancelled and the credit arising therefrom was applied to eliminate the balance of HK$471,835,000 of the accumulated losses of the Company as at 31 December 2004 and the remaining credit of HK$97,151,000 arising therefrom was transferred to the Company’s contributed surplus account; and
(c) every twenty-five issued and unissued shares of nominal value HK$0.01 each in the authorised share capital of the Company were consolidated into one new share of nominal value HK$0.25 each (the “New Share(s)”) (the “Share Consolidation”).

As a result of the Capital Reorganisation, the authorised share capital of the Company became HK$250,000,000 divided into 1,000,000,000 New Shares, of which 158,639,799 New Shares were in issue and fully paid. The New Shares rank pari passu in all respects with each other.

In the prior year, pursuant to a placing agreement dated 3 March 2004, arrangements were made for a private placement to independent third parties of 468,000,000 existing shares of HK$0.01 each of the Company held by Multi-Investment Group Limited (“MIG”), a substantial shareholder of the Company, at a placing price

– 93 –

APPENDIX I FINANCIAL INFORMATION OF THE CAG GROUP

of HK$0.02 per share. Concurrently, pursuant to a subscription agreement dated 3 March 2004, MIG subscribed to and was allotted 660,000,000 new shares of HK$0.01 each of the Company at an issue price of HK$0.02 per share, of which HK$0.01 per share was credited to issued share capital and the balance of HK$0.01 per share was credited to the share premium account. The net proceeds from the issue of new shares of approximately HK$13 million have been applied for the general working capital of the Group.

Share options

Details of the Company’s share option scheme and the share options issued under the scheme are included in note 35 to the financial statements.

35. SHARE OPTION SCHEME

On 24 September 1993, an Executive Share Option Scheme (the “Scheme”) was approved by the shareholders of the Company (as amended by the shareholders of the Company on 28 June 2001), under which the directors of the Company may, at their discretion, offer any employee (including any director) of the Company or of any of its subsidiaries options to subscribe to shares of the Company subject to the terms and conditions stipulated in the Scheme. The summary terms and particulars of outstanding options under the Scheme are disclosed below pursuant to the requirements as contained in Chapter 17 of the Listing Rules.

Summary of the Scheme

(a) Purposes of the Scheme

The purposes of the Scheme are to attract and retain high caliber employees, and to motivate them to a higher level of performance.

(b) Participants of the Scheme

The Board may, at its discretion, grant to any employee (including any director) of the Company or of any of its subsidiaries’ options to subscribe for the Company’s shares.

(c) Maximum number of shares available for issue under the Scheme

The maximum number of the shares in respect of which options may be granted under the Scheme is such number of shares, which when aggregated with shares already subject to any other share option schemes of the Company, represents 10% of the issued share capital of the Company from time to time (excluding for this purpose any shares issued pursuant to the Scheme). The Scheme expired on 23 September 2003 and, as a result, there are no further shares available for issue under the Scheme as at the date of this annual report.

(d) Maximum entitlement to any participant

Under the Scheme, no options may be granted to any employee which if exercised in full would result in the total number of the Company’s shares already issued and issuable to the employee under all the options granted to the employee exceeding 25% of the aggregate number of shares of the Company for the time being issued and issuable under the Scheme.

(e) Period and payment on acceptance of options

Under the Scheme, the offer of an option to acquire shares must be accepted in writing in such manner as the Board may prescribe within 14 days from the date of offer and upon payment of a nominal consideration of HK$1 in total by the participant to the Company, whereby such consideration is not refundable.

(f) Period within which the shares must be taken up under an option

For those options granted on or before 28 June 2001, the exercise period of the options is 10 years from the date of grant. The number of options that can be exercised is restricted to a maximum of 20% of the shares comprised in the option in the first year from the date of grant and the threshold is increased progressively by 20% each year until it reaches 100% in the fifth year from the date of grant.

For those options granted after 28 June 2001, an option may be exercised in whole or in part at any time during an exercise period ranging from two to five years from the date of grant as specified by the Board in each grant.

– 94 –

APPENDIX I FINANCIAL INFORMATION OF THE CAG GROUP

(g) Basis of determining the exercise price

The exercise price of the options is determined by the Board and will not be less than the higher of (i) the nominal value of the Company’s shares; and (ii) an amount not less than 80% of the average closing price of the Company’s shares on The Stock Exchange of Hong Kong Limited for the five business days immediately preceding the date of the offer.

(h) Expiration of the Scheme

The Scheme expired on 23 September 2003.

Particulars of the outstanding options

During the year, options to subscribe for 30,000 shares lapsed in accordance with the terms of the Scheme upon the expiry of the option period for ten years from the date of grant of those options.

Details of the share options outstanding as at 31 December 2005 which were granted to directors and employees under the Scheme are as follows:

Number of shares subject to the outstanding share options as at 1 January 2005 Arising from the Capital Reorganisation during the year* 500,000 (480,000) 250,000 (240,000) 12,000,000 (11,520,000)	Number of shares subject to the outstanding share options as at 1 January 2005 Arising from the Capital Reorganisation during the year* 500,000 (480,000) 250,000 (240,000) 12,000,000 (11,520,000)	Number of shares subject to the outstanding share options expired during the year** (20,000) (10,000) –	Number of shares subject to the outstanding share options as at 31 December 2005 Exercise price per share Date of grant Exercisable from Exercisable until HK$ – 19.5 22 December 1995 22 December 1995 21 December 2005 – 19.5 7 June 1997 22 December 1995 21 December 2005 480,000 1.75 16 July 1999 16 July 1999 15 July 2009 480,000 320,000 1.75 13 July 1999 13 July 1999 12 July 2009 160,000 1.75 12 July 1999 12 July 1999 11 July 2009 320,000 1.75 13 July 1999 13 July 1999 12 July 2009 1,280,000 9,000 19.5 2 January 1996 2 January 1996 1 January 2006 160,000 1.75 16 July 1999 16 July 1999 15 July 2009 160,000 1.75 19 July 1999 19 July 1999 18 July 2009 329,000 1,609,000
12,750,000 8,000,000 4,000,000 8,000,000 32,750,000 225,000 4,000,000 4,000,000 8,225,000	(12,240,000) (7,680,000) (3,840,000) (7,680,000) (31,440,000) (216,000) (3,840,000) (3,840,000) (7,896,000)	(30,000) – – – (30,000) – – – –	480,000
			320,000 160,000 320,000
			1,280,000
			9,000 160,000 160,000
			329,000
40,975,000	(39,336,000)	(30,000)

As announced on 3 June 2005, the number of shares subject to the outstanding share options has been adjusted from 40,975,000 shares to 1,639,000 shares with the relevant exercise price being adjusted to HK$19.5 (Previous: HK$0.78) per share and HK$1.75 (Previous: HK$0.07) per share as a result of the Capital Reorganisation becoming effective on 6 June 2005.

These options lapsed upon expiring of the 10-year exercise period.

– 95 –

APPENDIX I

FINANCIAL INFORMATION OF THE CAG GROUP

At the balance sheet date, the Company had 1,609,000 share options outstanding under the Scheme. The exercise in full of the outstanding share options would, under the present capital structure of the Company, result in the issue of 1,609,000 additional ordinary shares of the Company and additional share capital of approximately HK$402,000 and share premium of approximately HK$2,573,000 (before issue expenses).

At the date of approval of these financial statements, the Company had 1,600,000 share options outstanding under the Scheme, which represented approximately 1% of the Company’s shares in issue as at that date.

36. RESERVES

(a) Group

The amounts of the Group’s reserves and the movements therein for the current and the prior years are presented in the consolidated statement of changes in equity on page 32 of these financial statements.

(b) Company

At 1 January 2004 Issue of shares (note 34) Share issue expenses Net profit for the year At 31 December 2004 and 1 January 2005 Arising from the Capital Reorganisation (note 34) Net profit for the year At 31 December 2005	Share premium account HK$’000 562,724 6,600 (338) –	Capital reserve HK$’000 236,500 – – –	Contributed surplus Retained profits/ (accumulated losses)* HK$’000 HK$’000 – (713,876) – – – – – 5,541	Contributed surplus Retained profits/ (accumulated losses)* HK$’000 HK$’000 – (713,876) – – – – – 5,541	Total HK$’000 85,348 6,600 (338) 5,541 97,151 – 522 97,673
	568,986 (568,986) –	236,500 (236,500) –	– 97,151 –	(708,335) 708,335 522	97,151 – 522
	–	–	97,151	522

There is no specific provision in the Companies Act which regulates the use of contributed surplus save that the Company cannot make a distribution out of the contributed surplus to the shareholders if there are reasonable grounds for believing that the Company is, or would after the payment be, unable to pay its liabilities as they become due or the realisable value of the Company’s assets would thereby be less than the aggregate of its liabilities and its issued share capital and share premium.

– 96 –

APPENDIX I FINANCIAL INFORMATION OF THE CAG GROUP

37. DISPOSAL OF SUBSIDIARIES

Net assets disposed of: Property, plant and equipment Retention monies receivable over one year Inventories Construction contracts Trade and retention monies receivables Prepayments, deposits and other receivables Cash and cash equivalents Trade payables Other payables and accruals Tax payable Interest-bearing bank loan Deferred tax liabilities Minority interests Reclassification of remaining 40% equity interest in a subsidiary to equity investments at fair value through profit or loss Gain on disposal of subsidiaries (note 5) Satisfied by: Cash received	2005 HK$’000 11,705 591 5,175 177 6,232 630 3,530 (6,583) (4,010) (1,784) (5,000) (1,059) (876)	2004 HK$’000 – – – – – 8 4 – – – – – –
	8,728 (1,168) 1,128	12 – –
	8,688 8,688	12

		12

An analysis of the net inflow of cash and cash equivalents in respect of the disposal of the subsidiaries is as follows:

Cash consideration received Cash and cash equivalents disposed of Net inflow of cash and cash equivalents in respect of the disposal of subsidiaries	2005 HK$’000 8,688 (3,530) 5,158	2004 HK$’000 12 (4)
		8

The result of the subsidiaries disposed of in the year ended 31 December 2005 had no significant impact on the Group’s consolidated turnover or profit after tax for the year.

– 97 –

FINANCIAL INFORMATION OF THE CAG GROUP

APPENDIX I

38. RELATED PARTY TRANSACTIONS

(a) In addition to the transactions detailed elsewhere in these financial statements, the Group had the following material transactions with related parties during the year:

		2005	2004
	Notes	HK$’000	HK$’000
Management fees paid to a major shareholder	(i)	2,000	2,000
Rental and office expenses paid to a related company	(ii)	380	496
Sale of goods to an associate	(iii)	(639)	(2,881)
Service income from an associate	(iii)	(5,415)	–
Rental income received from a related company	(iv)	(392)	(541)

Notes:

(i) The management fees are charged by Chinney Investments, Limited (“CIL”) based on the time involvement of the personnel providing services. Dr. James Sai-Wing Wong, a director of the Company, is also a director of and has beneficial interests in CIL. Mr. Herman Man-Hei Fung is a common director of the Company and CIL.
(ii) The rental and office expenses were charged by Hon Kwok on an actual basis. Dr. James Sai-Wing Wong is a director of and has beneficial interests in Hon Kwok. Mr. Herman Man-Hei Fung is a common director of the Company and Hon Kwok.
(iii) The sales of goods to and service income from subsidiaries of Shun Cheong, an associate of the Group, were made according to the published prices and conditions offered to third-party customers. Mr. Stephen Sek-Kee Yu is a common director of the Company and Shun Cheong. Mr. James Sai-Wing Wong was a director of Shun Cheong until 16 September 2004.
(iv) The rental income arose from leasing certain space of an office premises of the Group to DrilTech Ground Engineering Limited, a subsidiary of CIL, and was charged in accordance with the amount agreed by both parties.
(b) Other transactions with related parties:
(i) A sale and purchase agreement dated 26 October 2005 entered into between Best Treasure Limited (as vendor), a wholly-owned subsidiary of the Company, Chinney Construction (BVI) Limited (as purchaser), an 86.05% owned subsidiary of CIL and the Company as vendor’s guarantor in relation to the sale and purchase of the entire issued share capital of JMT for a cash consideration of HK$7,800,000. Details are set out in item 2 in the section headed “Connected Transactions” in the Report of the Directors.
(ii) A sale and purchase agreement dated 27 September 2005 entered into between DMT International Hong Kong Limited (as vendor), a wholly-owned subsidiary of the Company and Mr. Yee-Cheong Lung (as purchaser), a director of DMT PVC as well as a shareholder holding 30% then equity interest in DMT PVC, in relation to the sale and purchase of a 30% equity interest in DMT PVC for a cash consideration of HK$888,000. Details are set out in item 1 in the section headed “Connected Transactions” in the Report of the Directors.
(iii) A subscription agreement dated 3 March 2004 entered into between the Company as issuer and MIG as subscriber in relation to the subscription of 660,000,000 new shares of HK$0.01 each of the Company at a price of HK$0.02 per share for net cash proceeds of approximately HK$13 million.

– 98 –

APPENDIX I

FINANCIAL INFORMATION OF THE CAG GROUP

(c) Outstanding balances with related parties:
(i) Details of the Group’s outstanding balances with related companies as at the balance sheet date are disclosed in note 25 to the financial statements.
(ii) Details of the Group’s trade balances with its associates as at the balance sheet date are disclosed in note 24 to the financial statements.
(d) Compensation of key management personnel of the Group:

Short term employee benefits Post-employment benefits Total compensation paid to key management personnel	2005 HK$’000 11,951 546 12,497	2004 HK$’000 12,593 539
		13,132

Further details of directors’ emoluments are included in note 8 to the financial statements.

39. OPERATING LEASE ARRANGEMENTS

(a) As lessor

The Group leases certain of its investment properties (note 15 to the financial statements) under operating lease arrangements, with leases negotiated for terms of three years. The terms of the leases generally also require the tenants to pay security deposits.

At 31 December 2005, the Group had total future minimum lease receivables under non-cancellable operating leases with its tenants falling due as follows:

Within one year In the second to fifth years, inclusive	Group 2005 2004 HK$’000 HK$’000 634 – 1,522 – 2,156 –	Group 2005 2004 HK$’000 HK$’000 634 – 1,522 – 2,156 –
		–

(b) As lessee

The Group leases certain of its office properties under operating lease arrangements. Leases for properties are negotiated for terms ranging from one to three years (2004: one to twelve years).

At 31 December 2005, the Group had total future minimum lease payments under non-cancellable operating leases falling due as follows:

Within one year In the second to fifth years, inclusive	Group 2005 2004 HK$’000 HK$’000 3,697 3,803 2,035 3,584 5,732 7,387	Group 2005 2004 HK$’000 HK$’000 3,697 3,803 2,035 3,584 5,732 7,387
		7,387

The Company had no operating lease commitments at the balance sheet date (2004: Nil).

– 99 –

FINANCIAL INFORMATION OF THE CAG GROUP

APPENDIX I

40. COMMITMENTS

In addition to the operating lease commitments detailed in note 39(b) above, at 31 December 2004, the Group had commitments under forward foreign exchange contracts amounting to HK$5,379,000.

The Group and the Company had no other significant commitment at the balance sheet date.

41. CONTINGENT LIABILITIES

At the balance sheet date, contingent liabilities not provided for in the financial statements were as follows:

	Group		Company
	2005	2004	2005	2004
	HK$’000	HK$’000	HK$’000	HK$’000
Guarantees given to banks in
connection with facilities
granted to subsidiaries	–	–	495,000	433,334

As at 31 December 2005, the total facilities utilised by the subsidiaries amounted to HK$255,593,000 (2004: HK$312,939,000).

(ii) On 26 October 2005, Best Treasure Limited, a wholly-owned subsidiary of the Company as vendor, the Company as vendor’s guarantor and Chinney Construction (BVI) Limited, an 86.05% owned subsidiary of Chinney Investments Limited, as purchaser entered into an agreement in relation to the sale and purchase of the entire issued share capital of JMT for a cash consideration of HK$7,800,000. The Company as the vendor’s guarantor and Best Treasure Limited as the vendor have undertaken to indemnify Chinney Construction (BVI) Limited up to a maximum amount of HK$7,800,000 until 8 November 2007, being two years after the completion date, in case there are valid claims against the Company and/or Best Treasure Limited under the agreement.
(iii) In its ordinary course of business, the Group provided corporate guarantees and indemnities to certain banks for an aggregate amount of HK$2,158,000 in relation to issue of performance bonds to clients on contracting works.

42. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

The Group’s principal financial instruments comprise interest-bearing bank loans and overdrafts, cash and bank balances, and short term deposits. The main purpose of these financial instruments is to raise finance for the Group’s operations. The Group has various other financial assets and liabilities such as gross amounts due from and to contract customers, trade and retention monies receivables, other receivables, and trade and bills payables, which arise directly from the Group’s operations.

The main risks arising from the Group’s financial instruments are cash flow interest rate risk, foreign currency risk, credit risk and liquidity risk. The directors meet periodically to analyse and formulate measures to manage each of these risks and they are summarised below.

Cash flow interest rate risk

The Group’s exposure to the risk of changes in market interest rates relates primarily to the Group’s debt obligations with a floating interest rate.

The interest rates and terms of repayment of interest-bearing bank loans and overdrafts are disclosed in note 30 to the financial statements. Other financial assets and liabilities do not have material interest rate risk. Interest-bearing bank loans and overdrafts, cash and bank balances, and short term deposits are stated at cost and are not revalued on a periodic basis. Floating-rate interest income and expenses are charged to the consolidated income statement as incurred.

The nominal interest rates of the financial instruments approximate to their respective effective interest

rates.

– 100 –

FINANCIAL INFORMATION OF THE CAG GROUP

APPENDIX I

Foreign currency risk

The Group has transactional currency exposures. Such exposures arise from sales or purchases by operating units in currencies other than the units’ functional currency. The Group uses forward currency contracts to eliminate the currency exposures on such sale and purchase transactions. The forward currency contracts must be in the same currency as the hedged item. It is the Group’s policy not to enter into forward contracts until a firm commitment is in place.

Credit risk

The Group trades only with recognised and creditworthy third parties. It is the Group’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are closely monitored on an ongoing basis to minimise the Group’s exposure to bad debts.

With respect to credit risk arising from the other financial assets of the Group, which mainly comprise cash and cash equivalents, the Group’s exposure to credit risk arises from default of the counterparties, with a maximum exposure equal to the carrying amount of these instruments.

Liquidity risk

The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of bank overdrafts, bank loans, and trust receipt loans. The Group’s policy is to maintain the Group at net current asset position.

43. POST BALANCE SHEET EVENT

On 26 January 2006, Chinney Alliance Trading (BVI) Limited, a wholly-owned subsidiary of the Company, as purchaser, the Company as purchaser’s guarantor and Shun Cheong, as vendor entered into an agreement relating to the sale and purchase of the entire issued share capital of Shun Cheong Investments Limited for a cash consideration of HK$35,000,000. Shun Cheong Investments Limited and its subsidiaries (the “Contracting Group”) are engaged in the building related contracting services for both public and private sector. The transaction was approved by the shareholders of the Company at a special general meeting held on 27 March 2006 and completed on 31 March 2006. Details of the transaction are set out in the newspaper announcement of the Company dated 2 February 2006 and the circular to the shareholders of the Company dated 10 March 2006.

Shun Cheong Investments Limited reported an audited consolidated net tangible assets of HK$38,395,000 as at 30 September 2005, assuming that the corporate restructuring which included the transfer of certain subsidiaries of Shun Cheong Investments Limited engaging in the building maintenance business to a wholly-owned subsidiary of Shun Cheong to form the remaining business of Shun Cheong (the “Remaining Shun Cheong Group”) and the waiver of an aggregate sum of HK$18,053,000 due by the Contracting Group to the Remaining Shun Cheong Group had taken place on or before 30 September 2005. The Contracting Group is expected to incur losses from 1 October 2005 to 31 March 2006, the amount of which has yet to be ascertained from the audited financial information of the Contracting Group for the year ended 31 March 2006. In case the purchase consideration of HK$35,000,000 exceeds the audited consolidated net tangible assets of the Contracting Group as at 31 March 2006, the positive goodwill so arise will be treated as an asset and assessed annually or more frequently for impairment. Any impairment losses arising from the assessment is to be charged as expense to the consolidated income statement. In case the audited consolidated net tangible assets of the Contracting Group as at 31 March 2006 exceeds the purchase consideration of HK$35,000,000, the negative goodwill so arise will be credited as income to the consolidated income statement.

– 101 –

APPENDIX I FINANCIAL INFORMATION OF THE CAG GROUP

The audited carrying amounts of the identifiable assets and liabilities of the Contracting Group as at 30 September 2005, reclassified to conform with the classification used by the Group, are as follows:

Property, plant and equipment
Available-for-sale equity investments
Financial assets at fair value through profit or loss
Gross amount due from contract customers
Trade and retention monies receivables
Amounts due from related companies
Deposits, prepayments, and other receivables
Tax recoverable
Pledged time deposits
Cash and cash equivalents
Trade and bills payables
Trust receipt loans
Other payables and accruals
Tax payable
Interest-bearing bank loans and overdrafts
Loan from a minority shareholder of a subsidiary
Deferred tax liabilities
Minority interests

As at
30 September
2005
HK$’000
291
2,500
647
63,899
90,209
20,575
25,985
4,288
26,800
6,932
(45,193)
(18,356)
(95,518)
(346)
(26,303)
(6,900)
(26)
(11,089)
38,395

44. COMPARATIVE AMOUNTS

As further explained in note 2.2 to the financial statements, due to the adoption of new HKFRSs during the current year, the accounting treatment and presentation of certain items and balances in the financial statements have been revised to comply with the new requirements. Accordingly, certain comparative amounts have been reclassified and restated to conform with the current year’s presentation and accounting treatment.

45. APPROVAL OF THE FINANCIAL STATEMENTS

The financial statements were approved and authorised for issue by the board of directors on 11 April 2006.

– 102 –

APPENDIX I FINANCIAL INFORMATION OF THE CAG GROUP

3. STATEMENT OF INDEBTEDNESS

As at 31 July 2006, being the latest practicable date prior to the printing of this circular for ascertaining information for inclusion in this statement of indebtedness, the CAG Group had outstanding secured and unsecured bank borrowings, which represented bank overdrafts, term loan and trust receipt loans, of approximately HK$36,800,000 and HK$188,257,000 respectively. Furthermore, the CAG Group had an unsecured loan from a minority shareholder of a subsidiary of HK$6,900,000 which was interest-free and had no fixed terms of repayment.

(i) The CAG Group provided corporate guarantees and indemnities to certain banks and a financial institution of an aggregate amount of approximately HK$14,008,000 for the issue of performance bonds in its ordinary course of business; and
(ii) On 26 October 2005, Best Treasure Limited, a wholly-owned subsidiary of the Company as vendor, the Company as vendor’s guarantor and Chinney Construction (BVI) Limited, a 86.05% owned subsidiary of Chinney as purchaser, entered into an agreement (the “Agreement”) in relation to the sale and purchase of the entire issued share capital of Jackson Mercantile Trading Company Limited for a cash consideration of HK$7,800,000. In accordance with the Agreement, the Company as the vendor’s guarantor and Best Treasure Limited as the vendor have undertaken to indemnify Chinney Construction (BVI) Limited up to a maximum amount of HK$7,800,000 until 8 November 2007, being two years after the completion date, in case there are valid claims against the Company and/or Best Treasure Limited under the Agreement.

The CAG Group’s secured banking facilities were secured by certain land and buildings and time deposits of the CAG Group.

Save as the aforesaid and apart from intra-group liabilities, normal trade payables and bills payables, the CAG Group did not have any debt securities, outstanding loan capital, other borrowings or other indebtedness in the nature of borrowing including bank overdrafts and liabilities under acceptance or other similar indebtedness, debentures, mortgages, charges, loans, acceptance credits, hire purchase commitments, guarantees or other material contingent liabilities as at the close of business on 31 July 2006.

For the purpose of the above indebtedness statement, foreign currency amounts have been translated into Hong Kong dollars at the approximately exchange rates prevailing at the close of business on 31 July 2006.

Save as disclosed above, the Directors have confirmed that there has been no material change in the indebtedness and contingent liabilities of the CAG Group since 31 July 2006.

– 103 –

APPENDIX I FINANCIAL INFORMATION OF THE CAG GROUP

4. WORKING CAPITAL

The Directors are of the opinion after due and careful enquiry that, following the completion of the Open Offer, taking into account the financial resources available to the CAG Group, including internal resources and present available banking facilities, and in the absence of unforeseen circumstances, the CAG Group has available sufficient working capital for the CAG Group’s present requirements, that is for at least the next 12 months from the date of publication of this circular.

5. MATERIAL CHANGE

Save for (i) the transactions in relation to the Acquisition in January 2006 (details of which were set out in the circular to the Shareholders dated 10 March 2006) which was approved by the Shareholders on 27 March 2006; (ii) the disposal of 32,000,000 shares in Shun Cheong by the Company on 12 April 2006 (details of which were set out in the circular to the Shareholders dated 8 May 2006) which would record a loss of approximately HK$6.2 million; and (iii) the information as set out in the section headed “Statement of indebtedness” above, the Directors are not aware of any material change in the financial or trading position or outlook of the CAG Group since 31 December 2005, the date to which the latest audited financial statements of the Company were made up.

– 104 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE CAG GROUP

APPENDIX II

The following is a text of the letter from Ernst & Young, the reporting accountants, in respect of the unaudited pro forma financial information of the CAG Group, prepared for the purpose of incorporation in this circular.

18th Floor Two International Finance Centre 8 Finance Street Central Hong Kong

8 September 2006

The Board of Directors Chinney Alliance Group Limited

Dear Sirs,

CHINNEY ALLIANCE GROUP LIMITED (THE “COMPANY”) AND ITS SUBSIDIARIES (THE “CAG GROUP”)

We report on the unaudited pro forma financial information (the “Pro forma NTA”) relating to adjusted net tangible assets set out in the Section headed “UNAUDITED PRO FORMA STATEMENT OF ADJUSTED CONSOLIDATED NET TANGIBLE ASSETS OF THE CAG GROUP” of Appendix II to the circular of the Company dated 8 September 2006 (the “Circular”) in connection with the proposed capital reduction, proposed open offer of new shares on the basis of three offer shares for every two new shares held and application for whitewash wavier (the “Transactions”). The Pro Forma NTA is unaudited and has been prepared by the directors of the Company, solely for illustrative purposes, to provide information to the shareholders of the Company about how the Transactions might affect the consolidated net tangible assets of the CAG Group as at 31 December 2005.

The historical financial information is derived from the audited historical financial information of the CAG Group and where applicable, appearing elsewhere in the Circular. The basis of preparation is set out in the accompanying introduction and notes to the Pro Forma Statement of Unaudited Adjusted Consolidated Net Tangible Assets of the CAG Group.

RESPONSIBILITIES

It is the responsibility solely of the directors of the Company to prepare the Pro Forma NTA in accordance with Rule 4.29 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) and with reference to Accounting Guideline 7 “Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars” issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”).

– 105 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE CAG GROUP

APPENDIX II

It is our responsibility to form an opinion, as required by Rule 4.29(7) of the Listing Rules, on the Pro Forma NTA and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the Pro Forma NTA beyond that owed to those to whom those reports were addressed by us at the dates of their issue.

BASIS OF OPINION

We conducted our engagement in accordance with Hong Kong Standard on Investment Circular Reporting Engagements (HKSIR) 300 “Accountants’ Reports on Pro Forma Financial Information in Investment Circulars” issued by the HKICPA. Our work consisted primarily of comparing the unadjusted financial information with the source documents, considering the unaudited evidence supporting the adjustments and discussing the Pro Forma NTA with the directors of the Company. This engagement did not involve independent examination of any of the underlying financial information.

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

The Pro Forma NTA is for illustrative purposes only, based on the judgements and assumptions of the directors of the Company, and, because of its hypothetical nature, does not provide any assurance or indication that any event will take place in the future and may not be indicative of the financial position of the CAG Group, had the Transactions actually occurred as at the date 31 December 2005; or any future dates.

OPINION

In our opinion:

(a) the Pro Forma NTA 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 CAG Group in respect of the year ended 31 December 2005; and
(c) the adjustments are appropriate for the purposes of the Pro Forma NTA as disclosed pursuant to Rule 4.29(1) of the Listing Rules.

Yours faithfully, Ernst & Young

Certified Public Accountants Hong Kong

– 106 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE CAG GROUP

APPENDIX II

UNAUDITED PRO FORMA STATEMENT OF ADJUSTED CONSOLIDATED NET TANGIBLE ASSETS OF THE CAG GROUP

For illustrative purposes only, the pro forma statement which has been prepared in accordance with Rule 4.29 of the Listing Rules is set out here to provide the investors with further information on how the proposed capital reduction (the “Capital Reduction”) and the proposed open offer (the “Open Offer”) might have affected the financial position of the CAG Group. Although reasonable care has been exercised in preparing the said information, prospective investors who read the information should bear in mind that these figures are inherently subject to adjustments and may not give a complete picture of the actual financial position of the CAG Group after the completion of the Capital Reduction and Open Offer.

Set out below is the unaudited pro forma statement of adjusted consolidated net tangible assets of the CAG Group based on the audited consolidated net tangible assets of the CAG Group as at 31 December 2005 adjusted to reflect the effects of the Capital Reduction and the Open Offer assuming that 237,959,698 offer shares (the “Offer Shares”) will be issued pursuant to the Open Offer:

Net tangible assets Number of shares issued Unaudited pro forma adjusted consolidated net tangible assets per share before/after the Open Offer	Audited consolidated net tangible assets of the CAG Group as at 31 December 2005 (before the Open Offer) HK$’000 157,468 158,639,799 HK$0.9926	Estimated effect on the Capital Reduction HK$’000 Note (i) – –	Estimated net proceeds from the Open Offer HK$’000 Note (ii) 57,000 237,959,698	Unaudited pro forma adjusted consolidated net tangible assets of the CAG Group after the Open Offer HK$’000 Note (iii) 214,468

				396,599,497

				HK$0.5408

– 107 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE CAG GROUP

APPENDIX II

Notes:

(i) The Capital Reduction has no effect on the net tangible assets to the CAG Group as at 31 December 2005 since it involves a reduction of the nominal value of each existing share in issue from HK$0.25 to HK$0.1 by the cancellation of HK$0.15 from the paid-up capital on each existing share and a credit of HK$23,795,969.85 to the contributed surplus account of the Company. There is no inflow and outflow of the financial resources to and from the CAG Group arising from the Capital Reduction.
(ii) The estimated net proceeds from the Open Offer is calculated based on the issue of 237,959,698 Offer Shares at a price of HK$0.25 per Offer Share on the basis of 3 Offer Shares for every 2 New Shares as at the latest practicable date as set out in the Circular, and after deducting the estimated expenses of approximately HK$2,490,000.
(iii) No adjustment has been made to reflect any trading result or other transaction of the CAG Group entered into subsequent to 31 December 2005. Accordingly, the CAG Group’s acquisition for the entire equity interest in Shun Cheong Investment Limited at a consideration of HK$35,572,000 (including direct expenses of HK$572,000) and the disposal of the CAG Group’s interest in an associate, Shun Cheong Holdings Limited, at a net proceeds of HK$9,566,000 (after direct expenses of HK$34,000), as announced by the Company on 2 February 2006 and 13 April 2006, respectively, are not reflected in this pro forma statement.

– 108 –

APPENDIX III ACCOUNTANTS’ REPORT OF THE CONTRACTING GROUP AND PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

The following is a reproduction of an accountant’s report, together with the unaudited pro forma combined balance sheet of the CAG group, after the completion of the Acquisition, which were included in the circular of CAG dated 10 March 2006 to the Shareholders:

(I) ACCOUNTANTS’ REPORT OF THE CONTRACTING GROUP FOR THE THREE YEARS ENDED 31 MARCH 2005 AND THE SIX MONTHS ENDED 30 SEPTEMBER 2005

The following is a text of the accountants’ report from Ernst & Young, the auditors and reporting accountants of the Company, for each of the three years ended 31 March 2003, 2004 and 2005, and the six months ended 30 September 2005 prepared for the purpose of incorporation in this circular.

==> picture [147 x 38] intentionally omitted <==

18th Floor Two International Finance Centre 8 Finance Street Central Hong Kong

10 March 2006

The Board of Directors

Chinney Alliance Group Limited

Dear Sirs,

We set out below our report on the financial information (the “Summaries”) regarding Shun Cheong Investments Limited (the “Target Company”) and certain of its subsidiaries (hereinafter collectively referred to as the “Contracting Group”) for each of the three years ended 31 March 2003, 2004 and 2005, and the six months ended 30 September 2005 (the “Relevant Periods”) and the comparative unaudited financial information for the six months ended 30 September 2004, pursuant to a conditional sale and purchase agreement (the “Agreement”) dated 26 January 2006 regarding the proposed acquisition of the building related contracting business under the Contracting Group (the “Acquisition”) from Shun Cheong Holdings Limited (“SCH”) as vendor, Chinney Alliance Trading (BVI) Limited (“CAT (BVI)”) as purchaser, and Chinney Alliance Group Limited (the “Company” or “CAG”) as purchaser’s guarantor. The Summaries have been prepared on the basis as set out in Section 1 below, for inclusion in the circular (the “Circular”) dated 10 March 2006 issued by the Company in connection with the Acquisition.

The Target Company was incorporated in the British Virgin Islands with limited liability and is a wholly-owned subsidiary of SCH. The Contracting Group has adopted 31 March as its financial year end date.

– 109 –

ACCOUNTANTS’ REPORT OF THE CONTRACTING GROUP AND PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

During the Relevant Periods, the principal activities of the Contracting Group consisted of the provision of multi-disciplinary building services, comprising electrical engineering, water pumping and fire services, air-conditioning installation, plumbing and drainage, environmental engineering, extra low voltage systems engineering and project management, together with the trading of electrical and mechanical engineering materials and equipment. The principal activity of the Target Company is investment holding.

For the purpose of this report, we have examined the audited financial statements or, where appropriate, the unaudited management accounts of all companies of the Contracting Group for the Relevant Periods and the six months ended 30 September 2004 and have carried out such additional procedures as are necessary in accordance with the Auditing Guideline 3.340 “Prospectuses and the Reporting Accountant” issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”).

The Summaries of the Contracting Group (which includes the consolidated income statements, the consolidated statements of changes in equity and the consolidated cash flow statements of the Contracting Group for the Relevant Periods and the consolidated balance sheets of the Contracting Group and the balance sheets of the Target Company as at 31 March 2003, 2004 and 2005 and 30 September 2005) have been prepared based on the audited financial statements or, where appropriate, unaudited management accounts of the companies comprising the Contracting Group, on the basis as set out in Section 1 below and the significant accounting policies as detailed in Section 2.

The directors of the respective companies of the Contracting Group are responsible for the preparation of the respective financial statements which give a true and fair view. The directors of the Target Company (the “Directors”) are responsible for the preparation of the Summaries which give a true and fair view. In preparing the Summaries and the financial statements which give a true and fair view, it is fundamental that appropriate accounting policies are selected and applied consistently. The directors of CAG are responsible for the contents of the Circular in which this report is included. It is our responsibility to form an independent opinion on the Summaries and to report our opinion to you.

In our opinion, on the basis of presentation as set out in Section 1 below, the Summaries give a true and fair view of the state of affairs of the Contracting Group and the Target Company as at 31 March 2003, 2004, 2005 and 30 September 2005 and of the consolidated results and cash flows of the Contracting Group for the Relevant Periods.

The comparative consolidated income statements, statements of changes in equity and cash flow statements of the Contracting Group for the six months ended 30 September 2004 together with the notes thereon (the “30 September 2004 Financial Information”) have been extracted from the Contracting Group’s financial information which was prepared by the Directors solely for the purpose of this report. We have reviewed the 30 September 2004 Financial Information in accordance with the Statement of Auditing Standards 700 “Engagements to review interim financial reports” issued by the HKICPA. A review consists

– 110 –

ACCOUNTANTS’ REPORT OF THE CONTRACTING GROUP AND PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

principally of making enquiries of management and applying analytical procedures to the financial information and based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review excluded audit procedures such as tests of controls and verification of assets and liabilities and transactions. It is substantially less in scope and provides a lower level of assurance than an audit. Accordingly, we do not express an audit opinion on the 30 September 2004 Financial Information.

On the basis of our review, for the purpose of this report which does not constitute an audit, we are not aware of any material modification that should be made to the 30 September 2004 Financial Information of the Contracting Group.

1. BASIS OF PRESENTATION

On 26 January 2006, SCH and CAT (BVI) entered into the Agreement pursuant to which SCH has conditionally agreed to dispose and CAT (BVI) has conditionally agreed to acquire the entire issued share capital of the Target Company, being the holding company for the building related contracting business under the Contracting Group upon the completion of a corporate restructuring of SCH and its subsidiaries and/or investments prior to completion (the “Corporate Restructuring”), which include (i) the transfer of certain subsidiaries of the Target Company engaging in the building maintenance business to a wholly-owned subsidiary of SCH so as to form a remaining SCH Group (hereinafter collectively referred to as the “Remaining Group” in this report) and (ii) the waiver of an aggregate sum of approximately HK$18 million due by the Contracting Group to the Remaining Group as at 30 September 2005 (the “Waiver”), assuming the Corporate Restructuring had taken place.

The Summaries as presented in this report have been prepared to illustrate the financial position of the Contracting Group as at 31 March 2003, 2004, 2005 and 30 September 2005 and the consolidated results for the Relevant Periods then ended, as if the Contracting Group had been in place throughout the Relevant Periods and the Waiver was effected on 30 September 2005.

The Summaries have been prepared in accordance with all applicable Hong Kong Financial Reporting Standards (“HKFRSs”), (which also include Hong Kong Accounting Standards (“HKASs”) and Interpretations) issued by the HKICPA, accounting principles generally accepted in Hong Kong (“GAAP”), the disclosure requirements of the Hong Kong Companies Ordinance and the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited. The Summaries have been prepared under the historical cost convention, except for available-for-sale equity investments and equity investments at fair value through profit or loss, which have been measured at fair value as further explained below. The Summaries are presented in Hong Kong dollars and all values are rounded to the nearest thousand (HK$’000) except when otherwise indicated.

The HKICPA has issued a number of new and revised HKFRSs which are effective for the accounting periods beginning on or after 1 January 2005. The Summaries have been prepared in accordance with the new HKFRSs.

– 111 –

ACCOUNTANTS’ REPORT OF THE CONTRACTING GROUP AND PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Basis of consolidation

The consolidated financial statements include the financial statements of the Target Company and its subsidiaries for the Relevant Periods. The results of the subsidiaries are consolidated from the date of acquisition, being the date on which the Contracting Group obtains control, and continue to be consolidated until the date that such control ceases. All significant inter-company transactions and balances within the Contracting Group are eliminated on consolidation.

Minority interests represent the interests of outside shareholders in the results and net assets of the Target Company’s subsidiaries and are presented separately in the consolidated income statement and within equity in the consolidated balance sheet from the results/equity attributable to equity holders of the parent.

The definitions used in the Circular apply to this report unless otherwise stated.

At the date of this report, the Target Company had direct or indirect interests in the following principal subsidiaries, all of which are private companies, the particulars of which are set out below:

			Percentage
		Nominal value	of equity
	Place of	of issued	attributable
	incorporation	ordinary share	to the Target
Name	and operation	capital	Company*	Principal activities
Shun Cheong Engineering	British Virgin	US$1	100	Investment holding
Limited	Islands
Shun Cheong International	British Virgin	US$1	100	Investment holding
Limited	Islands
Shun Cheong Automation	Hong Kong	HK$2,000,000	85	Design and installation
Systems Limited				of computer control
				systems and building
				automation projects
Shun Cheong Electrical	Hong Kong	HK$4,100,000	100	Design, installation,
Engineering Company				repair and
Limited				maintenance of
				electrical and
				mechanical systems

– 112 –

ACCOUNTANTS’ REPORT OF THE CONTRACTING GROUP AND PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

			Percentage
		Nominal value	of equity
	Place of	of issued	attributable
	incorporation	ordinary share	to the Target
Name	and operation	capital	Company*	Principal activities
Shun Cheong Electrical	Hong Kong	HK$100,000	100	General trading of
Supplies Company				materials and
Limited				equipment for
				electrical installation
Shun Cheong Trade and	Hong Kong	HK$663,000	100	Trading of electrical
Development Company				generators and uPVC
Limited				conduits and trunking
				systems
Shun Cheong Management	Hong Kong	HK$2	100	Provision of
Limited				management Services
Shun Wing Construction &	Hong Kong	HK$1,000	50.10	Provision of building
Engineering Company				and electrical
Limited (“Shun Wing”)				maintenance services
Westco Airconditioning	Hong Kong	HK$4,100,000	100	Design, installation and
Limited				maintenance of
				heating ventilation
				and air-conditioning
				systems

All the above subsidiaries are held indirectly by the Target Company, except for Shun Cheong Engineering Limited, Shun Cheong International Limited and Shun Cheong Management Limited which are held directly by the Target Company.

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

– 113 –

ACCOUNTANTS’ REPORT OF THE CONTRACTING GROUP AND PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Subsidiaries

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

The results of subsidiaries are included in the Target Company’s income statement to the extent of dividends received and receivable. The Target Company’s interests in subsidiaries are stated at cost less any impairment losses.

Associates

An associate is an entity, not being a subsidiary or a jointly-controlled entity, in which the Contracting Group has a long term interest of generally not less than 20% of the equity voting rights and over which it is in a position to exercise significant influence.

The Contracting Group’s share of the post-acquisition results and reserves of associates is included in the consolidated income statement and consolidated reserves, respectively. The Contracting Group’s interests in associates are stated in the consolidated balance sheet at the Contracting Group’s share of net assets under the equity method of accounting, less any impairment losses.

The results of associates are included in the Target Company’s income statement to the extent of dividends received and receivable. The Target Company’s interests in associates are treated as non-current assets and are stated at cost less any impairment losses.

Critical accounting estimates and judgements

The preparation of the Contracting Group’s financial statements requires the use of estimates and assumptions about future events and conditions. In this connection, the Directors consider the significant areas where management’s judgement is necessary are those in relation to (i) the valuation of the Contacting Group’s available-for-sale equity investments and equity investments at fair value through profit or loss, (ii) provision for foreseeable losses against gross amount due from contract customers and (iii) recognition of losses against the Contracting Group’s trade and other receivables and retention money receivables.

Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are considered to be reasonable under the circumstances. It should be noted that actual results could differ from those estimates.

– 114 –

ACCOUNTANTS’ REPORT OF THE CONTRACTING GROUP AND PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Impairment of assets

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

An assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognised impairment loss of an asset is reversed only if there has been a change in the estimates used to determine the recoverable amount of that asset, however not to an amount higher than the carrying amount that would have been determined (net of any depreciation/amortisation), had no impairment loss been recognised for the asset in prior years. A reversal of such impairment loss is credited to the income statement in the period in which it arise.

Property, plant and equipment and depreciation

Property, plant and equipment, are stated at cost less accumulated depreciation and any impairment losses. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditure incurred after items of property, plant and equipment have been put into operation, such as repairs and maintenance, is normally charged to the income statement in the period in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property, plant and equipment and the cost of the item can be measured reliably, the expenditure is capitalised as an additional cost of that asset or as a replacement.

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APPENDIX III ACCOUNTANTS’ REPORT OF THE CONTRACTING GROUP AND PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

Depreciation is calculated on the straight-line basis to write off the cost of each item of property, plant and equipment to its residual value over its estimated useful life. The principal annual rates used for this purpose are as follows:

Furniture and office equipment	20%
Motor vehicles	20%
Leasehold improvements	3 years or over the lease terms,
	whichever is shorter

Where parts of an item of property, plant and equipment have different useful lives, the cost of that item is allocated on a reasonable basis among the parts and each part is depreciated separately.

Residual values, useful lives and depreciation method are reviewed, and adjusted if appropriate, at each balance sheet date.

Investments

The Contracting Group classifies its investments as financial assets at fair value through profit or loss and available-for-sale financial assets under the scope of HKAS 39. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments after initial recognition and, where allowed and appropriate, re-evaluates this designation at every financial reporting date.

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

Financial assets at fair value through profit or loss

Financial assets classified as held for trading are included in the category “financial assets at fair value through profit or loss”. Financial assets are classified in this category if acquired principally for the purpose of selling in the short term or if so designated by management. Assets in this category are classified as current assets if they are either held for trading or are expected to be realised within 12 months of the balance sheet date.

Realised and unrealised gain or losses arising from changes in fair values of the “financial assets at fair value through profit or loss” are recognised in the consolidated income statement in the period in which they arise.

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APPENDIX III

Available-for-sale financial assets

Available-for-sale financial assets are those non-derivative financial assets in listed and unlisted equity securities that are designated as available-for-sale or not classified in any other categories under the scope of HKAS 39. After initial recognition, available-for-sale financial assets are measured at fair value with gains or losses being recognised as a separate component of equity until the investment is derecognised or until the investment is determined to be impaired at which time the cumulative gain or loss previously reported in equity is included in the consolidated income statement.

The fair values of quoted investments are based on bid prices. If the market for a financial asset is not active (and for unlisted securities), the Contracting Group establishes fair value by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis or other valuation models as appropriate.

The Contracting Group assesses at each balance sheet date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. If an available-for-sale asset is impaired, an amount comprising the difference between its cost (net of any principal payment and amortisation) and its current fair value, less any impairment loss previously recognised in consolidated income statement, is transferred from equity to the consolidated income statement. Impairment losses on equity instruments classified as available-for-sale are not reversed through the consolidated income statement.

Interest-bearing loans and borrowings

All loans and borrowings are initially recognised at the fair value of the consideration received less directly attributable transaction costs.

After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method.

Gains and losses are recognised in net profit or loss when the liabilities are derecognised as well as through the amortisation process.

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APPENDIX III ACCOUNTANTS’ REPORT OF THE CONTRACTING GROUP AND PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

Installation and maintenance contracts and contracts in progress

Revenue from fixed price installation and maintenance contracts is recognised on the percentage of completion method, measured by reference to the percentage of certified work performed to date to the estimated total contract sum of the relevant contracts. When the outcome of the contracts cannot be estimated reliably, revenue is recognised only to the extent of certified work performed that is probable to be recoverable.

Provision is made for foreseeable losses as soon as they are anticipated by management.

Where contract costs incurred to date plus recognised profits less recognised losses exceed progress billings, the surplus is treated as an amount due from contract customers.

Where progress billings exceed contract costs incurred to date plus recognised profits less recognised losses, the surplus is treated as an amount due to contract customers.

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined on the first-in, first-out basis. Net realisable value is based on estimated selling prices less any estimated costs to be incurred to completion and disposal.

Income tax

Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities.

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

where the deferred tax liability arises from goodwill or the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

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APPENDIX III

in respect of taxable temporary differences associated with investments in subsidiaries and associates, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

where the deferred tax asset relating to the deductible temporary differences arises from negative goodwill or the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
in respect of deductible temporary differences associated with investments in subsidiaries and associates, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.

Provisions

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APPENDIX III

Foreign currencies

These financial statements are presented in Hong Kong dollars, which is the Target Company’s functional and presentation currency. Each entity in the Contracting Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Foreign currency transactions are initially recorded using the functional currency rates ruling at the date of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rates of exchange ruling at the balance sheet date. All differences are taken to profit or loss. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.

Related parties

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

(a) the party, directly or indirectly through one or more intermediaries, (i) controls, is controlled by, or is under common control with, the Contracting Group; (ii) has an interest in the Contracting Group that gives it significant influence over the Contracting Group; or (iii) has joint control over the Contracting Group;
(b) the party is an associate;
(c) the party is a jointly-controlled entity;
(d) the party is a member of the key management personnel of the Contracting Group or its parent;
(e) the party is a close member of the family of any individual referred to in (a) or (d);
(f) the party is an entity that is controlled, jointly controlled or significantly influenced by or for which significant voting power in such entity resides with, directly or indirectly, any individual referred to in (d) or (e); or
(g) the party is a post-employment benefit plan for the benefit of employees of the Contracting Group, or of any entity that is a related party of the Contracting Group.

Cash and cash equivalents

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APPENDIX III ACCOUNTANTS’ REPORT OF THE CONTRACTING GROUP AND PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

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

Leases

Leases that transfer substantially all the rewards and risks of ownership of assets to the Contracting Group, other than legal title, are accounted for as finance leases. At the inception of a finance lease, the cost of the leased asset is capitalised at the present value of the minimum lease payments and recorded together with the obligation, excluding the interest element, to reflect the purchase and financing. Assets held under capitalised finance leases are included in property, plant and equipment, and depreciated over the shorter of the lease terms and the estimated useful lives of the assets. The finance costs of such leases are charged to the income statement so as to provide a constant periodic rate of charge over the lease terms.

Assets acquired through hire purchase contracts of a financing nature are accounted for as finance leases, but are depreciated over their estimated useful lives.

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

Employee benefits

Paid leave carried forward

The Contracting Group provides paid annual leave to its employees under their employment contracts on a calendar year basis. Under certain circumstances, such leave which remains untaken as at the balance sheet date is permitted to be carried forward and utilised by the respective employees in the following year. An accrual is made at the balance sheet date for the expected future cost of such paid leave earned during the year/period by the employees and carried forward.

Retirement benefits schemes

The Contracting Group operates defined contribution retirement benefits schemes, including an Occupational Retirement Schemes Ordinance retirement benefits scheme (the “ORSO Scheme”) and a Mandatory Provident Fund retirement benefits scheme (the “MPF Scheme”) under the Mandatory Provident Fund Schemes Ordinance, for all of its employees (including executive directors of the Contracting Group).

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APPENDIX III

The ORSO Scheme is managed by an independent trustee. The Contracting Group makes monthly contributions to the scheme at 5% to 15% of the employees’ basic salaries while the employees are not required to make any contributions. The employees are entitled to receive 100% of the contributions made by the Contracting Group together with the accrued earnings thereon upon retirement or leaving the Contracting Group after completing 10 years of service or at a reduced scale of 30% to 90% after completing three to nine years of service. Forfeited contributions and related earnings are used to reduce the contributions payable by the Contracting Group.

Under the MPF Scheme, contributions are made based on a percentage of the employees’ basic salaries and are charged to the income statement as they become payable in accordance with the rules of the MPF Scheme. The Contracting Group’s employer contributions vest fully with the employees when contributed into the MPF Scheme, except for the Contracting Group’s employer voluntary contributions, which are refunded to the Contacting Group when the employee leaves employment prior to the contributions vesting fully, in accordance with the rules of the MPF Scheme.

The assets of both schemes are held separately from those of the Contracting Group in independently administered funds.

Revenue recognition

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

(a) from the sale of goods, when the significant risks and rewards of ownership have been transferred to the buyer, provided that the Contracting Group maintains neither managerial involvement to the degree usually associated with ownership, nor effective control over the goods sold;
(b) from installation and maintenance contracts, on the percentage of completion basis, as further explained in the accounting policy for “Installation and maintenance contracts and contracts in progress” above;
(c) project management income, when project management services are rendered; and
(d) interest income, on an accrual basis using the effective interest method by applying the rate that discounts the estimated future cash receipts through the expected life of the financial instrument to the net carrying amount of the financial assets.

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APPENDIX III ACCOUNTANTS’ REPORT OF THE CONTRACTING GROUP AND PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

3. CONSOLIDATED INCOME STATEMENT

The following is a summary of the consolidated income statements of the Contracting Group for the Relevant Periods and the six months ended 30 September 2004, which is presented on the basis set out in Section 1 above:

Year ended 31 March Six months ended 30 September 2003 2004 2005 2004 2005 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (unaudited) 640,816 734,616 505,574 237,277 206,084 (571,568) (654,467) (489,696) (218,280) (194,737) 69,248 80,149 15,878 18,997 11,347 6,538 4,965 4,109 2,028 2,600 (66,110) (61,591) (37,400) (18,482) (18,412) (7,130) (9,108) (757) (944) – (1,244) 245 103 (95) 133 – (2,179) – – – (1,899) (1,566) (1,431) (705) (1,022) (2) – – – – – – – – 18,053 (599) 10,915 (19,498) 799 12,699 (4,363) (4,249) (688) (1,158) (66) (4,962) 6,666 (20,186) (359) 12,633 (16,601) (2,731) (20,467) (3,065) 12,680 11,639 9,397 281 2,706 (47) (4,962) 6,666 (20,186) (359) 12,633	Year ended 31 March Six months ended 30 September 2003 2004 2005 2004 2005 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (unaudited) 640,816 734,616 505,574 237,277 206,084 (571,568) (654,467) (489,696) (218,280) (194,737) 69,248 80,149 15,878 18,997 11,347 6,538 4,965 4,109 2,028 2,600 (66,110) (61,591) (37,400) (18,482) (18,412) (7,130) (9,108) (757) (944) – (1,244) 245 103 (95) 133 – (2,179) – – – (1,899) (1,566) (1,431) (705) (1,022) (2) – – – – – – – – 18,053 (599) 10,915 (19,498) 799 12,699 (4,363) (4,249) (688) (1,158) (66) (4,962) 6,666 (20,186) (359) 12,633 (16,601) (2,731) (20,467) (3,065) 12,680 11,639 9,397 281 2,706 (47) (4,962) 6,666 (20,186) (359) 12,633	Year ended 31 March Six months ended 30 September 2003 2004 2005 2004 2005 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (unaudited) 640,816 734,616 505,574 237,277 206,084 (571,568) (654,467) (489,696) (218,280) (194,737) 69,248 80,149 15,878 18,997 11,347 6,538 4,965 4,109 2,028 2,600 (66,110) (61,591) (37,400) (18,482) (18,412) (7,130) (9,108) (757) (944) – (1,244) 245 103 (95) 133 – (2,179) – – – (1,899) (1,566) (1,431) (705) (1,022) (2) – – – – – – – – 18,053 (599) 10,915 (19,498) 799 12,699 (4,363) (4,249) (688) (1,158) (66) (4,962) 6,666 (20,186) (359) 12,633 (16,601) (2,731) (20,467) (3,065) 12,680 11,639 9,397 281 2,706 (47) (4,962) 6,666 (20,186) (359) 12,633	Year ended 31 March Six months ended 30 September 2003 2004 2005 2004 2005 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (unaudited) 640,816 734,616 505,574 237,277 206,084 (571,568) (654,467) (489,696) (218,280) (194,737) 69,248 80,149 15,878 18,997 11,347 6,538 4,965 4,109 2,028 2,600 (66,110) (61,591) (37,400) (18,482) (18,412) (7,130) (9,108) (757) (944) – (1,244) 245 103 (95) 133 – (2,179) – – – (1,899) (1,566) (1,431) (705) (1,022) (2) – – – – – – – – 18,053 (599) 10,915 (19,498) 799 12,699 (4,363) (4,249) (688) (1,158) (66) (4,962) 6,666 (20,186) (359) 12,633 (16,601) (2,731) (20,467) (3,065) 12,680 11,639 9,397 281 2,706 (47) (4,962) 6,666 (20,186) (359) 12,633	Year ended 31 March Six months ended 30 September 2003 2004 2005 2004 2005 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (unaudited) 640,816 734,616 505,574 237,277 206,084 (571,568) (654,467) (489,696) (218,280) (194,737) 69,248 80,149 15,878 18,997 11,347 6,538 4,965 4,109 2,028 2,600 (66,110) (61,591) (37,400) (18,482) (18,412) (7,130) (9,108) (757) (944) – (1,244) 245 103 (95) 133 – (2,179) – – – (1,899) (1,566) (1,431) (705) (1,022) (2) – – – – – – – – 18,053 (599) 10,915 (19,498) 799 12,699 (4,363) (4,249) (688) (1,158) (66) (4,962) 6,666 (20,186) (359) 12,633 (16,601) (2,731) (20,467) (3,065) 12,680 11,639 9,397 281 2,706 (47) (4,962) 6,666 (20,186) (359) 12,633
69,248 6,538 (66,110) (7,130) (1,244) – (1,899) (2) – (599) (4,363)	80,149 4,965 (61,591) (9,108) 245 (2,179) (1,566) – – 10,915 (4,249)	15,878 4,109 (37,400) (757) 103 – (1,431) – – (19,498) (688)	18,997 2,028 (18,482) (944) (95) – (705) – – 799 (1,158)	11,347 2,600 (18,412 – 133 – (1,022 – 18,053
				12,699 (66
(4,962)	6,666	(20,186)	(359)
(16,601) 11,639	(2,731) 9,397	(20,467) 281	(3,065) 2,706	12,680 (47
(4,962)	6,666	(20,186)	(359)

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APPENDIX III

Notes:

(a) Revenue, other income and gains

Turnover represented the net invoiced value of services rendered and goods sold, after allowances for returns and trade discounts, and an appropriate proportion of contract revenue from long term installation and maintenance contracts during the Relevant Periods.

An analysis of the Contracting Group’s revenue, other income and gains is as follows:

Year ended 31 March 2003 2004 2005 HK$’000 HK$’000 HK$’000 584,944 705,006 479,171 4,638 2,240 2,222 51,234 27,370 24,181 640,816 734,616 505,574	Year ended 31 March 2003 2004 2005 HK$’000 HK$’000 HK$’000 584,944 705,006 479,171 4,638 2,240 2,222 51,234 27,370 24,181 640,816 734,616 505,574	Year ended 31 March 2003 2004 2005 HK$’000 HK$’000 HK$’000 584,944 705,006 479,171 4,638 2,240 2,222 51,234 27,370 24,181 640,816 734,616 505,574	Six months ended 30 September 2004 2005 HK$’000 HK$’000 (unaudited) 224,498 184,625 1,023 996 11,756 20,463 237,277 206,084	Six months ended 30 September 2004 2005 HK$’000 HK$’000 (unaudited) 224,498 184,625 1,023 996 11,756 20,463 237,277 206,084
				206,084

1,658 568 – – 2,200 2,112	950 204 (33) – 2,160 1,684	927 87 313 199 1,680 903	464 43 – – 840 681	642 478 – – 840 640
6,538	4,965	4,109	2,028	2,600

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ACCOUNTANTS’ REPORT OF THE CONTRACTING GROUP AND PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

(b) Profit/(loss) before tax

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

Year ended 31 March 2003 2004 2005 HK$’000 HK$’000 HK$’000 43,188 24,583 17,332 528,380 629,884 472,364	Year ended 31 March 2003 2004 2005 HK$’000 HK$’000 HK$’000 43,188 24,583 17,332 528,380 629,884 472,364	Year ended 31 March 2003 2004 2005 HK$’000 HK$’000 HK$’000 43,188 24,583 17,332 528,380 629,884 472,364	Six months ended 30 September 2004 2005 HK$’000 HK$’000 (unaudited) 7,230 395 211,050 194,342 218,280 194,737 523 244 361 288 216 215 12,641 11,971 797 827 (163) (77) 634 750 13,275 12,721 – 375 – – – (18,053) 19 (9)	Six months ended 30 September 2004 2005 HK$’000 HK$’000 (unaudited) 7,230 395 211,050 194,342 218,280 194,737 523 244 361 288 216 215 12,641 11,971 797 827 (163) (77) 634 750 13,275 12,721 – 375 – – – (18,053) 19 (9)
571,568 1,948 1,623 489 49,827 2,243 (116) 2,127 51,954	654,467 1,687 1,070 462 50,899 2,042 (791) 1,251 52,150	489,696 838 619 452 25,046 1,841 (309) 1,532 26,578	218,280 523 361 216 12,641 797 (163) 634 13,275	194,737
				244 288 215 11,971 827 (77
				750
				12,721
– (595) – 429	109 (392) – 7	1,460 (134) – (47)	– – – 19

* The Contracting Group had no forfeited contributions available to reduce its contributions to the pension schemes in future years as at 31 March 2003, 2004 and 2005 and 30 September 2004 and 2005.

** Pursuant to the Agreement entered into on 26 January 2006, upon the completion of the Corporate Restructuring, approximately HK$18 million of the amounts due by the Contracting Group to the Remaining Group as at 30 September 2005 are to be waived and such balances had been incorporated in the consolidated income statements of the Contracting Group for the six months ended 30 September 2005, on the basis of presentation as set out in Section 1 of this report.

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APPENDIX III

(c) Directors’ and senior executives’ remuneration:

Fees Other emoluments: Salaries, allowances and benefits in kind Performance related payments Pension scheme contributions	Year ended 31 March 2003 2004 2005 HK$’000 HK$’000 HK$’000 – – – 3,342 5,397 3,322 538 334 330 153 220 175 4,033 5,951 3,827	Six months ended 30 September 2004 2005 HK$’000 HK$’000 (unaudited) – – 1,533 1,533 – – 88 88 1,621 1,621	Six months ended 30 September 2004 2005 HK$’000 HK$’000 (unaudited) – – 1,533 1,533 – – 88 88 1,621 1,621
			1,621

Year ended 31 March 2003

Directors: Mr. Au Shiu Wai, Frank Mr. Chan Yuen Keung, Zuric Mr. Ou Ka Chi	Fees HK$’000 – – – –	Salaries, allowances and benefits in kind Performance related payments Pension scheme contributions Total remuneration HK$’000 HK$’000 HK$’000 HK$’000 1,063 80 72 1,215 1,223 380 11 1,614 1,056 78 70 1,204 3,342 538 153 4,033	Salaries, allowances and benefits in kind Performance related payments Pension scheme contributions Total remuneration HK$’000 HK$’000 HK$’000 HK$’000 1,063 80 72 1,215 1,223 380 11 1,614 1,056 78 70 1,204 3,342 538 153 4,033
			4,033

Year ended 31 March 2004

Directors: Mr. Au Shiu Wai, Frank Mr. Au Yu Fai, Patrick Mr. Chan Yuen Keung, Zuric Mr. Ou Ka Chi	Fees HK$’000 – – – – –	Salaries, allowances and benefits in kind Performance related payments Pension scheme contributions Total remuneration HK$’000 HK$’000 HK$’000 HK$’000 1,040 80 76 1,196 975 75 68 1,118 1,306 101 12 1,419 2,076 78 64 2,218 5,397 334 220 5,951	Salaries, allowances and benefits in kind Performance related payments Pension scheme contributions Total remuneration HK$’000 HK$’000 HK$’000 HK$’000 1,040 80 76 1,196 975 75 68 1,118 1,306 101 12 1,419 2,076 78 64 2,218 5,397 334 220 5,951
			5,951

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ACCOUNTANTS’ REPORT OF THE CONTRACTING GROUP AND PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Year ended 31 March 2005

Directors: Mr. Au Shiu Wai, Frank Mr. Au Yu Fai, Patrick Mr. Chan Yuen Keung, Zuric Six months ended 30 September Directors: Mr. Au Shiu Wai, Frank Mr. Au Yu Fai, Patrick Mr. Chan Yuen Keung, Zuric	Fees Salaries, allowances and benefits in kind Performance related payments Pension scheme contributions Total remuneration HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 – 1,040 80 96 1,216 – 975 150 67 1,192 – 1,307 100 12 1,419 – 3,322 330 175 3,827 2004 (unaudited) Fees Salaries, allowances and benefits in kind Performance related payments Pension scheme contributions Total remuneration HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 – 480 – 48 528 – 450 – 34 484 – 603 – 6 609 – 1,533 – 88 1,621	Fees Salaries, allowances and benefits in kind Performance related payments Pension scheme contributions Total remuneration HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 – 1,040 80 96 1,216 – 975 150 67 1,192 – 1,307 100 12 1,419 – 3,322 330 175 3,827 2004 (unaudited) Fees Salaries, allowances and benefits in kind Performance related payments Pension scheme contributions Total remuneration HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 – 480 – 48 528 – 450 – 34 484 – 603 – 6 609 – 1,533 – 88 1,621
		1,621

Six months ended 30 September 2005

Directors: Mr. Au Shiu Wai, Frank Mr. Au Yu Fai, Patrick Mr. Chan Yuen Keung, Zuric	Fees HK$’000 – – – –	Salaries, allowances and benefits in kind Performance related payments Pension scheme contributions Total remuneration HK$’000 HK$’000 HK$’000 HK$’000 480 – 48 528 450 – 34 484 603 – 6 609 1,533 – 88 1,621	Salaries, allowances and benefits in kind Performance related payments Pension scheme contributions Total remuneration HK$’000 HK$’000 HK$’000 HK$’000 480 – 48 528 450 – 34 484 603 – 6 609 1,533 – 88 1,621
			1,621

There was no arrangement under which a Director waived or agreed to waive any remuneration during the Relevant Periods and the six months ended 30 September 2004.

During the Relevant Periods and the six months ended 30 September 2004, no emoluments were paid by the Contracting Group to any of the Directors as an inducement to join, or upon joining the Contracting Group, or as compensation for loss of office.

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APPENDIX III

(d) Five highest paid employees

The five highest paid employees of the Contracting Group during the years ended 31 March 2003, 2004 and 2005 and the six months ended 30 September 2004 and 2005 included three, four, three, three and three Directors, respectively, details of whose remuneration are set out in Section 3(c) above. Details of the remuneration of the remaining non-Director, highest paid employees during the Relevant Periods and the six months ended 30 September 2004 are set out below.

Salaries, allowances and benefits in kind Performance related payments Pension scheme contribution	Year ended 31 March 2003 2004 2005 HK$’000 HK$’000 HK$’000 1,607 647 1,284 125 50 81 110 44 72 1,842 741 1,437	Six months ended 30 September 2004 2005 HK$’000 HK$’000 (unaudited) 598 598 – – 36 36 634 634	Six months ended 30 September 2004 2005 HK$’000 HK$’000 (unaudited) 598 598 – – 36 36 634 634
			634

The number of non-Director, highest paid employees whose remuneration fell within the following bands is as follows:

Nil – HK$1,000,000 HK$1,000,001 – HK$1,500,000	Year ended 31 March 2003 2004 2005 1 – 2 1 1 – 2 1 2	Six months ended 30 September 2004 2005 2 2 – – 2 2	Six months ended 30 September 2004 2005 2 2 – – 2 2
			2

During the Relevant Periods and the six months ended 30 September 2004, no emoluments were paid by the Contracting Group to the non-Director, highest paid employees as an inducement to join, or upon joining the Contracting Group, or as compensation for loss of office.

(e) Finance costs

Interest on bank loans, overdrafts and other loans wholly repayable within five years Interest on other loans Interest on finance leases Bank charges	Year ended 31 March 2003 2004 2005 HK$’000 HK$’000 HK$’000 1,322 813 739 – – 234 65 51 43 512 702 415 1,899 1,566 1,431	Six months ended 30 September 2004 2005 HK$’000 HK$’000 (unaudited) 340 746 – 94 43 – 322 182 705 1,022	Six months ended 30 September 2004 2005 HK$’000 HK$’000 (unaudited) 340 746 – 94 43 – 322 182 705 1,022
			1,022

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ACCOUNTANTS’ REPORT OF THE CONTRACTING GROUP AND PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

(f) Tax

Hong Kong profits tax has been provided at the statutory tax rate on the estimated assessable profits arising in Hong Kong during the Relevant Periods and the six months ended 30 September 2004. The statutory tax rate for Hong Kong profits tax is 16% for the year ended 31 March 2003; and 17.5% for the years ended 31 March 2004 and 2005 and the six months ended 30 September 2004 and 2005.

Contracting Group: Current – Hong Kong Charge for the year/period Overprovision in prior years Deferred (Section 4(o)) Total tax charge for the year/period	Year ended 31 March 2003 2004 2005 HK$’000 HK$’000 HK$’000 4,690 4,398 793 (20) (24) (3) (307) (125) (102) 4,363 4,249 688	Six months ended 30 September 2004 2005 HK$’000 HK$’000 (unaudited) 1,158 66 – – – – 1,158 66	Six months ended 30 September 2004 2005 HK$’000 HK$’000 (unaudited) 1,158 66 – – – – 1,158 66
			66

A reconciliation of the tax expenses applicable to profit/(loss) before tax using the statutory rates of Hong Kong to the tax expense at the effective tax rates is as follows:

Year ended 31 March 2003 2004 2005 HK$’000 HK$’000 HK$’000 (599) 10,915 (19,498)	Year ended 31 March 2003 2004 2005 HK$’000 HK$’000 HK$’000 (599) 10,915 (19,498)	Year ended 31 March 2003 2004 2005 HK$’000 HK$’000 HK$’000 (599) 10,915 (19,498)	Six months ended 30 September 2004 2005 HK$’000 HK$’000 (unaudited) 799 12,699	Six months ended 30 September 2004 2005 HK$’000 HK$’000 (unaudited) 799 12,699

(95) 24 (20) (24) 1,539 (258) 3,231 (34)	1,910 – (24) (8) 2,043 (699) 1,001 26	(3,412) – (3) (2) 161 (44) 3,970 18	140 – – (1) 159 – 851 9	2,222 – – (3,197 92 (208 1,130 27
4,363	4,249	688	1,158	66

– 129 –

ACCOUNTANTS’ REPORT OF THE CONTRACTING GROUP AND PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

(g) Related party transactions

(1) In addition to the transactions detailed elsewhere in this report, the Contracting Group had the following material transactions with related parties, including the Remaining Group entities, during the Relevant Periods and the six months ended 30 September 2004:

					Six months	ended
		Year	ended 31 March		30 September
		2003	2004	2005	2004	2005
	Notes	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
					(unaudited)
Billing of building
maintenance works and
building services installation
works to Chinney
Construction Company,
Limited (“Chinney
Construction”)	(i)	(274,343)	(268,515)	(78,509)	(50,099)	(9,612)
Payment to Diyixian.com
Limited (“Diyixian”) of
rental for server co-location
at Diyixian’s data centres
and for access to the internet
together with related set-up
charges	(ii)	192	–	–	–	–
Purchase of merchandise from
Chinney Alliance
Engineering Limited	(iii)	808	1,155	817	613	491
Interest income from the
Remaining Group	(iv)	(1,658)	(950)	(927)	(464)	(642)
Sub-contracting charge paid to
a 49.90% minority shareholder
of Shun Wing for the
completion of work orders
of a building maintenance
contract		81,670	92,310	25,846	11,140	1,617
Management fee paid to a
49.90% minority shareholder
of Shun Wing for the
provision of management
services of a building
maintenance contract		5,091	6,510	–	–	–
Management fee received from
the Remaining Group for the
provision of various
management, secretarial and
administrative services		(2,200)	(2,160)	(1,680)	(840)	(840)
Sub-contracting charge paid to
the Remaining Group for
various building and
installation services		141,778	163,899	79,323	31,463	48,186
Waiver of payable balances by
the Remaining Group		–	–	–	–	(18,053)

– 130 –

ACCOUNTANTS’ REPORT OF THE CONTRACTING GROUP AND PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Notes:

(i) Chinney Construction is a company of which Wong Sai Wing, James (who resigned as chairman and executive director of SCH, the holding company of the Contracting Group, on 17 September 2004) and Chan Yuen Keung, Zuric, are also directors of SCH and have indirect beneficial interests therein.

The amounts due from Chinney Construction are unsecured, interest-free and are repayable within normal credit terms of 60 days. Details of the balances are included in Section 4(h) to this Summaries.

The Contracting Group also had amounts payable to Chinney Construction of HK$22,930,000 and HK$15,700,000, which were unsecured, interest-free and had no fixed terms of repayment as at 31 March 2005 and 30 September 2005, respectively. There were no amounts payable to Chinney Construction as at 31 March 2003 and 2004.

(ii) Diyixian was a minority shareholder of Speedlink Limited, a former subsidiary of SCH which was dissolved in August 2003.
(iii) Chinney Alliance Engineering Limited is a wholly-owned subsidiary of CAG, a company listed on The Stock Exchange of Hong Kong Limited, which is also a substantial shareholder of SCH. Wong Sai Wing, James and Yu Sek Kee, Stephen, a director of SCH, are also directors of CAG.
(iv) Interest was charged to the Remaining Group at prevailing market rates.

In the opinion of the Directors, the above transactions were conducted at mutually agreed terms and rates in the normal course of the Contracting Group’s business.

(2) Outstanding balances with related parties
(i) Details of the balances with the Remaining Group are included in Section 4(i) to the report.
(ii) Details of the Contracting Group’s loan from a minority shareholder of a subsidiary are included in Section 4(n) to this report.
(3) Compensation of key management personnel of the Contracting Group:

The executive Directors are the key management personnel of the Contracting Group. Details of their remunerations are disclosed in Section 3(c) to this report.

(h) Dividends

				Six months	ended
	Year	ended 31 March		30 September
	2003	2004	2005	2004	2005
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
				(unaudited)
Interim – 31 March 2003,
2004 and 30 September
2005: HK$60,000 per
ordinary share, 31 March
2005 and 30 September
2004: Nil	6,000	6,000	–	–	6,000

– 131 –

APPENDIX III ACCOUNTANTS’ REPORT OF THE CONTRACTING GROUP AND PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

4. BALANCE SHEETS

The following is a summary of the consolidated balance sheets of the Contracting Group and the balance sheets of the Target Company as at 31 March 2003, 2004 and 2005 and 30 September 2005, after making such adjustments as we consider appropriate and on the basis as set out in Section 1 above:

Consolidated balance sheet of the Contracting Group

2003 HK$’000 3,326 – 12,365 166	31 March 2004 HK$’000 1,720 – 3,257 411	2005 HK$’000 519 – 2,500 514	30 September 2005 HK$’000 291 – 2,500 647
15,857 82,718 3,499 116,830 21,812 334 47,164 1,907 27,348 19,723 321,335 56,512 34,339 23,032 15,818 34,520 59,348 1,715 29,741 270 255,295 66,040 81,897	5,388 74,017 3,248 102,106 23,592 272 50,855 2,184 26,800 8,275 291,349 40,246 26,358 6,443 19,197 33,844 66,963 474 26,941 180 220,646 70,703 76,091	3,533 59,338 395 126,769 20,753 268 32,305 4,288 26,800 7,467 278,383 67,900 22,520 3,263 23,002 31,165 31,593 357 46,339 – 226,139 52,244 55,777	3,438
			63,899 – 96,110 19,857 227 20,575 4,288 26,800 6,932
			238,688
			39,365 38,721 6,472 21,960 34,193 – 346 44,659 –
			185,716
			52,972
			56,410

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ACCOUNTANTS’ REPORT OF THE CONTRACTING GROUP AND PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Notes NON-CURRENT LIABILITIES Loan from a minority shareholder of a subsidiary (n) Finance lease payables (m) Deferred tax liabilities (o) Total non-current liabilities Net assets EQUITY Equity attributable to equity holders of the parent: Issued capital (p) Reserves (q) Minority interests Total equity	2003 HK$’000 6,900 180 253 7,333 74,564 1 60,912 60,913 13,651 74,564	31 March 2004 HK$’000 6,900 – 128 7,028 69,063 1 52,181 52,182 16,881 69,063	2005 HK$’000 6,900 – 26 6,926 48,851 1 31,714 31,715 17,136 48,851	30 September 2005 HK$’000 6,900 – 26
				6,926
				49,484

				1 38,394
				38,395 11,089
				49,484

– 133 –

ACCOUNTANTS’ REPORT OF THE CONTRACTING GROUP AND PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Balance sheet of the Target Company

Notes NON-CURRENT ASSETS Interests in subsidiaries (b) Net assets EQUITY Issued capital (p) Reserves (q) Total equity	2003 HK$’000 33,116 33,116 1 33,115 33,116	31 March 2004 HK$’000 33,116 33,116 1 33,115 33,116	2005 HK$’000 33,116 33,116 1 33,115 33,116	30 September 2005 HK$’000 33,116
				33,116

				1 33,115
				33,116

– 134 –

ACCOUNTANTS’ REPORT OF THE CONTRACTING GROUP AND PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Notes:

(a) Property, plant and equipment

Contracting Group

Furniture and office equipment HK$’000 7,254 (3,691) 3,563	Motor vehicles Leasehold improvements HK$’000 HK$’000 3,380 985 (1,423) (386) 1,957 599	Motor vehicles Leasehold improvements HK$’000 HK$’000 3,380 985 (1,423) (386) 1,957 599	Total HK$’000 11,619 (5,500) 6,119 6,119 64 (1,948) (909) 3,326 8,748 (5,422) 3,326 8,748 (5,422) 3,326 3,326 88 (1,687) (7) 1,720 8,294 (6,574) 1,720
3,563 64 (999) (851)	1,957 – (676) –	599 – (273) (58)	6,119 64 (1,948 (909
1,777	1,281	268
4,673 (2,896)	3,380 (2,099)	695 (427)	8,748 (5,422
1,777	1,281	268
4,673 (2,896)	3,380 (2,099)	695 (427)	8,748 (5,422
1,777	1,281	268
1,777 88 (819) (7)	1,281 – (676) –	268 – (192) –	3,326 88 (1,687 (7
1,039	605	76
4,219 (3,180)	3,380 (2,775)	695 (619)	8,294 (6,574
1,039	605	76

– 135 –

ACCOUNTANTS’ REPORT OF THE CONTRACTING GROUP AND PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Furniture and office equipment HK$’000 4,219 (3,180) 1,039	Motor vehicles Leasehold improvements HK$’000 HK$’000 3,380 695 (2,775) (619) 605 76	Motor vehicles Leasehold improvements HK$’000 HK$’000 3,380 695 (2,775) (619) 605 76	Total HK$’000 8,294 (6,574) 1,720 1,720 148 (838) (511) 519 5,559 (5,040) 519 5,559 (5,040) 519 519 34 (244) (18) 291 4,644 (4,353) 291
1,039 148 (699) –	605 – (94) (511)	76 – (45) –	1,720 148 (838 (511
488	–	31
4,367 (3,879)	497 (497)	695 (664)	5,559 (5,040
488	–	31
4,367 (3,879)	497 (497)	695 (664)	5,559 (5,040
488	–	31
488 34 (242) (18)	– – – –	31 – (2) –	519 34 (244 (18
262	–	29
3,452 (3,190)	497 (497)	695 (666)	4,644 (4,353
262	–	29

The net book value of the Contracting Group’s property, plant and equipment held under finance leases included in the total amounts of motor vehicles as at 31 March 2003 and 2004 were HK$648,000 and HK$468,000, respectively. As at 31 March 2005 and 30 September 2005, no items of property, plant and equipment of the Contracting Group was held under finance leases.

– 136 –

ACCOUNTANTS’ REPORT OF THE CONTRACTING GROUP AND PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

(b) Interests in subsidiaries

Target Company

								30
					31	March		September
				2003		2004	2005	2005
				HK$’000		HK$’000	HK$’000	HK$’000
Unlisted	shares,	at	cost	33,116		33,116	33,116	33,116

Particulars of the Contracting Group’s principal subsidiaries are set out in Section 1 above.

(c) Interest in an associate

								30
					31	March		September
				2003		2004	2005	2005
				HK$’000		HK$’000	HK$’000	HK$’000
Share	of	net	assets	–		–	–	–

Particulars of the associate as at 31 March 2003 and 2004 are as follows:

			Percentage of
		Place of	ownership interest
		incorporation	attributable to the	Principal
Name	Business structure	and operations	Contracting Group	activity
MIT Shun Cheong	Corporate	Hong Kong	50	Inactive
Company Limited

The associate was deregistered on 18 February 2005.

(d) Available-for-sale equity investments

				30
		31 March		September
	2003	2004	2005	2005
	HK$’000	HK$’000	HK$’000	HK$’000
Unlisted equity investments,
at fair value	12,365	3,257	2,500	2,500

The above investments consist of investments in equity securities which are designated as available-for-sale financial assets and have no fixed maturity date or coupon rate.

The available-for-sale equity investments were stated at their fair values as estimated by the directors of the Contracting Group based on available audited financial statements or latest available unaudited financial information. The Directors believe the estimated fair values resulting from the aforesaid valuation method are reasonable and appropriate at the respective balance sheet dates.

(e) Equity investments at fair value through profit or loss

				30
		31 March		September
	2003	2004	2005	2005
	HK$’000	HK$’000	HK$’000	HK$’000
Listed equity investments in Hong Kong,
at market value	166	411	514	647

– 137 –

ACCOUNTANTS’ REPORT OF THE CONTRACTING GROUP AND PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

(f) Gross amount due from/(to) contract customers

2003 HK$’000 82,718 (56,512) 26,206	31 March 2004 HK$’000 74,017 (40,246) 33,771	2005 HK$’000 59,338 (67,900) (8,562)	30 September 2005 HK$’000 63,899 (39,365
			24,534

2,073,258 (2,047,052)	2,616,187 (2,582,416)	2,861,282 (2,869,844)	3,047,717 (3,023,183
26,206	33,771	(8,562)	24,534

(g) Inventories

							30
				31	March		September
			2003		2004	2005	2005
			HK$’000		HK$’000	HK$’000	HK$’000
Merchandise	for	sale	3,499		3,248	395	–

(h) Trade and other receivables

The Contracting Group seeks to maintain strict control over its outstanding receivables to minimise credit risk. Overdue balances are reviewed regularly by senior management. In view of the aforementioned and that the Contracting Group’s trade receivables relate to a large number of diversified customers, there is no significant concentration of credit risk. Trade receivables are non-interest-bearing.

Trade receivables Other receivables	2003 HK$’000 101,530 15,300 116,830	31 March 2004 HK$’000 83,839 18,267 102,106	2005 HK$’000 97,112 29,657 126,769	30 September 2005 HK$’000 70,351 25,759
				96,110

An aged analysis of the Contracting Group’s trade receivables as at each of the balance sheet dates, based on the invoice date and net of provisions for bad and doubtful debts, is as follows:

0 – 30 days 31 – 60 days 61 – 90 days Over 90 days	2003 HK$’000 85,438 6,572 2,780 6,740 101,530	31 March 2004 HK$’000 61,230 14,071 5,574 2,964 83,839	2005 HK$’000 53,351 5,221 5,143 33,397 97,112	30 September 2005 HK$’000 24,582 1,820 2,062 41,887
				70,351

– 138 –

APPENDIX III ACCOUNTANTS’ REPORT OF THE CONTRACTING GROUP AND PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

Included in the trade receivables balance as at 30 September 2005 as set out above are amounts due from Chinney Construction of approximately HK$32,912,000 (31 March 2003: HK$15,420,000; 31 March 2004: HK$46,729,000 and 31 March 2005: HK$33,717,000) which arose from the Contracting Group’s provision of various building and maintenance services for Chinney Construction. Please refer to Section 3(g)(1)(i) for details of related party transactions with Chinney Construction.

(i) Balances with the Remaining Group

The balances with the Remaining Group are unsecured, interest-free and have no fixed terms of repayment, except for the amounts due from Shun Cheong Real Estates Limited and Tinhawk Company Limited which are unsecured, bear interest at prevailing market rate and have no fixed terms of repayment.

Subsequent to 30 September 2005, the amounts due from the Remaining Group were substantially reduced as payments have been made by the Remaining Group.

(j) Cash and cash equivalents and pledged time deposits

Cash and bank balances Time deposits Less: Time deposit pledged for general banking facilities (Section 4(l)) Cash and cash equivalents	2003 HK$’000 7,136 39,935	31 March 2004 HK$’000 2,777 32,298	2005 HK$’000 1,957 32,310	30 September 2005 HK$’000 1,366 32,366
	47,071 (27,348)	35,075 (26,800)	34,267 (26,800)	33,732 (26,800
	19,723	8,275	7,467	6,932

(k) Trade payables

An aged analysis of the Contracting Group’s trade payables as at each of the balance sheet dates is as follows:

0 – 30 days 31 – 60 days Over 60 days	2003 HK$’000 12,982 8,366 12,991 34,339	31 March 2004 HK$’000 10,675 7,878 7,805 26,358	2005 HK$’000 14,343 3,735 4,442 22,520	30 September 2005 HK$’000 9,368 11,201 18,152
				38,721

– 139 –

ACCOUNTANTS’ REPORT OF THE CONTRACTING GROUP AND PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

(l) Interest-bearing bank loans and overdrafts

2003 HK$’000 16,086 – 13,655 29,741	31 March 2004 HK$’000 17,143 – 9,798 26,941	2005 HK$’000 25,490 4,519 16,330 46,339	30 September 2005 HK$’000 21,942 4,361 18,356
			44,659

16,086 13,655	17,143 9,798	30,009 16,330	26,303 18,356
29,741	26,941	46,339	44,659

As at 30 September 2005, the Contracting Group’s banking facilities, including overdrafts, letters of credit and bank guarantees of approximately HK$76,500,000 (31 March 2003: HK$100,500,000; 31 March 2004: HK$85,500,000 and 31 March 2005: HK$76,500,000), of which HK$66,561,000 (31 March 2003: HK$75,467,000; 31 March 2004: HK$50,968,000 and 31 March 2005: HK$67,793,000) has been utilised as at the balance sheet date.

As at 30 September 2005, the aforesaid banking facilities are secured by bank deposits of the Contracting Group of approximately HK$26,800,000 (31 March 2003: HK$27,348,000 and 31 March 2004 and 2005: HK$26,800,000) and corporate guarantees from SCH.

All of the above borrowings of the Contracting Group bear interest at floating interest rates.

The carrying amounts of the Contracting Group’s bank borrowings approximate their fair values at the respective balance sheet dates.

– 140 –

ACCOUNTANTS’ REPORT OF THE CONTRACTING GROUP AND PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

(m) Finance lease payables

During the Relevant Periods, the Contracting Group leased motor vehicles for its building services contracting business and classified these leases as finance leases. These leases expired in the year ended 31 March 2005.

As at each of the balance sheet date, the total future minimum lease payments under finance leases and their present values were as follows:

2003 HK$’000 322 214 536 (86) 450 (270)	2003 HK$’000 322 214 536 (86) 450 (270)	Minimum lease payments 31 March 30 September 2004 2005 2005 HK$’000 HK$’000 HK$’000 214 – – – – – 214 – –	Minimum lease payments 31 March 30 September 2004 2005 2005 HK$’000 HK$’000 HK$’000 214 – – – – – 214 – –	Minimum lease payments 31 March 30 September 2004 2005 2005 HK$’000 HK$’000 HK$’000 214 – – – – – 214 – –	value of minimum lease payments 31 March 30 September 2004 2005 2005 HK$’000 HK$’000 HK$’000 180 – – – – – 180 – –
					–

	) )	(34) 180 (180)	– – –	– – –
450 (270
180		–	–	–

(n) Loan from a minority shareholder of a subsidiary

The loan from a minority shareholder of a subsidiary was unsecured, interest-free and had no fixed terms of repayment as at 31 March 2003, 2004 and 2005 and 30 September 2005.

(o) Deferred tax liabilities

The movements in deferred tax liabilities, which comprised the tax effects of the accelerated tax depreciation and the cumulative differences in profit relating to incomplete long term installation and maintenance contracts, during the Relevant Periods are as follows:

2003 HK$’000 – –	31 March 2004 HK$’000 – 128	2005 HK$’000 128 (102)	30 September 2005 HK$’000 26 –
– 560 (307) 253	128 253 (253) –	26 – – –	26
			– –
			–
253	128	26	26

– 141 –

APPENDIX III ACCOUNTANTS’ REPORT OF THE CONTRACTING GROUP AND PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

As at 30 September 2005, the Contracting Group has tax losses arising in Hong Kong of approximately HK$60,163,000 (31 March 2003: HK$35,292,000; 31 March 2004: HK$35,594,000 and 31 March 2005: HK$53,093,000) that are available indefinitely for offsetting against future taxable profits of the companies in which the losses arose. Deferred tax assets have not been recognised in respect of these losses as they have arisen in subsidiaries that have been loss-making for some time or the future profit streams are unpredictable.

At 31 March 2003, 2004 and 2005 and 30 September 2005, there were no significant unrecognised deferred tax liabilities for taxes that would be payable on the unremitted earnings of certain of the Contracting Group’s subsidiaries as the Contracting Group had no liability to additional tax should such amounts be remitted.

(p) Share capital

Target Company

Authorised: 50,000 ordinary shares of US$1 each Issued and fully paid: 100 ordinary share of US$1 each	2003 HK$’000 390 1	31 March 2004 HK$’000 390 1	2005 HK$’000 390 1	30 September 2005 HK$’000 390

				1

During the Relevant Periods, there was no movement in the share capital of the Target Company.

(q) Reserves

(i) Contracting Group

The amounts of the Contracting Group’s reserves and the movements therein for the Relevant Periods are presented in the consolidated statements of changes in equity set out in Section 6 of this report.

(ii) Target Company

Surplus account HK$’000 33,115 – –	Retained profits HK$’000 – 6,000 (6,000)	Total HK$’000 33,115 6,000 (6,000)
33,115 – – 33,115 – –	– 6,000 (6,000) – 6,000 (6,000)	33,115 6,000 (6,000)
		33,115 6,000 (6,000)
33,115	–	33,115

The surplus account of the Target Company represents the difference between the aggregate net asset value of the subsidiaries acquired and the nominal value of the Target Company’s shares issued for the acquisition of the subsidiaries.

– 142 –

ACCOUNTANTS’ REPORT OF THE CONTRACTING GROUP AND PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

(r) Dissolution of subsidiaries, net

The fair values of the identifiable assets and liabilities of the subsidiaries dissolved during the Relevant Periods at their dates of dissolution are as follows:

Net assets disposed of: Cash and bank balances Trade and other receivables Other payables and accruals Minority interests Gain/(loss) on dissolution of subsidiaries	Year ended 31 March 2003 2004 2005 HK$’000 HK$’000 HK$’000 – 565 133 – – 6 – (365) (426) – (167) (26)	Year ended 31 March 2003 2004 2005 HK$’000 HK$’000 HK$’000 – 565 133 – – 6 – (365) (426) – (167) (26)	Year ended 31 March 2003 2004 2005 HK$’000 HK$’000 HK$’000 – 565 133 – – 6 – (365) (426) – (167) (26)	Six months ended 30 September 2004 2005 HK$’000 HK$’000 (unaudited) – – – – – – – –	Six months ended 30 September 2004 2005 HK$’000 HK$’000 (unaudited) – – – – – – – –
	– –	33 (33)	(313) 313	– –	– –
	–	–	–	–	–

An analysis of the net outflow of cash and cash equivalents in respect of the dissolution of subsidiaries is as follows:

				Six months	ended	ended
	Year	ended 31 March		30 September
	2003	2004	2005	2004		2005
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
				(unaudited)
Cash and bank balances
disposed of	–	(565)	(133)	–		–

The results of the subsidiaries dissolved during the years ended 31 March 2004 and 2005 had no significant impact on the Contracting Group’s consolidated turnover or profit/(loss) after tax for those years.

(s) Contingent liabilities

In addition to the bank deposits as detailed in Section 4(j) to this report to secure the banking facilities granted to the Contracting Group as set out in Section 4(l) to the report, as at 30 September 2005, the Contracting Group had contingent liabilities in respect of letters of indemnity provided by certain subsidiaries of the Contracting Group to a financial institution for the issue of performance bonds amounted to HK$4,470,000 (31 March 2003, 2004 and 2005: Nil).

Save as disclosed above, the Contracting Group and the Target Company had no significant contingent liabilities as at 31 March 2003, 2004, 2005 and 30 September 2005.

– 143 –

ACCOUNTANTS’ REPORT OF THE CONTRACTING GROUP AND PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

(t) Operating lease arrangements

The Contracting Group leases certain of its office properties under operating lease arrangements. Leases for these properties are negotiated for terms ranging from one to three years.

At 31 March 2003, 2004 and 2005 and 30 September 2005, the Contracting Group had total future minimum lease payments under non-cancellable operating leases falling due as follows:

Within one year In the second to fifth years, inclusive	2003 HK$’000 1,322 407 1,729	31 March 2004 HK$’000 569 64 633	2005 HK$’000 205 52 257	30 September 2005 HK$’000 102 23
				125

(u) Commitments

Apart from the operating lease commitments detailed in Section 4 (t) above, neither the Contracting Group nor the Target Company had any significant commitments as at 31 March 2003, 2004, 2005 and 30 September 2005.

5. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

The Contracting Group’s principal financial instruments comprise interest-bearing bank loans and overdrafts, cash and bank balances, pledged time deposits and finance leases. The main purpose of these financial instruments is to raise finance for the Contracting Group’s operations. The Contracting Group has various other financial assets and liabilities such as gross amounts due from and to contract customers, trade and other receivables, retention money receivables and payables and trade and bills payables, which arise directly from the Contracting Group’s operations.

The main risk arising from the Contracting Group’s financial instruments are cash flow interest rate risk, credit risk, and liquidity risk. The Directors meet periodically to analyse and formulate measures to manage the Contracting Group’s exposure to these risks. Generally, the Contracting Group introduces conservative strategies on its risk management. As the Group’s exposure to these risks is kept to a minimum, the Contracting Group has not used any derivatives and other instruments for hedging purposes. The Contracting Group does not hold or issue derivative financial instruments for trading purposes. The Directors review and agree policies for managing each of these risks and they are summarised as follows:

(i) Cash flow interest rate risk

Cash flow interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates.

The interest rates and terms of repayment of interest-bearing bank loans and other borrowings are disclosed in Section 4(l). Other financial assets and liabilities do not have material interest rate risk.

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ACCOUNTANTS’ REPORT OF THE CONTRACTING GROUP AND PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Interest-bearing bank loans and other borrowings, cash and bank balances, and short term time deposits are stated at cost and are not revalued on a periodic basis. Floating-rate interest income and expenses are charged to the consolidated income statement as incurred.

The nominal interest rates of the financial instruments approximate to their respective effective interest rates.

(ii) Credit risk

The Contracting Group maintains various credit policies for business operations as detailed in Section 4(h) above. In addition, all receivable balances are closely monitored on an ongoing basis to minimize the Contracting Group’s exposure to bad debts.

With respect to credit risk arising from the other financial assets of the Contracting Group, which mainly comprise cash and cash equivalents, the Contracting Group’s exposure to credit risk arises from default of the counterparties, with a maximum exposure equal to the carrying amount of these instruments.

(iii) Liquidity risk

The Contracting Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of bank overdrafts, bank loans, trust receipt loans and finance leases. The Contracting Group’s policy is to maintain the Contracting Group at a net current asset position.

The Contracting Group’s overall risk management policy focuses on monitoring all potential financial risks to the Contracting Group. Whenever possible and considered appropriate, the Contracting Group will reduce the risk exposure.

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APPENDIX III ACCOUNTANTS’ REPORT OF THE CONTRACTING GROUP AND PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

6. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

Movements in the shareholders’ equity of the Contracting Group for the Relevant Periods and the six months ended 30 September 2004 on the basis set out in Section 1 above are as follows:

Attributable to equity holders of the parent

	Attributable to equity holders of the parent	Attributable to equity holders of the parent	Attributable to equity holders of the parent	Attributable to equity holders of the parent	Attributable to equity holders of the parent	Attributable to equity holders of the parent

At 1 April 2002 Loss for the year Interim 2003 dividend At 31 March 2003 and 1 April 2003 Loss for the year Interim 2004 dividend Dissolution of subsidiaries (Section 4(r)) At 31 March 2004 and 1 April 2004 Loss for the year Dissolution of subsidiaries (Section 4(r)) At 31 March 2005 and 1 April 2005 Profit for the period Interim 2006 dividend At 30 September 2005 At 31 March 2004 and 1 April 2004 Loss for the period At 30 September 2004	Issued share capital HK$’000 1 – – 1 – – – 1 – – 1 – –	Surplus accounts* HK$’000 33,115 – – 33,115 – – – 33,115 – – 33,115 – –	Retained profits/ (accumulated losses)* HK$’000 50,398 (16,601) (6,000) 27,797 (2,731) (6,000) – 19,066 (20,467) – (1,401) 12,680 (6,000)	Total HK$’000 83,514 (16,601) (6,000) 60,913 (2,731) (6,000) – 52,182 (20,467) – 31,715 12,680 (6,000)	Minority interests HK$’000 8,012 11,639 (6,000) 13,651 9,397 (6,000) (167) 16,881 281 (26) 17,136 (47) (6,000)	Total equity HK$’000 91,526 (4,962 (12,000
						74,564 6,666 (12,000 (167
						69,063 (20,186 (26
						48,851 12,633 (12,000
	1	33,115	5,279	38,395	11,089
	1 –	33,115 –	19,066 (3,065)	52,182 (3,065)	16,881 2,706	69,063 (359
	1	33,115	16,001	49,117	19,587

* These reserves accounts comprise the consolidated reserves of HK$60,912,000, HK$52,181,000, HK$31,714,000 and HK$38,394,000 as at 31 March 2003, 2004 and 2005 and 30 September 2005 respectively.

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ACCOUNTANTS’ REPORT OF THE CONTRACTING GROUP AND PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

7. CONSOLIDATED CASH FLOW STATEMENTS

The consolidated cash flow statements of the Contracting Group for the Relevant Periods and the six months ended 30 September 2004 after making such adjustments as we consider appropriate and on the basis set out in Section 1 above are as follows:

CASH FLOWS FROM OPERATING ACTIVITIES Profit/(loss) before tax Adjustments for: Share of loss of an associate Interest paid Interest income Depreciation Loss/(gain) on disposal of items of property, plant and equipment Loss/(gain) on dissolution of subsidiaries (Section 4(r)) Gain on dissolution of an associate Provision for amounts due from former subsidiaries Provision for doubtful debts Impairment loss of available-for-sale equity investments Unrealised holding (gain)/loss on equity investments at fair value through profit or loss Waiver of payable balances by the Remaining Group Operating profit/(loss) before working capital changes Decrease/(increase) in gross amount due from contract customers Decrease/(increase) in inventories Decrease/(increase) in trade and other receivables (note (b)) Decrease/(increase) in retention money receivables Decrease in prepayments, deposits and other assets Increase/(decrease) in gross amount due to contract customers Increase/(decrease) in trade payables Increase/(decrease) in bills payable Increase/(decrease) in retention money payable Increase/(decrease) in other payables and accruals Cash generated from/(used in) operations – page 116	Year ended 31 March 2003 2004 2005 HK$’000 HK$’000 HK$’000 (599) 10,915 (19,498) 2 – – 1,387 864 1,016 (2,226) (1,154) (1,014) 1,948 1,687 838 429 7 (47) – 33 (313) – – (199) – 2,179 – – 109 1,460 7,130 9,108 757 1,244 (245) (103) – – –	Year ended 31 March 2003 2004 2005 HK$’000 HK$’000 HK$’000 (599) 10,915 (19,498) 2 – – 1,387 864 1,016 (2,226) (1,154) (1,014) 1,948 1,687 838 429 7 (47) – 33 (313) – – (199) – 2,179 – – 109 1,460 7,130 9,108 757 1,244 (245) (103) – – –	Year ended 31 March 2003 2004 2005 HK$’000 HK$’000 HK$’000 (599) 10,915 (19,498) 2 – – 1,387 864 1,016 (2,226) (1,154) (1,014) 1,948 1,687 838 429 7 (47) – 33 (313) – – (199) – 2,179 – – 109 1,460 7,130 9,108 757 1,244 (245) (103) – – –	Six months ended 30 September 2004 2005 HK$’000 HK$’000 (unaudited) 799 12,699 – – 383 840 (507) (1,120) 523 244 19 (9) – – – – – – – 375 944 – 95 (133) – (18,053) 2,256 (5,157) (2,352) (4,561) (55) 395 (21,131) 30,284 2,943 896 6 41 37,308 (28,535) 4,350 16,201 (3,238) 3,209 1,758 (1,042) (22,316) 3,028 (471) 14,759	Six months ended 30 September 2004 2005 HK$’000 HK$’000 (unaudited) 799 12,699 – – 383 840 (507) (1,120) 523 244 19 (9) – – – – – – – 375 944 – 95 (133) – (18,053) 2,256 (5,157) (2,352) (4,561) (55) 395 (21,131) 30,284 2,943 896 6 41 37,308 (28,535) 4,350 16,201 (3,238) 3,209 1,758 (1,042) (22,316) 3,028 (471) 14,759
	9,315 (22,124) 880 (42,572) 3,821 847 21,314 5,508 (9,962) (3,290) 10,075 (26,188)	23,503 8,701 251 12,436 (1,780) 62 (16,266) (7,981) (16,589) 3,379 (311) 5,405	(17,103) 14,679 2,853 (26,129) 2,839 4 27,654 (3,838) (3,180) 3,805 (2,054) (470)	2,256 (2,352) (55) (21,131) 2,943 6 37,308 4,350 (3,238) 1,758 (22,316) (471)	(5,157 (4,561 395 30,284 896 41 (28,535 16,201 3,209 (1,042 3,028
					14,759

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ACCOUNTANTS’ REPORT OF THE CONTRACTING GROUP AND PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Year ended 31 March 2003 2004 2005 HK$’000 HK$’000 HK$’000 (26,188) 5,405 (470) (1,322) (813) (973) (65) (51) (43) (7,739) (5,892) (3,011)	Year ended 31 March 2003 2004 2005 HK$’000 HK$’000 HK$’000 (26,188) 5,405 (470) (1,322) (813) (973) (65) (51) (43) (7,739) (5,892) (3,011)	Year ended 31 March 2003 2004 2005 HK$’000 HK$’000 HK$’000 (26,188) 5,405 (470) (1,322) (813) (973) (65) (51) (43) (7,739) (5,892) (3,011)	Six months ended 30 September 2004 2005 HK$’000 HK$’000 (unaudited) (471) 14,759 (340) (840) (43) – (8) (77) (862) 13,842 507 1,120 (17) (34) 430 27 – – – – – – 920 1,113 – – – – (180) – (5,116) 2,026 (12,141) (13,810) (17,437) (11,784) (17,379) 3,171 17,932 4,258 553 7,429 4,896 1,366 5,500 5,566 26,800 26,800 (36,643) (26,303) 553 7,429	Six months ended 30 September 2004 2005 HK$’000 HK$’000 (unaudited) (471) 14,759 (340) (840) (43) – (8) (77) (862) 13,842 507 1,120 (17) (34) 430 27 – – – – – – 920 1,113 – – – – (180) – (5,116) 2,026 (12,141) (13,810) (17,437) (11,784) (17,379) 3,171 17,932 4,258 553 7,429 4,896 1,366 5,500 5,566 26,800 26,800 (36,643) (26,303) 553 7,429
(35,314) 2,226 (64) 480 – (2) (990) 1,650 (6,000) (6,000) (337) 7,772 38,112 33,547 (117) 31,102	(1,351) 1,154 (88) – (565) – – 501 (6,000) (6,000) (270) (3,857) 3,924 (12,203) (13,053) 30,985	(4,497) 1,014 (148) 558 (133) – – 1,291 – – (180) 6,532 (16,820) (10,468) (13,674) 17,932	(862) 507 (17) 430 – – – 920 – – (180) (5,116) (12,141) (17,437) (17,379) 17,932	13,842
				1,120 (34 27 – – –
				1,113
				– – – 2,026 (13,810
				(11,784
				3,171 4,258
30,985	17,932	4,258	553
7,136 12,587 27,348 (16,086)	2,777 5,498 26,800 (17,143)	1,957 5,510 26,800 (30,009)	4,896 5,500 26,800 (36,643)	1,366 5,566 26,800 (26,303
30,985	17,932	4,258	553

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ACCOUNTANTS’ REPORT OF THE CONTRACTING GROUP AND PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Notes:

Major non-cash transactions

(a) During the six months ended 30 September 2005, an interim dividend of HK$6,000,000 was settled by the Contracting Group through current account with the Remaining Group.
(b) During the six months ended 30 September 2005, Shun Wing, a subsidiary of the Contracting Group, settled a dividend of HK$6,000,000 payable to its minority shareholder by offsetting the balance due from it.
(c) As set out in Section 1 above, the waiver of payable balances by the Remaining Group of HK$18,053,000 was credited to the consolidated income statement as if the Corporate Restructuring had taken place. This waiver had no cash flow impact to the Contracting Group for the six months ended 30 September 2005.

8. SEGMENT INFORMATION

Segment information is presented by way of the Contracting Group’s primary segment reporting basis, by business segment. In determining the Contracting Group’s geographical segments, revenues are attributed to the segments based on the location of the customers, and assets are attributed to the segments based on the location of the assets. No further geographical segment information is presented as over 90% of the Contracting Group’s revenue is derived from customers based in Hong Kong and over 90% of the Contracting Group’s assets are located in Hong Kong.

The Contracting Group’s operating businesses are structured and managed separately according to the nature of their operations and the products and services they provide. Each of the Contracting Group’s business segments represents a strategic business unit that offers products and services which are subject to risks and returns that are different from those of the other business segments. The summarised details of the business segments are as follows:

(a) the building services contracting and project management business segment, which includes the provision of multi-disciplinary building services, comprising electrical engineering, water pumping and fire services, air conditioning installation, plumbing and drainage, environmental engineering, extra low voltage systems engineering and project management; and
(b) the trading of electrical and mechanical engineering materials and equipment segment.

Intersegment sales and transfers are transacted with reference to the selling prices used for sales made to third parties at the then prevailing market prices.

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ACCOUNTANTS’ REPORT OF THE CONTRACTING GROUP AND PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

(a) Business segments

The following tables present revenue, results and certain assets, liabilities and expenditure information for the Contracting Group’s business segments.

Year ended 31 March 2003

Segment revenue: Sale to external customers Intersegment sales Total Segment results Interest income and unallocated gains Impairment loss of available-for-sale equity investments Unrealised holding loss on equity investments at fair value through profit or loss Finance costs Share of loss of an associate Loss before tax Tax Loss for the year Assets and liabilities Segment assets Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities Other segment information: Depreciation Capital expenditure	Building services contracting business and project management HK$’000 589,582 – 589,582 2,532 206,672 152,847 1,879 53	Trading of electrical and mechanical engineering materials and equipment Eliminations Consolidated HK$’000 HK$’000 HK$’000 51,234 – 640,816 8,342 (8,342) – 59,576 (8,342) 640,816 606 – 3,138 6,538 (7,130) (1,244) (1,899) (2) (599) (4,363) (4,962) 21,847 – 228,519 108,673 337,192 11,824 – 164,671 97,957 262,628 69 – 1,948 11 – 64

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ACCOUNTANTS’ REPORT OF THE CONTRACTING GROUP AND PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Year ended 31 March 2004

Segment revenue: Sales to external customers Intersegment sales Total Segment results Interest income and unallocated gains Impairment loss of available-for-sale equity investments Unrealised holding gain on equity investments at fair value through profit or loss Provision for amounts due from former subsidiaries Finance costs Profit before tax Tax Profit for the year Assets and liabilities Segment assets Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities Other segment information: Depreciation Capital expenditure Provision for doubtful debts	Building services contracting business and project management HK$’000 707,246 – 707,246 21,265 185,870 116,406 1,633 75 109	Trading of electrical and mechanical engineering materials and equipment Eliminations Consolidated HK$’000 HK$’000 HK$’000 27,370 – 734,616 9,951 (9,951) – 37,321 (9,951) 734,616 (2,707) – 18,558 4,965 (9,108) 245 (2,179) (1,566) 10,915 (4,249) 6,666 19,085 – 204,955 91,782 296,737 9,862 – 126,268 101,406 227,674 54 – 1,687 13 – 88 – – 109

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ACCOUNTANTS’ REPORT OF THE CONTRACTING GROUP AND PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Year ended 31 March 2005

Segment revenue: Sales to external customers Intersegment sales Total Segment results Interest income and unallocated gains Impairment loss of available-for-sale equity investments Unrealised holding gain on equity investments at fair value through profit or loss Finance costs Loss before tax Tax Loss for the year Assets and liabilities Segment assets Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities Other segment information: Depreciation Capital expenditure Provision for doubtful debts	Building services contracting business and project management HK$’000 481,393 – 481,393 (16,487) 196,237 139,814 797 148 6	Trading of electrical and mechanical engineering materials and equipment Eliminations Consolidated HK$’000 HK$’000 HK$’000 24,181 – 505,574 1,963 (1,963) – 26,144 (1,963) 505,574 (5,035) – (21,522) 4,109 (757) 103 (1,431) (19,498) (688) (20,186) 11,805 − 208,042 73,874 281,916 8,036 − 147,850 85,215 233,065 41 – 838 – – 148 1,454 – 1,460

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ACCOUNTANTS’ REPORT OF THE CONTRACTING GROUP AND PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Six months ended 30 September 2004

Segment revenue: Sales to external customers Intersegment sales Total Segment results Interest income and unallocated gains Impairment loss of available-for-sale equity investments Unrealised holding loss on equity investments at fair value through profit or loss Finance costs Profit before tax Tax Loss for the period Other segment information: Depreciation Capital expenditure	Building services contracting business and project management HK$’000 225,521 – 225,521 1,596 503 17	Trading of electrical and mechanical engineering materials and equipment Eliminations Consolidated HK$’000 HK$’000 HK$’000 11,756 – 237,277 1,152 (1,152) – 12,908 (1,152) 237,277 (1,081) – 515 2,028 (944) (95) (705) 799 (1,158) (359) 20 – 523 – – 17

– 153 –

ACCOUNTANTS’ REPORT OF THE CONTRACTING GROUP AND PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Six months ended 30 September 2005

Segment revenue: Sales to external customers Intersegment sales Total Segment results Interest income and unallocated gains Unrealised holding gain on equity investments at fair value through profit or loss Waiver of payable balances by the Remaining Group Finance costs Profit before tax Tax Profit for the period Assets and liabilities Segment assets Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities Other segment information: Depreciation Capital expenditure Provision for doubtful debts	Building services contracting business and project management HK$’000 185,621 4 185,625 (7,140) 165,306 132,272 236 20 37	Trading of electrical and mechanical engineering materials and equipment Eliminations Consolidated HK$’000 HK$’000 HK$’000 20,463 – 206,084 3,350 (3,354) – 23,813 (3,354) 206,084 75 – (7,065) 2,600 133 18,053 (1,022) 12,699 (66) 12,633 15,078 – 180,384 61,742 242,126 8,439 – 140,711 51,931 192,642 8 – 244 14 – 34 338 – 375

– 154 –

ACCOUNTANTS’ REPORT OF THE CONTRACTING GROUP AND PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

(b) Geographical segments

No geographical segment information is presented as over 90% of the Contracting Group’s revenue is derived from customers based in Hong Kong and over 90% of the Contracting Group’s assets are located in Hong Kong.

9. SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements have been prepared by the Contracting Group in respect of any period subsequent to 30 September 2005.

Yours faithfully,

Ernst & Young Certified Public Accountants Hong Kong

– 155 –

APPENDIX III ACCOUNTANTS’ REPORT OF THE CONTRACTING GROUP AND PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

(II) UNAUDITED PRO FORMA COMBINED BALANCE SHEET OF THE ENLARGED GROUP

The unaudited pro forma combined balance sheet of the Group and the Contracting Group (collectively the “Enlarged Group”) has been prepared to demonstrate the effect of the Acquisition on the consolidated balance sheet of the Group on the assumption that SCI would have become a wholly-owned subsidiary of CAT(BVI) as if the Acquisition had been completed on 30 June 2005 with further adjustments as explained in the notes below.

The unaudited pro forma combined balance sheet has been prepared for illustrative purposes only and, because of its nature, may not give a true picture of the financial position of the Enlarged Group as at 30 June 2005 or at any future dates.

The historical consolidated balance sheets of the Group and the Contracting Group have been extracted from the respective unaudited and audited interim financial statements in respect of the six months ended 30 June 2005 and 30 September 2005, respectively, as set out in Appendices I and II to the Circular.

The Group as at 30 June 2005 HK$’000 (Unaudited) 35,589 – 21,671 – – 766 4,618	The Contracting Group as at 30 September 2005 HK$’000 (Audited) (Note 1) 291 – – 2,500 647 – –	Total Pro Forma Adjustments Notes HK$’000 HK$’000 35,880 – 35,600 2 (35,600) 3 21,671 (1,615) 4 2,500 647 766 4,618	Pro Forma Enlarged Group HK$’000 (Unaudited) 35,880 – 20,056 2,500 647 766 4,618
62,644 3,036 103,450 3,610 258,492 1,784 9,776 10,330 – – 66,624 457,102 67,443 216,818 353 32,745 7,007 38,837 363,203	3,438 – – 63,899 90,209 20,575 – 25,985 4,288 26,800 6,932 238,688 45,193 18,356 – 95,518 346 26,303 185,716	66,082 3,036 103,450 67,509 348,701 22,359 9,776 36,315 4,288 26,800 73,556 (35,600) 2 695,790 112,636 235,174 353 128,263 7,353 65,140 548,919	64,467
			3,036 103,450 67,509 348,701 22,359 9,776 36,315 4,288 26,800 37,956
			660,190
			112,636 235,174 353 128,263 7,353 65,140
			548,919

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ACCOUNTANTS’ REPORT OF THE CONTRACTING GROUP AND PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

The Group as at 30 June 2005 HK$’000 (Unaudited) 93,899	The Contracting Group as at 30 September 2005 HK$’000 (Audited) (Note 1) 52,972	Total Pro Forma Adjustments Notes HK$’000 HK$’000 146,871	Pro Forma Enlarged Group HK$’000 (Unaudited) 111,271
156,543 – 1,248 1,047 2,295	56,410 6,900 – 26 6,926	212,953 6,900 1,248 1,073 9,221	175,738
			6,900 1,248 1,073
			9,221
154,248	49,484	203,732	166,517

39,660 113,062 152,722 1,526	1 38,394 38,395 11,089	39,661 (1) 3 151,456 (38,394) 3 2,795 3 (1,615) 4 191,117 12,615	39,660 114,242
			153,902 12,615
154,248	49,484	203,732	166,517

Notes:

This column represents the historical audited financial information of the Contracting Group as at 30 September 2005 as set out in the Accountants’ Report of the Contracting Group in Appendix II to the Circular. Certain balances have been reclassified in order to conform with the classification used by the Group.
The adjustment represents the aggregate effect on cash of (i) cash consideration of approximately HK$35 million for the Acquisition; and (ii) estimated expenses of approximately HK$0.6 million to be incurred for the Acquisition.
The adjustments represent the elimination of the acquisition cost incurred by the Group and the pre-acquisition reserves of the Contracting Group. The excess amount of the fair value of the identifiable assets and liabilities of the Contracting Group over the fair value of consideration given by the Group (the “Excess Amount”) is recognised immediately in the income statement (included in reserves above) in accordance with Hong Kong Financial Reporting Standard No. 3 – Business Combinations. This adjustment is for illustrative purpose and the actual Excess Amount at date of completion may be different. The directors of the Company are in the opinion that the Excess Amount will be substantially reduced or may even turn into a goodwill as the Contracting Group is expected to incur losses for the period from 1 October 2005 up to the date of completion of the Acquisition.
The adjustment represents the Group’s share of loss on disposal of the Contracting Group by Shun Cheong Holdings Limited (“SCH”), an associate to which the Company owns 29.93% equity interest as at 30 June 2005, after taking into account the estimated expenses of HK$2,000,000 to be incurred by SCH arising from this transaction and on the assumption that no loss is incurred by the Contracting Group for the period from 1 October 2005 up to the date of completion of the Acquisition.
There are outstanding balances between the Group and the Contracting Group, which have not been eliminated in the Pro Forma Combined Balance Sheet of the Enlarged Group. As at 30 June 2005, the Group had a receivable of approximately HK$3,370,000 from the Contracting Group grouped under “Trade and retention monies receivables” in the unaudited interim financial statements of the Group for the six months ended 30 June 2005. As at 30 September 2005, the Contracting Group had no material balances with the Group in the audited interim financial statements of the Contracting Group for the six months ended 30 September 2005.

– 157 –

GENERAL INFORMATION

APPENDIX IV

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 jointly and severally accept full responsibility for the accuracy of the information contained in this circular and confirm, having made all reasonable enquiries, that to the best of their knowledge, opinions expressed in this circular have been arrived at after due and careful consideration and there are no other facts not contained in this circular, the omission of which would make any statement herein misleading.

2. SHARE CAPITAL OF THE COMPANY

The authorized and issued share capital of the Company as at the Latest Practicable Date were, and immediately following completion of the Capital Reduction and Open Offer will be, as follows:

(a) Share capital

Authorised:

No. of shares HK$ As at the Latest Practicable Date 1,000,000,000 Existing Shares of HK$0.25 each 250,000,000 Immediately following completion of the Capital Reduction 2,500,000,000 New Shares of HK$0.10 each 250,000,000

– 158 –

GENERAL INFORMATION

APPENDIX IV

Issued, to be issued and fully paid-up or credited as fully paid-up:

No. of shares 158,639,799 Existing Shares in issue as at the Latest Practicable Date – Reduction of nominal value of each Existing Share in issue from HK$0.25 to HK$0.1 by cancellation of HK$0.15 from the paid-up capital on each Existing Share	HK$ 39,659,950 (23,795,970) 15,863,980 23,795,970 39,659,950
158,639,799 237,959,698 Offer Shares to be issued upon completion of the Open Offer (assuming no outstanding Share Options are exercised on or before the Record Date)	15,863,980 23,795,970
396,599,497 New Shares in issue upon completion of the Capital Reduction and Open Offer (assuming no outstanding Share Options are exercised on or before the Record Date)

All Existing Shares rank pari passu in all respects, including in particular as to dividend, voting rights and return on capital. The Existing Shares in issue are listed on the Stock Exchange.

All of the Offer Shares, when allotted and issued, will rank pari passu in all respects, including in particular as to dividend, voting rights and return on capital, with all New Shares in issue as at the date of allotment and issue of the Offer Shares. All of the New Shares and the Offer Shares will be listed on the Stock Exchange. There are no arrangements under which future dividends are waived or agreed to be waived.

No share or loan capital of the Company or any member of the CAG Group has been put under option or agreed conditionally or unconditionally to be put under option and no warrant or conversion right affecting the Existing Shares has been issued or granted or agreed conditionally, or unconditionally to be issued or granted. There have been no Existing Shares issued by the Company since the end of the last financial year, being 31 December 2005.

No part of the share or loan capital of the Company is listed or dealt in, nor is listing or permission to deal in the share or loan capital of the Company being, or proposed to be, sought on any other stock exchange.

– 159 –

GENERAL INFORMATION

APPENDIX IV

(b) Share Options

Pursuant to the Share Option Scheme, the Directors may, at their discretion, offer any employee (including any Director) of the Company or of any of its subsidiaries options to subscribe shares of the Company subject to the terms and conditions stipulated in the Share Option Scheme.

At the Latest Practicable Date, the Company had outstanding Share Options for 1,600,000 Existing Shares under the Share Option Scheme, which represented approximately 1% of the Company’s Existing Shares in issue as at that date.

(c) Convertible securities

Save as disclosed above, as at the Latest Practicable Date, there was no outstanding option, warrants or securities convertible or exchangeable into the Existing Shares.

3. MARKET PRICES

The table below shows the closing prices of the Existing Shares as recorded on the Stock Exchange on (i) the last day on which dealings took place in each of the six months immediately preceding the date of the Announcement and in each month before the Latest Practicable Date; (ii) the Last Trading Day; and (iii) the Latest Practicable Date.

	Closing price
	per Existing
Date	Share
	HK$
28 February 2006	0.31
31 March 2006	0.32
28 April 2006	0.28
30 May 2006	0.27
30 June 2006	0.26
31 July 2006	0.245
31 August 2006	0.24
Last Trading Day	0.24
Latest Practicable Date	0.242

The highest and lowest closing prices of the Existing Shares as quoted on the Stock Exchange during the period commencing six months prior to the Last Trading Day and ending on the Latest Practicable Date were HK$0.40 on 7 April 2006 and 8 April 2006 and HK$0.23 on nine trading days in June 2006, respectively.

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APPENDIX IV

4. DISCLOSURE OF INTERESTS

(a) Directors

As at the Latest Practicable Date, the interests and short positions of the Directors in the Existing Shares, underlying shares and debentures of the Company and its associated corporations (within the meaning of Part XV of the SFO) which were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests or short positions which they are taken or deemed to have under such provisions of the SFO) or which were required to be entered in the register maintained by the Company pursuant to Section 352 of the SFO or which were required to be notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers, were as follows:

(i) Directors’ interests in the Existing Shares

Name of Director James Sai-Wing Wong Frank Kwok-Kit Chu	Number of the Existing Shares held, capacity and nature of interest Percentage of the Company’s issued share capital Personal interests Family interests Corporate interests Total – – 46,158,319 (Note) 46,158,319 29.10% 48,240 47,840 – 96,080 0.06%

Note: These shares are held by Multi-Investment, a company in which Dr. Wong is a director and has a beneficial interest.

On 22 August 2006, the Company was notified relevant forms of disclosure of interests were filed with the Stock Exchange pursuant to the SFO in respect of the proposed Open Offer of the Company in which EIL, a company controlled by Dr. Wong has agreed to underwrite 168,722,220 Offer Shares pursuant to the Underwriting Agreement and that Multi-Investment, a company controlled by Dr. Wong has undertaken to subscribe for 69,237,478 Offer Shares. The proposed Open Offer is subject to the approval of Independent Shareholders at the SGM to be held on 3 October 2006. The disclosure of these forms has been made on the assumptions that (a) EIL will be called upon to subscribe for 168,722,220 Offer Shares in full; and (b) Multi-Investment has subscribed for 69,237,478 Offer Shares.

All the interests stated above represent long positions.

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APPENDIX IV

(ii) Directors’ interests in options grant by/underlying shares of the Company

					Percentage
					of the
			Exercise	Number of	Company’s
Name of			price per	options	issued share
Director	Date of grant	Exercise period	share	outstanding	capital
			HK$
Stephen Sek-Kee	16 July 1999	16 July 1999 to	1.75	480,000	0.3%
Yu		15 July 2009
Frank Kwok-Kit	13 July 1999	13 July 1999 to	1.75	320,000	0.2%
Chu		12 July 2009
Herman Man-Hei	13 July 1999	13 July 1999 to	1.75	320,000	0.2%
Fung		12 July 2009

Save as disclosed in this circular, so far as was known to any Director as at the Latest Practicable Date, none of the Directors had any interest or short position in the Existing Shares, underlying shares and debentures of the Company or any associated corporations (within the meaning of the Part XV of the SFO) which were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which the Director is taken or deemed to have under such provisions of the SFO), or which were required to be entered in the register maintained by the Company pursuant to Section 352 of the SFO or which were required, pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers, to be notified to the Company and the Stock Exchange.

Management fees are charged by Chinney based on the time involvement of the personnel providing services. Messrs James Sai-Wing Wong and Herman Man-Hei Fung, both directors of the Company, are also directors of Chinney and Dr. Wong has a beneficial interest in CIL.

As detailed in a circular to the Shareholders dated 8 May 2006, the Company sold 32,000,000 shares in Shun Cheong to Upsky Enterprises Limited (“Upsky”, a company owned by Mr. Vincent Tian-Quan Mo, an independent non-executive Director) for a cash consideration of HK$9.6 million on 12 April 2006. The consideration of HK$9.6 million was arrived at by the Board after arm’s length negotiation with Upsky after considering the loss making track record of Shun Cheong and the historical share price performance of Shun Cheong. Subsequently in July 2006, the Company accepted the voluntary cash offer made by Upsky to acquire all the Shun Cheong shares in issue at an offer price of HK$0.30 per share and sold all remaining 2,697,500 shares in Shun Cheong at a cash consideration of HK$809,250.

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APPENDIX IV

So far as the Directors are aware and, save as disclosed above and in this circular, as at the Latest Practicable Date:

(i) None of the Directors had any direct or indirect interests in any assets acquired or disposed of by or leased to or proposed to be acquired or disposed of by or leased to any member of the CAG Group since 31 December 2005, being the date to which the latest published audited financial statements of the Company were made up;
(ii) None of the Directors was materially interested in any contract or arrangement entered into by any member of the CAG Group or by the Underwriter which is subsisting at the Latest Practicable Date and which was significant in relation to the business of the CAG Group. Save for the Underwriting Agreement, the Underwriter has not entered into any material contract in which any Director has a material personal interest;
(iii) None of the Directors or their respective associates had an interest in a business which competes or may compete either directly or indirectly with the business of the CAG Group, or have or may have any other conflicts of interest with the CAG Group; and
(iv) None of the Directors was or will be given any compensation for loss of office or otherwise in connection with the Open Offer, the Underwriting Agreement and/or the Whitewash Waiver. There is no agreement or arrangement between any Director and any other person which is conditional on or dependent upon the outcome of the Open Offer and/ or the Whitewash Waiver or otherwise connected with the Open Offer and/or the Whitewash Waiver.
(v) There were no dealings in the Existing Shares by the Directors for the past six months prior to the date of the Announcement.

(b) Substantial shareholders

(i) As at the Latest Practicable Date, so far as was known to any Director, the following persons had an interest or short position in the Existing Shares and underlying shares of the Company which would fall to be disclosed to the Company pursuant to the provisions of Divisions 2 and 3 of Part XV of the SFO:

				Percentage
				of the
		Capacity and	Number of	Company’s
Name of		nature of	Existing	issued share
Shareholder	Note	interest	Shares held	capital
James Sai-Wing	1	Interest through	46,158,319	29.10%
Wong		a controlled
		corporation

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APPENDIX IV

				Percentage
				of the
		Capacity and	Number of	Company’s
Name of		nature of	Existing	issued share
Shareholder	Note	interest	Shares held	capital
Madeline May-	1	Interest through	46,158,319	29.10%
Lung Wong		a controlled
		corporation
Lucky Year	1	Interest through	46,158,319	29.10%
Finance Limited		a controlled
		corporation
Chinney Holdings	1	Interest through	46,158,319	29.10%
Limited		a controlled
		corporation
Chinney	1	Interest through	46,158,319	29.10%
		a controlled
		corporation
Newsworthy	1	Interest through	46,158,319	29.10%
Resources		a controlled
Limited		corporation
Multi-Investment	1	Beneficial	46,158,319	29.10%
		owner
Sumitomo Mitsui	2	Beneficial	12,792,000	8.06%
Banking		owner
Corporation
Credit Suisse First	2	Beneficial	12,792,000	8.06%
Boston		owner
International
Dresdner	2	Beneficial	12,792,000	8.06%
Kleinwort		owner
Wasserstein
Limited

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APPENDIX IV

				Percentage
				of the
		Capacity and	Number of	Company’s
Name of		nature of	Existing	issued share
Shareholder	Note	interest	Shares held	capital
Krung Thai Bank	2	Beneficial	12,792,000	8.06%
Public Company		owner
Limited
PT. Bank Mandiri	2	Beneficial	12,792,000	8.06%
(Persero)		owner
PT. NISP Sekuritas	2	Beneficial	12,792,000	8.06%
		owner

All the interests stated above represent long positions.

Notes:

Dr. James Sai-Wing Wong, Ms. Madeline May-Lung Wong, Lucky Year Finance Limited, Chinney Holdings Limited, Chinney, Newsworthy Resources Limited and MultiInvestment are deemed to be interested in the same parcel of 46,158,319 shares by virtue of Section 316 of the SFO.

These shares are registered in the name of an agent bank on behalf of six banks that comprise a syndicate of lenders to a shareholder of the Company (the “Syndicate”). The Syndicate’s interest in the relevant shares was acquired as a result of security given by the shareholder over such shares in respect of a loan advanced to the shareholder by the Syndicate. Such interest became discloseable upon the Syndicate becoming entitled to exercise the power of sale and voting rights in respect of the interest in the shares as a result of a default by the shareholder. Accordingly, Sumitomo Mitsui Banking Corporation, Credit Suisse First Boston International, Dresdner Kleinwort Wasserstein Limited, Krung Thai Bank Public Company Limited, PT. Bank Mandiri (Persero) and PT. NISP Sekuritas are each deemed to have a security interest in the relevant shares.

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APPENDIX IV

(ii) So far as was known to any Director, as at the Latest Practicable Date, the following person was directly or indirectly interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other member of the CAG Group other than the Company and the amount of such person’s interest in such securities was as follows:

Name of person		Approximate
having 10%	Name of member	percentage of
or more interest	of the CAG Group	interest held
Saengsup Supaporn	Dharmala Sulee Limited	30%
Howing Engineering	Shun Wing Construction &	49.90%
Limited	Engineering Company Limited
Shu-Lin Lin	Shun Cheong Shenzhen Jinda	30.00%
	Joint Venture Company
	Limited
Koon-Hung Lo	Shun Cheong Automation	15.00%
	Systems Limited

Note: Dharmala Sulee Limited has an interest of approximately 99.9% in each of Cosper Enterprise Co., Ltd., Mail Order Gallery Enterprise Co., Ltd. and Shopper Express Enterprise Co., Ltd.

Save as disclosed in this circular, the Directors are not aware of any person as at the Latest Practicable Date who had an interest or short position in the Existing Shares or underlying shares of the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO, or, was directly or indirectly, interested in 10% or more of the nominal value of the issued share capital carrying rights to vote in all circumstances at general meetings of any other member of the CAG Group other than the Company, or any options in respect of such capital.

5. SHAREHOLDINGS AND DEALINGS

(a) Save for the 46,158,319 Existing Shares held by Multi-Investment and 96,080 Existing Shares and Share Options for 320,000 Existing Shares held by Mr. Frank Kwok-Kit Chu (an executive Director), Share Options for 480,000 Existing Shares held by Mr. Stephen Sek-Kee Yu (an executive Director) and Share Options for 320,000 Existing Shares held by Mr. Herman Man-Hei Fung (an non-executive Director), none of the Underwriter, the director of the Underwriter and its concert parties and any of their respective directors owned or controlled any Existing Shares, convertible securities, warrants, options or derivatives of the Company as at the Latest Practicable Date, and none of them had dealt for value in any such securities during the period commencing six months prior to the Last Trading Day and ending on the Latest Practicable Date.

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APPENDIX IV

(b) No person with whom the Underwriter or his associates or their respective concert parties had any arrangement of the kind referred to in Note 8 to Rule 22 of the Takeovers Code owned or controlled any Existing Shares, convertible securities, warrants, options or derivatives of the Company as at the Latest Practicable Date, and none of them had dealt for value in any such securities during the period starting six months prior to the Last Trading Day and ending on the Latest Practicable Date.
(c) Neither Veda Capital and Ernst & Young nor any other advisers to the Company as specified in class (2) of the definition of associate (excluding exempt principal traders) in the Takeovers Code, their respective ultimate holding companies, nor any of their respective subsidiaries or fellow subsidiaries owned or controlled any Existing Shares, convertibles securities, warrants, options or derivatives of the Company as at the Latest Practicable Date.
(d) At no time during the period commencing six months prior to the Last Trading Day and ending on the Latest Practicable Date was any member of the CAG Group a party to any arrangement to enable the Directors and their associates to acquire benefits by means of the acquisition of the Existing Shares or any other body corporate.
(e) As at the Latest Practicable Date, there was no agreement, arrangement or understanding between the Underwriter or any of his concert parties and other persons in relation to the transfer, charge or pledge of the Offer Shares that may be subscribed by the Underwriter or any of his concert parties under the Underwriting Agreement.
(f) As at the Latest Practicable Date, no person had any arrangement of the kind referred to in Note 8 to Rule 22 of the Takeovers Code with the Company or with any person who is an associate of the Company by virtue of classes (1), (2), (3) and (4) of the definition of associate in the Takeovers Code.
(g) Save for the Underwriting Agreement, no agreement, arrangement or understanding (including any compensation arrangement) existed between the Underwriter or any party acting in concert with it and any of the Directors, recent Directors, Shareholders or recent Shareholders having any connection with or dependence upon the Open Offer or the Whitewash Waiver as at the Latest Practicable Date.
(h) No person has irrevocably committed itself, himself or herself to vote for or against the Open Offer and the Whitewash Waiver as at the Latest Practicable Date.
(i) Save for the interests of Multi-Investment and Mr. Frank Kwok-Kit Chu in CAG, the Underwriter and parties acting in concert with it, including the director of the Underwriter, do not own or control any Existing Shares as at the Latest Practicable Date.
(j) No pension fund of the Company and its subsidiaries, any subsidiaries of the Company, or any advisers to the Company as specified in class (2) of the definition of associate but excluding exempt principal traders had any interests in the Existing Shares as at the Latest Practicable Date.

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GENERAL INFORMATION

APPENDIX IV

(k) No fund manager connected with the Company has managed any Existing Shares on a discretionary basis during the six months prior to the date of the Announcement and up to and including the Latest Practicable Date.
(l) None of the Directors has decided, in respect of their own beneficial shareholdings in the Company, if any, to vote for or against the Whitewash Waiver.

6. MATERIAL CONTRACTS

The following contracts (not being contracts entered into in the ordinary course of business) have been entered into by the CAG Group after the date two years immediately preceding the date of the Announcement which are or may be material:

(i) the Underwriting Agreement;
(ii) a deed of indemnity executed by the Company in favour of Shun Cheong dated 31 March 2006 to guarantee and indemnify unconditionally and irrevocably all liabilities and obligations of Chinney Alliance Trading (BVI) Limited as vendor of a sale and purchase agreement dated 26 January 2006 for the Acquisition and of Shun Cheong under the corporate guarantees provided by Shun Cheong to certain banks for general banking facilities granted to certain subsidiaries of Shun Cheong Investments Limited;
(iii) a sale and purchase agreement dated 26 January 2006 entered into between Shun Cheong, which was owned as to approximately 29.93% by the Company (before the disposal of the Company’s interest in Shun Cheong as mentioned in paragraph (ii) above) (as vendor), Chinney Alliance Trading (BVI) Limited, a wholly-owned subsidiary of the Company (as purchaser) and the Company as purchaser’s guarantor in relation to the Acquisition for a cash consideration of HK$35,000,000 (as refer to in the Company’s circular dated 10 March 2006);
(iv) a sale and purchase agreement dated 26 October 2005 entered into between Best Treasure Limited, a wholly-owned subsidiary of the Company (as vendor), Chinney Construction (BVI) Limited, a 86.05% owned subsidiary of CIL (as purchaser) and the Company as vendor’s guarantor in relation to the disposal of the entire issued share capital of Jackson Mercantile Trading Company Limited for a cash consideration of HK$7,800,000 (as refer to in the Company’s circular dated 11 November 2005); and
(v) a sale and purchase agreement dated 27 September 2005 entered into between DMT International Hong Kong Limited, a wholly-owned subsidiary of the Company (as vendor) and Mr. Lung Yee Cheong (as purchaser) in relation to the disposal of a 30% interest in DMT PVC (a 70% owned direct subsidiary of DMT) at a consideration of HK$888,000 (as announced on 27 September 2005).

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APPENDIX IV

7. DIRECTORS’ SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors has any existing or proposed service contract(s) with any member of the CAG Group and CAG’s associated companies which have been entered into or amended within six months before the date of the Announcement, which are continuous contracts with a notice period of 12 months or more or which are fixed service contracts with more than 12 months to run irrespective of notice period.

8. LITIGATION

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

9. EXPERTS

The qualifications of the experts who have provided their opinion or report contained in this circular are set out as follows:

Name	Qualification
Veda Capital	a licensed corporation to carry out type 6 regulated
	activities (advising on corporate finance) under the
	SFO
Ernst & Young	certified public accountants

As at the Latest Practicable Date, neither Veda Capital nor Ernst & Young had any beneficial interest in the share capital of any member of the CAG Group or had any right, whether legally enforceable or not, to subscribe for or to nominate persons to subscribe for securities in any member of the CAG Group or had any interest, either directly or indirectly, in any assets which have been, since 31 December 2005, being the date to which the latest published audited accounts of the Company were made up, acquired or disposed of by or leased to or are proposed to be acquired or disposed of by or leased to any member of the CAG Group.

Each of Veda Capital and Ernst & Young has given and has not withdrawn its written consent to the issue of this document with the inclusion herein of its letter and/or references to its names, in the form and context in which it respectively appears.

10. MISCELLANEOUS

The English language text of this circular shall prevail over the Chinese language text.

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GENERAL INFORMATION

APPENDIX IV

11. CORPORATE INFORMATION

Head office and principal place 18/F, 77 Des Voeux Road Central of business Hong Kong Executive Directors James Sai-Wing Wong (Chairman) Stephen Sek-Kee Yu Frank Kwok-Kit Chu Non-executive Director Herman Man-Hei Fung Independent Non-executive William Gage McAfee Directors David Chung-Shing Wu Vincent Tian-Quan Mo Legal adviser of the Company On Hong Kong Law in relation to the Open Offer Tsun and Partners, Solicitors Suites 1002-1003, Aon China Building 29 Queen’s Road Central Hong Kong

On Bermuda Law Conyers Dill & Pearman 2901 One Exchange Square 8 Connaught Place Central Hong Kong Company Secretary Yun-Sang Lo, BBA, CPA, FCCA Qualified Accountant Sai-Man Lau, CPA Authorised Representatives Stephen Sek-Kee Yu Yun-Sang Lo Principal Bankers CITIC Ka Wah Bank Limited 232 Des Voeux Road Central Hong Kong Standard Chartered Bank (Hong Kong) Limited Standard Chartered Bank Building 4-4A Des Voeux Road Central Hong Kong

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GENERAL INFORMATION

APPENDIX IV

The Hongkong and Shanghai Banking Corporation Limited 1 Queen’s Road Central Hong Kong Hong Kong Branch Share Tengis Limited Registrar 26th Floor, Tesbury Centre 28 Queen’s Road East Wanchai Hong Kong Principal Share Registrar The Bank of Bermuda Limited 6 Front Street Hamilton HM 11 Bermuda Auditors Ernst & Young Certified Public Accountants 18th Floor Two International Finance Centre 8 Finance Street Central Hong Kong Financial Advisers to the Company Evolution Watterson Securities Limited 5th Floor 8 Queen’s Road Central Hong Kong Independent Financial Adviser Veda Capital Limited to the Independent Board Suite 11-12, 13th Floor Committees and Independent Nam Fung Tower Shareholders 173 Des Voeux Road Central Hong Kong Underwriter Enhancement Investments Limited 18th Floor 77 Des Voeux Road Central Hong Kong Sole director and shareholder Dr. Wong of the Underwriter

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GENERAL INFORMATION

APPENDIX IV

12. DIRECTORS AND SENIOR MANAGEMENT

Executive Directors

James Sai-Wing Wong

Aged 68, was appointed an executive Director and Chairman in 1998. He is the chairman of Chinney, a director of Lucky Year Finance Limited, Chinney Holdings Limited, Newsworthy Resources Limited and Multi-Investment, all being substantial shareholders of the Company. He is also the chairman of Hon Kwok Land Investment Company, Limited (“Hon Kwok”). Chinney and Hon Kwok are both listed on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”). He was appointed a Justice of the Peace for Hong Kong in 1987.

Stephen Sek-Kee Yu

Aged 54, was appointed an executive Director in 1996. He is the managing director of Chinney Alliance Engineering Limited, Jacobson van den Berg (Hong Kong) Limited and Shun Cheong. Shun Cheong is listed on the Stock Exchange. He has worked with three North American banks for over seventeen years during which he held various posts including the chief executive of a Canadian bank in Hong Kong, prior to joining the CAG Group in 1994. He holds a Bachelor’s degree in Computer Science from the University of Western Ontario, Canada and a Master’s degree in Finance from the University of British Columbia, Canada. Mr. Yu was appointed Chief Financial Officer in addition to executive director of the Company on 11 April 2006.

Frank Kwok-Kit Chu

Aged 60, was appointed an executive Director in 1993. He is the managing director of DMT International Hong Kong Limited and Jacobson van den Berg (Hong Kong) Limited. He worked with a major Singaporean bank for sixteen years before he joined the CAG Group in 1989. He has over thirty years of experience in business, banking and finance in the region. He holds a Bachelor of Arts degree from Stanford University, USA and a Master’s degree in Business Administration from Cranfield Institute of Management, United Kingdom.

Non-executive Director

Herman Man-Hei Fung

Aged 68, was appointed a Director in 1998. He is the managing director of Chinney and a director of Lucky Year Finance Limited, Chinney Holdings Limited, Newsworthy Resources Limited and Multi-Investment, all being substantial shareholders of the Company. He is also the vice chairman of Hon Kwok. Chinney and Hon Kwok are both listed on the Stock Exchange.

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GENERAL INFORMATION

APPENDIX IV

Independent non-executive Directors

William Gage McAfee

Aged 63, was appointed an independent non-executive Director in 2000. He is the managing director of The GE Asia Pacific Capital Technology Fund, Asia Pacific Capital Limited and APC Asset Management (HK) Limited and a director of Internet Technology Group Limited.

Mr. McAfee has lived and worked in Hong Kong and Southeast Asia since the late 1960s. He served with the U.S. State Department in Vietnam from 1969 to 1971 and was also an adjunct professor at the Saigon Law School. For more than twenty years, he was with the American law firm Coudert Brothers where he was a founder of their East Asia group in Singapore and later the senior partner in Hong Kong. In 1992, he co-founded Asia Pacific Capital Limited, a direct investment company and in 1996 APC Asset Management (HK) Limited.

A former president of the American Chamber of Commerce in Hong Kong, Mr. McAfee has acted as an adviser to the Asian Development Bank, served on the General Committee of the Hong Kong General Chamber of Commerce, the Law Reform Commission and was the deputy chairman of the Hong Kong Community Chest. He is also a member of the Listing Committee of the Stock Exchange, the Council on Foreign Relations, the International Institute for Strategic Studies, the Asia Center Committee of Harvard University, the Development Board of Philips Academy, Andover, Board of Governors of the Chinese International School and served as an adviser to the Hong Kong Basic Law Consultative Committee. He received an A.B. in Government from Harvard College and a J.D. from Columbia Law School.

David Chung-Shing Wu

Aged 71, was appointed an independent non-executive Director in 2003. Mr. Wu had been a member of the Hong Kong Inland Revenue Board of Review for thirty-six years. He has substantial experience in the textile industry and securities investment. Prior to his retirement, he was the vice president of a US international investment bank. He holds a Bachelor’s degree in Economics from Harvard University, USA.

Vincent Tian-Quan Mo

Aged 42, was appointed an independent non-executive Director in 2003. He is a director of Shun Cheong, which is listed on the Stock Exchange, and the director and chief executive officer of Soufun Holdings Limited, a company conducting real estate internet business in the Mainland China. He has over ten years of experience in the provision of on-line information and analysis on the trading, leasing, financing and valuation of real estate properties. He holds a Bachelor’s degree in Mechanical Engineering from South China University of Technology, a Master’s degree in Economics and Management from Tsinghua University and a Master’s degree in Economics from Indiana University, USA.

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APPENDIX IV

13. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be made available for inspection during normal business hours (from 9:00 a.m. to 5:00 p.m.) on any weekday (except for public holidays) at the head office and principal place of business of the Company at 18th Floor, 77 Des Voeux Road Central, Hong Kong up to and including 3 October 2006, and will also be available on the websites of the Company at http://chinneyalliancegroup.etnet.com.hk and the Securities and Futures Commission at http://www.sfc.hk until (and including) the date of the SGM:

(a) the Underwriting Agreement;
(b) the memorandum of association and the bye-laws of the Company;
(c) the published audited consolidated financial statements of the Company for each of the two financial years ended 31 December 2004 and 2005;
(d) the letter from the Independent Board Committee, the text of which is set out on pages 24 to 25 of this circular;
(e) the letter from Veda Capital, the text of which is set out on page 26 to 40 of this circular;
(f) the comfort letter issued by Ernst & Young on unaudited pro forma statement of adjusted consolidated net tangible assets of the CAG Group, the text of which is set out in Appendix II to this circular;
(g) the written consents from each of Veda Capital and Ernst & Young as referred to in the paragraph headed ‘‘Experts” in this appendix;
(h) each of the material contracts, as referred to in the paragraph headed ‘‘Material Contracts” in this appendix;
(i) a circular of the Company dated 10 March 2006 in relation to the Acquisition for a cash consideration of HK$35.0 million (subject to adjustment);
(j) a circular of the Company dated 8 May 2006 in relation to the Company’s disposal of 32,000,000 shares of Shun Cheong to Upsky for a cash consideration of HK$9.6 million on 12 April 2006; and
(k) the letter dated 18 August 2006 from Multi-Investment to CAG in relation to its undertaking to subscribe for 69,237,478 Offer Shares that it is entitled to subscribe for under the Open Offer.

– 174 –

NOTICE OF SGM

==> picture [328 x 47] intentionally omitted <==

(Stock Code: 385)

NOTICE IS HEREBY GIVEN that a special general meeting of Chinney Alliance Group Limited (the “Company”) will be held at Chater Room III, Function Room Level, The Ritz-Carlton Hong Kong, 3 Connaught Road Central, Hong Kong on Tuesday, 3 October 2006 at 3:30 p.m. (the “Meeting”) for the purpose of considering, and if thought fit, passing the following resolutions:

SPECIAL RESOLUTION

“ THAT , with effect from 10:00 a.m. (Hong Kong time) on the business day in Hong Kong after the day on which this Resolution is duly passed and conditional upon the Listing Committee of The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) granting its approval to the listing of, and permission to deal in, the new ordinary shares of the Company of HK$0.10 each (the “New Shares”),
(i) the issued share capital of HK$39,659,949.75 of the Company be reduced by HK$23,795,969.85 to HK$15,863,979.90 by reducing the nominal value of every issued share from HK$0.25 to HK$0.10 so THAT each of such issued shares shall be treated as one fully paid share of HK$0.10 each (the “Capital Reduction”);
(ii) subject to and forthwith upon the Capital Reduction becoming effective, the credit which will arise as a result of the Capital Reduction shall be credited to the contributed surplus account of the Company, and the directors of the Company (the “Directors”) be and are hereby authorised to apply credits in the contributed surplus account in such manner as they in their absolute discretion consider appropriate in accordance with the By-laws of the Company and applicable laws (the “Application of Credit”);
(iii) subject to and forthwith upon the Capital Reduction becoming effective, the entire authorised but unissued share capital of the Company (including that arising from the Capital Reduction) be cancelled (“Authorised Capital Cancellation”);
(iv) subject to and forthwith upon the Authorised Capital Cancellation becoming effective, the authorised share capital of the Company be increased from such amount as shall have resulted from the Authorised Capital Cancellation to HK$250,000,000 by the creation of such number of new shares of HK$0.10 each as shall be necessary to restore the authorised share capital of the Company to HK$250,000,000 (“Capital Restoration”); and

– 175 –

NOTICE OF SGM

(v) the Directors be and are hereby authorised generally to do all acts and things, and to approve, sign and execute any other documents which in their opinion may be necessary, desirable or expedient to carry into effect or to give effect to the Capital Reduction and/or the Application of Credit and/or the Authorised Capital Cancellation and/or the Capital Restoration.”

ORDINARY RESOLUTIONS

“ THAT , subject to and conditional upon (i) passing of the resolution No. 1 set out in the notice convening the Meeting; (ii) the filing and/or registration of all documents relating to the Open Offer (as defined below) required by law to be filed and/or registered with the Registrar of Companies in Bermuda and Registrar of Companies in Hong Kong; (iii) the Listing Committee of the Stock Exchange granting listing of, and permission to deal in, the Offer Shares (as defined below) in their fully-paid form; and (iv) the underwriting agreement dated 18 August 2006 made between Enhancement Investments Limited as underwriter (the “Underwriter”) and the Company (the “Underwriting Agreement”), a copy of which has been produced to the Meeting marked “A” and signed by the chairman of the meeting for the purpose of identification, becoming unconditional and not being terminated in accordance with its terms; and (v) the granting of the Whitewash Waiver (as defined in the ordinary resolution No. 3 of the notice convening the Meeting) by the Securities and Futures Commission of Hong Kong, being fulfilled:
(i) the issue by way of an open offer (the “Open Offer”) of 237,959,698 new shares of HK$0.10 each in the capital of the Company (the “Offer Shares”) to those shareholders (the “Qualifying Shareholders”) whose names appear on the register of members of the Company at the close of business on 3 October 2006 or such other date as may be agreed between the Underwriter and the Company (the “Record Date”), other than the Excluded Shareholders (as defined in the circular of the Company dated 8 September 2006 (the “Circular”) and dispatched to the shareholders of the Company containing the notice convening the Meeting, a copy of which has been produced to the Meeting marked “B” and signed by the chairman of the Meeting for the purpose of identification), in the proportion of three Offer Shares for every two New Shares held on the Record Date at the subscription price of HK$0.25 per Offer Share and on the terms and conditions as set out in the Circular, be and is hereby approved;
(ii) the Directors be and are hereby authorized to allot and issue the Offer Shares in the manner aforesaid under and in connection with the Open Offer provided that no Offer Shares shall be offered to the Excluded Shareholders, and such Offer Shares together with any Offer Shares offered to, but not accepted by, the Qualifying Shareholders shall be offered for application under forms of application for excess Offer Shares; and

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NOTICE OF SGM

(iii) the Directors be and are hereby authorised to do such acts and things and execute such documents (with the Company’s seal(s) affixed thereto, if applicable) which in their opinion may be necessary, desirable or expedient to carry out or give effect to any or all the transactions contemplated in this resolution and the Circular.”
“ THAT the waiver (the “Whitewash Waiver”) for Enhancement Investments Limited and parties acting in concert with it, including Multi-Investment Group Limited and Mr. Frank Kwok-Kit Chu, from their obligations which may arise under Rule 26 of the Hong Kong Code on Takeovers and Mergers to make a mandatory general offer to the shareholders of the Company for all the issued shares of the Company not already owned by the Underwriter and parties acting in concert with it, including Multi-Investment Group Limited and Mr. Frank Kwok-Kit Chu, as a result of the transactions contemplated under the underwriting agreement dated 18 August 2006 entered into between the Company and Enhancement Investments Limited in respect of an open offer of 237,959,698 Offer Shares (as defined in ordinary resolution No. 2 as set out in this notice convening the Meeting) to shareholders of the Company on the basis of three Offer Shares for two New Shares held, be and is hereby approved and that the Directors be and are hereby authorized to do all things and acts and sign all documents which they consider desirable or expedient to implement or give effect to any matters relating to or in connection with the Whitewash Waiver.”

By Order of the Board Yun-Sang Lo Company Secretary

Hong Kong, 8 September 2006

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NOTICE OF SGM

Notes:

(1) A shareholder entitled to attend and vote at the above meeting (or at any adjournment thereof) is entitled to appoint one or more proxies to attend and vote instead of the shareholder. The proxy need not be a shareholder of the Company.
(2) In order to be valid, a form of proxy in the prescribed form, together with the power of attorney or other authority (if any) under which it is signed or a certified copy of that power of attorney or other authority must be completed, signed and deposited with the Company’s Hong Kong branch share registrar, Tengis Limited at 26/F, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong, not less than 48 hours before the time appointed for holding the above meeting or any adjournment thereof.
(3) Where there are joint registered holders of any shares, any one of such joint holders may vote at the above meeting (or at any adjournment thereof), either in person or by proxy, in respect of such shares as if he were solely entitled thereto, but if more than one of such joint holders be present at the meeting, the vote of the senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holders, and for this purpose seniority shall be determined by the order in which the names stand in the register of members of the Company in respect of the joint holding.
(4) Pursuant to bye-law 66 of the Company’s Bye-laws, a resolution put to the vote of a general meeting shall be decided on a show of hands unless (before or on the declaration of the result of the show of hands or on the withdrawal of any other demand for a poll) a poll is demanded by:
(a) the chairman of such meeting; or
(b) at least three shareholders of the Company (the “Shareholder(s)”) present in person or in the case of a Shareholder being a corporation by its duly authorised representative or by proxy for the time being entitled to vote at the meeting; or
(c) a Shareholder or Shareholders present in person or in the case of a Shareholder being a corporation by its duly authorised representative or by proxy and representing not less than one-tenth of the total voting rights of all Shareholders having the right to vote at the meeting; or
(d) by a Shareholder or Shareholders present in person or in the case of a Shareholder being a corporation by its duly authorised representative or by proxy and holding shares 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 shares conferring that right.

A demand by a person as proxy for a Shareholder or in the case of a Shareholder being a corporation by its duly authorised representative shall be deemed to be the same as a demand by a Shareholder.

At the date of hereof, the Board comprises the following directors:

Executive Directors Dr. James Sai-Wing Wong Mr. Stephen Sek-Kee Yu Mr. Frank Kwok-Kit Chu

Non-Executive Director Mr. Herman Man-Hei Fung

Independent Non-Executive Directors Mr. William Gage McAfee Mr. David Chung-Shing Wu Mr. Vincent Tian-Quan Mo

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AI assistant

Chinney Alliance Group Limited — Proxy Solicitation & Information Statement 2006

49180_rns_2006-09-08_3ec5d7b5-2df0-40be-9914-63f3b10a9899.pdf

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

(Stock Code: 385)

PROPOSED CAPITAL REDUCTION

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

EXPECTED TIMETABLE

EXPECTED TIMETABLE

EFFECT OF BAD WEATHER ON THE LATEST TIME FOR ACCEPTANCE OF AND PAYMENT FOR THE OPEN OFFER

PROPOSED CAPITAL REDUCTION

INTRODUCTION

LETTER FROM THE BOARD

CAPITAL REDUCTION

Effects of the Capital Reduction

LETTER FROM THE BOARD

Conditions of the Capital Reduction

Reason for the Capital Reduction

LETTER FROM THE BOARD

Free exchange of New Share certificates and trading arrangement

THE OPEN OFFER

Issue statistics

Qualifying Shareholders

LETTER FROM THE BOARD

Closure of register of members

The Subscription Price

LETTER FROM THE BOARD

Status of the Offer Shares

Certificates for the Offer Shares and refund cheques

Rights of the Excluded Shareholders

Application for excess Offer Shares

LETTER FROM THE BOARD

Independent Shareholders’ approval at the SGM

Application for listing

LETTER FROM THE BOARD

Undertaking by Multi-Investment

The Underwriting Agreement

Termination of the Underwriting Agreement

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Conditions of the Open Offer

LETTER FROM THE BOARD

Shareholding changes of CAG

LETTER FROM THE BOARD

Information on Multi-Investment, Chinney and CAG Group

The Share Options

Reasons for the Open Offer and use of proceeds

LETTER FROM THE BOARD

Fund raising activities of CAG during the past 12 months

Warning of risks of dealings in the Existing Shares and New Shares

The Whitewash Waiver

LETTER FROM THE BOARD

SGM

LETTER FROM THE BOARD

Right to demand a poll

Recommendation

LETTER FROM THE BOARD

Additional information

(Stock Code: 385)

PROPOSED CAPITAL REDUCTION

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

William Gage McAfee

Vincent Tian-Quan Mo

Veda Capital Limited

PROPOSED OPEN OFFER OF NEW SHARES ON THE BASIS OF THREE OFFER SHARES FOR EVERY TWO NEW SHARES HELD AND APPLICATION FOR WHITEWASH WAIVER

INTRODUCTION

LETTER FROM VEDA CAPITAL

BASIS OF OUR ADVICE

LETTER FROM VEDA CAPITAL

PRINCIPAL FACTORS AND REASONS CONSIDERED

Financial and business highlights of the CAG Group

LETTER FROM VEDA CAPITAL

Reasons for the Open Offer and the use of proceeds

Terms of the Open Offer

LETTER FROM VEDA CAPITAL

(a) Review on share prices and historical closing prices

Chinney Alliance Group Limited Proxy Solicitation & Information Statement 2006