CR Construction Group Holdings Limited - Proxy Solicitation & Information Statement 2003

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

If you have sold or transferred all your shares in KEL Holdings Limited, you should at once hand this circular and the accompanying form of proxy to the purchaser or the transferee to the bank, stockbroker or other agent through whom the sale was effected for transmission to the purchaser or the transferee.

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

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KEL HOLDINGS LIMITED

(Incorporated in Bermuda with limited liability)

MAJOR AND CONNECTED TRANSACTION

PROPOSED ACQUISITION OF THE ENTIRE ISSUED SHARE CAPITAL OF BILLION TREASURE HOLDINGS LIMITED AND RELATED SHAREHOLDER’S LOAN

PROPOSED CAPITAL REORGANISATION AND GRANT OF GENERAL MANDATES TO ISSUE AND REPURCHASE SHARES OF THE COMPANY

Independent Financial Adviser to the Independent Shareholders

F IRST S HANGHAI G ROUP

First Shanghai Capital Limited

A letter from the Board is set out on pages 5 to 17 of this circular.

A letter from First Shanghai Capital Limited setting out its advice and recommendation to the independent shareholders of KEL Holdings Limited is set out on pages 18 to 26 of this circular.

A notice convening a special general meeting of KEL Holdings Limited to be held at 11th Floor, Nanyang Plaza, 57 Hung To Road, Kwun Tong, Kowloon, Hong Kong at 11:00 a.m. on Monday, 12 May, 2003 is set out on pages 91 to 95 of this circular. A form of proxy for use at the special general meeting is enclosed with this circular. Whether or not you are able to attend the meeting, you are requested to complete and return the enclosed form of proxy in accordance with the instructions printed thereon to the branch share registrar of the Company at Tengis Limited, Ground Floor, BEA Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong as soon as possible and in any event by not later than 48 hours before the time appointed for the holding of the special general meeting or any adjournment thereof. Completion and return of the form of proxy shall not preclude you from attending and voting in person at the special general meeting or any adjourned meeting should you so wish.

17 April, 2003

		Page
EXPECTED TIMETABLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		ii
DEFINITIONS	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
LETTER FROM THE BOARD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		5
LETTER FROM FIRST SHANGHAI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		18
APPENDIX I	FINANCIAL INFORMATION OF THE GROUP . . . . . . . . . . . . . . .	27
APPENDIX II	FINANCIAL INFORMATION OF THE ENLARGED
	GROUP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	58
APPENDIX III	ACCOUNTANTS’ REPORT ON THE BILLION
	TREASURE GROUP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	61
APPENDIX IV	PROPERTY VALUATION REPORT . . . . . . . . . . . . . . . . . . . . . . . . . .	74
APPENDIX V	GENERAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	80
NOTICE OF SPECIAL GENERAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		91

– i –

2003

EXPECTED TIMETABLE

Latest time for lodging proxy forms for the Special General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11:00 a.m., Saturday, 10 May Date of the Special General Meeting . . . . . . . . . . . . . . . . . . . . . . . . 11:00 a.m., Monday, 12 May Effective date of the Capital Reorganisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tuesday, 13 May Dealings in the KEL New Shares on Stock Exchange commence . . . . . . . . . . . Tuesday, 13 May First day for free exchange of existing share certificates for new share certificates for KEL New Shares . . . . . . . . . . . . . . . . . . . . . . . . Tuesday, 13 May Last day for free exchange of existing share certificates for new shares certificates for KEL New Shares . . . . . . . . . . . . . 4:30 p.m., Thursday, 12 June

Notes: All references in this circular to times and dates are references to Hong Kong times and dates.

– ii –

DEFINITIONS

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

“Acquisition”
the acquisition by the Company of the entire issued share capital of Billion Treasure and the Shareholder’s Loan pursuant to the Acquisition Agreement (as amended by the Supplemental Agreement);
“Acquisition Agreement”
the agreement dated 6 March, 2003 entered into between Deson and the Company in respect of the Acquisition;
“associate(s)”
has the meaning ascribed to it under the Listing Rules;
“Billion Treasure”
Billion Treasure Holdings Limited, a company incorporated in the British Virgin Islands with limited liability and an indirect wholly-owned subsidiary of Deson;
“Billion Treasure Group”
Billion Treasure and Bless Honour;
“Bless Honour”
Bless Honour Limited, a company incorporated in Hong Kong with limited liability which is a wholly-owned subsidiary of Billion Treasure;
“Board” the board of Directors;
“Business Day”
a day (other than a Saturday or a Sunday) on which banks are open for business in Hong Kong;
“Capital Reorganisation”

the reorganisation of the share capital of the Company involving (i) the reduction of the nominal value of each of the shares in the issued share capital of the Company from HK$0.10 to HK$0.07; (ii) the credit in the sum of HK$25,868,329.77 arising from the reduction of capital be applied to set off against an equivalent amount of the audited accumulated loss of HK$670,337,000 of the Company as at 31 March, 2002; and (iii) the authorised share capital of the Company be reduced to HK$126,000,000 divided into 1,800,000,000 shares of HK$0.07 each and, forthwith upon such reduction, the authorised share capital of the Company will immediately be increased to the amount of HK$179,999,999.97 (being as near to the original amount of authorised share capital of HK$180,000,000 as practicable) by the creation of the requisite number of the KEL New Shares;

– 1 –

DEFINITIONS

“CCASS” the Central Clearing and Settlement System established and operated by HKSCC;
“Company” KEL Holdings Limited, an exempted company incorporated in Bermuda with limited liability the shares of which are listed on the main board of the Stock Exchange;
“Companies Act” the Companies Act 1981 of Bermuda (as amended);
“Consideration Shares” 657,142,857 KEL New Shares to be issued to Deson (or as it may direct) as consideration for the Acquisition at the issue price of HK$0.07 per KEL New Share;
“Deson” Deson Development International Holdings Limited, an exempted company incorporated in Bermuda with limited liability, the shares of which are listed on the main board of the Stock Exchange and which is the ultimate holding company of the Company;
“Deson Group” Deson and its subsidiaries other than companies comprising the Group;
“Directors” the directors of the Company;
“Disposal” the disposal by the Deson Group of the entire share capital of Billion Treasure and the Shareholder’s Loan pursuant to the Acquisition Agreement (as amended by the Supplemental Agreement);
“Enlarged Group” the Group as enlarged following completion of the Acquisition;
“First Shanghai” First Shanghai Capital Limited, a deemed licensed corporation to carry on a business in type 6 regulated activity (advising on corporate finance) under the SFO and the independent financial adviser to the Independent Shareholders in relation to the Acquisition and the issue of the Consideration Shares;
“General Mandate” the general mandate proposed to be granted to the Directors to allot, issue and deal with the KEL Shares as described on this circular;

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DEFINITIONS

“Group” the Company and its subsidiaries;
“HK$” Hong Kong dollars, the lawful currency of Hong Kong;
“HKSCC” Hong Kong Securities Clearing Company Limited;
“Hong Kong” the Hong Kong Special Administrative Region of the People’s Republic of China;
“Independent Shareholders” the shareholders of the Company, other than Deson and its associates;
“Independent Third Parties” persons or companies other than the directors, the chief executives and the substantial shareholders (as defined in the Listing Rules) of the Company or Deson (as the case may be) or any of its subsidiaries and/or their respective associates;
“KEL Existing Share(s)”
Share(s) of HK$0.10 each in the authorised capital of the Company existing as at the Latest Practicable Date;
“KEL New Share(s)”
Share(s) of HK$0.07 each in the authorised capital of the Company arising from the Capital Reorganisation;
“KEL Share(s)” or “Shares”
the KEL New Share(s) or the KEL Existing Share(s), as the case may be;
“Latest Practicable Date”
10 April, 2003, being the latest practicable date prior to the printing of this circular for ascertaining certain information included in this circular;
“Listing Rules”
the Rules Governing the Listing of Securities on the Stock Exchange;
“Properties” the properties comprising 24th, 27th and 28th floors and 19 carparks at Zhongda Square;
“Repurchase Mandate”
the general mandate proposed to be granted to the Directors to repurchase KEL New Shares as described in this circular;
“Sale Shares”
1,000 shares of US$1.00 each in the share capital of Billion Treasure;

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DEFINITIONS

“SFO” the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong);
“Shareholder(s)” holder(s) of KEL Share(s);
“Shareholder’s Loan” the loan due by the Billion Treasure Group to the Deson Group which stood at the amount of HK$40,236,066 as at 28 February, 2003;
“Special General Meeting” the special general meeting of the Company to be held at 11th Floor, Nanyang Plaza, 57 Hung To Road, Kwun Tong, Kowloon, Hong Kong at 11:00 a.m. on Monday, 12 May, 2003, a notice of which is set out on pages 91 to 95 of this circular;
“Stock Exchange” The Stock Exchange of Hong Kong Limited;
“Super Win” Super Win Development Limited, a company incorporated in the British Virgin Islands and a wholly owned subsidiary of Deson, Super Win currently owns approximately 55.62% of the issued share capital of the Company;
“Supplemental Agreement”
the supplemental agreement dated 10 April, 2003 entered into between Deson and the Company pursuant to which certain terms of the Acquisition Agreement have been revised;
“Takeovers Code”
The Hong Kong Code on Takeovers and Mergers;
“Zhongda Square”
a 28-storey commercial/office complex with 2 levels of basement carparks on 989 Dongfang Road, Lujiazui, Pudong District, Shanghai, the People’s Republic of China;
“%”
per cent.

– 4 –

LETTER FROM THE BOARD

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KEL HOLDINGS LIMITED

(Incorporated in Bermuda with limited liability)

Directors:

Registered Office:

Executive Mr. Wang Ke Duan (Chairman) Mr. Tjia Boen Sien (Managing Director and Deputy Chairman) Mr. Wang Jing Ning Mr. Keung Kwok Cheung Mr. Kong Kwok Fai Mr. Song Sio Chong

Independent Non-executive: Mr. Siu Man Po Ms. Wong Sin Yee

Cedar House 41 Cedar Avenue Hamilton HM12 Bermuda

Principal place of business and head office:

11th Floor, Nanyang Plaza 57 Hung To Road, Kwun Tong Kowloon Hong Kong

17 April, 2003

To the Shareholders and, for information only, holders of convertible notes and share options granted or issued by the Company

Dear Sir or Madam,

MAJOR AND CONNECTED TRANSACTION

PROPOSED ACQUISITION OF THE ENTIRE ISSUED SHARE CAPITAL OF BILLION TREASURE HOLDINGS LIMITED AND RELATED SHAREHOLDER’S LOAN

PROPOSED CAPITAL REORGANISATION AND GRANT OF GENERAL MANDATES TO ISSUE AND REPURCHASE SHARES OF THE COMPANY

INTRODUCTION

The Board announced on 6 March, 2003 that the Company entered into the Acquisition Agreement with Deson on 6 March, 2003 for the acquisition of the entire issued share capital of Billion Treasure and the Shareholder’s Loan and the capital reorganisation of the Company involving, among other things, the reduction of the nominal value of the shares in the issued share capital of the Company from HK$0.10 per share to HK$0.01 per share. It was also announced on 10 April, 2003 that the Company entered into the Supplemental Agreement with

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LETTER FROM THE BOARD

Deson on 10 April, 2003 pursuant to which certain terms of the Acquisition Agreement relating to the capital reorganisation of the Company involving, among other things, the reduction of the nominal value of the shares in the issued share capital of the Company from HK$0.10 per share to HK$0.01 per share have been amended and the latest time for fulfilment of all conditions precedent to the completion of the Acquisition as stated in the joint announcement of the Company dated 6 March, 2003 has been extended from 30 April, 2003 to 30 May, 2003.

The total consideration of HK$46,000,000 will be satisfied by the Company by way of issuing 657,142,857 Consideration Shares to Deson (or as it may direct).

In order to facilitate the Acquisition by enabling the Company to issue and allot the Consideration Shares, the Board proposes to reduce the nominal value of the shares in the issued capital of the Company by reducing issued share capital to the extent of HK$0.03 in respect of each KEL Existing Share in issue.

The Acquisition constitutes a major transaction for the Company under the Listing Rules. Since Deson is a controlling shareholder of the Company having an indirect shareholding interest of approximately 55.62% in the Company, the Acquisition also constitutes a connected transaction for the Company under the Listing Rules and is required to be made conditional upon the approval of the Independent Shareholders at the Special General Meeting. Deson, through Super Win, will abstain from voting on the resolutions to approve the Acquisition to be proposed at the Special General Meeting. After completion of the Acquisition, which is expected to take place on or before 30 May, 2003, Deson will be interested in approximately 74.81% of the issued share capital of the Company as enlarged by the issue of the Consideration Shares (assuming no other issue of KEL Shares in the interim).

Given that the independent non-executive Directors also act as the independent nonexecutive directors of Deson, no independent board committee of the Company has been established by the Board in connection with the Acquisition and the issue of the Consideration Shares. First Shanghai is the independent financial adviser to the Independent Shareholders in respect of the Acquisition and the issue of the Consideration Shares. The purpose of this circular is (i) to provide Shareholders with further information relating to the Acquisition, the issue of the Consideration Shares, the Capital Reorganisation and the General Mandate and the Repurchase Mandate; (ii) to set out the advice from First Shanghai to the Independent Shareholders in respect of the Acquisition and the issue of the Consideration Shares; and (iii) to give Shareholders notice of the Special General Meeting to be convened for the purpose of considering and, if thought fit, approving the Acquisition, the issue of the Consideration Shares, the General Mandate and the Repurchase Mandate.

THE ACQUISITION AGREEMENT

Date of the Acquisition Agreement

6 March, 2003

– 6 –

LETTER FROM THE BOARD

Parties and assets involved

Vendor : Deson Purchaser : the Company Assets to be acquired : (i) 1,000 shares of US$1.00 each in the issued share capital of Billion Treasure, representing the entire issued share capital of Billion Treasure, the sole asset of which is the entire issued share capital of Bless Honour; Bless Honour owns the Properties with a total gross floor area of 3,098.49 sq.m. (excluding the 19 carparks); apart from such properties, Bless Honour does not have any other material assets or properties; and

(ii) the Shareholder’s Loan.

Consideration

Set out below are the details of the consideration payable by the Company and the method of settlement under the Acquisition Agreement:

Consideration : A sum of HK$46,000,000, of which HK$5,763,934 shall be attributable to the acquisition of the Sale Shares and HK$40,236,066 shall be attributable to the acquisition of the Shareholder’s Loan. The sum of HK$46,000,000 represents a discount of approximately 3.86% to the unaudited consolidated net tangible assets value of the Billion Treasure Group as at 28 February, 2003, adjusted for the valuation surplus of approximately HK$6,316,619 (being the surplus of the value as stated in the valuation report dated 17 April, 2003 as set out in Appendix IV to this circular, to the net book value of the Properties as stated in the unaudited accounts of Bless Honour as at 28 February, 2003).

Method of settlement : By way of issuing 657,142,857 KEL New Shares to Deson (or as it of consideration may direct) at an issue price of HK$0.07 per KEL New Share.

The consideration for the Acquisition and the Disposal was arrived at after arm’s length negotiations between Deson and the Company by reference to the current open market value of the Properties as at 4 March, 2003 of HK$48,000,000 as stated in the valuation report dated 17 April, 2003 as set out in Appendix IV to this circular prepared by B.I. Appraisals Limited, an independent firm of chartered surveyors, not connected with the directors, chief executives or substantial shareholders of the Company or Deson or any of their respective subsidiaries or any of their respective associates. As at 31 March, 2002, the net book value of the Properties carried in the audited accounts of Bless Honour for the year then ended amounted to approximately HK$41,683,381.

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LETTER FROM THE BOARD

The Consideration Shares, which are issued at HK$0.07 each, represent approximately 76.21% of the existing issued share capital of the Company and approximately 43.25% of the issued share capital of the Company as enlarged by the issue of the Consideration Shares (assuming no other issue of KEL Shares in the interim).

An application has been made to the Stock Exchange for the listing of and permission to deal in the Consideration Shares.

Issue price of the Consideration Shares

The issue price per Consideration Share is HK$0.07 which represents:

no discount to the closing price of HK$0.07 per KEL Share as quoted on the Stock Exchange on 3 March, 2003, being the last trading day prior to suspension of trading in the KEL Shares on the Stock Exchange pending the issue of the announcement of the Company dated 6 March, 2003;
a discount of approximately 7.16% to the average closing price of HK$0.0754 per KEL Share for the 10 trading days up to and including 3 March, 2003;
a discount of approximately 10.14% to the average closing price of HK$ 0.0779 per KEL Share for the 30 trading days up to and including 3 March, 2003; and
no discount to the closing price of HK$0.07 per KEL Share on the Latest Practicable Date.

As at 31 March, 2002, the audited consolidated net tangible assets of the Group were approximately HK$4,928,000, equivalent to net assets of approximately HK$0.0057 per KEL Share.

Conditions precedent

Completion of the Acquisition Agreement is conditional upon, among other things, the following conditions being fulfilled:

(i) the passing by the Independent Shareholders of the necessary resolutions to approve the Acquisition, the issue of the Consideration Shares and other transactions contemplated in the Acquisition Agreement in accordance with the Listing Rules and the passing by the Shareholders of the necessary resolutions to approve the Capital Reorganisation;
(ii) the passing by the shareholders of Deson of the necessary resolutions to approve the Disposal in accordance with the Listing Rules;

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LETTER FROM THE BOARD

(iii) all necessary consents for the Capital Reorganisation having been obtained and the Capital Reorganisation having become effective; and
(iv) the Stock Exchange having granted listing of and permission to deal in the Consideration Shares and the KEL New Shares.

In the event that the above conditions are not fulfilled on or before 30 May, 2003 (or such later date as may be agreed between the parties to the Acquisition), the Acquisition Agreement shall lapse.

Completion

Completion of the Acquisition Agreement shall take place on the second Business Day after the fulfilment of the above conditions, or such later date as the relevant parties may agree in writing prior to 30 May, 2003. Completion of the Acquisition is expected to take place no later than 30 May, 2003.

INFORMATION ON BILLION TREASURE

Billion Treasure is an investment holding company and is beneficially interested in the entire issued share capital of Bless Honour. Apart from its interests in Bless Honour and the Shareholder’s Loan, Billion Treasure does not carry on any business or has any outstanding liabilities or other assets. As at 31 March, 2002, the unaudited consolidated net asset value of the Billion Treasure Group was HK$652,292.94.

INFORMATION ON BLESS HONOUR

Bless Honour is principally engaged in the business of property investment in the People’s Republic of China and solely owns the Properties with a total gross floor area of 3,098.49 sq.m. (excluding the 19 carparks). The majority of the Properties with a total gross floor area of 2,955.93 sq.m. are currently let by Bless Honour to Independent Third Parties. However, the other properties with a total gross floor area of 142.56 sq.m. has been leased by Deson Development Limited, a wholly-owned subsidiary of Deson. After the Acquisition, the leasing of the said properties from Bless Honour to Deson Development Limited will constitute a connected transaction for the Company and Deson. Deson has undertaken to lease from Bless Honour on normal commercial terms for a term of one year at market value after completion of the Acquisition. As the annual rental of HK$98,178 payable by Deson Development Limited to Bless Honour does not exceed HK$1,000,000, such transaction will fall within the de minimis exemption in Rule 14.24(5) of the Listing Rules and will, therefore, not be subject to any of the shareholders’ approval, announcement or notification requirements applicable to connected transactions in Chapter 14 of the Listing Rules.

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LETTER FROM THE BOARD

The audited net profit and the total rental income of Bless Honour for the year ended 31 March, 2001 and the year ended 31 March, 2002 are set out as follows:

	Year ended	Year ended
	31 March, 2001	31 March, 2002
	HK$	HK$
Profit before taxation	283,161	530,186
Profit attributable to shareholders	230,810	426,810
Total rental income	673,908	1,088,169

The audited net asset value of Bless Honour was HK$ 670,145 as at 31 March, 2002 (comprising total assets of HK$ 50,618,638 including the book value of the Properties held by Bless Honour, cash and bank balances, loan due from fellow subsidiaries and other receivables as at 31 March, 2002 and total liabilities of HK$49,948,493 including the loan due to Billion Treasure, bank loans and tenancy deposits as at 31 March, 2002). The rental income of Bless Honour for each of the two years ended 31 March, 2002 were HK$673,908 and HK$1,088,169 respectively. Out of the 13 existing tenancy agreements, 7 of them will expire on or before 31 March, 2004, in view of the growth potential of Shanghai’s property market as stated in the paragraph headed “Reasons for the Acquisition” below, the Directors expect that Bless Honour may renew those tenancy agreements or enter into new tenancy agreements at comfortable rental rate commensurate with those of the other similar properties in Shanghai. With respect to the 7 tenancy agreements which will expire on or before 31 March, 2004, the Directors expect that, on the basis of the current market rental value of Zhongda Square, their respective rental yield may increase by approximately 23%. Based on the current market rental value of Zhongda Square, the Directors expect that the rental yield of the Properties may increase by approximately 35% in the coming years.

At present, the board of directors of Bless Honour consists of 3 members who are representatives of the Deson Group. The Directors do not presently intend to change the member of the existing board of directors of Bless Honour after completion of the Acquisition Agreement.

REASONS FOR THE ACQUISITION

The Group is principally engaged in the provision of electrical and mechanical engineering services and the leasing of construction machinery and equipment. Despite the Acquisition, following which the Group will (as explained below) receive a reliable source of rental income from the leasing of the Properties at Zhongda Square, the Group will from time to time render its longer term intention with regard to its investment in the Properties, taking into account the conditions for the time being of the commercial property market in Shanghai and will continue to focus on the provision of electrical and mechanical engineering services and the leasing of construction machinery and equipment.

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LETTER FROM THE BOARD

In view of the difficult operating environment for engineering and maintenance contractors, the Directors consider that the acquisition of Billion Treasure which indirectly owns the Properties would strengthen the financial condition of the Group by providing a source of reliable recurring rental income and an additional cash flow stream to the Group. In addition, Shanghai’s successful bid to host the 2010 World Expo coupled with the establishment of the Shanghai Universal Studio will stimulate the property market in Shanghai. Further, in view of the buoyant property market in the core business districts in Shanghai, in one of where the principal assets of Billion Treasure are located, they believe that the Acquisition would also represent an investment by the Company with potential for future appreciation in capital value.

The consideration for the Acquisition will be satisfied in full by the issue of Consideration Shares and there is no cash requirement on the Group to fund the Acquisition. As at 30 September, 2002, the Company had unaudited consolidated net assets of HK$2,140,000. Having considered the cashflow and the net assets position of the Company, the Directors considered that it would be beneficial to the Company to issue shares as consideration for the Acquisition. As such, the Acquisition will not affect the existing cash flow position of the Group. The issue of the Consideration Shares by the Company to satisfy the payment of the consideration for the Acquisition will also have a positive effect on the consolidated balance sheet of the Group.

With reference to (i) the closing price of HK$0.07 per KEL Share as quoted on the Stock Exchange on 3 March, 2003, being the last trading day prior to suspension of trading in the KEL Shares on the Stock Exchange pending the issue of the joint announcement of the Company dated 6 March, 2003, (ii) the average closing price of HK$0.0754 per KEL Share for the 10 trading days up to and including 3 March, 2003 and (iii) the average closing price of HK$ 0.0779 per KEL Share for the 30 trading days up to and including 3 March, 2003, the Directors consider the issue price of HK$0.07 per Consideration Share is fair and reasonable.

In view of the above, the Directors consider the terms of the Acquisition Agreement to be fair and reasonable and are in the best interests of the Company and its Shareholders as a whole.

EFFECTS OF THE ACQUISITION

Shareholding structure

The shareholding of Deson in the Company prior to and immediately after completion of the Acquisition are 479,581,399 KEL Existing Shares representing 55.62% of the existing issued share capital of the Company and 1,136,724,256 KEL New Shares representing 74.81% of the issued share capital of the Company as enlarged by the issue of the Consideration Shares (assuming no other issue of KEL Shares in the interim). As advised by the directors of Deson, Deson has no present intention to acquire any further shares in the Company and Deson will make appropriate steps to ensure not less than 25% of the KEL Shares will be held by the public.

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LETTER FROM THE BOARD

Net tangible assets

Set out in Appendix II to this circular is a pro forma statement of unaudited combined assets and liabilities of the Enlarged Group. Upon the completion of the Acquisition, the pro forma unaudited consolidated net asset value of the Enlarged Group would be increased by approximately 21 times to approximately HK$47,670,000 based on the unaudited consolidated net asset value of the Group as at 30 September, 2002. Based on 1,519,420,516 shares issued and to be issued upon the completion of the Acquisition, the pro forma consolidated net asset value of the Enlarged Group would be increased to approximately HK$0.0314 per KEL Share.

Earnings

Completion of the Acquisition will have the following impact of the Group’s net loss:

(i) the net profit of the Billion Treasure Group will be applied to set off the Group’s net loss; and
(ii) the Acquisition will further strengthen the financial position of the Group which, in turn, can reduce the overall finance costs of the Company.

CAPITAL REORGANISATION

Proposal for the Capital Reorganisation

It was originally proposed that the Company would effect a capital reorganisation involving, among other things, the reduction of the nominal value of the shares in the issued share capital of the Company from HK$0.10 to HK$0.01 as stated in the announcement of the Company dated 6 March, 2003. Given that the Company and Deson intended to reduce the nominal value of the Shares of the Company to an extent sufficient for facilitating the Acquisition by enabling the Company to issue and allot the Consideration Shares, the Company and Deson entered into the Supplemental Agreement pursuant to which certain terms of the above-mentioned capital reorganisation has been amended. As such, the Company will effect the Capital Reorganisation in order to facilitate the Acquisition by enabling the Company to issue and allot the Consideration Shares. The Capital Reorganisation as referred to in the Supplemental Agreement will involve:–

(i) the nominal value of each of the 862,277,659 issued KEL Shares will be reduced from HK$0.10 to HK$0.07 (the “Capital Reduction”), as a result, the Company’s existing issued share capital of HK$86,227,765.90 will be reduced by HK$25,868,329.77 to HK$60,359,436.13;
(ii) the credit in the sum of HK$25,868,329.77 arising from the Capital Reduction will be applied to set off against an equivalent amount of the audited accumulated loss of HK$670,337,000 of the Company as at 31 March, 2002; and

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LETTER FROM THE BOARD

(iii) upon the Capital Reduction becoming effective, the authorised share capital of the Company will be reduced to HK$126,000,000 divided into 1,800,000,000 shares of HK$0.07 each and, forthwith upon such reduction, the authorised share capital of the Company will immediately be increased to the amount of HK$179,999,999.97 (being as near to the original amount of authorised share capital of HK$180,000,000 as practicable) by the creation of the requisite number of the KEL New Shares upon the Capital Reorganisation becoming effective . On the basis of 862,277,659 KEL New Shares in issue, the authorised share capital of the Company will then be HK$179,999,999.97 divided into 2,571,428,571 KEL New Shares, of which HK$60,359,436.13 divided into 862,277,659 KEL New Shares will be in issue and 1,709,150,912 KEL New Shares will be unissued.

The Capital Reorganisation is subject to, among other things, (i) the passing of the relevant resolutions by the Shareholders to approve the Capital Reorganisation; (ii) compliance with section 46 of the Companies Act which includes the publication of a legal notice in relation to the Capital Reorganisation in an appointed newspaper in Bermuda; and (iii) the Stock Exchange having granted listing of and permission to deal in the KEL New Shares. Assuming the conditions of the Capital Reorganisation are fulfilled, it is expected that the Capital Reorganisation will become effective on the Business Day following the day passing the relevant resolution to approve the Capital Reorganisation. The KEL New Shares will rank pari passu in all respects with each other and the Capital Reorganisation will not result in any change in the relative rights of the Shareholders.

Implementation of the Capital Reorganisation will not, itself, alter the underlying assets, business, operations, management or financial position of the Company or the proportionate interest of the Shareholders, other than related expenses incurred which are immaterial. The Directors consider that the Capital Reorganisation will not, itself, have a material adverse effect on the financial position of the Group.

It is one of the conditions for the completion of the Acquisition that the Capital Reorganisation has become effective prior to the completion of the Acquisition Agreement. The Capital Reorganisation is not itself subject to completion of the Acquisition Agreement and will, subject to fulfilment of the relevant conditions, become effective irrespective of whether the Acquisition Agreement is completed. The Directors noted that the KEL Shares have been traded at prices below their nominal value of HK$0.10 each for a majority of trading days since August, 2002. They consider the Capital Reorganisation which, if implemented, will allow flexibility in the pricing for any issue of KEL Shares in future if and when the Directors consider appropriate. It will also facilitate any future capital raising exercises when circumstances arise. The Directors consider the Capital Reorganisation is in the interests of the Shareholders. Apart from the Acquisition, the Directors do not have present intention to issue new KEL Shares.

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LETTER FROM THE BOARD

As at the date of the Latest Practicable Date, the authorised share capital of the Company was HK$180,000,000 divided into 1,800,000,000 KEL Existing Shares of which HK$86,227,765.90 divided into 862,277,659 KEL Existing Shares were issued and credited as fully paid. Immediately upon the Capital Reorganisation becoming effective and on the basis that 862,277,659 KEL Existing Shares will be in issue immediately prior to the Capital Reorganisation becoming effective, the authorised share capital of the Company will be HK$179,999,999.97 divided into 2,571,428,571 KEL New Shares of which HK$60,359,436.13 divided into 862,277,659 KEL New Shares were issued and credited as fully paid.

Free exchange of certificates for KEL New Shares

Existing share certificates may be lodged with the Company’s branch share registrar in Hong Kong, Tengis Limited at Ground Floor, BEA Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong in exchange for new share certificates for the KEL New Shares during the period from Tuesday, 13 May, 2003 to Thursday, 12 June, 2003 at any time from 9:00 a.m. to 4:30 p.m. Shareholders should note that unless the relevant existing share certificates are lodged with Tengis Limited by 4:30 p.m. on Thursday, 12 June, 2003, a charge of HK$2.5 (or such higher amounts as may from time to time be allowed by the Stock Exchange) will be made on the issue of every new share certificate for the KEL New Shares or cancellation of every old share certificate. New share certificates will be issued in the colour of green to distinguish from the existing share certificates in the colour of yellow.

Adjustment in relation to the convertible notes

In 2000, the Company and certain of its subsidiaries entered into a conditional debt restructuring and share subscription agreement with Wonderland Development Limited, the former holding company of the Company, Deson and certain of the Group’s bank creditors. Such agreement became unconditional on 10 August, 2000. Three schemes of arrangement involving the Company and its two subsidiaries were implemented under Section 166 of the Companies Ordinance (Chapter 32 of the Laws of Hong Kong) (the “Schemes”) according to the terms of the restructuring proposal.

Under the Schemes, for every HK$10,000 of scheme debt, the Company issued convertible notes in the principal amount of HK$187.50 to the scheme creditor on 30 August, 2000. The convertible notes bear interest at a rate of 2% per annum and are convertible into new KEL Shares at a conversion price of HK$0.10 per KEL Share (subject to adjustment) at any time up to 1 September, 2003. The auditors of the Company have confirmed that no adjustment is required for the conversion price of convertible notes as a result of the Capital Reorganisation.

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LETTER FROM THE BOARD

APPLICATION FOR LISTING

An application has been made to the Stock Exchange by the Company for the grant of the listing of and permission to deal in the Consideration Shares and the KEL New Shares in issue at the time when the Capital Reorganisation becoming unconditional and effective.

Subject to the granting of the listing of and permission to deal in the Consideration Shares and the KEL New Shares on the Stock Exchange, both of the Consideration Shares and the KEL New Shares will be accepted as eligible securities by HKSCC for deposit, clearance and settlement in CCASS with effect from the commencement date of dealings in the Consideration Shares and the KEL New 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.

The KEL Existing Shares are listed and dealt in on Stock Exchange. No part of the Company’s securities are listed or dealt in on any other stock exchange, nor application for the listing of or permission to deal in the KEL Existing Shares and the KEL New Shares on any other stock exchange is being or proposed to be sought.

GENERAL MANDATE TO REPURCHASE NEW SHARES

At the Special General Meeting, an ordinary resolution will be proposed to grant to the Directors an authority, conditional upon the Capital Reorganisation becoming effective, to repurchase, as for the fully paid KEL New Shares, of up to 10% of the aggregate nominal amount of share capital of the Company in issue immediately following the Capital Reorganisation becoming effective.

The Repurchase Mandate will, if granted, remain in effect until the earliest of (i) the conclusion of the next annual general meeting of the Company; (ii) the expiration of the period within which the next annual general meeting of the Company is required to be held by law or by the bye-laws of the Company; and (iii) the revocation or variation by an ordinary resolution of the Shareholders in general meeting.

An explanatory statement in relation to the Repurchase Mandate as required by the relevant provisions of the Listing Rules concerning the regulation of repurchases by companies of their own securities on the Stock Exchange is set out in Appendix V to this circular.

GENERAL MANDATE TO ISSUE NEW SHARES

At the Special General Meeting, an ordinary resolution will also be proposed that the Directors be given, conditional upon the Capital Reorganisation becoming effective, a general

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LETTER FROM THE BOARD

mandate to allot, issue and deal with KEL New Shares not exceeding 20% of the aggregate nominal amount of the share capital of the Company in issue immediately following the Capital Reorganisation becoming effective in order to increase the flexibility for raising capital to facilitate expansion plan of the Company as the Directors consider appropriate.

The General Mandate will, if granted, remain effective until the earliest of (i) the conclusion of the next annual general meeting of the Company; (ii) the expiration of the period within which the next annual general meeting of the Company is required to be held by law or the bye-laws of the Company; and (iii) the revocation or variation by an ordinary resolution of the Shareholders in general meeting.

In addition, if the Repurchase Mandate is granted, an ordinary resolution will be proposed at the Special General Meeting providing that any KEL New Shares repurchased under the Repurchase Mandate will be added to the total number of the KEL New Shares which may be allotted and issued under the General Mandate.

With respect to the Repurchase Mandate and the General Mandate, the Directors wish to state that, apart from the issue of the Consideration Shares, they have no present intention of exercising the Repurchase Mandate to repurchase the New Shares and the General Mandate to allot KEL New Shares in the share capital of the Company upon the Capital Reorganisation becoming effective.

GENERAL

The Acquisition constitutes a major transaction for the Company under the Listing Rules. Since Deson is a controlling shareholder of the Company having an indirect shareholding interest of approximately 55.62% in the Company, the Acquisition also constitutes a connected transaction for the Company under the Listing Rules and is required to be made conditional upon the approval of the Independent Shareholders at the Special General Meeting. In accordance with the Listing Rules, Deson and its associates will abstain from voting on the resolutions to approve the Acquisition Agreement and the issue of the Consideration Shares to be proposed at the Special General Meeting. First Shanghai has been appointed to advise the Independent Shareholders regarding the terms of the Acquisition.

SPECIAL GENERAL MEETING

A notice of the Special General Meeting to be held at 11th Floor, Nanyang Plaza, 57 Hung To Road, Kwun Tong, Kowloon, Hong Kong at 11:00 a.m. on 12 May, 2003 at which relevant resolutions will be proposed to approve the terms of the Acquisition Agreement, the issue of the Consideration Shares, the Capital Reorganisation, the General Mandate and the Repurchase Mandate to set out on pages 91 to 95 to this circular.

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LETTER FROM THE BOARD

A form of proxy for use at the Special General Meeting is enclosed. Whether or not you are able to attend the Special General Meeting, you are requested to complete and return the enclosed form of proxy in accordance with the instructions printed thereon to the branch share registrar of the Company in Hong Kong, Tengis Limited, Ground Floor, BEA Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong as soon as possible and in any event not later than 48 hours before the time of the Special General Meeting or any adjournment thereof. Completion and return of the form of proxy shall not preclude you from attending and voting in person at the Special General Meeting or any adjourned meeting should you so wish.

RECOMMENDATION

Your attention is drawn to the letter from First Shanghai to the Independent Shareholders containing its advice and recommendation set out on pages 18 to 26 of this circular.

Having considered the terms of the Acquisition, First Shanghai is of the view that the terms of the Acquisition are fair and reasonable so far as the Independent Shareholders are concerned and that the Acquisition is in the interests of the Company and the Shareholders as a whole. Accordingly, they recommend the Independent Shareholders to vote in favour of the ordinary resolutions to be proposed at the Special General Meeting to approve the Acquisition.

Having regard to the information described above, the Board is of the opinion that the Capital Reorganisation and the grant of the Repurchase Mandate and the General Mandate to the Directors upon the Capital Reorganisation becoming effective, are in the interests of the Company and the Shareholders as a whole. Accordingly, the Board recommends the Shareholders to vote in favour of the relevant resolutions to approve the same at the Special General Meeting.

ADDITIONAL INFORMATION

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

Yours faithfully,

For and on behalf of the Board

KEL HOLDINGS LIMITED

Tjia Boen Sien

Managing Director and Deputy Chairman

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LETTER FROM FIRST SHANGHAI

The following is the text of the letter of advice to the Independent Shareholders from First Shanghai in connection with the terms of the Acquisition and the issue of the Consideration Shares which has been prepared for the purpose of inclusion in this circular.

F IRST S HANGHAI G ROUP

First Shanghai Capital Limited

19th Floor, Wing On House 71 Des Voeux Road Central Hong Kong

17 April, 2003

To the Independent Shareholders and, for information only, holders of convertible notes and share options granted or issued by the Company

Dear Sir or Madam,

MAJOR AND CONNECTED TRANSACTION PROPOSED ACQUISITION OF THE ENTIRE ISSUED SHARE CAPITAL OF BILLION TREASURE HOLDINGS LIMITED AND RELATED SHAREHOLDER’S LOAN

INTRODUCTION

We refer to our engagement as the independent financial adviser to advise the Independent Shareholders in respect of the terms of the Acquisition and the issue of the Consideration Shares, details of which are set out in the circular dated 17 April, 2003 (the “Circular”) to the Shareholders, of which this letter forms a part. Unless the context otherwise requires, terms used in this letter shall have the same meanings as those defined in the Circular.

Pursuant to the joint announcement of the Company dated 6 March, 2003 that Deson, the controlling shareholder of the Company having an indirect shareholding interest of approximately 55.62% in the Company, entered into an agreement with the Company, pursuant to which the Company has conditionally agreed to acquire from the Deson Group (i) the entire issued share capital of Billion Treasure; and (ii) the Shareholder’s Loan for a consideration of HK$46,000,000.

The Acquisition constitutes a major transaction for the Company under the Listing Rules. Since Deson is a controlling shareholder of the Company having an indirect shareholding interest of approximately 55.62% in the Company, the Acquisition also constitutes a connected transaction for the Company under the Listing Rules and is required to be made conditional upon the approval of the Independent Shareholders at the Special General Meeting. Deson and its associates will abstain from voting on the resolution to approve the Acquisition and the issue of the Consideration Shares to be proposed at the Special General Meeting.

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LETTER FROM FIRST SHANGHAI

In putting forth our opinion and recommendations, we have relied on the accuracy of the information and representations included in the Circular and provided to us by the Directors and the Company, and have assumed that all such information and representations made or referred to in the Circular and provided to us by the Directors and the Company were true at the time they were made and continued to be true as at the date hereof. We have also assumed that all statements of belief, opinion and intention made by the Directors in the Circular were reasonably made after due enquiry. We have no reason to doubt the truth, accuracy and completeness of the information and representations provided to us by the Directors and have been advised by the Directors that no material facts have been withheld or omitted from the information provided and referred to in the Circular that the omission of which would make any statement in the Circular, including this letter, misleading. We have also relied on the information and representations provided by B.I. Appraisals Limited, an independent firm of chartered surveyors (the “Valuer”), regarding the valuation (the “Valuation”) of the Properties as at 4 March, 2003, the property valuation report in respect of the Properties is set out in Appendix IV to the Circular, and assumed that the bases and assumptions made in determining the Valuation are fair and reasonable. We consider that we have reviewed sufficient information to reach an informed view and to justify reliance on the accuracy of the information contained in the Circular and to provide a reasonable basis for our advice. We have not, however, conducted any independent verification of the information included in the Circular and provided to us by the Directors nor have we conducted any form of investigation into the Properties or the Valuation or the business, affairs or the future prospects of the Group and the Deson Group.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In formulating our opinion and recommendations as to the fairness and reasonableness of the terms of the Acquisition and the issue of the Consideration Shares, we have taken into account the following principal factors and reasons:

1. Background of the Group

The Group is principally engaged in the provision of electrical and mechanical (“E&M”) engineering services and the leasing of construction machinery and equipment in Hong Kong. The shares of the Company have been listed on the main board since 24 April, 1997.

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LETTER FROM FIRST SHANGHAI

As stated in the annual report (the “Annual Report”) of the Company for the year ended 31 March, 2002 (“FY2002”), the Group’s turnover for FY2002 was approximately HK$19.1 million, representing an increase of approximately 35.45% as compared to that of the year ended 31 March, 2001 (“FY2001”), which amounted to approximately HK$14.1 million. The net loss attributable to Shareholders for FY2002 amounted to approximately HK$10.86 million, representing an improvement of approximately 63.78% as compared to the net loss attributable to Shareholders of HK$30.1 million in FY2001 (the waiver of interest accrued in FY2001 had been excluded for comparison purpose while there was no such item in FY2002). After discussion with the management of the Group, we have noted that the improvement in operational performance in FY2002 was due to the reactivation of all the 11 licences held under the List of Approved Suppliers of Material and Specialist Contractors for Public Works under Works Bureau of the HKSAR Government, which allowed the Group to secure more projects from both the public and private sectors.

2. Reasons for the Acquisition

The Group will from time to time render its longer term intention with regard to its investment in the Properties, taking into account the conditions for the time being of the commercial property market in Shanghai.

As mentioned in the section headed “Information on Bless Honour” in the letter from the Board, the total rental income generated from the Properties for FY2001 and FY2002 were HK$673,908 and HK$1,088,169 respectively. As also mentioned in the “Information of the assets to be acquired” below, the unaudited net profit of the Billion Treasure Group for FY2001 and FY2002 were HK$220,520 and HK$416,520 respectively.

In addition, the Directors consider that Shanghai’s successful bid to host the 2010 World Expo coupled with the establishment of the Shanghai Universal Studio may stimulate the property market in Shanghai. Furthermore, in view of the buoyant property market in a core business district in Shanghai, one of where the principal assets of Billion Treasure are located, the Directors believe that the Acquisition would also represent an investment by the Company with potential for future appreciation in capital value.

As illustrated in the paragraph headed “Financial effects of the Acquisition on the Group”, upon the completion of the Acquisition, (i) the proforma unaudited consolidated net loss of the Enlarged Group for FY2002 would lessen by approximately 3.84%; (ii) the gearing ratio of the Group as at 30 September, 2002 would decrease from approximately 874.77% to approximately 73.34% and (iii) the current ratio of the Group would improve from approximately 1.13 to

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LETTER FROM FIRST SHANGHAI

approximately 2.98. As such, we consider that the Acquisition represents a business opportunity that can help the Group covering part of the losses from its existing operations and improving its financial position. Please refer to the paragraph headed “Financial effects of the Acquisition on the Group” for details of the financial effects.

3. Information on the assets to be acquired

Information on Billion Treasure

Billion Treasure was incorporated on 18 September, 1995 in the British Virgin Islands. It is an investment holding company and is beneficially interested in the entire issued share capital of Bless Honour. Apart from its interests in Bless Honour and the Shareholder’s Loan, Billion Treasure does not carry out any business or has any outstanding liabilities or other assets.

As at 31 March, 2002, the unaudited consolidated net tangible asset value of the Billion Treasure Group was approximately HK$652,293. The main part of assets held by Billion Treasure is the Properties carrying by its wholly-owned subsidiary, Bless Honour, with an audited net book value of approximately HK$41.68 million as at 31 March, 2002. The unaudited consolidated net profit of the Billion Treasure Group for FY2001 and FY2002 were approximately HK$220,520 and approximately HK$416,520 respectively.

Information on Bless Honour and the Properties

Bless Honour was incorporated on 21 September, 1995 in Hong Kong. It is principally engaged in the business of property investment in the People’s Republic of China and solely owns the Properties with a total gross floor area of 3,098.49 sq.m. (excluding the 19 carparks). The Properties are located at Zhongda Square in Pudong District of Shanghai. The Zhongda Square was completed in July 1996 and the land use rights of the land on which it is erected have been granted for a term from 8 September, 1998 to 21 December, 2043. The terms of tenancies of the Properties range from 1 to 5 years with the latest expiring on 30 September, 2007. The current total annual rental income is approximately RMB1.67 million (or approximately HK$1.56 million) exclusive of management fees.

The majority of the Properties with a total gross floor area of 2,955.93 sq.m. are currently let by Bless Honour to Independent Third Parties. However, the other properties with a total gross floor area of 142.56 sq.m. have been leased by Deson Development Limited, a wholly-owned subsidiary of Deson. After the Acquisition, the leasing of the said properties from Bless Honour to Deson Development Limited will constitute a connected transaction for the Company and Deson. Deson has undertaken to lease from Bless Honour on normal commercial terms for a term of one year at market value after completion of the Acquisition. As the annual rental of HK$98,178 payable by Deson

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LETTER FROM FIRST SHANGHAI

Development Limited to Bless Honour does not exceed HK$1,000,000, such transaction will fall within the de minimis exemption in Rule 14.24(5) of the Listing Rules and will, therefore, not be subject to any of the shareholders’ approval, announcement or notification requirements applicable to connected transactions in Chapter 14 of the Listing Rules.

The audited net asset value of Bless Honour was HK$670,145 as at 31 March, 2002, comprising total assets of HK$50,618,638 including the book value of the properties held by Bless Honour, cash and bank balances, loan due from fellow subsidiaries and other receivables as at 31 March, 2002 and total liabilities of HK$49,948,493 including the loan due to Billion Treasure, bank loans and tenancy deposits as at 31 March, 2002. The rental income of Bless Honour for FY2001 and FY2002 were approximately HK$673,908 and approximately HK$1,088,169 respectively, representing a growth rate of 61.47%.

Out of the 13 existing tenancy agreements, 7 of them will expire on or before 31 March, 2004, the Directors expect that Bless Honour may renew those tenancy agreements or enter into new tenancy agreements at comfortable rental rate commensurate with those of the other similar properties in Shanghai. With respect to the 7 tenancy agreements which will expire on or before 31 March, 2004, the Directors expect that, on the basis of the current market rental value of Zhongda Square, their respective rental yield may increase by approximately 23%. Based on the current market value of Zhongda Square, the Directors expect that the rental yield of the Properties may increase by approximately 35% in the coming years. Having discussed with the management of the Group and based on the current market rental rates of similar type of office buildings in the neighbourhood of Zhongda Square, which range from approximately RMB2.0/sq.m./day to approximately RMB2.8/sq.m./day as advised by the Valuer, which is higher than the current average rental rate charged by Bless Honour to its tenants of approximately RMB1.53/sq.m./day, we are of the view that the Directors’ expectation is fair and reasonable. However, we would like to draw the attention of the Independent Shareholders that the actual changes in rental yield will depend on the then property market condition in Shanghai.

4. Basis of consideration

Pursuant to the Acquisition Agreement, the Company has conditionally agreed to acquire from Deson the entire issued capital of Billion Treasure and the Shareholder’s Loan for a consideration of HK$46,000,000. The Directors have advised that the consideration was arrived at after arm’s length negotiations between Deson and the Company with reference to (i) the Valuation of the Properties of approximately HK$48,000,000 as stated in the property valuation report dated 17 April, 2003 prepared by the Valuer and (ii) the Shareholder’s Loan of approximately HK$40,236,066.

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LETTER FROM FIRST SHANGHAI

Valuation of the Properties

The Properties were valued by the Valuer at HK$48,000,000 as at 4 March, 2003, suggesting that the net book value of the Properties carried in the audited accounts of Bless Honour as at 31 March, 2002, which amounted to approximately HK$41,683,381, was undervalued by HK$6,316,619 (“Valuation Discrepancy”). The property valuation report dated 17 April 2003 in respect of the Properties is set out in Appendix IV to the Circular.

The Valuation was arrived by using direct comparison approach, which considers prices recently paid or offered for similar properties, with adjustments made to the indicated market prices to reflect condition and utility of the Properties relative to the market comparable. In addition, the Valuer has valued the constituent units/ car parking spaces of the Properties on the basis that each of them is considered individually. The Valuation represents the aggregate value of the constituent units/ car parking spaces.

Consideration and payment terms for the Acquisition

The aggregate consideration of HK$46,000,000 comprises HK$5,763,934 for the acquisition of the entire issued share capital of Billion Treasure and HK$40,236,066 for the acquisition of the Shareholder’s Loan. The consideration will be settled by way of issuing 657,142,857 KEL New Shares at an issue price of HK$0.07 per KEL New Share.

We have noted that the consideration of HK$5,763,934 for the acquisition of the entire issued share capital of Billion Treasure represents a discount of approximately 17.29% to the aggregate sum of HK$6,968,912 comprising the audited net tangible asset value of the Billion Treasure Group as at 31 March, 2002 and the Valuation Discrepancy.

Having considered the above, we are of the view that the basis for determining the consideration for the Acquisition is fair and reasonable.

5. Issue price of the Consideration Shares (the “Issue Price”)

The Issue Price is HK$0.07 per KEL New Share which represents:

the same price as the closing price of HK$0.07 per KEL Share as quoted on the Stock Exchange on 3 March, 2003, being the last trading day prior to suspension of trading in the Shares on the Stock Exchange pending the issue of the joint announcement of the Company dated 6 March, 2003 (“Last Trading Day”);
a discount of approximately 7.16% to the average closing price of HK$0.0754 per KEL Share for the 10 trading days up to and including 3 March, 2003 (“Last 10 Trading Days”);

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LETTER FROM FIRST SHANGHAI

a discount of approximately 10.14% to the average closing price of HK$ 0.0779 per KEL Share for the 30 trading days up to and including 3 March, 2003 (“Last 30 Trading Days”);
the same price as the closing price of HK$0.07 per KEL Share on the Latest Practicable Date; and
a premium of approximately 1,128.07% to the audited consolidated net tangible assets value (“NTAV”) of HK$0.0057 per KEL Share as at 31 March, 2002.

We have noted that the Issue Price is set at discounts of approximately 7.16% and 10.14% to the average closing prices for the Last 10 Trading Days and the Last 30 Trading Days respectively. According to the Annual Report, the Group incurred continuous operating losses in the past five years (excluding the waiver of interest accrued in FY2001), which led to depletion in the net worth of the Company. Given the continued loss-making trend, we consider that the said discounts are justifiable.

Having considered that the Issue Price is set (i) at the closing price on the Last Trading Day and (ii) at a premium to the audited consolidated NTAV per Share, we are of the view that the Issue Price is fair and reasonable so far as the Independent Shareholders are concerned.

6. Dilution effect on the Independent Shareholders’ interests

As showed in the letter from the Board, the shareholding of Deson in the Company prior to and immediately after completion of the Acquisition are 479,581,399 KEL Existing Shares representing approximately 55.62% of the existing issued capital of the Company and 1,136,724,256 KEL New Shares representing approximately 74.81% of the enlarged issued share capital of the Company after the issue of the Consideration Shares. Accordingly, the aggregate shareholding of Independent Shareholders currently amounting to approximately 44.38% of the existing issued share capital will be diluted to approximately 25.19% of the enlarged issued share capital upon the completion of the Acquisition. Taking into account the benefits of the Acquisition as discussed above, as well as the issue of KEL New Shares at premium to the NTAV, we consider that the dilution effect on the Independent Shareholders’ interests is acceptable.

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LETTER FROM FIRST SHANGHAI

7. Financial effects of the Acquisition on the Group

Upon completion of the Acquisition, Billion Treasure will become a wholly-owned subsidiary of the Group and its assets and liabilities will be consolidated into the Group. The financial effects on the Group, as a result of Acquisition, are analysed in terms of NTAV, gearing ratio, earnings and working capital as follows:

(a) NTAV

As stated in the interim report for six months ended 30 September, 2002, the unaudited consolidated NTAV of the Group was approximately HK$2,140,000 as at 30 September, 2002. As set out in Appendix II to the Circular, upon the completion of the Acquisition, the proforma unaudited consolidated NTAV of the Enlarged Group as at 30 September, 2002 would be increased by approximately 21 times to approximately HK$47,670,000. Based on 1,519,420,516 shares issued and to be issued upon the completion of the Acquisition, the proforma unaudited NTAV per KEL Share would be increased by approximately 12 times from approximately HK$0.0025 per KEL Share to approximately HK$0.0314 per KEL Share.

(b) Gearing ratio

The gearing ratio (which is equal to total liabilities divided by Shareholders’ equity) of the Group was approximately 874.77% as at 30 September, 2002. As the proforma unaudited consolidated NTAV of the Group would be enlarged to approximately HK$47,670,000 upon the completion of the Acquisition, the gearing ratio of the Enlarged Group would decrease to approximately 73.34%.

(c) Earnings

The audited net loss attributable to Shareholders for the year ended 31 March, 2002 was approximately HK$10,860,000, or approximately HK$0.0126 per KEL Share based on 862,277,659 KEL Existing Shares while the unaudited net profit of the Billion Treasure Group for the same period was HK$416,520.

Assuming that the Acquisition had been completed on 1 April, 2001, the proforma unaudited consolidated net loss of the Enlarged Group for the year ended 31 March, 2002 would lessen by approximately 3.84% to approximately HK$10,443,480. Taking into consideration the issue of 657,142,857 KEL New Shares upon the completion of the Acquisition, the proforma unaudited consolidated net loss per KEL Share would be reduced by 45.23% from approximately HK$0.0126 per KEL Share to approximately HK$0.0069 per KEL Share.

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LETTER FROM FIRST SHANGHAI

(d) Working capital

According to the property valuation report in respect of the Properties in Appendix IV to the Circular, the current total rental income from the Properties is approximately RMB139,292 (or approximately HK$130,179) per month exclusive of management fees. Assuming there is no change in the monthly rent, the Properties will yield a total annual rental income of approximately RMB1,671,504 (or approximately HK$1,562,153).

As the consideration for the Acquisition will be satisfied in full by the issue of the Consideration Shares, there is no cash requirement on the Group to fund the Acquisition. Based on the financial information of the Group and the Enlarged Group set out in Appendix I and Appendix II to the Circular respectively, we note that the current ratio (which is equal to current assets divided by current liabilities) of the Group would improve from approximately 1.13 to approximately 2.98 upon the completion of the Acquisition. Therefore, we concur with the Directors’ opinion that the Acquisition would improve the working capital of the Group.

RECOMMENDATION

Having considered the above principal factors and reasons, we are of the opinion that the Acquisition and the issue of the Consideration Shares are in the interests of the Company and the Shareholders as a whole and that the terms of the Acquisition and the issue of the Consideration Shares are fair and reasonable so far as the Independent Shareholders are concerned. Accordingly, we advise the Independent Shareholders to vote in favour of the ordinary resolutions to be proposed at the Special General Meeting to approve the Acquisition and the transactions contemplated thereunder.

Yours faithfully, For and on behalf of

First Shanghai Capital Limited

Helen Zee Managing Director

Byron Tan Director

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

1. SHARE CAPITAL

The authorised and issued share capital of the Company as at the Latest Practicable Date and following completion of the Acquisition are as follows:

*Authorised:* As at the Latest Practicable Date Reduce of nominal value of Shares from HK$0.10 each to HK$0.07 each Increase of authorised share capital from HK$126,000,000 to HK$179,999,999.97 Upon completion of the Acquisition *Issued and fully paid:* At 31 March, 2002 Arising on exercise of warrants Arising on reduction of nominal value of Shares from HK$0.10 each to HK$0.07 each upon the Capital Reorganisation becoming effective Assuming the Acquisition becoming unconditional Issue of Consideration Shares Upon completion of the Acquisition	Number of Shares Ordinary Shares Ordinary Shares of HK$0.10 of HK$0.07 each each 1,800,000,000 – (1,800,000,000) 1,800,000,000 – 771,428,571 – 2,571,428,571 862,251,459 – 26,200 – (862,277,659) 862,277,659 – 862,277,659 – 657,142,857 – 1,519,420,516	Value HK$’000 180,000 (54,000) 54,000 180,000 86,225 3 (25,869) 60,359 46,000 106,359

– 27 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

All the Shares in issue and to be issued rank and will rank pari passu in all respects with each other including as regards to dividends, voting and return of capital.

As at the Latest Practicable Date, there were outstanding an aggregate of HK$9,675,000 convertible notes, which bear interest at a rate of 2% per annum and are convertible into new Shares at a price of HK$0.10 per Share (subject to adjustment) at any time up to 1 September, 2003. Save as disclosed above or pursuant to the Acquisition Agreement, no share or loan capital of the Company has been put under option or agreed conditionally or unconditionally to be put under option and no warrant or conversion right affecting the Shares has been issued or granted or agreed conditionally, or unconditionally to be issued or granted.

Save as disclosed above, no share or loan capital of the Company has been issued or is proposed to be issued for cash or otherwise and no commissions, discounts, brokerages or other special terms have been granted in connection with the issue or sale of any such capital.

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

2. INDEBTEDNESS

As at 28 February 2003, the Group had outstanding borrowings of approximately HK$9,933,000, comprising secured trust receipt loans of approximately HK$167,000, an obligation under a finance lease of approximately HK$91,000 and 2% convertible notes of HK$9,675,000 (the “Notes”).

The Group’s trust receipt loans are secured by time deposits aggregating HK$5,122,000 and a corporate guarantee of the Company of HK$8,000,000.

The Notes are convertible into ordinary shares of the Company of HK$0.10 each, before any capital reduction, at a conversion price of HK$0.10 per share (subject to adjustment) on or before 1 September 2003. Any outstanding Notes as at 1 September 2003 are redeemable by the Company at their principal amount.

As at 28 February 2003, the Group has aggregate contingent liabilities of approximately HK$378 million, of which, HK$141 million is related to claims received from a main contractor for an alleged breach of a subcontract and the remaining HK$237 million is related to claims received from an employer of the same construction project in respect of damages for the alleged breach of the same subcontract, which is being dealt with under arbitration. Pursuant to the Schemes, as established in accordance with Section 166 of the Hong Kong Companies Ordinance, the ultimate exposure under both claims will be subject to the assessment of the Schemes administrator. According to the terms of the Schemes, the exposures will be limited to 10% of the total claim amount, which will be partly settled by the issue of the Company’s shares and partly by cash or convertible notes.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Save as disclosed in this circular, the Group did not have, any outstanding indebtedness on 28 February 2003, any loan capital, bank overdrafts and liabilities under acceptances or other similar indebtedness, debentures, mortgages, charges or loans or acceptance credits or hire purchase or finance lease commitments, guarantees or other material contingent liabilities.

3. SUMMARY OF FINANCIAL INFORMATION

The following is a summary of the results and of the assets, liabilities and minority interests of the Group for the five financial years ended 31 March 2002, as extracted from the audited financial statements.

RESULTS TURNOVER OPERATING PROFIT/(LOSS) Share of loss of an associate PROFIT/(LOSS) BEFORE TAX Tax PROFIT/(LOSS) BEFORE MINORITY INTERESTS Minority interests NET PROFIT/(LOSS) ATTRIBUTABLE TO SHAREHOLDERS ASSETS, LIABILITIES AND MINORITY INTERESTS TOTAL ASSETS TOTAL LIABILITIES MINORITY INTERESTS NET ASSETS/(LIABILITIES)	2002 HK$’000 19,117 (10,874) – (10,874) – (10,874) 14 (10,860) 2002 HK$’000 22,459 (16,803) (728) 4,928	Year ended 31 March 2001 2000 1999 HK$’000 HK$’000 HK$’000 14,095 29,353 195,618 33,760 (110,485) (106,565) – – – 33,760 (110,485) (106,565) – (89) 255 33,760 (110,574) (106,310) 5 – – 33,765 (110,574) (106,310) As at 31 March 2001 2000 1999 HK$’000 HK$’000 HK$’000 19,308 13,900 69,665 (18,368) (604,761) (549,952) (40) – – 900 (590,861) (480,287)	1998 HK$’000 865,578 (560,557) (101) (560,658) (30) (560,688) – (560,688) 1998 HK$’000 260,950 (634,927) – (373,977)

– 29 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

4. AUDITED FINANCIAL INFORMATION OF THE GROUP

The following financial information is an extract from the audited financial statements of the Group for the year ended 31 March 2002 together with notes thereto.

CONSOLIDATED PROFIT AND LOSS ACCOUNT

Year ended 31 March 2002

Notes TURNOVER 6 Cost of sales Gross profit/(loss) Other revenue and gains 6 Administrative expenses LOSS FROM OPERATING ACTIVITIES 7 Finance costs 8 PROFIT/(LOSS) BEFORE TAX Tax 10 PROFIT/(LOSS) BEFORE MINORITY INTERESTS Minority interests NET PROFIT/(LOSS) ATTRIBUTABLE TO SHAREHOLDERS 11, 24 EARNINGS/(LOSS) PER SHARE 12 Basic Diluted	2002 HK$’000 19,117 (17,814) 1,303 540 (12,352) (10,509) (365) (10,874) – (10,874) 14 (10,860) (1.48) cents N/A	2001 HK$’000 14,095 (38,585) (24,490) 3,743 (9,157) (29,904) 63,664 33,760 – 33,760 5 33,765 7.26 cents 6.73 cents

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

CONSOLIDATED STATEMENT OF RECOGNISED GAINS AND LOSSES

Year ended 31 March 2002

Notes General reserve arising on debt restructuring not recognised in the profit and loss account 24 Net profit/(loss) attributable to shareholders 24 Total recognised gains and losses	2002 HK$’000 – (10,860) (10,860)	2001 HK$’000 490,659 33,765
		524,424

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

CONSOLIDATED BALANCE SHEET

31 March 2002

Notes NON-CURRENT ASSETS Fixed assets 13 CURRENT ASSETS Gross amounts due from contract customers 15 Trade receivables 16 Other receivables Pledged time deposits 17 Pledged cash and bank balances 17 Cash and cash equivalents 17 CURRENT LIABILITIES Trade payables 18 Retention money payable Other payables and accruals Provision for scheme debts 19 Gross amounts due to contract customers 15 Trust receipt loans Due to the immediate holding company 20 NET CURRENT ASSETS TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Convertible notes 21 MINORITY INTERESTS CAPITAL AND RESERVES Issued capital 23 Reserves 24	2002 HK$’000 388 1,353 4,582 1,317 5,500 – 9,319 22,071 1,469 368 748 1,047 3,014 482 – 7,128 14,943 15,331 (9,675) (728) 4,928 86,225 (81,297) 4,928	2001 HK$’000 (Restated) 973 2,804 1,901 423 – 13,207 – 18,335 322 40 2,371 1,047 2,117 1,292 928 8,117 10,218 11,191 (10,251) (40) 900 71,337 (70,437) 900

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

CONSOLIDATED CASH FLOW STATEMENT

Year ended 31 March 2002

Notes NET CASH OUTFLOW FROM OPERATING ACTIVITIES 25(a) RETURNS ON INVESTMENTS AND SERVICING OF FINANCE Interest received Interest paid Net cash inflow/(outflow) from returns on investments and servicing of finance INVESTING ACTIVITIES Purchases of fixed assets Proceeds from disposal of fixed assets Increase in pledged time deposits Movement in pledged bank balances Net cash inflow/(outflow) from investing activities NET CASH OUTFLOW BEFORE FINANCING FINANCING 25(b) Issue of share capital Exercise of warrants New other loans Capital contributions by minority interests Net cash inflow from financing activities INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at beginning of year Discharge of bank overdrafts under the schemes of arrangement CASH AND CASH EQUIVALENTS AT END OF YEAR ANALYSIS OF THE BALANCES OF CASH AND CASH EQUIVALENTS Cash and bank balances Trust receipt loans	2002 HK$’000 (12,234) 112 (365) (253) (112) 7 (5,500) 13,207 7,602 (4,885) 14,308 4 – 702 15,014 10,129 (1,292) – 8,837 9,319 (482) 8,837	2001 HK$’000 (10,286) 348 (201) 147 (1,198) 18 – (5,912) (7,092) (17,231) 13,094 – 2,800 45 15,939 (1,292) (15,547) 15,547 (1,292) – (1,292) (1,292)

– 33 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

BALANCE SHEET

31 March 2002

Notes NON-CURRENT ASSETS Interests in subsidiaries 14 CURRENT ASSETS Other receivables Pledged cash and bank balances 17 Cash and cash equivalents 17 CURRENT LIABILITIES Provision for scheme debts 19 Other payables and accruals NET CURRENT LIABILITIES TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Convertible notes 21 CAPITAL AND RESERVES Issued capital 23 Reserves 24	2002 HK$’000 18,821 339 – 102 441 1,047 304 1,351 (910) 17,911 (9,675) 8,236 86,225 (77,989) 8,236	2001 HK$’000 (Restated) 12,791 – 62 – 62 1,047 1,124 2,171 (2,109) 10,682 (10,251) 431 71,337 (70,906) 431

– 34 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

31 March 2002

1. CORPORATE INFORMATION

During the year, the Group was engaged in the provision of electrical and mechanical engineering services and the leasing of construction machinery and equipment.

In the opinion of the directors, Deson Development International Holdings Limited (“Deson”), a company incorporated in Bermuda and listed on The Stock Exchange of Hong Kong Limited, is the Company’s ultimate holding company.

2. CORPORATE UPDATE

In the prior year, the Company and certain of its subsidiaries entered into a conditional debt restructuring and share subscription agreement (“DRA”) with Wonderland Development Limited, the former holding company of the Company, Deson and certain of the Group’s bank creditors. The DRA became unconditional on 10 August 2000. Three schemes of arrangement involving the Company and its two subsidiaries, Kenworth Engineering Limited (“Kenworth”) and Kenworth Group Limited (“Kenworth Group”) were set up under Section 166 of the Hong Kong Companies Ordinance (the “Schemes”), according to the terms of the restructuring proposal.

Under the Schemes, for every HK$10,000 of scheme debt, the Company, Kenworth and Kenworth Group, as appropriate, agreed to make a cash payment to the scheme creditor in the amount of HK$312.50 and the Company agreed to issue to such scheme creditor 5,000 new shares of HK$0.10 each of the Company and convertible notes in the principal amount of HK$187.50. The notes, bearing interest at a rate of 2% per annum, are convertible into new shares of the Company at a conversion price of HK$0.10 per share at any time up to the third anniversary of the issue date. The settlement of any and all of the debts due to the scheme creditors under the Schemes would constitute a full discharge and satisfaction of such debts. Any creditors who may have initiated legal proceedings (including any winding-up petition) against the Group in connection with such debts were to pursue the termination of such proceedings.

The administrator of the Schemes (the “Scheme Administrator”) is in the process of assessing individual claims submitted and, where appropriate, the Scheme Administrator will, in writing, admit or reject such claims. If the proving creditors are dissatisfied with the decision of the Scheme Administrator in respect of the claims, he may refer such matter to the adjudicators who, in accordance with such procedures as the adjudicators may think fit, may reverse or vary the decision of the Scheme Administrator and such determinations by the adjudicators shall be final, conclusive and binding on the Group and the proving creditors. The above process is in progress and has not been completed as of date of approval of these financial statements.

In the opinion of directors, sufficient provision for scheme debts has been made and no additional provision is required.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

3. IMPACT OF NEW AND REVISED HONG KONG STATEMENTS OF STANDARD ACCOUNTING PRACTICE (“HKSSAPs”)

The following recently-issued and revised HKSSAPs and related Interpretations are effective for the first time for the current year’s financial statements:

HKSSAP 9 (Revised): “Events after the balance sheet date”
HKSSAP 14 (Revised): “Leases”
HKSSAP 18 (Revised): “Revenue”
HKSSAP 26: “Segment reporting”
HKSSAP 28: “Provisions, contingent liabilities and contingent assets”
• HKSSAP 29: “Intangible assets”
HKSSAP 30: “Business combinations”
HKSSAP 31: “Impairment of assets”
HKSSAP 32: “Consolidated financial statements and accounting for investments insubsidiaries”
Interpretation 12: “Business combinations – subsequent adjustment of fair values and goodwill initially reported”
Interpretation 13: “Goodwill – continuing requirements for goodwill and negative goodwill previously eliminated against/credited to reserves”

These HKSSAPs prescribe new accounting measurement and disclosure practices. The major effects on the Group’s accounting policies and on the amounts disclosed in these financial statements of those HKSSAPs and Interpretations which have had a significant effect on the financial statements, are summarised as follows:

HKSSAP 14 (Revised) prescribes the basis for lessor and lessee accounting for finance and operating leases, and the required disclosures in respect thereof. Certain amendments have been made to the previous accounting measurement treatments, which may be accounted for retrospectively or prospectively, in accordance with the requirements of the HKSSAP. The revised HKSSAP requirements have not had a material effect on the amounts previously recorded in the financial statements, therefore no prior year adjustment has been required. The disclosure changes under this HKSSAP have resulted in changes to the detailed information disclosed for operating leases, which are further detailed in note 27 to the financial statements.

HKSSAP 26 prescribes the principles to be applied for reporting financial information by segment. It requires that management assesses whether the Group’s predominant risks or returns are based on business segments or geographical segments and determines one of these bases to be the primary segment information reporting format, with the other as the secondary segment information reporting format. The impact of this HKSSAP is the inclusion of significant additional segment reporting disclosures which are set out in note 5 to the financial statements.

HKSSAP 28 prescribes the recognition criteria and measurement bases to apply to provisions, contingent liabilities and contingent assets, together with the required disclosures in respect thereof.

HKSSAP 31 prescribes the recognition and measurement criteria for impairments of assets. The HKSSAP is required to be applied prospectively and therefore, has had no effect on amounts previously reported in prior year financial statements.

– 36 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of preparation

These financial statements have been prepared in accordance with Hong Kong Statements of Standard Accounting Practice, 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.

Basis of consolidation

The consolidated financial statements include the financial statements of the Company and its subsidiaries for the year ended 31 March 2002. The results of subsidiaries acquired or disposed of during the year are consolidated from or up to their effective dates of acquisition or disposal, respectively. All significant intercompany transactions and balances within the Group are eliminated on consolidation.

Subsidiaries

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

The Company’s interests in subsidiaries are stated at cost less any impairment losses.

Impairment of assets

An assessment is made at each balance sheet date of whether there is any indication of impairment of any asset, or whether there is any indication that an impairment loss previously recognised for an asset in prior years may no longer exist or may have decreased. If any such indication exists, the asset’s recoverable amount is estimated. An asset’s recoverable amount is calculated as the higher of the asset’s value in use or its net selling price.

An impairment loss is recognised only if the carrying amount of an asset exceeds its recoverable amount. An impairment loss is charged to the profit and loss account in the period in which it arises.

A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the recoverable amount of an 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 an impairment loss is credited to the profit and loss account in the period in which it arises.

– 37 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

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 construction contracts and other long term contract work performed, on the percentage of completion basis when the outcome of contracts can be reasonably foreseen and after making due allowances for contingencies. Provision is made for any foreseeable losses as soon as losses are anticipated by management;
(b) rental income, on a time proportion basis over the lease terms;
(c) interest income, on a time proportion basis taking into account the principal outstanding and the effective interest rate applicable; and
(d) from the rendering of services, in the accounting period in which the services are rendered.

Fixed assets and depreciation

Fixed assets 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 the fixed assets have been put into operation, such as repairs and maintenance, is normally charged to the profit and loss account in the period in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the fixed asset, the expenditure is capitalised as an additional cost of that asset.

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

Depreciation is calculated on the straight-line basis to write off the cost of each asset over its estimated useful life, after taking into account its estimated residual value. The principal annual rates used for this purpose are as follows:

Leasehold improvements	Over the remaining lease terms
Furniture, fixtures and office equipment	20%
Plant, machinery and workshop equipment	20%
Motor vehicles	20%

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.

– 38 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

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.

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

Borrowing costs

Borrowing costs directly attributable to the acquisition or construction of assets which take a substantial period of time to get ready for their intended use or sale, are capitalised as part of the cost of the assets. The capitalisation rate for the period is based on the weighted average of the attributable borrowing costs of the borrowings. All other borrowing costs are charged to the profit and loss account in the period in which they are incurred.

Operating leases

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 profit and loss account on the straight-line basis over the lease terms. Where the Group is the lessee, rentals payable under the operating leases are charged to the profit and loss account on the straight-line basis over the lease terms.

Foreign currencies

Foreign currency transactions are recorded at the applicable rates of exchange ruling at the transaction dates. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the applicable rates of exchange ruling at that date. Exchange differences are dealt with in the profit and loss account.

On consolidation, the financial statements of overseas subsidiaries are translated into Hong Kong dollars at the applicable rates of exchange ruling at the balance sheet date. The resulting translation differences are included in the exchange fluctuation reserve.

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.

Deferred tax

Deferred tax is provided, using the liability method, on all significant timing differences to the extent it is probable that the liability will crystallise in the foreseeable future. A deferred tax asset is not recognised until its realisation is assured beyond reasonable doubt.

– 39 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Provident fund scheme

The Group operates defined contribution retirement benefits schemes under the Mandatory Provident Fund Schemes Ordinance, for those employees who are eligible to participate. Contributions are made based on a percentage of the employees’ basic salaries and are charged to the profit and loss account as they become payable in accordance with the rules of the schemes. The assets of the schemes are held separately from those of the Group in independently administered funds. When an employee leaves the Mandatory Provident Fund Exempted Occupational Retirement Schemes Ordinance retirement benefits scheme prior to his/ her interest in the Group’s employer contributions vesting fully, the ongoing contributions payable by the Group may be reduced by the relevant amount of forfeited contributions. In respect of the Mandatory Provident Fund retirement benefits scheme the Group’s employer contributions vest fully with the employees when contributed into the scheme.

Cash equivalents

For the purpose of the consolidated cash flow statement, cash equivalents represent short term highly liquid investments which are readily convertible into known amounts of cash and which were within three months of maturity when acquired, less advances from banks repayable within three months from the date of the advance. For the purpose of balance sheet classification, cash equivalents represent assets similar in nature to cash, which are not restricted as to use.

Related parties

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

5. SEGMENT INFORMATION

HKSSAP 26 was adopted during the year, as detailed in note 3 to the financial statements. Segment information is presented by way of business segment as the primary segment.

No separate analysis of financial information by geographical segment is presented as over 90% of the Group revenue, results, assets and liabilities are derived from operations carried out in Hong Kong.

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:

(a) the building services (single-trade) segment is engaged in the provision of electrical and mechanical services, air-conditioning and ventilation engineering services, fire services and hydraulic services on a single-trade basis under which the Group is responsible for providing one specified type of building service in a project while other types of engineering services, if any, are handled by other subcontractors;

– 40 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(b) the packaged/design and build contracts segment provides a comprehensive range of building services and has substantially more scope for undertaking project coordination and design management to meet clients’ basic concepts and requirements; and
(c) the environmental engineering services segment relates to waste water handling, water treatment and sewage treatment services.

Business segments

Group

Building services (single-trade) 2002 2001 HK$’000 HK$’000 Segment revenue: Sales to external customers 12,750 4,835 Other revenue 137 233 12,887 5,068 Segment results (2,655) 2,179 Interest income and unallocated gains Unallocated expenses Loss from operating activities Finance costs Profit/(loss) before tax Tax Profit/(loss) before minority interests Minority interests Net profit/(loss) attributable to shareholders	Packaged/ design and build contracts 2002 2001 HK$’000 HK$’000 3,781 4,062 7 195 3,788 4,257 (3,705) (14,664)	Environmental engineering services 2002 2001 HK$’000 HK$’000 2,586 5,198 64 250 2,650 5,448 (31) (17,323)	Consolidated 2002 2001 HK$’000 HK$’000 19,117 14,095 208 678 19,325 14,773 (6,391) (29,808) 332 3,065 (4,450) (3,161) (10,509) (29,904) (365) 63,664 (10,874) 33,760 – – (10,874) 33,760 14 5 (10,860) 33,765

– 41 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Group

Building services (single-trade) 2002 2001 HK$’000 HK$’000 Segment assets 5,575 2,948 Unallocated assets Total assets Segment liabilities 4,298 3,238 Unallocated liabilities Total liabilities Other segment information: Depreciation 85 75 Unallocated amounts Capital expenditure 14 299 Unallocated amounts	Packaged/ design and build contracts 2002 2001 HK$’000 HK$’000 639 1,761 937 1,092 – – – –	Environmental engineering services 2002 2001 HK$’000 HK$’000 235 365 209 258 – – – –	Consolidated 2002 2001 HK$’000 HK$’000 6,449 5,074 16,010 14,234 22,459 19,308 5,444 4,588 11,359 13,780 16,803 18,368 85 75 602 698 687 773 14 299 98 899 112 1,198	Consolidated 2002 2001 HK$’000 HK$’000 6,449 5,074 16,010 14,234 22,459 19,308 5,444 4,588 11,359 13,780 16,803 18,368 85 75 602 698 687 773 14 299 98 899 112 1,198
				19,308

				4,588 13,780
				18,368

				75 698
				773

				299 899
				1,198

– 42 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

6. TURNOVER, REVENUE AND GAINS

The Group’s turnover represents an appropriate proportion of the contract revenue of construction contracts and the gross rental income from plant and machinery. An analysis of the Group’s turnover and revenue is as follows:

p’s turnover and revenue is as follows:
Construction contracts Rental income from plant and machinery Turnover Interest income Service fee income Waiver of bank loans Other Other revenue and gains	2002 HK$’000 18,830 287 19,117 112 105 – 323 540	2001 HK$’000 13,734 361
		14,095

		348 541 2,405 449
		3,743

7. LOSS FROM OPERATING ACTIVITIES

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

Staff costs: Wages and salaries (including directors’ remuneration – note 9) Pension contributions Less: Forfeited contributions Net pension contributions* Auditors’ remuneration Depreciation Minimum lease payments under operating leases on land and buildings Loss on disposal of fixed assets	2002 HK$’000 12,129 395 (282) 113 12,242 410 687 1,261 3	2001 HK$’000 4,402 399 (9)
		390
		4,792
		530 773 1,116 19

* As at 31 March 2002, there were no material forfeited contributions available to offset future employer’s contributions to the provident fund scheme (2001: Nil).

– 43 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

8. FINANCE COSTS

Interest on convertible notes Interest on bank loans, overdrafts and other loans wholly repayable within five years Waiver of interest accrued on bank loans, overdrafts and other loans wholly repayable within five years* Total finance costs	2002 HK$’000 (198) (167) – (365)	2001 HK$’000 (119 (82 63,865
		63,664

* Pursuant to the terms of the DRA, any interest charged by the banks on the bank borrowings of the Company and its participating subsidiaries since 4 September 1998 was waived upon the completion of the Restructuring Proposal.

9. DIRECTORS’ AND EMPLOYEES’ EMOLUMENTS

(a) Directors’ emoluments disclosed pursuant to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and Section 161 of the Hong Kong Companies Ordinance are as follows:

Executive directors: Fees Salaries, bonuses and allowances Independent non-executive directors: Fees Total directors’ remuneration	Group 2002 2001 HK$’000 HK$’000 – – 2,803 121 2,803 121 80 66 2,883 187	Group 2002 2001 HK$’000 HK$’000 – – 2,803 121 2,803 121 80 66 2,883 187
		121
		66
		187

The number of directors 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	Number of directors 2002 2001 9 18 1 – 10 18	Number of directors 2002 2001 9 18 1 – 10 18
		18

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

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(b) Employees’ emoluments

The five highest paid employees during the year include three (2001: Nil) directors, details of whose remuneration are set out in (a) above. Details of the emoluments of the remaining two (2001: five) non-director, highest paid employees are set out below:

Basic salaries, other allowances and bonuses Pension scheme contributions	Group 2002 2001 HK$’000 HK$’000 1,171 858 123 64 1,294 922	Group 2002 2001 HK$’000 HK$’000 1,171 858 123 64 1,294 922
		922

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

	Number	of employees
	2002	2001
Nil to HK$1,000,000	2	5

10. TAX

No provision for Hong Kong profits tax has been made as the Group had no assessable profits for the current and prior years.

11. NET PROFIT/(LOSS) ATTRIBUTABLE TO SHAREHOLDERS

The net loss attributable to shareholders for the year dealt with in the financial statements of the Company is approximately HK$7,083,000 (2001: HK$545,364,000).

12. EARNINGS/(LOSS) PER SHARE

The calculation of basic earnings/(loss) per share is based on the net loss attributable to shareholders for the year of HK$10,860,000 (2001: net profit of HK$33,765,000) and the weighted average number of 735,819,000 (2001: 465,355,000) shares in issue during the year.

The diluted loss per share for the year ended 31 March 2002 has not been disclosed, as the convertible notes and warrants outstanding during the year had an anti-dilutive effect on the basic loss per share for this year.

The calculation of diluted earnings per share in the prior year was based on the net profit attributable to shareholders for that year of HK$33,884,000, which comprised the HK$33,765,000 used in the basic earnings per share calculation and the HK$119,000 interest expense on the convertible notes assumed to be saved on the deemed exercise of all convertible notes outstanding in the prior year. The weighted average number of shares used in the calculation was 503,581,000 shares, which comprised the 465,355,000 shares used in the basic earnings per share calculation and the weighted average of 38,226,000 shares assumed to have been issued at no consideration on the deemed exercise of all convertible notes outstanding in the prior year.

– 45 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

13. FIXED ASSETS

Group

				Plant,
		Furniture,	machinery
		fixtures		and
Leasehold		and office		workshop	Motor
improvements		equipment	equipment		vehicles		Total
	HK$’000	HK$’000		HK$’000	HK$’000		HK$’000
Cost:
At beginning of year	854	1,798		1,630	370		4,652
Additions	–	98		14	–		112
Disposals	–	(9)		–	(179)		(188)
At 31 March 2002	854	1,887		1,644	191		4,576
Accumulated depreciation:
At beginning of year	447	1,561		1,337	334		3,679
Provided during the year	407	195		61	24		687
Disposals	–	(8)		–	(170)		(178)
At 31 March 2002	854	1,748		1,398	188		4,188
Net book value:
At 31 March 2002	–	139		246	3		388

At 31 March 2001	407	237		293	36		973

INTERESTS IN SUBSIDIARIES
					Company
					2002		2001
				HK$’000		HK$’000
Unlisted shares, at cost				121,888			110,388
Due from subsidiaries				498,081			491,847
				619,969			602,235
Less: Provision for impairment				(591,555)		(588,799)
				28,414			13,436
Due to subsidiaries				(9,593)			(645)
				18,821			12,791

14. INTERESTS IN SUBSIDIARIES

– 46 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

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

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

		Nominal value of	Percentage	Percentage	Percentage
	Place of	issued and		of	equity
	incorporation/	fully paid	attributable to			Principal
Name	operations	share capital	the	Company		activities
			2002		2001
Kenworth Group	British Virgin	US$2	100		100	Investment
Limited	Islands/					holding
	Hong Kong
Kenworth Engineering	Hong Kong	HK$24,274,140	100	*	100 *	Provision of
Limited						electrical and
						mechanical
						engineering
						services
KEL Employment	Hong Kong	HK$2	100	*	100 *	Provision of
Services Limited						management
						and
						administrative
						services
Kingsly Corporation	Hong Kong	HK$2,340,000	70	*	100 *	Trading of
Limited						construction
						materials
Synergy Asia Limited	Hong Kong	HK$100,000	55	*	55 *	Dormant
Viable Investments	British Virgin	US$1	100		100	Investment
Limited	Islands					holding

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.

Held indirectly through subsidiaries

– 47 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

15. CONSTRUCTION CONTRACTS

Gross amounts due from contract customers –Note (a) Gross amounts due to contract customers –Note (b) Contract costs incurred plus recognised profits less recognised losses to date –Note (c) Less: Progress billings received and receivable –Note (c)	2002 HK$’000 1,353 (3,014) (1,661) 2,390,498 (2,392,159) (1,661)	2001 HK$’000 2,804 (2,117
		687

		2,741,269 (2,740,582
		687

Notes:

(a) At 31 March 2002, retentions held by customers for contract works included in trade receivables under current assets amounted to approximately HK$905,000 (2001: HK$946,000).
(b) At 31 March 2002, there were no advances received from customers for contract works included in trade payables under current liabilities (2001: Nil).
(c) These amounts are mainly related to construction contracts which have either been terminated or which have ceased, or had insignificant activities during the year. Since there are numerous disputes and claims between the Group and its contract employers, suppliers, subcontractors and subcontractors’ employees, the directors have not been able to negotiate and agree final completion accounts for these terminated, ceased or inactive construction contracts.

16. TRADE RECEIVABLES

An aged analysis of trade receivables is as follows:

Balance HK$’000 Current to 90 days 2,465 91 – 180 days 179 181 – 360 days 1,153 Over 360 days 44,909 48,706 Retention money receivable 28,745 Total 77,451	2002 Provision HK$’000 – (1) (119) (44,909) (45,029) (27,840) (72,869)	Net balance HK$’000 2,465 178 1,034 – 3,677 905 4,582	Balance HK$’000 863 14 4 50,810 51,691 31,520 83,211	2001 Provision HK$’000 – – – (50,736) (50,736) (30,574) (81,310)	Net balance HK$’000 863 14 4 74
					955 946
					1,901

– 48 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The Group’s trading terms with its customers are mainly on credit. The credit period is generally for a period of 60 days. For retention receivables in respect of construction work carried out by the Group, the due dates are usually one year after the completion of the construction work. Each customer has a maximum credit limit. The Group seeks to maintain strict control over its outstanding receivables. Overdue balances are reviewed regularly by senior management.

17. CASH AND CASH EQUIVALENTS

Cash and bank balances Time deposits Less: Pledged time deposits: Pledged for bank overdraft facilities Pledged cash and bank balances Cash and cash equivalents	Group 2002 2001 HK$’000 HK$’000 9,319 13,207 5,500 – 14,819 13,207 (5,500) – – (13,207) 9,319 –	Company 2002 2001 HK$’000 HK$’000 102 62 – – 102 62 – – – (62 102 –	Company 2002 2001 HK$’000 HK$’000 102 62 – – 102 62 – – – (62 102 –
			62 – (62
			–

On 4 September 1998, the Group executed a guarantee and debenture (the “Debenture”) over all of its assets and undertaking, subject to the existing security arrangements, in favour of the security trustee in return for a formal standstill arrangement amongst the participating bankers. The Debenture was released and discharged on 13 November 2001 upon the settlement of the Group’s bank borrowings by the Scheme Administrator under the Schemes.

18. TRADE PAYABLES

An aged analysis of trade payables is as follows:

			2002	2001
			HK$’000	HK$’000
Current to	90	days	1,469	322

19. PROVISION FOR SCHEME DEBTS

The Group made a scheme debt provision in the prior year. The Company’s directors have estimated and provided for the expected claims of the scheme debts on a case by case basis. The adoption of HKSSAP 28 has resulted in the reclassification of the provision as a separate line item on the balance sheets.

20. DUE TO THE IMMEDIATE HOLDING COMPANY

The amount was unsecured, interest-free and fully repaid during the year.

– 49 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

21. CONVERTIBLE NOTES

At beginning of year Issue of convertible notes Arising on exercise of convertible notes_(Note 23(b))_ At 31 March	2002 HK$’000 10,251 – (576) 9,675	2001 HK$’000 – 10,251 –
		10,251

Under the Schemes as detailed in note 2 to the financial statements, for every HK$10,000 of scheme debt, the Company issued convertible notes in the principal amount of HK$187.50 to the scheme creditor on 30 August 2000. The notes, bear interest at a rate of 2% per annum and are convertible into new shares of the Company at a conversion price of HK$0.10 per share (the “Conversion Price”) at any time up to 1 September 2003, being the third anniversary of the date of the issue. The Conversion Price is subject to certain adjustments as defined in the note instrument.

22. DEFERRED TAX

The principal components of the Group’s net deferred tax asset not recognised in the financial statements are as follows:

Accelerated depreciation allowances Tax losses available for future relief	Group 2002 2001 HK$’000 HK$’000 – (40 79,536 75,121 79,536 75,081	Group 2002 2001 HK$’000 HK$’000 – (40 79,536 75,121 79,536 75,081
		75,081

The benefit of any future tax relief, which may arise from past losses incurred by a subsidiary, has not been included as an asset in the balance sheet because the directors consider it prudent not to recognise the benefit thereof until it is assured beyond reasonable doubt.

As at 31 March 2002, the Company did not have any significant unprovided deferred tax (2001: Nil).

– 50 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

23. SHARE CAPITAL

Shares Authorised: 1,800,000,000 shares of HK$0.10 each Issued and fully paid: 862,251,459 (2001: 713,368,757) ordinary shares of HK$0.10 each	2002 HK$’000 180,000 86,225	2001 HK$’000 180,000

		71,337

Details of the movements in the issued share capital of the Company during the year were as follows:

Number of shares Notes At beginning of year 713,368,757 Issue of new shares (a) 143,081,399 Arising on exercise of convertible notes (b) 5,765,189 Arising on exercise of warrants (c) 36,114 At 31 March 2002 862,251,459	Amount HK$’000 71,337 14,308 576 4
	86,225

(a) On 11 February 2002, the Company allotted and issued 143,081,399 new ordinary shares of HK$0.10 each to Super Win Development Limited, a wholly-owned subsidiary of Deson, at a subscription price of HK$0.10 per ordinary share. The market price of the Company’s shares at the placing date is HK$0.098 per ordinary share. The proceeds derived from the placing, before expenses, of approximately HK$14,308,000 were used as general working capital of the Group.
(b) During the year, the Company allotted and issued 5,765,189 new ordinary shares of HK$0.10 each to convertible note holders upon the exercise of their conversion rights at HK$0.10 per ordinary shares (note 21).
(c) The subscription rights attaching to 36,114 warrants were exercised at the subscription price of HK$0.10 per share, resulting in the issue of 36,114 new ordinary shares at HK$0.10 each for a total cash consideration, before expenses, of HK$3,611.

– 51 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Share options

The Company operates a share option scheme, further details of which are set out under the heading “Share option scheme” in the Report of the Directors on page 18.

At 31 March 2002, no share options were outstanding under the option scheme and none of the Company’s directors and none of the Group’s employees were granted share options during the year.

Warrants

The Company issued 40 million warrants to its shareholders on the basis of one warrant for every new share of HK$0.10 each then held by the existing shareholders prior to the completion of the DRA. Each warrant carries subscription rights to subscribe for one new share at a subscription price of HK$0.10 per share. The warrants are exercisable during the one-year period between 3 August 2001 and 2 August 2002.

During the year, 36,114 warrants were exercised for 36,114 new ordinary shares of HK$0.10 each at HK$0.10 per share. At the balance sheet date, the Company had 39,963,886 warrants outstanding. The exercise in full of such warrants would, under the present capital structure of the Company, result in the issue of 39,963,886 additional shares of HK$0.10 each.

– 52 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

24. RESERVES

Group At 1 April 2000 Share capital reduction Capital reduction against share premium Profit for the year Arising from the effect of the Schemes At 31 March 2001 and 1 April 2001 Loss for the year At 31 March 2002 Reserves retained by: Company and subsidiaries At 31 March 2002 Company and subsidiaries At 31 March 2001 Company At 1 April 2000 Share capital reduction Capital reduction against share premium Loss for the year Arising from the effect of the Schemes At 31 March 2001 and 1 April 2001 Loss for the year At 31 March 2002	Share premium Contributed Accumulated account surplus losses HK$’000 HK$’000 HK$’000 46,186 89,800 (766,847) – – 36,000 (46,186) – 46,186 – – 33,765 – – – – 89,800 (650,896) – – (10,860) – 89,800 (661,756) – 89,800 (661,756) – 89,800 (650,896) 46,186 101,689 (200,076) – – 36,000 (46,186) – 46,186 – – (545,364) – – – – 101,689 (663,254) – – (7,083) – 101,689 (670,337)	General reserve HK$’000 – – – – 490,659 490,659 – 490,659 490,659 490,659 – – – – 490,659 490,659 – 490,659	Total HK$’000 (630,861) 36,000 – 33,765 490,659 (70,437) (10,860) (81,297) (81,297) (70,437) (52,201) 36,000 – (545,364) 490,659 (70,906) (7,083) (77,989)

The contributed surplus of the Group represents the difference between the nominal value of the Company’s share capital issued as consideration in exchange for the nominal value of the issued share capital of the subsidiaries acquired at the time of the Company’s listing in 1997.

The contributed surplus of the Company represents the difference between the nominal value of the Company’s share capital issued in exchange for the aggregate net asset value of the subsidiaries acquired at the date of the reorganisation at the time of the Company’ listing in 1997.

– 53 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Under the Companies Act 1981 of Bermuda (as amended), the contributed surplus is available for distribution to shareholders of the Company under certain circumstances which the Company cannot currently meet.

The general reserve of the Group and the Company represents the total discharged liabilities of the Company as at 3 August 2000 pursuant to the Schemes.

The directors acknowledge the provisions and requirements of HKSA statement 2.01 “Framework for the preparation and presentation of financial statements” and statement 2.102 “Net profit or loss for the period, fundamental errors and changes in accounting policies” (the “Accounting Standards”) in respect of the treatment of the credit arising on the settlement of the Group’s net liabilities discharged through the Schemes. However, having considered, inter alia, the substance of the entire debt and capital restructuring exercise, the legal and practical effects of the Schemes, the time span required for the completion and termination of the Schemes and the requirements of the Accounting Standards, the directors consider that the inclusion of the net liabilities discharged under the Schemes directly in the general reserve during the year ended 31 March 2001, instead of in the profit and loss account and hence in the accumulated losses account for that year, is more appropriate and fairer considering the financial effect of the Schemes as a whole.

25. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT

(a) Reconciliation of loss from operating activities to net cash outflow from operating activities

Loss from operating activities
Waiver of bank loans
Interest income
Depreciation
Loss on disposal of fixed assets
Decrease/(increase) in gross amounts due from
contract customers
Decrease/(increase) in trade receivables
Increase in other receivables
Increase in trade payables
Increase in retention money payable
Decrease in other payables and accruals
Increase in provision for scheme debts
Increase/(decrease) in gross amounts due to
contract customers
Increase/(decrease) in amount due to the
immediate holding company
Decrease in amounts due to related companies
Net cash outflow from operating activities

Group
2002
2001
HK$’000
HK$’000
(Restated)
(10,509)
(29,904)
–
(2,405)
(112)
(348)
687
773
3
19
1,451
(907)
(2,681)
1,913
(894)
(114)
1,147
43,873
328
1,351
(1,623)
(7,464)
–
1,047
897
(17,692)
(928)
928
–
(1,356)
(12,234)
(10,286)

– 54 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(b) Analysis of changes in financing

Issued capital (including share premium account) HK$’000 Balance at 1 April 2000 86,186 Cash inflow from financing, net 13,094 Settlement by subscription money 26,906 Capital reduction (82,186) Effect of the Schemes 27,337 Waiver of bank loans – Share of loss – Balance at 31 March 2001 and 1 April 2001 71,337 Cash inflow from financing, net 14,312 Share of loss – Conversion of convertible notes_(Note 23(b))_ 576 Balance at 31 March 2002 86,225	Bank loans HK$’000 305,106 – – – (302,701) (2,405) – – – – – –	Other loans HK$’000 5,309 2,800 (8,109) – – – – – – – – –	Minority interests HK$’000 – 45 – – – – (5
			40 702 (14 –
			728

26. CONTINGENT LIABILITIES

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

		Company
	2002	2001
	HK$’000	HK$’000
Guarantees given to a bank in connection with facilities
granted to a subsidiary	8,000	–

As at 31 March 2002, the bank facilities granted to a subsidiary subject to guarantees given to a bank by the Company were utilised to the extent of approximately HK$482,000.

– 55 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

27. COMMITMENTS

Certain office properties leased by the Group are under operating lease arrangements. Leases for properties are negotiated for term of two years.

As at 31 March 2002, the Group had total future minimum lease payments under noncancellable operating leases falling due as follows:

Leases expiring: Within one year In the second to fifth years, inclusive	Group 2002 2001 HK$’000 HK$’000 144 637 132 – 276 637	Group 2002 2001 HK$’000 HK$’000 144 637 132 – 276 637
		637

As at 31 March 2002, the Company did not have any significant capital commitments.

28. RELATED PARTY TRANSACTIONS

During the year, the Group had the following significant transactions with related parties:

		2002	2001
		HK$’000	HK$’000
Construction contracting income received from
a fellow subsidiary	(a)	3,502	–
Service income received from a fellow subsidiary	(b)	–	541
Rental expense paid to a fellow subsidiary	(c)	580	338
Tender service fees paid to a fellow subsidiary	(d)	936	–

(a) The directors consider that the construction contracts were made according to conditions similar to those offered to the major customers of the Group.
(b) The service income received from a fellow subsidiary was calculated on a basis determined through negotiation between the respective parties.
(c) The rental expenses were based on rates approximate to those of the market at that time.
(d) The tender service fees were based on the actual costs incurred.

– 56 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

29. COMPARATIVE AMOUNTS

As further explained in note 3 to the financial statements, due to the adoption of certain new and revised SSAPs during the 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 to conform with the current year’s presentation.

30. APPROVAL OF THE FINANCIAL STATEMENTS

The financial statements were approved and authorised for issue by the board of directors on 30 May 2002.

– 57 –

FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX II

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

Set out below is a pro forma statement of unaudited combined assets and liabilities of the Enlarged Group based on the unaudited consolidated balance sheet of the Group as at 30 September 2002 and the audited consolidated balance sheet of the Billion Treasure Group as at 31 December 2002 as set out in the Accountants’ Report of this circular:

NON-CURRENT ASSETS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES MINORITY INTERESTS NET ASSETS	The Group HK$’000 421 21,152 (18,720) 2,432 2,853 – (713) 2,140	Pro forma combined Billion balances of Treasure the Enlarged Group Adjustments Group HK$’000 HK$’000 HK$’000 101 522 56,991 4,680 (1) 82,823 (48,864) 40,236 (2) (27,818) (470)(3) 8,127 55,005 8,228 55,527 (7,144) (7,144) – (713) 1,084 47,670

Notes:

This represents fair value adjustment for the completed properties held for sale of Billion Treasure Group prior to the Acquisition. The adjustment is based on the total consideration paid of HK$46,000,000, including the acquisition of loan from the immediate holding company of Billion Treasure of HK$40,236,000.

The properties were revalued on 4 March 2003 by B.I. Appraisals Limited, an independent professional valuer, at an open market value of HK$48,000,000 based on their existing use.

This represents acquisition of loan from the immediate holding company of Billion Treasure.
This represents the estimated expenses on the Acquisition.

– 58 –

FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX II

2. PRO FORMA STATEMENT OF UNAUDITED ADJUSTED CONSOLIDATED NET TANGIBLE ASSETS OF THE GROUP FOLLOWING THE COMPLETION OF THE ACQUISITION

The following statement of unaudited pro forma adjusted consolidated net tangible assets of the Group is prepared based on the net tangible assets of the Group as stated in the audited consolidated financial statements of the Group as at 31 March 2002 and adjusted as follows:

HK$’000

Consolidated net tangible assets based on the Group’s audited
consolidated balance sheet as at 31 March 2002
Unaudited net loss attributable to the Shareholders for the six
months ended 30 September 2002 based on the
Group’s unaudited interim report
Arising on exercise of warrants for the six months ended
30 September 2002
Unaudited consolidated net tangible assets of the Group
as at 30 September 2002 and before the completion of Acquisition
Add: Net proceeds from issue and allotments of the Consideration Shares
Less: Estimated expenses on acquisition
Unaudited pro forma adjusted consolidated net tangible assets
Unaudited pro forma adjusted consolidated net tangible assets per share
(based on an aggregate of 1,519,420,516 shares immediately
after the Acquisition)

4,928
(2,791)
3
2,140
46,000
(470)
47,670
HK$0.03

– 59 –

FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX II

3. WORKING CAPITAL

The Directors are of the opinion that after taking into account the credit facilities and internal resources available to the Enlarged Group, the Enlarged Group will have sufficient working capital for its present requirements.

– 60 –

ACCOUNTANTS’ REPORT ON THE BILLION TREASURE GROUP

APPENDIX III

Certified Public Accountants Phone: 852 2846 9888 15/F Hutchison House 852 2526 5371 10 Harcourt Road Fax: 852 2860 4432 Central, Hong Kong 852 2845 9208

17 April, 2003

The Board of Directors KEL Holdings Limited 11/F., Nanyang Plaza 57 Hung To Road Kwun Tong Kowloon Hong Kong Dear Sirs,

We set out below our report on the financial information (the “Financial Information”) regarding Billion Treasure Holdings Limited (the “Company”) and its wholly-owned subsidiary, Bless Honour Limited (“Bless Honour”) (hereinafter collectively referred to as the “Group”)for inclusion in the circular of KEL Holdings Limited dated 17 April, 2003 in connection with the proposed acquisition of a 100% interest in the registered and paid-up capital of the Company.

The Company was incorporated as a limited liability company in the British Virgin Islands on 18 September 1995 and has been an investment holding company since its incorporation. Bless Honour was incorporated as a limited liability company in Hong Kong and is involved in property holding.

As at the date of this report, no audited financial statements have been prepared for the Company. We have, however, performed an independent review of the management accounts of the Company since the date of its incorporation.

We have acted as auditors of Bless Honour during the three years ended 31 March 2002 and the nine months ended 31 December 2002 (the “Relevant Periods”).

For the purposes of this report, we have examined the audited financial statements or, where appropriate, management accounts, of all the companies now comprising the Group for the Relevant Periods, and carried out such additional procedures as we considered necessary in accordance with the Auditing Guideline “Prospectuses and the reporting accountant” issued by the Hong Kong Society of Accountants.

– 61 –

ACCOUNTANTS’ REPORT ON THE BILLION TREASURE GROUP

APPENDIX III

The Financial Information has been prepared from the unaudited management accounts of the Company and the audited financial statements and unaudited management accounts of Bless Honour for the Relevant Periods. All significant intercompany transactions and balances within the Group are eliminated on consolidation.

In our opinion, the Financial Information gives, for the purpose of this report, a true and fair view of the results of the Group for the Relevant Periods and of the balance sheets of the Group and the Company as at 31 March 2000, 2001 and 2002 and 31 December 2002.

1. PRINCIPAL ACCOUNTING POLICIES

The principal accounting policies adopted in arriving at the Financial Information set out in the report are set out below.

Basis of preparation

The Financial Information has been prepared in accordance with Hong Kong Statements of Standard Accounting Practice and accounting principles generally accepted in Hong Kong. It has been prepared under the historical cost convention.

Basis of consolidation

The consolidated financial statements include the financial statements of the Company and Bless Honour for the Relevant Periods. All significant intercompany transactions and balances within the Group are eliminated on consolidation.

Subsidiaries

A subsidiary is a company in which the Company, directly or indirectly, controls more than half of its voting power or issued share capital or controls the composition of its board of directors. Interests in subsidiaries are stated at cost less any impairment losses.

Impairment of assets

– 62 –

ACCOUNTANTS’ REPORT ON THE BILLION TREASURE GROUP

APPENDIX III

An impairment loss is recognised only if the carrying amount of an asset exceeds its recoverable amount. An impairment loss is charged to the profit and loss account in the period in which it arises.

A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the recoverable amount of an 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 an impairment loss is credited to the profit and loss account in the period in which it arises.

Operating leases

Completed properties held for sale

Completed properties held for sale are stated at the lower of cost and net realisable value. Cost includes all development expenditure, applicable borrowing costs and other direct costs attributable to such properties. Net realisable value is determined by reference to prevailing market prices on an individual property basis.

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) rental income, on a time proportion basis over the lease terms; and
(b) interest income, on a time proportion basis taking into account the principal outstanding and the effective interest rate applicable.

Borrowing costs

Borrowing costs are charged to the profit and loss account in the period in which they are incurred.

– 63 –

ACCOUNTANTS’ REPORT ON THE BILLION TREASURE GROUP

APPENDIX III

Deferred tax

Foreign currency transactions

Foreign currency transactions during the Relevant Periods are recorded at the applicable rates of exchange ruling at the transaction dates. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the applicable rates of exchange ruling at that date. Exchange differences are dealt with in the profit and loss account.

Related parties

Cash and cash equivalents

Cash and cash equivalents comprise cash on hand and at banks, including time deposits, which are not restricted as to use.

– 64 –

ACCOUNTANTS’ REPORT ON THE BILLION TREASURE GROUP

APPENDIX III

2. INCOME STATEMENTS

The following is a summary of the consolidated income statements of the Group for the Relevant Periods:

Notes TURNOVER Other revenue (a) General and administrative expenses PROFIT FROM OPERATING ACTIVITIES (b) Finance costs (c) PROFIT BEFORE TAX Tax (d) NET PROFIT FOR THE YEAR	Nine months ended Year ended 31 March 31 December 2000 2001 2002 2002 HK$ HK$ HK$ HK$ – – – – 53,577 673,908 1,088,289 1,068,291 (46,054) (401,037) (454,013) (208,834) 7,523 272,871 634,276 859,457 – – (114,380) (327,281) 7,523 272,871 519,896 532,176 – (52,351) (103,376) (100,336) 7,523 220,520 416,520 431,840

– 65 –

ACCOUNTANTS’ REPORT ON THE BILLION TREASURE GROUP

APPENDIX III

Notes:

(a) Other revenue

An analysis of other revenue is as follows:

				Nine months
				ended
		Year ended 31	March	31 December
	2000	2001	2002	2002
	HK$	HK$	HK$	HK$
Gross rental income from completed
properties held for sale	53,577	673,908	1,088,169	983,632
Bank interest income	–	–	120	84,659
	53,577	673,908	1,088,289	1,068,291

(b) Profit from operating activities

Profit from operating activities is arrived at after charging/(crediting):

Directors’ remuneration Auditors’ remuneration Gross rental income Less: Outgoings Net rental income	Nine months ended Year ended 31 March 31 December 2000 2001 2002 2002 HK$ HK$ HK$ HK$ – – – – 16,000 17,000 17,000 – (53,577) (673,908) (1,088,169) (983,632 3,682 124,950 48,094 52,783 (49,895) (548,958) (1,040,075) (930,849	Nine months ended Year ended 31 March 31 December 2000 2001 2002 2002 HK$ HK$ HK$ HK$ – – – – 16,000 17,000 17,000 – (53,577) (673,908) (1,088,169) (983,632 3,682 124,950 48,094 52,783 (49,895) (548,958) (1,040,075) (930,849
		(930,849

(c) Finance costs

				Nine months	Nine months
					ended
		Year ended 31	March	31	December
	2000	2001	2002		2002
	HK$	HK$	HK$		HK$
Interest expense on a bank loan	–	–	114,380		327,281

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ACCOUNTANTS’ REPORT ON THE BILLION TREASURE GROUP

APPENDIX III

(d) Tax

				Nine months	Nine months
					ended
		Year ended 31	March	31	December
	2000	2001	2002		2002
	HK$	HK$	HK$		HK$
Tax charge for the year/period	–	52,351	103,376		100,336

No provision for Hong Kong profits tax has been made as the Company had no assessable profits arising in Hong Kong during the Relevant Periods. 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.

No provision for deferred tax has been provided as the net effect of all timing differences was immaterial as at the balance sheet date.

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ACCOUNTANTS’ REPORT ON THE BILLION TREASURE GROUP

APPENDIX III

3. BALANCE SHEETS

The following is a summary of the consolidated balance sheets of the Group as at the end of the Relevant Periods:

Notes NON-CURRENT ASSETS Pledged time deposits (a) CURRENT ASSETS Due from fellow subsidiaries (c) Completed properties held for sale (d) Prepayments, sundry debtors and deposits Pledged time deposits (a) Cash and cash equivalents (a) CURRENT LIABILITIES Due to fellow subsidiaries (c) Due to the intermediate holding company (e) Due to the immediate holding company (e) Due to a shareholder (f) Deposits, accruals and other payables Interest-bearing bank loan (g) Tax payable NET CURRENT ASSETS TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITY Interest-bearing bank loan (g) CAPITAL AND RESERVES Issued capital (h) Retained profits	2000 HK$ – – 66,617,829 14,087 – – 66,631,916 285,411 2,250 41,139,546 25,085,385 104,071 – – 66,616,663 15,253 15,253 – 15,253 7,730 7,523 15,253	As at As at 31 March 31 December 2001 2002 2002 HK$ HK$ HK$ – 5,100,000 101,004 – 3,415,761 – 41,683,381 41,683,381 41,683,381 156,745 301,291 140,871 – – 15,083,627 – 98,625 83,683 41,840,126 45,499,058 56,991,562 308,835 51,955 – 2,250 – – 41,145,305 41,149,805 47,621,562 – – – 147,963 394,323 534,430 – 669,145 696,241 – 11,997 11,997 41,604,353 42,277,225 48,864,230 235,773 3,221,833 8,127,332 235,773 8,321,833 8,228,336 – (7,669,540) (7,144,203) 235,773 652,293 1,084,133 7,730 7,730 7,730 228,043 644,563 1,076,403 235,773 652,293 1,084,133

– 68 –

APPENDIX III ACCOUNTANTS’ REPORT ON THE BILLION TREASURE GROUP

The following is a summary of the balance sheets of the Company as at the end of the Relevant Periods:

Notes NON-CURRENT ASSET Interest in a subsidiary (b) CURRENT LIABILITIES Due to a fellow subsidiary (c) Due to the immediate holding company (e) Due to a shareholder (f) Deposits, accruals and other payables NET CURRENT LIABILITIES CAPITAL AND RESERVES Issued capital (h) Accumulated losses	2000 HK$ 66,238,420 – 41,145,305 25,085,385 5,000 66,235,690 (66,235,690) 2,730 7,730 (5,000) 2,730	As at As at 31 March 31 December 2001 2002 2002 HK$ HK$ HK$ 41,153,035 41,153,035 47,599,422 9,290 19,580 – 41,145,305 41,145,305 47,621,562 – – – 6,000 6,000 – 41,160,595 41,170,885 47,621,562 (41,160,595) (41,170,885) (47,621,562) (7,560) (17,850) (22,140) 7,730 7,730 7,730 (15,290) (25,580) (29,870) (7,560) (17,850) (22,140)

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ACCOUNTANTS’ REPORT ON THE BILLION TREASURE GROUP

APPENDIX III

Notes:

(a) Cash and cash equivalents

Cash and bank balances Time deposits Less: Time deposits pledged for: Long term bank loan_(note 3(g))_ Short term bank loan of a fellow subsidiary Long term bank loan of a fellow subsidiary Cash and cash equivalents	2000 HK$ – – – – – – – –	As at As at 31 March 31 December 2001 2002 2002 HK$ HK$ HK$ – 98,625 83,683 – 5,100,000 15,184,631 – 5,198,625 15,268,314 – (100,000) (101,004 – – (15,083,627 – (5,000,000) – – (5,100,000) (15,184,631 – 98,625 83,683	As at As at 31 March 31 December 2001 2002 2002 HK$ HK$ HK$ – 98,625 83,683 – 5,100,000 15,184,631 – 5,198,625 15,268,314 – (100,000) (101,004 – – (15,083,627 – (5,000,000) – – (5,100,000) (15,184,631 – 98,625 83,683
			15,268,314
			(101,004 (15,083,627 –
			(15,184,631
			83,683

(b) Interest in a subsidiary

Company

Company
Unlisted shares, at cost Due from a subsidiary	2000 HK$ 2 66,238,418 66,238,420	As at As at 31 March 31 December 2001 2002 2002 HK$ HK$ HK$ 2 2 2 41,153,033 41,153,033 47,599,420 41,153,035 41,153,035 47,599,422
			47,599,422

The amount due from a subsidiary is unsecured, interest-free and has no fixed terms of repayment.

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ACCOUNTANTS’ REPORT ON THE BILLION TREASURE GROUP

APPENDIX III

Particulars of the subsidiary as at the respective balance sheet dates are as follows:

		Nominal value of	Percentage
	Place of	issued and	of equity
	incorporation/	fully paid	attributable to	Principal
Name	operation	share capital	the Company	activity
Bless Honour	Hong Kong/	HK$2	100	Property
Limited	The People’s			investment
	Republic of
	China
	(the “PRC”)

(c) Due from/to fellow subsidiaries

The balances were unsecured and interest-free. The amounts due from and to fellow subsidiaries were fully repaid on 31 December 2002.

(d) Completed properties held for sale

The completed properties held for sale are leased to third parties under operating leases, further details of which are included in note 3(i) below.

The Group’s completed properties held for sale with an aggregate carrying amount of HK$41,683,381 are pledged to a bank for securing a bank loan granted to the Group as at 31 December 2002 and 31 March 2002, respectively (note 3(g)).

The details of the Group’s completed properties held for sale are as follows:

Location	Tenure	Use
24, 27-28 floors and 19 car park spaces,	Term of 45 years,	Office/
Zhongda Square,	from 8 September 1998	commercial
989 Dongfang Road,	to 21 December 2043,
Lujiazhui,	both dates inclusive
Pudong District,
Shanghai,
The PRC

(e) Due to holding companies

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

(f) Due to a shareholder

The balance was unsecured, interest-free and was repaid during the year ended 31 March

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ACCOUNTANTS’ REPORT ON THE BILLION TREASURE GROUP

APPENDIX III

(g) Interest-bearing bank loan

Bank loan repayable: Within one year In the second year In the third to fifth years, inclusive Beyond five years Portion classified as current liabilities Long term portion	2000 HK$ – – – – – – –	As at As at 31 March 31 December 2001 2002 2002 HK$ HK$ HK$ – 669,145 696,241 – 705,639 734,600 – 2,358,861 2,455,674 – 4,605,040 3,953,929 – 8,338,685 7,840,444 – (669,145) (696,241) – 7,669,540 7,144,203	As at As at 31 March 31 December 2001 2002 2002 HK$ HK$ HK$ – 669,145 696,241 – 705,639 734,600 – 2,358,861 2,455,674 – 4,605,040 3,953,929 – 8,338,685 7,840,444 – (669,145) (696,241) – 7,669,540 7,144,203
			7,840,444 (696,241)
			7,144,203

The Group’s bank loan was fully repaid on 27 February 2003.

The Group’s bank loan was secured by:

(i) the Group’s completed properties held for sale situated in the PRC (note 3(d)); and
(ii) the Group’s time deposit of HK$101,004 and HK$100,000 as at 31 December 2002 and 31 March 2002, respectively (note 3(a)).

(h) Share capital

Authorised: 50,000 shares of US$1 each Issued and fully paid: 1,000 shares of US$1 each	2000 HK$ 386,500 7,730	As at As at 31 March 31 December 2001 2002 2002 HK$ HK$ HK$ 386,500 386,500 386,500 7,730 7,730 7,730	As at As at 31 March 31 December 2001 2002 2002 HK$ HK$ HK$ 386,500 386,500 386,500 7,730 7,730 7,730

			7,730

(i) Operating lease arrangements

The Group temporarily leases its completed properties held for sale under operating lease arrangements, with leases negotiated for terms ranging from one to five years. The terms of the leases generally also require the tenants to pay security deposits and provide for periodic rent adjustments according to the then prevailing market conditions.

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ACCOUNTANTS’ REPORT ON THE BILLION TREASURE GROUP

APPENDIX III

As at the end of the Relevant Periods, 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	2000 HK$ – – –	As at As at 31 March 31 December 2001 2002 2002 HK$ HK$ HK$ 720,017 1,182,966 1,455,574 954,753 1,418,785 1,296,097 1,674,770 2,601,751 2,751,671	As at As at 31 March 31 December 2001 2002 2002 HK$ HK$ HK$ 720,017 1,182,966 1,455,574 954,753 1,418,785 1,296,097 1,674,770 2,601,751 2,751,671
			2,751,671

(j) Contingent liabilities

The Group did not have any significant contingent liabilities at the respective balance sheet dates.

4. CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

At 1 April 1999 Net profit for the year At 31 March 2000 and 1 April 2000 Net profit for the year At 31 March 2001 and 1 April 2001 Net profit for the year At 31 March 2002 and 1 April 2002 Net profit for the period At 31 December 2002	Issued capital HK$ 7,730 – 7,730 – 7,730 – 7,730 – 7,730	Retained profits HK$ – 7,523 7,523 220,520 228,043 416,520 644,563 431,840 1,076,403	Total HK$ 7,730 7,523
			15,253 220,520
			235,773 416,520
			652,293 431,840
			1,084,133

5. SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements of the Group have been prepared in respect of any period subsequent to 31 December 2002.

– 73 –

PROPERTY VALUATION REPORT

APPENDIX IV

The following are the texts of the letter and valuation certificate received from B.I. Appraisals Limited in connection with their valuation of the Properties.

==> picture [63 x 47] intentionally omitted <==

==> picture [197 x 38] intentionally omitted <==

Registered Professional Surveyors, Valuers & Property Consultants

17 April, 2003

The Directors KEL Holdings Limited 11th Floor Nanyang Plaza 57 Hung To Road Kwun Tong Kowloon

Dear Sirs,

Re: Whole of Levels 24, 27 and 28 together with Car Parking Space Nos. 31 to 39 on Basement 1 and Car Parking Space Nos. 82 to 91 on Basement 2, Zhongda Square, No. 989 Dongfang Road, Lujiazui, Pudong District, Shanghai, The People’s Republic of China (the “PRC”)

In accordance with the instruction from KEL Holdings Limited (hereinafter referred to as the “Company”) for us to value the captioned property (hereinafter referred to as the “Property”), we confirm that we have carried out inspection, made relevant enquiries and obtained such further information as we consider necessary for providing you with our opinion of the open market value of such property interest as at 4th March, 2003 (hereinafter referred to as the “date of valuation”). It is our understanding that this valuation document is to be used for reference purpose.

This letter, forming part of our valuation report, identifies the property being valued, explains the basis and methodology of our valuation, and lists out the assumptions and the title investigation we have made in the course of our valuation, as well as the limiting conditions.

Basis of Valuation

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

(a) a willing seller;

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PROPERTY VALUATION REPORT

APPENDIX IV

(b) that, prior to the date of valuation, there had been a reasonable period (having regard to the nature of the property and the state of the market) for the proper marketing of the interest, for the agreement of price and terms and for the completion of the sale;
(c) that the state of the market, level of values and other circumstances were, on any earlier assumed date of exchange of contracts, the same as on the date of valuation;
(d) that no account is taken of any additional bid by a prospective purchaser with a special interest; and
(e) that both parties to the transaction had acted knowledgeably, prudently and without compulsion.”

In the course of our valuation, we have valued the tenanted units / car parking spaces of the Property on an open market basis assuming sale subject to the existing tenancies and valued the vacant / owner-occupied units / car parking spaces on an open market basis assuming sale with the benefit of vacant possession.

Furthermore, we have valued the constituent units / car parking spaces of the Property on the basis that each of them is considered individually. Our valuation is the aggregate value of the constituent units / car parking spaces and we have not applied any bulk discount.

Valuation Methodology

In arriving at the value of the property interest in the Property, we have focused our valuation procedures using the Direct Comparison Approach, which considers prices recently paid or offered for similar properties, with adjustments made to the indicated market prices to reflect condition and utility of the Property relative to the market comparable.

Valuation Assumptions

Our valuation has been made on the assumption that the Property is sold on the open market without the benefit of a deferred terms contract, leaseback, joint venture, management agreement or any similar arrangement which would serve to affect the value of such property interest. In addition, no account has been taken of any option or right of pre-emption concerning or effecting sales of the Property and no forced sale situation in any manner is assumed in our valuation.

In valuing the property interest, we have assumed that the owner of the Property has valid and enforceable title to the property interest which is freely transferable, and has free and uninterrupted right to use the same for the whole of the unexpired term granted subject to payment of annual land use fees and all requisite land premium/purchase consideration otherwise payable has been fully settled.

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PROPERTY VALUATION REPORT

APPENDIX IV

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

Title Investigation

Due to the nature of the land registration system in the PRC, we are not able to investigate the title to or any liabilities against the property interest. However, we have been provided with a certified copy of the Certificate for Real Estate Ownership for the Property. We have not examined the original document to verify ownership and to ascertain the existence of any amendments that may not appear on the copies handed to us. Yet, we have been provided with a copy of the legal opinion regarding the title to the property interest prepared by Allen & John Law Firm, the Company’s legal advisers as to PRC law, (hereinafter referred to as the “PRC Legal Adviser”). In the course of our preparation of this valuation report, we have relied on the certified copy of the Certificate for Real Estate Ownership for the Property as well as the legal opinion prepared by the PRC Legal Adviser in relation to the title to the property interest.

Limiting Conditions

We have inspected the exterior and, where possible, the interior of the Property. During the course of our inspection, we did not note any serious defects. However, no structural survey has been made and we are unable to report as to whether the Property is free from rot, infestation or other defects. No tests were carried out on any of the services provided in the Property.

We have not carried out on-site measurements to verify the correctness of the floor areas in respect of the Property but have assumed that the floor areas shown on the copy of the Certificate for Real Estate Ownership for the Property as provided by the Company are correct. Dimensions, measurements and areas included in the valuation certificate are based on information contained in the documents provided to us by the Company and are therefore only approximations.

We have relied to a considerable extent on the information provided by the Company and the PRC Legal Adviser and have accepted advice on such matters as planning approvals, statutory notices, easements, tenures, building age, particulars of occupancy, tenancy agreements, floor areas and all other relevant matters in the identification of the Property.

We have had no reason to doubt the truth and accuracy of the information provided to us by the Company. We were also advised by the Company that no material facts have been omitted from the information provided. We consider that we have been provided with sufficient information to reach an informed view, and have no reason to suspect that any material information has been withheld.

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PROPERTY VALUATION REPORT

APPENDIX IV

Our valuation has been prepared in accordance with the Hong Kong Guidance Notes on the Valuation of Property Assets (2nd Edition) published by the Hong Kong Institute of Surveyors in March 2000 and under generally accepted valuation procedures and practices, which are in compliance with the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited.

Remarks

Unless otherwise stated, all monetary amounts stated in our valuation certificate are in Hong Kong Dollars (HK$). The exchange rates adopted in our valuation are HK$1 = RMB1.06 and USD1 = RMB8.3 which were approximately the prevailing exchange rate as at the date of valuation.

We hereby certify that we have neither present nor prospective interests in the Company, the Property or the value reported herein.

Our valuation certificate is enclosed herewith.

Yours faithfully, For and on behalf of

B.I. APPRAISALS LIMITED

William C. K. Sham MRICS, AHKIS, RPS (G.P.) Executive Director

Encl.

Note: Mr. William C. K. Sham is a Chartered Surveyor who has over 10 years’ experience in the valuation of properties in the PRC.

– 77 –

PROPERTY VALUATION REPORT

APPENDIX IV

VALUATION CERTIFICATE

Property

Description and tenure

Particulars of occupancy

Open market value in existing state as at 4th March, 2003

Whole of Levels 24, Zhongda Square (the 27 and 28 together “ Building”) is a 28-storey with Car Parking commercial / office Space Nos. 31 to 39 building erected on two on Basement 1 and levels of basement car park Car Parking Space completed in about July Nos. 82 to 91 on 1996. Basement 2, Zhongda Square, The Property comprises No. 989 Dongfang three whole floors, Road, Lujiazui, designated as Levels 24, Pudong District, 27 and 28, together with 9 Shanghai, the PRC car parking spaces on

The Property comprises three whole floors, designated as Levels 24, 27 and 28, together with 9 car parking spaces on Basement 1 and 10 car parking spaces on Basement 2 of the Building.

The total gross floor area of the Property (excluding the area for the car parking spaces) is approximately 3,098.49 sq.m. (33,352 sq.ft.).

The land use rights of the land on which the Building is erected have been granted for a term from 8th September, 1998 to 21st December, 2043.

All constituent units of the Property, except for Units 2401B and 2403A having a total gross floor area of approximately 142.56 sq.m. that are owneroccupied, are leased to various tenants for terms range from 1 to 5 years with the latest expiring on 30th September, 2007. The current total rental income is approximately RMB137,792.45 per month exclusive of management fees.

Regarding the car parking spaces, 7 bays are currently vacant, whereas 2 bays are owner-occupied and 7 bays are occupied by the two existing tenants under the respective leasing contracts. The remaining 3 bays are licensed on monthly basis with a total licence fee of approximately RMB1,500 per month.

$48,000,000

Notes:

Pursuant to a certified copy of the Certificate for Real Estate Ownership No. 滬房地市字 (2000) 第 003752 號 issued by 上海市房屋土地管理局 (Shanghai Municipal Building and Land Administration Bureau) on 26th June, 2000, the title to the Property, comprising all three levels of office with a total gross floor area of 3,098.49 sq.m. and all 19 car parking spaces, is solely owned by 佑誠有限公司 (Bless Honour Limited).
Pursuant to three Certificates for Real Estate Property Leasing Contract Registration Nos. (浦東新區 ) 區／縣租登 (2000)第 100539號 , 第 100730號 , and 第 101141號 , dated 28th May, 2001, 20th August, 2001 and 25th February, 2002 all issued by 上海市浦東新區房地產登記處 , the leasing contracts regarding Units 2701 and 2702 on Level 27 and whole of Level 28 have been registered.

– 78 –

PROPERTY VALUATION REPORT

APPENDIX IV

We have been advised by the Company that the registrations for the leasing contracts of the remaining tenanted units are in process and that the registration procedures are expected to be completed in April 2003.
The opinion of the PRC Legal Adviser states that
a) Bless Honour Limited has been duly incorporated in Hong Kong and has full corporate power and legal capacity in purchasing and letting real estate property in the PRC.
b) According to the Certificate for Real Estate Ownership, Bless Honour Limited has duly obtained the sole ownership of the Property.
c) The tenancy agreements separately entered into between Bless Honour Limited and the various existing tenants are in compliance with the relevant regulations under the PRC law and are valid and legally enforceable.
d) Bless Honour Limited is in possession of a proper legal title to the Property and is entitled to mortgage, transfer and let the Property freely to both local and overseas purchasers.
We have relied on the aforesaid PRC legal opinion and prepared our valuation on the following assumptions:
a) Bless Honour Limited is in possession of a proper legal title to the Property and is entitled to transfer the Property with the residual term of its land use rights at no extra land premium or other onerous payments payable to the government.
b) The Property, whether as a whole or on strata-titled basis, may be disposed of freely to both local and overseas purchasers.
The status of the title and grant of major approvals and licences in accordance with the information provided to us by the Company are as follow:

Certificate for State-owned Land Use Yes Certificate for Real Estate Ownership Yes Contracts for Real Estate Property Leasing Yes Certificate for Real Estate Property Leasing Contract Registration (part) Yes

– 79 –

GENERAL INFORMATION

APPENDIX V

1. RESPONSIBILITY STATEMENT

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

2. MARKET PRICES

The table below shows the closing price of the Shares on the Stock Exchange on (1) the end of each of the six calendar months immediately preceding the joint announcement of the Company dated 6 March, 2003; (ii) 3 March, 2003, being the last trading day on which the Shares were traded before the joint announcement of the Company dated 6 March, 2003; and (iii) the Latest Practicable Date:

Date	Closing Price per Share
	HK$
30 September, 2002	0.089
31 October, 2002	0.070
30 November, 2002	0.070
31 December, 2002	0.080
31 January, 2003	0.079
28 February, 2003	0.070
3 March, 2003	0.070
Latest Practicable Date	0.070

The highest and lowest closing prices per Share recorded on the Stock Exchange within the relevant period were HK$0.095 and HK$0.065 on 5 September, 2002 and 28 November, 2002 respectively.

3. EXPLANATORY STATEMENT OF REPURCHASE OF SHARES

This is the explanatory statement (the “Explanatory Statement”) to provide requisite information to you for your consideration of the Repurchase Mandate, as required by the relevant rules set out in the Listing Rules on the Stock Exchange to regulate the repurchase by companies with primary listings on the Stock Exchange of their own shares on the Stock Exchange.

– 80 –

GENERAL INFORMATION

APPENDIX V

This Explanatory Statement also constitutes the memorandum required under Section 49BA(3) of the Companies Ordinance.

(i) Share capital

As at the Latest Practicable Date, the issued share capital of the Company comprised 862,277,659 Shares. Assuming the Acquisition (including the Capital Reorganisation), the issued share capital of the Company will comprise 1,519,420,516 KEL New Shares. The passing of the ordinary resolution numbered 4 as set out in the notice of Special General Meeting will allow the Company to repurchase a maximum of 151,942,052 KEL New Shares, assuming the Acquisition (including the Capital Reorganisation) proceeds, on the basis that no further Shares will be issued prior to the date of the Special General Meeting.

(ii) Funding of repurchases

In repurchasing Shares, the Company may only apply funds legally available for such purpose in accordance with its memorandum of association and bye-laws and the applicable laws of Bermuda. Bermuda law provides that repurchase may only be effected out of the capital paid up on the repurchased Shares, or out of funds of the Company otherwise available for dividend or distribution or the proceeds of a new issue of Shares made for such purpose. Any premium payable on repurchase of Shares may only be paid out of the funds of the Company otherwise available for dividend or distribution or out of the share premium or contributed surplus accounts of the Company.

There might be an adverse impact on the working capital or gearing position of the Company (as compared with the position disclosed in the audited financial statements for the year ended 31 March, 2002 contained in the annual report for the year ended 31 March, 2002) in the event that the mandate to repurchase Shares were to be exercised in full at any time during the proposed repurchase period. However, the Directors do not propose to exercise the Repurchase Mandate to such extent as would, in the circumstances, have a material adverse effect on the working capital requirements of the Company or the gearing levels which in the opinion of the Directors are from time to time appropriate for the Company.

(iii) Reasons for repurchases

The Directors believe that the Repurchase Mandate is in the best interests of the Company and will give the Company additional flexibility to repurchase the Company’s own Shares in the market. Such repurchases may, depending on market conditions and funding arrangements at the time, lead to an enhancement of the value of the Shares and/or its earnings per Share and will only be made when the Directors believe that such repurchases will benefit the Company and the Shareholders.

– 81 –

GENERAL INFORMATION

APPENDIX V

(iv) General

None of the Directors nor, to the best of their knowledge having made all reasonable enquiries, any of their associates currently intend to sell Shares to the Company or its subsidiaries if the Repurchase Mandate is approved by the Shareholders.

The Directors have undertaken to the Stock Exchange that, so far as the same may be applicable, they will exercise the Repurchase Mandate in accordance with the Listing Rules and the applicable laws of Bermuda.

No purchases have been made by the Company of its Shares (whether on the Stock Exchange or otherwise) in the six months prior to the date of this circular.

No connected person (as defined in the Listing Rules) has notified the Company that he has a present intention to sell Shares to the Company, or has undertaken not to do so, if the Repurchase Mandate is exercised. In accordance with the Listing Rules, the Company shall not knowingly purchase Shares from a connected person on the Stock Exchange.

If, as the result of a share repurchase, a Shareholder’s proportionate interest in the voting rights of the Company increases, such increase will be treated as an acquisition for the purposes of the Takeovers Code. Accordingly, a Shareholder or a group of Shareholders acting in concert, depending on the level of increase of the Shareholders’ interest, could obtain or consolidate control of the Company and become obliged to make a mandatory offer in accordance with Rule 26 of the Takeovers Code.

As at the Latest Practicable Date, Deson was the only substantial Shareholder (as defined in the Listing Rules) and was, through Super Win, beneficially interested in 479,581,399 Shares representing approximately 55.62% of the issued share capital of the Company. Immediately upon the completion of the Acquisition, Deson will be interested in approximately 74.81% of the issued share capital of the Company as enlarged by the issue of the Consideration Shares (assuming no other issue of KEL Shares in the interim). In the event that the Repurchase Mandate were exercised in full by the Company, the percentage shareholding of Deson in the Company would increase from approximately 74.81% to approximately 83.13%. Such an increase will decrease the shareholding held by the public to less than 25%, however, the Directors have no intention to exercise the Repurchase Mandate to such an extent as would result in the shares held by the public drop below 25%. The Directors are not aware of any consequences which would arise under the Takeovers Code as a consequence of any repurchases pursuant to the Repurchase Mandate. Any purchase of Shares which would result in the amount of Shares held by the public being reduced to less than 25% could only be implemented with the agreement of the Stock Exchange to waive the dealing restriction regarding the public shareholding referred to above. However, the Directors have no present intention to exercise the power to repurchase Shares to the extent that the aggregate amount of the share capital of the Company in public hands would be reduced to less than 25%.

– 82 –

GENERAL INFORMATION

APPENDIX V

The highest and lowest prices at which the Shares have traded on the Stock Exchange during each of the twelve months prior to the printing of this circular were as follows:

	Trading	Price per Share
	Highest	Lowest
	HK$	HK$
2002
April	0.091	0.088
May	0.105	0.080
June	0.120	0.094
July	0.105	0.070
August	0.100	0.088
September	0.095	0.089
October	0.089	0.070
November	0.075	0.060
December	0.080	0.060
2003
January	0.085	0.060
February	0.082	0.048
March	0.080	0.055

4. DISCLOSURE OF INTERESTS

As at the Latest Practicable Date, the interests of the Directors and chief executive of the Company in any shares in or debenture of, or has a short position in shares in the relevant share capital of the Company or any associated corporations (within the meaning of the SFO) which are required to be notified to the Company and the Stock Exchange pursuant to section 347 of the SFO (including interests which they are deemed or taken to have under sections 344 and 345 of the SFO) or which are required, pursuant to section 352 of the SFO, to be entered in the register referred to therein, or which are required pursuant to the Model Code for Securities Transactions by Directors of Listed Companies, to be notified to the Company and the Stock Exchange were as follows:–

(A) Interests in shares of the Company

	Number of Shares	held and nature	of interests
			Percentage of
	Nature of	Number of	the issued
Name of Directors	interest	Shares held	share capital
Tjia Boen Sien	Corporate_(Note 1)_	479,581,399	55.62%
Wang Jing Ning	Corporate_(Note 1)_	479,581,399	55.62%

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GENERAL INFORMATION

APPENDIX V

(B) Interest in convertible notes of the Company

Name of Directors	Nature of interest	Principal Amount
Tjia Boen Sien	Corporate_(Note 1)_	HK$2,389,791
Wang Jing Ning	Corporate_(Note 1)_	HK$2,389,791

(C) Interest in shares and warrants of associated corporations of the Company

Deson

	Nature of	Number of	Number of
Name of Directors	interest	shares held	warrants held
Tjia Boen Sien	Corporate (Note 2)	1,968,750,000	393,750,000
	Personal	215,230,000	24,894,000
Wang Jing Ning	Corporate_(Note 2)_	1,968,750,000	393,750,000
	Personal	15,330,000	3,066,000
Wang Ke Duan	Personal	5,600,000	1,120,000
Keung Kwok Cheung	Personal	7,000,000	1,400,000
Kong Kwok Fai	Personal	5,000,000	1,000,000
Song Sio Chong	Personal	3,000,000	600,000
Siu Man Po	Personal	1,500,000	300,000

(D) Directors’ rights to acquire shares

Deson has granted options to acquire ordinary shares of Deson in favour of certain persons who are Directors pursuant to Deson’s share option scheme. The share options

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GENERAL INFORMATION

APPENDIX V

granted to Directors to subscribe for ordinary shares of Deson which were outstanding at the Latest Practicable Date, were as follows :

	Number of	Date		Exercise
	share options as	of grant		price
	at the Latest	of share	Exercise period	of share
Name of Director	Practicable Date	options	of share options	options
				HK$
Wang Ke Duan	2,000,000	23 Oct 00	23 Apr 01 to 22 Apr 03	0.03840
	3,000,000	23 Jul 01	23 Jan 02 to 22 Jan 04	0.03088
	5,000,000
Tjia Boen Sien	26,000,000	23 Jul 01	23 Jan 02 to 22 Jan 04	0.03088
	35,000,000	29 Aug 01	28 Feb 02 to 28 Feb 04	0.02864
	61,000,000
Wang Jing Ning	3,000,000	23 Oct 00	23 Apr 01 to 22 Apr 03	0.03840
	5,000,000	23 Jul 01	23 Jan 02 to 22 Jan 04	0.03088
	8,000,000
Keung Kwok Cheung	5,000,000	23 Jul 01	23 Jan 02 to 22 Jan 04	0.03088
Kong Kwok Fai	5,000,000	23 Oct 00	23 Apr 01 to 22 Apr 03	0.03840
	4,000,000	23 Jul 01	23 Jan 02 to 22 Jan 04	0.03088
	9,000,000
Song Sio Chong	3,000,000	23 Jul 01	23 Jan 02 to 22 Jan 04	0.03088

Notes:

479,581,399 Shares, representing approximately 55.62% of the issued share capital of the Company and convertible notes with principal amount of HK$2,389,791, are held by Super Win. Approximately 41.09% of the issued share capital of Deson is owned by Sparta Assets Limited (“ Sparta Assets ”), a company incorporated in this British Virgin Islands. Mr. Tjia Boen Sien and Mr. Wang Jing Ning own 80% and 10% of the issued share capital of Sparta Assets respectively.
Sparta Assets was beneficially interested in 1,968,750,000 shares of Deson. Mr. Tjia Boen Sien and Mr. Wang Jing Ning own 80% and 10% of the issued share capital of Sparta Assets, respectively.

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GENERAL INFORMATION

APPENDIX V

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

(i) none of the Directors or any chief executive of the Company has any interest in any shares in or debenture of, or has a short position in shares in the relevant share capital of the Company or any associated corporations (within the meaning of the SFO) which have to be notified to the Company and the Stock Exchange pursuant to section 347 of the SFO (including interests which they are deemed or taken to have under sections 344 and 345 of the SFO) or which are required, pursuant to section 352 of the SFO, to be entered in the register referred to therein, or which are required pursuant to the Model Code for Securities Transactions by Directors of Listed Companies, to have been notified to the Company and the Stock Exchange;
(ii) none of the Directors, Ernst & Young, B.I. Appraisals Limited or First Shanghai had any direct or indirect interest in any assets which had been acquired or disposed of by or leased to any member of the Group since 31 March, 2002 (the date to which the latest published audited consolidated accounts of the Company were made up) or proposed to be so acquired, disposed of or leased;
(iii) there is no contract or arrangement subsisting at the date of this circular in which any of the Directors is materially interested and which is significant in relation to the business of the Group; and
(iv) Ernst & Young, B.I. Appraisals Limited or First Shanghai does not have any shareholding in any member of the Group or any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group.

5. SUBSTANTIAL SHAREHOLDERS

As at the Latest Practicable Date, the following interests of 5% or more in the issued share capital of the Company were recorded in the register of interests in shares and short positions required to be kept by the Company pursuant to section 336 of the SFO:

		Approximate
	Number of	percentage of
Name of Shareholder	Shares held	issued share capital
Super Win	479,581,399_(Note)_	55.62%
Deson Development Holdings Limited	479,581,399_(Note)_	55.62%
Deson	479,581,399_(Note)_	55.62%
Sparta Assets	479,581,399_(Note)_	55.62%

Note: Super Win holds 479,581,399 Shares. By virtue of Super Win being a wholly-owned subsidiary of Deson Development Holdings Limited (“ DDHL ”), and DDHL being a wholly-owned subsidiary of Deson, and Sparta Assets being beneficially interested in 41.09% of the issued share capital of Deson, each of DDHL, Deson and Sparta Assets is deemed to be interested in the 479,581,399 Shares held by Super Win.

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GENERAL INFORMATION

APPENDIX V

According to the register of interests in shares and short positions kept by the Company under section 336 of the SFO and save as disclosed herein, as at the Latest Practicable Date, so far as is known to or can be ascertained after reasonable enquiry by the Directors, no person (not being a Director or chief executive of the Company) other than those whose interests are set out below was directly or indirectly interested in 5% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of the Company or any other member of the Group or held any options in respect of any such capital:

Subsidiaries

Subsidiaries
		Percentage of
		interest held
Name of company	Name of shareholder	in the subsidiary
Kingsly Corporation Limited	Okabe Company	30%
	Limited_(Note)_
Synergy Asia Limited	Faraday Pacific Limited	45%

Note: Okabe Company Limited holds approximately 5.87% of the issued share capital of Deson, and approximately 30% of the issued share capital of Deson Metals Company Limited, an associated company of Deson.

6. LITIGATION

(a) Kenworth Engineering Limited (“ Kenworth ”), a wholly-owned subsidiary of the Company, has commenced litigation in March 2001 against Pilecon Engineering Berhad (“ Pilecon ”), a main contractor of Kenworth, for approximately HK$14,835,400 plus damages in connection with the termination of certain electrical and mechanical sub-contract for construction of treatment and disposal facilities. However, Pilecon made a defence and counterclaim in October 2001 for approximately HK$12,270,600. The proceeding is in a stage of discovery of document.
(b) Kenworth has commenced litigation in August 1999 against China Water & Electricity Corporation (“ China Water ”), a main contractor of Kenworth, for the recovery of insurance loss of approximately HK$423,800. However, China Water made a counterclaim in November 1999 for approximately HK$2,274,700. In January 2000, Kenworth commenced another litigation against China Water for recovery of outstanding payments of approximately HK$1,780,100. Both actions had been consolidated and both Kenworth and China Water are preparing their expert reports for this proceedings.

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GENERAL INFORMATION

APPENDIX V

(c) Kenworth had received a claim of approximately HK$141 million from Nishimatsu Construction Company Limited (“ Nishimatsu ”), a main contractor of Kenworth, for the alleged breach of a subcontract, which alleged breach Kenworth has not admitted. Kenworth has resumed arbitration against Nishimatsu for the outstanding contract sum in respect of the completed work and the losses it incurred from the wrongful termination of the subcontract. The Scheme administrator of the Schemes which became effective on 10 August, 2000 is awaiting the outcome of the matter. The claim, if awarded to Nishimatsu, is subject to the terms and conditions of the Schemes. The Directors, after obtaining the advice in the letters from the Group’s legal counsel dated 14 March, 2003 and 4 April, 2003, consider that Kenworth has valid defences against the claim and are of the view that no material financial loss will be suffered by Kenworth.

Save as disclosed herein, neither the Company nor any other members of the Group is engaged in any litigation or arbitration of material importance and no litigation or claim of material importance is known to the Directors to be pending or threatened against any member of the Group.

7. MATERIAL ADVERSE CHANGE

The Directors are not aware of any material adverse change in the financial or trading positions of the Group since 31 March, 2002, the date to which the latest audited financial statements of the Group were made up.

8. SERVICE CONTRACTS

None of the Directors has any existing or proposed service contracts with the Company or any other member of the Group (excluding contracts expiring or determinable by the Company within one year without payment of compensation other than statutory compensation).

9. MATERIAL CONTRACTS

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

A subscription agreement dated 29 January, 2002 entered into between KEL and Super Win, an indirect wholly-owned subsidiary of Deson, in relation to the subscription of 143,081,399 KEL Shares at a subscription price of HK$0.10 per KEL Share subscripted by Super Win.

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GENERAL INFORMATION

APPENDIX V

A settlement deed dated 7 May, 2002 entered into between Kenworth, a subsidiary of the Company, and the Airport Authority (the “ AA ”), for a claim against AA for approximately HK$105,062,900 plus damages (the “ Claim ”). The Claim was dismissed by the High Court on 16 May, 2002 and both parties agreed to dismiss all the liabilities thereunder except for the Claim by AA against Kenworth of HK$236,602,600 under the Schemes of Kenworth.
The Acquisition Agreement
The Supplemental Agreement

Save as aforesaid, during the two years prior to the date of this circular, neither the Company nor any of its subsidiaries has entered into any contract, not being a contract entered into in the ordinary course of business, which is or may be material.

10. QUALIFICATION OF EXPERTS

The qualifications of the experts who have given opinion in this circular are as follows:

Name	Qualification
Ernst & Young	certified public accountants
First Shanghai	a deemed licensed corporation to carry on a business in
	type 6 regulated activity (advising on corporate finance)
	under the SFO
B.I. Appraisals Limited	an independent firm of chartered surveyors

11. CONSENTS

The experts named in the paragraph headed “Qualification of experts” in this Appendix have given and have not withdrawn their respective written consents to the issue of this circular with copies of their reports or letters (as the case may be) and the references to their names included herein in the form and context in which they are respectively included.

12. GENERAL

(i) The secretary of the Company is Mr. Ong Chi King. He holds a Bachelor degree in business administration from the Hong Kong University of Science and Technology. He is an associate of the Association of Chartered Certified Accountants and an associate of the Hong Kong Society of Accountants.

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GENERAL INFORMATION

APPENDIX V

(ii) The share registrar and transfer office of the Company in Hong Kong is Tengis Limited, Ground Floor, BEA Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong.
(iii) The english text of this circular shall prevail over the Chinese text.

13. DOCUMENTS FOR INSPECTION

Copies of the following documents will be available for inspection during normal business hours at 11th Floor, Nanyang Plaza, 57 Hung To Road, Kwun Tong, Kowloon, Hong Kong up to and including 12 May, 2003:–

(i) the memorandum of association and the bye-laws of the Company;
(ii) the annual reports of the Company for each of the three years ended 31 March, 2002 and the interim report of the Company for the six months ended 30 September, 2002;
(iii) the letter from First Shanghai, the text of which is set out on pages 18 to 26;
(iv) the accountants’ reports on the Billion Treasure Group, the text of which is set out in Appendix III, together with statement of adjustments (if any);
(v) the valuation report for the Properties prepared by B.I. Appraisals Limited, the texts of which are set out in Appendix IV;
(vi) the written consents referred to in the paragraph headed “Consents” in this Appendix; and
(vii) the material contracts referred to in the paragraph headed “Material contracts” in this Appendix.

– 90 –

NOTICE OF SPECIAL GENERAL MEETING

==> picture [111 x 36] intentionally omitted <==

KEL HOLDINGS LIMITED

(Incorporated in Bermuda with limited liability)

NOTICE OF SPECIAL GENERAL MEETING

NOTICE IS HEREBY GIVEN that a special general meeting of KEL Holdings Limited (the “ Company ”) will be held at 11th Floor, Nanyang Plaza, 57 Hung To Road, Kwun Tong, Kowloon, Hong Kong at 11:00 a.m. on Monday, 12 May, 2003 for the purpose of considering and, if thought fit, passing the following resolutions:

SPECIAL RESOLUTION

“ THAT , with effect from the Business Day (as defined below) following the day which this resolution is duly passed and conditional upon (i) the Listing Committee of The Stock Exchange of Hong Kong Limited granting the listing of and permission to deal in the new shares of HK$0.07 each to be issued upon the Capital Reorganisation (as defined in the circular of the Company dated 17 April, 2003) becoming unconditional and effective; and (ii) the publication of the notice in relation to the Capital Reorganisation in accordance with the Companies Act 1981 of Bermuda as amended,
(a) the nominal value of the issued share capital of the Company be reduced from HK$0.10 each to HK$0.07 each so that the issued share capital of the Company of HK$86,227,765.90 is reduced by HK$25,868,329.77 to HK$60,359,436.13;
(b) the nominal value of the authorised share capital of the Company be reduced from HK$0.10 each to HK$0.07 each so that the authorised share capital of the Company of HK$180,000,000 divided into 1,800,000,000 shares of par value of HK$0.10 each is reduced by HK$54,000,000 to HK$126,000,000 of 1,800,000,000 shares of par value of HK$0.07 each;
(c) the authorised share capital of the Company be increased from HK$126,000,000 divided into 1,800,000,000 shares of par value of HK$0.07 each to HK$179,999,999.97 divided into 2,571,428,571 shares of par value of HK$0.07 each;
(d) the sum of HK$25,868,329.77 arising from the reduction of issued share capital will be applied to set off against an equivalent amount of the audited accumulated loss of the Company as at 31 March 2002;
(e) the Directors be and is hereby authorised generally to do all such acts, deeds and things as they shall, in their absolute discretion, deem appropriate to effect and implement any of the foregoing; and

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NOTICE OF SPECIAL GENERAL MEETING

(f) for the purpose of this resolution, “Business Day” means a day (other than a Saturday or a Sunday) on which banks in Hong Kong are generally open for business.”

ORDINARY RESOLUTIONS

“ THAT the Acquisition Agreement and the Supplemental Agreement (as defined and described in the circular of the Company dated 17 April, 2003), copies of which are produced to the meeting marked “A” and signed by the chairman of the meeting for the purpose of identification, and the transactions contemplated in or incidental to the Acquisition Agreement and the Supplemental Agreement be and are hereby approved, confirmed and ratified; and the directors of the Company or any one or more of them be and are hereby authorised on behalf of the Company:
(a) to sign, seal, execute, perfect and deliver all such documents and do all such deeds, acts, matters and things as they may in their absolute discretion consider necessary or desirable for the purpose of or in connection with the implementation of the Acquisition Agreement, the Supplemental Agreement and all transactions contemplated thereunder;
(b) subject to completion of the Acquisition Agreement and the Supplemental Agreement and the passing of the resolution numbered 1 set out in the notice convening this meeting, to issue up to 657,142,857 new ordinary shares of HK$0.07 each in the capital of the Company (“Consideration Shares”), credited as fully paid and ranking pari passu in all respects with all the existing issued ordinary shares in the capital of the Company, subject to and in accordance with the terms of the Acquisition Agreement and the Supplemental Agreement;
(c) to exercise or enforce all of the rights of the Company under the Acquisition Agreement and the Supplemental Agreement; and
(d) to complete the Acquisition Agreement and the Supplemental Agreement in accordance with its terms.”
“ THAT , subject to the passing of resolutions numbered 1 and 2 set out in the notice convening this meeting:
(a) subject to paragraph (c) of this Resolution, the exercise by the directors of the Company during the Relevant Period (as hereinafter defined) of all the powers of the Company to allot, issue and deal with additional shares in the capital of the Company and to allot, issue or grant securities convertible into such shares, or options, warrants or similar rights to subscribe for any such shares or such convertible securities and to make or grant offers, agreements and options which might require the exercise of such power whether during or after the end of the Relevant Period be and is hereby generally and unconditionally approved;

– 92 –

NOTICE OF SPECIAL GENERAL MEETING

(b) the approval in paragraph (a) of this Resolution shall be in addition to any other authorisations given to the directors of the Company and shall authorise such directors during the Relevant Period to make or grant offers, agreements and options which might require the exercise of such power after the end of the Relevant Period;
(c) the aggregate nominal amount of share capital allotted or agreed conditionally or unconditionally to be allotted (whether pursuant to an option or otherwise) and issued by the directors of the Company pursuant to the approval given in paragraph (a) of this Resolution, otherwise than pursuant to (i) a Rights Issue; (ii) an issue of shares as scrip dividends pursuant to the bye-laws of the Company from time to time; (iii) an issue of shares under any option scheme or similar arrangement for the time being adopted for the grant or issue to employees of the Company and/or any of its subsidiaries of shares or rights to acquire shares of the Company; or (iv) an issue of shares pursuant to the exercise of rights of subscription or conversion under terms of any warrants issued by the Company or any securities which are convertible into shares in the Company, shall not exceed 20% of the aggregate of (1) the nominal amount of the issued share capital of the Company at the date of passing of this Resolution and (2) the nominal amount of those Consideration Shares (as such term is defined in resolution numbered 2 set out in the notice convening this meeting) actually issued on completion of and pursuant to the terms of the Acquisition Agreement and the Supplemental Agreement (as such term is defined in resolution numbered 2 set out in the notice convening this meeting), and the said approval shall be limited accordingly;
(d) subject to the passing of each of paragraphs (a), (b) and (c) of this Resolution, any prior approvals of the kind referred to in paragraphs (a), (b) and (c) of this Resolution which had been granted to the directors of the Company and which are still in effect be and are hereby revoked; and
(e) for the purpose of this Resolution:

“Relevant Period” means the period from the passing of this Resolution until whichever is the earlier of:

(i) the conclusion of the next annual general meeting of the Company;
(ii) the expiration of the period within which the next annual general meeting of the Company is required by law or the bye-laws of the Company to be held; and
(iii) the date on which the authority set out in this Resolution is revoked or varied by an ordinary resolution of the shareholders of the Company in general meeting.

– 93 –

NOTICE OF SPECIAL GENERAL MEETING

“Rights Issue” means an offer of shares open for a period fixed by the directors of the Company to the holders of shares of the Company on the register on a fixed record date in proportion to their then holdings of such shares (subject to such exclusion or other arrangements as the directors of the Company may deem necessary or expedient in relation to fractional entitlements or having regard to any restrictions or obligations under the laws of, or the requirements of any recognised regulatory body or any stock exchange in, any territory outside Hong Kong applicable to the Company).”

4. “ THAT :

(a) Subject to paragraph (b) below, the exercise by the directors of the Company during the Relevant Period (as hereinafter defined) of all the powers of the Company to repurchase shares of the Company on The Stock Exchange of Hong Kong Limited or on any other stock exchange on which the shares of the Company may be listed and recognised for this purpose by the Securities and Futures Commission and The Stock Exchange of Hong Kong Limited under the Hong Kong Code on Share Repurchases and, subject to and in accordance with all applicable laws and the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, be and is hereby generally and unconditionally approved;
(b) the aggregate nominal amount of the shares of the Company which may be repurchased pursuant to the approval in paragraph (a) above shall not exceed 10% of the aggregate of (1) the nominal amount of the share capital of the Company in issue at the date of passing of this Resolution and (2) the nominal amount of those Consideration Shares (as such term is defined in resolution numbered 2 set out in the notice convening this meeting) actually issued on completion of and pursuant to the terms of the Acquisition Agreement and the Supplemental Agreement (as such term is defined in resolution numbered 2 set out in the notice convening this meeting), and the said approval shall be limited accordingly;
(c) subject to the passing of each of the paragraphs (a) and (b) of this Resolution, any prior approvals of the kind referred to in paragraphs (a) and (b) of this Resolution which had been granted to the directors of the Company and which are still in effect be and are hereby revoked; and
(d) for the purpose of this Resolution:

“Relevant Period” means the period from the passing of this Resolution until whichever is the earlier of:

(i) the conclusion of the next annual general meeting of the Company;

– 94 –

NOTICE OF SPECIAL GENERAL MEETING

(ii) the expiration of the period within which the next annual general meeting of the Company is required by law or the bye-laws of the Company to be held; or
(iii) the revocation or variation of the authority given under this Resolution by ordinary resolution of the shareholders of the Company in general meeting.”
“ THAT conditional upon the passing of resolutions numbered 3 and 4 set out in the notice convening this meeting, the new issue mandate granted to the directors of the Company to exercise the powers of the Company to allot, issue and otherwise deal with shares of the Company pursuant to resolution numbered 3 set out in the notice convening this meeting be and is hereby extended by the addition to the aggregate nominal amount of the share capital of the Company which may be allotted by the directors of the Company pursuant to such new issue mandate an amount representing the aggregate nominal amount of the share capital of the Company repurchased by the Company under the authority granted pursuant to resolution numbered 4 set out in the notice convening this meeting, provided that such amount shall not exceed 10% of the aggregate of (1) the nominal amount of the share capital of the Company in issue at the date of passing of this Resolution and (2) the nominal amount of those Consideration Shares (as such term is defined in resolution numbered 2 set out in the notice convening this meeting) actually issued on completion of and pursuant to the terms of the Acquisition Agreement and the Supplemental Agreement (as such term is defined in resolution numbered 2 set out in the notice convening this meeting).”

By order of the Board Ong Chi King Company Secretary

Hong Kong, 17 April, 2003

Notes:

A member entitled to attend and vote at the special general meeting is entitled to appoint one or more proxies to attend and, on a poll, vote in his stead. A proxy need not be a member of the Company.
A form of proxy for use at the meeting is enclosed.
To be valid, a proxy form together with any power of attorney or other authority, if any, under which it is signed, or a notarially certified copy of such power or authority, must be lodged with the Company’s branch share registrar in Hong Kong, Tengis Limited, Ground Floor, BEA Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong not later than 48 hours before the time fixed for holding the meeting or any adjournment thereof. Completion and return of the form of proxy will not preclude shareholders of the Company from attending and voting in person at the special general meeting or any adjourned meeting should they so wish.

– 95 –

AI assistant

CR Construction Group Holdings Limited — Proxy Solicitation & Information Statement 2003

50019_rns_2003-04-17_6e6156aa-3853-4740-b422-12c37bda7db7.pdf

KEL HOLDINGS LIMITED

MAJOR AND CONNECTED TRANSACTION

PROPOSED ACQUISITION OF THE ENTIRE ISSUED SHARE CAPITAL OF BILLION TREASURE HOLDINGS LIMITED AND RELATED SHAREHOLDER’S LOAN

PROPOSED CAPITAL REORGANISATION AND GRANT OF GENERAL MANDATES TO ISSUE AND REPURCHASE SHARES OF THE COMPANY

Independent Financial Adviser to the Independent Shareholders

First Shanghai Capital Limited

CONTENTS

EXPECTED TIMETABLE

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

KEL HOLDINGS LIMITED

MAJOR AND CONNECTED TRANSACTION

PROPOSED ACQUISITION OF THE ENTIRE ISSUED SHARE CAPITAL OF BILLION TREASURE HOLDINGS LIMITED AND RELATED SHAREHOLDER’S LOAN

PROPOSED CAPITAL REORGANISATION AND GRANT OF GENERAL MANDATES TO ISSUE AND REPURCHASE SHARES OF THE COMPANY

INTRODUCTION

LETTER FROM THE BOARD

THE ACQUISITION AGREEMENT

Date of the Acquisition Agreement

Parties and assets involved

Consideration

Issue price of the Consideration Shares

Conditions precedent

Completion

INFORMATION ON BILLION TREASURE

INFORMATION ON BLESS HONOUR

REASONS FOR THE ACQUISITION

LETTER FROM THE BOARD

EFFECTS OF THE ACQUISITION

Shareholding structure

LETTER FROM THE BOARD

Net tangible assets

Earnings

CAPITAL REORGANISATION

Proposal for the Capital Reorganisation

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Free exchange of certificates for KEL New Shares

Adjustment in relation to the convertible notes

LETTER FROM THE BOARD

APPLICATION FOR LISTING

GENERAL MANDATE TO REPURCHASE NEW SHARES

GENERAL MANDATE TO ISSUE NEW SHARES

LETTER FROM THE BOARD

GENERAL

SPECIAL GENERAL MEETING

LETTER FROM THE BOARD

RECOMMENDATION

ADDITIONAL INFORMATION

KEL HOLDINGS LIMITED

Tjia Boen Sien

First Shanghai Capital Limited

MAJOR AND CONNECTED TRANSACTION PROPOSED ACQUISITION OF THE ENTIRE ISSUED SHARE CAPITAL OF BILLION TREASURE HOLDINGS LIMITED AND RELATED SHAREHOLDER’S LOAN

INTRODUCTION

LETTER FROM FIRST SHANGHAI

PRINCIPAL FACTORS AND REASONS CONSIDERED

1. Background of the Group

LETTER FROM FIRST SHANGHAI

2. Reasons for the Acquisition

3. Information on the assets to be acquired

LETTER FROM FIRST SHANGHAI

4. Basis of consideration

LETTER FROM FIRST SHANGHAI

Valuation of the Properties

Consideration and payment terms for the Acquisition

5. Issue price of the Consideration Shares (the “Issue Price”)

6. Dilution effect on the Independent Shareholders’ interests

7. Financial effects of the Acquisition on the Group

(a) NTAV

(b) Gearing ratio

(c) Earnings

(d) Working capital

RECOMMENDATION

First Shanghai Capital Limited

1. SHARE CAPITAL

2. INDEBTEDNESS

CR Construction Group Holdings Limited Proxy Solicitation & Information Statement 2003