CR Construction Group Holdings Limited - Proxy Solicitation & Information Statement 2004

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 or to the bank, stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser or the transferee.

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

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KEL HOLDINGS LIMITED 基電控股有限公司 []*

(Incorporated in Bermuda with limited liability)

(Stock Code : 681)

(1) VERY SUBSTANTIAL ACQUISITION – PROPOSED ACQUISITION BY A SUBSIDIARY OF KEL HOLDINGS LIMITED OF A 51% SHAREHOLDING IN XIN HUA RESOURCE INVESTMENT LIMITED AND THE RELATED SHAREHOLDER’S LOAN; AND
(2) PROPOSED CHANGE OF NAME

A letter from the Board is set out on pages 4 to 10 of this circular.

A notice convening the Special General Meeting of the Company to be held at 10:30 a.m. on Wednesday, 20 October 2004 at The Ritz-Carlton Hong Kong, Salon II, The Ballroom, Ballroom Level, 3 Connaught Road, Central, Hong Kong is set out on pages 95 to 96 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 Special General Meeting, you are requested to complete the accompanying form of proxy in accordance with the instructions printed thereon and return the same to the Company’s branch share registrar in Hong Kong, Tengis Limited at Ground Floor, Bank of East Asia 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 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.

28 September 2004

* For identification only

		Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		1
Letter from the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		4
Appendix I	Financial information on the Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	11
Appendix II	Accountants’ reports on the Xin Hua Group. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	43
Appendix III	Financial information of the Enlarged Group. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	65
Appendix IV	Valuation report on the Enlarged Group’s interests in land and buildings. . . . .	77
Appendix V	General information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	91
Notice of Special General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		95

– i –

DEFINITIONS

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

“Announcement” the announcement dated 6 August 2004 issued jointly by Deson and the Company “associate(s)” has the meaning ascribed to it under the Listing Rules “Board” the board of Directors “Brilliant China” Brilliant China Investments Limited, a company incorporated in the British Virgin Islands with limited liability and is a direct wholly-owned subsidiary of the Company “Business Day” a day (other than a Saturday, a Sunday or a day on which typhoon signal no. 8 or a “black” rainstorm warning is hoisted in Hong Kong) on which banks are generally open for business in Hong Kong “Camture” Camture Limited, a company incorporated in the British Virgin Islands with limited liability which is wholly-owned by Ms. Han “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 which is a subsidiary of Deson “connected person” has the meaning ascribed to it under the Listing Rules “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 “Deson Group” Deson and its subsidiaries “Directors” the directors of the Company “Enlarged Group” the Company and its subsidiaries immediately after completion of the Second Xin Hua Acquisition “First Xin Hua Acquisition” the acquisition by Brilliant China of a 49% shareholding in Xin Hua and the related shareholders’ loans, details of which are set out in the circular of the Company dated 31 March 2004 “Glass Product” 綿竹

Mian Zhu City Hongsen Glass Products Company Limited (綿竹市紅森玻璃製品有限責任公司 ), a limited liability company established in the PRC which is owned as to 70% by Hong Sen

the Company and its subsidiaries

“Group” the Company and its subsidiaries “HK$” Hong Kong dollars, the lawful currency of Hong Kong “Hong Kong” the Hong Kong Special Administrative Region of the People’s Republic of China

“Hong Sen”

Mian Zhu City Hong Sen Natural Gas Co., Ltd. (綿竹市紅森天然氣有限責任公司 ), a limited liability company established in the PRC which is owned as to 99% by Zhong Min and 1% by Yan Ting

– 1 –

DEFINITIONS

“Latest Practicable Date”	24 September 2004, 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
“Long Stop Date”	30 October 2004, or such other date as the parties to the Second
	Xin Hua Acquisition Agreement may agree
“Long Teng”	Mian Zhu City Long Teng Gas Installation Co. Ltd. (綿竹市龍騰
	燃氣安裝有限責任公司), a limited liability company established
	in the PRC which is owned as to 99% by Zhong Min and 1% by
	Yan Ting
“Ms. Han”	Ms. Han Fengyun (韓鳳雲), who is beneficially interested in the
	entire issued share capital of Camture and who is an independent
	third party not connected with the Company or any of its
	connected persons
“PRC”	the People’s Republic of China
“RMB”	Renminbi Yuan, the lawful currency of the PRC

“Second Xin Hua Acquisition” the acquisition by Brilliant China of a 51% shareholding in Xin Hua and the Xin Hua Shareholder’s Loan from Camture pursuant to the terms of the Second Xin Hua Acquisition Agreement
“Second Xin Hua Acquisition the conditional sale and purchase agreement dated 2 Agreement” August 2004 entered into between Camture, Brilliant China, Ms. Han and the Company in respect of the Second Xin Hua Acquisition
“SFO” Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong)
“Share(s)” share(s) of HK$0.07 each in the capital of the Company “Shareholder(s)” holder(s) of Shares “Special General Meeting” the special general meeting of the Company to be held at 10:30 a.m. on Wednesday, 20 October 2004 at The Ritz-Carlton Hong Kong, Salon II, The Ballroom, Ballroom Level, 3 Connaught Road, Central, Hong Kong, notice of which is set out on pages 95 to 96 of this circular
“Stock Exchange”

The Stock Exchange of Hong Kong Limited

“subsidiary”

has the meaning ascribed to it under the Companies Ordinance (Chapter 32 of the Laws of Hong Kong) and “subsidiaries” shall be construed accordingly

“Super Win”

Super Win Development Limited, a company incorporated in the British Virgin Islands with limited liability which is an indirect wholly-owned subsidiary of Deson and which is interested in approximately 52.08% of the entire issued share capital of the Company

– 2 –

DEFINITIONS

“Xin Hua” Xin Hua Resource Investment Limited, a company incorporated in the British Virgin Islands with limited liability which is owned as to 51% by Camture
“Xin Hua Group” Xin Hua and its subsidiaries, including Zhong Min, Hong Sen, Long Teng, Yan Ting and Glass Product
“Xin Hua Sale Shares” 25,500 shares of Xin Hua held by and registered in the name of Camture which represent 51% of the entire issued share capital of Xin Hua as at the Latest Practicable Date
“Xin Hua Shareholder’s Loan” the total amount advanced by Camture to Xin Hua by way of interest-free shareholder’s loan which stands at HK$27,817,442.64 as at the Latest Practicable Date
“Yan Ting” LongXin (YanTing) Natural Gas Company Limited (鹽亭龍興燃氣有限責任公司 ), a limited liability company established in the PRC which is owned as to 99% by Zhong Min
“Zhong Min” Beijing Zhong Min Gas Co. Ltd. (北京中民燃氣有限公司 ), a wholly-owned foreign enterprise established in the PRC and a wholly-owned subsidiary of Xin Hua
“%” per cent.

– 3 –

LETTER FROM THE BOARD

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KEL HOLDINGS LIMITED 基電控股有限公司 *

(Incorporated in Bermuda with limited liability)

(Stock Code: 681)

Executive Directors: 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 Mr. Mo Shikang Independent non-executive Directors: Mr. Siu Man Po Ms. Wong Sin Yee

Registered office: Canon’s Court 22 Victoria Street Hamilton HM12 Bermuda

Head office and principal place of business in Hong Kong: 11th Floor Nanyang Plaza 57 Hung To Road Kwun Tong Kowloon Hong Kong 28 September 2004

To the Shareholders

Dear Sirs,

(1) VERY SUBSTANTIAL ACQUISITION – PROPOSED ACQUISITION BY A SUBSIDIARY OF KEL HOLDINGS LIMITED OF A 51% SHAREHOLDING IN XIN HUA RESOURCE INVESTMENT LIMITED AND THE RELATED SHAREHOLDER’S LOAN; AND
(2) PROPOSED CHANGE OF NAME

A. INTRODUCTION

As announced by the Company on 18 February 2004, Brilliant China (a wholly-owned subsidiary of the Company) has entered into an agreement with respect to the purchase of a 49% shareholding in the issued share capital of Xin Hua. As a result of the First Xin Hua Acquisition, which was completed on 30 April 2004, Brilliant China became a 49% shareholder of Xin Hua. Please refer to the Company’s circular dated 31 March 2004 for details of the First Xin Hua Acquisition and other transactions which were completed on 30 April 2004.

It was jointly announced by the Company and Deson on 6 August 2004 that Brilliant China has conditionally agreed to acquire a 51% shareholding in Xin Hua and the Xin Hua Shareholder’s Loan from Camture and upon the completion of the Second Xin Hua Acquisition, the approval of the Shareholders as well as that of the Registrar of Companies in Bermuda, the name of the Company was proposed to be changed to “Chinese People Gas Holdings Company Limited” and the Chinese translation of the name of the Company be changed from “基電控股有限公司 ” to “中民燃氣控股有限公司 ” for identification purpose only.

The purpose of this circular is (i) to give the Shareholders further information on the terms of the Second Xin Hua Acquisition Agreement; (ii) to convene the Special General Meeting to seek the approval of the Shareholders with respect to the Second Xin Hua Acquisition and the proposed change of the name of the Company; and (iii) to provide the Shareholders with such information concerning the Company as required by the Listing Rules.

* For identification only

– 4 –

LETTER FROM THE BOARD

B. THE SECOND XIN HUA ACQUISITION AGREEMENT DATED 2 AUGUST 2004

Date

2 August 2004

Parties

Camture (as seller and warrantor)

To the best of the knowledge, information and belief of the Directors having made all reasonable enquiries, Camture and its ultimate beneficial owner are third parties independent of the Company and any connected person of the Company.

Brilliant China (as purchaser)
Ms. Han (as warrantor)
the Company

Assets to be acquired

Pursuant to the Second Xin Hua Acquisition Agreement, Brilliant China has conditionally agreed to acquire from Camture the Xin Hua Sale Shares and the Xin Hua Shareholder’s Loan.

The Xin Hua Sale Shares to be purchased by Brilliant China will not be subject to any subsequent transfer restrictions pursuant to the terms of the Second Xin Hua Acquisition Agreement.

Consideration

The total consideration for the Second Xin Hua Acquisition is HK$65,000,000, of which HK$37,182,557 is attributable to the sale and purchase of the Xin Hua Sale Shares and HK$27,817,443 is attributable to (and is equal to the face value as at the date of the Second Xin Hua Acquisition Agreement, which Camture and Ms. Han have undertaken to maintain up to completion) the Xin Hua Shareholder’s Loan.

The consideration is payable by Brilliant China in cash pursuant to the terms of the Second Xin Hua Acquisition Agreement and will be paid out of the internal resources of the Group.

The total consideration for the purchase of the Xin Hua Sale Shares and the Xin Hua Shareholder’s Loan under the Second Xin Hua Acquisition Agreement, being HK$65,000,000, represents a premium of approximately 111.70% to the consideration for the purchase of an aggregate 49% shareholding in Xin Hua and the related shareholders’ loans under the First Xin Hua Acquisition of HK$29,500,000.

The consideration for the Second Xin Hua Acquisition was arrived at after arm’s length negotiations between all parties to the Second Xin Hua Acquisition Agreement by reference to the expected future growth potential of the Xin Hua Group as illustrated below.

The unaudited consolidated profits before tax of Hong Sen and Long Teng for the five months ended 31 May, 2004 was approximately HK$1,762,000 and HK$199,000 respectively, which represent an increase of 41.10% and 2.71% when compared with the unaudited consolidated profits before tax of Hong Sen and Long Teng for a period of five months during 2003 of approximately HK$2,997,000 and HK$465,000 respectively.

The unaudited consolidated profits after tax of Hong Sen and Long Teng for the five months ended 31 May, 2004 was HK$1,402,000 and HK$170,000 respectively which represent an increase of 84.78% and 33.33% when compared with the unaudited consolidated profits after tax of Hong Sen and Long Teng for a period of five months during 2003 of approximately HK$1,821,000 and HK$306,000 respectively.

– 5 –

LETTER FROM THE BOARD

The Directors consider that the consideration for the Second Xin Hua Acquisition is fair and reasonable after taking into account the following factors: (i) the growth potential of the Xin Hua Group as mentioned above; (ii) the acquisition of a 51% shareholding in Xin Hua represents the acquisition of the controlling interest in, and resulting in a 100% control of, the Xin Hua Group; and (iii) in May 2004, Xin Hua, through Zhong Min, increased its interest in Hong Sen and Long Teng from 33% to 99% and acquired a 99% interest in Yan Ting, thereby strengthening the asset base of the Xin Hua Group.

Conditions precedent

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

any or all approvals, consents and waivers necessary or otherwise appropriate under the Listing Rules for the consummation of the transactions contemplated under the Second Xin Hua Acquisition Agreement by Brilliant China, including but not limited to the approval by the Shareholders, shall have been obtained; and
Brilliant China and its professional advisors, including accountants, legal advisors and valuers, having been allowed full access to all Books and Records (as defined in the Second Xin Hua Acquisition Agreement) of each member of the Xin Hua Group and Camture having supplied or procured the supply of all information reasonably required by Brilliant China for the purpose of a due diligence review and its professional advisors and, as a result of the due diligence review, Brilliant China is satisfied as to the results of, among other things, the financial position of each member of the Xin Hua Group.

In the event that the conditions to the completion of the Second Xin Hua Acquisition (as set out in the Second Xin Hua Acquisition Agreement) are not fulfilled on or before the Long Stop Date, the Second Xin Hua Acquisition Agreement shall lapse.

Completion

Completion of the Second Xin Hua Acquisition shall take place on the second Business Day immediately following the day upon which all of the above conditions for the Second Xin Hua Acquisition shall have been fulfilled, or such other date as the relevant parties may agree in writing but, in any event, no later than the Long Stop Date.

Subsequent to the completion of the Second Xin Hua Acquisition, Xin Hua will become a whollyowned subsidiary of Brilliant China and a member of the Group.

Information on the Xin Hua Group

Shareholding

As at the Latest Practicable Date, Xin Hua is owned as to 49% by Brilliant China and 51% by Camture.

Xin Hua, a company incorporated in the British Virgin Islands, is an investment holding company and is beneficially interested in the entire equity interest in Zhong Min. Apart from its interests in Zhong Min, Xin Hua does not carry on any other business or has any other material assets, and has no material liabilities.

Zhong Min, a wholly foreign owned enterprise established in the PRC, is beneficially interested in 99% of each of Hong Sen, Long Teng and Yan Ting. Hong Sen is interested in 70% of Glass Product.

– 6 –

LETTER FROM THE BOARD

Principal business activities

The principal business activities of each of Hong Sen, Long Teng, Yan Ting and Glass Product are as follows:

Hong Sen : Distribution and supply of piped natural gas in the PRC Long Teng : Installation of natural gas distribution facilities in the PRC Yan Ting : Distribution and supply of piped natural gas and installation of natural gas distribution facilities in the PRC Glass Product : Manufacturing and sale of glass products in the PRC

Financial information

Details of the unaudited net assets and profits/(loss) before and after tax [(Note 1)] of each of Zhong Min, Hong Sen (consolidated), Long Teng and Yan Ting are set out in the table below:

	For the year ended	For the year ended	For the year ended
Name of company	31 December, 2003	31 December, 2002
	(HK$)		(HK$)
Zhong Min
Loss before and after tax	(1,697,000)	(Note 2)	N/A	(Note 3)
Net assets	51,612,000		N/A	(Note 3)

Hong Sen (consolidated figures)
Profit before tax	2,997,000		1,053,000	(Note 4)
Profit after tax	1,821,000		602,000	(Note 4)
Net assets	19,853,000		11,234,000

Long Teng
Profit before tax	465,000		393,000	(Note 5)
Profit after tax	306,000		252,000	(Note 5)
Net assets	8,014,000		5,110,000

Yan Ting
Profit before tax	257,000		220,000
Profit after tax	238,000		220,000
Net assets	2,298,000		3,125,000

Note 1: Translated from RMB to HK$ at an exchange rate of HK$1 to RMB 1.06.

Note 2: As Zhong Min was incorporated on 11 July 2003, these figures only represent the operating results of a period of less than six months from the date of its incorporation.
Note 3: As Zhong Min was incorporated on 11 July 2003, no comparative figures are available for the year ended 31 December 2002.
Note 4: As Hong Sen was incorporated on 6 September 2002, these figures only represent the operating results of a period of less than four months from the date of its incorporation.

Note 5: As Long Teng was incorporated on 23 April 2002, these figures only represent the operating results of a period of just over eight months from the date of its incorporation.

The audited consolidated net loss of the Xin Hua Group from 2 June 2003 (date of incorporation of Xin Hua) to 31 December 2003 was approximately HK$1,695,000. During this period, Xin Hua only owned a 33% interest in the share capital of each of Hong Sen and Long Teng and had no interest in Yan Ting.

– 7 –

LETTER FROM THE BOARD

The audited consolidated net asset value of the Xin Hua Group as at 31 December 2003 was approximately HK$51,564,000, without taking into account as liability the total shareholder’s loan due to its then shareholder as at that date of approximately HK$52,722,000. As the shareholder’s loan was provided by the then shareholder to Xin Hua for long term investment purpose, the relevant amount will be classified by Xin Hua as “long-term liabilities” in the accounts of the Xin Hua Group.

Board composition

As at the Latest Practicable Date, the board of Xin Hua comprises two directors, Ms. Han and Mr. Mo Shikang (莫世康 ), who was appointed to the board of Xin Hua by Brilliant China subsequent to the First Xin Hua Acquisition. Upon the completion of the Second Xin Hua Acquisition, Ms. Han will retire from her directorship and the board of Xin Hua will be made up of four directors comprising Mr. Mo Shikang (莫世康 ) and three other representatives to be nominated by Brilliant China.

The aggregate of the remuneration payable to and benefits in kind receivable by the directors of Xin Hua subsequent to the completion of the Second Xin Hua Acquisition will be reviewed and determined by its board in accordance with its power under the articles of association.

Reasons for the Second Xin Hua Acquisition

As mentioned in the Announcement, the Group had for a number of years been principally engaged in the provision of electrical and mechanical engineering services and the leasing of construction machinery and equipment. The Group had been experiencing difficult market conditions during the past few years owing to the weak local economy and the keen competition in the construction industry.

Since the beginning of 2003, the Directors had been exploring new business opportunities which would generate revenue and cash flow and provide a reliable source of income to the Group. The Directors noted that the PRC had historically relied heavily on coal as its primary energy source but the PRC government in recent years had strongly encouraged the use of other more environmental friendly forms of fuel such as natural gas to combat the pollution and environmental damage caused by coal combustion.

As a result, the Directors considered that the growth prospects of the Xin Hua Group (which was then comprised only a 33% interests in each of Hong Sen and Long Teng) were promising and the Company effected the First Xin Hua Acquisition.

The financial performance of the Xin Hua Group and its business expansion since the completion of the First Xin Hua Acquisition confirms the view of the Directors. The unaudited consolidated profits before tax of Hong Sen and Long Teng for the five months ended 31 May 2004 was approximately HK$1,762,000 and HK$199,000, respectively, which represent an increase of 41.10% and 2.71% when compared with the unaudited consolidated profits before tax of Hong Sen and Long Teng for the period of five months during the year ended 31 December 2003 of approximately HK$2,997,000 and HK$465,000, respectively. The unaudited consolidated profits after tax of Hong Sen and Long Teng for the same period was HK$1,402,000 and HK$170,000, respectively which represent an increase of 84.78% and 33.33% when compared with the unaudited consolidated profits after tax of Hong Sen and Long Teng for the period of five months during the year ended 31 December 2003 of approximately HK$1,821,000 and HK$306,000, respectively. In May 2004, Xin Hua, through Zhong Min, increased its interest in Hong Sen and Long Teng from 33% to 99% and acquired a 99% interest in Yan Ting, thereby strengthening the asset base of the Xin Hua Group. The Directors are confident that by acquiring the remaining 51% interest in Xin Hua, it will bring additional earnings and long term value to the Group. After completion of the Second Xin Hua Acquisition, the net loss attributable to shareholders is expected to increase from HK$9,132,000 to HK$11,972,000 and the total assets and total liabilities of the Group are expected to increase from HK$72,053,000 and HK$38,985,000 to HK$204,596,000 and HK$178,216,000 respectively. Details of the effect of the Second Xin Hua Acquisition on the earnings and assets and liabilities of the Company is set out in Appendix III to this circular.

The Directors believe that the terms of the Second Xin Hua Acquisition Agreement are fair and reasonable and in the interest of the Shareholders as a whole.

– 8 –

LETTER FROM THE BOARD

Listing Rules implications of the Second Xin Hua Acquisition for the Company

Pursuant to Rule 14.22 of the Listing Rules, the Company is required to aggregate the First Xin Hua Acquisition and the Second Xin Hua Acquisition in calculating the relevant percentage ratios under Rule 14.06 of the Listing Rules, as a result of which the Second Xin Hua Acquisition constitutes a very substantial acquisition of the Company and is therefore subject to the approval of the Shareholders at the Special General Meeting. No Shareholders or their associates will be required to abstain from voting at the Special General Meeting pursuant to Rule 14.49 of the Listing Rules.

C. PROPOSED CHANGE OF NAME OF THE COMPANY

The principal businesses of the Company are investment in the distribution and supply of piped natural gas business in the PRC and the holding and leasing of properties in the PRC.

To reflect the Company’s increased investment in the distribution and supply of piped natural gas business in the PRC upon completion of the Second Xin Hua Acquisition, it is proposed that upon completion of the Second Xin Hua Acquisition, the approval of the Shareholders as well as that of the Registrar of Companies in Bermuda, the name of the Company be changed to “Chinese People Gas Holdings Company Limited” and the Chinese translation of the name of the Company be changed from “基電控股有限公司 ” to “中民燃氣控股有限公司 ” for identification purpose only.

The proposed change of name will become effective after the new name has been entered into the register maintained by the Registrar of Companies in Bermuda in place of the existing name. A subsequent notification of change of name is required to be made to the Registrar of Companies in Hong Kong. A further announcement will be made by the Company in compliance with the Listing Rules when the proposed name change becomes effective.

The proposed change of name will not affect any of the rights of the Shareholders. All share certificates of the Company in issue bearing the existing name of the Company will continue to be effective as documents of title to the Shares and will continue to be valid for trading, settlement and registration purposes. Once the proposed change of name becomes effective, any new share certificates of the Company will be issued in the new name. Accordingly, there will not be any arrangement for an exchange of existing share certificates of the Company for new share certificates bearing the new name of the Company.

D. RECOMMENDATION

Having regard to the information described above, the Board is of the opinion that the Second Xin Hua Acquisition and the proposed change of the Company’s name are in the interest 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.

E. SPECIAL GENERAL MEETING

A notice of the Special General Meeting to be held at 10:30 a.m. on Wednesday, 20 October 2004 at The Ritz-Carlton Hong Kong, Salon II, The Ballroom, Ballroom Level, 3 Connaught Road, Central, Hong Kong at which relevant resolutions will be proposed to approve the Second Xin Hua Acquisition and the proposed name change is set out on pages 95 to 96 of this circular.

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 the accompanying form of proxy in accordance with the instructions printed thereon and return the same to the Company’s branch share registrar in Hong Kong, Tengis Limited at Ground Floor, Bank of East Asia 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 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.

– 9 –

LETTER FROM THE BOARD

No Shareholders or their associates will be required to abstain from voting at the Special General Meeting pursuant to Rule 14.49 of the Listing Rules.

Pursuant to the bye-laws of the Company, a resolution put to vote at a general meeting shall be decided on a show of hands unless a poll is required by the rules of the Stock Exchange or (before or on the declaration of the result of the show of hands or on withdrawal of any other demand for a poll) is duly demanded. A poll may be demanded by:

(a) the Chairman of the meeting;
(b) at least three members present in person or by a duly authorized corporate representative or by proxy and entitled to vote at the meeting;
(c) any member or members present in person or by a duly authorized corporate representative or by proxy and representing in the aggregate not less than one-tenth of the total voting rights of all members having the right to attend and vote at the meeting; or
(d) any member or members present in person or by a duly authorized corporate representative or by proxy and holding shares conferring a right to attend and vote at the meeting on which there have been paid up sums in the aggregate equal to not less than one-tenth of the total sum paid up on all shares conferring that right.

F. 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

– 10 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

1. SUMMARY OF FINANCIAL INFORMATION OF THE GROUP

The following is a summary of the audited financial results of the Group for the three financial years ended 31 March 2004, as extracted from the audited financial statements of the Group for the relevant periods.

Consolidated Profit and Loss Account

		Year ended 31	March
	2004	2003	2002
	HK$’000	HK$’000	HK$’000
Turnover	38,243	31,136	19,117

Loss before tax	(9,024)	(8,805)	(10,874)
Tax	(135)	–	–
Loss before minority interests	(9,159)	(8,805)	(10,874)
Minority interests	27	45	14
Net loss attributable to shareholders	(9,132)	(8,760)	(10,860)

Consolidated Assets, Liabilities, and Minority Interests
		As at 31 March
	2004	2003	2002
	HK$’000	HK$’000	HK$’000
Total assets	72,053	17,274	22,459
Total liabilities	(38,711)	(20,420)	(16,803)
Minority interests	(274)	(683)	(728)
Net assets/(liabilities)	33,068	(3,829)	4,928

– 11 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

2. 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 2004 together with notes thereto.

CONSOLIDATED PROFIT AND LOSS ACCOUNT

Notes TURNOVER 6, 7 Cost of sales 7 Gross profit 7 Other revenue and gains 6 Administrative expenses Write-back of provision for doubtful debts LOSS FROM OPERATING ACTIVITIES 8 Finance costs 9 Share of loss of a jointly-controlled entity LOSS BEFORE TAX Tax 11 LOSS BEFORE MINORITY INTERESTS Minority interests NET LOSS FROM ORDINARY ACTIVITIES ATTRIBUTABLE TO SHAREHOLDERS 12 LOSS PER SHARE 13 Basic Diluted	2004 HK$’000 38,243 (35,246) 2,997 1,424 (15,135) 2,233 (8,481) (518) (25) (9,024) (135) (9,159) 27 (9,132) 0.63 cents N/A	2003 HK$’000 31,136 (27,757) 3,379 161 (15,219) 3,086 (8,593) (212) – (8,805) – (8,805) 45 (8,760) 1.02 cents N/A

– 12 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

CONSOLIDATED BALANCE SHEET

Notes NON-CURRENT ASSETS Fixed assets 14 Interest in a jointly-controlled entity 15 CURRENT ASSETS Due from fellow subsidiaries 17 Gross amounts due from contract customers 18 Properties held for sale 19 Trade receivables 20 Other receivables Pledged time deposits 21 Cash and bank balances 21 CURRENT LIABILITIES Trade and bills payables 22 Retention money payable Tax payable Other payables and accruals Provision for scheme debts 23 Gross amounts due to contract customers 18 Interest-bearing bank borrowings 24 Due to fellow subsidiaries 17 Due to ultimate holding company 17 Convertible notes 25 NET CURRENT ASSETS/(LIABILITIES) TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Interest-bearing bank borrowings 24 MINORITY INTERESTS CAPITAL AND RESERVES Issued capital 27 Reserves 29	2004 HK$’000 279 556 835 1,695 750 46,569 5,945 9,925 5,283 1,051 71,218 3,736 1,146 12 3,759 1,047 4,947 4,778 11,652 202 – 31,279 39,939 40,774 (7,432) (274) 33,068 106,380 (73,312) 33,068	2003 HK$’000 367 – 367 499 1,003 – 6,534 1,507 5,122 2,242 16,907 1,149 717 – 1,231 1,047 6,480 – 121 – 9,675 20,420 (3,513) (3,146) – (683) (3,829) 86,228 (90,057) (3,829)

– 13 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

CONSOLIDATED SUMMARY STATEMENT OF CHANGES IN EQUITY

Notes Total equity at 1 April Exercise of warrants 27 Exercise of convertible notes, including share premium 25, 27, 29 Issue of new shares 27 Net loss for the year 29 Total equity at 31 March	2004 HK$’000 (3,829) – 29 46,000 (9,132) 33,068	2003 HK$’000 4,928 3 – – (8,760) (3,829)

– 14 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

CONSOLIDATED CASH FLOW STATEMENT

Notes CASH FLOWS FROM OPERATING ACTIVITIES Loss before tax Adjustments for: Finance costs 9 Share of loss of a jointly-controlled entity Interest income 6 Depreciation 8 Gain on disposal of fixed assets 8 Operating loss before working capital changes Increase in amount due from fellow subsidiaries Increase in amount due from a jointly-controlled entity Decrease in gross amounts due from contract customers Decrease/(increase) in trade receivables Increase in other receivables Increase/(decrease) in trade and bills payables Increase in retention money payable Increase in other payables and accruals Increase/(decrease) in gross amounts due to contract customers Increase in amount due to fellow subsidiaries Increase in amount due to the ultimate holding company Cash used in operations Overseas taxes paid Net cash outflow from operating activities CASH FLOWS FROM INVESTING ACTIVITIES Interest received Purchases of fixed assets 14 Proceeds from disposal of fixed assets Capital contribution to a jointly-controlled entity Acquisition of subsidiaries 30 Repayment to the minority shareholders Decrease/(increase) in pledged time deposits Net cash inflow/(outflow) from investing activities	2004 HK$’000 (9,024) 518 25 (62) 125 (2) (8,420) (824) (81) 253 589 (8,306) 2,587 429 1,941 (1,533) 11,531 202 (1,632) (135) (1,767) 62 (37) 2 (500) (454) (382) (161) (1,470)	2003 HK$’000 (8,805) 212 – (109) 163 (4) (8,543) (499) – 350 (1,952) (190) (320) 349 483 3,466 121 – (6,735) – (6,735) 109 (142) 4 – – – 378 349

– 15 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

CONSOLIDATED CASH FLOW STATEMENT (CONTINUED)

Notes CASH FLOWS FROM FINANCING ACTIVITIES Interest paid Exercise of warrants 27 Redemption of convertible notes 25 Increase/(decrease) in trust receipt loans New bank loans Repayment of bank loans Net cash outflow from financing activities NET DECREASE IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at beginning of year CASH AND CASH EQUIVALENTS AT END OF YEAR ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS Cash and bank balances 21 Bank overdrafts 24	2004 HK$’000 (518) – (9,646) 261 8,500 (383) (1,786) (5,023) 2,242 (2,781) 1,051 (3,832) (2,781)	2003 HK$’000 (212) 3 – (482) – – (691) (7,077) 9,319 2,242 2,242 – 2,242

– 16 –

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

BALANCE SHEET

Notes NON-CURRENT ASSETS Interests in subsidiaries 16 CURRENT ASSETS Other receivables Cash and cash equivalents 21 CURRENT LIABILITIES Provision for scheme debts 23 Other payables and accruals Due to ultimate holding company 17 Due to a fellow subsidiary 17 Convertible notes 25 NET CURRENT LIABILITIES CAPITAL AND RESERVES Issued capital 27 Reserves 29	2004 HK$’000 28,812 3,314 28 3,342 1,047 738 202 8,819 – 10,806 (7,464) 21,348 106,380 (85,032) 21,348	2003 HK$’000 (11,167) 151 32 183 1,047 458 – – 9,675 11,180 (10,997) (22,164) 86,228 (108,392) (22,164)

– 17 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

1. CORPORATE INFORMATION

During the year, the Group was engaged in the following activities:

(a) the provision of electrical and mechanical engineering services, and

(b) property holding and investment.

Upon completion of the transactions as detailed in note 34 to the financial statements, the Group ceased to be engaged in the provision of electrical and mechanical engineering services. The principal activities of the Group and its associates have changed to:

(a) distribution, supply and installation of piped natural gas; and
(b) property holding and investment.

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 (the “Stock Exchange”), is the Company’s ultimate holding company.

2. CORPORATE UPDATE

In prior years, the Company and certain of its subsidiaries entered into a debt restructuring and share subscription agreement (the “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 established 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 single cash payment to the scheme creditor in the amount of HK$312.50 and the Company agreed to issue to the 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 convertible notes would bear interest at a rate of 2% per annum and would be 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. For the Schemes of the Company and Kenworth Group, all admitted creditors have been paid their entitlements in full in accordance with terms of the Schemes and the creditors were notified that the Schemes of the Company and Kenworth Group had been terminated on 13 November 2002. The convertible notes expired on 1 September 2003 at which date they were redeemed by the Company. The settlement arrangement for the portion of payment that would have been paid by way of convertible notes to the remaining creditors as at 1 September 2003 under the Kenworth Scheme would be determined when their claims are admitted. 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 had 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, they 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. Such determinations by the adjudicators are final, conclusive and binding on the Group and the proving creditors.

During the year, the Group paid an additional deposit of HK$2,614,000 to the Scheme Administrator, who had also since made distributions to certain admitted creditors of the Kenworth Scheme. As at 31 March 2004, the deposit of HK$2,614,000 was kept by the Scheme Administrator and the balance has been included in other receivables in the financial statements.

The Scheme Administrator is still in the process of assessing the remaining claims and this process has not been completed as at the date of approval of these financial statements.

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

3. IMPACT OF A REVISED HONG KONG STATEMENT OF STANDARD ACCOUNTING PRACTICE (“HKSSAP”)

HKSSAP 12 (Revised): “Income taxes” is effective for the first time for the current year’s financial statements. HKSSAP 12 prescribes the accounting for income taxes payable or recoverable, arising from the taxable profit or loss for the current period (current tax); and income taxes payable or recoverable in future periods, principally arising from taxable and deductible temporary differences and the carry forward of unused tax losses (deferred tax).

The HKSSAP has had no significant impact for these financial statements on the amounts recorded for income taxes. However, the related note disclosures are now more extensive than previously required. These are detailed in note 11 to the financial statements and include a reconciliation between the accounting loss and the tax expense for the year.

– 18 –

FINANCIAL INFORMATION ON 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 2004. 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.

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

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

Joint venture companies

A joint venture company is a company set up by contractual arrangement, whereby the Group and other parties undertake an economic activity. The joint venture company operates as a separate entity in which the Group and the other parties have an interest.

The joint venture agreement between the venturers stipulates the capital contributions of the joint venture parties, the duration of the joint venture and the basis on which the assets are to be realised upon its dissolution. The profits and losses from the joint venture company’s operations and any distributions of surplus assets are shared by the venturers, either in proportion to their respective capital contributions, or in accordance with the terms of the joint venture agreement.

A joint venture company is treated as:

(a) a subsidiary, if the Company has unilateral control, directly or indirectly, over the joint venture company;
(b) a jointly-controlled entity, if the Company does not have unilateral control, but has joint control, directly or indirectly, over the joint venture company;
(c) an associate, if the Company does not have unilateral or joint control, but holds, directly or indirectly, generally not less than 20% of the joint venture company’s registered capital and is in a position to exercise significant influence over the joint venture company; or
(d) a long term investment, if the Company holds, directly or indirectly, less than 20% of the joint venture company’s registered capital and has neither joint control of, nor is in a position to exercise significant influence over, the joint venture company.

Jointly-controlled entities

A jointly-controlled entity is a joint venture company which is subject to joint control, resulting in none of the participating parties having unilateral control over the economic activity of the jointly-controlled entity.

The Group’s share of the post-acquisition results and reserves of a jointly-controlled entity is included in the consolidated profit and loss account and consolidated reserves, respectively. The Group’s interests in the jointly-controlled entity are stated in the consolidated balance sheet at the Group’s share of net assets under the equity method of accounting, less any impairment losses.

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.

– 19 –

FINANCIAL INFORMATION ON 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, 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 foreseeable losses as soon as they are anticipated by management;
(b) rental income, on a time proportion basis over the lease terms; and
(c) interest income, on a time proportion basis taking into account the principal outstanding and the effective interest rate applicable.

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 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 a fixed asset, the expenditure is capitalised as an additional cost of that asset.

Depreciation is calculated on the straight-line basis to write off the cost of each asset over its estimated useful life. 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%

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.

Properties held for sale

Properties held for sale are stated at the lower of cost and net realisable value. Cost includes all direct costs attributable to such properties. Net realisable value is determined by reference to the estimated sales proceeds in the ordinary course of business less any estimated costs to be incurred on disposal.

Construction contracts

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

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 qualifying assets, which necessarily 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 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 exchange rates ruling at the transaction dates. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the applicable exchange rates ruling at that date. Exchange differences are dealt with in the profit and loss account.

– 20 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

On consolidation, the financial statements of overseas subsidiaries are translated into Hong Kong dollars using the net investment method. The profit and loss accounts of the overseas subsidiaries are translated into Hong Kong dollars at the weighted average exchange rates for the year, and their balance sheets are translated into Hong Kong dollars at the exchange rates ruling at the balance sheet date. The resulting translation differences are included in the exchange fluctuation reserve.

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

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.

Income tax

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

Deferred tax liabilities are recognised for all taxable temporary differences:

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

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

except where the deferred tax asset relating to the deductible temporary differences arises from the initial recognition of an asset or liability and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
in respect of deductible temporary differences associated with investments in subsidiaries and interests in joint ventures, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.

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

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

Employee benefits

Paid leave carried forward

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

– 21 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Pension scheme

The Group operates a defined contribution Mandatory Provident Fund retirement benefits scheme (the “MPF Scheme”) under the Mandatory Provident Fund Schemes Ordinance, for those employees who are eligible to participate in the MPF Scheme. Contributions are made based on a percentage of the employees’ basic salaries and are charged to the profit and loss account as they become payable in accordance with the rules of the MPF Scheme. The assets of the MPF Scheme are held separately from those of the Group in an independently administered fund. The Group’s employer contributions vest fully with the employees when contributed into the MPF Scheme.

Share option scheme

The Company operates a share option scheme for the purpose of providing incentives and rewards to eligible participants who contribute to the success of the Group’s operations. The financial impact of share options granted under the share option scheme is not recorded in the Company’s or the Group’s balance sheet until such time as the options are exercised, and no charge is recorded in the profit and loss account or balance sheet for their cost. Upon the exercise of share options, the resulting shares issued are recorded by the Company as additional share capital at the nominal value of the shares, and the excess of the exercise price per share over the nominal value of the shares is recorded by the Company in the share premium account. Options which are cancelled prior to their exercise date, or which lapse, are deleted from the register of outstanding options.

Cash and cash equivalents

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

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

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

The Group’s operating businesses are structured and managed separately, according to the nature of their operations and the products and services they provide. Each of the Group’s business segments represents a strategic business unit that offers products and services which are subject to risks and returns that are different from those of the 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;
(b) the packaged/design and build contracts segment provides a comprehensive range of building services and has substantially greater scope for undertaking project co-ordination and design management to meet clients’ basic concepts and requirements;
(c) the environmental engineering services segment comprises the provision of waste water handling, water treatment and sewage treatment services; and
(d) the property holding and investment segment comprises the Group’s rental income from the leasing of properties held for sale.

During the year, the Group entered into an agreement to dispose of certain subsidiaries of the Group. Accordingly, the business segments (a), (b) and (c) above will be discontinued after year end upon completion of the transactions. Details of the discontinuing operations have been disclosed in note 7 to the financial statements.

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

– 22 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

(a) Business segments

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

Group

Segment revenue: Sales to external customers Other revenue Segment results Interest income and unallocated gains Write-back of provision for doubtful debts Unallocated expenses Loss from operating activities Finance costs Share of loss of a jointly-controlled entity Loss before tax Tax Loss before minority interests Minority interests Net loss from ordinary activities attributable to shareholders	Property holding and investment 2004 2003 HK$’000 HK$’000 – – 1,351 – 1,351 – 904 – – – – –	Discontinuing operations Packaged / Environmental Building services design and engineering (single-trade) build contracts services 2004 2003 2004 2003 2004 2003 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 10,107 18,713 26,433 9,060 1,703 3,363 2 – 6 – 1 – 10,109 18,713 26,439 9,060 1,704 3,363 (2,014) (4,682) (7,190) (3,731) (553) (1,104) 461 3,086 1,772 – – – – – – – (25) –	Consolidated 2004 2003 HK$’000 HK$’000 38,243 31,136 1,360 – 39,603 31,136 (8,853) (9,517) 64 161 2,233 3,086 (1,925) (2,323) (8,481) (8,593) (518) (212) (25) – (9,024) (8,805) (135) – (9,159) (8,805) 27 45 (9,132) (8,760)	Consolidated 2004 2003 HK$’000 HK$’000 38,243 31,136 1,360 – 39,603 31,136 (8,853) (9,517) 64 161 2,233 3,086 (1,925) (2,323) (8,481) (8,593) (518) (212) (25) – (9,024) (8,805) (135) – (9,159) (8,805) 27 45 (9,132) (8,760)
				31,136
				(9,517) 161 3,086 (2,323)
				(8,593) (212) –
				(8,805) –
				(8,805) 45
				(8,760)

– 23 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Segment assets Interests in a jointly- controlled entity Unallocated assets Bank overdrafts included in segment assets Total assets Segment liabilities Unallocated liabilities Bank overdrafts included in segment assets Total liabilities Other segment information: Depreciation Unallocated amounts Capital expenditure Unallocated amounts	Property holding and investment 2004 2003 HK$’000 HK$’000 46,752 – – – – – 8,940 – – – – – – –	Discontinuing operations Packaged / Environmental Building services design and engineering (single-trade) build contracts services 2004 2003 2004 2003 2004 2003 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 4,528 6,046 4,492 1,407 1,492 1,307 – – – – 556 – 1,013 – 2,648 – 171 – 3,097 5,872 6,446 1,873 659 275 1,013 – 2,648 – 171 – 66 67 – – – – 11 8 – – – –	Consolidated 2004 2003 HK$’000 HK$’000 57,264 8,760 556 – 10,401 8,514 3,832 – 72,053 17,274 19,142 8,020 15,737 12,400 3,832 – 38,711 20,420 66 67 59 96 125 163 11 8 26 134 37 142	Consolidated 2004 2003 HK$’000 HK$’000 57,264 8,760 556 – 10,401 8,514 3,832 – 72,053 17,274 19,142 8,020 15,737 12,400 3,832 – 38,711 20,420 66 67 59 96 125 163 11 8 26 134 37 142
				17,274
				8,020 12,400 –
				20,420
				67 96
				163
				8 134
				142

(b) Geographical segments

The following tables present revenue, and certain asset and expenditure information for the Group’s geographical segments.

Group

	Hong	Kong	Mainland	China	Consolidated	Consolidated
	2004	2003	2004	2003	2004	2003
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
Segment revenue:
Sales to external
customers	38,243	31,136	–	–	38,243	31,136
Other segment information:
Segment assets	21,469	17,274	46,752	–	68,221	17,274
Bank overdrafts
included in
segment assets	3,832	–	–	–	3,832	–
					72,053	17,274
Capital expenditure	37	142	–	–	37	142

– 24 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

6. TURNOVER, OTHER REVENUE AND GAINS

The Group’s turnover represents an appropriate proportion of the contract revenue of construction contracts. An analysis of the Group’s turnover, other revenue and gains is as follows:

Turnover Construction contracts Other revenue and gains Interest income Gain on disposal of fixed assets Rental income from properties held for sale Other	2004 HK$’000 38,243 62 2 1,351 9 1,424	2003 HK$’000 31,136

		109 – – 52
		161

7. DISCONTINUING OPERATIONS

On 18 February 2004, the Group entered into an agreement to dispose of its entire 100% equity interest in Kenworth Group and its related shareholder’s loan to Deson for a consideration of HK$7,000,000. Upon completion of the disposal of Kenworth Group, the Group will discontinue its business in the provision of electrical and mechanical engineering services, which includes building services, packaged/design and build contracts and environmental engineering services. The transaction was completed on 30 April 2004.

The turnover, other revenue, expenses and results of the discontinuing operations for the two years ended 31 March 2004 are as follows:

TURNOVER Cost of sales Gross profit Other revenue and gains Administrative expenses Write-back of provision for doubtful debts LOSS FROM OPERATING ACTIVITIES Finance costs Share of loss of a jointly-controlled entity LOSS BEFORE MINORITY INTERESTS Minority interests NET LOSS ATTRIBUTABLE TO SHAREHOLDERS	2004 HK$’000 38,243 (35,246) 2,997 73 (12,799) 2,233 (7,496) (182) (25) (7,703) 27 (7,676)	2003 HK$’000 31,136 (27,757)
		3,379 156 (12,884) 3,086
		(6,263) (19) –
		(6,282) 45
		(6,237)

The net cash flows from the discontinuing operations are as follows:

Operating Investing Financing	2004 HK$’000 (4,202) (1,016) 79 (5,139)	2003 HK$’000 (6,662) 349 (694)
		(7,007)

– 25 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

The carrying amounts of the total assets and liabilities, including balances with group companies, relating to the discontinuing operations are as follows:

Total assets Total liabilities Minority interests Net liabilities of subsidiaries disposed of Balances with group companies	2004 HK$’000 31,723 (527,374) (274) (495,925) 497,257	2003 HK$’000 17,091 (504,855) (683)
		(488,447)
		495,376

8. LOSS FROM OPERATING ACTIVITIES

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

Staff costs (including directors’ remuneration_(note 10)_): Wages and salaries Pension scheme contributions Less: Forfeited contributions Net pension scheme contributions* Auditors’ remuneration Depreciation Minimum lease payments under operating leases for land and buildings Gain on disposal of fixed assets	2004 HK$’000 7,518 180 – 180 7,698 440 125 418 (2)	2003 HK$’000 9,519 228 (223)
		5
		9,524
		400 163 783 (4)

As at 31 March 2004, there were no forfeited contributions available to offset future employer contributions to the pension scheme (2003: Nil).

9. FINANCE COSTS

Interest on convertible notes Interest on bank loans and overdrafts: wholly repayable within five years wholly repayable after five years	2004 HK$’000 81 182 255 518	2003 HK$’000 194 18 –
		212

– 26 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

10. DIRECTORS’ AND EMPLOYEES’ REMUNERATION

(a) Directors’ remuneration disclosed pursuant to the Listing Rules and Section 161 of the Hong Kong Companies Ordinance are as follows:

Executive directors: Fees Salaries, allowances and benefits in kind Pension scheme contributions Independent non-executive directors: Fees	Group 2004 HK$’000 – 1,603 12 1,615 60 1,675	2003 HK$’000 – 1,603 12
		1,615
		60
		1,675

The number of directors whose remuneration fell within the following band is as follows:

	Number of directors
	2004	2003
Nil to HK$1,000,000	8	8

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

(b) Employees’ remuneration

The five highest paid employees during the year include three (2003: three) directors, details of whose remuneration are set out in (a) above. Details of the remuneration of the remaining two (2003: two) nondirector, highest paid employees are as follows:

Salaries, allowances and benefits in kind Pension scheme contributions	Group 2004 HK$’000 1,095 24 1,119	2003 HK$’000 1,035 37
		1,072

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

	Number	of employees
	2004	2003
Nil to HK$1,000,000	2	2

– 27 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

11. TAX

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

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.


	2004	2003
	HK$’000	HK$’000
Current year provision – elsewhere	135	–

A reconciliation of the tax credit applicable to loss before tax using the statutory rate for the countries in which the Company and its subsidiaries and jointly-controlled entity are domiciled to the tax expense at the effective tax rates, and a reconciliation of the applicable rates (i.e., the statutory tax rate) to the effective rates, are as follows:

Group	2004		2003
	HK$’000	%	HK$’000	%
Loss before tax	(9,024)		(8,805)
Tax at the domestic rates
applicable to profits/losses
in the countries concerned	(1,481)	16.4	(1,409)	16.0
Income not subject to tax	(83)	0.9	(209)	2.4
Expenses not deductible for tax	122	(1.3)	–	–
Unrecognised tax losses	1,577	(17.5)	1,618	(18.4)
Tax charge at the Group’s
effective rate	135	(1.5)	–	–

12. NET LOSS FROM ORDINARY ACTIVITIES ATTRIBUTABLE TO SHAREHOLDERS

The net loss from ordinary activities attributable to shareholders for the year ended 31 March 2004 dealt with in the financial statements of the Company was HK$2,517,000 (2003: HK$30,403,000).

13. LOSS PER SHARE

The calculation of basic loss per share is based on the net loss attributable to shareholders for the year of HK$9,132,000 (2003: HK$8,760,000) and the weighted average number of 1,440,382,000 (2003: 862,268,000) shares in issue during the year.

Diluted loss per share amounts for the years ended 31 March 2004 and 2003 have not been disclosed, as the convertible notes expired during the year and the amount outstanding in the prior year had anti-dilutive effects on the basic loss per share for both years.

– 28 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

14. FIXED ASSETS

Group

Group
Plant, Furniture, machinery fixtures and Leasehold and office workshop improvements equipment equipment HK$’000 HK$’000 HK$’000 Cost: At beginning of year 582 1,934 1,652 Additions 3 24 10 Disposals – (125) (6) At 31 March 2004 585 1,833 1,656 Accumulated depreciation: At beginning of year 573 1,766 1,462 Provided during the year 9 50 66 Disposals – (125) (6) At 31 March 2004 582 1,691 1,522 Net book value: At 31 March 2004 3 142 134 At 31 March 2003 9 168 190	Motor vehicles HK$’000 43 – – 43 43 – – 43 – –	Total HK$’000 4,211 37 (131
		4,117
		3,844 125 (131
		3,838
		279
		367

15. INTEREST IN A JOINTLY-CONTROLLED ENTITY

Share of net assets Due from a jointly-controlled entity	Group 2004 HK$’000 475 81 556	2003 HK$’000 – –
		–

The amount due from the jointly-controlled entity is unsecured, interest-free and has no fixed term of repayment.

Particulars of the jointly-controlled entity are as follows:

		Place of	Percentage of	Percentage of
	Business	registration	Ownership	Voting	Profit	Principal
Name	structure	and operations	interest	power	sharing	activities
Kenworth-Watfield	Corporate	Hong Kong	50	50	50	Provision of
Joint Venture Limited						electrical and
						mechanical
						engineering
						services

The jointly-controlled entity is held through a subsidiary.

– 29 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

16. INTERESTS IN SUBSIDIARIES

Unlisted shares, at cost Due from subsidiaries Due to subsidiaries Less: Provision for impairment	Company 2004 2003 HK$’000 HK$’000 118,655 112,891 548,698 506,583 (19,067) (11,167 648,286 608,307 (619,474) (619,474 28,812 (11,167	Company 2004 2003 HK$’000 HK$’000 118,655 112,891 548,698 506,583 (19,067) (11,167 648,286 608,307 (619,474) (619,474 28,812 (11,167
		608,307 (619,474
		(11,167

The balances with 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
	Place of	issued ordinary/	of	equity
	incorporation/	registered	attributable to				Principal
Name	operations	share capital	the Company				activities
			2004	2003
Kenworth Group Limited	British Virgin	US$3	100	100			Investment
	Islands/						holding
	Hong Kong
Kenworth Engineering	Hong Kong	Ordinary shares	100*	100*			Provision of
Limited		HK$5,374,140					electrical and
		Preference shares					mechanical
		HK$20,000,000					engineering
							services
Kingsly Corporation	Hong Kong	HK$2,340,000	70*		70*		Trading of
Limited							construction
							material
Bless Honour Limited #	Hong Kong/	HK$2	100*			–	Property
	Mainland China						holding and
							investment

Held indirectly through subsidiaries
# Acquired during the year

During the year, the Group acquired certain subsidiaries from Deson, the ultimate holding company of the Company. Further details of this acquisition are included in notes 30 and 33 to the financial statements.

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.

17. DUE FROM/(TO) GROUP COMPANIES

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

– 30 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

18. CONSTRUCTION CONTRACTS

Notes Gross amount due from contract customers (i) Gross amount due to contract customers (ii) Contract costs incurred plus recognised profits less recognised losses to date (iii) Less: Progress billings received and receivable (iii)	2004 HK$’000 750 (4,947) (4,197) 993,935 (998,132) (4,197)	2003 HK$’000 1,003 (6,480
		(5,477
		964,690 (970,167
		(5,477

Notes:

(i) At 31 March 2004, retentions held by customers for contract works included in trade receivables under current assets amounted to HK$947,000 (2003: HK$807,000).
(ii) At 31 March 2004, there were no advance received from customers for contract works included in trade payables under current liabilities (2003: Nil).
(iii) 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 the final completion accounts for these terminated, ceased or inactive construction contracts.

19. PROPERTIES HELD FOR SALE

	2004	2003
	HK$’000	HK$’000
Properties held for sale	46,569	–

The properties held for sale are leased to third parties under operating leases, further details of which are included in note 32(a) to the financial statements.

The Group’s properties held for sale are pledged to secure bank loans granted to the Group (note 24).

Details of the properties held for sale of the Company are as follows:

Location Tenure Use The 24th, 27th-28th floors and The property has Office/ 19 car park spaces a term of 45 years, commercial at Zhongda Square, commencing on 989 Dongfang Road, 8 September 1998 Lujiazhui, and expiring on Pudong District, 21 December 2043 Shanghai, People’s Republic of China

– 31 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

20. TRADE RECEIVABLES

An aged analysis of trade receivables as at the balance sheet date is as follows:

Balance HK$’000 4,132 439 177 38,702	2004 Net Provision balance HK$’000 HK$’000 – 4,132 – 439 – 177 (38,452) 250	Balance HK$’000 4,631 904 237 39,968	2003 Net Provision balance HK$’000 HK$’000 – 4,631 (74) 830 (6) 231 (39,933) 35
43,450 26,620	(38,452) 4,998 (25,673) 947	45,740 26,768	(40,013) 5,727 (25,961) 807

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.

21. CASH AND CASH EQUIVALENTS AND PLEDGED TIME DEPOSITS

	Group		Company	Company
	2004	2003	2004	2003
	HK$’000	HK$’000	HK$’000	HK$’000
Cash and bank balances	1,051	2,242	28	32
Time deposits	5,283	5,122	–	–
	6,334	7,364	28	32
Less: Time deposits pledged for
bank credit facilities	(5,283)	(5,122)	–	–
Cash and cash equivalents	1,051	2,242	28	32

22. TRADE AND BILLS PAYABLES

An aged analysis of trade and bills payables as at the balance sheet date is as follows:


			2004	2003
			HK$’000	HK$’000
Current to	90	days	3,736	1,149

23. PROVISION FOR SCHEME DEBTS

The Group had made a scheme debt provision in prior years. The Company’s directors have estimated and provided for the expected claims of the scheme debts on a case-by-case basis.

– 32 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

24. INTEREST-BEARING BANK BORROWINGS

Bank overdrafts, secured Bank loans, secured Trust receipt loans, secured Bank overdrafts repayable on demand Bank loans repayable: Within one year or on demand In the second year In the third to fifth years, inclusive Beyond five years Trust receipt loans repayable within one year Portion classified as current liabilities Long term portion	Group 2004 HK$’000 3,832 8,117 261 12,210 3,832 685 721 2,405 4,306 8,117 261 12,210 (4,778) 7,432	2003 HK$’000 – – –
		–
		–
		– – – –
		–
		–
		– –
		–

The Group’s bank loans and banking facilities are secured by:

(i) the Group’s properties held for sale situated in Mainland China, which had an aggregate carrying value at the balance sheet date of HK$46,569,000 (2003: Nil); and

(ii) the pledge of the Group’s time deposits amounting to HK$5,283,000 (2003: HK$5,122,000).

25. CONVERTIBLE NOTES

At beginning of year Exercise of convertible notes Redemption of convertible notes At 31 March	Group and Company 2004 2003 HK$’000 HK$’000 9,675 9,675 (29) – (9,646) – – 9,675	Group and Company 2004 2003 HK$’000 HK$’000 9,675 9,675 (29) – (9,646) – – 9,675
		9,675

Under the Schemes, as further 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 creditors on 30 August 2000. The notes bore interest at a rate of 2% per annum and would be 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 was subject to certain adjustments as defined in the note instrument.

Upon maturity of the convertible notes on 1 September 2003, the Company repaid the principal amount outstanding to the convertible note holders.

– 33 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

26. DEFERRED TAX

The Group has tax losses arising in Hong Kong of HK$89,346,000 (2003: HK$87,721,000) that are available indefinitely for offsetting against future taxable profits of the companies in which the losses arose. Deferred tax assets have not been recognised in respect of these losses as they have arisen in subsidiaries that have been lossmaking for some time.

27. SHARE CAPITAL

	2004	2003
Shares	HK$’000	HK$’000
Authorised:
2,571,428,571 (2003: 1,800,000,000) shares at
HK$0.07 (2003: HK$0.10) each	180,000	180,000
Issued and fully paid:
1,519,715,736 (2003: 862,277,659) ordinary shares
of HK$0.07 (2003: HK$0.10) each	106,380	86,228

Details of the movements in the authorised share capital were as follows:

Notes At 1 April 2002 and 1 April 2003 Capital reduction (ii) Increase in authorised capital (iii) At 31 March 2004	Number of shares 1,800,000,000 – 771,428,571 2,571,428,571	Amount HK$’000 180,000 (54,000) 54,000
		180,000

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

Notes At 1 April 2002 Exercise of warrants At 31 March 2003 and 1 April 2003 Capital reduction (i) Issue of new shares 30 Exercise of convertible notes (iv) At 31 March 2004	Number of shares 862,251,459 26,200 862,277,659 – 657,142,857 295,220 1,519,715,736	Amount HK$’000 86,225 3
		86,228 (25,868) 46,000 20
		106,380

(i) Pursuant to certain special resolutions passed at a special general meeting of the Company held on 12 May 2003 and board resolutions passed on the same date, a capital reorganisation was implemented on 13 May 2003. The nominal value of each issued ordinary share of the Company was reduced from HK$0.10 to HK$0.07 by the cancellation of HK$0.03 of the paid-up capital (the “Capital Reduction”), and the credit arising from the Capital Reduction of approximately HK$25,868,000 was applied to set off against the accumulated losses of the Company.
(ii) Upon the Capital Reduction becoming effective on 12 May 2003, the authorised share capital of the Company was reduced to HK$126,000,000, comprising 1,800,000,000 shares of HK$0.07 each.
(iii) On the same date, the authorised share capital of the Company was increased to HK$180,000,000 by the creation of 771,428,571 new shares of HK$0.07 each.

– 34 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

(iv) The conversion rights attaching to HK$29,522 convertible notes were exercised at the conversion price of HK$0.10 per share, resulting in the issuance of 295,220 new ordinary shares of HK$0.07 each. Share premium of HK$8,857 has been included in the share premium account.

Share options

Details of the Company’s share option scheme are included in note 28 to the financial statements.

At 31 March 2004, no share option was outstanding under the share option scheme and none of the Company’s directors or the Group’s employees were granted share options during the year.

28. SHARE OPTION SCHEME

The Company operates a share option scheme (the “Option Scheme”) for the purpose of providing incentives and rewards to eligible participants who contribute to the success of the Group’s operations. Eligible participants of the Option Scheme include full-time employees (including executive directors) of the Group. The Option Scheme became effective on 4 April 1997 and, unless otherwise amended or altered, will remain in force for 10 years from that date.

The maximum number of unexercised share options currently permitted to be granted under the Option Scheme is an amount equivalent, upon their exercise, to 10% of the shares of the Company in issue at any time. The maximum number of shares issuable under share options to each eligible participant in the Option Scheme is limited to 25% of the aggregate number of shares for the time being issued and are issuable under the Option Scheme.

The offer of a grant of share options may be accepted within 28 days from the date of the offer, upon payment of a nominal consideration of HK$1 in total by the grantee. The exercise period of the share options granted is determinable by the directors, and commences after a certain vesting period and ends on a date which is not later than three years from the date of the offer of the share options or the expiry date of the Option Scheme, if earlier.

The exercise price of the share options is determinable by the directors at their discretion and will be the higher of a price being not less than 80% of the average of the closing price of the shares on the Stock Exchange for the five trading days immediately preceding the offer date, and the nominal value of the shares of the Company.

On 1 September 2001, the Stock Exchange amended Chapter 17 (Share Option Schemes) of the Listing Rules. In accordance with the revised rules, it is possible for the Company to grant further options from its existing scheme only if the options granted are in accordance with the requirements of the new rules of Chapter 17.

At 31 March 2004, no share option was outstanding under the Option Scheme and none of the Company’s directors or the Group’s employees were granted share options during the year.

– 35 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

29. RESERVES

	Share
	premium	Contributed	Accumulated	General
	account	surplus	losses	reserve	Total
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
Group
At 1 April 2002	–	89,800	(661,756)	490,659	(81,297)
Net loss for the year	–	–	(8,760)	–	(8,760)
At 31 March 2003 and
1 April 2003	–	89,800	(670,516)	490,659	(90,057)
Exercise of convertible notes	9	–	–	–	9
Capital reduction	–	–	25,868	–	25,868
Transfer to accumulated losses	–	–	490,659	(490,659)	–
Net loss for the year	–	–	(9,132)	–	(9,132)
At 31 March 2004	9	89,800	(163,121)	–	(73,312)
Reserves retained by:
Company and subsidiaries	9	89,800	(163,096)	–	(73,287)
A jointly-controlled entity	–	–	(25)	–	(25)
At 31 March 2004	9	89,800	(163,121)	–	(73,312)
Company and subsidiaries
at 31 March 2003	–	89,800	(670,516)	490,659	(90,057)
Company
At 1 April 2002	–	101,689	(670,337)	490,659	(77,989)
Net loss for the year	–	–	(30,403)	–	(30,403)
At 31 March 2003 and
1 April 2003	–	101,689	(700,740)	490,659	(108,392)
Exercise of convertible notes	9	–	–	–	9
Capital reduction	–	–	25,868	–	25,868
Transfer to accumulated losses	–	–	490,659	(490,659)	–
Net loss for the year	–	–	(2,517)	–	(2,517)
At 31 March 2004	9	101,689	(186,730)	–	(85,032)

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’s listing in 1997. 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. During the year, the directors decided to transfer the general reserve to the accumulated losses of the Company as this would provide a fairer presentation of the reserves of the Company and of the Group as at the balance sheet date.

– 36 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

30. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT

Acquisition of subsidiaries Net assets acquired: Due from a fellow subsidiary Properties held for sale Other receivables Cash and bank balances Other payables and accruals Tax payable Satisfied by: Issue of shares Cash	2004 HK$’000 372 46,569 112 105 (587) (12) 46,559 46,000 559 46,559	2003 HK$’000 – – – – – –
		–
		– –
		–

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

Cash consideration Cash and bank balances acquired Net outflow of cash and cash equivalents in respect of the acquisition of subsidiaries	2004 HK$’000 (559) 105 (454)	2003 HK$’000 – –
		–

On 14 May 2003, the Group acquired a 100% interest in certain subsidiaries from Deson, the ultimate holding company of the Company. Further details of the transaction are included in note 33 to the financial statements. The purchase consideration of HK$46,000,000 for the acquisition was satisfied by way of issuing 657,142,857 shares of the Company.

31. CONTINGENT LIABILITIES

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

	Company
	2004	2003
	HK$’000	HK$’000
Guarantees given to banks in connection with
facilities granted to subsidiaries	16,500	8,000

As at 31 March 2004, the bank facilities granted to subsidiaries subject to the guarantees given to banks by the Company have been utilised to the amount of HK$12,939,000 (2003: Nil).

(b) In October 2000, Kenworth received a claim of approximately HK$341 million from a main contractor of a construction project for the alleged breach of a subcontract which Kenworth has not admitted. The claim amount was revised to HK$141 million in 2002. A counterclaim was submitted by Kenworth against this main contractor for the outstanding contract sum in respect of the completed work and the loss due to the wrongful termination of the subcontract. Under the provisions of the subcontract, the disputed claim is subject to arbitration proceedings between Kenworth and the main contractor. The arbitration application was lodged before the commencement of the Scheme and the process commenced in August 2002 upon the appointment of the arbitrator. As at the date of these financial statements, a security deposit of HK$5 million has been paid by the Group to the arbitrator and the amount has been included as other receivables in the financial statements. Both Kenworth and the main

– 37 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

contractor are in the process of submitting information to the arbitrator for assessment. The Scheme Administrator is required to await the arbitrator’s decision or, in the event that such decision is subject to appeal or further appeal(s) by either party thereto, to await the ultimate outcome and final decision to be made by the relevant appellate body. In any event, the claim, if awarded in favour of the main contractor, is still subject to the terms and conditions of the Schemes, as further detailed in note 2 to the financial statements.

In relation to the same construction project detailed above, in October 2000 Kenworth also received a claim of approximately HK$353 million from the contract employer in respect of damages for the alleged breach of the same subcontract. The claim amount was revised to HK$237 million in 2002. The Scheme Administrator is in the process of examining the grounds for the claim and the outcome of the assessment cannot be determined at this stage.

Pursuant to an agreement dated 18 October 2000 entered into between Kenworth and the Company, the Company agreed to discharge the liabilities of Kenworth under the Schemes by the allotment of certain redeemable cumulative preference shares by Kenworth.

The Group appointed an independent chartered surveyor to estimate its potential exposure under the above two claims in 2003. According to the report of the surveyor, the maximum exposure of the above claims amounted to HK$70 million. The directors consider that the Group has valid defences against the claim and based on existing evidence believe that it is not probable that any material loss will be suffered by the Group. In addition, as the arbitration proceedings are at a preliminary stage, it is not currently possible to estimate the eventual outcome of the claims but the directors currently consider that no provision needs to be made in the financial statements.

32. COMMITMENTS

(a) As lessor

The Group leases its properties held for sale (note 19) 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.

At 31 March 2004, the Group had total future minimum lease receivables under non-cancellable operating leases with its tenants falling due as follows:

Within one year In the second to fifth years, inclusive	Group 2004 HK$’000 1,205 970 2,175	2003 HK$’000 – –
		–

(b) As lessee

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

As at 31 March 2004, the Group had total future minimum lease payments under non-cancellable operating leases falling due as follows:

Within one year In the second to fifth years, inclusive	Group 2004 HK$’000 140 129 269	2003 HK$’000 132 –
		132

As at 31 March 2004, the Company had no significant operating lease or capital commitments except as disclosed in note 34 to the financial statements.

– 38 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

33. RELATED PARTY TRANSACTIONS

The Group had the following material transactions with Deson and its subsidiaries during the year which also constitute connected transactions as defined in the Listing Rules:

		2004	2003
	Notes	HK$’000	HK$’000
Construction contracting income received from
fellow subsidiaries	(i)	6,422	7,808
Rental expense paid to a fellow subsidiary	(ii)	–	580
Acquisition of subsidiaries from the ultimate
holding company	(iii)	46,000	–

Notes:

(i) The directors consider that the construction contracts were entered into according to conditions similar to those offered to the major customers of the Group.
(ii) The rental expense was based on rates approximating those of the market at the time the initial lease was entered into. The rental expense was waived by the fellow subsidiary in the current year.
(iii) During the year, the Group acquired certain subsidiaries from the ultimate holding company of the Company for HK$46,000,000. The consideration was determined with reference to the open market value of the properties held by these subsidiaries. Further details of the transaction are included in note 30 and in the “Connected transactions” section of the Report of the Directors on pages 17 and 18.

34. POST BALANCE SHEET EVENTS

On 18 February 2004, the Group entered into agreements with independent third parties to acquire an aggregate 49% equity interest in Xin Hua Resources Investment Limited (“Xin Hua”) and its related shareholders’ loans (the “Xin Hua Acquisition”) for HK$29,500,000. The consideration for the Xin Hua Acquisition was satisfied by way of issuing 295,000,000 shares of the Company at HK$0.10 each.

The Xin Hua Acquisition constituted a major transaction for the Company under the Listing Rules. Mr. Mo Shikang, a director of Xin Hua, was appointed as an executive director of the Company upon completion of the Xin Hua Acquisition, hence, the Xin Hua Acquisition also constituted a connected transaction for the Group under the Listing Rules. The Xin Hua Acquisition was approved by the shareholders of Company at a special general meeting on 16 April 2004 and was completed on 30 April 2004.

On 18 February 2004, the Group entered into an agreement with Deson to acquire the entire issued share capital of Penmark Limited (“Penmark”) and its related shareholders’ loan (the “Penmark Acquisition”) at a consideration of HK$7,500,000. The consideration was satisfied by issuing 75,000,000 shares of the Company at HK$0.10 each. The Company also granted Deson an option to subscribe for one option share for every two shares issued at the option exercise price of HK$0.105 per option share.

The Penmark Acquisition constituted a disclosable transaction for the Company under the Listing Rules. As Deson is a controlling shareholder of the Company having a shareholding interest of approximately 74.8% in the Company, the Penmark Acquisition also constituted a connected transaction for the Company under the Listing Rules. The transaction was approved by the independent shareholders of the Company at a special general meeting on 16 April 2004 and was completed on 30 April 2004.

On 18 February 2004, the Group entered into an agreement with Deson to dispose of the entire issued share capital of Kenworth Group and its shareholder’s loan (the “Kenworth Disposal”) for HK$7,000,000 to Deson. The consideration was paid by Deson in cash and gave rise to a gain on disposal currently estimated at approximately HK$6 million.

The Kenworth Disposal has been aggregated with the Subscription (defined below) and as a result, the Subscription and the Kenworth Disposal constituted major transactions for the Company under the Listing Rules. As Deson is a controlling shareholder of the Company having a shareholding interest of 74.8% in the Company, the Subscription and the Kenworth Disposal also constituted connected transactions for the Company under the Listing Rules. The Subscription and the Kenworth Disposal were approved by the independent shareholders of the Company at a special general meeting on 16 April 2004 and were completed on 30 April 2004.

– 39 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

On 18 February 2004, the Company entered into a placing agreement with a placing agent to place up to 800,000,000 new shares at a price of HK$0.10 each. The placing agent agreed to place to not less than six independent placees i) 200,000,000 placing shares on a fully underwritten basis and ii) 600,000,000 placing shares on a best endeavours basis. An aggregate of 400,000,000 placing shares were successfully placed. Pursuant to the placing agreement, the Company granted each placee a placing option which will entitle the placee to subscribe for one option share for every two placing shares subscribed for by the placee at the option exercise price of HK$0.105 per option share.

The issuance of the placing shares and the option shares was approved by shareholders of the Company on 16 April 2004. On 30 April 2004, 400,000,000 shares of the Company were issued at HK$0.10 each to the placees resulting in cash inflows of HK$40,000,000 before expenses.

On 18 February 2004, the Company entered into a subscription agreement with Super Win Development Limited (“Super Win”), the immediate holding company of the Company. The Company will issue 325,000,000 new shares (the “Subscription Shares”) to Super Win at a price of HK$0.10 each for an aggregate consideration of HK$32,500,000 (the “Subscription”). Pursuant to the subscription agreement, Super Win will be entitled to subscribe for one option share for every two shares subscribed for at the option exercise price of HK$0.105 per option share.

The Subscription has been aggregated with the Kenworth Disposal and as a result, the Subscription and the Kenworth Disposal constituted major transactions for the Group under the Listing Rules. The Subscription and the Kenworth Disposal were approved by the independent shareholders of the Company at a special general meeting on 16 April 2004. The transactions were completed on 30 April 2004.

A summary of the pro forma statements of unaudited combined assets and liabilities of the Group based on the audited consolidated balance sheet of the Group as at 31 March 2004 is presented below:

	The Group’s
	audited
	consolidated							Summary
	net assets						of	proforma
	31 March							combined
	2004			Adjustments				net assets
	HK$’000			HK$’000				HK$’000
				Notes
		(i)	(ii)	(iii)	(iv)	(v)
NON-CURRENT ASSETS	835	(835)	7,506	29,500				37,006
CURRENT ASSETS	71,218	(12,683)			72,500			131,035
CURRENT LIABILITIES	(31,279)	18,912	(6)			(1,900)		(14,273)
NET CURRENT ASSETS	39,939							116,762
TOTAL ASSETS LESS
CURRENT
LIABILITIES	40,774							153,768
NON-CURRENT
LIABILITIES	(7,432)							(7,432)
MINORITY INTERESTS	(274)	274						–
NET ASSETS	33,068							146,336

Notes:

(i) The amounts represent the disposal of certain subsidiaries of the Group to Deson for HK$7,000,000.
(ii) The amounts represent the acquisition of a subsidiary from Deson for HK$7,500,000.

– 40 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

(iii) The amount represents the acquisition of 49% equity interest in an associate for HK$29,500,000.

(iv) The amount represents the placing and Subscription of 400,000,000 shares and 325,000,000 shares of the Company at HK$0.10 each.

(v) The amount represents the estimated expenses for all the above post balance sheet events.

35. APPROVAL OF THE FINANCIAL STATEMENTS

The financial statements were approved and authorised for issue by the board of directors on 24 June 2004.

3 INDEBTEDNESS

As at the close of business on 31 July 2004, the Enlarged Group had outstanding bank borrowings of approximately HK$21,491,000, comprising secured bank loans of approximately HK$16,376,000 and a secured bank overdraft of approximately HK$5,115,000.

The Enlarged Group’s bank loans and overdraft are secured by time deposits aggregating HK$5,284,000, the Enlarged Group’s properties held for sale situated in Mainland China, which had an aggregate carrying value as at 31 July 2004 of HK$46,569,000 and corporate guarantees given by certain customers.

As stated in the 2004 annual report of the Company, Kenworth Engineering Limited (“Kenworth”) received a claim of approximately HK$341 million from a main contractor of a construction project for the alleged breach of a subcontract in October 2000 which Kenworth has not admitted. The claim amount was revised to HK$141 million in 2002. A counterclaim was submitted by Kenworth against this main contractor for the outstanding contract sum in respect of the completed work and the loss due to the wrongful termination of the subcontract. Under the provisions of the subcontract, the disputed claim is subject to arbitration proceedings between Kenworth and the main contractor. The arbitration application was lodged before the commencement of three schemes of arrangement involving the Company and its then two subsidiaries, Kenworth and Kenworth Group Limited, which were established under Section 166 of the Hong Kong Companies Ordinance, according to the terms of the restructuring proposal (the “Schemes”) and the process commenced in August 2002 upon the appointment of the arbitrator. As at 31 July 2004, a security deposit of HK$5 million had been paid by the Group to the arbitrator. Both Kenworth and the main contractor are in the process of submitting information to the arbitrator for assessment. The administrator of the Schemes (the “Scheme Administrator”) is required to await the arbitrator’s decision or, in the event that such decision is subject to appeal or further appeal(s) by either party thereto, to await the ultimate outcome and final decision to be made by the relevant appellate body. In any event, the claim, if awarded in favour of the main contractor, is still subject to the terms and conditions of the Schemes.

The Group appointed an independent chartered surveyor to estimate its potential exposure under the above two claims in 2003. According to the report of the surveyor, the maximum exposure of the above claims amounted to HK$70 million. The directors consider that the Group has valid defences against the claims and based on existing evidence believe that it is not probable that any material loss will be suffered by the Group. In addition, as the arbitration proceedings are at a preliminary stage, it is not currently possible to estimate the eventual outcome of the claims but the directors currently consider that no provision needs to be made as at 31 July 2004.

– 41 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Save as disclosed in this circular and apart from intra-group liabilities, the Enlarged Group did not, as at the close of business on 31 July 2004, have any outstanding loan capital issued and outstanding or agreed to be issued, 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.

4. WORKING CAPITAL

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

The Directors are not aware of any matter or fact which will render the Group not having sufficient working capital for its requirements after completion of the Second Xin Hua Acquisition.

5. MANAGEMENT DISCUSSION AND ANALYSIS

Property holdings and investment

The Directors consider that the growth in the economy of the PRC, especially Shanghai, is significant in these few years which is expected to have a positive impact on the commercial property market in the PRC. The Group currently has a total of 3,632.20 m[2] of Zhongda Square together with 19 car parks as the reserve for property holdings and investment purpose, the Directors believe that the Group will benefit from the growth in the economy of the PRC. The Directors also believe that the opening of the Universal Studios in 2006 in Shanghai, PRC and the hosting of the World Expo in 2010 will have a positive impact on the PRC property market and the property holding and investment segment will continue to contribute a sizeable contribution to the Group’s operating results in coming years.

Natural gas business

As at the Latestable Practicable Date, the total population and the number of families in the city of Hong Sen is approximately 100,000 and 33,000 respectively and the total population and the number of families in the city of Yan Ting is approximately 60,000 and 20,000 respectively. The existing natural gas network only covers 42% and 60% of the total capacity of the city of Hong Sen and the city of Yan Ting respectively. The Directors are confident that income from the installation of the remaining natural gas network and the recurring income from the supply of natural gas in these two cities will have a significant contribution to the future income of Group.

– 42 –

APPENDIX II ACCOUNTANTS’ REPORTS ON THE XIN HUA GROUP

The following is the text of a report, prepared for the sole purpose of inclusion in this circular, received from the independent reporting accountants, Ernst & Young, Certified Public Accountants, Hong Kong.

15th Floor Hutchison House 10 Harcourt Road Central Hong Kong 28 September 2004

The Board of Directors KEL Holdings Limited

Dear Sirs,

We set out below our report on the financial information regarding Xin Hua Resource Investment Limited (“Xin Hua”), a 49% associate of KEL Holdings Limited (“KEL”), and its subsidiaries (hereinafter collectively referred to as the “Xin Hua Group”) to be further acquired by Brilliant China Investments Limited (“Brilliant China”), a subsidiary of KEL pursuant to a conditional sale and purchase agreement (the “Agreement”) dated 2 August 2004 entered into between Brilliant China and Camture Limited, prepared on the basis as set out in Section 1 below, for inclusion in the circular issued by KEL dated 28 September 2004 (the “Circular”). Pursuant to the Agreement, Brilliant China will acquire an additional 51% equity interest in Xin Hua. Camture Limited is incorporated in the British Virgin Islands with limited liability. Upon completion of the Agreement, Xin Hua will become a subsidiary of KEL.

Xin Hua is an investment holding company incorporated in the British Virgin Islands with limited liability on 2 June 2003. During the periods from 2 June 2003 (date of incorporation) to 31 March 2004, 2 June 2003 (date of incorporation) to 30 June 2003 and from 1 April 2004 to 30 June 2004 (the “Relevant Periods”), the Xin Hua Group was principally involved in the distribution and supply of piped natural gas and the installation of natural gas distribution facilities in the People’s Republic of China (the “PRC”).

Xin Hua has adopted 31 March and all of its subsidiaries have adopted 31 December as their financial year end date. As at the date of this report, no audited financial statements have been prepared for Xin Hua. We have, however, performed our independent review of all relevant transactions of Xin Hua since its date of incorporation.

Particulars of subsidiaries and associates of the Xin Hua Group not audited by Ernst & Young are as follows:

Company	Period/Year end	Statutory auditors
Beijing Zhong Min Gas Co. Ltd.	Period from	Beijing ZhongBoHua
(“Zhong Min”)	11 July 2003	Certified Public Accountants
	(date of incorporation)
	to 31 December 2003
Mian Zhu City Hong Sen Natural	Year ended	Sichuan Wantong
Gas Co., Ltd.	31 December 2003	Certified Public Accountants
(“Hong Sen”)*
Mian Zhu City Long Teng Gas	Year ended	Sichuan Wantong
Installation Co. Ltd.	31 December 2003	Certified Public Accountants
(“Long Teng”)*
Mian Zhu City Hongsen Glass	Year ended	Sichuan Wantong
Products Company Limited	31 December 2003	Certified Public Accountants
(“Glass Product”)*

The companies were associates of the Xin Hua Group as at 31 March 2004 and became subsidiaries of the Xin Hua Group on 31 May 2004.

– 43 –

APPENDIX II ACCOUNTANTS’ REPORTS ON THE XIN HUA GROUP

For the purpose of this report, we have undertaken an independent audit of the financial statements and management accounts of all companies now comprising the Xin Hua Group for the Relevant Periods in accordance with Hong Kong Statements of Auditing Standards and Auditing Guidelines issued by the Hong Kong Institute of Certified Public Accountants, and have carried out such additional procedures as we considered necessary in accordance with the Auditing Guideline 3.340 “Prospectuses and the reporting accountant” issued by the Hong Kong Institute of Certified Public Accountants.

The summaries of the consolidated profit and loss accounts, the consolidated statements of changes in equity and the consolidated cash flow statements of the Xin Hua Group for the Relevant Periods and of the consolidated balance sheets of the Xin Hua Group and the balance sheets of Xin Hua as at 31 March 2004 and 30 June 2004 (the “Financial Information”) as set out in this report have been prepared in accordance with the basis as set out in Section 1 below.

The directors of Xin Hua are responsible for preparing the Financial Information. In preparing the Financial Information, it is fundamental that appropriate accounting principles are selected and applied consistently. The directors of KEL are responsible for the content of the Circular relating to the KEL Group in which this report is included. It is our responsibility to form an independent opinion based on our examination on the Financial Information and to report our opinion to you.

In our opinion, the Financial Information together with the notes thereto give, for the purpose of this report, a true and fair view of the consolidated results and cash flows of the Xin Hua Group for each of the Relevant Periods and of the consolidated balance sheets of the Xin Hua Group and balance sheets of Xin Hua as at 31 March 2004 and 30 June 2004.

1. BASIS OF PRESENTATION

At the date of this report, Xin Hua had direct or indirect interests in the following subsidiaries, all of which are private companies (or if incorporated outside Hong Kong, have substantially similar characteristics to a private company incorporated in Hong Kong), the particulars of which are set out below:

	Place and
	date of		Percentage of
	incorporation/	Issued share/	equity attributable
	establishment	registered	to Xin Hua		Principal
Company	and operations	capital	Direct	Indirect	activities
Beijing Zhong Min	People’s Republic	US$24,000,000	100	–	Investment
Gas Co. Ltd.	of China				holding
	11 July 2003
LongXin (YanTing)	People’s Republic	RMB3,018,900	–	99	Distribution and
Natural Gas	of China				supply of piped
Company Limited	18 April 2001				natural gas and
(“Yan Ting”)					installation of
					natural gas
					distribution
					facilities
Mian Zhu City Hong Sen	People’s Republic	RMB16,308,800	–	99.99	Distribution and
Natural Gas Co., Ltd.	of China				supply of piped
	6 September 2002				natural gas

– 44 –

APPENDIX II ACCOUNTANTS’ REPORTS ON THE XIN HUA GROUP

1. BASIS OF PRESENTATION (CONTINUED)

	Place and
	date of		Percentage of
	incorporation/	Issued share/	equity attributable
	establishment	registered	to Xin Hua		Principal
Company	and operations	capital	Direct	Indirect	activities
Mian Zhu City Long	People’s Republic	RMB7,633,400	–	99.99	Installation of
Teng Gas Installation	of China				natural gas
Co. Ltd.	23 April 2002				distribution
					facilities
Mian Zhu City Hongsen	People’s Republic	RMB1,000,000	–	69.99	Manufacturing
Glass Products	of China				and sale of glass
Company Limited	7 August 2003				products

The Financial Information has been prepared based on unaudited management accounts of Xin Hua and the audited financial statements and management accounts of its subsidiaries for the Relevant Periods, after making such adjustments as we consider appropriate for the purpose of this report. All significant intercompany transactions and balances within the Xin Hua Group are eliminated on consolidation.

The Financial Information has been prepared on the going concern basis notwithstanding the deficiency in assets of the Xin Hua Group at the balance sheet date because the shareholders of Xin Hua have agreed not to demand repayment of the shareholders’ loans and will provide the Xin Hua Group with continuing financial support to meet its liabilities as when they fall due.

2. PRINCIPAL ACCOUNTING POLICIES

The principal accounting policies adopted in arriving at the Financial Information set out in this 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 Xin Hua and its subsidiaries for the Relevant Periods. The results of subsidiaries acquired or disposed of during the Relevant Periods are consolidated from or to their effective dates of acquisition or disposal, respectively. All significant intercompany transactions and balances within the Xin Hua Group are eliminated on consolidation.

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

Subsidiaries

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

The results of subsidiaries are included in Xin Hua’s profit and loss account to the extent of dividends received and receivable. Xin Hua’s interests in subsidiaries are stated at cost less any impairment losses.

– 45 –

APPENDIX II ACCOUNTANTS’ REPORTS ON THE XIN HUA GROUP

2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

Associates

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

The Xin Hua Group’s share of the post-acquisition results and reserves of the associates is included in the consolidated profit and loss account and consolidated shareholders’ equity, respectively. The Xin Hua Group’s interests in associates are stated in the consolidated balance sheet at the Xin Hua Group’s share of net assets under the equity method of accounting, less any impairment losses. Goodwill arising from the acquisition of associates is included as part of the Xin Hua Group’s interest in associates.

Goodwill

Goodwill arising on the acquisition of subsidiaries and associates represents the excess of the cost of the acquisition over the Xin Hua Group’s share of the fair values of the identifiable assets and liabilities acquired as at the date of acquisition.

Goodwill arising on acquisition is recognised in the consolidated balance sheet as an asset and amortised on the straight-line basis over its estimated useful life of not more than 20 years. In the case of associates, any unamortised goodwill is included in the carrying amount thereof, rather than as a separately identified asset on the consolidated balance sheet.

On disposal of subsidiaries or associates, the gain or loss on disposal is calculated by reference to the net assets at the date of disposal, including the attributable amount of goodwill which remains unamortised and any relevant reserves, as appropriate.

The carrying amount of goodwill is reviewed annually and written down for impairment when it is considered necessary. A previously recognised impairment loss for goodwill is not reversed unless the impairment loss was caused by a specific external event of an exceptional nature that was not expected to recur, and subsequent external events have occurred which have reversed the effect of that event.

Negative goodwill

Negative goodwill arising on the acquisition of subsidiaries and associates represents the excess of the Xin Hua Group’s share of the fair values of the identifiable assets and liabilities acquired as at the date of acquisition, over the cost of the acquisition.

To the extent that negative goodwill relates to expectations of future losses and expenses that are identified in the acquisition plan and that can be measured reliably, but which do not represent identifiable liabilities as at the date of acquisition, that portion of negative goodwill is recognised as income in the consolidated profit and loss account when the future losses and expenses are recognised.

To the extent that negative goodwill does not relate to identifiable expected future losses and expenses as at the date of acquisition, negative goodwill is recognised in the consolidated profit and loss account on a systematic basis over the remaining average useful life of the acquired depreciable/ amortisable assets. The amount of any negative goodwill in excess of the fair values of the acquired non-monetary assets is recognised as income immediately.

In the case of associates, any negative goodwill not yet recognised in the consolidated profit and loss account is included in the carrying amount thereof, rather than as a separately identified item on the consolidated balance sheet.

On disposal of subsidiaries or associates, the gain or loss on disposal is calculated by reference to the net assets at the date of disposal, including the attributable amount of negative goodwill which has not been recognised in the consolidated profit and loss account.

– 46 –

APPENDIX II ACCOUNTANTS’ REPORTS ON THE XIN HUA GROUP

2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

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 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 a fixed asset, the expenditure is capitalised as an additional cost of that asset.

Depreciation is calculated on the straight-line basis to write off the cost of each asset, net of residual value, over its estimated useful life. The estimated useful lives of the different categories of fixed assets are as follows:

Land use rights	Over the terms of the leases
Buildings	20 to 25 years
Leasehold improvements	3 years or over the terms of the leases, whichever
	is shorter
Machinery and equipment	5 to 10 years
Gas pipelines	15 to 25 years
Office equipment	5 to 10 years
Motor vehicles	5 years

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.

Construction in progress represents gas station structures, machinery and pipelines and other fixed assets under construction/installation and is stated at cost less any impairment losses, and is not depreciated. Cost comprises direct costs of construction, installation and testing. Construction in progress is reclassified to the appropriate category of fixed assets when completed and ready for use.

Impairment of assets

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.

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 Xin Hua 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.

– 47 –

APPENDIX II ACCOUNTANTS’ REPORTS ON THE XIN HUA GROUP

2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

Long term investment

Long term investment is an investment in unlisted equity security intended to be held on a long term basis.

The unlisted equity security is stated at cost less provision for impairment deemed necessary by the directors.

Revenue recognition

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

(a) from sales of piped gas, when the significant risks and rewards of ownership have been transferred to the buyer, provided that the Xin Hua Group maintains neither managerial involvement to the degree usually associated with ownership, nor effective control over the goods sold;
(b) gas pipelines installation income, in the period in which services are rendered; and
(c) interest income, on a time proportion basis taking into account the principal outstanding and the effective interest rate applicable.

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined on the weighted average basis and includes all costs of purchase, costs of conversion, and other costs incurred in bringing the inventories to their present location and condition. In the case of work in progress and self-produced finished goods, cost comprises direct materials, direct labour and an appropriate proportion of overheads. Net realisable value is based on the estimated selling prices less any estimated costs to be incurred to completion and disposal.

Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, i.e. assets that necessarily take a substantial period of time to get ready for their intended use or sale, are capitalised as part of the cost of those assets. The capitalisation of such borrowing costs ceases when the assets are substantially ready for their intended use or sale. All other borrowing costs are charged to their profit and loss in the period in which they are incurred.

Income tax

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

Deferred tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Tax rates enacted or substantively enacted by the balance sheet date are used to determine deferred tax.

Deferred tax liabilities are provided in full on all taxable temporary differences while deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

A deferred tax asset is also recognised for the carryforward of unused tax losses, to the extent that it is probable that future taxable profit will be available against which the carryforward of the unused tax losses can be utilised.

– 48 –

APPENDIX II ACCOUNTANTS’ REPORTS ON THE XIN HUA GROUP

2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

Foreign currencies

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

On consolidation, the financial statements of overseas subsidiaries and associates are translated into Hong Kong dollars using the net investment method. The profit and loss accounts of overseas subsidiaries and associates are translated into Hong Kong dollars at the weighted average exchange rates for the Relevant Period, and their balance sheets are translated into Hong Kong dollars at the exchange rates ruling at the balance sheet date. The resulting translation differences are included in the exchange fluctuation reserve.

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

Related parties

– 49 –

APPENDIX II ACCOUNTANTS’ REPORTS ON THE XIN HUA GROUP

3. CONSOLIDATED PROFIT AND LOSS ACCOUNT

The following is a summary of the consolidated profit and loss account of the Xin Hua Group for the Relevant Periods, which is presented on the basis set out in Section 1 above:

		Period from		Period from	Period from
		2 June 2003		2 June 2003
		(date of		(date of
		incorporation)	incorporation)		1 April 2004
		to 31 March		to 30 June	to 30 June
		2004		2003	2004
	Notes	HK$’000		HK$’000	HK$’000
TURNOVER	(a)	–		–	4,345
Cost of sales		–		–	(3,834)
Gross profit		–		–	511
Other revenue	(a)	11		–	74
Administrative expenses		(2,710)		–	(1,278)
Other operating expenses		(92)		–	(90)
LOSS FROM OPERATING ACTIVITIES	(b)	(2,791)		–	(783)
Finance costs	(d)	–		–	(122)
Share of profits and losses of associates		1,115		–	795
LOSS BEFORE TAX		(1,676)		–	(110)
Tax	(e)	(379)		–	(364)
LOSS BEFORE MINORITY INTERESTS		(2,055)		–	(474)
Minority interests		–		–	7
NET LOSS FROM ORDINARY
ACTIVITIES ATTRIBUTABLE TO
SHAREHOLDERS		(2,055)		–	(467)

Notes:

(a) Turnover and revenue

Turnover represents the invoiced value of installation services performed, pipeline natural gas and glass products sold, net of value-added tax. All significant intra-group transactions have been eliminated on consolidation.

– 50 –

APPENDIX II ACCOUNTANTS’ REPORTS ON THE XIN HUA GROUP

3. CONSOLIDATED PROFIT AND LOSS ACCOUNT (CONTINUED)

Notes: (continued)

(a) Turnover and revenue (continued)

An analysis of the Xin Hua Group’s turnover and other revenue is as follows:

Turnover: Sale of piped gas Gas pipeline installation income Sale of glass products Other revenue: Interest income Negative goodwill recognised as income	Period from 2 June 2003 (date of incorporation) to 31 March 2004 HK$’000 – – – – 11 – 11 11	Period from 2 June 2003 (date of incorporation) 1 April 2004 to 30 June to 30 June 2003 2004 HK$’000 HK$’000 – 3,683 – 76 – 586 – 4,345 – 30 – 44 – 74 – 4,419	Period from 2 June 2003 (date of incorporation) 1 April 2004 to 30 June to 30 June 2003 2004 HK$’000 HK$’000 – 3,683 – 76 – 586 – 4,345 – 30 – 44 – 74 – 4,419
			4,345
			30 44
			74
			4,419

(b) Loss from operating activities

This is arrived at after charging/(crediting):

	Period from	Period from	Period from
	2 June 2003	2 June 2003
	(date of	(date of
	incorporation)	incorporation)	1	April 2004
	to 31 March	to 30 June		to 30 June
	2004	2003		2004
	HK$’000	HK$’000		HK$’000
Cost of inventories sold	–	–		3,811
Cost of installation services	–	–		23
Depreciation	14	–		178
Amortisation of goodwill	28	–		90
Negative goodwill recognised as income	–	–		(44)
Minimum lease payments under operating leases
in respect of land and buildings	234	–		105
Staff costs:
Wages and salaries	282	–		644
Auditors’ remuneration	65	–		–
Loss on disposal of fixed assets	–	–		14
Exchange losses, net	42	–		–

– 51 –

APPENDIX II ACCOUNTANTS’ REPORTS ON THE XIN HUA GROUP

3. CONSOLIDATED PROFIT AND LOSS ACCOUNT (CONTINUED)

Notes: (continued)

(c) Directors’ and senior executives’ remuneration

Fees Other emoluments: Salaries, allowances and benefits in kind Pension scheme contributions	Period from 2 June 2003 (date of incorporation) to 31 March 2004 HK$’000 – – –	Period from 2 June 2003 (date of incorporation) 1 April 2004 to 30 June to 30 June 2003 2004 HK$’000 HK$’000 – – – – – –	Period from 2 June 2003 (date of incorporation) 1 April 2004 to 30 June to 30 June 2003 2004 HK$’000 HK$’000 – – – – – –
			–

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

(d) Finance costs

Interest on bank loans, overdrafts and other loans wholly repayable with five years Interest on other loans	Period from 2 June 2003 (date of incorporation) to 31 March 2004 HK$’000 – – –	Period from 2 June 2003 (date of incorporation) 1 April 2004 to 30 June to 30 June 2003 2004 HK$’000 HK$’000 – 120 – 2 – 122	Period from 2 June 2003 (date of incorporation) 1 April 2004 to 30 June to 30 June 2003 2004 HK$’000 HK$’000 – 120 – 2 – 122
			122

(e) Tax

PRC corporate income tax Share of tax attributable to associates	Period from 2 June 2003 (date of incorporation) to 31 March 2004 HK$’000 – 379 379	Period from 2 June 2003 (date of incorporation) 1 April 2004 to 30 June to 30 June 2003 2004 HK$’000 HK$’000 – 91 – 273 – 364	Period from 2 June 2003 (date of incorporation) 1 April 2004 to 30 June to 30 June 2003 2004 HK$’000 HK$’000 – 91 – 273 – 364
			364

No provision for Hong Kong profits tax has been made as the Xin Hua Group had no assessable profits earned in or derived from Hong Kong during the Relevant Periods.

The PRC corporate income tax for the Xin Hua Group is calculated at rates ranging from zero to 33% on its estimated assessable profits for the Relevant Periods based on existing legislation, interpretations and practices in respect thereof.

– 52 –

APPENDIX II ACCOUNTANTS’ REPORTS ON THE XIN HUA GROUP

3. CONSOLIDATED PROFIT AND LOSS ACCOUNT (CONTINUED)

Notes: (continued)

(e) Tax (continued)

A reconciliation of the tax credit applicable to loss before tax using the statutory rate for the PRC in which the Xin Hua Group and its associates are domiciled to the tax expense at the effective tax rates is as follows:

Loss before tax Tax at the statutory rate of 33% Expenses not deductible for tax Tax losses not recognised Tax charge at the effect rate	Period from 2 June 2003 (date of incorporation) to 31 March 2004 HK$’000 (1,676) (553) 584 348 379	Period from 2 June 2003 (date of incorporation) 1 April 2004 to 30 June to 30 June 2003 2004 HK$’000 HK$’000 – (110) – (36) – 76 – 324 – 364

– 53 –

APPENDIX II ACCOUNTANTS’ REPORTS ON THE XIN HUA GROUP

4. BALANCE SHEETS

The following is a summary of the consolidated balance sheets of the Xin Hua Group and balance sheets of Xin Hua as at 31 March 2004 and 30 June 2004, which is presented on the basis as set out in Section 1 above:

Consolidated balance sheets of the Xin Hua Group

Notes NON-CURRENT ASSETS Fixed assets (a) Goodwill: (c) Goodwill Negative goodwill Interest in associates (d) Other investment CURRENT ASSETS Inventories (e) Trade receivables (f) Prepayments, deposits and other receivables Cash and bank balances CURRENT LIABILITIES Trade payables (g) Tax payable Accrued liabilities and other payables Bank loans (h) NET CURRENT ASSETS TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Loans from shareholders (i) MINORITY INTERESTS CAPITAL AND RESERVES Issued capital (j) Reserves (k)	31 March 2004 HK$’000 332 – – 9,662 – 9,994 – – 28,070 14,886 42,956 – – (60) – (60) 42,896 52,890 (54,404) – (1,514) 389 (1,903) (1,514)	30 June 2004 HK$’000 25,760 8,522 (4,352) – 188 30,118 1,075 5,135 25,307 18,862 50,379 (4,212) (2,596) (12,245) (8,483) (27,536) 22,843 52,961 (54,404) (538) (1,981) 389 (2,370) (1,981)

– 54 –

APPENDIX II ACCOUNTANTS’ REPORTS ON THE XIN HUA GROUP

4. BALANCE SHEETS (CONTINUED)

Balance sheets of Xin Hua

NON-CURRENT ASSETS Interests in subsidiaries CURRENT ASSETS Cash and bank balances NON-CURRENT LIABILITIES Loans from shareholders CAPITAL Issued capital Notes: (a) Fixed assets Land use rights HK$’000 Costs: Additions in the period and balance at 31 March 2004 and 1 April 2004 – Additions – Acquisition of subsidiaries 4,888 Disposals – At 30 June 2004 4,888 Accumulated depreciation: Provided during the period and balance at 31 March 2004 and 1 April 2004 – Provided during the period 19 At 30 June 2004 19 Net book value: At 30 June 2004 4,869 At 31 March 2004 –	Buildings HK$’000 – 30 7,352 – 7,382 – 64 64 7,318 –	Leasehold improvements HK$’000 – 95 – – 95 – 2 2 93 –	Notes (b) (i) (j) Machinery and Gas equipment pipelines HK$’000 HK$’000 – – 11 – 8,552 2,234 – – 8,563 2,234 – – 43 15 43 15 8,520 2,219 – –		31 March 2004 HK$’000 54,792 1 54,793 (54,404) 389 389 Office Motor equipment vehicles HK$’000 HK$’000 83 263 126 547 141 422 – (14 ) 350 1,218 9 5 7 28 16 33 334 1,185 74 258	30 June 2004 HK$’000 54,792 1 54,793 (54,404) 389 389 Construction in progress Total HK$’000 HK$’000 – 346 742 1,551 480 24,069 – (14 ) 1,222 25,952 – 14 – 178 – 192 1,222 25,760 – 332




					Office equipment HK$’000 83 126 141 – 350 9 7 16 334 74

The Xin Hua Group’s land use rights and buildings included above are held under medium term leases and are situated in the PRC.

– 55 –

APPENDIX II ACCOUNTANTS’ REPORTS ON THE XIN HUA GROUP

4. BALANCE SHEETS (CONTINUED)

Notes: (continued)

(b) Interests in subsidiaries

Interests in subsidiaries
		Company
	31 March		30 June
	2004		2004
	HK$’000		HK$’000
Unlisted investment, at cost	54,792		54,792

(c) Goodwill and negative goodwill

The amounts of goodwill and negative goodwill capitalised as an asset or recognised in the consolidated balance sheets, arising from the acquisition of subsidiaries, are as follows:

Cost: Transfer of goodwill from associates upon acquisition of additional interests in associates Acquisition of subsidiaries At 30 June 2004 Accumulated amortisation: Amortisation provided/(recognised as income) during the period and balance at 30 June 2004 Net book value: At 30 June 2004 At 31 March 2004 (d) Interests in associates Share of net assets Due to an associate Goodwill on acquisition of associates	Goodwill HK$’000 1,042 7,570 8,612 90 8,522 – 31 March 2004 HK$’000 9,091 (471) 8,620 1,042 9,662	Negative goodwill HK$’000 – (4,396
		(4,396
		(44
		(4,352

		–

		30 June 2004 HK$’000 – –
		– –
		–

The amount due to an associate is unsecured, interest-free and has no fixed terms of repayment.

(e) Inventories Raw materials Finished goods	31 March 2004 HK$’000 – – –	30 June 2004 HK$’000 551 524
		1,075

None of the inventories included above was stated at net realisable value as at 31 March 2004 and 30 June 2004.

– 56 –

APPENDIX II ACCOUNTANTS’ REPORTS ON THE XIN HUA GROUP

4. BALANCE SHEETS (CONTINUED)

Notes: (continued)

(f) Trade receivables

The Xin Hua Group normally allows credit terms to its established customers of not more than 30 days. A longer credit period is granted to certain customers with long business relationships with the Xin Hua Group and a strong financial position.

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

Within 1 month Over 3 months	31 March 2004 HK$’000 – – –	30 June 2004 HK$’000 4,446 689
		5,135

(g) Trade payables

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

Within 1 month 1 to 2 months 2 to 3 months Over 3 months Bank loans Bank loans	31 March 2004 HK$’000 – – – – – 31 March 2004 HK$’000 –	30 June 2004 HK$’000 3,629 56 50 477
		4,212

		30 June 2004 HK$’000 8,483

(h) Bank loans

As at 30 June 2004, certain customers of the Xin Hua Group have provided guarantees for the above bank loans.

(i) Loans from shareholders

The balances are unsecured, interest-free and are not repayable within one year.

(j) Share capital

Company	31 March	31 March	30 June	30 June
	2004	2004	2004	2004
	US$’000	HK$’000	US$’000	HK$’000
Authorised, issued and fully paid:
50,000 shares of US$1 each	50	389	50	389

Xin Hua has an authorised share capital of US$50,000 comprising 50,000 ordinary shares of US$1 each. 50,000 ordinary shares of US$1 each were issued on incorporation to the shareholders at par for cash to provide the initial capital of Xin Hua.

– 57 –

APPENDIX II ACCOUNTANTS’ REPORTS ON THE XIN HUA GROUP

4. BALANCE SHEETS (CONTINUED)

Notes: (continued)

(k) Reserves

(i) Xin Hua Group

The amounts of the Xin Hua Group’s reserves and the movements therein for the Relevant Periods are presented in the consolidated statements of changes in equity of this report.

(ii) Xin Hua

Xin Hua has no operating results in the Relevant Periods.

(l) Operating lease arrangements

As lessee

The Xin Hua Group lease its land and buildings under operating lease arrangements, with leases negotiated for terms ranging from one to five years.

At 31 March 2004 and 30 June 2004, the Xin Hua Group had total future minimum lease payments under noncancellable operating leases falling due as follows:

Within one year In the second to fifth years, inclusive	The Xin Hua Group 31 March 30 June 2004 2004 HK$’000 HK$’000 107 557 – 108 107 665	The Xin Hua Group 31 March 30 June 2004 2004 HK$’000 HK$’000 107 557 – 108 107 665
		665

Xin Hua did not have any operating lease arrangement as at 31 March 2004 and 30 June 2004.

(m) Commitments

In addition to the operating lease arrangements detailed in note (l) above, Xin Hua had the following commitments at the balance sheet date:


	31 March	30 June
	2004	2004
	HK$’000	HK$’000
Commitment authorised, contracted for,
in respect of investment in a subsidiary	131,928	131,928

(n) Contingent liabilities

The Xin Hua Group and Xin Hua did not have any significant contingent liabilities as at 31 March 2004 and 30 June 2004.

– 58 –

APPENDIX II ACCOUNTANTS’ REPORTS ON THE XIN HUA GROUP

5. CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

The consolidated statements of changes in equity of the Xin Hua Group for the Relevant Periods, prepared on the basis as set out in Section 1 above, are as follows:

Issue of shares Net loss for the period Exchange realignment At 31 March 2004 and 1 April 2004 Net loss for the period At 30 June 2004 Issue of shares and balance at 30 June 2003	Issued capital HK$’000 389 – – 389 – 389 389	Exchange fluctuation Accumulated reserve losses HK$’000 HK$’000 – – – (2,055) 152 – 152 (2,055) – (467) 152 (2,522) – –	Total HK$’000 389 (2,055) 152 (1,514) (467) (1,981) 389

– 59 –

APPENDIX II ACCOUNTANTS’ REPORTS ON THE XIN HUA GROUP

6. CONSOLIDATED CASH FLOW STATEMENTS

The consolidated cash flow statements of the Xin Hua Group for the Relevant Periods, prepared on the basis as set out in Section 1 above, are as follows:

		Period from	Period	from
		2 June 2003	2 June 2003
		(date of	(date of
		incorporation)	incorporation)	1 April 2004
		to 31 March	to 30 June	to 30 June
		2004	2003	2004
	Notes	HK$’000	HK$’000	HK$’000
CASH FLOWS FROM OPERATING
ACTIVITIES
Loss before tax		(1,676)	–	(110)
Adjustments for:
Finance costs		–	–	122
Interest income	3(a)	(11)	–	(30)
Loss on disposal of fixed assets	3(b)	–	–	14
Depreciation	3(b)	14	–	178
Negative goodwill recognised as income	3(a)	–	–	(44)
Amortisation of goodwill	3(b)	28	–	90
Share of profits and losses of associates		(1,115)	–	(795)
Operating loss before working capital
changes		(2,760)	–	(575)
Decrease in inventories		–	–	39
Decrease in trade receivables		–	–	828
Decrease/(increase) in prepayments,
deposits and other receivables		(28,070)	–	29,392
Decrease in trade payables		–	–	(549)
Increase/(decrease) in accrued liabilities and
other payables		60	–	(5,152)
Increase/(decrease) in an amount due to
an associate		471	–	(471)
Cash generated from/(used in) operations		(30,299)	–	23,512
Interest paid		–	–	(122)
Tax paid		–	–	(25)
Net cash inflow/(outflow) from operating
activities (page 61)		(30,299)	–	23,365

– 60 –

APPENDIX II ACCOUNTANTS’ REPORTS ON THE XIN HUA GROUP

6. CONSOLIDATED CASH FLOW STATEMENTS (CONTINUED)

		Period from		Period from	Period from
		2 June 2003		2 June 2003
		(date of		(date of
		incorporation)	incorporation)		1 April 2004
		to 31 March		to 30 June	to 30 June
		2004		2003	2004
	Notes	HK$’000		HK$’000	HK$’000
Net cash inflow/(outflow) from operating
activities (page 60)		(30,299)		–	23,365
CASH FLOWS FROM INVESTING
ACTIVITIES
Interest received	3(a)	11		–	30
Purchases of fixed assets		(346)		–	(1,551)
Acquisition of associates		(9,425)		–	–
Acquisition of subsidiaries	6	–		–	(17,868)
Net cash outflow from investing activities		(9,760)		–	(19,389)
CASH FLOWS FROM FINANCING
ACTIVITIES
Loans from shareholders		54,404		–	–
Proceeds from issue of share capital		389		389	–
Net cash inflow from financing activities		54,793		389	–
NET INCREASE IN CASH AND CASH
EQUIVALENTS		14,734		389	3,976
Cash and cash equivalents at beginning
of period		–		–	14,886
Effect of foreign exchange rate changes, net		152		–	–
CASH AND CASH EQUIVALENTS AT END
OF PERIOD		14,886		389	18,862

ANALYSIS OF BALANCES OF
CASH AND CASH EQUIVALENTS
Cash and bank balances		14,886		389	18,862

– 61 –

APPENDIX II ACCOUNTANTS’ REPORTS ON THE XIN HUA GROUP

6. CONSOLIDATED CASH FLOW STATEMENTS (CONTINUED)

Acquisition of subsidiaries

Net assets acquired: Fixed assets Long term investment Inventories Trade receivables Prepayments, deposits and other receivables Cash and bank balances Trade payables Tax payable Accrued liabilities and other payables Bank loans Minority interests Goodwill Negative goodwill Satisfied by: Cash Reclassification to interests in subsidiaries from interests in associates Cash consideration Cash and bank balances acquired Net outflow of cash and cash equivalents in respect of the acquisition of subsidiaries	31 March 2004 HK$’000 – – – – – – – – – – – – – – – – – – – – –	30 June 2003 2004 HK$’000 HK$’000 – 24,069 – 188 – 1,114 – 5,963 – 26,629 – 9,221 – (4,761) – (2,530) – (17,337) – (8,483) – 34,073 – (545) – 7,570 – (4,396) – 36,702 – 27,089 – 9,613 – 36,702 – (27,089) – 9,221 – (17,868)

On 21 May 2004 and 31 May 2004, the Xin Hua Group acquired a 99% interest in Yan Ting and a further 66.99% interest in Hong Sen, Long Teng and an effective 46.89% interest in Glass Product from third parties, respectively. Yan Ting, Hong Sen and Long Teng are engaged in the distribution and supply of piped natural gas and installation of natural gas distribution facilities. Glass Product is engaged in the manufacturing and sales of glass products. The purchase consideration of HK$27,089,000 for the acquisition was in the form of cash, and has been being paid at the acquisition date.

Since its acquisition, Yan Ting, Hong Sen, Long Teng and Glass Product contributed HK$4,345,000 to the Xin Hua Group’s turnover and HK$117,000 to the consolidated loss after tax and before minority interests for the period ended 30 June 2004. In the case of the associate which was reclassified to a subsidiary, these turnover and loss after tax amounts exclude the former associate’s contribution to the results prior to its becoming a subsidiary.

– 62 –

APPENDIX II ACCOUNTANTS’ REPORTS ON THE XIN HUA GROUP

7. SEGMENT INFORMATION

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

In determining the Xin Hua Group’s business segments, revenue and results are attributed to the segments based on the nature of their operations.

(a) Business segments

The following tables present revenue and certain asset and expenditure information for the Xin Hua Group’s business segments.

Distribution and supply of piped natural gas and installation of natural gas distribution facilities Period from Period from 2 June 2003 2 June 2003 (date of (date of incorporation) incorporation) to 31 March to 30 June 2004 2003 HK$’000 HK$’000 Segment revenue: Sales to external customers – – Segment results (2,802 ) – Interest income Loss from operating activities Finance costs Share of profits and losses of associates 1,053 – Loss before tax Tax Loss before minority interests Minority interests Net loss from ordinary activities attributable to shareholders	Manufacturing and sale of glass products Period from Period from 2 June 2003 2 June 2003 Period from (date of (date of 1 April 2004 incorporation) incorporation) to 30 June to 31 March to 30 June 2004 2004 2003 HK$’000 HK$’000 HK$’000 3,759 – – (914 ) – – 801 62 –	Consolidated Period from Period from 2 June 2003 2 June 2003 Period from (date of (date of 1 April 2004 incorporation) incorporation) to 30 June to 31 March to 30 June 2004 2004 2003 HK$’000 HK$’000 HK$’000 586 – – 101 (2,802 ) – 11 – (2,791 ) – – – (6 ) 1,115 – (1,676 ) – (379 ) – (2,055 ) – – – (2,055 ) –	Period from 1 April 2004 to 30 June 2004 HK$’000 4,345

			(813 30
			(783 (122 795
			(110 (364
			(474 7
			(467

– 63 –

APPENDIX II ACCOUNTANTS’ REPORTS ON THE XIN HUA GROUP

7. SEGMENT INFORMATION (CONTINUED)

(a) Business segments (continued)

	Distribution and supply	Distribution and supply	Distribution and supply	Distribution and supply
	of piped natural gas
		and installation of				Manufacturing
		natural	gas					and sale of
	distribution		facilities				glass			products						Consolidated
	31 March		30 June			31 March					30 June				31 March				30 June
		2004	2004				2004						2004			2004			2004
	HK$’000		HK$’000			HK$’000					HK$’000				HK$’000				HK$’000
Segment assets	38,064		54,410					–					7,225		38,064				61,635
Unallocated assets															14,886				18,862
Segment liabilities	(54,464)		(65,555)					–					(5,306)		(54,464)				(70,861)
Unallocated liabilities																–			(11,617)

		Distribution
		and supply
		of piped
		natural gas
		and
		installation of
		natural gas					Manufacturing
		distribution						and sale of
		facilities					glass products									Consolidated
Period from		Period from				Period from		Period from							Period from	Period		from
2 June 2003		2 June 2003				2 June 2003		2 June 2003							2 June 2003	2 June		2003
	(date of	(date of	Period	from		(date of				(date of	Period from				(date of		(date of		Period from
incorporation)		incorporation)	1 April	2004	incorporation)		incorporation)				1	April 2004		incorporation)		incorporation)			1 April 2004
to 31 March		to 30 June	to 30	June		to 31 March		to	30 June			to 30 June			to 31 March	to	30	June	to 30 June
	2004	2003		2004		2004				2003			2004		2004			2003	2004
HK$’000		HK$’000	HK$’000			HK$’000		HK$’000					HK$’000		HK$’000	HK$’000			HK$’000
Other segment information:
Depreciation	14	–		119		–				–			59		14			–	178
Amortisation of goodwill	28	–		90		–				–			–		28			–	90
Negative goodwill recognised
as income	–	–		(44 )		–				–			–		–			–	(44	)
Capital expenditure	346	–	1,520			–				–			31		346			–	1,551

(b) Geographical segment

All assets and liabilities and customers of the Xin Hua Group are located in the PRC.

8. SUBSEQUENT EVENTS

No significant events took place subsequent to 30 June 2004.

9. SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements have been prepared by the Xin Hua Group or any of the companies comprising the Xin Hua Group in respect of any period subsequent to 30 June 2004.

Yours faithfully,

ERNST & YOUNG

Certified Public Accountants Hong Kong

– 64 –

FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

For illustrative purpose only, the proforma financial information prepared in accordance with Rule 4.29 of the Listing Rules is set out here to provide additional information on the proforma financial information of the Enlarged Group to illustrate the performance and financial position of the Enlarged Group after completion of the acquisition of a 51% equity interest in Xin Hua Resource Investment Limited (“Xin Hua”), a 49% associate of KEL Holdings Limited (the “Company”), and a related shareholder’s loan (collectively the “Second Xin Hua Acquisition”), and before the transactions completed on 30 April 2004, further details of were included in the Company’s circular dated 31 March 2004 (the “Transactions”) and on pages 69 of Appendix III of this circular.

The proforma financial information is derived after making a number of adjustments based on directors’ judgments and assumptions. Although reasonable care has been exercised in preparing the said information, the amounts presented by their nature are inherently subject to change and may not give a true picture of the actual financial position or performance of the Enlarged Group as at 31 March 2004.

(A) UNAUDITED PROFORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

UNAUDITED PROFORMA COMBINED PROFIT AND LOSS ACCOUNT, COMBINED ASSETS AND LIABILITIES AND COMBINED CASH FLOW STATEMENT OF THE ENLARGED GROUP

On 2 August 2004, Brilliant China Investment Limited (“Brilliant China”), a wholly-owned subsidiary of the Company, as purchaser entered into a conditional sale and purchase agreement (the “Agreement”) with Camture Limited as vendor. Pursuant to the Agreement, Brilliant China has conditionally agreed to acquire an additional 51% equity interest in Xin Hua and a related shareholder’s loan at an aggregate consideration of HK$65,000,000. In addition, the Group completed certain transactions on 30 April 2004, further details of which were included in the Company’s circular dated 31 March 2004 and on page 69 of Appendix III of this circular.

Set out below is the unaudited proforma combined profit and loss account and assets and liabilities of the Enlarged Group assuming completion of the Second Xin Hua Acquisition and before the completion of the Transactions (the “Proforma Statements”). The Proforma Statements have been prepared based on the audited financial statements of the Group and the accountants’ report of the Xin Hua Group, as set out in Appendix II to this circular, as at 31 March 2004, and after making certain proforma combination adjustments as set out below.

– 65 –

APPENDIX III FINANCIAL INFORMATION OF THE ENLARGED GROUP

1. UNAUDITED PROFORMA COMBINED PROFIT AND LOSS ACCOUNT OF THE ENLARGED GROUP

Turnover Cost of sales Gross profit Other revenue and gains Administrative expenses Other operating expenses Write-back of provision for doubtful debts LOSS FROM OPERATING ACTIVITIES Finance costs Share of loss of a jointly-controlled entity Share of losses of associates Loss before tax Tax LOSS BEFORE MINORITY INTERESTS Minority interests NET LOSS FROM ORDINARY ACTIVITIES ATTRIBUTABLE TO SHAREHOLDERS	The Xin Hua Proforma Group for combined The Group the period Enlarged for the from 2 June Group for the year 2003 (date of twelve months ended incorporation) ended 31 March to 31 March Proforma 31 March 2004 2004 adjustments 2004 HK$’000 HK$’000 HK$’000 Notes HK$’000 38,243 – 49,319 1 87,562 (35,246) – (38,159) 1 (73,405) 2,997 – 14,157 1,424 11 698 1 2,133 (15,135) (2,710) (5,596) 1 (23,441) – (92) (3,747) 1,2 (3,839) 2,233 – 2,233 (8,481) (2,791) (8,757) (518) – (577) 1 (1,095) (25) – (25) – 1,115 (1,115) 1 – (9,024) (1,676) (9,877) (135) (379) (1,192) 1 (1,706) (9,159) (2,055) (11,583) 27 – (416) 1 (389) (9,132) (2,055) (11,972)	The Xin Hua Proforma Group for combined The Group the period Enlarged for the from 2 June Group for the year 2003 (date of twelve months ended incorporation) ended 31 March to 31 March Proforma 31 March 2004 2004 adjustments 2004 HK$’000 HK$’000 HK$’000 Notes HK$’000 38,243 – 49,319 1 87,562 (35,246) – (38,159) 1 (73,405) 2,997 – 14,157 1,424 11 698 1 2,133 (15,135) (2,710) (5,596) 1 (23,441) – (92) (3,747) 1,2 (3,839) 2,233 – 2,233 (8,481) (2,791) (8,757) (518) – (577) 1 (1,095) (25) – (25) – 1,115 (1,115) 1 – (9,024) (1,676) (9,877) (135) (379) (1,192) 1 (1,706) (9,159) (2,055) (11,583) 27 – (416) 1 (389) (9,132) (2,055) (11,972)
		14,157 2,133 (23,441) (3,839) 2,233
		(8,757) (1,095) (25) –
		(9,877) (1,706)
		(11,583) (389)
		(11,972)

Notes:

The proforma combined adjustments reflect the Group’s additional 51% equity interest in the Xin Hua Group which includes its 100% equity interest in Beijing Zhong Min Gas Co. Ltd. (“Zhong Min”), 50.99% equity interest in Mian Zhu City Hong Sen Natural Gas Co., Ltd. (“Hong Sen”), 50.99% equity interest in Mian Zhu City Long Teng Gas Installation Co. Ltd. (“Long Teng”), 35.70% equity interest in Mian Zhu City Hongsen Glass Products Company Limited (“Glass Product”) and 50.49% equity interest in LongXin (YanTing) Natural Gas Company Limited (“Yan Ting”) on the basis as if the aforesaid shareholding structure of Xin Hua Group had been in existence since 2 June 2003, date of incorporation of Xin Hua.

For the purpose of preparing the unaudited proforma combined statement of assets and liabilities of the Enlarged Group after the completion of the Second Xin Hua Acquisition (the “Completion”), the net fair value of the identifiable assets and liabilities of the Xin Hua Group on 2 June 2003 (date of incorporation), on the basis as if the aforesaid shareholding structure had been in existence since 2 June 2003, is applied in the calculation of the estimated goodwill arising from the Second Xin Hua Acquisition.

– 66 –

APPENDIX III FINANCIAL INFORMATION OF THE ENLARGED GROUP

1. UNAUDITED PROFORMA COMBINED PROFIT AND LOSS ACCOUNT OF THE ENLARGED GROUP (CONTINUED)

The adjustment represents the estimated goodwill of approximately HK$37,056,000 arising from the acquisition of a 51% equity interest in Xin Hua by the Company. For illustrative purposes, the estimated goodwill was amortised on a straight-line basis over a 10-year amortisation period.
Since the fair value of the assets and liabilities of the Xin Hua Group at the date of Completion will be different from their adjusted book value used in the preparation of the unaudited proforma combined statement of assets and liabilities below, the actual goodwill of the Enlarged Group arising from the Second Xin Hua Acquisition will be different from the estimated goodwill as shown above.

2. UNAUDITED PROFORMA COMBINED STATEMENT OF ASSETS AND LIABILITIES OF THE ENLARGED GROUP AFTER COMPLETION

					Proforma
					consolidated
		The Xin Hua			Enlarged
	The Group as	Group as at			Group as at
	at 31 March	31 March	Proforma		31 March
	2004	2004	adjustments		2004
	HK$’000	HK$’000	HK$’000	Notes	HK$’000
NON-CURRENT ASSETS
Fixed assets	279	332	24,356	1	24,967
Goodwill	–	–	41,498	1,2	41,498
Interests in a jointly-controlled
entity	556	–			556
Interests in associates	–	9,662	(9,662)	1	–
Long term investments	–	–	188	1	188
	835	9,994			67,209
CURRENT ASSETS
Due from fellow subsidiaries	1,695	–			1,695
Gross amounts due from
contract customers	750	–			750
Properties held for sale	46,569	–			46,569
Inventories	–	–	1,532	1	1,532
Trade receivables	5,945	–	4,293	1	10,238
Prepayments, deposits and
other receivables	9,925	28,070	8,313	1	46,308
Pledged time deposits	5,283	–			5,283
Cash and bank balances	1,051	14,886	9,075	1	25,012
	71,218	42,956			137,387

– 67 –

APPENDIX III FINANCIAL INFORMATION OF THE ENLARGED GROUP

2. UNAUDITED PROFORMA COMBINED STATEMENT OF ASSETS AND LIABILITIES OF THE ENLARGED GROUP AFTER COMPLETION (CONTINUED)

						Proforma
						combined
		The Xin Hua				Enlarged
	The Group as	Group as at				Group as at
	at 31 March		31 March	Proforma		31 March
	2004		2004	adjustments		2004
	HK$’000		HK$’000	HK$’000	Notes	HK$’000
CURRENT LIABILITIES
Trade and bills payables	3,736		–	13,262	1	16,998
Retention money payable	1,146		–			1,146
Tax payable	12		–	1,972	1	1,984
Other payables and accruals	3,759		60	87,855	1,3	91,674
Provision for scheme debts	1,047		–			1,047
Gross amounts due to contract
customers	4,947		–			4,947
Interest-bearing bank and
other borrowings	4,778		–	8,483	1	13,261
Due to fellow subsidiaries	11,652		–			11,652
Due to the ultimate holding
company	202		–			202
	31,279		60			142,911
NET CURRENT ASSETS/
(LIABILITIES)	39,939		42,896			(5,524)
TOTAL ASSETS LESS
CURRENT LIABILITIES	40,774		52,890			61,685
NON-CURRENT LIABILITIES
Loans from shareholders	–		(54,404) 27,746		1	(26,658)
Interest-bearing bank and
other borrowings	(7,432)		–			(7,432)
	(7,432)		(54,404)			(34,090)
MINORITY INTERESTS	(274)		–	(941)	1	(1,215)
	33,068		(1,514)			26,380

SHAREHOLDERS’ EQUITY	33,068		(1,514) (5,174)		1,2,3	26,380

Notes:

The adjustments represent the financial effects of the following transactions:

1 (i) Acquisitions of 50.99% equity interests in each of Hong Sen and Long Teng a 35.70% equity interest in glass product and a 50.49% equity interest in Yan Ting by Zhong Min, and the related eliminations; and
(ii) On 2 August 2004, the Group entered into an agreement with an independent third party to acquire a further 51% equity interest in the Xin Hua Group and a related shareholder’s loan for HK$65,000,000. The consideration will be satisfied by cash. Following the completion of such acquisition, Xin Hua will become a wholly-owned subsidiary.

– 68 –

FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

2. UNAUDITED PROFORMA COMBINED STATEMENT OF ASSETS AND LIABILITIES OF THE ENLARGED GROUP AFTER COMPLETION (CONTINUED)

The adjustment represents the estimated goodwill of approximately HK$37,056,000 arising from the acquisition of a 51% equity interest in Xin Hua by the Company. For illustrative purposes, the estimated goodwill was amortised on a straight-line basis over a 10- year amortisation period.
The estimated expense for the acquisition of the Xin Hua Group.

Additional information

The Group completed the following transactions on 30 April 2004. They have not been taken into account in the unaudited proforma combined statement of assets and liabilities of the Enlarged Group as at 31 March 2004.

(i) On 18 February 2004, the Group entered into an agreement with Deson to dispose of the entire issued share capital of Kenworth Group Limited, a subsidiary of the Company, and a related shareholder’s loan (the “Kenworth Disposal”) for HK$7,000,000 to Deson. The consideration was paid by Deson in cash and gave rise to a gain on disposal currently estimated at approximately HK$6,000,000. The Kenworth Disposal was approved by the independent shareholders of the Company at a special general meeting on 16 April 2004 and was completed on 30 April 2004.
(ii) On 18 February 2004, the Group entered into an agreement with Deson to acquire the entire issued share capital of Penmark Limited (“Penmark”) and a related shareholder’s loan (collectively the “Penmark Acquisition”) at a consideration of HK$7,500,000. The consideration was satisfied by issuing 75,000,000 shares of the Company at HK$0.10 each. The Company also granted Deson an option to subscribe for one option share for every two shares issued at the option exercise price of HK$0.105 per option share. The Penmark Acquisition was approved by the independent shareholders of the Company at a special general meeting on 16 April 2004 and was completed on 30 April 2004.
(iii) On 18 February 2004, the Group entered into an agreement with independent third parties to acquire an aggregate 49% equity interest in Xin Hua Resource Investment Limited (“Xin Hua”) and the related shareholders’ loans (collectively the “First Xin Hua Acquisition”) for HK$29,500,000. The consideration for the First Xin Hua Acquisition was satisfied by way of issuing 295,000,000 shares of the Company at HK$0.10 each. The First Xin Hua Acquisition was approved by the shareholders of Company at a special general meeting on 16 April 2004 and was completed on 30 April 2004;
(iv) On 18 February 2004, the Company entered into a placing agreement with a placing agent to place up to 800,000,000 new shares at a price of HK$0.10 each. An aggregate of 400,000,000 placing shares were successfully placed, resulting in a cash inflow of HK$40,000,000 before expenses. The transaction was approved by the shareholders of the Company on 16 April 2004 and was completed on 30 April 2004.

On 18 February 2004, the Company entered into a subscription agreement with Super Win Development Limited (“Super Win”), the immediate holding company of the Company. The Company issued 325,000,000 new shares (the “Subscription Shares”) to Super Win at a price of HK$0.10 each for an aggregate consideration of HK$32,500,000 (the “Subscription”). The Subscription was approved by the independent shareholders of the Company at a special general meeting on 16 April 2004 and was completed on 30 April 2004.

– 69 –

APPENDIX III FINANCIAL INFORMATION OF THE ENLARGED GROUP

3. UNAUDITED PROFORMA COMBINED CASH FLOW STATEMENT OF THE ENLARGED GROUP

The following table is an illustrative and unaudited proforma combined cash flow statement of the Enlarged Group for the twelve months ended 31 March 2004 which has been prepared for the purpose of illustration as if the Completion had taken place on 2 June 2003 (date of incorporation of Xin Hua).

					Proforma
		The Xin Hua			combined
	The Group	Group from			Enlarged
	for the	2 June 2003			Group for the
	year	(date of			twelve months
	ended	incorporation)			ended
	31 March	to 31 March	Proforma		31 March
	2004	2004	adjustments		2004
	HK$’000	HK$’000	HK$’000	Notes	HK$’000
CASH FLOWS FROM
OPERATING ACTIVITIES
Loss before tax	(9,024)	(1,676)			(10,700)
Adjustments for:
Finance costs	518	–			518
Share of loss of a
jointly-controlled entity	25	–			25
Share of losses of associates	–	(1,115)			(1,115)
Interest income	(62)	(11)			(73)
Depreciation	125	14			139
Gain on disposal of fixed assets	(2)	–			(2)
Goodwill amortisation	–	28			28
Operating loss before working
capital changes	(8,420)	(2,760)			(11,180)
Increase in amounts due from
fellow subsidiaries	(824)	–			(824)
Increase in amount due from
a jointly-controlled entity	(81)	–			(81)
Increase in amounts due to
an associate	–	471			471
Decrease in gross amounts due
from contract customers	253	–			253
Decrease in trade receivables	589	–			589
Increase in prepayments, deposits
and other receivables	(8,306)	(28,070)			(36,376)
Increase in trade and bills payables	2,587	–			2,587
Increase in retention money payable	429	–			429
Increase in other payables
and accruals	1,941	60			2,001
Decrease in gross amounts due to
contract customers	(1,533)	–			(1,533)
Increase in amounts due to
fellow subsidiaries	11,531	–			11,531
Increase in amount due to the ultimate
holding company	202	–			202
Cash used in operations	(1,632)	(30,299)			(31,931)
Overseas taxes paid	(135)	–			(135)
Net cash outflow from
operating activities (page 71)	(1,767)	(30,299)			(32,066)

– 70 –

FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

3. UNAUDITED PROFORMA COMBINED CASH FLOW STATEMENT OF THE ENLARGED GROUP (CONTINUED)

Net cash outflow from operating
activities (page 70)
CASH FLOWS FROM INVESTING
ACTIVITIES
Interest received
Purchase of fixed assets
Proceeds from disposal of
fixed assets
Capital contribution to
jointly-controlled entities
Acquisition of subsidiaries
Acquisition of associates
Repayment to the minority
shareholders
Increase in pledged time deposits
Net cash outflow from investing
activities
CASH FLOWS FROM FINANCING
ACTIVITIES
Loans from shareholders
Proceeds from issue of share capital
Interest paid
Redemption of convertible notes
Increase in trust receipt loans
New bank loans
Repayment of bank loans
Net cash outflow from financing
activities
NET INCREASE/(DECREASE) IN
CASH AND CASH
EQUIVALENTS
Cash and cash equivalents at the
beginning of the year
Effect of foreign exchange rate
changes, net
Cash and cash equivalents at the
end of the year
ANALYSIS OF BALANCES OF
CASH AND CASH
EQUIVALENTS
Cash and bank balances
Bank overdrafts

Proforma
The Xin Hua
combined
The Group
Group from
Enlarged
for the
2 June 2003
Group for the
year
(date of
twelve months
ended
incorporation)
ended
31 March
to 31 March
Proforma
31 March
2004
2004
adjustments
2004
HK$’000
HK$’000
HK$’000
Notes
HK$’000
(1,767)
(30,299)
(32,066)
62
11
73
(37)
(346)
(383)
2
–
2
(500)
–
(500)
(454)
–
9,075
1
8,621
–
(9,425)
(9,425)
(382)
–
(382)
(161)
–
(161)
(1,470)
(9,760)
(2,155)
–
54,404
54,404
–
389
389
(518)
–
(518)
(9,646)
–
(9,646)
261
–
261
8,500
–
8,500
(383)
–
(383)
(1,786)
54,793
53,007
(5,023)
14,734
18,786
2,242
–
2,242
–
152
152
(2,781)
14,886
21,180
1,051
14,886
9,075
1
25,012
(3,832)
–
(3,832)
(2,781)
14,886
21,180

Note:

On 2 August 2004, the Group entered into an agreement with an independent third party to acquire a further 51% equity interest in the Xin Hua Group and a related shareholder’s loan for HK$65,000,000. The consideration was satisfied by cash. Following the completion of such acquisition, Xin Hua will become a wholly-owned subsidiary.

– 71 –

FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

(B) LETTER FROM THE REPORTING ACCOUNTANTS

15th Floor Hutchison House 10 Harcourt Road Central Hong Kong

28 September 2004

The Directors KEL Holdings Limited

Dear Sirs,

We report on the unaudited proforma financial information of the Enlarged Group (the Group (as defined herein) together with the Xin Hua Group (as defined herein)) set out on pages 65 to 71 in Appendix III to the circular dated 28 September 2004 issued by KEL Holdings Limited (the “Company”, and together with its subsidiaries are referred to as the “Group”), solely for illustrative purposes, to provide information about how the proposed acquisition of an additional 51% equity interest in the Xin Hua Group by the Company and the transactions as described in the accompanying introduction to the unaudited proforma financial information of the Enlarged Group might have affected the historical financial information in respect of the Group.

The historical financial information is derived from the audited historical financial information of the Group and of the Xin Hua Group appearing elsewhere herein. The basis of preparation of the proforma financial information is set out in the accompanying introduction and notes to the unaudited proforma financial information of the Enlarged Group.

Responsibilities

It is the responsibility solely of the directors of the Company to prepare the proforma financial information in accordance with paragraph 29(1) of Chapter 4 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”).

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

Basis of opinion

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

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

– 72 –

FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

(B) LETTER FROM THE REPORTING ACCOUNTANTS (CONTINUED)

Basis of opinion (continued)

The proforma financial information is for illustrative purposes only, based on the directors’ judgements and assumptions as set out on page 65 to 71, and because of its nature, it does not provide any assurance or indication that any event will take place in the future and may not be indicative of the financial position or results of:

the Enlarged Group had the transaction actually occurred as at the dates indicated therein; or
the Enlarged Group at any future date or for any future periods.

Opinion

In our opinion:

(a) the accompanying unaudited proforma financial information has been properly compiled on the basis stated;
(b) such basis is consistent with the accounting policies of the Company; and
(c) the adjustments are appropriate for the purposes of the proforma financial information as disclosed pursuant to paragraph 29(1) of Chapter 4 of the Listing Rules.

Yours faithfully,

Ernst & Young

Certified Public Accountants

Hong Kong

– 73 –

APPENDIX III FINANCIAL INFORMATION OF THE ENLARGED GROUP

D. MANAGEMENT DISCUSSION AND ANALYSIS

Business Review

For the year ended 31 March 2002

During the year, the Group was mainly involved in the electrical and mechanical engineering and maintenance projects in both the public and the private sectors in Hong Kong.

The Group recorded a turnover HK$19,117,000 for the year which represented an increase of 36% as compared to that of the year ended 2001. The net loss attributable to Shareholders amounted to approximately HK$10,860,000. Basic loss per Share was approximately HK1.48 cents. The increase in turnover was due to the expansion of customer base through the existing network in construction industry in Hong Kong and the PRC of Deson, the ultimate holding company of the Group. On 11 October 2001, the Group proposed to enter into a number of continuing connected transactions with Deson for the provision of electrical and mechanical engineering services by the Group to Deson. This proposal was approved by the Shareholders of the Company on 22 November 2001. Such an arrangement enhanced the flexibility of the Group to explore the electrical and mechanical engineering business in both Hong Kong and the PRC with the assistance of Deson which has extensive connections in the PRC construction industry. Apart from this, the Group has continued to seek opportunity to broaden the scope type of business activities of the Group.

As at 31 March 2002, the Group’s total assets amounted of HK$22,459,000 and current liabilities, noncurrent liabilities, shareholders’ equity and minority interests of HK$7,128,000, HK$9,675,000, HK$4,928,000 and HK$728,000 respectively.

The Group’s long-term capital comprised shareholders’ equity, minority interest and non-current liabilities with an aggregate amount of approximately HK$15,331,000. The Group’s long term borrowings represented convertible notes issued under the schemes of arrangement approved by the Shareholders on 10 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 at any time up to 1 September 2003, being the third anniversary of the date of the issue. The Group’s gearing ratio was 63% which was calculated based on the long term borrowings of HK$9,675,000 and long term capital of HK$15,331,000.

The Group’s receivables and payables were dominated mainly in Hong Kong dollars and Renminbi. Since Hong Kong dollars and Renminbi are relatively stable, the Company consider the exchange risk is not significant.

As at 31 March 2002, the Group had 74 employees, one of whom was based in the PRC. The remuneration policy and packages of the Group’s employees are reviewed and approved by the Directors. Apart from pension funds, discretionary bonuses are linked to individual performance as recognition of and reward for value creation.

The Group’s banking facilities are secured by the Group’s time deposits of HK$5,500,000.

Xin Hua was only incorporated on 2 June 2003 and therefore had no attributable business in 2002.

For the year ended 31 March 2003

During the year, the Group was mainly involved in the electrical and mechanical engineering and maintenance projects in both the public and private sectors in Hong Kong.

The Group turnover for the year was HK$31,136,000 which represented an increase of 62.9% as compared to that of the year ended 2002. The Group recorded a net loss attributable to Shareholders of approximately HK$8,760,000 and basic loss per Share of approximately HK1.02 cents. The increase in turnover was due to the expansion of customer base through the existing network in construction industry in Hong Kong and the PRC of Deson and the rebuild of confidence from both the private and public sector in Hong Kong.

– 74 –

FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

As at 31 March 2003, the Group had total assets of HK$17,274,000, and current liabilities, deficiency in assets and minority interests of HK$20,420,000, HK$3,829,000 and HK$683,000, respectively.

The Group’s total current assets and current liabilities were approximately HK$16,907,000 and HK$20,420,000 respectively as at 31 March 2003 and the current ratio was approximately 0.83. No gearing ratio was calculated as the Group did not have any long-term liabilities as at 31 March 2003. The Group’s long term capital comprised shareholders’ equity.

As at 31 March 2003, the Group’s aggregate cash amounted to HK$7,364,000, representing approximately 43.56% of total current assets. The cash balance and convertible notes were principally denominated in Hong Kong dollars. Hence, there is no significant exposure to foreign exchange fluctuation.

As at 31 March 2003, the Group had 86 employees, none of whom was based in the PRC.

The remuneration policy and package of the Group’s employees are reviewed and approved by the Directors. Apart from pension funds, discretionary bonuses are linked to individual performance as recognition of and reward for value creation.

The Group’s banking facilities are secured by the Group’s time deposits of HK$5,122,000.

Details of the contingent liabilities of the Group are set out in “Material Litigation” section of Appendix V of this circular.

Xin Hua was only incorporated on 2 June 2003 and therefore had no attributable business in 2003.

For the year ended 31 March 2004

During the year, the Group was mainly involved in property holding and investment, the provision of electrical and mechanical engineering services and the distribution, supply and installation of piped natural gas.

Discontinued operation in Electrical and Mechanical Engineering Services

Market sentiment was, during the year under review, adversely affected by the unfavourable economic conditions in Hong Kong, rising unemployment rate and other negative factors. However, due to the expansion of customer base through the existing network in construction industry in Hong Kong and PRC of Deson, the Group can still achieve a turnover of HK$38 million which represented an increase of 22.8% as compared with last year.

Due to some positive signs on the Hong Kong economy, the Group was awarded several engineering projects during this year including the installation of Trunk Sewers and Effluent Export Pipeline in Ngong Ping Sewage Treatment Plant, Lantau Island, New Territories, Buildings Services Installation for a secondary school at Nam Fung Road, Aberdeen, Hong Kong and several school improvement works. At the Latest Practicable Date, the Group has projects on hand with a total contractual sums of over HK$300 million.

Property holdings and investment

To strengthen the financial and asset positions, the Group acquired 24th, 27th and 28th floor of Zhongda Square, Shanghai, PRC together with 19 carparks in May 2003 at a total consideration of HK$46,000,000. The consideration was satisfied by the issue of 657,142,857 Shares. During this year, this segment contributed a turnover and profit of HK$1,351,000 and HK$904,000, respectively to the results of the Group. On 30 April 2004, the Group further acquired unit 2 of level 3A of Zhongda Square. The Group now has a total of 3,632.20 m[2] of Zhongda Square together with 19 car parks as the reserve for property holdings and investment purpose.

– 75 –

FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Natural Gas Business

The PRC has historically relied heavily on coal as its primary energy source but the PRC government in recent years encouraged the use of other more environmentally friendly forms of fuel such as natural gas to combat the pollution and environmental damage caused by coal combustion. The natural gas market currently only share a very low percentage of the total energy source supply in PRC and the Directors are of the view that this business segment has a high potential for future growth.

As at 31 March 2004, the Group had total assets of HK$204,596,000, and current liabilities, long-term liabilities, shareholders’ equity and minority interests of HK$142,911,000, HK$34,090,000, HK$26,380,000 and HK$1,215,000 respectively.

The Group’s gearing ratio was 55.26% which was calculated based on the long term borrowings of HK$34,090,000 and long term capital of HK$61,685,000.

The Group’s receivables and payables were dominated mainly in Hong Kong dollars and Renminbi. Since Hong Kong dollars and Renminbi are relatively stable, we consider the exchange risk is not significant.

The Group had 274 employees, 205 of whom was based in the PRC.

The remuneration policy and package of the Group’s employees are reviewed and approved by the directors. Apart from pension funds, discretionary bonuses are linked to individual performance as recognition of and reward for value creation.

The Group’s banking facilities are secured by the Enlarged Group’s properties held for sale of HK$46,569,000 and time deposits of HK$5,283,000 and corporate guarantees given by certain customers.

Details of the contingent liabilities of the Group are set out in “Material Litigation” section of Appendix V of this circular.

– 76 –

APPENDIX IV VALUATION REPORT ON THE ENLARGED GROUP’S INTERESTS IN LAND AND BUILDINGS

The following is the text of a letter, summary of values and valuation certificate, prepared for the purpose of incorporation in this circular, received from B.I. Appraisals Limited, an independent valuer, in connection with its valuation as at 31 August 2004 of the relevant property interests in the PRC.

==> picture [63 x 46] intentionally omitted <==

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

Registered Professional Surveyors, Valuers & Property Consultants

Room 2201, Wing On House, 71 Des Voeux Road Central, Hong Kong Tel:(852) 2127 7762 Fax:(852) 2137 9876 Email: [email protected] Website: www.bisurveyors.com.hk

28 September 2004

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

Dear Sirs,

Re: Portfolio of properties held by KEL Holdings Limited and/or its subsidiaries and associated companies in the People’s Republic of China (the “PRC”)

In accordance with your instructions for us to value the property interests in the properties, which are held by KEL Holdings Limited (hereinafter referred to as the “Company”) and its subsidiaries and associated companies (hereinafter together referred to as the “Group”) in the PRC, we confirm that we have carried out inspections, made relevant enquiries and obtained such further information as we consider necessary for the purpose of providing you with our opinion of the open market value of each of the properties in existing state as at 31 August 2004 (hereinafter referred to as the “date of valuation”).

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

Basis of Valuation

Our valuation of the property interest in each of the properties is our opinion of its 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;
(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

– 77 –

APPENDIX IV VALUATION REPORT ON THE ENLARGED GROUP’S INTERESTS IN LAND AND BUILDINGS

(e) that both parties to the transaction had acted knowledgeably, prudently and without compulsion.”

We have valued the properties on the basis that each of them is considered individually and have not allowed for any discount for the properties to be sold to a single party nor taken into account any effect on the values if the properties are to be offered for sale at the same time as a portfolio.

Our valuations have 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.

Valuation Methodology

In valuing the property interests in Property Nos. 1, 3, 4 and 7 in Group I which are held and occupied by the Group in the PRC, due to the nature of buildings and structures constructed, there are no readily identifiable market comparable, we have adopted the depreciated replacement cost method in assessing the value of such property interests. This method of valuation is based on an estimate of the open market value for the existing use of the land, plus the current gross replacement costs of the buildings and structures erected thereon, less allowances for physical deterioration and all relevant forms of obsolescence. The depreciated replacement cost method generally furnishes the most reliable indication of value for property in the absence of a known market based on comparable.

In valuing the property interests in Property Nos. 2, 5 and 6 in Group I, we have adopted the Direct Comparison Approach assuming such property interests are capable of being sold in the existing state on a strata-titled basis with the benefit of immediate vacant possession and by making reference to comparable sales transactions and offerings as available in the relevant markets.

In valuing the property interests in Group II which are held by the Group for investment in the PRC, we have adopted the Investment Approach by taking into account the current rents passing and the reversionary income potential of the tenancies. For portions of each of these properties which are vacant, we have valued on the basis of capitalization of hypothetical and reasonable rents assuming typical lease terms and the reversionary potential of the hypothetical tenancies.

Valuation Assumptions

Our valuations have been made on the assumption that the properties are to be sold in the open market in existing state without the benefit of any deferred terms contract, leaseback, joint venture, management agreement or any similar arrangements, which could affect their values.

In addition, no account has been taken of any option or right of pre-emption concerning or effecting sales of the properties and no forced sale situation in any manner is assumed in our valuations.

We have assumed that the properties have been constructed, occupied and used in full compliance with, and without contravention of, all ordinances, except only where otherwise stated. We have further assumed that all consents, approvals, required licences, permits, certificates, and authorizations have been obtained, except only where otherwise stated, for the use of the properties upon which our valuations are based.

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

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 interests. However, we have been provided with copies of documents regarding the title to the property interests. We have not examined the original documents to verify ownership

– 78 –

APPENDIX IV VALUATION REPORT ON THE ENLARGED GROUP’S INTERESTS IN LAND AND BUILDINGS

and to ascertain the existence of any amendments that may not appear on the copies handed to us. All documents and leases have been used for reference only.

Limiting Conditions

We have inspected the exteriors, and whenever possible, the interiors of the properties. However, no structural surveys have been made nor have any tests been carried out on any of the services provided in the properties. We are, therefore, unable to report whether the properties are free from rot, infestation or any other structural defects. Yet, in the course of our inspections, we did not note any serious defects.

Unless otherwise stated, we have not carried out detailed on-site measurements to verify the site and floor areas of the properties but have assumed that the areas shown on the copies of the documents furnished to us are correct. Dimensions, measurements and areas included in the valuation certificates are based on information contained in the documents provided to us and are therefore only approximations.

Moreover, we have not carried out any site investigations to determine or otherwise the suitability of the ground conditions, the presence or otherwise of contamination and the provision of or otherwise suitability for services etc. for any future development. Our valuations are prepared on the assumption that these aspects are satisfactory and that no extraordinary expenses or delays will be incurred during any construction period.

We have relied to a considerable extent on the information provided by the Group and have accepted advice given to us on such matters as particulars of occupancy, tenancy agreement, tenancy schedule, usage of the properties, site and floor areas and other relevant matters in the identification of the properties. We have had no reason to doubt the truth and accuracy of the information provided to us and we have also been advised that no material facts have been omitted from the information supplied. 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.

Remarks

Unless otherwise stated, all monetary amounts stated in the valuation certificates are in Hong Kong Dollars (HK$). The exchange rates adopted in our valuations are approximately HK$1=RMB1.06 and USD1=HK$7.8, which are approximately the prevailing exchange rates as at the date of valuation.

We hereby certify that we have neither present nor prospective interests in the Group, the properties valued or the values reported herein.

We enclose herewith the summary of values and valuation certificates.

Yours faithfully, For and on behalf of

B.I. APPRAISALS LIMITED William C. K. Sham MRICS, MHKIS, RPS (G.P.) Executive Director

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

– 79 –

APPENDIX IV VALUATION REPORT ON THE ENLARGED GROUP’S INTERESTS IN LAND AND BUILDINGS

SUMMARY OF VALUES

Open market value
in existing state as at
No. Property 31 August 2004 Group I – Property interests held and occupied by the Group in the PRC 1. The land and buildings of an office complex at Ying Xiang Heng Street HK$2,600,000 (迎祥橫街 ), Jiannan Town (劍南鎮 ), Mianzhu City (綿竹市 ), Deyang City (德陽市 ), Sichuan Province, the PRC
1. Shop No. 10 on Level 1 of Block No. 5, Xiao Xi Street (小西街 ) HK$170,000 (also known as No. 92 Ying Xiang Road), Jiannan Town, Mianzhu City, Deyang City, Sichuan Province, the PRC
1. The land and buildings of a gas station at Liu Zu (六組 ), Liang HK$1,700,000 Shui Jing Village (涼水井村 ), Qing Dao (清道 ), Mianzhu City, Deyang City, Sichuan Province, the PRC
1. The land and buildings of a gas station at Si Ya (寺埡 ), Yunxi Town HK$600,000 (雲溪鎮 ), Yanting County (鹽亭縣 ), Mianyang City (綿陽市 ), Sichuan Province, the PRC
1. Whole of Level -1 and Level 1 of the Residential Block and Level -1 and Level 3 HK$4,900,000 to Level 8 of the Office Block of a composite complex at Mi Jiang Road (彌江路 ), Yunxi Town, Yanting County, Mianyang City, Sichuan Province, the PRC
1. Whole of Level -1 of a composite building at Yan Zi Road (鹽梓路 ), HK$1,050,000 Yunxi Town, Yanting County, Mianyang City, Sichuan Province, the PRC
1. The land and buildings of an industrial complex at An Shi Road No commercial value (安什路 ), Mianzhu City, Deyang City, Sichuan Province, the PRC (See Note below) Sub-total: HK$11,020,000
Group II – Property interests held for investment by the Group in the PRC 8. Unit 02 on Level 3A, Zhongda Square, No. 989 Dongfang Road, HK$7,800,000 Lujiazui, Pudong District, Shanghai, the PRC
1. Whole of Levels 24, 27 and 28 together with Car Parking Space HK$51,600,000 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 PRC Sub-total: HK$59,400,000 Grand Total: HK$70,420,000
Note: In the course of our valuation, we have ascribed no commercial value to the property. Had the Group obtained a valid Certificate of State-owned Land Use for the land and valid Certificate(s) of Building Ownership for the corresponding buildings, the open market value in the existing state of the property, as at 31 August 2004, would be HK$5,300,000.

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APPENDIX IV VALUATION REPORT ON THE ENLARGED GROUP’S INTERESTS IN LAND AND BUILDINGS

VALUATION CERTIFICATE

Group I – Property interests held and occupied by the Group in the PRC

Description and tenure

No. Property

The land and The property comprises an office buildings of an complex erected over a parcel of office complex at land with a site area of Ying Xiang Heng approximately 2,079.30 sq.m. Street, (22,382 sq.ft.). Jiannan Town, Mianzhu City, The office complex comprises a 3- Deyang City, storey office building together with Sichuan Province, the ancillary structures including a the PRC 1-storey guardhouse and two steel sheds for car parking purpose. The building and the structures were completed in the period between 1996 and 2003.

Open market value Particulars of in existing state as at occupancy 31 August 2004 The property is currently HK$2,600,000 occupied by the Group for office use.

The office building has a gross floor area of approximately 1,216.08 sq.m. (13,090 sq.ft.).

The land use rights of the property have been granted for a term to be expired on 4 July 2052 for composite use.

Notes:

1) Pursuant to the Certificate of State-owned Land Use No. 竹國用 (2004)字第 1474號 (Zhu Guo Yong (2004) Zi No. 1474) issued by 綿竹市人民政府 (Mianzhu Municipal People’s Government) on 31 May 2004, the land use rights of the land in the property with a site area of 2,079.30 sq.m. have been granted to 綿竹市紅森天然氣有限責任公司 (Mian Zhu City Hong Sen Natural Gas Co., Limited) for composite use for a term to be expired on 4 July 2052.
2) Pursuant to the Certificate of Building Ownership No.竹房權證監證字第 0000184號 (Zhu Fang Quan Zheng Jian Zheng Zi No. 0000184) issued by Mianzhu Municipal People’s Government on 20 June 2002, the ownership of the office building in the property having a gross floor area of 1,216.08 is vested in Mian Zhu City Hong Sen Natural Gas Co., Limited.
3) We have been advised that Mian Zhu City Hong Sen Natural Gas Co., Limited is a 49% indirectly owned associated company of the Group.
4) We have relied on the information given by the Group and prepared our valuation on the following assumptions:
a) Mian Zhu City Hong Sen Natural Gas Co., 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) All outstanding costs, land grant considerations and expenses otherwise payable have been fully settled.
c) The design and construction of the property are in compliance with the local planning regulations and have been approved by the relevant government authorities.
d) All consents, approvals and licences from relevant government authorities for the occupation of the property have been granted without any onerous conditions or undue delay, which might affect its value.
e) The property may be disposed of freely to both local and overseas purchasers.
5) The status of the title and grant of major approvals and licences in accordance with the information provided to us by the Group are as follows:

Certificate of State-owned Land Use Yes Certificate of Building Ownership Yes

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VALUATION REPORT ON THE ENLARGED GROUP’S INTERESTS IN LAND AND BUILDINGS

APPENDIX IV

No. Property

Description and tenure

Open market value Particulars of in existing state as at occupancy 31 August 2004

Shop No. 10 on The property comprises a shop Level 1 of Block premises on Level 1 of a 6-storey No. 5, Xiao Xi building completed in about 1998. Street (also known as No. 92 Ying The gross floor area of the property Xiang Road), is approximately 46.08 sq.m. (496 Jiannan Town, sq.ft.). Mianzhu City, Deyang City, The land use rights of the property Sichuan Province, have been granted for a term to be the PRC expired on 11 October 2050 for commercial/services use.

The property is currently HK$170,000 occupied by the Group for retail use.

Notes:

1) Pursuant to the Certificate of State-owned Land Use No. 竹國用 (2004)字第 1044號 (Zhu Guo Yong (2004) Zi No. 1044) issued by Mianzhu Municipal People’s Government on 1 May 2004, the land use rights of the property with an allocated land area of 8.33 sq.m. have been granted to Mian Zhu City Hong Sen Natural Gas Co., Limited for commercial/services use for a term to be expired on 11 October 2050.
2) Pursuant to the Certificate of Building Ownership No.字第 836號 (Zi No. 836) issued by Mianzhu Municipal People’s Government on 8 May 1998, the ownership of the property having a gross floor area of 46.08 sq.m. is vested in 綿竹市天然氣公司 (Mian Zhu City Natural Gas Company).
3) We have been advised that Mian Zhu City Natural Gas Company has subsequent restructured to form Mian Zhu City Hong Sen Natural Gas Co., Limited, which, as advised, is a 49% indirectly owned associated company of the Group.
4) We have relied on the information provided by the Group and prepared our valuation on the following assumptions:
a) Mian Zhu City Hong Sen Natural Gas Co., 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) All outstanding costs, land grant consideration and expenses otherwise payable have been fully settled.
c) The design and construction of the property are in compliance with the local planning regulations and have been approved by the relevant government authorities.
d) All consents, approvals and licences from relevant government authorities for the occupation of the property have been granted without any onerous conditions or undue delay, which might affect its value.
e) The property may be disposed of freely to both local and overseas purchasers.
5) The status of the title and grant of major approvals and licences in accordance with the information provided to us by the Group are as follows:

Certificate of State-owned Land Use Certificate of Building Ownership

Yes Yes

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VALUATION REPORT ON THE ENLARGED GROUP’S INTERESTS IN LAND AND BUILDINGS

APPENDIX IV

No. Property

Description and tenure

Open market value Particulars of in existing state as at occupancy 31 August 2004

The land and The property comprises a gas station buildings of a gas erected over a parcel of land with a station at Liu Zu, site area of approximately 5,016.00 Liang Shui Jing sq.m. (53,992 sq.ft.). Village, Qing Dao, Currently standing on the site are 7 Mianzhu City, blocks of buildings and structures Deyang City, completed in the period between Sichuan Province, 1993 and 2000. The buildings and the PRC structures include a block of 1- storey retail building, a block of 1- storey office building, a block of 1- storey duty office building, a block of 2-storey office/quarters building and ancillary structures including a fire preventive equipment storage house, a toilet and a storage shed. The total gross floor area of the buildings and structures is approximately 1,442.00 sq.m. (15,522 sq.ft.).

The property is currently HK$1,700,000 occupied by the Group as a gas station.

The land use rights of the property have been granted for a term to be expired on 1 April 2054 for industrial use.

Notes:

1) Pursuant to the Certificate of State-owned Land Use No. 竹國用 (2004)字第 912號 (Zhu Guo Yong (2004) Zi No. 912) issued by Mianzhu Municipal People’s Government on 12 April 2004, the land use rights of the land in the property with a site area of 5,016.00 sq.m. have been granted to Mian Zhu City Hong Sen Natural Gas Co., Limited for industrial use for a term to be expired on 1 April 2054.
2) We have been advised that Mian Zhu City Hong Sen Natural Gas Co., Limited is a 49% indirectly owned associated company of the Group.
3) We have relied on the information provided by the Group and prepared our valuation on the following assumptions:
a) Mian Zhu City Hong Sen Natural Gas Co., 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) All outstanding costs, land grant considerations and expenses otherwise payable have been fully settled.
c) The design and construction of the property are in compliance with the local planning regulations and have been approved by the relevant government authorities.
d) All consents, approvals and licences from relevant government authorities for the occupation of the property have been granted without any onerous conditions or undue delay, which might affect its value.
e) The property may be disposed of freely to both local and overseas purchasers.
4) The status of the title and grant of major approvals and licences in accordance with the information provided to us by the Group are as follows:

Certificate of State-owned Land Use Yes Certificate of Building Ownership No

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VALUATION REPORT ON THE ENLARGED GROUP’S INTERESTS IN LAND AND BUILDINGS

APPENDIX IV

No. Property Description and tenure

The land and The property comprises a gas station buildings of a gas erected over a parcel of land with a station at Si Ya, site area of approximately 1,740.40 Yunxi Town, sq.m. (18,734 sq.ft.). Yanting County, Mianyang City, Currently standing on the site are a Sichuan Province, block of 1-storey duty office the PRC building, a block of 2-storey office/ quarters building and an ancillary structure of toilet, all completed in about 1991.

Open market value Particulars of in existing state as at occupancy 31 August 2004 The property is currently HK$600,000 occupied by the Group as a gas station.

The total gross floor area of the buildings is approximately 268.50 sq.m. (2,890 sq.ft.).

The land use rights of the property have been granted for industrial use for a term not specified in the Certificate of State-owned Land Use.

Notes:

1) Pursuant to the Certificate of State-owned Land Use No. 鹽國用 (2001)字第 000695號 (Yan Guo Yong (2001) Zi No. 000695) issued by Yanting County People’s Government on 29 November 2001, the land use rights of the property with a site area of 1,740.40 sq.m. have been granted to 鹽亭龍興燃氣有限責任公司 (Longxin (Yan Ting) Natural Gas Company Limited) for industrial use for a term not specified in the Certificate of State-owned Land Use.
2) Pursuant to the Certificate of Building Ownership No. 鹽房權證縣房監字第 0000005015號 (Yan Fang Quan Zheng Xian Fang Jian Zi No. 0000005015) issued by Yanting County Building and Land Administration Office on 30 November 2001, the ownership of the buildings having a total gross floor area of 268.50 sq.m. is vested in Longxin (Yan Ting) Natural Gas Company Limited.
3) We have been advised that Longxin (Yan Ting) Natural Gas Company Limited is a 49% indirectly owned associated company of the Group.
4) We have relied on the information provided by the Group and prepared our valuation on the following assumptions:
a) Longxin (Yan Ting) Natural Gas Company 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 land use rights of the land in the property have been granted for a term of 50 years from the issuance date of the Certificate of State-owned Land Use.
c) All outstanding costs, land grant consideration and expenses otherwise payable have been fully settled.
d) The design and construction of the property are in compliance with the local planning regulations and have been approved by the relevant government authorities.
e) All consents, approvals and licences from relevant government authorities for the occupation of the property have been granted without any onerous conditions or undue delay, which might affect its value.
f) The property may be disposed of freely to both local and overseas purchasers.
5) The status of the title and grant of major approvals and licences in accordance with the information provided to us by the Group are as follows:

Certificate of State-owned Land Use Yes Certificate of Building Ownership Yes

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VALUATION REPORT ON THE ENLARGED GROUP’S INTERESTS IN LAND AND BUILDINGS

APPENDIX IV

No. Property

Description and tenure

Particulars of occupancy

Open market value in existing state as at 31 August 2004

Whole of Level -1 The subject composite complex and Level 1 of the comprises a block of 8-storey mixed Residential Block commercial and residential building and Level -1 and (“Residential Block”) and a block of Level 3 to Level 8 8-storey mixed commercial and of the Office Block office building (“Office Block”) of a composite completed in about 1995. complex at Mi Jiang Road, Yunxi The property comprises the whole Town, Yanting floor of Levels -1 and 1 of the County, Mianyang Residential Block and the whole City, Sichuan floor of Levels -1 and 3 to 8 (i.e. Province, the PRC roof level) of the Office Block.

The property is currently occupied by the Group for office, hostel, customer services centre uses.

HK$4,900,000

The total gross floor area of the property is approximately 3,053.72 sq.m. (32,870 sq.ft.).

The land use rights of the property have been granted. Yet the use as well as the term have not been specified in the Certificate of Stateowned Land Use.

Notes:

1) Pursuant to the Certificate of State-owned Land Use No. 鹽國用 (2001)字第 000696號 (Yan Guo Yong (2001) Zi No. 000696) issued by Yanting County People’s Government on 29 November 2001, the land use rights of the property with an allocated land area of 656.91 sq.m. have been granted to Longxin (Yan Ting) Natural Gas Company Limited.
2) Pursuant to the Certificate of Building Ownership No. 鹽房權證縣房監字第 0000005013號 (Yan Fang Quan Zheng Xian Fang Jian Zi No. 0000005013) issued by Yanting County People’s Government on 30 November 2001, the ownership of the property having a gross floor area of 3,053.72 sq.m. for commercial, services and office uses is vested in Longxin (Yan Ting) Natural Gas Company Limited.
3) We have been advised that Longxin (Yan Ting) Natural Gas Company Limited is a 49% indirectly owned associated company of the Group.
4) We have relied on the information provided by the Group and prepared our valuation on the following assumptions:
a) Longxin (Yan Ting) Natural Gas Company 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 land use rights of the land in the property have been granted for composite use for a term of 50 years from the issuance date of the Certificate of State-owned Land Use.
c) All outstanding costs, land grant consideration and expenses otherwise payable have been fully settled.
d) The design and construction of the property are in compliance with the local planning regulations and have been approved by the relevant government authorities.
e) All consents, approvals and licences from relevant government authorities for the occupation of the property have been granted without any onerous conditions or undue delay, which might affect its value.
f) The property, whether as a whole or on a strata-titled basis, may be disposed of freely to both local and overseas purchasers.
5) The status of the title and grant of major approvals and licences in accordance with the information provided to us by the Group are as follows:

Certificate of State-owned Land Use Yes Certificate of Building Ownership Yes

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VALUATION REPORT ON THE ENLARGED GROUP’S INTERESTS IN LAND AND BUILDINGS

APPENDIX IV

Description and tenure

No. Property

Whole of Level -1 The property comprises the whole of of a composite Level -1 of an 8-storey mixed building at Yan Zi commercial and residential building, Road, Yunxi Town, completed in about 1998. Yanting County, Mianyang City, The total gross floor area of the Sichuan Province, property is approximately 738.68 the PRC sq.m. (7,951 sq.ft.).

Open market value Particulars of in existing state as at occupancy 31 August 2004 The property is currently HK$1,050,000 occupied by the Group for storage use.

The land use rights of the property have been granted for composite use for a term not specified in the Certificate of State-owned Land Use.

Notes:

1) Pursuant to the Certificate of State-owned Land Use No. 鹽國用 (2001)字第 000697號 (Yan Guo Yong (2001) Zi No. 000697) issued by Yanting County People’s Government on 29 November 2001, the land use rights of the property with an allocated land area of 1,154.93 sq.m. have been granted to Longxin (Yan Ting) Natural Gas Company Limited for composite use for a term not specified in the said Certificate of State-owned Land Use.
2) Pursuant to the Certificate of Building Ownership No. 鹽房權證縣房監字第 0000005014號 (Yan Fang Quan Zheng Xian Fang Jian Zi No. 0000005014) issued by Yanting County People’s Government on 30 November 2001, the ownership of the property having a gross floor area of 738.68 sq.m. is vested in Longxin (Yan Ting) Natural Gas Company Limited.
3) We have been advised that Longxin (Yan Ting) Natural Gas Company Limited is a 49% indirectly owned associated company of the Group.
4) We have relied on the information provided by the Group and prepared our valuation on the following assumptions:
a) Longxin (Yan Ting) Natural Gas Company 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 land use rights of the land in the property have been granted for a term of 50 years from the issuance date of the Certificate of State-owned Land Use.
c) All outstanding costs, land grant consideration and expenses otherwise payable have been fully settled.
d) The design and construction of the property are in compliance with the local planning regulations and have been approved by the relevant government authorities.
e) All consents, approvals and licences from relevant government authorities for the occupation of the property have been granted without any onerous conditions or undue delay, which might affect its value.
f) The property, whether as a whole or on a strata-titled basis, may be disposed of freely to both local and overseas purchasers.
5) The status of the title and grant of major approvals and licences in accordance with the information provided to us by the Group are as follows:

Certificate of State-owned Land Use Yes Certificate of Building Ownership Yes

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VALUATION REPORT ON THE ENLARGED GROUP’S INTERESTS IN LAND AND BUILDINGS

APPENDIX IV

No. Property

Description and tenure

Open market value Particulars of in existing state as at occupancy 31 August 2004

The land and The property comprises an industrial buildings of an complex erected on a parcel of land industrial complex with a site area of approximately at An Shi Road, 12,320.60 sq.m. (132,619 sq.ft.). Mianzhu City, Deyang City, The industrial complex comprises a Sichuan Province, total 15 blocks of 1 to 2-storey the PRC buildings together with ancillary structures including a water tower and two steel sheds, completed in the period between 1995 and 2003.

The property is currently No commercial value occupied by the Group for (See Note 5 below) production use.

The total gross floor area of the property is approximately 5,313.89 sq.m. (57,199 sq.ft.). (See Note 2 below)

The land use rights of the property have been administratively appropriated for industrial use for a term not specified in the Certificate of State-owned Land Use.

Notes:

1) Pursuant to the Certificate of State-owned Land Use No. 竹國用 (1998)字第 6595號 (Zhu Guo Yong (2004) Zi No. 6595) issued by Mianzhu Municipal People’s Government on 16 December 1998, the land use rights of the land in the property with a site area of 12,320.60 sq.m. have been administratively appropriated to 四川省綿竹華安玻璃廠 (Sichuan Province Mianzhu Hua An Glass Factory) for industrial use for a term not specified in the said Certificate of State-owned Land Use.
2) Pursuant to the Certificate of Building Ownership No.字第 1095號 (Zi No. 1095) issued by Mianzhu City Building Ownership Supervision Office on 10 April 1999, the ownership of eleven buildings in the property with a total gross floor area of 4,090.07 is collectively vested in Sichuan Province Mianzhu Hua An Glass Factory.
3) We have been advised that Sichuan Province Mianzhu Hua An Glass Factory has been renamed to 綿竹市紅森玻璃製品有限責任公司 (Mian Zhu City Hong Sen Glass Products Company Limited), which is a 34.3% indirectly owned associated company of the Group.
4) We have also been advised that Mian Zhu City Hong Sen Glass Products Company Limited has applied for the issuance of the relevant title certificates of the property.
5) In the course of our valuation, we have ascribed no commercial value to the property. Had the Group obtained a valid Certificate of State-owned Land Use for the land and valid Certificate(s) of Building Ownership for the corresponding buildings, the open market value in the existing state of the property, as at 31 August 2004, would be HK$5,300,000.
6) We have relied on the information given by the Group and prepared our valuation on the following assumptions:
a) Sichuan Province Mianzhu Hua An Glass Factory 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 land use rights of the property are for a term of 50 years from the issuance date of the Certificate of Stateowned Land Use.

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APPENDIX IV VALUATION REPORT ON THE ENLARGED GROUP’S INTERESTS IN LAND AND BUILDINGS

c) All outstanding costs, land grant considerations and expenses otherwise payable have been fully settled.
d) The design and construction of the property are in compliance with the local planning regulations and have been approved by the relevant government authorities.
e) All consents, approvals and licences from relevant government authorities for the occupation of the property have been granted without any onerous conditions or undue delay, which might affect its value.
f) The property may be disposed of freely to both local and overseas purchasers.
7) The status of the title and grant of major approvals and licences in accordance with the information provided to us by the Group are as follows:

Certificate of State-owned Land Use Yes Certificate of Building Ownership (part) Yes

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APPENDIX IV VALUATION REPORT ON THE ENLARGED GROUP’S INTERESTS IN LAND AND BUILDINGS

Group II – Property interests held for investment by the Group in the PRC

Description and tenure

No. Property

Unit 02 on Level Zhongda Square, completed in July 3A, Zhongda 1996, is a 28-storey commercial/ Square, No. 989 office complex erected on two levels Dongfang Road, of basement car park. Lujiazui, Pudong District, The property comprises a unit on Shanghai, Level 3A of the building. the PRC The gross floor area of the property is approximately 533.71 sq.m. (5,745 sq.ft.).

Open market value Particulars of in existing state as at occupancy 31 August 2004 The property is currently HK$7,800,000 leased to Deson Development Limited for office use for a term of one year expiring on 30 April 2005 at a monthly rent of HK$40,000 inclusive of management fee.

The land use rights of the property have been granted for a term from 23 February 1998 to 21 December 2043.

Notes:

1) Pursuant to the Certificate for Real Estate Ownership No. 滬房地市字 (1999) 第 003108號 (Hu Fang Di Shi Zi (1999) No. 003108) issued by 上海市房屋土地管理局 (Shanghai Municipal Building and Land Administration Bureau) on 9 July 1999, the ownership of the property is vested in 景達物業有限公司 (Penmark Limited).
2) Pursuant to the Tenancy Agreement entered into between Penmark Limited and Deson Development Limited on 15 April 2004, the property having a gross floor area of 533.71 sq.m. has been leased to Deson Development Limited for a term of one year from 1 May 2004 to 30 April 2005 at a rent of HK$40,000 per month, inclusive of management fee.
3) We have been advised that Penmark Limited is a directly wholly owned subsidiary of the Group.
4) We have relied on the information given by the Group and prepared our valuation on the following assumptions:
a) Penmark 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) All outstanding costs, land grant considerations and expenses otherwise payable have been fully settled.
c) The design and construction of the property are in compliance with the local planning regulations and have been approved by the relevant government authorities.
d) All consents, approvals and licences from relevant government authorities for the occupation of the property have been granted without any onerous conditions or undue delay, which might affect its value.
e) The property may be disposed of freely to both local and overseas purchasers.
5) The status of the title and grant of major approvals and licences in accordance with the information provided to us by the Group are as follows:

Certificate for Real Estate Ownership

Yes

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VALUATION REPORT ON THE ENLARGED GROUP’S INTERESTS IN LAND AND BUILDINGS

APPENDIX IV

Description and tenure

No. Property

Whole of Levels Zhongda Square, completed in July 24, 27 and 28 1996, is a 28-storey commercial/ together with Car office building erected on two levels Parking Space Nos. of basement car park. 31 to 39 on Basement 1 and The property comprises three whole Car Parking Space floors, designated as Levels 24, 27 Nos. 82 to 91 on and 28, together with nine car Basement 2, parking spaces on Basement 1 and Zhongda Square, ten car parking spaces on Basement No. 989 Dongfang 2. Road, Lujiazui, Pudong The total gross floor area of the District, property (excluding the area for the Shanghai, car parking spaces) is approximately the PRC 3,098.49 sq.m. (33,352 sq.ft.).

The land use rights of the property have been granted for a term from 8 September 1998 to 21 December 2043.

Open market value Particulars of in existing state as at occupancy 31 August 2004 All constituent units of HK$51,600,000 the property, are leased to various tenants for terms ranging from 1 to 5 years with the latest expiring on 30 September 2007. The total rental income for the month of August 2004 is approximately RMB189,474.40 exclusive of management fees.

Particulars of occupancy

Regarding the subject 19 car parking spaces, except for 2 bays which are vacant, 5 bays which are owner-occupied and 9 bays which are occupied by existing tenants under the respective leasing contracts, the remaining 3 bays are licensed on monthly basis with a total licence fee of approximately RMB1,450 per month.

Notes:

1) Pursuant to a certified copy of the Certificate for Real Estate Ownership No. 滬房地市字 (2000)第 003752號 (Hu Fang Di Shi Zi (2000) No. 003752) issued by Shanghai Municipal Building and Land Administration Bureau on 26 June 2000, 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).
2) We have been advised that Bless Honour Limited is an indirectly wholly owned subsidiary of the Group.
3) We have relied on the information provided by the Group 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) All outstanding costs, land grant considerations and expenses otherwise payable have been fully settled.
c) The design and construction of the property are in compliance with the local planning regulations and have been approved by the relevant government authorities.
d) All consents, approvals and licences from relevant government authorities for the occupation of the property have been granted without any onerous conditions or undue delay, which might affect its value.
e) The property, whether as a whole or on strata-titled basis, may be disposed of freely to both local and overseas purchasers.
4) The status of the title and grant of major approvals and licences in accordance with the information provided to us by the Group are as follows:

Certificate for State-owned Land Use Yes Certificate for Real Estate Ownership Yes

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GENERAL INFORMATION

APPENDIX V

A. 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.

B. DISCLOSURE OF INTERESTS

(i) Save as disclosed below, as at the Latest Practicable Date, none of the Directors and chief executive of the Company had any interest or short position in the Shares, underlying Shares or debentures of the Company or any associated corporations (within the meaning of Part XV of the SFO) which will have to be notified to the Company and the Stock Exchange pursuant to the provisions under Divisions 7 and 8 of Part XV of the SFO (including the interests and short positions which he would be deemed or taken to have under Sections 344 and 345 of the SFO) or the Model Code for Securities Transactions by Directors of Listed Companies, or which will have to be, pursuant to Section 352 of the SFO, entered in the register referred to herein:

Long positions in the Shares

			Approximate
			percentage of
			the Company’s
			issued share
Name of Director	Nature of interest	Number of Shares	capital
Mr. Tjia Boen Sien	Interest by attribution	1,561,724,256	59.73%
	(Note 1)
Mr. Wang Jing Ning	Interest by attribution	1,561,724,256	59.73%
	(Note 1)
Mr. Mo Shikang	Interest by attribution	30,000,000	1.15%
	(Note 2)

Note 1: 1,561,724,256 Shares are held by Super Win, a wholly-owned subsidiary of Deson Development Holdings Limited which in turn is a wholly-owned subsidiary of Deson. Deson is owned as to 45.72% by Sparta Assets Limited a company incorporated in the British Virgin Islands and is owned as to 90% by Mr. Tjia Boen Sien and 10% by Mr. Wong Jing Ning.
Note 2: 30,000,000 Shares are held by Smarksborne Ltd., a company incorporated in the British Virgin Islands and is wholly-owned by Mr. Mo Shikang.

Long positions in the shares of the associated corporation of the Company – Deson

			Approximate
			percentage of
			Deson’s issued
Name of Director	Nature of interest	Number of shares	share capital
Mr. Tjia Boen Sien	Interest by attribution	2,362,500,000	45.72%
	(Note 1)
	Beneficial Owner	351,124,000	6.79%
Mr. Wang Jing Ning	Interest by attribution	2,362,500,000	45.72%
	(Note 1)
	Beneficial Owner	18,396,000	0.36%
Mr. Wang Ke Duan	Beneficial Owner	2,689,600	0.05%
Mr. Song Sio Chong	Beneficial Owner	6,600,000	0.13%
Mr. Siu Man Po	Beneficial Owner	1,800,000	0.03%

Note 1: 2,362,500,000 shares in Deson are held by Sparta Assets Limited, a company incorporated in the British Virgin Islands and is beneficially owned as to 90% by Mr. Tjia Boen Sien and 10% by Mr. Wang Jing Ning.

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GENERAL INFORMATION

APPENDIX V

(ii) Save as disclosed below, the Directors and the chief executive of the Company are not aware of any other person who, as at the Latest Practicable Date, had an interest or short position in the Shares or the underlying Shares which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO or who will be interested, directly or indirectly, in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of the Company:

Long positions in the Shares

			Approximate
			percentage of
			the Company’s
			issued share
Name of Shareholder	Nature of interest	Number of Shares	capital
Super Win	Beneficial owner	1,561,724,256	59.73%
Deson Development	Interest by attribution	1,561,724,256	59.73%
Holdings Limited	(Note 1)
Deson	Interest by attribution	1,561,724,256	59.73%
	(Note 2)
Sparta Assets Limited	Interest by attribution	1,561,724,256	59.73%
	(Note 3)
Mr. Tjia Boen Sien	Interest by attribution	1,561,724,256	59.73%
	(Note 4)
Mr. Wang Jing Ning	Interest by attribution	1,561,724,256	59.73%
	(Note 4)

Notes:

Pursuant to the SFO, Deson Development Holdings Limited is deemed to be interested in the same block of 1,561,724,256 Shares held by Super Win, its wholly-owned subsidiary.
Pursuant to the SFO, Deson is deemed to be interested in the same block of 1,561,724,256 Shares held by Super Win, its indirect wholly-owned subsidiary.
Sparta Assets Limited is interested in approximately 45.72% of the entire issued share capital of Deson and is therefore entitled to exercise or control the exercise of one third or more of the voting power at general meetings of Super Win. Pursuant to the SFO, Sparta Assets Limited is deemed to be interested in the same block of 1,561,724,256 Shares held by Super Win.
Sparta Assets Limited, a company incorporated in the British Virgin Islands, is beneficially owned as to 90% by Mr. Tija Boen Sien and 10% by Mr. Wang Jing Ning.

C. NO MATERIAL ADVERSE CHANGE

Save for those transactions disclosed in the Company’s circular dated 31 March 2004, the Directors are not aware of any material adverse change in the financial or trading positions of the Group since 31 March 2004, being the date to which the latest audited financial statements of the Group were made up.

D. COMPETING INTEREST

Other than the interest in Deson, an associated corporation of the Company, as disclosed in Part B in this appendix, none of the Directors or their respective associates has, as at the Latest Practicable Date, any interest in a business which competes or is likely to compete, either directly or indirectly, with the business of the Company.

As at the Latest Practicable Date, none of the Directors or proposed Director has any interest, direct or indirect, in (i) any assets which had been acquired or disposed of by or leased to any member of the Group since 31 March 2004 (the date to which the latest published audited consolidated financial statements of the Group were made up) or proposed to be so acquired, disposed of or leased; or (ii) any contract or arrangement subsisting at as that date which is significant in relation to the business of the Group.

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GENERAL INFORMATION

APPENDIX V

E. SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors or proposed Directors had entered into any existing or proposed service contracts with the Company or any other member of the Group save for those expiring or determinable by the relevant employer within one year without payment of compensation (other than statutory compensation).

F. MATERIAL LITIGATION

Kenworth Engineering Limited (“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 (being HK$122 million) in respect of the completed work and the losses (being HK$15.5 million) it incurred from the wrongful termination of the subcontract. The schemes administrator of the Schemes of Kenworth 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. In relation to the same construction project detailed above, Kenworth had also received a claim of approximately HK$237 million. The Scheme administrator is in the process of examining the grounds for claim and the outcome of the assessment cannot be determined at this stage. Please refer to the paragraph headed “3. Indebtedness” in Appendix I to this circular for further details.

Save as disclosed herein, as at the Latest Practicable Date, no member of the Group was engaged in any litigation or claim 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.

G. MATERIAL CONTRACTS

Set out below are information on the material contracts, not being contracts entered into in the ordinary course of business, which were entered into by the Group within the two years immediately preceding the Latest Practicable Date:

(i) an agreement dated 6 March 2003 entered into between the Company and Deson in relation to the disposal by the Deson Group of the entire issued share capital of Billion Treasure Holdings Limited and a related shareholder’s loan for an aggregate consideration of HK$46 million;
(ii) a sale and purchase agreement dated 18 February 2004 entered into between Smarksborne Ltd., Rhythorth Limited, Brilliant China, Mr. Mo Shikang and the Company in respect of the First Xin Hua Acquisition for an aggregate consideration of HK$29.5 million;
(iii) a placing agreement dated 18 February 2004 entered into between the Company and Guotai Junan Securities (Hong Kong) Limited in connection with the placing of 800,000,000 New Shares to independent placees at a placing price of HK$0.10 per placing share;
(iv) an agreement dated 18 February 2004 entered into between Deson and the Company in respect of the acquisition by the Company of the entire issued share capital of Penmark Limited and the Penmark Shareholder’s Loan (as defined therein) from Deson for an aggregate consideration of HK$7.5 million;
(v) an agreement dated 18 February 2004 entered into between the Company and Super Win in relation to the subscription of Shares by Super Win at an aggregate subscription price of HK$32.5 million;
(vi) a sale and purchase agreement dated 18 February 2004 entered into between the Company and Deson in relation to the disposal by the Company to Deson of the entire issued share capital of Kenworth Group Limited and a related shareholder’s loan for an aggregate consideration of HK$7 million; and
(vii) the Second Xin Hua Acquisition Agreement.

H. QUALIFICATION OF EXPERTS

The following are the qualifications of the experts (the “ Experts”) who have given their advice, letters or reports for the inclusion in this circular:

		Nature of opinion
Name	Qualification	or advice	Date of Opinion
Ernst & Young	Certified Public	Accountants’ Report	28 September 2004
	Accountants’
B.I. Appraisals Limited	Chartered Surveyors	Property Valuation
		Report	28 September 2004

– 93 –

GENERAL INFORMATION

APPENDIX V

I. CONSENT

The Experts have given and have not withdrawn their respective written consents to the issue of this circular with the inclusion of their advice, letters, reports and references to their names in the form and context in which they appear.

As at the Latest Practicable Date, none of the Experts had any shareholding in the Company or any other member of the Group or the right, whether legally enforceable or not, to subscribe for or to nominate persons to subscribe for securities in the Company or any other member of the Group.

As at the Latest Practicable Date, none of the Experts had any direct or indirect interests in any assets which had been acquired or disposed of by or leased to any member of the Group since 31 March 2004 (the date to which the latest published audited consolidated financial statements of the Group were made up) or proposed to be so acquired, disposed of or leased.

J. GENERAL

(i) As at the Latest Practicable Date, none of the Directors was materially interested in any contract or arrangement subsisting which is significant to the business of the Group.
(ii) As at the Latest Practicable Date, none of the Directors has any direct or indirect interests in any assets which had been acquired or disposed of by or leased to any member of the Group since 31 March 2004, being the date to which the latest published audited consolidated financial statements of the Company were made up or proposed to be so acquired, disposed of or leased.
(iii) Mr. Ong Chi King is the secretary and the qualified accountant of the Company. Mr. Ong holds a bachelor degree in Business Administration from the Hong Kong University of Science and Technology. He is a fellow of the Association of Chartered Certified Accountants and Certified Public Accountant of the Hong Kong Institute of Certified Public Accountants.
(iv) The Company’s registered office is at Canon’s Court, 22 Victoria Street, Hamiliton HM12 Bermuda. The principal place of business of the Company in Hong Kong is at 11th Floor, Nanyang Plaza, 57 Hung To Road, Kwun Tong, Kowloon, Hong Kong. The branch share registrar and transfer office of the Company in Hong Kong is Tengis Limited at Ground Floor, Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong.
(v) In the event of any inconsistency between the English text and the Chinese text of this circular, the English version shall prevail.

K. 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 20 October 2004:

(i) the memorandum of association and bye-laws of the Company;
(ii) the contracts referred to under the paragraph headed “Material Contracts” in this Appendix;
(iii) the audited consolidated accounts of the Group for each of the two years ended 31 March 2004, the text of which is set out in Appendix I to this circular;
(iv) the accountants’ report on the Xin Hua Group dated 28 September 2004 prepared by Ernst & Young, the text of which is set out in Appendix II to this circular;
(v) the report from Ernst & Young on the unaudited pro forma financial information of the Enlarged Group, the text of which is set out in Appendix III to this circular;
(vi) the property valuation report dated 28 September 2004 prepared by B.I. Appraisals Limited, the text of which is set out in Appendix IV to this circular;
(vii) the written consents of the Experts; and
(viii) a circular of the Company dated 31 March 2004.

– 94 –

NOTICE OF SPECIAL GENERAL MEETING

==> picture [111 x 37] intentionally omitted <==

KEL HOLDINGS LIMITED 基電控股有限公司 *

(Incorporated in Bermuda with limited liability)

(Stock Code: 681)

NOTICE IS HEREBY GIVEN that a special general meeting (the “ Special General Meeting ”) of KEL Holdings Limited (the “ Company ”) will be held at 10:30 a.m. on Wednesday, 20 October 2004 at The Ritz-Carlton Hong Kong, Salon II, The Ballroom, Ballroom Level, 3 Connaught Road, Central, Hong Kong for the purpose of considering and, if thought fit, passing the following resolutions:

ORDINARY RESOLUTION

(A) “ THAT
(i) the agreement dated 2 August 2004 between Camture, Brilliant China, Ms. Han and the Company relating to the acquisition by Brilliant China from Camture of a 51% shareholding in Xin Hua and a related shareholder’s loan pursuant to the terms thereof (the “Second Xin Hua Acquisition Agreement”) and the transactions contemplated thereunder be and are hereby approved, ratified and confirmed; and
(ii) the Board of directors of the Company be and are hereby authorized to take all steps necessary, desirable or expedient for the purposes of or in connection with, the implementation of the Second Xin Hua Acquisition Agreement and to make and agree to such amendments to the terms of the Second Xin Hua Acquisition as the directors in their discretion consider to be necessary and in the best interest of the Company.”

SPECIAL RESOLUTION

(B) “ THAT
(i) subject to the passing of the resolution set out as Resolution (A) in the notice convening this meeting and subject to the approval of the Registrar of Companies in Bermuda, the name of the Company be changed from “KEL Holdings Limited” to “Chinese People Gas Holdings Company Limited” and the Chinese translation of the name of the Company be changed from “基電控股有限公司 ” to “中民燃氣控股有限公司 ” for identification purposes only;
(ii) any director or the secretary of the Company be and are hereby authorized to, upon the completion of the Second Xin Hua Acquisition Agreement (as defined in the resolution set out as Resolution (A) in the notice convening this meeting) file all such documents with the Registrar of Companies in Bermuda and do all such acts, deeds and things as he/she in his/ her absolute discretion deems fit to effect and implement the change of the Company’s name.”

By order of the Board Ong Chi King Company Secretary

Hong Kong, 28 September 2004

* For identification purposes only

– 95 –

NOTICE OF SPECIAL GENERAL MEETING

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 at Tengis Limited at Ground Floor, Bank of East Asia 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.

– 96 –

AI assistant

CR Construction Group Holdings Limited — Proxy Solicitation & Information Statement 2004

50019_rns_2004-09-28_69465a7c-5283-4054-ba61-67801ca2cb83.pdf

KEL HOLDINGS LIMITED 基電控股有限公司 [*]

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

KEL HOLDINGS LIMITED 基電控股有限公司 *

A. INTRODUCTION

B. THE SECOND XIN HUA ACQUISITION AGREEMENT DATED 2 AUGUST 2004

Date

Parties

Assets to be acquired

Consideration

Conditions precedent

Completion

Information on the Xin Hua Group

Shareholding

Principal business activities

Financial information

Board composition

Reasons for the Second Xin Hua Acquisition

Listing Rules implications of the Second Xin Hua Acquisition for the Company

C. PROPOSED CHANGE OF NAME OF THE COMPANY

D. RECOMMENDATION

E. SPECIAL GENERAL MEETING

F. ADDITIONAL INFORMATION

1. SUMMARY OF FINANCIAL INFORMATION OF THE GROUP

Consolidated Profit and Loss Account

2. AUDITED FINANCIAL INFORMATION OF THE GROUP

CONSOLIDATED PROFIT AND LOSS ACCOUNT

CONSOLIDATED BALANCE SHEET

APPENDIX I

CONSOLIDATED SUMMARY STATEMENT OF CHANGES IN EQUITY

CONSOLIDATED CASH FLOW STATEMENT

CONSOLIDATED CASH FLOW STATEMENT (CONTINUED)

FINANCIAL INFORMATION ON THE GROUP

BALANCE SHEET

NOTES TO FINANCIAL STATEMENTS

1. CORPORATE INFORMATION

2. CORPORATE UPDATE

3. IMPACT OF A REVISED HONG KONG STATEMENT OF STANDARD ACCOUNTING PRACTICE (“HKSSAP”)

4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of preparation

Basis of consolidation

Subsidiaries

Joint venture companies

Jointly-controlled entities

Impairment of assets

Revenue recognition

Fixed assets and depreciation

Properties held for sale

Construction contracts

Borrowing costs

Operating leases

Foreign currencies

Provisions

Income tax

Employee benefits

Pension scheme

Share option scheme

Cash and cash equivalents

Related parties

5. SEGMENT INFORMATION

(a) Business segments

Group

(b) Geographical segments

Group

6. TURNOVER, OTHER REVENUE AND GAINS

7. DISCONTINUING OPERATIONS

APPENDIX I

8. LOSS FROM OPERATING ACTIVITIES

9. FINANCE COSTS

APPENDIX I

10. DIRECTORS’ AND EMPLOYEES’ REMUNERATION

(b) Employees’ remuneration

11. TAX

12. NET LOSS FROM ORDINARY ACTIVITIES ATTRIBUTABLE TO SHAREHOLDERS

13. LOSS PER SHARE

CR Construction Group Holdings Limited Proxy Solicitation & Information Statement 2004

KEL HOLDINGS LIMITED 基電控股有限公司 []*