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 was effected for transmission to the purchaser or the transferee.

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

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KEL HOLDINGS LIMITED

(Incorporated in Bermuda with limited liability)

1. MAJOR AND CONNECTED TRANSACTION – PROPOSED ACQUISITION BY A SUBSIDIARY OF KEL OF AN AGGREGATE 49% SHAREHOLDING IN XIN HUA RESOURCE INVESTMENT LIMITED AND RELATED SHAREHOLDER’S LOANS

2. PROPOSED PLACING OF NEW SHARES BY KEL

3. DISCLOSEABLE AND CONNECTED TRANSACTION – PROPOSED ACQUISITION BY KEL FROM DESON OF THE ENTIRE ISSUED SHARE CAPITAL OF PENMARK LIMITED AND A RELATED SHAREHOLDER’S LOAN

4. MAJOR AND CONNECTED TRANSACTION – PROPOSED SUBSCRIPTION OF NEW SHARES IN KEL BY A SUBSIDIARY OF DESON

5. MAJOR AND CONNECTED TRANSACTION – PROPOSED DISPOSAL BY KEL TO DESON OF THE ENTIRE ISSUED SHARE CAPITAL OF KENWORTH GROUP LIMITED AND A RELATED SHAREHOLDER’S LOAN

6. PROPOSED INCREASE IN AUTHORISED SHARE CAPITAL

7. PROPOSED GRANT OF GENERAL MANDATE TO ISSUE AND REPURCHASE SHARES

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F IRST S HANGHAI G ROUP
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First Shanghai Capital Limited

A letter from the Board is set out on pages 6 to 23 of this circular.

A letter from First Shanghai Capital Limited setting out its advice and recommendation to the independent shareholders of KEL Holdings Limited is set out on pages 24 to 41 of this circular.

A notice convening a special general meeting of KEL Holdings Limited to be held at The Ritz-Carlton Hong Kong, The Harbour Room, 3rd Floor, 3 Connaught Road, Central, Hong Kong at 11:00 a.m. on Friday, 16 April, 2004 is set out on pages 89 to 93 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, 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 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.

31 March, 2004

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
Letter from First Shanghai. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	24
Appendix I Financial Information of the Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	42
Appendix II Accountants’ Reports on the Xin Hua Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	66
Appendix III Property Valuation Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	76
Appendix IV General Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	80
Notice of Special General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	89

– i –

DEFINITIONS

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

“Announcement” the joint announcement issued by Deson and KEL dated 18 February, 2004; “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 KEL; “Business Day” a day (other than a Saturday or a Sunday) on which banks are open for business in Hong Kong; “Connected Transactions” collectively, the Xin Hua Acquisition, the Penmark Acquisition, the Subscription and the Kenworth Disposal; “Deson” Deson Development International Holdings Limited, an exempted company incorporated in Bermuda with limited liability and the shares of which are listed on the Main Board of the Stock Exchange; “Deson Group” Deson and its subsidiaries; “Directors” the directors of KEL; “General Mandate” the general mandate proposed to be granted to the Directors to allot, issue and deal with the new KEL Shares as described in this circular;

“First Shanghai” First Shanghai Capital Limited, independent financial adviser to the Independent Shareholders in relation to the Connected Transactions, a deemed licensed corporation to carry on a business in type 6 regulated activity (advising on corporate finance) under the SFO;

“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 company established in the PRC and is owned as to 33% by Zhong Min;

“Increase in Authorised Share Capital”

the increase in the authorised share capital of KEL from HK$180,000,000 to HK$350,000,000 by the creation of 2,428,571,428 KEL Shares;

“Independent Shareholders”

the shareholders of KEL, other than Deson and its associates;

“Independent Third Party(ies)”
person(s) or company(ies) which is/are not connected person(s) (as defined in the Listing Rules);
“KEL” or “Company”

KEL Holdings Limited, an exempted company incorporated in Bermuda with limited liability whose shares are listed on the Main Board of the Stock Exchange and a subsidiary of Deson;

– 1 –

DEFINITIONS

“KEL Group” KEL and its subsidiaries; “KEL New Shares” collectively, the Xin Hua Consideration Shares, the Placing Shares, the Penmark Consideration Shares and the Subscription Shares;
“KEL Share(s)” or “Shares” share(s) of HK$0.07 each in the capital of KEL; “Kenworth” Kenworth Group Limited, a company incorporated in the British Virgin Islands with limited liability and a wholly-owned subsidiary of KEL;
“Kenworth Disposal” the disposal by KEL to Deson of the entire issued share capital of Kenworth and the Kenworth Shareholder’s Loan pursuant to the Kenworth Disposal Agreement;
“Kenworth Disposal Agreement” a conditional sale and purchase agreement dated 18 February, 2004 entered into between KEL and Deson in relation to the Kenworth Disposal;
“Kenworth Group” Kenworth and its subsidiaries;
“Kenworth Sale Shares” 3 shares of US$1.00 each in the share capital of Kenworth; “Kenworth Shareholder’s Loan” the shareholder’s loan due by the Kenworth Group to KEL which stood at the amount of HK$497,722,493.15 as at 31 December, 2003;
“Latest Practicable Date” 26 March, 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 April, 2004, or such other date as the parties to the relevant Transaction 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 company established in the PRC and is owned as to 33% by Zhong Min;
“Mr. Mo” Mr. Mo Shikang（莫世康）, who is beneficially interested in 42.66% of each of Smarksborne and Rhythorth and is an Independent Third Party;
“Mr. Tjia” Mr. Tjia Boen Sien, the Managing Director and Deputy Chairman of Deson and KEL;
“Mr. Wang”
Mr. Wang Jing Ning, an executive Director of Deson and KEL;
“Option” the right to be granted by KEL entitling the holder of the same to require KEL to issue and allot to it (or its nominee(s)) Option Shares in accordance with the terms and conditions set out in the Option Certificate;

“Option Certificate” the certificate to be issued by KEL to the holder of the Options under the terms and conditions of the Options;

– 2 –

DEFINITIONS

“Option Exercise Period” the period commencing from the date falling six months from the Option Issue Date and ending on the date falling thirty months from the Option Issue Date, both date inclusive;
“Option Exercise Price” HK$0.105 per Option Share (subject to adjustment); “Option Issue Date” the date on which the Option is issued by KEL; “Option Share(s)” new KEL Shares to be issued and allotted upon exercise of the Option;
“Penmark” Penmark Limited, a company incorporated in Hong Kong with limited liability and an indirect wholly-owned subsidiary of Deson;
“Penmark Acquisition” the acquisition by KEL of the entire issued share capital of Penmark and the Penmark Shareholder’s Loan from Deson pursuant to the Penmark Acquisition Agreement;
“Penmark Acquisition Agreement” the agreement dated 18 February, 2004 entered into between Deson and KEL in respect of the Penmark Acquisition;
“Penmark Acquisition Option” the Option to be granted by KEL under the Penmark Acquisition; “Penmark Consideration Shares” the KEL New Shares to be issued by KEL under the Penmark Acquisition;
“Penmark Sale Shares” 3 shares of HK$10.00 each in the share capital of Penmark; “Penmark Shareholder’s Loan” the shareholder’s loan due by Penmark to the Deson Group which stood at the amount of HK$8,228,038.33 as at 31 December, 2003;
“Placing” the placing of the Placing Shares by the Placing Agent pursuant to the Placing Agreement;
“Placing Agent” Guotai Junan Securities (Hong Kong) Limited, a deemed licensed corporation for types 1, 4, 6 and 9 regulated activities (dealing in securities, advising on securities and corporate finance, and asset management) under the SFO;
“Placing Agreement” the conditional placing agreement entered into between KEL and the Placing Agent on 18 February, 2004 in connection with the placing of 800,000,000 Placing Shares of KEL to independent placees;
“Placing Options” the Options to be granted by KEL under the Placing; “Placing Price” HK$0.10 per Placing Share; “Placing Shares” KEL New Shares to be placed by the Placing Agent under the Placing;

“PRC”

the People’s Republic of China;

“Repurchase Mandate”

the general mandate proposed to be granted to the Directors to repurchase KEL Shares as described in this circular;

– 3 –

DEFINITIONS

“Rhythorth”

Rhythorth Limited, a company incorporated in the British Virgin Islands with limited liability and the beneficial owners of which are Independent Third Parties;

“SFO”
Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong);
“Shareholder(s)”

shareholder(s) of KEL;

“Smarksborne”
Smarksborne Ltd., a company incorporated in the British Virgin Islands with limited liability and the beneficial owners of which are Independent Third Parties;
“Sparta Assets”
Sparta Assets Limited, the controlling shareholder of Deson which was interested in 2,068,750,000 shares in Deson, representing approximately 44.31% of the issued capital of Deson, as at the Latest Practicable Date;
“Special General Meeting”
the special general meeting of KEL to be held at 11:00 a.m. on Friday, 16 April, 2004 at The Ritz-Carlton Hong Kong, The Harbour Room, 3rd Floor, 3 Connaught Road, Central, Hong Kong, notice of which is set out on pages 89 to 93 of this circular;
“Stock Exchange”

The Stock Exchange of Hong Kong Limited;

“Subscription”
the subscription of the Subscription Shares pursuant to the Subscription Agreement;
“Subscription Agreement” the conditional agreement dated 18 February, 2004 entered into between KEL and Super Win in relation to the subscription of the Subscription Shares by Super Win and the issue of the Subscription Shares by KEL;
“Subscription Consideration” HK$32,500,000 payable by Super Win for the Subscription Shares;
“Subscription Option”

the Option to be granted by KEL under the Subscription;

“Subscription Shares”
325,000,000 new KEL Shares to be allotted and issued by KEL to Super Win pursuant to the Subscription Agreement;
“substantial shareholder”

has the meaning ascribed thereto under the Listing Rules;

“Super Win”

Super Win Development Limited, a company which is incorporated in the British Virgin Islands with limited liability and is an indirect wholly-owned subsidiary of Deson;

“Transactions”
collectively, the Xin Hua Acquisition, the Placing, the Penmark Acquisition, the Subscription and the Kenworth Disposal;
“Xin Hua”

Xin Hua Resources Investment Limited, a company incorporated in the British Virgin Islands and is owned as to 15% by Smarksborne and 34% by Rhythorth;

“Xin Hua Acquisition”

the acquisition by Brilliant China of an aggregate 49% shareholding in Xin Hua from Smarksborne and Rhythorth pursuant to the Xin Hua Acquisition Agreement;

– 4 –

DEFINITIONS

“Xin Hua Acquisition Agreement”	the conditional sale and purchase agreement dated 18 February,
	2004 entered into between Smarksborne, Rhythorth, Brilliant
	China, Mr. Mo and KEL in respect of the Xin Hua Acquisition;
“Xin Hua Consideration Shares”	the KEL New Shares to be issued by KEL under the Xin Hua
	Acquisition;
“Xin Hua Group”	Xin Hua and its subsidiaries;
“Xin Hua Sale Shares”	24,500 shares of US$1.00 each in the share capital of Xin Hua;
“Xin Hua Sellers”	collectively, Rhythorth and Smarksborne;
“Xin Hua Shareholder’s Loans”	the respective amounts advanced by Smarksborne and Rhythorth
	respectively to Xin Hua by way of interest-free shareholder’s
	loans which stand at US$1,048,923.18 and US$2,377,559.20 as at
	18 February, 2004 (and which shall remain at the same respective
	amounts at completion of the Xin Hua Acquisition), and where
	the context requires, the full title to, benefit and interests in such
	advances, and “Xin Hua Shareholder’s Loan” refers to either or
	the relevant one of such advances;
“Zhong Min”	Beijing Zhong Min Gas Co. Ltd.（北京中民燃氣有限公司）, a
	wholly-owned foreign enterprise established in the PRC and a
	wholly-owned subsidiary of Xin Hua;
“Zhongda Property”	the property situated at Unit 02 on Level 3A Floor, Zhongda
	Square on 989 Dongfang Road, Lujiazhui, Pudong District,
	Shanghai, PRC;
“Zhongda Square”	a 28-storey commercial/office complex with 2 levels of basement
	carparks on 989 Dongfang Road, Lujiazhui, Pudong New District,
	Shanghai, PRC;
“HK$”	Hong Kong dollars, the lawful currency of Hong Kong;
“US$”	United States dollars, the lawful currency of the United States of
	America;
“RMB”	renminbi yuan, the lawful currency of the PRC; and
“%”	per cent..

– 5 –

LETTER FROM THE BOARD

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KEL HOLDINGS LIMITED

(Incorporated in Bermuda with limited liability)

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

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:

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

31 March, 2004

To the Shareholders

Dear Sirs,

1. MAJOR AND CONNECTED TRANSACTION – PROPOSED ACQUISITION BY A SUBSIDIARY OF KEL OF AN AGGREGATE 49% SHAREHOLDING IN XIN HUA RESOURCE INVESTMENT LIMITED AND RELATED SHAREHOLDER’S LOANS

2. PROPOSED PLACING OF NEW SHARES BY KEL

3. DISCLOSEABLE AND CONNECTED TRANSACTION – PROPOSED ACQUISITION BY KEL FROM DESON OF THE ENTIRE ISSUED SHARE CAPITAL OF PENMARK LIMITED AND A RELATED SHAREHOLDER’S LOAN

4. MAJOR AND CONNECTED TRANSACTION – PROPOSED SUBSCRIPTION OF NEW SHARES IN KEL BY A SUBSIDIARY OF DESON

5. MAJOR AND CONNECTED TRANSACTION – PROPOSED DISPOSAL BY KEL TO DESON OF THE ENTIRE ISSUED SHARE CAPITAL OF KENWORTH GROUP LIMITED AND A RELATED SHAREHOLDER’S LOAN

6. PROPOSED INCREASE IN AUTHORISED SHARE CAPITAL

7. PROPOSED GRANT OF GENERAL MANDATE TO ISSUE AND REPURCHASE SHARES

INTRODUCTION

It was announced on 18 February, 2004 that KEL and Deson jointly announced in the Announcement

that:

Brilliant China (a wholly-owned subsidiary of KEL) has conditionally agreed to acquire an aggregate 49% shareholding in Xin Hua and the Xin Hua Shareholder’s Loans;

– 6 –

LETTER FROM THE BOARD

KEL has conditionally agreed to place 800,000,000 Placing Shares and the Placing Agent agreed to place the same to not less than six independent placees;
KEL has conditionally agreed to acquire from the Deson Group the entire issued share capital of Penmark and the Penmark Shareholder’s Loan;
Super Win (an indirect wholly-owned subsidiary of Deson) has conditionally agreed to subscribe for the Subscription Shares from KEL; and
Deson has conditionally agreed to acquire from KEL the entire issued share capital of Kenworth and the Kenworth Shareholder’s Loan.

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

TRANSACTIONS

A. THE XIN HUA ACQUISITION AGREEMENT DATED 18 FEBRUARY, 2004

Parties

(1) Smarksborne and Rhythorth (as the sellers, which, and the beneficial owners of the issued share capital of which, are Independent Third Parties)
(2) Mr. Mo (as a warrantor, who is beneficially interested in 42.66% of each of Smarksborne and Rhythorth and an Independent Third Party)
(3) Brilliant China (as the purchaser, which is a wholly-owned subsidiary of KEL)
(4) KEL

Assets to be acquired

Pursuant to the Xin Hua Acquisition Agreement, Brilliant China has conditionally agreed to acquire:

(i) from Smarksborne, a 15% shareholding in Xin Hua and the Xin Hua Shareholder’s Loan; and
(ii) from Rhythorth, a 34% shareholding in Xin Hua and the Xin Hua Shareholder’s Loan.

Consideration

The total consideration of HK$29.5 million for the Xin Hua Acquisition, of which HK$2,773,437.44 is attributable to the sale and purchase of the Xin Hua Sale Shares and HK$26,726,562.56 is attributable to the Xin Hua Shareholder’s Loans, payable by Brilliant China to the Xin Hua Sellers will be satisfied by issuing 90,300,000 and 204,700,000 Xin Hua Consideration Shares to Smarksborne and Rhythorth respectively. It also represents a discount of approximately 22.48% to HK$38,055,000, being the amount equivalent to the Xin Hua Consideration Shares at the price of HK$0.129 per KEL Share as quoted on the Stock Exchange on 4 February, 2004.

– 7 –

LETTER FROM THE BOARD

The total of 295,000,000 Xin Hua Consideration Shares represent approximately 19.41% of the existing issued share capital of KEL and approximately 16.26% of the issued share capital of KEL as enlarged by the issue of the Xin Hua Consideration Shares and approximately 9.79% of the issued share capital of KEL as enlarged by the issue of the KEL New Shares.

The Xin Hua Consideration Shares will be issued to Smarksborne and Rhythorth (or their respective nominees) in accordance with the approximate proportions of their respective shareholding interests in Xin Hua to be sold to Brilliant China as follows:

	Percentage of
	shareholding interest	No. of Xin Hua
	in Xin Hua	Consideration Shares
Smarksborne	15%	90,300,000
Rhythorth	34%	204,700,000

Assuming completion of the Xin Hua Acquisition, each of Smarksborne and Rhythorth (or their respective nominees) will be interested in approximately 4.98% and 11.28% (which will therefore result in Rhythorth becoming a substantial shareholder of KEL), respectively of the issued share capital of KEL as enlarged by the issue of the Xin Hua Consideration Shares and 3% and 6.79% respectively of the issued share capital of KEL as enlarged by the issue of the KEL New Shares.

The consideration for the Xin Hua Acquisition was arrived at after arm’s length negotiations between all parties to the Xin Hua Acquisition Agreement by reference to the expected future growth potential of the Xin Hua Group. The Directors note that the unaudited profit of Hong Sen and Long Teng for the year ended 31 December, 2003 were RMB1,692,000 (approximately HK$1,596,000) and RMB324,000 (approximately HK$306,000) respectively. The consideration for the Xin Hua Acquisition also represents a premium of 13.62% to the portion of the unaudited net assets (as adjusted by excluding the Xin Hua Shareholders’ Loans which are part of what KEL is purchasing) of the Xin Hua Group attributable to the Xin Hua Sellers as at 31 December, 2003 of approximately HK$25,964,000.

Application will be made to the Stock Exchange for the listing of, and permission to deal in, the Xin Hua Consideration Shares.

The Xin Hua Consideration Shares to be issued to Smarksborne and Rhythorth will upon issue rank pari passu in all respects with all other KEL Shares in issue at that time.

Issue price of Xin Hua Consideration Share

See below under the heading “Issue Price of the KEL New Shares”.

Conditions Precedent

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

(i) the passing by the Shareholders of the necessary resolutions to approve the Xin Hua Acquisition and other transactions contemplated in the Xin Hua Acquisition Agreement in accordance with the Listing Rules; and
(ii) any or all approvals, consents and waivers required by any applicable law, rules or regulations, or by governmental, administrative or regulatory bodies necessary or otherwise appropriate, for Xin Hua Acquisition contemplated by Xin Hua Acquisition Agreement having been obtained.

In the event that the above conditions are not fulfilled on or before the Long Stop Date, the Xin Hua Acquisition Agreement shall lapse.

– 8 –

LETTER FROM THE BOARD

Completion

Completion of the Xin Hua Acquisition shall take place on the second Business Day immediately following the day upon which all of the conditions for the 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.

The Board is currently made up of 8 Directors, comprising 6 executive Directors and 2 independent non-executive Directors. Upon completion of the Xin Hua Acquisition, Mr. Mo will be appointed as an additional executive Director. Save for Mr. Mo’s appointment, the Board has no intention of making any other change to its composition upon completion of the Xin Hua Acquisition.

Information on the Xin Hua Group

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. Zhong Min, a wholly foreignowned enterprise established in the PRC, is beneficially interested in 33% of each of Hong Sen and Long Teng. Hong Sen is principally engaged in the distribution and supply of piped natural gas in the PRC whilst Long Teng is principally engaged in the installation of natural gas distribution facilities in the PRC. Apart from its interests in Zhong Min, Xin Hua does not carry on any other business or has any other material assets. As at the Latest Practicable Date, Xin Hua is owned as to 15%, 34%, 30.25% and 20.75% by Smarksborne, Rhythorth and two other Independent Third Parties respectively.

The existing board of Xin Hua consists of four directors, and each of the existing shareholders of Xin Hua is entitled to nominate one director. Assuming completion of the Xin Hua Acquisition, Brilliant China will be entitled to nominate two directors to the board of Xin Hua and Xin Hua will be treated as an associated company of the KEL Group.

The unaudited net asset value of Zhong Min as at 31 December, 2003 was RMB54,709,000 (approximately HK$51,612,000). For the six months ended 31 December, 2003, the unaudited loss attributable to the shareholder of Zhong Min was RMB1,799,000 (approximately HK$1,697,000).

Shareholding of the Xin Hua Group

A. Existing shareholding structure of the Xin Hua Group

==> picture [382 x 195] intentionally omitted <==

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

Smarksborne Rhythorth Independent Independent
Third Party Third Party
15% 34% 30.25% 20.75%
Xin Hua
100%
Zhong Min
33% 33%
Long Teng Hong Sen
----- End of picture text -----

– 9 –

LETTER FROM THE BOARD

B. Shareholding structure of the Xin Hua Group immediately following completion of the Xin Hua Acquisition

==> picture [301 x 195] intentionally omitted <==

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

Brilliant Independent Independent
China Third Party Third Party
49% 30.25% 20.75%
Xin Hua
100%
Zhong Min
33% 33%
Long Teng Hong Sen
----- End of picture text -----

Reasons for the Xin Hua Acquisition

The Directors note that the KEL 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. During the past few years, the KEL Group has experienced difficult market conditions owing to the weak local economy and the keen competition in the construction industry.

In order to turnaround the difficulties faced by the KEL Group and to strengthen its financial condition, the Directors have been exploring new business opportunities which will generate revenue and cash flow and provide a reliable source of income to the KEL Group. In May 2003, the KEL Group acquired from Deson the entire issued share capital of Billion Treasure Holdings Limited which holds certain rental properties at Zhongda Square (in the same building as the Zhongda Property). Save for the diversification into the natural gas business and other than as represented by the Penmark Acquisition and the Kenworth Disposal, the directors of KEL have no present intention to make any other change to the KEL Group’s business.

The PRC has historically relied heavily on coal as its primary energy source, but PRC government in recent years has strongly 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 Directors advised that they are therefore of the view that the growth prospects of the Xin Hua Group are promising and that the Xin Hua Acquisition represents a good business opportunity for the KEL Group as it will bring additional earnings to the KEL Group.

The consideration for the Xin Hua Acquisition will be satisfied in full by the issue of the Xin Hua Consideration Shares and there is no immediate cash payment to be made by the KEL Group. As such, the Xin Hua Acquisition will not worsen the financial condition of the KEL Group.

– 10 –

LETTER FROM THE BOARD

Shareholding structure of KEL before and after the Xin Hua Acquisition

Deson Smarksborne Rhythorth Others	Existing Shareholding 1,136,724,256 – – 382,991,480 1,519,715,736	% 74.80 – – 25.20 100.00	Immediately after completion of the Xin Hua Acquisition 1,136,724,256 90,300,000 204,700,000 382,991,480 1,814,715,736	% 62.64 4.98 11.28 21.10
				100.00

Appointment of Mr. Mo as executive Director to the Board

Following completion of the Xin Hua Acquisition, Mr. Mo will be appointed to the Board. The biography and information of Mr. Mo is set out below:

Mr. Mo, aged 46. He holds a Bachelor degree in Mathematics from Tianjin Education University and a Master degree in Economics from Tianjin College of Finance. Mr. Mo has rich experience in the development and management of natural gas projects in the PRC.

Listing rules implications of the Xin Hua Acquisition

The Xin Hua Acquisition (including the issue of the Xin Hua Consideration Shares) constitutes a major transaction for KEL under the Listing Rules and is subject to the approval of the Shareholders at the Special General Meeting to be convened for such purpose. Given that Mr. Mo will be appointed as an additional executive Director upon completion of the Xin Hua Acquisition, the Xin Hua Acquisition also constitutes a connected transaction for KEL under the Listing Rules and is subject to the approval of the Shareholders at the Special General Meeting. None of the Shareholders is interested in the Xin Hua Acquisition and, as such, none of them will be required to abstain from voting at the Special General Meeting.

B. THE PLACING AGREEMENT DATED 18 FEBRUARY, 2004

Issuer: KEL

Placing Agent:

Guotai Junan Securities (Hong Kong) Limited is the placing agent and will receive a placing commission of 0.8% on the gross proceeds of the Placing. The Placing Agent is an Independent Third Party.

Placees:

The Placing Shares (together with the Placing Options to be granted) will be placed to not less than six institutional, professional and/or other investors and their ultimate beneficial owners will be Independent Third Parties. No placees will hold 10% or more of the issued share capital of KEL upon completion of the Placing.

Number of Placing Shares:

800,000,000 Placing Shares, of which the Placing Agent has agreed:–

(i) to underwrite and procure placees to take up, or, failing which, the Placing Agent will take up, 200,000,000 Placing Shares at the Placing Price; and

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LETTER FROM THE BOARD

(ii) on a best endeavours basis, to procure Placees to take up up to 600,000,000 Placing Shares at the Placing Price.

Assuming 800,000,000 Placing Shares have been placed by the Placing Agent, the Placing Shares represent approximately 52.64% of the existing issued share capital of KEL and approximately 34.49% of the issued share capital of KEL as enlarged by the Placing.

KEL has agreed that each placee under the Placing will be granted a Placing Option which will entitle it to subscribe at the Option Exercise Price for one Option Share for every two Placing Shares subscribed by such placee. Each Placing Option shall be exercisable at any time during the Option Exercise Period.

Placing Price:

Ranking of the Placing Shares:

Conditions:

HK$0.10 per Placing Share (which is the same as the issue price of all the other KEL New Shares pursuant to the other Transactions). The Placing Price was determinated after arm’s length negotiations between KEL and the Placing Agent. The Directors, having taken into account the market conditions prevailing immediately prior to the Placing, consider that the terms of the Placing are fair and reasonable and in the interests of the Shareholders as a whole.

The Placing Shares, when fully paid and issued, will rank equally in all respects with the other KEL Shares in issue or to be issued by KEL on or prior to the date of completion of the Placing, including the right to all dividends and other distributions declared, made or paid at anytime after the completion of the Placing.

The Placing is conditional upon

(i) the listing of, and permission to deal in, the Placing Shares and the Option Shares to be issued pursuant to any exercise of the Placing Options being granted by the Listing Committee of the Stock Exchange;
(ii) the passing by the members of KEL of all necessary resolutions approving the Increase in Authorized Share Capital and the issue by KEL of the Placing Shares and the Option Shares issuable upon exercise of the Placing Options upon the terms and conditions of the Placing Agreement; and
(iii) if necessary, the Bermuda Monetary Authority granting permission for the allotment and issue of the Placing Shares and the Option Shares and for the grant of the Placing Options.

In the event that the above conditions are not fulfilled on or before the Long Stop Date, the Placing Agreement shall lapse. The Placing Options and the Placing Shares will only be issued by KEL when all the conditions to the Placing Agreement are fulfilled.

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LETTER FROM THE BOARD

Application for listing:

Application will be made to the Stock Exchange for the listing of, and permission to deal in, the Placing Shares and the Option Shares issuable upon exercise of the Placing Options.

Completion of the Placing is expected to take place on the second Business Day following the fulfillment of all the above conditions.

Completion: Completion of the Placing is expected to take place on the second Business Day following the fulfillment of all the above conditions. Use of Proceeds: The Placing will broaden the shareholder base and capital base of KEL. See below under the section headed “Use of Proceeds from the Placing, the Subscription and the Kenworth Disposal” for a description of the intended use of such proceeds. Assuming the Placing is completed in respect of all the 800,000,000 Placing Shares, the net proceeds from the Placing are estimated to be approximately HK$78.5 million.

Shareholding structure of KEL before and after the Placing

Deson Placees Others	Existing Shareholding 1,136,724,256 – 382,991,480 1,519,715,736	% 74.80 – 25.20 100.00	Immediately after completion of the Placing 1,136,724,256 800,000,000 382,991,480 2,319,715,736	% 49.00 34.49 16.51 100.00	Immediately following completion of the Placing and upon exercise of related Options 1,136,724,256 1,200,000,000 382,991,480 2,719,715,736	% 41.80 44.12 14.08
						100.00

Listing Rules implications of the Placing

Pursuant to the Listing Rules, the issue of the Placing Shares and the Option Shares issuable upon exercise of the Placing Options is subject to the approval of the Shareholders.

C. THE PENMARK ACQUISITION AGREEMENT DATED 18 FEBRUARY, 2004

Parties

(1) Deson (as the seller)
(2) KEL (as the purchaser)

Assets to be acquired

Pursuant to the Penmark Acquisition Agreement, KEL conditionally agreed to acquire from Deson:–

(i) 3 shares of HK$10.00 each in the issued share capital of Penmark, representing the entire issued share capital of Penmark, the sole asset of which is the Zhongda Property with a total gross floor area of 533.71 m[2] ; and
(ii) the Penmark Shareholder’s Loan.

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LETTER FROM THE BOARD

Consideration

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

Consideration:

A sum of HK$7,500,000, of which HK$1 is attributable to the acquisition of the Penmark Sale Shares and HK$7,499,999 is attributable to the acquisition of the Penmark Shareholder’s Loan. The sum of HK$7,500,000 represents a premium of approximately 7.1% to the audited net assets of Penmark as at 31 March, 2003 (as adjusted by excluding the Penmark Shareholder’s Loan as it is included in the Penmark Acquisition but without taking into account the independent valuation of the Zhongda Property referred to below).

KEL has also agreed that Deson will be granted the Penmark Acquisition Option which will entitle it to subscribe at the Option Exercise Price for one Option Share for every two Penmark Consideration Shares to which it is entitled under the Penmark Acquisition.

Method of settlement of By way of issuing 75,000,000 Penmark Consideration consideration: Shares to Deson (or its nominee) at an issue price of HK$0.10 per Penmark Consideration Share. The total consideration of HK$7,500,000 for the Penmark Acquisition represents a discount of 22.48% to HK$9,675,000, being the amount equivalent to the Penmark Consideration Shares at the price of HK$0.129 per KEL Share as quoted on the Stock Exchange on 4 February, 2004.

The consideration for the Penmark Acquisition was arrived at after arm’s length negotiations between Deson and KEL by reference to the current open market value of the Zhongda Property as at 18 February, 2004 of HK$8,000,000 as stated in the valuation report dated 31 March, 2004 prepared by B.I. Appraisals Limited, an independent firm of chartered surveyor and an Independent Third Party. This compares with the net book value as stated in the audited financial statements of Penmark as at 31 March, 2003 of the Zhongda Property of approximately HK$7,000,000.

The Penmark Consideration Shares, which are issued at HK$0.10 each, represent approximately 4.94% of the existing issued share capital of KEL, approximately 4.7% of the issued share capital of KEL as enlarged by the issue of the Penmark Consideration Shares and 2.49% of the issued share capital of KEL as enlarged by the issue of the KEL New Shares.

An application will be made to the Stock Exchange for the listing of, and permission to deal in, the Penmark Consideration Shares and the Option Shares issuable upon exercise of the Penmark Acquisition Option.

Issue price of the Penmark Consideration Shares

Please see below under the section headed “Issue Price of the KEL New Shares”.

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LETTER FROM THE BOARD

Conditions precedent

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

(i) the passing by the Independent Shareholders at a general meeting of KEL of the necessary resolutions to approve the Penmark Acquisition, the Increase in Authorised Share Capital, the issue and allotment of the Penmark Consideration Shares and the Option Shares issuable upon exercise of the Penmark Acquisition Option and other transactions contemplated in the Penmark Acquisition Agreement in accordance with the Listing Rules;
(ii) the Stock Exchange having granted listing of, and permission to deal in, the Penmark Consideration Shares and the Option Shares issuable upon exercise of the Penmark Acquisition Options; and
(iii) if necessary, the Bermuda Monetary Authority granting permission for the allotment and issue of the Penmark Consideration Shares and the Option Shares and for the grant of the Penmark Acquisition Option.

In the event that the above conditions are not fulfilled on or before the Long Stop Date, the Penmark Acquisition Agreement shall lapse. The Penmark Acquisition Option and the Penmark Consideration Shares will only be issued by KEL when all the conditions to the Penmark Acquisition Agreement are fulfilled.

Completion

Completion of the Penmark Acquisition shall take place on the second Business Day immediately following the day upon which all of the conditions for the Penmark 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.

Information on Penmark

Penmark is principally engaged in the business of property investment and owns the Zhongda Property which has a total gross floor area of 533.71 m[2] . The Zhongda Property is currently occupied as office by Deson Development Limited, an indirect wholly-owned subsidiary of Deson.

The audited net loss of Penmark for the two years ended 31 March, 2003 is set out as follows:

		2002	2003
		HK$	HK$
Loss	before taxation and attributable
to	shareholders	196,000	25,000

The audited net deficit of Penmark was HK$1,225,000 as at 31 March, 2003, as no rental income was charged by Penmark to Deson Development Limited for the two years ended 31 March, 2003 on the basis that both Penmark and Deson Development Limited are wholly-owned by the Deson Group. Deson has undertaken that Deson Development Limited will lease from Penmark on normal commercial terms (as confirmed by B.I. Appraisals Limited, an independent valuer) for a term of one year at HK$40,000 per month after completion of the Penmark Acquisition, which is less than HK$1,000,000 per annum. Accordingly, although such leasing arrangement will amount to a connected transaction for both Deson and KEL, it will fall within the de minimis exemption in Rule 14.24(5) of the Listing Rules and, will therefore, not be subject to any of the Shareholders’ approval, announcement or notification requirements applicable to connected transactions in Chapter 14 of the Listing Rules.

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LETTER FROM THE BOARD

Reasons for the Penmark Acquisition

The KEL 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. In May, 2003, with a view to diversify into a business which would generate revenue and cash flow and provide a reliable source of income for the KEL Group, the KEL Group completed the acquisition from Deson of the entire issued share capital of a company which owns the properties comprising 24th, 27th and 28th floors and 19 carparks at Zhongda Square with a total gross floor area 3,098.49 m[2] . Under the existing rental agreements, the aggregate monthly rental of those properties at Zhongda Square is HK$154,000.

The effective acquisition of the Zhongda Property through the Penmark Acquisition with a total gross floor area of 533.71 m[2] will enable the KEL Group to further increase its interest in Zhongda Square which in turn will provide a further additional source of reliable recurring rental income and an additional cash flow stream to the KEL Group. In view of the buoyant property market in a core business district in Shanghai where Zhongda Square is located, the Directors believe that the Penmark Acquisition would also represent an investment by KEL with potential appreciation in capital value.

The consideration for the Penmark Acquisition will be satisfied in full by the issue of 75,000,000 Penmark Consideration Shares and there is no cash requirement on the KEL Group to fund the Penmark Acquisition. The Directors consider that it will be beneficial to KEL to issue new KEL Shares as consideration for the Penmark Acquisition as it will not affect the existing cash resources of the KEL Group. The issue of the Penmark Consideration Shares by KEL to satisfy the payment of the consideration for the Penmark Acquisition will also have a positive effect on the consolidated net assets of the KEL Group.

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

Shareholding structure of KEL before and after Penmark Acquisition

Deson Others	Existing Shareholding 1,136,724,256 382,991,480 1,519,715,736	% 74.80 25.20 100.00	Immediately after completion of the Penmark Acquisition 1,211,724,256 382,991,480 1,594,715,736	% 75.98 24.02 100.00	Immediately following completion of the Penmark Acquisition and upon exercise of related Options 1,249,224,256 382,991,480 1,632,215,736	% 76.54 23.46
						100.00

Listing Rules implications of the Penmark Acquisition

The Penmark Acquisition (including the issue of the Penmark Consideration Shares) constitutes a discloseable transaction for KEL under the Listing Rules. Since Deson is a controlling shareholder of KEL having a shareholding interest of approximately 74.8% in KEL, the Penmark Acquisition also constitutes a connected transaction for KEL under the Listing Rules and is required to be made conditional upon the approval of the Independent Shareholders at the Special General Meeting. Deson and its associates will abstain from voting at the Special General Meeting. After completion of the Penmark Acquisition, Deson will be interested in approximately 75.98% of the issued share capital of KEL as enlarged by the issue of the Penmark Consideration Shares.

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LETTER FROM THE BOARD

D. THE SUBSCRIPTION AGREEMENT DATED 18 FEBRUARY, 2004

Subscriber:

Super Win (an indirect wholly-owned subsidiary of Deson)

Issuer: KEL

Number of Subscription Shares and the Subscription Option:

325,000,000 Subscription Shares, representing approximately 21.39% of the existing issued share capital of KEL, approximately 17.62% of the enlarged issued share capital of KEL immediately after completion of the Subscription Agreement and 10.78% of the issued share capital of KEL as enlarged by the issue of the KEL New Shares.

KEL has agreed that Super Win (or its nominee(s)) will be granted a Subscription Option which will entitle it to subscribe for at the Option Exercise Price of one Option Share for every two Subscription Shares subscribed by Deson under the Subscription. Such Subscription Option shall be exercised during the Option Exercise Period.

An application will be made to the Stock Exchange for the listing of, and permission to deal in, the Subscription Shares and the Option Shares issuable upon exercise of the Subscription Option.

The Subscription Shares to be issued to Super Win (or its nominee) will upon issue rank pari passu in all respect with all other KEL Shares in issue at that time.

Subscription Consideration:

HK$32,500,000 at a subscription price of HK$0.10 per Subscription Share. See below under “Issue Price of the KEL New Shares” for a comparison of such subscription price with recent closing prices of KEL Shares.

Basis of the Subscription Consideration:

The subscription price of HK$0.10 for the Subscription Shares was determined and negotiated on an arm’s length basis between the parties to the Subscription Agreement.

Payment:

The Subscription Consideration shall be paid by Super Win in cash upon completion of the Subscription Agreement.

Conditions precedent:

The Subscription Agreement is conditional upon, inter alia:

i. the passing by the Independent Shareholders at a general meeting of KEL of the necessary resolutions to approve the Subscription, the issue and allotment of the Subscription Shares and the Option Shares issuable upon exercisable under the Subscription Option, the Increase in the Authorised Share Capital and other transactions contemplated under the Subscription Agreement in accordance with the Listing Rules;
ii. the Stock Exchange granting the listing of, and permission to deal in, the Subscription Shares and the Option Shares issuable upon exercise of the Subscription Option;
iii. if necessary, the Bermuda Monetary Authority granting permission for the allotment and issue of Subscription Shares and the Option Shares issuable upon exercise of the Subscription Option and for the grant of the Subscription Option; and

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LETTER FROM THE BOARD

iv. the Xin Hua Acquisition Agreement being completed in accordance with its terms.

In the event that any of the above conditions are not fulfilled on or before the Long Stop Date, the Subscription Agreement shall be terminated. The Subscription Options and the Subscription Shares will only be issued by KEL when all the conditions to the Subscription Agreement are fulfilled.

Reasons for the Subscription

The Subscription will raise further funds to enhance KEL’s capital and working capital position. The net proceeds from the Subscription are estimated to be approximately HK$32,000,000. See below under the section headed “Use of proceeds from the Placing, the Subscription and the Kenworth Disposal” for a description of the intended use of such proceeds.

Shareholding structure of KEL before and after Subscription

Deson Others	Existing Shareholding 1,136,724,256 382,991,480 1,519,715,736	% 74.80 25.20 100.00	Immediately after completion of Subscription 1,461,724,256 382,991,480 1,844,715,736	% 79.24 20.76 100.00	Immediately following completion of the Subscription and upon exercise of related Options 1,624,224,256 382,991,480 2,007,215,736	% 80.92 19.08
						100.00

Listing Rules Implications of the Subscription

The Subscription involves an issue of the Subscription Shares and the Subscription Option by KEL to Deson and will be subject to the approval of the Independent Shareholders under the Listing Rules.

The Subscription has been aggregated with the Kenworth Disposal and as a result, the Subscription and the Kenworth Disposal constitute major transactions for KEL under the Listing Rules. Since Deson is a controlling shareholder of KEL having a shareholding interest of 74.8% in KEL, the Subscription and the Kenworth Disposal also constitute connected transactions for KEL under the Listing Rules. The Subscription and the Kenworth Disposal are required to be made conditional upon approval by the Independent Shareholders at the Special General Meeting. Deson and its associates will abstain from voting at the Special General Meeting.

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LETTER FROM THE BOARD

E. THE KENWORTH DISPOSAL AGREEMENT DATED 18 FEBRUARY, 2004

Parties

(1) Deson (as the purchaser)

(2) KEL (as the seller)

Assets to be disposed of

The entire issued share capital of Kenworth, a company incorporated in the British Virgin Islands with limited liability, together with the Kenworth Shareholder’s Loan.

Consideration

The consideration receivable under the Kenworth Disposal Agreement of HK$7,000,000 was arrived at after arm’s length negotiations between Deson and KEL. Such consideration, of which HK$1 is attributable to the acquisition of the Kenworth Sale Shares and HK$6,999,999 is attributable to the acquisition of the Kenworth Shareholder’s Loan. The basis of such consideration is calculated based on the unaudited consolidated net asset of Kenworth as at 31 December, 2003 of HK$4,844,000 (as adjusted by excluding the Kenworth Shareholder’s Loan as it is being sold by KEL under the Kenworth Disposal). The consideration for the Kenworth Disposal will be payable in cash by Deson.

Conditions of the Kenworth Disposal Agreement

Completion of the Kenworth Disposal Agreement shall be conditional upon, among other things, the Xin Hua Acquisition Agreement being completed in accordance with its terms.

In the event that the above condition is not fulfilled on or before the Long Stop Date, the Kenworth Disposal Agreement shall lapse.

Completion

Completion of the Kenworth Disposal Agreement shall take place on the second Business Day immediately following the day upon which the condition pursuant to Kenworth Disposal Agreement having been fulfilled or such later date as the relevant parties may agree in writing, but, in any event, no later than the Long Stop Date.

Information on the Kenworth Group

Kenworth is an investment holding company and the Kenworth Group is principally engaged in the provision of electrical and mechanical engineering services. Kenworth Group currently holds 11 licences under the List of Approved Suppliers of Materials and Specialist Contractors for Public Works under Works Bureau of the Government of Hong Kong.

The unaudited consolidated net loss of the Kenworth Group for the year ended 31 March, 2002 and the year ended 31 March, 2003 are set out below:–

	2002	2003
	HK$	HK$
Turnover	19,117,000	31,184,000
Loss before taxation	6,546,000	6,323,000
Loss after taxation	6,546,000	6,323,000

The deterioration in operating results of the Kenworth Group for the two years ended 31 March, 2003 was mainly due to the weak local economy and the keen competition within the local construction industry during the relevant periods.

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LETTER FROM THE BOARD

The unaudited consolidated net tangible deficit of the Kenworth Group as at 31 March, 2002 and as at 31 March, 2003 were approximately HK$492,973,000 and HK$488,249,000 respectively.

Reasons for the Kenworth Disposal and use of proceeds

The Directors would make reference to the circular of KEL dated 30 October, 2001 relating to continuing connected transactions of KEL in respect of the provision of electrical and mechanical engineering services by the KEL Group to the Deson Group. After completion of the Kenworth Disposal, the KEL Group will no longer be engaged in the provision of electrical and mechanical engineering services to the Deson Group and such continuing connected transactions for the KEL Group will cease.

Further, the Directors also consider the Xin Hua Acquisition and the Penmark Acquisition will contribute to the further diversification of the KEL Group’s existing businesses. They therefore consider that it is in the interest of KEL and its shareholders as a whole to dispose of the entire issued share capital of Kenworth, a loss making operation of the KEL Group in the past few years.

The existing business of KEL is principally comprised of the provision of electrical and mechanical engineering services, the leasing of construction machinery and equipment and the leasing of the properties at Zhongda Square which were acquired in mid May last year. Upon the completion of the Xin Hua Acquisition and the Kenworth Disposal (which is conditional on the completion of the Xin Hua Acquisition), the business of the KEL Group will principally comprise the holding and leasing of properties in Zhongda Square and the investment in the Xin Hua Group which is engaged in the distribution and supply of piped natural gas and the installation of natural gas distribution facilities in the PRC.

The Directors estimate that the net proceeds of the Kenworth Disposal will be approximately HK$6,900,000. See below under the section headed “Use of proceeds from the Placing, the Subscription and Kenworth Disposal” for a description of the intended use of such proceeds.

Listing Rules implication of the Kenworth Disposal

The Kenworth Disposal has been aggregated with the Subscription and as a result, the Subscription and the Kenworth Disposal constitute major transactions for KEL under the Listing Rules. Since Deson is a controlling shareholder of KEL having a shareholding interest of 74.8% in KEL, the Subscription and the Kenworth Disposal also constitute connected transactions for KEL under the Listing Rules. The Subscription and the Kenworth Disposal are required to be made conditional upon the approval of the Independent Shareholders at the Special General Meeting. Deson and its associates will abstain from voting at the Special General Meeting.

ISSUE PRICE OF THE KEL NEW SHARES

The issue price for the Xin Hua Acquisition Shares, the Placing Shares, the Penmark Consideration Shares and the Subscription Shares is in each case HK$0.10 per KEL New Share, which represents:

a discount of approximately 22.48% to the closing price of HK$0.129 per KEL Share as quoted on the Stock Exchange on 4 February, 2004, being the last trading day prior to suspension of trading in the KEL Shares on the Stock Exchange pending the issue of the Announcement;
a discount of approximately 6.54% to the average closing price of HK$0.107 per KEL Share as quoted on the Stock Exchange for the 10 trading days up to and including 4 February, 2004;
a premium of approximately 2.04% to the average closing price of HK$0.098 per KEL Share as quoted on the Stock Exchange for the 30 trading days up to and including 4 February, 2004; and
a premium of approximately 289.11% to the unaudited consolidated net assets of approximately HK$0.0257 per KEL Share as at 30 September, 2003.

As at 30 September, 2003, the unaudited consolidated net assets of KEL were approximately HK$39,044,000, equivalent to net assets of approximately HK$0.0257 per KEL Share.

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LETTER FROM THE BOARD

OPTIONS

The principal terms of the Placing Options, the Penmark Acquisition Option and the Subscription Option are as follows:–

Grantor:

KEL

Option:

each holder of the Option has the right to subscribe at the Option Exercise Price for one Option Share.

Option Exercise Price:

HK$0.105 per Option Share (subject to adjustment). This concern with the issue price of HK$0.10 per KEL New Share under the Xin Hua Acquisition, the Placing, the Penmark Acquisition and the Subscription. See above under the section headed “Issue Price of the KEL New Shares”.
Option Exercise Period:
the period commencing from the date falling six months from the Option Issue Date and ending on the date falling thirty months from the Option Issue Date, both dates inclusive.
Ranking of the Option Shares:

The Option Shares, when fully paid and issued, will rank equally in all respects with the other KEL Shares in issue or to be issued by KEL at the time of exercise, including the right to all dividends and other distributions declared, made or paid.

The issue of Option Shares, if any part of any of the Options (which if exercised in full would result in the issue by KEL of 600,000,000 KEL New Shares) is exercised, this will also further enlarge KEL’s capital base and provide additional working capital for the KEL Group.

SHAREHOLDING STRUCTURE OF KEL

The shareholding structure of KEL shall be as follows:

Deson Placees Smarksborne Rhythorth Others	Existing Shareholding No. of KEL Shares held 1,136,724,256 – – – 382,991,480 1,519,715,736	% 74.80 – – – 25.20 100.00	Immediately after the Completion of the Transactions No. of KEL Shares held 1,536,724,256 800,000,000 90,300,000 204,700,000 382,991,480 3,014,715,736	% 50.97 26.54 3.00 6.79 12.70 100.00	Immediately following Completion of the Transactions and upon exercise by Super Win only of its Option No. of KEL Shares held 1,736,724,256 800,000,000 90,300,000 204,700,000 382,991,480 3,214,715,736	% 54.02 24.89 2.81 6.37 11.91 100.00	Immediately after the Completion of the Transactions and upon exercise of the Options No. of KEL Shares held 1,736,724,256 1,200,000,000 90,300,000 204,700,000 382,991,480 3,614,715,736	% 48.05 33.20 2.50 5.66 10.59
								100.00

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LETTER FROM THE BOARD

USE OF PROCEEDS FROM THE PLACING, THE SUBSCRIPTION AND THE KENWORTH DISPOSAL

As advised by the Directors, the net proceeds expected to be generated by KEL from the following Transactions are as follows:–

– Placing: HK$78,500,000 – Subscription: HK$32,000,000 – Kenworth Disposal: HK$6,900,000

Such net proceeds are intended to be used by KEL to fund any suitable investment opportunities and/or as general working capital. Although the Directors have from time to time explored different potential investment opportunities, save for the Xin Hua Acquisition and the Penmark Acquisition, KEL has not made any commitment or entered into any detailed negotiations regarding any other investment opportunities and has no specific investment plan in relation to any particular project.

INCREASE IN AUTHORISED SHARE CAPITAL

In order to enable the issue of the KEL New Shares under the relevant Transactions and to facilitate future expansion, KEL proposes to increase its authorised share capital from HK$180,000,000 to HK$350,000,000 by the creation of 2,428,571,428 KEL New Shares.

The Increase in Authorised Share Capital is conditional on the passing of the ordinary resolution by the Shareholders at the Special General Meeting to approve the Increase in Authorised Share Capital.

MAINTENANCE OF THE LISTING STATUS OF KEL

It is the intention of Deson to maintain the listing status of KEL after any of the Transactions (if any of them becomes unconditional). Deson will ensure to take appropriate steps, including the appointment of Placing Agents to place down its shareholding interests in KEL, to ensure that not less than 25% of the KEL Shares will be held by the public within 30 days of the completion of any of the Transactions so as to comply with the minimum public float requirement of the Listing Rules, if required.

PROPOSED GRANT OF GENERAL MANDATES TO ISSUE AND REPURCHASE SHARES

At the Special General Meeting, an ordinary resolution will be proposed to grant the General Mandate to the Directors to allot, issue and deal with shares in KEL not exceeding 20% of the aggregate nominal amount of share capital of KEL in issue as at the date of passing the resolution approving the General Mandate as enlarged by the issue of the KEL New Shares to provide flexibility to KEL to raise fund by issue of KEL New Shares efficiently.

At the same Special General Meeting, it is also proposed to grant to the Directors the Repurchase Mandate authorising the repurchase by KEL on the Stock Exchange of up to 10% of the aggregate nominal amount of share capital of KEL in issue as at the date of passing the resolution approving the Repurchase Mandate as enlarged by the issue of the KEL New Shares.

If the Repurchase Mandate is granted, a further ordinary resolution will be proposed at the same Special General Meeting providing that any shares in KEL repurchased under the Repurchase Mandate will be added to the total number of shares in KEL which may be allotted and issued under the General Mandate.

With respect to the Repurchase Mandate and the General Mandate, the Directors wish to state that they have no present intention of exercising the Repurchase Mandate to repurchase any shares in KEL or the General Mandate to issue any shares in KEL for fund raising purpose.

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

– 22 –

LETTER FROM THE BOARD

SPECIAL GENERAL MEETING

A notice of the Special General Meeting to be held at The Ritz-Carlton Hong Kong, The Harbour Room, 3rd Floor, 3 Connaught Road, Central, Hong Kong at 11:00 a.m. on Friday, 16 April, 2004 at which relevant resolutions will be proposed to approve the terms of the Transactions, the issue of the KEL New Shares, Increased in Authorised Share Capital and the General Mandate and the Repurchase Mandate to set out on pages 89 to 93 to 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, 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.

RECOMMENDATION

Your attention is drawn to the letter from First Shanghai to the Independent Shareholders containing its advice and recommendation set out on pages 24 to 41 of this circular.

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

Having regard to the information described above, the Board is of the opinion that the Transactions, the issue of the KEL New Shares, the Increased in Authorised Share Capital and the General Mandate and the Repurchase Mandate are in the interests of the Company and the Shareholders as a whole. Accordingly, the Board recommends the Shareholders to vote in favour of the relevant resolutions to approve the same at the Special General Meeting.

ADDITIONAL INFORMATION

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

Yours faithfully, For and on behalf of the Board KEL HOLDINGS LIMITED Tjia Boen Sien

Managing Director and Deputy Chairman

– 23 –

LETTER FROM FIRST SHANGHAI

The following is the text of a letter received from First Shanghai in respect of the Connected Transactions prepared for the purpose of incorporation in this circular.

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F IRST S HANGHAI G ROUP
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FIRST SHANGHAI CAPITAL LIMITED

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

31 March, 2004

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

To the Independent Shareholders

Dear Sirs,

1. MAJOR AND CONNECTED TRANSACTION – PROPOSED ACQUISITION BY A SUBSIDIARY OF KEL OF AN AGGREGATE 49% SHAREHOLDING IN XIN HUA RESOURCE INVESTMENT LIMITED AND RELATED SHAREHOLDER’S LOANS

2. DISCLOSEABLE AND CONNECTED TRANSACTION – PROPOSED ACQUISITION BY KEL FROM DESON OF THE ENTIRE ISSUED SHARE CAPITAL OF PENMARK LIMITED AND A RELATED SHAREHOLDER’S LOAN

3. MAJOR AND CONNECTED TRANSACTION – PROPOSED SUBSCRIPTION OF NEW SHARES IN KEL BY A SUBSIDIARY OF DESON

4. MAJOR AND CONNECTED TRANSACTION - PROPOSED DISPOSAL BY KEL TO DESON OF THE ENTIRE ISSUED SHARE CAPITAL OF KENWORTH GROUP LIMITED AND A RELATED SHAREHOLDER’S LOAN

INTRODUCTION

We refer to our engagement to advise (i) the Independent Shareholders in respect of the Kenworth Disposal, the Penmark Acquisition and the Subscription and (ii) the Shareholders in respect of the Xin Hua Acquisition, details of which are set out in the circular of the Company dated 31 March, 2004 (the “Circular”) to the Shareholders of which this letter forms a part. Unless the context otherwise requires, terms used in this letter shall have the same meanings as those defined in the Circular.

In our capacity as the independent financial adviser, our role is to give an independent opinion as to whether the terms of the Connected Transactions are fair and reasonable so far as the interests of the Independent Shareholders/Shareholders (as the case may be) are concerned. In formulating our recommendation, we have relied on the accuracy of information and representations included in the Circular and provided to us by the Directors and management of the KEL Group, and have assumed that all such information and representations provided were true at the time they were made and continue to be true as at the date hereof. We have also assumed that all statements of belief, opinion and intention made by the Directors in the Circular were reasonably made after due enquiry. We have no reason to doubt the truth, accuracy and completeness of the information and representations provided to us by the Directors and have no reason to doubt that any relevant material facts have been withheld or omitted from the information provided and referred to in the

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LETTER FROM FIRST SHANGHAI

Circular. We have also relied on the information and representations provided by B.I. Appraisals Limited, an independent firm of chartered surveyor (the “Valuer”), regarding the valuation (the “Valuation”) of the Zhongda Property as at 18 February, 2004, the text of which is set out in Appendix III to the Circular, and assumed that the bases and assumptions made in determining the Valuation are fair and reasonable.

We consider that we have reviewed sufficient information to reach an informed view and to justify reliance on the accuracy of the information contained in the Circular and to provide a reasonable basis for our recommendations. We have not, however, conducted any independent verification of the information nor have we conducted any form of in-depth investigation into the businesses, affairs or the prospects of the KEL Group.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In arriving at our opinion as to the fairness and reasonableness of the terms of the Connected Transactions and giving our advice in relation thereto, we have taken into account the following principal factors and reasons:

I. BACKGROUND INFORMATION ON THE KEL GROUP

The KEL Group had a number of years been principally engaged in the provision of electrical and mechanical engineering services and the leasing of construction machinery and equipment. As mentioned in the letter from the Board, during the past few years, the KEL Group has experienced difficult market conditions owing to the weak local economy and the keen competition in the construction industry. According to the annual report of KEL for the financial year ended 31 March 2003, the KEL Group recorded net loss of approximately HK$10.86 million and approximately HK$8.76 million for the financial year ended 31 March 2002 and 31 March 2003 respectively.

II. XIN HUA ACQUISITION

On 18 February, 2004, Brilliant China (a wholly-owned subsidiary of KEL), KEL, Smarksborne, Rhythorth and Mr. Mo entered into the Xin Hua Acquisition Agreement pursuant to which Brilliant China has conditionally agreed to acquire from the Xin Hua Sellers (i) an aggregate 49% shareholding in Xin Hua and (ii) the Xin Hua Shareholder’s Loans.

The total consideration for the Xin Hua Acquisition is HK$29,500,000 and will be satisfied by KEL by way of issuing 90,300,000 and 204,700,000 Xin Hua Consideration Shares to Smarksborne and Rhythorth respectively (or their respective nominees) at HK$0.10 each.

The Xin Hua Acquisition (including the issue of the Xin Hua Consideration Shares) constitutes a major transaction for KEL under the Listing Rules and is subject to the approval of the Shareholders at the Special General Meeting. Given that Mr. Mo will be appointed as an additional executive director of KEL upon completion of the Xin Hua Acquisition, the Xin Hua Acquisition also constitutes a connected transaction for KEL under the Listing Rules and is subject to the approval of the Shareholders at the Special General Meeting. None of the Shareholders is interested in the Xin Hua Acquisition and, as such, none of them will be required to abstain from voting at the Special General Meeting.

Information on the Xin Hua Group

Xin Hua, a company incorporated in the British Virgin Islands on 2 June, 2003, is an investment holding company and is beneficially interested in the entire equity interest in Zhong Min. Zhong Min, a wholly foreign-owned enterprise established in the PRC on 11 July, 2003, is beneficially interested in 33% of each of Hong Sen and Long Teng.

Apart from its interests in Zhong Min, Xin Hua does not carry on any other business nor has any other material assets. The unaudited net asset value of Zhong Min as at 31 December 2003 was approximately RMB54,709,000 (approximately HK$51,612,000). For the six months ended 31 December 2003, the unaudited loss attributable to the shareholder of Zhong Min was approximately RMB1,799,000 (approximately HK$1,697,000).

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LETTER FROM FIRST SHANGHAI

Hong Sen is principally engaged in the distribution and supply of piped natural gas in the PRC whilst Long Teng is principally engaged in the installation of natural gas distribution facilities in the PRC. The unaudited profit of Hong Sen and Long Teng for the year ended 31 December, 2003 were approximately RMB1,692,000 (approximately HK$1,596,000) and RMB324,000 (approximately HK$306,000) respectively.

Reasons for the Xin Hua Acquisition

As mentioned in the letter from the Board, the PRC has historically relied heavily on coal as its primary energy source. However, in recent years, the PRC government has 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. We note that the PRC government has embarked on a major expansion of its natural gas infrastructure, the “West-to-East Pipeline”, to carry natural gas from the reserve-rich western provinces to the eastern provinces. According to the Country Analysis Briefs issued by the Department of Energy in the United States in June 2003, natural gas accounted for only around 3% of the total energy consumption in the PRC, but consumption is expected to be more than double by 2010.

As mentioned in the paragraph headed “Background information on the KEL Group” above, during the past few years, the KEL Group has experienced difficult market conditions owing to the weak local economy and the keen competition in the construction industry. The KEL Group recorded losses for the last two financial years ended 31 March 2003. In addition, according to the interim results of the KEL Group for the six months ended 30 September, 2003, the KEL Group had net liabilities (which is calculated by total liabilities minus cash) as at 30 September 2003 of approximately HK$21.30 million.

We note that the management of the KEL Group does not have any expertise or professional experience in natural gas business. However, upon completion of the Xin Hua Acquisition, KEL will appoint Mr. Mo as an executive director of KEL, who will be mainly responsible for overseeing the natural gas business of the KEL Group. The Directors advised that Mr. Mo has rich experience in the development and management of natural gas projects in the PRC.

Consideration

The total consideration of HK$29.5 million for the Xin Hua Acquisition (“Xin Hua Consideration”), of which HK$2,773,437.44 is attributable to the sale and purchase of the Xin Hua Sale Shares and HK$26,726,562.56 is attributable to the Xin Hua Shareholder’s Loans. Xin Hua Consideration will be satisfied by issuing 90,300,000 and 204,700,000 new KEL Shares to Smarksborne and Rhythorth respectively at HK$0.10 per KEL Share.

Xin Hua Consideration was arrived at after arm’s length negotiations between all parties to the Xin Hua Acquisition Agreement by reference to the expected future growth potential of the Xin Hua Group. The Xin Hua Consideration also represents a premium of 13.62% to the portion of the unaudited net tangible asset value (“NTAV”) (as adjusted by excluding the Xin Hua Shareholders’ Loans which are part of what KEL Group is purchasing) of the Xin Hua Group attributable to the Xin Hua Sellers (“Adjusted Unaudited Xin Hua NTAV”) as at 31 December 2003 of approximately HK$25,964,000.

We have reviewed 7 companies (“Comparables”) listed on the Main Board and Growth Enterprise Market of the Stock Exchange which are engaged in, and have substantial turnover generated from, the distribution and supply of piped gas in the PRC and/or the installation of gas distribution facilities in the PRC. Due to the short history of the Xin Hua Group and loss making of Zhong Min, it is impracticable to compare the Xin Hua Consideration with the price to earning ratio of the Comparables. As such, we have compared the Xin Hua Consideration with the price to NTAV of the Comparables.

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LETTER FROM FIRST SHANGHAI

				Premium/
		Price per share as		(discount) of
		at the date of the	NTAV	price over/
Stock code	Name	Announcement	per share	(to) NTAV
		(HK$)	(HK$)	(%)
	China Gas Holdings
384	Limited	0.710	0.083	755.42
	GeoMaxima Energy
702	Holdings Limited	0.190	0.137	38.69
	Xinao Gas Holdings
2688	Limited	3.875	1.067	263.17
	Wah Sang Gas Holdings
8035	Limited	0.870	0.360	141.67
	Zhengzhou Gas Company
8099	Limited	0.800	0.216	270.37
	Panva Gas Holdings
8132	Limited	4.000	0.351	1,039.60
	Tianjin Tianlian Public
8290	Utilities Company Limited	0.485	0.17	185.29

Sources: Latest published financial reports of the above companies and www.hkex.com.hk

As shown in the table above, the premiums of price over NTAV of the Comparables as at the date of the Announcement ranged from approximately 38.69% to approximately 1,039.6%. Since the premium of 13.62% of the Xin Hua Consideration over the Adjusted Unaudited Xin Hua NTAV is lower than the premiums of price over NTAV of the Comparables, we consider that such premium is acceptable.

Issue price (“Issue Price”) of the KEL New Shares

Set out below is the comparison of the Issue Price with the closing prices and average closing prices of the KEL Shares:

		Premium/ (Discount)
	Closing price/ average	of the Issue Price over/
	closing price for the	(to) the closing price/
Date/ Period	period	average closing price
	(HK$)	(%)
As at 4 February, 2004, being the last
trading date prior to the issue of the
Announcement	0.1290	(22.48)
10-trading-day average	0.1070	(6.54)
30-trading-day average	0.0980	2.04
As at the Latest Practicable Date	0.3600	(72.22)
Unaudited NTAV per KEL Share as
at 30 September, 2003	0.0257	289.11
Source: Bloomberg

Note: Each of the average closing prices above refers to a period ending on 4 February, 2004, being the last trading date prior to the issue of the Announcement.

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LETTER FROM FIRST SHANGHAI

As shown in the above table, although the Issue Price was at discount to the respective closing price of the KEL Share on 4 February, 2004 and the Latest Practicable Date, as well as the 10-trading-day average closing price, the Issue Price was at premium over the 30-trading-day average closing price and the unaudited NTAV per KEL Share as at 30 September, 2003.

Liquidity of the KEL Shares

Set out below is the monthly trading volume of the KEL Shares, during the period from 1 March, 2003 to the Latest Practicable Date (“Review Period”):

		Average daily trading	Average daily trading
		volume as a percentage
			of then
	Average daily trading	total issued share
	volume	capital of KEL
	(Number of Shares)	(approximate %)
2003
March	1,877,314		0.22
April	362,000		0.04
May	494,850		0.03
June	4,808,355		0.32
July	541,338		0.04
August	172,048		0.01
September	516,038		0.03
October	1,834,387		0.12
November	510,379		0.03
December	1,428,148		0.09
2004
January	722,900		0.05
February	22,881,716		1.51
1 March to the Latest Practicable Date	7,386,612		0.49
Source: Bloomberg

As shown in the table above, the trading volume during the Review Period was, in general, thin. The percentage of the average daily trading volume of the KEL Shares to the total issued share capital of KEL during the Review Period ranged from approximately 0.01% to approximately 1.51%.

Taking into account (i) the thin trading volume of the KEL Shares during the Review Period; (ii) the loss-making track record of the KEL Group; and (iii) the substantial premium of the Issue Price over the unaudited NTAV per KEL Share, we concur with the Directors’ opinion that the discounts of the Issue Price to the respective closing price of the KEL Share on 4 February, 2004 and the Latest Practicable Date, as well as the 10-trading-day average closing price are acceptable. Therefore, we consider that the Issue Price is fair and reasonable.

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LETTER FROM FIRST SHANGHAI

Shareholding structure of KEL before and after the Xin Hua Acquisition

Set out below is the shareholding structure of KEL immediately before and after the Xin Hua Acquisition:

Deson Smarksborne Rhythorth Others Total	Existing Shareholding 1,136,724,256 – – 382,991,480 1,519,715,736	Percentage (%) 74.80 – – 25.20 100.00	Immediately after completion of the Xin Hua Acquisition 1,136,724,256 90,300,000 204,700,000 382,991,480 1,814,715,736	Percentage (%) 62.64 4.98 11.28 21.10
				100.00

We note that immediately after completion of the Xin Hua Acquisition, the shareholding interest of the existing shareholders of KEL will be diluted by approximately 16.27%. However, having considered the benefits, in particular, business opportunities provided by the Xin Hua Acquisition as discussed above, and the enhancement in NTAV per KEL Share after the Xin Hua Acquisition as discussed below, we consider that the dilution effect on shareholding is justifiable.

Financial effects of the Xin Hua Acquisition

	Immediately before	Immediately after
	the Xin Hua	the Xin Hua	*Percentage*
	Acquisition	Acquisition	*change (%)*
Adjusted Unaudited Xin Hua NTAV
as at 31 December, 2003	HK$25,964,000	HK$25,964,000	–
Unaudited NTAV of the KEL Group
as at 30 September, 2003	HK$39,044,000	HK$65,008,000	66.50
Unaudited NTAV per KEL Share	HK$0.0257	HK$0.0358	39.30
No. of KEL Shares	1,519,715,736	1,814,715,736	19.41
Cash and time deposits as at
30 September, 2003	HK$6,355,000	HK$6,355,000	–
Unaudited total liabilities as at
30 September, 2003	HK$27,655,000	HK$27,655,000	–
Net gearing ratio of the KEL Group
as at 30 September, 2003
(calculated by total liabilities
minus cash then divided by NTAV)	54.55%	32.77%	–39.93

As shown in the above table, immediately after the Xin Hua Acquisition, the proforma unaudited NTAV of the KEL Group as at 30 September, 2003 would be increased by approximately 66.50% to approximately HK$65,008,000 from approximately HK$39,044,000 based on the Adjusted Unaudited Xin Hua NTAV as at 31 December, 2003 of approximately HK$25,964,000. The net gearing ratio of the KEL Group as at 30 September, 2003 would be reduced from approximately 54.55% to approximately 32.77% due to the increase in the unaudited NTAV of the KEL Group.

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LETTER FROM FIRST SHANGHAI

As the Issue Price is substantially higher than the unaudited NTAV per KEL Share before the Xin Hua Acquisition, immediately after the Xin Hua Acquisition and based on 1,814,715,736 KEL Shares in issue and to be issued, the proforma unaudited NTAV per KEL Share would also be enhanced by approximately 39.30% to approximately HK$0.0358 from approximately HK$0.0257 (based on 1,519,715,736 KEL Shares in issue immediately before the Xin Hua Acquisition).

In addition, as the Xin Hua Consideration will be settled by way of issue of 295 million new KEL Shares, there will be no cash outflow under the Xin Hua Acquisition. As such, there is no material impact on the cash position of the KEL Group.

Opinion

As such, we concur with the view of the Directors that the Xin Hua Acquisition is in the interest of KEL and the Shareholders as a whole and that the terms of the Xin Hua Acquisition are fair and reasonable so far as the Shareholders are concerned.

III. THE SUBSCRIPTION

On 18 February, 2004, Super Win (an indirect wholly-owned subsidiary of Deson) entered into the Subscription Agreement with KEL for the conditional subscription by Super Win of the Subscription Shares at a price of HK$0.10 each at an aggregate consideration of HK$32,500,000. Pursuant to the Subscription Agreement, KEL has also agreed that Deson will be granted a Subscription Option which will entitle Deson (or its nominee) to subscribe at the Option Exercise Price for one Option Share for every two Subscription Shares subscribed by Deson under the Subscription.

The Subscription has been aggregated with the Kenworth Disposal and as a result, the Subscription and the Kenworth Disposal constitute major transactions for KEL under the Listing Rules. Since Deson is a controlling shareholder of KEL having a shareholding interest of approximately 74.8% in KEL, the Subscription and the Kenworth Disposal also constitute connected transactions for KEL under the Listing Rules. The Subscription and the Kenworth Disposal are required to be made conditional upon the approval of the Independent Shareholders at the Special General Meeting. Deson and its associates will abstain from voting at the Special General Meeting.

Reason for the Subscription and use of net proceeds

In addition to the Placing, the Subscription will raise further funds to enhance KEL’s capital and working capital position. The net proceeds from the Subscription are estimated to be approximately HK$32,000,000.

As mentioned in the letter from the Board, the existing business of KEL is principally comprised the provision of electrical and mechanical engineering services, the leasing of construction machinery and equipment and the leasing of the properties at Zhongda Square which were acquired in mid May last year. Upon the completion of the Xin Hua Acquisition and the Kenworth Disposal (which is conditional on the completion of the Xin Hua Acquisition), the business of the KEL Group will principally comprise the holding and leasing of properties in Zhongda Square and the investment in the Xin Hua Group which is engaged in the distribution and supply of piped natural gas and the installation of natural gas distribution facilities in the PRC.

The net proceeds from the Subscription are intended to be used by KEL to fund any suitable investment opportunities and/or as general working capital. Although the Directors have from time to time explored different potential investment opportunities, save for the Xin Hua Acquisition and the Penmark Acquisition, KEL has not made any commitment or entered into any detailed negotiations regarding any other investment opportunities and has no specific investment plan in relation to any particular project.

The Directors consider that the issue of the Option Shares, if any part of any of the Option is exercised, will further enlarge KEL’s capital base and provide additional working capital for the KEL Group.

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LETTER FROM FIRST SHANGHAI

Terms of the Subscription

Pursuant to the Subscription Agreement, Super Win (an indirect wholly-owned subsidiary of Deson) will subscribe 325,000,000 Subscription Shares at the Issue Price, and Super Win (or its nominee(s)) will be granted a Subscription Option which will entitle it to subscribe for at the Option Exercise Price of one Option Share for every two Subscription Shares subscribed by Deson under the Subscription. Such Subscription Option shall be exercised during the Option Exercise Period.

We note that the principal terms of the Subscription are the same as the Placing, and the Directors advised that such principal terms were arrived at after arm’s length negotiation with the Placing Agent, an independent third party and not a connected person as defined in the Listing Rules, under the Placing. Pursuant to the Placing Agreement, KEL will place 800,000,000 Placing Shares at the Issue Price and the Placing Agent agreed to place to not less than six independent placees 200,000,000 Placing Shares on a fully underwritten basis and 600,000,000 Placing Shares on a best endeavour basis. Each placee will be granted a Placing Option which will entitle him/her/it to subscribe at the Option Exercise Price for one Option Share for every two Placing Shares subscribed by such placee. The Directors advised that given the loss-making track record of KEL and thin trading volume of the KEL Shares during the Review Period, each placee will be granted a Placing Option for every two Placing Shares subscribed as incentive for the placees to subscribe for the Placing Shares. For details of the Placing, please refer to the letter from the Board.

Accordingly, under the Subscription, Deson will also be granted a Subscription Option as an incentive to subscribe for the Subscription Shares.

Issue price

The issue price of the Subscription Shares of HK$0.10 per KEL Share is the same as the Issue Price. As discussed in the sub-paragraph headed “Issue price of the KEL New Shares” under the section headed “Xin Hua Acquisition” above, we consider that the Issue Price is fair and reasonable. For details of the discussion of the Issue Price, please see the paragraph headed “Issue price of the KEL New Shares” above.

Option

The Directors advised that the principal terms of the Subscription Option were determined after arm’s length negotiations between Deson and KEL and with reference to the terms of the Placing Options. We note that the principal terms of the Subscription Option are the same as that of the Placing Options, and the Directors advised that the principal terms of the Placing Options were arrived at after arm’s length negotiation with the Placing Agent, an independent third party, under the Placing. The principal terms of the Option are set out as follows:

Option Each holder of the Option has the right to subscribe at the Option Exercise Price for one Option Share. Option Exercise Price HK$0.105 per Option Share (subject to adjustment). Option Exercise Period The period commencing from the date falling six months from the Option Issue Date and ending on the date falling thirty months from the Option Issue Date, both dates inclusive. Ranking of the Option Shares The Option Shares, when fully paid and issued, will rank equally in all respects with the other KEL Shares in issue or to be issued by KEL at the time of exercise, including the right to all dividends and other distributions declared, made or paid.

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Set out below is the comparison of the Option Exercise Price with the closing prices and average closing prices of the KEL Shares:

		Premium/ (Discount)
	Closing price/ average	of the Issue Price over/
	closing price for the	(to) the closing price/
Date/ Period	period	average closing price
	(HK$)	(%)
As at 4 February, 2004, being the
last trading date prior to the issue
of the Announcement	0.1290	(18.60)
10-trading-day average	0.1070	(1.87)
30-trading-day average	0.0980	7.14
As at the Latest Practicable Date	0.3600	(70.83)
Unaudited NTAV per KEL Share
as at 30 September, 2003	0.0257	308.56

Source: Bloomberg

Note: Each of the average closing prices above refers to a period ending on 4 February, 2004, being the last trading date prior to the issue of the Announcement

Shareholding structure of KEL before and after the Subscription

Deson Others Total	Existing Shareholding 1,136,724,256 382,991,480 1,519,715,736	Percentage (%) 74.80 25.20 100.00	Immediately after completion of the Subscription 1,461,724,256 382,991,480 1,844,715,736	Percentage (%) 79.24 20.76 100.00	Immediately after completion of the Subscription and upon exercise of the Subscription Option in full 1,624,224,256 382,991,480 2,007,215,736	Percentage (%) 80.92 19.08
						100.00

Immediately after completion of the Subscription, the shareholding interest of the Independent Shareholders will be diluted by approximately 17.62%. Immediately after completion of the Subscription and upon exercise of the Subscription Option in full, the shareholding interest of the Independent Shareholders will be diluted by approximately 24.29%.

However, taking into account the enhancement in unaudited NTAV per KEL Share as at 30 September, 2003 as discussed below, we consider that the dilution effect on shareholding is acceptable.

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LETTER FROM FIRST SHANGHAI

Financial effects of the Subscription

		Immediately after
		completion of the
		Subscription and
		upon exercise of
	Immediately before	the Subscription	*Percentage*
	the Subscription	Option in full	*change (%)*
Unaudited NTAV of the KEL Group
as at 30 September 2003	HK$39,044,000	HK$88,106,500	125.66
Net proceeds from the Subscription
and the exercise of the
Subscription Option in full	–	HK$49,062,500	Not applicable
Unaudited NTAV per KEL Share	HK$0.0257	HK$0.0439	70.82
No. of KEL Shares	1,519,715,736	2,007,215,736	32.08
Cash on hand and time deposits
as at 30 September, 2003	HK$6,355,000	HK$55,417,500	772.03
Unaudited total liabilities as at
30 September, 2003	HK$27,655,000	HK$27,655,000	–
Net gearing ratio of the KEL
Group as at 30 September, 2003
(calculated by total liabilities
minus cash then divided by NTAV)	54.55%	Net cash	Not applicable
Audited net loss of the KEL Group
for the financial year ended
31 March, 2003	HK$(8,760,000)	HK$(8,760,000)	–
Loss per KEL Share for the financial
year ended 31 March, 2003_(Note)_	(1.02) cents	(0.65) cents	-36.27
Weighted average number of KEL
Shares for the financial year
ended 31 March, 2003	862,268,000	1,349,768,000	56.54

Note: Loss per KEL Share is calculated based on the audited net loss of the KEL Group divided by the weighted average number of KEL Shares.

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LETTER FROM FIRST SHANGHAI

As shown in the above table, immediately after completion of the Subscription and upon the exercise of the Subscription Option in full, the proforma unaudited NTAV of the KEL Group as at 30 September, 2003 would be increased by approximately 125.66% to approximately HK$86,106,500 from approximately HK$39,044,000. Further, immediately after the Subscription and upon the exercise of the Subscription Option in full, and based on 2,007,215,736 KEL Shares in issue and to be issued, the proforma unaudited NTAV per KEL Share as at 30 September, 2003 would be enhanced by approximately 70.82% to approximately HK$0.0439. Further, the working capital of the KEL Group would be improved from net debt position to net cash position.

Further, in order to illustrate the financial effects of the Subscription on the net loss of the KEL Group, it is assumed that the Subscription had been completed before 1 April, 2002. As illustrated in the table above, based on the audited net loss of the KEL Group for the financial year ended 31 March, 2003 of approximately HK$8,760,000 and the weighted average number of KEL Shares for the financial year ended 31 March, 2003 of 862,268,000 KEL Shares, the loss per KEL Share would be approximately 1.02 cents immediately before the Subscription. Immediately after completion of the Subscription and upon exercise of the Subscription Option in full, based on 487,500,000 KEL Shares to be issued immediately after completion of the Subscription and upon exercise of the Subscription Option in full, the proforma loss per KEL Share would be reduced by approximately 36.27% to approximately 0.65 cents.

Opinion

Having considered the factors stated above, we concur with the view of the Directors that the Subscription is in the interest of KEL and the Shareholders as a whole and that the terms of the Subscription are fair and reasonable so far as the Independent Shareholders are concerned.

IV. THE PENMARK ACQUISITION

On 18 February, 2004, Deson entered into the Penmark Acquisition Agreement with KEL, pursuant to which KEL has conditionally agreed to acquire from the Deson Group (i) the entire issued share capital of Penmark, the sole asset of which is the Zhongda Property and (ii) the Penmark Shareholder’s Loan. The total consideration for the Penmark Acquisition is HK$7,500,000 and will be satisfied by KEL by way of issuing 75,000,000 Penmark Consideration Shares to Deson (or its nominee) at HK$0.10 each. Pursuant to the Penmark Acquisition Agreement, KEL has also agreed that Deson will be granted the Penmark Acquisition Option which will entitle Deson to subscribe at the Option Exercise Price for one Option Share for every two Penmark Consideration Shares to which Deson is entitled under the Penmark Acquisition.

Information on Penmark

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LETTER FROM FIRST SHANGHAI

The audited net loss of Penmark for the financial year ended 31 March, 2002 and the financial year ended 31 March, 2003 is set out as follows:

		Financial year ended	Financial year ended
		31 March, 2002	31 March, 2003
		(HK$)	(HK$)
Loss	before taxation and attributable
to	shareholders	196,000	25,000

The audited net deficit of Penmark as at 31 March, 2003 was approximately HK$1,225,000, as no rental income was charged by Penmark to Deson Development Limited for the two years ended 31 March, 2003 since both Penmark and Deson Development Limited are wholly owned by the Deson Group. Deson has undertaken that Deson Development Limited will lease from Penmark on normal commercial terms (as confirmed by the Valuer) for a term of one year at HK$40,000 per month after completion of the Penmark Acquisition.

Reasons for the Penmark Acquisition

The Directors advised that in view of the tough business environment of the construction industry, the Directors have been exploring new business opportunities which will generate revenue and cash flow, and provide a reliable source of income to the KEL Group. In May 2003, the KEL Group acquired from Deson the entire issued share capital of Billion Treasure Holdings Limited which holds certain rental properties at Zhongda Square (in the same building as the Zhongda Property).

Zhongda Property is a major asset of Penmark. In view of the buoyant property market in a core business district in Shanghai where Zhongda Square is located, the Directors believe that the Penmark Acquisition would (i) enable the KEL Group to further enhance its investment in rental properties at Zhongda Square with potential appreciation in capital value, and (ii) provide an additional cash flow stream and a source of reliable recurring rental income.

Consideration

The total sum of the consideration of the Penmark Acquisition (“Penmark Consideration”) is HK$7,500,000, of which HK$1 is attributable to the acquisition of the Penmark Sale Shares and HK$7,499,999 is attributable to the acquisition of the Penmark Shareholder’s Loan, which amounted to HK$8,228,038.33 at 31 December, 2003. We note that the Penmark Consideration represents a premium of approximately 7.10% to the audited NTAV of Penmark as at 31 March, 2003 (as adjusted by excluding the Penmark Shareholder’s Loan as it is included in the Penmark Acquisition but without taking into account the Valuation) (“Adjusted Penmark NTAV”) of approximately HK$7,003,038.33.

The Penmark Consideration was arrived at after arm’s length negotiations between Deson and KEL by reference to the current open market value of the Zhongda Property as at 18 February, 2004. The Zhongda Property had been valued by the Valuer at a value of approximately HK$8,000,000 as at 18 February, 2004 as shown in the property valuation report issued by the Valuer set out in Appendix III to the Circular. However, the audited net book value as at 31 March, 2003 of the Zhongda Property was approximately HK$7,000,000, which is 12.5% below the Valuation. Accordingly, the Penmark Consideration represents a discount of approximately 6.29% to the audited NTAV of Penmark as at 31 March, 2003 of approximately HK$8,003,038.33 after taking into account the Valuation but excluding the Penmark Shareholder’s Loan as it is included in the Penmark Acquisition.

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LETTER FROM FIRST SHANGHAI

The Penmark Consideration will be settled by way of issuing 75,000,000 Penmark Consideration Shares to Deson (or its nominee) at the Issue Price per Penmark Consideration Shares, together with the Penmark Acquisition Option which will entitle Deson to subscribe at the Option Exercise Price for one Option Share for every two Penmark Consideration Shares.

For details of our discussion of the Issue Price and the Option, please see the sub-paragraph headed “Issue price of the KEL New Shares” under the section headed “Xin Hua Acquisition” and the sub-paragraph headed “Option” under the section headed “The Subscription”.

Having considered the above, we concur with the view of the Directors that the Penmark Consideration is fair and reasonable.

Shareholding structure of KEL before and after the Penmark Acquisition

Deson Others Total	Existing Shareholding 1,136,724,256 382,991,480 1,519,715,736	Percentage (%) 74.80 25.20 100.00	Immediately after completion of the Penmark Acquisition 1,211,724,256 382,991,480 1,594,715,736	Percentage (%) 75.98 24.02 100.00	Immediately after completion of the Penmark Acquisition and upon the exercise of the Penmark Acquisition Option in full 1,249,224,256 382,991,480 1,632,215,736	Percentage (%) 76.54 23.46
						100.00

Immediately after completion of the Penmark Acquisition, the shareholding interest of the Independent Shareholders will be diluted by approximately 4.68%. Immediately after completion of the Penmark Acquisition and upon exercise of Penmark Acquisition Option in full, the shareholding interest of the Independent Shareholders will be diluted by approximately 6.90%.

However, taking into account the benefits of the Penmark Acquisition as mentioned above, together with the improvement of the net gearing ratio of the KEL Group immediately after the Penmark Acquisition and upon the exercise of the Penmark Acquisition Option as discussed below, we consider that the dilution effect on shareholding is acceptable.

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LETTER FROM FIRST SHANGHAI

Financial effects of the Penmark Acquisition

		Immediately
		after completion
		of the Penmark
		Acquisition and
		upon exercise of
	Immediately before	the Penmark
	the Penmark	Acquisition	*Percentage*
	Acquisition	Option in full	*change (%)*
Adjusted Penmark NTAV as at
31 March, 2003	HK$7,003,038	HK$7,003,038	–
Net proceeds from the exercise
of the Penmark Acquisition
Option in full	–	HK3,937,500	–
Unaudited NTAV of the KEL
Group as at 30 September, 2003	HK$39,044,000	HK$49,984,538	28.02
Unaudited NTAV per KEL Share	HK$0.0257	HK$0.0306	19.07
No. of KEL Shares	1,519,715,736	1,632,215,736	7.40
Cash on hand and time deposits
at 30 September, 2003	HK$6,355,000	HK$10,292,500	61.96
Unaudited total liabilities as at
30 September, 2003	HK$27,655,000	HK$27,655,000	–
Net gearing ratio of the KEL
Group as at 30 September, 2003
(calculated by total liabilities
minus cash then divided by
NTAV)	54.55%	34.74%	-36.32
Audited net loss of Penmark for the
financial year ended
31 March, 2003	HK$(25,000)	HK$(25,000)	–
Audited net loss of the KEL Group
for the financial year ended
31 March, 2003	HK$(8,760,000)	HK$(8,785,000)	0.29
Loss per KEL Share for the
financial year ended
31 March, 2003_(Note)_	(1.02) cents	(0.90) cents	-11.76
Weighted average number of
KEL Shares for the financial
year ended 31 March, 2003	862,268,000	974,768,000	13.05

Note: Loss per KEL Share is calculated based on the audited net loss of the KEL Group divided by the weighted average number of KEL Shares.

As shown in the above table, immediately after completion of the Penmark Acquisition and upon exercise of the Penmark Acquisition Option in full, the proforma unaudited NTAV of the KEL Group as at 30 September, 2003 would be increased by approximately 28.02% or approximately HK$10,940,538, being the sum of the adjusted Penmark NTAV as at 31 March, 2003 (which amounted to approximately HK$7,003,038) and the net proceeds from the exercise of the Penmark Acquisition Option in full (which amounted to approximately HK$3,937,500), to approximately HK$49,984,538 from approximately HK$39,044,000. Further, the proforma unaudited NTAV per KEL Share as at 30 September, 2003 would be increased by approximately 19.07% or approximately HK$0.0049 to approximately HK$0.0306.

Since the Penmark Consideration will be settled by issue of the Penmark Consideration Shares, the cash position of the KEL Group as at 30 September, 2003 would be increased by approximately 61.96% from approximately HK$6,355,000 to approximately HK$10,292,500 upon exercise of the Penmark Acquisition Option in full. Further, the net gearing ratio of the KEL Group as at 30 September, 2003 would be improved from approximately 54.55% to approximately 34.74%.

– 37 –

LETTER FROM FIRST SHANGHAI

Further, in order to illustrate the financial effects of the Penmark Acquisition on the net loss of the KEL Group, it is assumed that the Penmark Acquisition had been completed before 1 April, 2002. As illustrated in the table above, based on the audited net loss of the KEL Group for the financial year ended 31 March, 2003 of HK$8,760,000 and the weighted average number of KEL Shares for the financial year ended 31 March, 2003 of 862,268,000 KEL Shares, the loss per KEL Share would be approximately 1.02 cents immediately before the Penmark Acquisition. Immediately after completion of the Penmark Acquisition and upon exercise of the Penmark Acquisition Option in full, and based on 112,500,000 KEL Shares to be issued immediately after completion of the Penmark Acquisition and upon exercise of the Penmark Acquisition Option in full, the proforma loss per KEL Share would be reduced by approximately 11.76% to approximately 0.90 cents.

In addition, as the Penmark Consideration will be settled by way of issue of 75 million new KEL Shares, there will be no cash outflow under the Penmark Acquisition. As such, there is no material impact on the cash position of the KEL Group.

Opinion

Taking into account the above factors and reasons, we concur with the view of the Directors that the Penmark Acquisition is in the interest of KEL and the Shareholders as a whole and that the terms of the Penmark Acquisition are fair and reasonable so far as the Independent Shareholders are concerned.

V. THE KENWORTH DISPOSAL

On 18 February, 2004, Deson entered into the Kenworth Disposal Agreement with KEL, pursuant to which Deson has conditionally agreed to acquire form KEL (i) entire issued share capital of Kenworth and (ii) the Kenworth Shareholder’s Loan. The total consideration for the Kenworth Disposal (“Kenworth Consideration”) is HK$7,000,000 and will be payable by Deson in cash.

The Kenworth Disposal has been aggregated with the Subscription and as a result, the Subscription and the Kenworth Disposal constitute major transactions for KEL under the Listing Rules. Since Deson is a controlling shareholder of KEL having a shareholding interest of approximately 74.8% in KEL, the Subscription and the Kenworth Disposal also constitute connected transactions for KEL under the Listing Rules. The Subscription and the Kenworth Disposal are required to be made conditional upon the approval of the Independent Shareholders at the Special General Meeting.

Upon completion of the Xin Hua Acquisition and the Kenworth Disposal (which is conditional on the completion of the Xin Hua Acquisition), the business of the KEL Group will principally comprise the holding and leasing of certain properties in Zhongda Square, as well as the investment in the Xin Hua Group which is engaged in the distribution and supply of piped natural gas in the PRC and the installation of natural gas distribution facilities in the PRC. The KEL Group will no longer be engaged in the provision of electrical and mechanical engineering services, as well as sales and leasing of construction machinery.

Information on the Kenworth Group

The unaudited consolidated net loss of the Kenworth Group for the financial year ended 31 March, 2002 and the year ended 31 March, 2003 are set out below:

	Financial year ended	Financial year ended
	31 March, 2002	31 March, 2003
	(HK$)	(HK$)
Turnover	19,117,000	31,184,000
Loss before taxation	6,546,000	6,323,000
Loss after taxation	6,546,000	6,323,000

The unaudited consolidated net tangible deficit of the Kenworth Group as at 31 March, 2003 was approximately HK$488,249,000.

– 38 –

LETTER FROM FIRST SHANGHAI

Reasons for the Kenworth Disposal and use of proceeds

The Directors advised that due to the weak local economy and the keen competition in the local construction industry, Kenworth Group had recorded operating losses for the past few years. The Directors are of the view that the Kenworth Disposal provides an opportunity for KEL to dispose of such loss-making operation, so as to improve KEL’s financial performance (as discussed below).

The Directors estimate that the net proceeds of the Kenworth Disposal will be approximately HK$6,900,000. Such net proceeds are intended to be used to fund any suitable investment opportunities and/or as general working capital.

Consideration

As mentioned in the letter from the Board in the Circular, the Kenworth Consideration was arrived at after arm’s length negotiations between Deson and KEL, of which HK$1 is attributable to the acquisition of the Kenworth Sale Shares and HK$6,999,999 is attributable to the acquisition of the Kenworth Shareholder’s Loan which amounted to approximately HK$497,722,493.15.

The basis of the Kenworth Consideration is determined with reference to the unaudited consolidated NTAV of the Kenworth Group as at 31 December, 2003 of HK$4,844,000 (as adjusted by excluding the Kenworth Shareholder’s Loan as it is being sold by KEL under the Kenworth Disposal) (“Adjusted Unaudited Kenworth NTAV”). We note that the Kenworth Consideration represents approximately 44.51% premium over the Adjusted Unaudited Kenworth NTAV. As such, we consider that the Kenworth Consideration is fair and reasonable.

Further, in order to illustrate the financial effects of the Kenworth Disposal on the net loss of the KEL Group, it is assumed that the Kenworth Disposal had been completed before 1 April, 2002. As illustrated in the table above, based on the audited net loss of the KEL Group for the financial year ended 31 March, 2003 of approximately HK$8,760,000 and the weighted average number of KEL Shares for the financial year ended 31 March, 2003 of 862,268,000 KEL Shares, the loss per KEL Share would be approximately 1.02 cents immediately before the Kenworth Disposal. Immediately after completion of the Kenworth Disposal, based on the profits gained from the Kenworth Disposal of approximately HK$2,056,000 as shown below, and taking into account the reduction of unaudited net loss of the Kenworth Group for the financial year ended 31 March, 2003 of approximately HK$6,323,000, the proforma audited net loss for the financial year ended 31 March, 2003 of the KEL Group would be reduced by approximately 95.65% to approximately HK$381,000 and the proforma loss per KEL Share would be reduced by approximately 96.08% to approximately 0.04 cents.

Since the Kenworth Consideration will be paid by cash by Deson, the cash position of the KEL Group would be increased by approximately HK$6,900,000.

– 39 –

LETTER FROM FIRST SHANGHAI

Financial effects of the Kenworth Disposal

	Before the	Immediately after
	Kenworth	completion of the	Percentage
	Disposal	Kenworth Disposal	*change (%)*
Net proceeds of the Kenworth Disposal	–	HK$6,900,000	–
Adjusted Unaudited Kenworth NTAV
as at 31 December, 2003	HK$4,844,000	HK$4,844,000	–
Profits gained from the Kenworth
Disposal based on the Adjusted
Unaudited Kenworth NTAV as at
31 December, 2003	–	HK$2,056,000	–
Unaudited NTAV of the KEL Group
as at 30 September, 2003	HK$39,044,000	HK$41,100,000	5.27
Unaudited NTAV per KEL Share	HK$0.0257	HK$0.0270	5.06
Number of KEL Shares	1,519,715,736	1,519,715,736	–
Cash on hand and time deposits at
30 September, 2003	HK$6,355,000	HK$13,255,000	108.58
Unaudited total liabilities as at
30 September, 2003	HK$27,655,000	HK$27,655,000	–
Net gearing ratio of the KEL Group
as at 30 September, 2003
(calculated by total liabilities minus
cash then divided by NTAV)	54.55%	35.04%	-35.77
Unaudited net loss of the Kenworth
Group for the financial year ended
31 March, 2003	HK$(6,323,000)	HK$(6,323,000)	–
Audited net loss of the KEL Group
for the financial year ended
31 March, 2003	HK$(8,760,000)	HK$(381,000)	-95.65
Loss per KEL Share for the financial
year ended 31 March, 2003_(Note)_	(1.02) cents	(0.04) cents	-96.08
Weighted average number of KEL
Shares for the financial year ended
31 March, 2003	862,268,000	862,268,000	–

Note: Loss per KEL Share is calculated based on the audited net loss of the KEL Group divided by the weighted average number of KEL Shares.

As shown in the above table, immediately after completion of the Kenworth Disposal, the proforma unaudited NTAV of the KEL Group as at 30 September, 2003 would be increased by approximately 5.27% to approximately HK$41,100,000 from approximately HK$39,044,000. The proforma unaudited NTAV per KEL Share as at 30 September, 2003 would also be increased by approximately 5.06% to approximately HK$0.0270. In addition, the net gearing ratio of the KEL Group as at 30 September, 2003 would be improved from approximately 54.55% to approximately 35.04%.

Opinion

Taking into account the above factors and reasons, we concur with the view of the Directors that the Kenworth Disposal is in the interest of KEL and the Shareholders as a whole and that the terms of the Kenworth Disposal are fair and reasonable so far as the Independent Shareholders are concerned.

– 40 –

LETTER FROM FIRST SHANGHAI

ADVICE

Having considered the above factors and reasons, we are of the view that the Connected Transactions are in the interests of KEL and the Shareholders as a whole, and their terms are fair and reasonable so far as the Independent Shareholders/ Shareholders (as the case may be) are concerned. Accordingly, we advise the Independent Shareholders to vote in favour of the resolutions to approve the Kenworth Disposal, the Penmark Acquisition and the Subscription, and the Shareholders to vote in favour of the resolutions to approve the Xin Hua Acquisition.

Yours faithfully, For and on behalf of First Shanghai Capital Limited

Helen Zee Managing Director

Byron Tan Executive Director

– 41 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

1. SHARE CAPITAL

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

Authorised: HK$ 2,571,428,571 KEL Shares 180,000,000 Issued and fully paid: 1,519,715,736 KEL Shares 106,380,000

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

Save as the Transactions, no Share or loan capital of the Company has been put under option or agreed conditionally or unconditionally to be put under option and no warrant or conversion right affecting the KEL Shares has been issued or granted or agreed conditionally, or unconditionally to be issued or granted.

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

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

2. WORKING CAPITAL

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

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

3. INDEBTEDNESS

At the close of business on 31 January, 2004, KEL Group had outstanding borrowings of approximately HK$11,608,000, comprising secured bank loan of approximately HK$8,228,000 and overdraft of approximately HK$3,380,000.

The KEL Group’s bank loan and overdraft are secured by time deposits aggregating HK$5,282,000 and completed properties for sales of HK$46,433,000.

As stated in the annual report 2003 of KEL, Kenworth Engineering Limited (“Kenworth Engineering”), a subsidiary of KEL, 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 Engineering has not admitted. The claim amount was revised to HK$141 million in 2002. A counterclaim was submitted by Kenworth Engineering 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 Engineering and the main contractor. The arbitration application was lodged before the commencement of three schemes of arrangement, involving KEL and its two subsidiaries, Kenworth Engineering and Kenworth, which were set up under Section 166 of the Hong Kong Companies Ordinance (the “Schemes”), the process commenced in August 2002 upon the appointment of the arbitrator. Both Kenworth Engineering and the main 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.

– 42 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

In relation to the same construction project detailed above, in October 2000 Kenworth Engineering 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 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 Engineering and KEL, KEL agreed to discharge the liabilities of Kenworth Engineering under the Schemes by the allotment of certain redeemable cumulative preference shares by Kenworth Engineering.

The KEL Group had appointed an independent chartered surveyor to estimate its potential exposure under the above two claims. According to the report of the surveyor, the maximum exposure of the above claims amounted to HK$70 million. However, according to the terms of the Schemes, the exposures under the above claims will be limited to 10% of the total claim amount being HK$37.8 million, which will be partly settled by the issue of KEL Shares with the total value of HK$18.9 million and partly by cash in the total amount of HK$18.9 million. The Directors consider that KEL 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 KEL Group. In addition, as the arbitration proceedings are in 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.

Save as disclosed in this circular, the KEL Group did not have any outstanding indebtedness at the close of business on 31 January, 2004, any loan capital, bank overdrafts and liabilities under acceptances or other similar indebtedness, debentures, mortgages, charges or loans or acceptance credits or hire purchase or finance lease commitments, guarantees or other material contingent liabilities.

4. SUMMARY OF FINANCIAL INFORMATION

The following is a summary of the results and of the assets, liabilities and minority interests of the KEL Group for the three financial years ended 31 March, 2003, as extracted from the audited financial statements.

RESULTS TURNOVER Cost of sales Gross profit/(loss) Other revenue and gains Administrative expenses Write-back of provision for doubtful debts LOSS FROM OPERATING ACTIVITIES Finance costs PROFIT/(LOSS) BEFORE TAX Tax PROFIT/(LOSS) BEFORE MINORITY INTERESTS Minority interests NET PROFIT/(LOSS) ATTRIBUTABLE TO SHAREHOLDERS	Year ended 31 March 2003 2002 2001 HK$’000 HK$’000 HK$’000 31,136 19,117 14,095 (27,757) (17,814) (38,585) 3,379 1,303 (24,490) 161 540 3,743 (15,219) (12,352) (9,157) 3,086 – – (8,593) (10,509) (29,904) (212) (365) 63,664 (8,805) (10,874) 33,760 – – – (8,805) (10,874) 33,760 45 14 5 (8,760) (10,860) 33,765

– 43 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

ASSETS, LIABILITIES AND MINORITY INTERESTS TOTAL ASSETS TOTAL LIABILITIES MINORITY INTERESTS NET ASSETS/(LIABILITIES)	As at 31 March 2003 2002 HK$’000 HK$’000 17,274 22,459 (20,420) (16,803) (683) (728) (3,829) 4,928	2001 HK$’000 19,308 (18,368) (40) 900

5. AUDITED FINANCIAL INFORMATION OF THE KEL GROUP

The following financial information is an extract from the audited financial statements of the KEL Group for the year ended 31 March, 2003 together with notes thereto.

Consolidated Profit and Loss Account

Year ended 31 March 2003

Notes TURNOVER 7 Cost of sales Gross profit Other revenue and gains 7 Administrative expenses Write-back of provision for doubtful debts LOSS FROM OPERATING ACTIVITIES 8 Finance costs 9 LOSS BEFORE TAX Tax 11 LOSS BEFORE MINORITY INTERESTS Minority interests NET LOSS ATTRIBUTABLE TO SHAREHOLDERS 12, 26 LOSS PER SHARE 13 Basic Diluted	2003 HK$’000 31,136 (27,757) 3,379 161 (15,219) 3,086 (8,593) (212) (8,805) – (8,805) 45 (8,760) 1.02 cents N/A	2002 HK$’000 19,117 (17,814) 1,303 540 (12,352) – (10,509) (365) (10,874) – (10,874) 14 (10,860) 1.48 cents N/A

– 44 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated Balance Sheet

31 March 2003

Notes NON-CURRENT ASSETS Fixed assets 14 CURRENT ASSETS Due from a fellow subsidiary 16 Gross amounts due from contract customers 17 Trade receivables 18 Other receivables Pledged time deposits 19 Cash and bank balances 19 CURRENT LIABILITIES Trade payables 20 Retention money payable Other payables and accruals Provision for scheme debts 21 Gross amounts due to contract customers 17 Trust receipt loans Due to a fellow subsidiary 16 Convertible notes 22 NET CURRENT ASSETS/(LIABILITIES) TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Convertible notes 22 MINORITY INTERESTS CAPITAL AND RESERVES Issued capital 24 Reserves 26	2003 HK$’000 367 499 1,003 6,534 1,507 5,122 2,242 16,907 1,149 717 1,231 1,047 6,480 – 121 9,675 20,420 (3,513) (3,146) – (683) (3,829) 86,228 (90,057) (3,829)	2002 HK$’000 388 – 1,353 4,582 1,317 5,500 9,319 22,071 1,469 368 748 1,047 3,014 482 – – 7,128 14,943 15,331 (9,675) (728) 4,928 86,225 (81,297) 4,928

TJIA BOEN SIEN

Director

WANG KE DUAN

Director

– 45 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated Summary Statement of Changes in Equity

Year ended 31 March 2003

Notes Total equity at 1 April Issue of new shares 24 Exercise of convertible notes 24 Exercise of warrants 24 Net loss attributable to shareholders 26 Total equity at 31 March	2003 HK$’000 4,928 – – 3 (8,760) (3,829)	2002 HK$’000 900 14,308 576 4 (10,860) 4,928

– 46 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated Cash Flow Statement

Year ended 31 March 2003

Notes CASH FLOWS FROM OPERATING ACTIVITIES Loss before tax Adjustments for: Finance costs 9 Interest income 7 Depreciation 8 Loss/(gain) on disposal of fixed assets 8 Operating loss before working capital changes Increase in amount due from a fellow subsidiary Decrease in gross amounts due from contract customers Increase in trade receivables Increase in other receivables Increase/(decrease) in trade payables Increase in retention money payable Increase/(decrease) in other payables and accruals Increase in gross amounts due to contract customers Decrease in amount due to the immediate holding company Increase in amount due to a fellow subsidiary Cash generated from operations and net cash outflow from operating activities CASH FLOWS FROM INVESTING ACTIVITIES Interest received Purchases of fixed assets 14 Proceeds from disposal of fixed assets Decrease/(increase) in pledged time deposits Movement in pledged bank balances Net cash inflow from investing activities CASH FLOWS FROM FINANCING ACTIVITIES Interest paid Proceeds from issue of share capital Exercise of warrants 24 Decrease in trust receipt loans Capital contributions by minority interests Net cash inflow/(outflow) from financing activities NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at beginning of year CASH AND CASH EQUIVALENTS AT END OF YEAR 19	2003 HK$’000 (8,805) 212 (109) 163 (4) (8,543) (499) 350 (1,952) (190) (320) 349 483 3,466 – 121 (6,735) 109 (142) 4 378 – 349 (212) – 3 (482) – (691) (7,077) 9,319 2,242	2002 HK$’000 (Restated) (10,874) 365 (112) 687 3 (9,931) – 1,451 (2,681) (894) 1,147 328 (1,623) 897 (928) – (12,234) 112 (112) 7 (5,500) 13,207 7,714 (365) 14,308 4 (810) 702 13,839 9,319 – 9,319

– 47 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Balance Sheet

31 March 2003

Notes NON-CURRENT ASSETS Interests in subsidiaries 15 CURRENT ASSETS Other receivables Cash and cash equivalents 19 CURRENT LIABILITIES Provision for scheme debts 21 Other payables and accruals Convertible notes 22 NET CURRENT LIABILITIES TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Convertible notes 22 CAPITAL AND RESERVES Issued capital 24 Reserves 26	2003 HK$’000 (11,167) 151 32 183 1,047 458 9,675 11,180 (10,997) (22,164) – (22,164) 86,228 (108,392) (22,164)	2002 HK$’000 18,821 339 102 441 1,047 304 – 1,351 (910) 17,911 (9,675) 8,236 86,225 (77,989) 8,236

TJIA BOEN SIEN

Director

WANG KE DUAN

Director

– 48 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

1. CORPORATE INFORMATION

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

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

2. BASIS OF PRESENTATION

The financial statements have been prepared on a going concern basis, notwithstanding that the Group had net current liabilities of HK$3,513,000 and a deficiency in assets of HK$3,829,000 as at 31 March 2003. In the opinion of the directors, the Group will have adequate working capital in the forthcoming year, after taking into consideration the following:

(i) Pursuant to the debt restructuring and share subscription agreement (the “DRA”), Deson, the ultimate holding company of the Company, undertook to procure that the Group be granted credit facilities of up to HK$50 million. In addition to this credit facility, to the extent that any contingent liabilities of the Company, Kenworth Engineering Limited and Kenworth Group Limited to be settled under the Schemes (as defined in note 3 to the financial statements), are not met by the available cash of the Group after completion of the DRA, Deson will procure that sufficient cash be made available to the Company to meet such contingent liabilities. Further details of the DRA are set out in note 3 to the financial statements and in the Company’s circular dated 26 June 2000.
(ii) Subsequent to the balance sheet date, on 14 May 2003, the Company completed the acquisition of Billion Treasure Holdings Limited, a subsidiary of Deson, for a total consideration of HK$46,000,000. The total consideration was satisfied by way of issuing 657,142,857 shares of the Company to Deson.

The directors believe that the acquisition will strengthen the financial condition of the Group by providing a source of reliable recurring rental income and additional cash flow streams to the Group. Further details of the transaction are disclosed in note 31 to the financial statements.

The directors are satisfied that, in light of the above, the Group will have sufficient financial resources to satisfy its ongoing working capital and other financial requirements in the forthcoming year. Accordingly, the financial statements have been prepared on a going concern basis.

3. CORPORATE UPDATE

In the prior year, the Company and certain of its subsidiaries entered into the DRA with Wonderland Development Limited (“Wonderland”), 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 (the “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, the Kenworth and the 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, 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. The settlement of any and all of the debts due to the scheme creditors under the Schemes would constitute a full discharge and satisfaction of such debts. Any creditors who may have initiated legal proceedings (including any winding-up petition) against the Group in connection with such debts were to pursue the termination of such proceedings.

The administrator of the Schemes (the “Scheme Administrator”) is still 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. The above process is in progress and has not been completed as at the date of approval of these financial statements.

– 49 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

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

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

The following new and revised HKSSAPs are effective for the first time for the current year’s financial statements:

• HKSSAP 1 (Revised): “Presentation of Financial Statements” • HKSSAP 11 (Revised): “Foreign Currency Translation” • HKSSAP 15 (Revised): “Cash Flow Statements” • HKSSAP 34: “Employee Benefits”

These HKSSAPs prescribe new accounting measurement and disclosure practices. The major effects on the Group’s accounting policies and on the amounts disclosed in these financial statements of these HKSSAPs are summarised as follows:

HKSSAP 1 prescribes the basis for the presentation of financial statements and sets out guidelines for their structure and minimum requirements for the content thereof. The principal impact of the revision to this HKSSAP is that a consolidated summary statement of changes in equity is now presented on page 26 of the financial statements in place of the consolidated statement of recognised gains and losses that was previously required.

HKSSAP 11 prescribes the basis for the translation of foreign currency transactions and financial statements. The adoption of the revised HKSSAP 11 has had no material effect on the financial statements.

HKSSAP 15 prescribes the format for the cash flow statement. The principal impact of the revision of this HKSSAP is that the consolidated cash flow statement now presents cash flows under three headings, cash flows from operating, investing and financing activities, rather than the five headings previously required. In addition, the definition of cash equivalents for the purpose of the consolidated cash flow statement has been revised. Further details of these changes are included in the accounting policy for “Cash and cash equivalents” in note 5 and in note 27 to the financial statements.

HKSSAP 34 prescribes the recognition and measurement criteria to apply to employee benefits, together with the required disclosures in respect thereof. The adoption of this HKSSAP has resulted in the recognition of an accrual for paid holiday carried forward by the Group’s employees as at the balance sheet date. In addition, disclosures are now required in respect of the Company’s share option scheme as detailed in note 25 to the financial statements. These share option scheme disclosures are similar to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) disclosures previously included in the Report of the Directors, which are now included in the notes to the financial statements as a consequence of the HKSSAP.

5. 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 2003. 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.

– 50 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

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.

Revenue recognition

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

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

Fixed assets and depreciation

Fixed assets are stated at cost less accumulated depreciation and any impairment losses.

The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditure incurred after the fixed assets have been put into operation, such as repairs and maintenance, is normally charged to the profit and loss account in the period in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of 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.

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.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

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

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

Borrowing costs

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

Operating leases

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

Foreign currency transactions

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.

Provisions

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

Deferred tax

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

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.

Pension schemes

The Group operates defined contribution retirement benefits schemes under the Mandatory Provident Fund Schemes Ordinance, for those employees who are eligible to participate. Contributions are made based on a percentage of the employees’ basic salaries and are charged to the profit and loss account as they become payable in accordance with the rules of the schemes. The assets of the schemes are held separately from those of the Group in independently administered funds. When an employee leaves the Mandatory Provident Fund Exempted Occupational Retirement Schemes Ordinance retirement benefits scheme (the “MPF Exempted ORSO Scheme”) prior to his/her interest in the Group’s employer contributions vesting fully, the ongoing contributions payable by the Group may be reduced by the relevant amount of forfeited contributions. With effect from 6 December 2002, the MPF Exempted ORSO Scheme was terminated. In respect of the Mandatory Provident Fund retirement benefits scheme, the Group’s employer contributions vest fully with the employees when contributed into the scheme.

– 52 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

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.

Prior to the adoption of the revised HKSSAP 15 during the year, as explained in note 4 to the financial statements, cash equivalents in the consolidated cash flow statement also included advances from banks repayable within three months from the date of the advance, in addition to bank overdrafts. This change in definition has resulted in a prior year adjustment relating to trust receipt loans, further details of which are included in note 27 to the financial statements.

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.

6. SEGMENT INFORMATION

Segment information is presented by way of the Group’s business segments.

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

The Group’s operating businesses are structured and managed separately, according to the nature of their operations and the products and services they provide. Each of the Group’s business segments represents a strategic business unit that offers products and services which are subject to risks and returns that are different from those of 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 more scope for undertaking project co-ordination and design management to meet clients’ basic concepts and requirements; and
(c) the environmental engineering services segment comprises the provision of waste water handling, water treatment and sewage treatment services.

– 53 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

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 Loss before tax Tax Loss before minority interests Minority interests Net loss attributable to shareholders Segment assets Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities Other segment information: Depreciation Unallocated amounts Capital expenditure Unallocated amounts	Building services (single-trade) 2003 2002 HK$’000 HK$’000 18,713 12,750 – 137 18,713 12,887 (4,682) (2,655) 3,086 – 6,046 5,575 5,872 4,298 67 85 8 14	Packaged/ design and Environmental build contracts engineering services 2003 2002 2003 2002 HK$’000 HK$’000 HK$’000 HK$’000 9,060 3,781 3,363 2,586 – 7 – 64 9,060 3,788 3,363 2,650 (3,731) (3,705) (1,104) (31) – – – – 1,407 639 1,307 235 1,873 937 275 209 – – – – – – – –	Consolidated 2003 2002 HK$’000 HK$’000 31,136 19,117 – 208 31,136 19,325 (9,517) (6,391) 161 332 3,086 – (2,323) (4,450) (8,593) (10,509) (212) (365) (8,805) (10,874) – – (8,805) (10,874) 45 14 (8,760) (10,860) 8,760 6,449 8,514 16,010 17,274 22,459 8,020 5,444 12,400 11,359 20,420 16,803 67 85 96 602 163 687 8 14 134 98 142 112

– 54 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

7. TURNOVER, OTHER REVENUE AND GAINS

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

Turnover Construction contracts Rental income from plant and machinery Other revenue and gains Interest income Service fee income Other	2003 HK$’000 31,136 – 31,136 109 – 52 161	2002 HK$’000 18,830 287
		19,117

		112 105 323
		540

8. LOSS FROM OPERATING ACTIVITIES

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

Cost of construction contracts 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 Loss/(gain) on disposal of fixed assets	2003 HK$’000 27,757 9,519 228 (223) 5 9,524 400 163 783 (4)	2002 HK$’000 17,814 12,129 395 (282)
		113
		12,242
		410 687 1,261 3

* As at 31 March 2003, there were no material forfeited contributions available to offset future employer contributions to the pension scheme (2002: Nil).

9. FINANCE COSTS

Interest on convertible notes Interest on bank loans, overdrafts and other loans wholly repayable within five years Total finance costs	2003 HK$’000 194 18 212	2002 HK$’000 198 167
		365

– 55 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

10. DIRECTORS’ AND EMPLOYEES’ EMOLUMENTS

(a) Directors’ emoluments 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 Total directors’ remuneration	Group 2003 HK$’000 – 1,603 12 1,615 60 1,675	2002 HK$’000 – 2,791 12
		2,803
		80
		2,883

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

Nil to HK$1,000,000 HK$1,000,001 to HK$1,500,000	Number of directors 2003 2002 8 9 – 1 8 10	Number of directors 2003 2002 8 9 – 1 8 10
		10

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

(b) Employees’ emoluments

The five highest paid employees during the year include three (2002: three) directors, details of whose remuneration are set out in (a) above. Details of the emoluments of the remaining two (2002: two) non-director, highest paid employees are as follows:

Salaries, allowances and benefits in kind Pension scheme contributions	Group 2003 2002 HK$’000 HK$’000 1,035 1,171 37 123 1,072 1,294	Group 2003 2002 HK$’000 HK$’000 1,035 1,171 37 123 1,072 1,294
		1,294

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

Nil to HK$1,000,000

Number	of employees
2003	2002
2	2

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.

– 56 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

12. NET LOSS ATTRIBUTABLE TO SHAREHOLDERS

The net loss attributable to shareholders for the year ended 31 March 2003 dealt with in the financial statements of the Company is approximately HK$30,403,000 (2002: HK$7,083,000).

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$8,760,000 (2002: HK$10,860,000) and the weighted average number of 862,268,000 (2002: 735,819,000) shares in issue during the year.

Diluted loss per share amounts for the years ended 31 March 2003 and 2002 have not been disclosed, as the convertible notes and warrants outstanding during these years had an anti-dilutive effect on the basic loss per share for these years.

14. FIXED ASSETS

Group

Leasehold improvements HK$’000 Cost: At beginning of year 854 Additions 16 Disposals (288) At 31 March 2003 582 Accumulated depreciation: At beginning of year 854 Provided during the year 7 Disposals (288) At 31 March 2003 573 Net book value: At 31 March 2003 9 At 31 March 2002 – 15. INTERESTS IN SUBSIDIARIES	Furniture, fixtures and office equipment HK$’000 1,887 118 (71) 1,934 1,748 89 (71) 1,766 168 139	Plant, machinery and workshop equipment HK$’000 1,644 8 – 1,652 1,398 64 – 1,462 190 246	Motor vehicles HK$’000 191 – (148) 43 188 3 (148) 43 – 3	Total HK$’000 4,576 142 (507) 4,211 4,188 163 (507) 3,844 367 388

Unlisted shares, at cost Due from subsidiaries Due to subsidiaries Less: Provision for impairment	Company 2003 2002 HK$’000 HK$’000 112,891 121,888 506,583 498,081 (11,167) (9,593) 608,307 610,376 (619,474) (591,555) (11,167) 18,821

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

– 57 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

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

		Nominal value of	Percentage	Percentage
	Place of	issued and		of equity
	incorporation/	fully paid	attributable to		Principal
Name	operations	share capital	the Company		activities
			2003	2002
Kenworth Group	British Virgin	US$3	100	100	Investment
Limited	Islands/				holding
	Hong Kong
Kenworth Engineering	Hong Kong	HK$24,274,140	100*	100*	Provision of
Limited					electrical and
					mechanical
					engineering
					services
Kingsly Corporation	Hong Kong	HK$2,340,000	70*	70*	Trading of
Limited					construction
					materials

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

Held indirectly through subsidiaries

16. DUE FROM/(TO) FELLOW SUBSIDIARIES

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

17. CONSTRUCTION CONTRACTS

Gross amounts due from contract customers –note (a) Gross amounts due to contract customers –note (b) Contract costs incurred plus recognised profits less recognised losses to date –note (c) Less: Progress billings received and receivable –note (c)	2003 HK$’000 1,003 (6,480) (5,477) 964,690 (970,167) (5,477)	2002 HK$’000 1,353 (3,014
		(1,661

		2,390,498 (2,392,159
		(1,661

Notes:

(a) At 31 March 2003, retentions held by customers for contract works included in trade receivables under current assets amounted to approximately HK$807,000 (2002: HK$905,000).
(b) At 31 March 2003, there were no advances received from customers for contract works included in trade payables under current liabilities (2002: Nil).
(c) These amounts are mainly related to construction contracts which have either been terminated or which have ceased, or had insignificant activities during the year. Since there are numerous disputes and claims between the Group and its contract employers, suppliers, subcontractors and subcontractors’ employees, the directors have not been able to negotiate and agree final completion accounts for these terminated, ceased or inactive construction contracts.

– 58 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

18. TRADE RECEIVABLES

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

Group

Current to 90 days 91 to 180 days 181 to 360 days Over 360 days Retention money receivable Total	Balance HK$’000 4,631 904 237 39,968 45,740 26,768 72,508	2003 Provision HK$’000 – (74) (6) (39,933) (40,013) (25,961) (65,974)	Net balance HK$’000 4,631 830 231 35 5,727 807 6,534	Balance HK$’000 2,465 179 1,153 44,909 48,706 28,745 77,451	2002 Provision HK$’000 – (1) (119) (44,909) (45,029) (27,840) (72,869)	Net balance HK$’000 2,465 178 1,034 –
						3,677 905
						4,582

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.

19. CASH AND CASH EQUIVALENTS AND PLEDGED TIME DEPOSITS

Cash and bank balances Time deposits Less: Time deposits pledged for bank credit facilities Cash and cash equivalents 20. TRADE PAYABLES	Group 2003 2002 HK$’000 HK$’000 2,242 9,319 5,122 5,500 7,364 14,819 (5,122) (5,500) 2,242 9,319	Company 2003 2002 HK$’000 HK$’000 32 102 – – 32 102 – – 32 102	Company 2003 2002 HK$’000 HK$’000 32 102 – – 32 102 – – 32 102
			102 –
			102

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

Current to 90 days 21. PROVISION FOR SCHEME DEBTS	Group 2003 2002 HK$’000 HK$’000 1,149 1,469	Group 2003 2002 HK$’000 HK$’000 1,149 1,469

The Group has 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.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

22. CONVERTIBLE NOTES

At beginning of year Arising on exercise of convertible notes At 31 March	Group and Company 2003 2002 HK$’000 HK$’000 9,675 10,251 – (576 9,675 9,675	Group and Company 2003 2002 HK$’000 HK$’000 9,675 10,251 – (576 9,675 9,675
		9,675

Under the Schemes, as further detailed in note 3 to the financial statements, for every HK$10,000 of scheme debt, the Company issued convertible notes in the principal amount of HK$187.50 to the scheme creditor on 30 August 2000. The notes bear interest at a rate of 2% per annum and are convertible into new shares of the Company at a conversion price of HK$0.10 per share (the “Conversion Price”) at any time up to 1 September 2003, being the third anniversary of the date of the issue. The Conversion Price is subject to certain adjustments as defined in the note instrument. Unless previously repurchased and cancelled, or converted, the notes were to repurchase at their principal amount plus accrued interest on 1 September 2003.

23. DEFERRED TAX

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


	2003	2002
	HK$’000	HK$’000
Tax losses available for future relief	87,721	79,536

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

As at 31 March 2003, the Company did not have any significant unprovided deferred tax (2002: Nil).

24. SHARE CAPITAL

Shares Authorised: 1,800,000,000 shares of HK$0.10 each Issued and fully paid: 862,277,659 (2002: 862,251,459) ordinary shares of HK$0.10 each	2003 HK$’000 180,000 86,228	2002 HK$’000 180,000

		86,225

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

At 1 April 2001 Issue of new shares Arising on exercise of convertible notes Arising on exercise of warrants At 31 March 2002 and 1 April 2002 Arising on exercise of warrants At 31 March 2003	Number of shares 713,368,757 143,081,399 5,765,189 36,114 862,251,459 26,200 862,277,659	Amount HK$’000 71,337 14,308 576 4
		86,225 3
		86,228

– 60 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The subscription rights attaching to 26,200 warrants were exercised at the subscription price of HK$0.10 per share, resulting in the issue of 26,200 new ordinary shares at HK$0.10 each for a total cash consideration, before expenses, of HK$2,620.

Share options

Details of the Company’s share option scheme are included in note 25 to the financial statements.

At 31 March 2003, no share options were outstanding under the option scheme and none of the Company’s directors or the Group’s employees were granted share options during the year.

Warrants

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

During the year, 26,200 warrants were exercised for 26,200 new ordinary shares of HK$0.10 each at HK$0.10 per share.

All remaining unexercised warrants expired on 2 August 2002.

25. SHARE OPTION SCHEME

HKSSAP 34 was adopted during the year, as explained in note 4 and under the heading “Employee benefits” in note 5 to the financial statements. As a result, the following detailed disclosures relating to the Company’s share option scheme are now included in the notes to the financial statements. In the prior year, these disclosures were included in the Report of the Directors, as their disclosure is also a requirement of the Listing Rules.

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 prices 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 2003, no share options were outstanding under the Option Scheme and none of the Company’s directors or the Group’s employees were granted share options during the year.

– 61 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

26. RESERVES

Contributed Accumulated surplus losses HK$’000 HK$’000 Group At 1 April 2001 89,800 (650,896) Net loss for the year – (10,860) At 31 March 2002 and 1 April 2002 89,800 (661,756) Net loss for the year – (8,760) At 31 March 2003 89,800 (670,516) Reserves retained by: Company and subsidiaries At 31 March 2003 89,800 (670,516) Company and subsidiaries At 31 March 2002 89,800 (661,756) Company At 1 April 2001 101,689 (663,254) Net loss for the year – (7,083) At 31 March 2002 and 1 April 2002 101,689 (670,337) Net loss for the year – (30,403) At 31 March 2003 101,689 (700,740)	General reserve HK$’000 490,659 – 490,659 – 490,659 490,659 490,659 490,659 – 490,659 – 490,659	Total HK$’000 (70,437) (10,860) (81,297) (8,760) (90,057) (90,057) (81,297) (70,906) (7,083) (77,989) (30,403) (108,392)

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.

The directors, having considered, inter alia, the substance of the entire debt and capital restructuring exercise, the legal and practical effects of the Schemes, the time span required for the completion and termination of the Schemes and the requirements of Hong Kong Society of Accountants statement 2.01 “Framework for the preparation and presentation of financial statements” and statement 2.102 “Net profit or loss for the period, fundamental errors and changes in accounting policies”, considered that the inclusion of the net liabilities discharged under the Schemes directly in the general reserve during the year ended 31 March 2001, instead of in the profit and loss account and hence in the accumulated losses account for that year, was more appropriate and fairer considering the financial effect of the Schemes as a whole.

27. NOTE TO THE CONSOLIDATED CASH FLOW STATEMENT

HKSSAP 15 (Revised) was adopted during the current year, as detailed in note 4 to the financial statements, which has resulted in a change to the layout of the consolidated cash flow statement. The consolidated cash flow statement is now

– 62 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

presented under three headings: cash flows from operating activities, investing activities and financing activities. Previously five headings were used, comprising the three headings listed above, together with cash flows from returns on investments and servicing of finance and from taxes paid. The significant reclassifications resulting from the change in presentation are that interest received is now included in cash flows from investing activities, and interest paid is now included in cash flows from financing activities. The presentation of the 2002 comparative consolidated cash flow statement has been changed to accord with the new layout.

In addition, the definition of “cash equivalents” under the revised HKSSAP 15 has been revised from that under the previous HKSSAP 15, as explained under the heading “Cash and cash equivalents” in note 5 to the financial statements. This has resulted in trust receipt loans no longer qualifying as cash equivalents. The amount of cash equivalents in the consolidated cash flow statement at 31 March 2002 has been adjusted to remove trust receipt loans amounting to HK$482,000, previously included at that date. The year’s movement in trust receipt loans is now included in cash flows from financing activities and the comparative cash flow statement has been changed accordingly.

28. CONTINGENT LIABILITIES

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

		Company
	2003	2002
	HK$’000	HK$’000
Guarantees given to a bank in connection with
facilities granted to a subsidiary	8,000	8,000

As at 31 March 2003, the bank facilities granted to a subsidiary subject to the guarantees given to a bank by the Company have not been utilised (2002: utilised to the extent of approximately HK$482,000).

(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 Schemes 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 both Kenworth and the main 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 3 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 Scheme by the allotment of certain redeemable cumulative preference shares by Kenworth.

During the year, the Group appointed an independent chartered surveyor to estimate its potential exposure under the above two claims. 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 in 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.

29. COMMITMENTS

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

– 63 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

As at 31 March 2003, the Group had total future minimum lease payments under non-cancellable operating leases falling due as follows:

Leases expiring: Within one year In the second to fifth years, inclusive	Group 2003 2002 HK$’000 HK$’000 132 144 – 132 132 276	Group 2003 2002 HK$’000 HK$’000 132 144 – 132 132 276
		276

As at 31 March 2003, neither the Group, nor the Company had any significant commitments.

30. RELATED PARTY TRANSACTIONS

In addition to those transactions and balances disclosed elsewhere in the financial statements, 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:

Notes Construction contracting income received from fellow subsidiaries (a) Rental expense paid to a fellow subsidiary (b) Tender service fees paid to a fellow subsidiary (c) Notes:	2003 HK$’000 7,808 580 –	2002 HK$’000 3,502 580 936

(a) The directors consider that the construction contracts were entered into according to conditions similar to those offered to the major customers of the Group.

(b) The rental expense was based on rates approximating those of the market at the time the initial lease was undertaken.

31. POST BALANCE SHEET EVENTS

On 6 March 2003, the Company entered into a provisional sale and purchase agreement (the “Acquisition”) with Deson for the acquisition of the entire issue share capital of Billion Treasure Holdings Limited (“Billion Treasure”) and its shareholder’s loan of HK$40,236,066 for a total consideration of HK$46,000,000. The total consideration was satisfied by way of issuing 657,142,857 shares (the “Consideration Shares”) of the Company to Super Win Development Limited, a wholly-owned subsidiary of Deson.

In order to facilitate the Acquisition by enabling the Company to issue and allot the Consideration Shares, the board proposed to reorganise the capital structure of the Company (the “Capital Reorganisation”). The implementation of the Capital Reorganisation involved the following principal procedures:

(i) A reduction of the nominal value of each of the shares in the issued share capital of the Company from HK$0.10 to HK$0.07;
(ii) The credit in the sum of HK$25,868,330 arising from the reduction of capital was applied to set off an equivalent amount of the accumulated losses of the Company; and
(iii) The authorised share capital of the Company was reduced to HK$126,000,000 divided into 1,800,000,000 share of HK$0.07 each and, following such reduction, the authorised share capital of the Company was increased to the amount of HK$180,000,000 by the creation of the requisite number of the Company’s share capital.

As at the Acquisition date, Deson was a connected person of the Company by virtue of its being a controlling shareholder of the Company owning approximately 55.62% thereof by virtue of indirect shareholding interests therein as at the balance sheet date. Accordingly, the transaction constituted a major and connected transaction for the Company under the Listing Rules.

– 64 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The Capital Reorganisation and the Acquisition were approved by the Company’s independent shareholders at a special general meeting on 12 May 2003 and were completed on 13 May 2003 and 14 May 2003, respectively. Upon completion of the Acquisition, Deson then owned approximately 74.81% of the enlarged issued share capital of the Company.

A summary pro forma statement of combined assets and liabilities of the Group based on the audited consolidated balance sheet of the Group as at 31 March 2003 and the audited consolidated balance sheet of Billion Treasure and its subsidiary as at 31 December 2002, is presented below:

The Group’s
Billion
audited
Treasure
consolidated
and its
net assets
subsidiary
31 March
31 December
2003
2002#
Adjustments
HK$’000
HK$’000
HK$’000
Notes
NON-CURRENT ASSETS
367
101
CURRENT ASSETS
16,907
56,991
4,680
(1)
CURRENT LIABILITIES
(20,420)
(48,864)
40,236
(2)
(354)
(3)
NET CURRENT ASSETS/
(LIABILITIES)
(3,513)
8,127
TOTAL ASSETS LESS
CURRENT LIABILITIES
(3,146)
8,228
NON-CURRENT LIABILITIES
–
(7,144)
MINORITY INTERESTS
(683)
–
NET ASSETS/(LIABILITIES)
(3,829)
1,084

Summary
pro forma
combined
net assets
HK$’000
468
78,578
(29,402)
49,176
49,644
(7,144)
(683)
41,817

# There are no significant differences in the financial position of Billion Treasure and its subsidiary as at 31 December 2002 and 31 March 2003.

Notes:

The amount represents a fair value acquisition accounting adjustment for the completed properties held for sale of Billion Treasure and its subsidiary prior to the Acquisition. The adjustment is based on the total consideration stated in the agreement of HK$46,000,000, including the acquisition of a loan from the immediate holding company of Billion Treasure of HK$40,236,000.

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

The amount represents the acquisition of a loan from the immediate holding company of Billion Treasure.
The amount represents the estimated Acquisition expenses.

32. COMPARATIVE AMOUNTS

As further explained in note 4 to the financial statements, due to the adoption of certain new and revised HKSSAPs during the current year, the accounting treatment and presentation of certain items and balances in the financial statements have been revised to comply with the new requirements. Accordingly, certain comparative amounts have been reclassified to conform with the current year’s presentation.

33. APPROVAL OF THE FINANCIAL STATEMENTS

The financial statements were approved and authorised for issue by the board of directors on 24 July 2003.

– 65 –

APPENDIX II ACCOUNTANTS’ REPORTS ON THE XIN HUA GROUP

15th Floor Hutchison House 10 Harcourt Road Hong Kong

31 March, 2004

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

Dear Sirs,

We set out below our report on the financial information (the “Financial Information”) regarding Xin Hua Resources Investment Limited (the “Company”) and its wholly-owned subsidiary, Beijing Zhongmin Gas Co. Ltd. (“Zhongmin”) (hereinafter collectively referred to as the “Group”) for inclusion in the circular of KEL Holdings Limited (“KEL”) dated 31 March, 2004 in connection with the proposed acquisition of a 49% equity interest in the registered and paid-up capital of the Company.

The Company was incorporated as a limited liability company in the British Virgin Islands on 2 June 2003 and has been an investment holding company since its incorporation. Zhongmin was incorporated as a limited liability company under the Company Laws of the People’s Republic of China (the “PRC”) on 11 July 2003 and is involved in investment holding.

As at the date of this report, no audited financial statements have been prepared for the Company. We have, however, performed an independent review of the management accounts of the Company since the date of its incorporation. The financial statements of Zhongmin were audited by Beijing ZhongBoHua Certified Public Accountants.

For the purpose of this report, we have examined the management accounts of the Group for the period from 2 June 2003 to 31 December 2003 (the “Relevant Period”), and carried out such additional procedures as we considered necessary in accordance with the Auditing Guideline “Prospectuses and the reporting accountant” issued by the Hong Kong Society of Accountants.

In our opinion, the Financial Information gives, for the purpose of this report, a true and fair view of the loss of the Group for the Relevant Period and of the balance sheets of the Company and of the Group as at 31 December 2003.

1. BASIS OF PRESENTATION

The Financial Information has been prepared from the unaudited management accounts of the Company and the audited financial statements of Zhongmin for the period from the date of incorporation to 31 December 2003, after making such adjustments as we consider appropriate for the purpose of this report. All significant intercompany transactions and balances within the Group are eliminated on consolidation.

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

– 66 –

APPENDIX II ACCOUNTANTS’ REPORTS ON THE XIN HUA GROUP

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 the Company and its subsidiary for the Relevant Period. All significant intercompany transactions and balances within the Group are eliminated on consolidation.

Subsidiaries

A subsidiary is a company whose financial and operating policies the company controls, directly or indirectly, so as to obtain benefits from its activities. Interests in subsidiaries are stated at cost less any impairment losses.

Associates

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

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

Goodwill

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

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

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.

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.

– 67 –

APPENDIX II ACCOUNTANTS’ REPORTS ON THE XIN HUA GROUP

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

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. Interest income is recognised, on a time proportion basis taking into account the principal outstanding and the effective interest rate applicable.

Borrowing costs

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

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.

Foreign currencies

Foreign currency transactions during the Relevant Period 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 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.

– 68 –

APPENDIX II ACCOUNTANTS’ REPORTS ON THE XIN HUA GROUP

Related parties

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 residue value, over its estimated useful life. The principal annual rate used for this purpose is 19%.

3. INCOME STATEMENT

The following is a summary of the consolidated income statement of the Group for the Relevant Period:

			From 2 June
			2003 (date of
			incorporation)
			to 31 December
		Notes	2003
			HK$
TURNOVER			–
Other revenue - interest income			11,474
General and administrative expenses			(1,706,721)
LOSS BEFORE TAX		(a)	(1,695,247)
Tax		(b)	–
NET	LOSS FOR THE RELEVANT PERIOD		(1,695,247)
(a)	Loss before tax
	This is arrived at after charging/(crediting):

	From 2 June
	2003 (date of
	incorporation)
	to 31 December
	2003
	HK$
Auditors’ remuneration	–
Depreciation	4,431
Directors’ remuneration	37,383
Staff cost (including directors’ remuneration)	223,154
Interest income	(11,474)

– 69 –

APPENDIX II ACCOUNTANTS’ REPORTS ON THE XIN HUA GROUP

(b) Tax

No provision for Hong Kong and overseas profits tax has been made as the Company had no assessable profits arising in Hong Kong or elsewhere during the Relevant Period.

A reconciliation of the tax charge applicable to loss before tax using the statutory rate to the tax charge at the effective tax rate is as follows:

Loss before tax Tax at the statutory tax rate of 33% Temporary differences not recognised Tax charge for the year	HK$ (1,695,247) (559,431) 559,431 –	2003 % (33.0) 33.0 –

The Group has tax losses arising in the PRC of HK$540,000 and deductible pre-operating expenses of HK$1,155,000 that are deductible in 5 years upon commencement of a subsidiary’s business in the PRC. Deferred tax assets have not been recognised in respect of these losses and pre-operating expenses as it is uncertain that there will be future profits available in that subsidiary to utilise the tax deductions and the tax losses.

– 70 –

APPENDIX II ACCOUNTANTS’ REPORTS ON THE XIN HUA GROUP

4. BALANCE SHEETS

The following is a summary of the consolidated balance sheet of the Group and balance sheet of the Company as at the end of the Relevant Period:

Group
Notes
NON-CURRENT ASSETS
Fixed assets
(a)
Interests in associates
(c)
CURRENT ASSETS
Other receivables
(d)
Prepayments, sundry debtors and deposits
Cash and bank balances
CURRENT LIABILITIES
Deposits, accruals and other payables
NET CURRENT ASSETS
TOTAL ASSETS LESS CURRENT LIABILITIES
NON-CURRENT LIABILITIES
Loans from shareholders
(e)
CAPITAL AND RESERVES
Issued capital
(f)
Reserves

31 December
2003
HK$
78,778
9,425,000
9,503,778
27,125,944
200,335
24,165,614
51,491,893
9,431,908
42,059,985
51,563,763
52,722,298
(1,158,535)
389,000
( 1,547,535)
(1,158,535)

– 71 –

APPENDIX II ACCOUNTANTS’ REPORTS ON THE XIN HUA GROUP

4. BALANCE SHEETS (continued)

Company

Notes
NON-CURRENT ASSET
Interest in a subsidiary
(b)
CURRENT ASSETS
Cash on hand
NON-CURRENT LIABILITIES
Loan from shareholders
(e)
CAPITAL
Issued capital
(f)
(a)
Fixed assets
Cost:
Additions during the period and
balance at 31 December 2003
Accumulated depreciation:
Provided during the period and
balance at 31 December 2003
Net book value:
At 31 December 2003
(b)
Interest in a subsidiary
Company
Unlisted investment, at cost
Particulars of the subsidiary as at the balance sheet date are as follows:
Percentage
Place of
of equity
incorporation/
Nominal value of
attributable to
Name
operation
share capital
the Company
Beijing Zhongmin
PRC
US$24,000,000
100
Gas Co. Ltd.
(note)

31 December
2003
HK$
53,110,512
786
(52,722,298)
389,000
389,000
Office
equipment
HK$
83,209
4,431
78,778
31 December
2003
HK$
53,110,512
Principal
activity
Investment
holding

Note : The nominal value of the subsidiary’s registered capital is US$24,000,000. As at 31 December 2003, US$6,826,544 was paid. On 8 January 2004, a further US$216,176 was paid and US$16,957,280 remained unpaid as at date of this report .

– 72 –

APPENDIX II ACCOUNTANTS’ REPORTS ON THE XIN HUA GROUP

(c) Interests in associates

Share of net assets of associates Goodwill on acquisition of associates	31 December 2003 HK$ 8,355,815 1,069,185
	9,425,000

Particulars of the associates are as follows:

		Percentage
		of effective
	Place of	interest
Company name	incorporation	attributable	Principal
	and operations	to the Group	activities
Mian Zhu City Hong Sen	PRC	33	Distribution and
Natural Gas Co., Ltd.			supply of piped
(“Hong Sen”)			natural gas
Mian Zhu City Long Teng	PRC	33	Installation of
Gas Installation Co., Ltd.			natural gas
(“Long Teng”)			distribution
			facilities

A summary of the net assets of Hong Sen and Long Teng as at 31 December 2003 and their results for the financial year ended 31 December 2003 are set out below:

Non-current assets Current assets Current liabilities Minority interests Turnover Net profit/(loss) from ordinary activities attributable to shareholders	Hong Sen As at 31 December 2003 (Note) HK$ 24,534,791 23,387,960 (29,387,106) ( 378,946) 18,156,699 Year ended 31 December 2003 HK$ 49,186,274 1,979,963	Long Teng As at 31 December 2003 (Note) HK$ 172,509 11,385,556 (4,394,112) –
		7,163,953

		Year ended 31 December 2003 HK$ 1,074,882

		(131,893

– 73 –

APPENDIX II ACCOUNTANTS’ REPORTS ON THE XIN HUA GROUP

Note : The amounts are extracted from the management accounts of the associates, which have been reviewed by Ernst & Young. The associates were acquired by the Group on 10 December 2003. In the opinion of the directors, the post acquisition results were insignificant and the results have not been included in the financial statements of the Group.

(d) Other receivable

Other receivable represents a deposit paid for the development of natural gas distribution facilities.

(e) Loans from shareholders

The balances are unsecured, interest-free and are not repayable in the next financial year.

(f) Share capital

	31 December
	2003
	HK$
Authorised, issued and fully paid
50,000 shares of US$1 each (US$50,000)	389,000

The Company has 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 the Company.

(g) Commitments

(i) Capital commitments

As at 31 December 2003, the Company has capital commitment in respect of contribution payable to a subsidiary of HK$133,609,488.

(ii) Operating lease commitments

Group

The Group leases its office property under an operating lease arrangement. The lease for office property is negotiated for term of one year.

As at the end of the Relevant Period, the Group had total future minimum lease payments under non-cancellable operating leases on land and buildings falling due as follows:

	31	December
		2003
		HK$
Within one year		111,804

(h) Contingent liabilities

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

– 74 –

APPENDIX II ACCOUNTANTS’ REPORTS ON THE XIN HUA GROUP

5. CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Issue of shares Exchange realignment Net loss for the period At 31 December 2003	Issued share capital HK$ 389,000 – – 389,000	Exchange fluctuation reserve HK$ – 147,712 – 147,712	Accumulated losses HK$ – – (1,695,247) (1,695,247)	Total HK$ 389,000 147,712 (1,695,247) (1,158,535)

6. SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements of the Group have been prepared in respect of any period subsequent to 31 December 2003.

Yours faithfully, Ernst & Young Certified Public Accountants Hong Kong

– 75 –

PROPERTY VALUATION REPORT

APPENDIX III

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

==> picture [63 x 47] 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

31 March, 2004

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

Dear Sirs,

Re: Unit 02 on Level 3A, Zhongda Square, No. 989 Dongfang Road, Lujiazui, Pudong New District, Shanghai, The People’s Republic of China (the “PRC”)

In accordance with the instruction from KEL Holdings Limited (hereinafter referred to as the “Company”) for us to value the interest in the captioned property (hereinafter referred to as the “Property”), which is held by Deson Development International Holdings Limited and/or its subsidiaries (hereinafter collectively referred to as “Deson Group”), we confirm that we have carried out inspection, made relevant enquiries and obtained such further information as we consider necessary for providing you with our opinion of the open market value of such property interest as at 18 February, 2004 (hereinafter referred to as the “date of valuation”). It is our understanding that this valuation document is to be used for reference purpose regarding a possible acquisition of such property interest by the Company and/or its subsidiaries (hereinafter referred to as “KEL Group”).

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

Basis of Valuation

Our valuation of the property interest is our opinion of 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
(e) that both parties to the transaction had acted knowledgeably, prudently and without compulsion.”

– 76 –

PROPERTY VALUATION REPORT

APPENDIX III

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

Valuation Methodology

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

Valuation Assumptions

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

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

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

Title Investigation

Due to the nature of the land registration system in the PRC, we are not able to investigate the title to or any liabilities against the property interest. However, we have been provided with a copy of the Certificate for Real Estate Ownership for the Property. We have not examined the original document to verify ownership and to ascertain the existence of any amendments that may not appear on the copies handed to us.

Limiting Conditions

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

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

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

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

– 77 –

PROPERTY VALUATION REPORT

APPENDIX III

Remarks

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

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

Our valuation certificate is enclosed herewith.

Yours faithfully, For and on behalf of

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

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

– 78 –

PROPERTY VALUATION REPORT

APPENDIX III

VALUATION CERTIFICATE

Property

Description and tenure

Particulars of occupancy

Open market value in existing state as at 18 February, 2004

Unit 02 on Level 3A, Zhongda Square (the Zhongda Square, No. “Building”) is a 28-storey 989 Dongfang Road, commercial/office building Lujiazui, Pudong New erected on two levels of District, Shanghai, the basement car park completed PRC in about July 1996.

The Property is currently $8,000,000 occupied by Deson Group (excluding KEL Group).

The Property comprises a unit on Level 3A of the Building.

The gross floor area of the Property is approximately 533.71 sq.m. (5,745 sq.ft.). The land use rights of the Property have been granted for a term from 23 February, 1998 and expiring on 21 December, 2043.

Notes:

Pursuant to the Certificate for Real Estate Ownership 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 Land Administrative Bureau) on 9 July, 1999, the ownership of the Property is vested in 景達物業有限公司 (Penmark Limited), which is a wholly-owned subsidiary of Deson Development International Holdings Limited.
We have relied on the information provided by Deson 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) The Property, whether as a whole or on strata-titled basis, may be disposed of freely to both local and overseas purchasers.
The status of the title and grant of major approvals and licences in accordance with the information provided to us by Deson Group are as follows:

Certificate for Real Estate Ownership

Yes

– 79 –

GENERAL INFORMATION

APPENDIX IV

1. RESPONSIBILITY STATEMENT

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

2. MARKET PRICES

The table below shows the closing price of the KEL Shares on the Stock Exchange on (1) the end of each of the six calendar months immediately preceding the date of the Announcement; (ii) 4 February, 2004, being the last trading day on which the KEL Shares were traded before the Announcement; and (iii) the Latest Practicable Date:

Date	Closing Price per KEL Share
	HK$
31 August, 2003	0.061
30 September, 2003	0.072
31 October, 2003	0.063
30 November, 2003	0.068
31 December, 2003	0.100
31 January, 2004	0.108
4 February, 2004	0.129
Latest Practicable Date	0.360

The highest and lowest closing prices per KEL Share recorded on the Stock Exchange within the relevant period were HK$0.370 and HK$0.060 on 9 March, 2004 and 20 October, 2003 respectively.

3. EXPLANATORY STATEMENT OF REPURCHASE OF SHARES

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

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

(i) Share capital

As at the Latest Practicable Date, the issued share capital of the Company comprised 1,519,715,736 KEL Shares. Assuming completion of all the Transactions, the issued share capital of the Company will comprise 3,014,715,736 KEL Shares. The passing of the ordinary resolution numbered 7 as set out in the notice of Special General Meeting will allow the Company to repurchase a maximum of 301,471,573 KEL Shares, assuming all the Transactions proceeds, on the basis that no further KEL Shares will be issued prior to the date of the Special General Meeting.

(ii) Funding of repurchases

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

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GENERAL INFORMATION

APPENDIX IV

There might be an adverse impact on the working capital or gearing position of the Company (as compared with the position disclosed in the audited financial statements for the year ended 31 March, 2003 contained in the annual report for the year ended 31 March, 2003) in the event that the mandate to repurchase KEL Shares were to be exercised in full at any time during the proposed repurchase period. However, the Directors do not propose to exercise the Repurchase Mandate to such extent as would, in the circumstances, have a material adverse effect on the working capital requirements of the Company or the gearing levels which in the opinion of the Directors are from time to time appropriate for the Company.

(iii) Reasons for repurchases

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

(iv) General

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

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

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

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

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

As at the Latest Practicable Date, Deson was the only substantial Shareholder (as defined in the Listing Rules) and was, through Super Win, beneficially interested in 1,136,724,256 KEL Shares representing approximately 74.8% of the issued share capital of the Company. Immediately upon the completion of the Transactions, Deson will be interested in approximately 50.97% of the issued share capital of the Company as enlarged by the issue of the KEL New Shares (assuming no other issue of KEL Shares in the interim). The Directors are not aware of any consequences which would arise under the Takeovers Code as a consequence of any repurchases pursuant to the Repurchase Mandate.

– 81 –

GENERAL INFORMATION

APPENDIX IV

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

	Trading	Price per Share
	Highest	Lowest
	HK$	HK$
2003
March	0.100	0.055
April	0.077	0.064
May	0.085	0.055
June	0.104	0.050
July	0.074	0.050
August	0.070	0.051
September	0.088	0.056
October	0.081	0.060
November	0.070	0.052
December	0.105	0.065
2004
January	0.109	0.090
February	0.385	0.100

4. DISCLOSURE OF INTERESTS

4.1 Save as disclosed below, as at the Latest Practicable Date, none of the Directors had any interest or short position in the securities, underlying shares or debentures of the Company or any associated corporations (within the meaning of the SFO) which would be required to be notified to the Company and the Stock Exchange pursuant to 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 pursuant to the Model Code for Securities Transactions by Directors of Listed Companies contained in the Listing Rules; or pursuant to Section 352 of the SFO to be entered in the Register of Interests:

(a) The Company

Name of Director	Nature of interest	Number of shares
Tjia Boen Sien	Corporate_(Note)_	1,736,724,256
Wang Jing Ning	Corporate_(Note)_	1,736,724,256

Note : Based on shareholding interests (including deemed interests) as recorded in the register of interests, Super Win, an indirect wholly-owned subsidiary of Deson, is interested in 1,736,724,256 KEL Shares pursuant to the SFO. Approximately 44.31% of the issued share capital of Deson is owned by Sparta Assets, a company incorporated in the British Virgin Islands. Mr. Tjia and Mr. Wang own 90% and 10% of the issued share capital of Sparta Assets, respectively.

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GENERAL INFORMATION

APPENDIX IV

(b) Associated corporations

Deson

	Nature of	Number of	Number of
Name of director	interests	shares held	warrants held
Tjia Boen Sien	Corporate_(Note)_	2,068,750,000	293,750,000
	Personal	276,230,000	24,894,000
Wang Jing Ning	Corporate_(Note)_	2,068,750,000	293,750,000
	Personal	15,330,000	3,066,000
Wang Ke Duan	Personal	1,569,600	1,120,000
Keung Kwok Cheung	Personal	6,997,278	–
Song Sio Chong	Personal	6,000,000	600,000
Siu Man Po	Personal	1,500,000	300,000

Note : Sparta Assets, a company incorporated in the British Virgin Islands, is beneficially interested in 2,068,750,000 shares of Deson. Mr. Tjia and Mr. Wang own 90% and 10% of the issued share capital of Sparta Assets, respectively.

– 83 –

GENERAL INFORMATION

APPENDIX IV

(c) Directors’ rights to acquire shares or debentures

Deson, the ultimate holding company of the Company, has granted options to acquire Deson’s ordinary shares in favour of certain Directors pursuant to Deson’s share option scheme. During the period, no such share options were granted to Directors, all the outstanding share options have been exercised or lapsed. The following were movements of share option during the period:

At 1 Name of April, director 2003 Wang Ke Duan 2,000,000 3,000,000 5,000,000 Tjia Boen Sien 26,000,000 35,000,000 61,000,000 Wang Jing Ning 3,000,000 5,000,000 8,000,000 Keung Kwok Cheung 5,000,000 Kong Kwok Fai 5,000,000 4,000,000 9,000,000 Song Sio Chong 3,000,000 91,000,000	Lapsed Exercised during the during period the period (2,000,000) – – (3,000,000) (2,000,000) (3,000,000) – (26,000,000) – (35,000,000) – (61,000,000) (3,000,000) – – (5,000,000) (3,000,000) (5,000,000) – (5,000,000) (5,000,000) – – (4,000,000) (5,000,000) (4,000,000) – (3,000,000) (10,000,000) (81,000,000)	At Date of Latest grant of Exercise price Practicable share Exercise period of share Date options of share options option HK$ – 23 Oct 00 23 Apr 01 to 22 Apr 03 0.0384 – 23 Jul 01 23 Jan 02 to 22 Jan 04 0.03088 – – 23 Jul 01 23 Jan 02 to 22 Jan 04 0.03088 – 29 Aug 01 28 Feb 02 to 28 Feb 04 0.02864 – – 23 Oct 00 23 Apr 01 to 22 Apr 03 0.0384 – 23 Jul 01 23 Jan 02 to 22 Jan 04 0.03088 – – 23 Jul 01 23 Jan 02 to 22 Jan 04 0.03088 – 23 Oct 00 23 Apr 01 to 22 Apr 03 0.0384 – 23 Jul 01 23 Jan 02 to 22 Jan 04 0.03088 – – 23 Jul 01 23 Jan 02 to 22 Jan 04 0.03088 –

Save as disclosed above, at no time during the period were rights to acquire benefits by means of the acquisition of shares in or debentures of the Company granted to any director or their respective spouse or children under 18 years of age, or were any such rights exercised by them; or was the Company, or any of its holding companies, subsidiaries or fellow subsidiaries a party to any arrangement to enable the directors to acquire such rights in any other body corporate.

– 84 –

GENERAL INFORMATION

APPENDIX IV

4.2 Save as disclosed below, the Directors or chief executive of KEL are not aware of any other person (other than a Director or chief executive of KEL) who, as at the close of business on the Latest Practicable Date, had an interest or short position in the securities or the underlying shares of the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO:

		Percentage of
		the Company’s enlarged
Name of shareholder	Number of KEL shares	issued share capital
Super Win	1,736,724,256_(Note)_	48.05%
Deson Development
Holdings Limited	1,736,724,256_(Note)_	48.05%
Deson	1,736,724,256_(Note)_	48.05%
Sparta Assets	1,736,724,256_(Note)_	48.05%

Note : Based on shareholding interests (including deemed interests) as recorded in the register of interests, Super Win, an indirect wholly-owned subsidiary of Deson, pursuant to the SFO, is interested in 1,736,724,256 KEL Shares in the Company. By virtue of Super Win being a wholly-owned subsidiary of Deson Development Holdings Limited (“DDHL”), and DDHL being a wholly-subsidiary of Deson, and Sparta Assets being beneficially interested in 44.31% of the issued share capital of Deson, each of DDHL, Deson and Sparta Assets is deemed to be interested in the 1,736,724,256 KEL Shares held by Super Win.
4.3 Save as disclosed below, the Directors or chief executive of KEL are not aware of any other person (other than a Director or chief executive of KEL) who as at the close of business on the Latest Practicable Date, is directly or indirectly interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meeting of any other member of the KEL Group:

Subsidiaries

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

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

5. MATERIAL ADVERSE CHANGE

Save for the Transactions and the acquisition of 24th, 27th and 28th Floors of Zhongda Square from Deson in May 2003 at a consideration of HK$46,000,000, the Directors are not aware of any material adverse change in the financial or trading positions of the KEL Group since 31 March, 2003, the date to which the latest audited financial statements of the KEL Group were made up.

6. SERVICE CONTRACTS

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

– 85 –

GENERAL INFORMATION

APPENDIX IV

7. MATERIAL LITIGATION

7.1 Kenworth Engineering Limited (“Kenworth Engineering”) has commenced litigation in March 2001 against Pilecon Engineering Berhad (“Pilecon”), a main contractor of Kenworth Engineering, for approximately HK$14,835,400 plus damages in connection with the termination of certain electrical and mechanical sub-contract for construction of treatment and disposal facilities. However, Pilecon made a defense and counterclaim in October 2001 for approximately HK$12,270,600. The proceeding is in a stage of discovery of document.
7.2 Kenworth Engineering had received a claim of approximately HK$141 million from Nishimatsu Construction Company Limited (“Nishimatsu”), a main contractor of Kenworth Engineering, for the alleged breach of a subcontract, which alleged breach Kenworth Engineering, has not admitted. Kenworth Engineering 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 scheme of arrangement (the “Schemes”) of Kenworth Engineering 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 Engineering 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, neither KEL nor any other members of the KEL Group is engaged in any litigation or arbitration of material importance and no litigation or claim of material importance is known to the Directors to be pending or threatened against any member of the KEL Group.

8. MATERIAL CONTRACTS

The following contracts, not being contracts entered into in the ordinary course of business, have been entered into by the members of the KEL Group within the two years immediately preceding the Latest Practicable Date and are or may be material:

8.1 a settlement deed dated 7 May, 2002 entered into amongst Kenworth Engineering, a subsidiary of KEL, and the Airport Authority (the “AA”), which save in respect of the AA’s claim submitted under the scheme of arrangement, the notice of appeal on 2 January, 2002, CACV6/2002 in respect of the court’s order dated 18 December, 2001 shall be dismissed by the high court on 16 May, 2002;
8.2 the agreement dated 6 March, 2003 entered into between KEL 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;
8.3 the Xin Hua Acquisition Agreement;
8.4 the Placing Agreement;
8.5 the Penmark Acquisition Agreement;
8.6 the Subscription Agreement; and
8.7 the Kenworth Disposal Agreement.

– 86 –

GENERAL INFORMATION

APPENDIX IV

9. CONSENT

The experts (the “Experts”) named in the paragraph headed “Qualification of Experts” in this appendix have given and have not withdrawn their respective written consents to the issue of this circular with the inclusion of their letters and references to their names in the form and context in which they appear.

None of the Experts has any shareholding in the Company or any member of the KEL Group or the right, whether legally enforceable or not, to subscribe for or to nominate persons to subscribe for securities in any member of the KEL Group.

As at the Latest Practicable Date, none of the Experts has any direct or indirect interests in any assets which had been acquired or disposed of by or leased to any member of the KEL Group since 31 March, 2003 (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.

10. QUALIFICATION OF EXPERTS

The following is the qualification of the Experts who have given their advice which is contained in this circular:

			Nature of
Name	Qualification	Date of opinion	opinion or advice
First Shanghai	A deemed licensed	31 March, 2004	Letter of advice
	corporation to		to the Independent
	carry on a business		Shareholders
	in type 6 regulated
	activity (advising on
	corporate finance)
	under the SFO
B.I. Appraisals	An independent firm	31 March, 2004	Property
Limited	of chartered surveyors		Valuation Report
Ernst & Young	Certified public	31 March, 2004	Accountants’
	accountants		report

11. GENERAL

11.1 None of the Directors is materially interested in any contract or arrangement subsisting at the date hereof which is significant to the business of the KEL Group.
11.2 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 KEL Group since 31 March, 2003 (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.
11.3 The secretary of KEL is Mr. Ong Chi King. He 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 an associate of the Hong Kong Society of Accountants.
11.4 The branch share registrar and transfer office of KEL in Hong Kong is Tengis Limited, Ground Floor, Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, and Hong Kong.
11.5 The English text of this circular shall prevail over the Chinese text.

– 87 –

GENERAL INFORMATION

APPENDIX IV

12. 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 16 April, 2004:–

(i) the memorandum and articles of association of KEL;
(ii) the material contracts referred to in this appendix;
(iii) the audited consolidated accounts of the KEL Group for each of the two years ended 31 March, 2003;
(iv) the written consents from the Experts referred to in this appendix;
(v) the letter of advice dated 31 March, 2004 from First Shanghai, the text of which is set out in this circular;
(vi) the accountants’ report dated 31 March, 2004 from Ernst & Young, the text of which is set out in this circular; and
(vii) the valuation report dated 31 March, 2004 from B.I. Appraisals Limited, the text of which is set out in this circular.

– 88 –

NOTICE OF SPECIAL GENERAL MEETING

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

KEL HOLDINGS LIMITED

(Incorporated in Bermuda with limited liability)

NOTICE OF SPECIAL GENERAL MEETING

NOTICE IS HEREBY GIVEN that a special general meeting (the “Special General Meeting”) of KEL Holdings Limited (the “Company”) will be held at The Ritz-Carlton Hong Kong, The Harbour Room, 3rd Floor, 3 Connaught Road, Central, Hong Kong at 11:00 a.m. on Friday, 16 April, 2004 for the purpose of considering and, if thought fit, passing the following resolution as an ordinary resolution:

ORDINARY RESOLUTIONS

“ THAT the authorized share capital of the Company be and is hereby increased from HK$180,000,000 divided into 2,571,428,571 shares of HK$0.07 each in the capital of the Company (the “Shares”) to HK$350,000,000 divided into 4,999,999,999 Shares by the creation of an additional 2,428,571,428 Shares.”
“ THAT conditional upon the passing of Ordinary Resolution No. 1 set out in the notice convening the Special General Meeting at which this Resolution is proposed:
(a) the Xin Hua Acquisition Agreement (as defined in the Circular dated 31 March, 2004 despatched to the shareholders of the Company (the “ Circular ”, a copy of which has been produced to the meeting and marked “A”, and initialed by the chairman of the meeting for the purpose of identification) and a copy of which has been produced to the meeting and marked “B”, and initialed by the chairman of the meeting for the purpose of identification) and the acquisition of (1) an aggregate 49% shareholding in Xin Hua (as defined in the Circular) and (ii) the Xin Hua Shareholder’s Loans (as defined in the Circular) pursuant to the Xin Hua Acquisition Agreement be and are hereby approved, ratified and confirmed;
(b) the issue and allotment of the Xin Hua Consideration Shares to the Xin Hua Sellers (both as defined in the Circular) pursuant to the terms set out in the Xin Hua Acquisition Agreement, be and are hereby approved;
(c) all other transactions contemplated under Xin Hua Acquisition Agreement be and are hereby approved;
(d) the directors of the Company (the “ Directors ”) be and are hereby authorized for and on behalf of the Company to take all steps necessary or expedient in their opinion to implement and/or give effect to the terms of the Xin Hua Acquisition Agreement, including (without limitation) the issue and allotment of the Xin Hua Consideration Shares;
(e) any one Director, or any two Directors if the affixation of the common seal is necessary, be and is/ are hereby authorized for and on behalf of the Company to execute all such other documents, instruments and agreements and to do all such acts or things deemed by him, her or them to be incidental to, ancillary to or in connection with the matters contemplated under the Xin Hua Acquisition Agreement and to agree to any amendment to any of the terms of the Xin Hua Acquisition Agreement which in the opinion of such Director(s) is not of a material nature and is in the interests of the Company.
“ THAT conditional upon the passing of Ordinary Resolution No. 1 set out in the notice convening the Special General Meeting at which this Resolution is proposed:
(a) the issue and allotment of the Placing Shares to the independent placees pursuant to the terms of the Placing Agreement (each as defined in the Circular, a copy of the Placing Agreement has been produced to the meeting and marked “C”, and initialed by the chairman of the meeting for the purpose of Identification) be and are hereby approved;

– 89 –

NOTICE OF SPECIAL GENERAL MEETING

(b) the issue and the allotment of the Option Shares upon exercise of the Placing Options (each as defined in the Circular) or any of them be and are hereby approved;
(c) the Directors be and are hereby authorized for and on behalf of the Company to take all steps necessary or expedient in their opinion to implement and/or give effect to the issue and allotment of the Placing Shares and the Option Shares issuable upon exercise of the Placing Options;
“ THAT conditional upon the passing of Ordinary Resolution No. 1 set out in the notice convening the Special General Meeting at which this Resolution is proposed:
(a) the Penmark Acquisition Agreement (as defined in the Circular, a copy of the Penmark Acquisition Agreement has been produced to the meeting and marked “D”, and initialed by the chairman of the meeting for the purpose of identification) and the acquisition of the entire issued share capital of Penmark and the Penmark Shareholder’s Loan (each as defined in the Circular) pursuant to the Penmark Acquisition Agreement be and are hereby approved, ratified and confirmed;
(b) the issue and allotment of the Penmark Consideration Shares to Deson (or as it may respectively direct) (as defined in the Circular) on the terms set out in the Penmark Acquisition Agreement be and are hereby approved;
(c) the issue and allotment by the Company of Option Shares upon exercise of the Penmark Acquisition Option (each as defined in the Circular ) be and hereby approved;
(d) all other transactions contemplated under the Penmark Acquisition Agreement be and are herby approved; and
(e) the Directors be and are hereby authorized for and on behalf of the Company to take all steps necessary or expedient in their opinion to implement and/or give effect to the terms of the Penmark Acquisition Agreement, including (without limitation) the issue and allotment of the Penmark Consideration Shares and the issue and allotment of the Option Shares upon exercise of the Penmark Acquisition Option;
(f) any one Director, or any two Directors if the affixation of the common seal is necessary, be and is/ are hereby authorized for and on behalf of the Company to execute all such other documents, instruments and agreements and to do all such acts or things deemed by him, her or them to be incidental to, ancillary to or in connection with the matters contemplated under the Penmark Acquisition Agreement and to agree to any amendment to any of the terms of the Penmark Acquisition Agreement which in the opinion of such Director(s) is not of a material nature and is in the interests of the Company.
“ THAT conditional upon the passing of Ordinary Resolutions No. 1 and 2 set out in the notice convening the Special General Meeting at which this Resolution is proposed:
(a) the Subscription Agreement (as defined in the Circular, a copy of the Subscription Agreement has been produced to the meeting and marked “E”, and initialed by the chairman of the meeting for the purpose of identification) and the Subscription (as defined in the Circular) pursuant to Subscription Agreement be and are hereby approved, ratified and confirmed;
(b) the issue and allotment of the Subscription Shares to Super Win (or as it may direct) (as defined in the Circular) on the terms set out in the Subscription Agreement be and are hereby approved;
(c) the issue and allotment by the Company of the Option Shares upon exercise of the Subscription Option (each as defined in the Circular) be and hereby approved;
(d) all other transactions contemplated under the Subscription Agreement be and are hereby approved; and

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NOTICE OF SPECIAL GENERAL MEETING

(e) the Directors be and are hereby authorized for and on behalf of the Company to take all steps necessary or expedient in their opinion to implement and/or give effect to the terms of the Subscription Agreement, including (without limitation) the issue and allotment of the Subscription Shares and the issue and allotment of the Option Shares upon exercise of the Subscription Option;
(f) any one Director, or any two Directors if the affixation of the common seal is necessary, be and is/ are hereby authorized for and on behalf of the Company to execute all such other documents, instruments and agreements and to do all such acts or things deemed by him, her or them to be incidental to, ancillary to or in connection with the matters contemplated under the Subscription Agreement and to agree to any amendment to any of the terms of the Subscription Agreement which in the opinion of such Director(s) is not of a material nature and is in the interests of the Company.
“ THAT conditional upon the passing of Ordinary Resolutions No. 1 and 2 set out in the notice convening the Special General Meeting at which this Resolution is proposed:
(a) the Kenworth Disposal Agreement (as defined in the Circular, a copy of the Agreement has been produced to the meeting and marked “F”, and initialed by the chairman of the meeting for the purpose of identification) and the disposal of the entire issued share capital of Kenworth and the Kenworth Shareholder’s Loan (both as defined in the Circular) pursuant to the Kenworth Disposal Agreement be and are hereby approved, ratified and confirmed;
(b) all other transactions contemplated under the Kenworth Disposal Agreement be and are hereby approved; and
(c) the Directors be and are hereby authorized for and on behalf of the Company to take all steps necessary or expedient in their opinion to implement and/or give effect to the terms of the Kenworth Disposal Agreement;
(d) any one Director, or any two Directors if the affixation of the common seal is necessary, be and is/ are hereby authorized for and on behalf of the Company to execute all such other documents, instruments and agreements and to do all such acts or things deemed by him, her or them to be incidental to, ancillary to or in connection with the matters contemplated under the Kenworth Disposal Agreement and to agree to any amendment to any of the terms of the Kenworth Disposal Agreement which in the opinion of such Director(s) is not of a material nature and is in the interests of the Company.
“ THAT conditional upon the passing of Ordinary Resolutions No.1 to No. 6 set out in the notice convening the Special General Meeting at which this Resolution is proposed:
(a) subject to paragraph (b) below, the exercise by the Directors during the Relevant Period (as hereinafter defined) of all the powers of the Company to repurchase the Shares on The Stock Exchange of Hong Kong Limited (the “ Stock Exchange ”) or on any other stock exchange on which the shares of the Company may be listed and recognised by the Stock Exchange and the Securities and Futures Commission for this purpose, subject to and in accordance with all applicable laws and requirements of the Rules Governing the Listing of Securities on the Stock Exchange or of any other stock exchange as amended from time to time be and is hereby generally and unconditionally approved;
(b) the aggregate nominal amount of the Shares to be repurchased pursuant to the approval in paragraph (a) above shall not exceed 10 per cent. of the aggregate nominal amount of the share capital of the Company in issue at the date of passing this Resolution as enlarged by the issue of the KEL New Shares (as defined in the Circular) and the said approval shall be limited accordingly;

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NOTICE OF SPECIAL GENERAL MEETING

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

  - (i) the conclusion of the next annual general meeting of the Company following passing of this Resolution;

  - (ii) the expiration of the period within which the next annual general meeting of the Company following passing of this Resolution is required by the bye-laws of the Company or any applicable law of Bermuda to be held; and

  - (iii) the date on which the authority set out in this Resolution is revoked or varied by an ordinary resolution of the shareholders of the Company in general meeting; and

(d) the general mandate granted to the Directors to exercise the powers of the Company to repurchase Shares pursuant to the ordinary resolution passed by the shareholders at the Annual General Meeting held on 9 September, 2003 be and is hereby revoked.”
“ THAT conditional upon the passing of Ordinary Resolutions No. 1 to 6 set out in the notice convening the Special General Meeting at which this Resolution is proposed:
(a) a general mandate be and is hereby generally and unconditionally given to the Directors to exercise during the Relevant Period (as hereinafter defined) all the powers of the Company to allot, issue and deal with additional Shares and to make or grant offers, agreements or options which would or might require the exercise of such powers either during or after the Relevant Period, provided that the aggregate nominal amount of the share capital of the Company to be allotted, issued and dealt with pursuant to the general mandate herein, otherwise than pursuant to (1) a Rights Issue (as hereinafter defined); or (2) any option scheme or similar arrangement for the time being adopted for the grant or issue to the employees and directors of the Company and/or any of its subsidiaries and/or other eligible participants specified thereunder of shares or rights to acquire shares of the Company; or (3) any scrip dividend pursuant to the bye-laws of the Company from time to time, shall not exceed 20 per cent. of the aggregate nominal amount of share capital in issue as at the date of this Resolution as enlarged by the issue of the KEL New Shares (as defined in the Circular) and the said approval shall be limited accordingly; and
(b) for the purposes of this Resolution:

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

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

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

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NOTICE OF SPECIAL GENERAL MEETING

“ THAT conditional upon the passing of Ordinary Resolutions No. 7 and 8 set out in the notice convening the Special General Meeting at which this Resolution is proposed, the general mandate granted to the Directors and for the time being in force to exercise the powers of the Company to allot, issue and deal with additional Shares pursuant to Ordinary Resolution No. 8 as set out in the notice convening the Special General Meeting at which this Resolution is proposed be and is hereby extended by the addition to the aggregate nominal amount of share capital which may be allotted, issued and dealt with or agreed conditionally or unconditionally to be allotted, issued and dealt with by the Directors pursuant to such general mandate an amount representing the aggregate nominal amount of shares in the capital of the Company repurchased by the Company since the granting of the said general mandate pursuant to the exercise by the Directors of the powers of the Company to repurchase such shares under the authority granted pursuant to Ordinary Resolution No. 7 as set out in the notice convening the Special General Meeting at which this Resolution is proposed provided that such amount shall not exceed 10 per cent. of the aggregate nominal amount of the share capital of the Company in issue as at the date of this Resolution as enlarged by the issue of the KEL New Shares (each as defined in the Circular).”

By order of the Board Ong Chi King Company Secretary

Hong Kong, 31 March, 2004

Notes:

A member entitled to attend and vote at the Special General Meeting is entitled to appoint one or more proxies to attend and, on a poll, vote in his stead. A proxy need not be a member of the Company.
A form of proxy for use at the meeting is enclosed.
To be valid, a proxy form together with any power of attorney or other authority, if any, under which it is signed, or a notarially certified copy of such power or authority, must be lodged with the Company’s branch share registrar in Hong Kong, Tengis Limited, Ground Floor, 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.

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AI assistant

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

50019_rns_2004-04-02_4b410ef8-cf89-45de-846e-3fe9ebdcbc32.pdf

KEL HOLDINGS LIMITED

First Shanghai Capital Limited

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

KEL HOLDINGS LIMITED

INTRODUCTION

TRANSACTIONS

A. THE XIN HUA ACQUISITION AGREEMENT DATED 18 FEBRUARY, 2004

Parties

Assets to be acquired

Consideration

Issue price of Xin Hua Consideration Share

Conditions Precedent

Completion

Information on the Xin Hua Group

Shareholding of the Xin Hua Group

A. Existing shareholding structure of the Xin Hua Group

Shareholding structure of KEL before and after the Xin Hua Acquisition

Appointment of Mr. Mo as executive Director to the Board

Listing rules implications of the Xin Hua Acquisition

B. THE PLACING AGREEMENT DATED 18 FEBRUARY, 2004

LETTER FROM THE BOARD

Placing Price:

Conditions:

LETTER FROM THE BOARD

Shareholding structure of KEL before and after the Placing

Listing Rules implications of the Placing

C. THE PENMARK ACQUISITION AGREEMENT DATED 18 FEBRUARY, 2004

Parties

Assets to be acquired

Consideration

Issue price of the Penmark Consideration Shares

Conditions precedent

Completion

Information on Penmark

Reasons for the Penmark Acquisition

Shareholding structure of KEL before and after Penmark Acquisition

Listing Rules implications of the Penmark Acquisition

D. THE SUBSCRIPTION AGREEMENT DATED 18 FEBRUARY, 2004

Subscription Consideration:

LETTER FROM THE BOARD

Reasons for the Subscription

Shareholding structure of KEL before and after Subscription

Listing Rules Implications of the Subscription

E. THE KENWORTH DISPOSAL AGREEMENT DATED 18 FEBRUARY, 2004

Parties

Assets to be disposed of

Consideration

Conditions of the Kenworth Disposal Agreement

Completion

Information on the Kenworth Group

LETTER FROM THE BOARD

Reasons for the Kenworth Disposal and use of proceeds

Listing Rules implication of the Kenworth Disposal

ISSUE PRICE OF THE KEL NEW SHARES

OPTIONS

SHAREHOLDING STRUCTURE OF KEL

USE OF PROCEEDS FROM THE PLACING, THE SUBSCRIPTION AND THE KENWORTH DISPOSAL

INCREASE IN AUTHORISED SHARE CAPITAL

MAINTENANCE OF THE LISTING STATUS OF KEL

PROPOSED GRANT OF GENERAL MANDATES TO ISSUE AND REPURCHASE SHARES

SPECIAL GENERAL MEETING

RECOMMENDATION

ADDITIONAL INFORMATION

FIRST SHANGHAI CAPITAL LIMITED

INTRODUCTION

PRINCIPAL FACTORS AND REASONS CONSIDERED

I. BACKGROUND INFORMATION ON THE KEL GROUP

II. XIN HUA ACQUISITION

Information on the Xin Hua Group

LETTER FROM FIRST SHANGHAI

Reasons for the Xin Hua Acquisition

Consideration

CR Construction Group Holdings Limited Proxy Solicitation & Information Statement 2004