CWT International Limited - Proxy Solicitation & Information Statement 2002

IMPORTANT

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.

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 Wah Tak Fung Holdings Limited, you should at once hand this circular and the accompanying form of proxy to the purchaser or transferee or to the bank, stockbroker or other agent through whom the sale was effected for transmission to the purchaser or transferee.

WAH TAK FUNG HOLDINGS LIMITED

(Incorporated in Bermuda with limited liability)

MAJOR AND CONNECTED TRANSACTION

Subscription for further shares in Hong Kong Satellite Technology Holdings Limited

Independent Financial Adviser to the Independent Board Committee

CHATERON

CORPORATE FINANCE LIMITED 華夏融資有限公司

A notice convening a special general meeting of the Company to be held at Hennessy Room, Level 7, Conrad Hong Kong, Pacific Place, 88 Queensway, Hong Kong on Monday, 17 June 2002 at 10:00 a.m. is set out on page 102 of this circular. A form of proxy is also enclosed. Whether or not you are able to attend and vote at the special general meeting, you are requested to complete the enclosed proxy form and return it to the Company at its principal place of business in Hong Kong at 28th to 30th Floors, Workington Tower, 78 Bonham Strand, Sheung Wan, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for holding the special general meeting. Completion and return of the proxy form will not preclude you from subsequently attending and voting at the special general meeting or any adjourned meetings should you so wish.

27 May 2002

CONTENTS

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Chairman
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4
Subscription Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5
Information on Hong Kong Satellite . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7
Reasons for the Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	8
Financial Effects of the Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	9
Future Plans and Prospects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	12
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	13
Special General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	13
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	13
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	14
Letter from Chateron. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	15
Appendix I – Financial Information on the Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	33
Appendix II – Accountants’ Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	68
Appendix III – Financial Information on the Enlarged Group . . . . . . . . . . . . . . . . . . . . .	77
Appendix IV – Valuation Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	83
Appendix V – General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	94
Notice of Special General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	102

DEFINITIONS

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

“Accountants” C h a r l e s C h a n , I p & F u n g C PA L t d . a n d PricewaterhouseCoopers, certified public accountants

“Acquisition”

the subscription by the Company of the Subscription Shares pursuant to the Subscription Agreement

“associates”

has the meaning ascribed to it under the Listing Rules

“Board”

the board of Directors

“Chateron” Chateron Corporate Finance Limited, the independent financial adviser to the Independent Board Committee in relation to the Acquisition and an investment adviser registered under the Securities Ordinance (Chapter 333 of the Laws of Hong Kong)

“Company” Wah Tak Fung Holdings Limited, a company incorporated in Bermuda with limited liability, the ordinary share capital of which is listed on the Stock Exchange “Completion” completion of the Subscription Agreement “Consideration” a cash sum of US$20 million (equivalent to about HK$156 million) payable by the Company for the Acquisition “Deloitte” Deloitte Touche Tohmatsu, certified public accountants, the auditors of the Company “Directors” the directors of the Company “Enlarged Group” the Group as enlarged following Completion “Fine Straight” Fine Straight Investments Limited, a company incorporated in Hong Kong with limited liability

“Fine Straight Agreement”

the agreement dated 31 December 2001 between Goldmile Pacific Limited and the Company in relation to the acquisition by the Company of the entire issued voting share capital of Fine Straight, details of which are contained in the Company’s circular to Shareholders dated 28 January 2002

“Group”

the Company and its subsidiaries

“Hong Kong Satellite”

Hong Kong Satellite Technology Holdings Limited, a company incorporated in the British Virgin Islands with limited liability on 15 November 2000

– 1 –

DEFINITIONS

“Hong Kong”

the Hong Kong Special Administrative Region of the PRC

“Independent Board Committee” an independent committee of the Board comprising Messrs. Ko Ming Tung, Edward, Tang Tin Sek and Chung Chi Chiu formed for the purpose of advising the Independent Shareholders on the Acquisition
“Independent Shareholders”

Shareholders other than Mr Chu and his associates

“Latest Practicable Date” 22 May 2002, being the latest practicable date prior to the printing of this circular for ascertaining certain information contained in this circular
“Listing Rules” the Rules Governing the Listing of Securities on the Stock Exchange
“Mr Chu” Mr Chu David Yu Lin, a Director and, together with Mrs Chu and their respective associates, a substantial shareholder of the Company
“Mrs Chu” Mrs Chu Ho Miu Hing, a Director, the wife of Mr Chu and, together with Mr Chu and their respective associates, a substantial shareholder of the Company
“Options” options to subscribe for Shares granted under the share option scheme of the Company adopted on 11 September 1996
“Placing” the placing of an aggregate of 487,500,000 new Shares by the Company at a price of HK$0.4 each as announced by the Company on 3 May 2002
“Placing Agreements”
two agreements dated 23 and 24 April 2002 entered into by the Company with Benevolent Developments Limited and Well Growth Group Limited respectively in relation to the Placing
“PRC” the People’s Republic of China
“Preference Shares”
unlisted convertible redeemable non-voting preference shares of the Company with a nominal value of HK$1 million each
“SDI Ordinance”

the Securities (Disclosure of Interests) Ordinance (Chapter 396 of the Laws of Hong Kong)

“SGM”

the special general meeting of the Company to be held at Hennessy Room, Level 7, Conrad Hong Kong, Pacific Place, 88 Queensway, Hong Kong on Monday, 17 June 2002 at 10:00 a.m. and any adjournment thereof

– 2 –

DEFINITIONS

“Share(s)” ordinary share(s) of HK$0.10 each in the capital of the Company “Shareholders” holders of Shares “Sky Citi-Link” Sky Citi-Link ATNT (Holdings) Limited, a company incorporated in the British Virgin Islands with limited liability

“Sky Citi-Link Agreement” the agreement dated 1 May 2002 between eCyberChina Holdings Limited, Teleinvest Holdings Limited and the Company in relation to, amongst others, the acquisition by the Company of an 80% interest in the issued share capital of Sky Citi-Link, as jointly announced by eCyberChina Holdings Limited, the Company and Asia Tele-Net and Technology Corporation Limited on 6 May 2002
“Stock Exchange” The Stock Exchange of Hong Kong Limited “Subscription Agreement” a conditional subscription agreement entered into between the Company, Hong Kong Satellite and Mr Chu on 25 April 2002 in connection with the Acquisition
“Subscription Shares” 200 new shares of US$1.00 each in the capital of Hong Kong Satellite
“Valuer” Grant Sherman Appraisal Limited, professional valuers “HK$” Hong Kong dollars “US$” United States dollars “%” per cent.

Unless otherwise stated, amounts in US$ have been translated, for illustration purpose only, into HK$ at an exchange rate of US$1 to HK$7.8.

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LETTER FROM THE CHAIRMAN

WAH TAK FUNG HOLDINGS LIMITED

(Incorporated in Bermuda with limited liability)

Executive directors: CHU David Yu Lin (Chairman) CHAN Fook Lai (Honorary Chairman) LU Xin (Vice-Chairman and Managing Director) SONG Yu Qing (Vice-Chairman) BAO Guanghe (Managing Director) CHAN King Hung CHU Ho Miu Hing

Independent non-executive directors: KO Ming Tung, Edward TANG Tin Sek CHUNG Chi Chiu

Registered office: Clarendon House 2 Church Street Hamilton HM Bermuda

Principal place of business: 28th to 30th Floors Workington Tower 78 Bonham Strand Sheung Wan Hong Kong 27 May 2002

To the Shareholders

Dear Sir or Madam,

MAJOR AND CONNECTED TRANSACTION

Subscription for further shares in Hong Kong Satellite Technology Holdings Limited

INTRODUCTION

The Company announced on 3 May 2002 that it had entered into the Subscription Agreement with Hong Kong Satellite and Mr Chu on 25 April 2002 to subscribe for the Subscription Shares, representing about 1.99% of Hong Kong Satellite’s existing issued share capital and about 1.95% of its issued share capital as enlarged by these new shares, for a total cash consideration of US$20 million (equivalent to about HK$156 million) subject to and upon terms and conditions described below.

The Acquisition, when aggregated with the previous acquisition of interest in Hong Kong Satellite by the Company as announced on 20 July 2001, constitutes a major transaction for the Company under the Listing Rules. Mr Chu is a Director and, together with Mrs Chu and their respective associates, a substantial shareholder of the Company. Mr Chu is also a director and, together with Mrs Chu, a controlling shareholder of Hong Kong Satellite. Accordingly, the Acquisition also constitutes a connected transaction for the Company under the Listing Rules and will be subject to approval of the Independent Shareholders at a general meeting of the Company to be convened.

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LETTER FROM THE CHAIRMAN

The Independent Board Committee has been appointed to advise the Independent Shareholders and Chateron has been appointed to advise the Independent Board Committee in connection with the Acquisition. The purpose of this circular is to provide Shareholders with further details of the Acquisition, to set out the advice from Chateron to the Independent Board Committee and the recommendation of the Independent Board Committee in respect of the Acquisition and to convene the SGM to consider and, if thought fit by the Independent Shareholders, to approve the Acquisition.

SUBSCRIPTION AGREEMENT

The Subscription Agreement was entered into on 25 April 2002 between the Company, Hong Kong Satellite and Mr Chu who guaranteed Hong Kong Satellite’s obligations to the Company under the Subscription Agreement.

Assets to be acquired

Pursuant to the Subscription Agreement, Hong Kong Satellite will issue to the Company 200 new shares of US$1.00 each in its capital, representing about 1.99% of its existing issued share capital and about 1.95% of its issued share capital as enlarged by these shares.

These shares will be issued free from all claims, charges, lien, encumbrances and equities and will, against payment of the consideration, be credited as fully paid and rank equally in all respects with the ordinary shares in Hong Kong Satellite then in issue.

Consideration

Amount

The Consideration is US$20 million (equivalent to about HK$156 million) to be satisfied in cash on Completion.

Source of Funding

It is intended that the Consideration will be funded from part of the net proceeds to be raised by the Company under the Placing. The remaining part of the net proceeds will be used for general working capital. In the event that the Subscription Agreement is not to take place for reasons mentioned in the sub-paragraph “Payment” below, the whole amount of the net proceeds arising from the Placing will be released to the Company, At present, the Company has no intention as to the use of the Placing proceeds except for general working capital.

It was announced on 3 May 2002 that completion of the Placing is expected to take place within 3 business days of the date on which the conditions contained in the Placing Agreements are fulfilled. Such conditions are expected to be fulfilled on 31 May 2002. On 22 May 2002, the Company agreed with Benevolent Developments Limited and Well Growth Group Limited, the placees who are parties to the Placing Agreements, to extend the date for completion of the Placing to 21 June 2002 (or such other date as the parties may agree). Accordingly, completion of the Placing is expected to take place on or before 21 June 2002.

Payment

As soon as cleared funds amounting to HK$156 million are received under the Placing, such funds will be deposited and held in escrow by a firm of solicitors jointly appointed by the Company and Hong Kong Satellite pending Completion.

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LETTER FROM THE CHAIRMAN

In the event that:

(a) Completion does not occur by the expiry of the time period for the fulfilment or waiver of the conditions as described and referred to in the section headed “Conditions” below or by the date fixed for Completion as referred to in the section headed “Completion” below (whichever is applicable) other than due to a default of the Company;
(b) the Placing Agreements are not completed by reason of the conditions contained in the Placing Agreements not having been fulfilled; or
(c) the Company has rescinded the Subscription Agreement by reason of a breach of warranty given by Hong Kong Satellite under the Subscription Agreement,

then the funds then held in escrow together with all interest accrued will be released to the Company.

Upon Completion, such funds will be released to Hong Kong Satellite to discharge the Consideration and all interest accrued on such funds will be repaid to the Company.

In the event that the Subscription Agreement is not completed by the expiry of the time period for the fulfilment or waiver of the conditions as described and referred to in the section headed “Conditions” below or by the date fixed for Completion as referred to in the section headed “Completion” below (whichever is applicable) due to the default of the Company, then the funds then held in escrow together with all interest accrued will be released to and forfeited by Hong Kong Satellite.

Pursuant to the escrow arrangement described above, if a dispute arises between the Company and Hong Kong Satellite in relation to any of the matters referred to in paragraphs (a) to (c) above, such dispute will be referred to a senior counsel to be appointed by agreement between the parties who will determine such dispute acting as an expert. Failing agreement on the appointment of such a senior counsel, either the Company or Hong Kong Satellite may request the President for the time being of the Hong Kong Bar Council to nominate and appoint an expert on their behalf. Determination by such expert on the dispute in question will be conclusive and binding between the parties and the funds then held in escrow will be released in accordance with the direction of such expert.

Basis

The Consideration was determined after arm’s length negotiations between the parties by reference to a discount of about 45% to the value of HK$14.27 billion (equivalent to about US$1.83 billion) as at 28 February 2002 for Hong Kong Satellite as estimated by the management of Hong Kong Satellite. Completion will be conditional on a valuation on Hong Kong Satellite to be performed to the reasonable satisfaction of the Company by an independent valuer to be appointed by the Company showing that its value is no less than US$1.005 billion, which is equivalent to a value of US$100,000 for each share in the existing issued share capital of Hong Kong Satellite and equivalent to the amount of the Consideration (on a per share basis) for the Subscription Shares. In this regard, the Company has appointed the Valuer to perform a business valuation of Hong Kong Satellite. The valuation report on Hong Kong Satellite prepared by the Valuer is set out in Appendix IV to this circular.

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LETTER FROM THE CHAIRMAN

Conditions

Completion is conditional upon:

(a) the Independent Shareholders passing the necessary resolutions at the SGM to approve the Subscription Agreement;
(b) Hong Kong Satellite providing to the Company a written valuation to the reasonable satisfaction of the Company prepared by the Valuer showing that its value as at 28 February 2002 is not less than US$1.005 billion (equivalent to about HK$7.839 billion); and
(c) the Company not being treated by the Stock Exchange as a new listing applicant as a result of or in connection with the transactions contemplated under the Subscription Agreement.

As at the Latest Practicable Date, the conditions set out in paragraphs (b) and (c) above have been fulfilled. If the remaining condition is not fulfilled by the date falling 90 days after the date of the Subscription Agreement (i.e. 24 July 2002) or such later date as the parties may agree, the Subscription Agreement will lapse and no party to this agreement will have any claim against the others save for any antecedent breach.

Completion

Completion will take place within three business days after all conditions are fulfilled or such other date as the parties may agree.

INFORMATION ON HONG KONG SATELLITE

Hong Kong Satellite is a company incorporated on 15 November 2000 with limited liability in the British Virgin Islands and is an investment holding company whose subsidiaries are principally engaged in:

(a) the development of a satellite communications platform to provide the following services to China and/or the Asian markets:
satellite telecommunications network
broadband internet access
direct television
mobile communications (for ships, trains, vehicles and other modes of transportation); and
(b) the manufacture, assembly, marketing and sale of new commercial communications satellites.

As at the Latest Practicable Date, the Company, Mr Chu and Mrs Chu were interested in about 1.99%, 32.34% and 16.92% of Hong Kong Satellite’s issued share capital respectively and, to the knowledge of the Directors, the remaining 48.75% of its issued share capital were being held by two independent third parties who are not connected with any of the directors, chief executives and substantial shareholders of the Company or any of its subsidiaries or their respective

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LETTER FROM THE CHAIRMAN

associates (as defined in the Listing Rules). Upon Completion, the Company, Mr Chu and Mrs Chu will be interested in about 3.9%, 31.71% and 16.59% respectively of Hong Kong Satellite’s issued share capital as enlarged by the Subscription Shares and, to the knowledge of the Directors, the remaining 47.8% of such enlarged share capital will be held by the two independent third parties as mentioned.

Based on the audited consolidated accounts of Hong Kong Satellite, its audited consolidated net loss before tax and extraordinary items amounted to about HK$9 million for the period from 15 November 2000, being the date of its incorporation, up to 31 December 2001 and its audited consolidated net assets as at 31 December 2001 were about HK$30 million. The accountants’ report on Hong Kong Satellite prepared by the Accountants is set out in Appendix II to this circular.

Under the Subscription Agreement, Hong Kong Satellite has undertaken to the Company that, unless with the prior consent of the Company, it will not, until the expiry of 12 months from the date of the Subscription Agreement (i.e. such 12 months period to expire on 24 April 2003), issue any new shares or other securities convertible or exercisable into new shares at an effective consideration per share that is less than the consideration per Subscription Share payable by the Company under the Subscription Agreement. To the knowledge of the Directors, Hong Kong Satellite has no present plan to issue any new shares to other parties.

REASONS FOR THE ACQUISITION

The Group is principally engaged in property investment and development, property leasing and provision of building management and agency services.

As set out in the audited consolidated financial statements of the Company for the year ended 31 March 2001:

(a) the audited consolidated loss before and after taxation and minority interests of the Company amounted to approximately HK$323,472,000 and approximately HK$323,320,000 respectively; and
(b) the audited net liabilities of the Company as at 31 March 2001 were approximately HK$240,701,000.

The unaudited consolidated net tangible asset value of the Company as at 24 January 2002 was about HK$314,916,000, which has been adjusted from its audited consolidated net liabilities of about HK$240,701,000 as at 31 March 2001 after having taken into account the financial effects of its debt restructuring exercises as described in its circular to Shareholders dated 28 January 2002.

As mentioned in the annual report of the Company for the year ended 31 March 2001, the Group is committed to repositioning itself to investing in businesses that could generate stable, sustainable and sufficient income in the long run and bring about a new outlook to the overall business development and financial structure of the Group. The Group acquired an approximately 1.99% interest in Hong Kong Satellite in October 2001, the details of which had been set out in a circular to Shareholders dated 3 October 2001. The Acquisition would enable the Group to acquire a further 1.95% interest in Hong Kong Satellite’s issued share capital as enlarged by the Subscription Shares which would bring the Group’s interest in Hong Kong Satellite to about 3.9% of such

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LETTER FROM THE CHAIRMAN

enlarged issued share capital. The Company also announced on 6 May 2002 that it had entered into the Sky Citi-Link Agreement to acquire an 80% interest in Sky Citi-Link, a company whose subsidiary is a traditional telecom carrier and one of the largest teleport operators in Asia holding an External Fixed Telecommunications Network Services Licence granted by the Office of Telecommunications Authority in Hong Kong which allows it to operate international telecommunication services. To this end, the Board considers that the Acquisition, coupled with the Group’s existing interest in Hong Kong Satellite and the transactions contemplated under the Sky Citi-Link Agreement, may provide the Group with an opportunity to diversify its investment into the technology field which the Board anticipates would offer vast market potential. The Board expects that the Group’s investment in Hong Kong Satellite may broaden the income stream of the Group and bring a potentially high rate of return on its investment in the long run. The Company presently intends to hold its interest in Hong Kong Satellite as a long term investment. Apart from the Consideration, the Company has no other capital commitment in respect of its current and proposed investment in Hong Kong Satellite. The Board believes that it is in the interests of the Company to enter into the Subscription Agreement. The Company may, in circumstances and on terms that it considers suitable and appropriate, acquire a further interest in Hong Kong Satellite in the future, but the timing or terms of any such acquisition has not been determined at present.

FINANCIAL EFFECTS OF THE ACQUISITION

Set out below is the pro forma statement of assets and liabilities of the Enlarged Group after Completion. Several adjustments were made to the audited consolidated net liabilities of approximately HK$240,701,000 of the Group as at 31 March 2001 in order to arrive at the adjusted proforma unaudited consolidated net tangible asset value of approximately HK$511,400,000 of the Enlarged Group. The adjustments took account of the financial effects arising from the Group’s unaudited interim results for the six months ended 30 September 2001, the previous acquisition of interest in Hong Kong Satellite by the Company as detailed in its circular dated 3 October 2001, the debt restructuring exercises of the Group as detailed in its circular dated 28 January 2002, various placements of new Shares and issuances of Shares on conversion of the Preference Shares and convertible debentures of the Company and exercises of the Options since 1 April 2001 and the Acquisition.

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LETTER FROM THE CHAIRMAN

Proforma financial effects of the Acquisition

Effect on net tangible assets

Before Completion

Audited consolidated net liabilities of the Group as at 31 March 2001 Add: Issue of new Shares – Exercise of debenture conversion rights – Exercise of Options – Placing of 130,000,000 new Shares on 16 May 2001 and 330,000,000 new Shares on 17 July 2001 Unaudited loss attributable to Shareholders for the six months ended 30 September 2001 Unaudited consolidated net liabilities of the Group at 30 September 2001 as disclosed in the unaudited interim results of the Group for the six months ended 30 September 2001 Add: Issue of new Shares – Issue of 390,000,000 new Shares on 31 October 2001 for the acquisition of interest in Hong Kong Satellite – Exercise of Options – Placing of 50,000,000 new Shares on 9 January 2002 – Issue of new Shares under the debt restructuring exercises as disclosed in the circular dated 28 January 2002 Adjusted proforma unaudited consolidated net tangible assets of the Group before the Placing and the Acquisition – Placing of 487,500,000 new Shares Adjusted proforma unaudited consolidated net tangible assets of the Group before the Acquisition Number of Shares in issue at the Latest Practicable Date and before the Placing and the Acquisition Number of Shares in issue at the Latest Practicable Date and after the Placing and before the Acquisition	3,900,000 766,000 79,000,000 101,400,000 15,927,000 19,528,000 376,537,000	HK$ (240,701,000) 83,666,000 (39,957,000) (196,992,000) 513,392,000 316,400,000 195,000,000 511,400,000 3,201,020,651 3,688,520,651

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LETTER FROM THE CHAIRMAN

Adjusted proforma unaudited consolidated net tangible assets
of the Group per Share before the Placing and the Acquisition
Adjusted proforma unaudited consolidated net tangible assets
of the Group per Share after the Placing and before the Acquisition
After Completion
Adjustedproforma unauditedconsolidated net tangible assets
of the Group after the Acquisition
Number of Shares in issue at the Latest Practicable Date
and after the Acquisition
Adjusted proformaunauditedconsolidated net tangible assets
of the Group per Share after the Acquisition
Effect on loss per Share
Before Completion
Unaudited loss attributable to Shareholders for the six months
ended 30 September 2001 as announced in the Group’s
unaudited interim results
Weighted average number of Shares in issue
at the Latest Practicable Date
– Basic
– Diluted
Loss per Share
– Basic_(Note 1)
– Diluted(Note 2)
_After Completion
Unaudited loss attributable to Shareholders for the six months
ended 30 September 2001 as announced in the Group’s
unaudited interim results

HK$
9.88 cents
13.86 cents
HK$
511,400,000
3,688,520,651
13.86 cents
HK$
(39,957,000)
2,268,130,627
2,385,457,725
(1.76 cents)
(1.68 cents)
HK$
(39,957,000)

– 11 –

LETTER FROM THE CHAIRMAN

Weighted average number of Shares in issue after the Placing and the Acquisition – Basic – Diluted Loss per Share – Basic_(Note 1) – Diluted(Note 2)_	2,391,588,068 2,553,497,234 (1.67 cents) (1.56 cents)

Note 1: The calculation is based on (i) the issued share capital of the Company as enlarged by the new Shares issued between 1 October 2001 and the Latest Practicable Date; and (ii) the unaudited loss attributable to Shareholders for the six months ended 30 September 2001.
Note 2: The calculation is based on (i) the issued share capital of the Company as enlarged by the new Shares issued between 1 October 2001 and the Latest Practicable Date after taking into account the potential dilutive effects resulting from exercise of Options and conversion of Preference Shares into Shares; and (ii) the unaudited loss attributable to Shareholders for the six months ended 30 September 2001.

It is of importance to note that the above mentioned proforma financial effects are prepared to illustrate a number of specific financial effects which are expected to result from the transactions contemplated under the Placing Agreements and Subscription Agreement only. These effects do not give an overall view insofar as the Group’s other businesses are concerned, which are beyond the scope of this circular.

FUTURE PLANS AND PROSPECTS

The Group intends to continue its existing property businesses. However, looking ahead, the Board is positive about the potential growth of the high-tech related businesses in the new economy and intends to diversify the Group’s businesses and investments into the technology field. On 25 April 2002, the Company entered into the Subscription Agreement which will allow it to acquire a further 1.95% interest in Hong Kong Satellite’s issued share capital as enlarged by the Subscription Shares. The Acquisition would bring the Group’s interest in Hong Kong Satellite to about 3.9% of such enlarged issued share capital. The Company may, in circumstances and on terms that it considers suitable and appropriate, acquire a further interest in Hong Kong Satellite in the future, but the timing or terms of any such acquisition has not been determined at present. On 6 May 2002, the Company also announced that it had entered into the Sky Citi-Link Agreement to acquire an 80% interest in Sky Citi-Link, a company whose subsidiary is a traditional telecom carrier and one of the largest teleport operators in Asia holding an External Fixed Telecommunications Network Services Licence granted by the Office of Telecommunications Authority in Hong Kong which allows it to operate international telecommunication services.

With the experience and knowledge of the Company’s management in satellite and telecommunications technology in China, the Board believes that the Group is able to seek and identify new China based high-tech related businesses in the area of satellite telecommunications network, broadband internet access, direct television and mobile communications.

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LETTER FROM THE CHAIRMAN

GENERAL

The Independent Board Committee, comprising Messrs. Ko Ming Tung, Edward, Tang Tin Sek and Chung Chi Chiu, has been appointed to advise the Independent Shareholders and Chateron has been appointed to advise the Independent Board Committee in connection with the Acquisition.

SPECIAL GENERAL MEETING

The Directors have resolved to convene the SGM to consider and, if thought fit by the Independent Shareholders, to approve the Acquisition. Notice of the SGM is set out on page 102 of this circular. Whether or not you are intending to attend the SGM, you are requested to return the enclosed proxy form to the Company at its principal place of business in Hong Kong at 28th to 30th Floors, Workington Tower, 78 Bonham Strand, Sheung Wan, Hong Kong as soon as practicable, but in any event not less than 48 hours prior to the time appointed for the SGM. Completion and return of the form of proxy will not preclude you from attending and voting in person at the SGM or any adjourned meeting should you so wish.

ADDITIONAL INFORMATION

Your attention is drawn to the letters from the Independent Board Committee and Chateron set out in this circular and the further information contained in the appendices to this circular.

By order of the board of Wah Tak Fung Holdings Limited Chu David Yu Lin Chairman

– 13 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

WAH TAK FUNG HOLDINGS LIMITED

(Incorporated in Bermuda with limited liability)

27 May 2002

To the Independent Shareholders

Dear Sir or Madam,

MAJOR AND CONNECTED TRANSACTION

Subscription for further shares in Hong Kong Satellite Technology Holdings Limited

We have been appointed as members of the Independent Board Committee to advise the Independent Shareholders in respect of the Acquisition, details of which are set out in the letter from the Chairman in the circular dated 27 May 2002 (the “Circular”) to the Shareholders. Unless the context otherwise requires, terms defined in the Circular have the same meanings when used in this letter.

Your attention is drawn to the advice of Chateron in respect of the Acquisition as referred to in the letter from Chateron set out on pages 15 to 32 of the Circular. In the course of your evaluation of your decision as to whether or not to vote in favour of the Acquisition at the SGM, we would advise you to weigh carefully as to your acceptances between the merits and risk factors inherent in the Subscription Agreement as mentioned in the aforesaid letter from Chateron. Having taken into account the advice of Chateron, we consider the terms of the Subscription Agreement to be fair and reasonable so far as the interests of the Independent Shareholders are concerned and that the entering into of the Subscription Agreement is in the interests of the Company and the Shareholders as a whole (including the Independent Shareholders). Accordingly, we recommend the Independent Shareholders to vote in favour of the resolution to be proposed at the SGM to, inter alia, approve the Subscription Agreement.

Yours faithfully, Ko Ming Tung, Edward Tang Tin Sek Chung Chi Chiu Independent Board Committee

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LETTER FROM CHATERON

The following is the text of the letter of advice to the Independent Board Committee from Chateron dated 27 May 2002 prepared for incorporation in this circular.

CHATERON

CORPORATE FINANCE LIMITED 2201-3, 22ND FLOOR, WORLDWIDE HOUSE, 19 DES VOEUX ROAD, CENTRAL, HONG KONG TEL: (852) 2868 2828 FAX: (852) 2868 0390

華夏融資有限公司

27 May 2002

The Independent Board Committee Wah Tak Fung Holdings Limited 28th to 30th Floors Workington Tower 78 Bonham Strand Sheung Wan Hong Kong

Dear Sirs,

CONNECTED TRANSACTION – SUBSCRIPTION AGREEMENT

INTRODUCTION

We refer to the announcement (the “ Announcement ”) issued by Wah Tak Fung Holdings Limited (the “ Company ”) dated 3 May 2002 in respect of, inter alia, the Subscription Agreement (as such term is defined in the Announcement) which was entered into on 25 April 2002 between the Company and Hong Kong Satellite Technology Holdings Limited (“ Hong Kong Satellite ”). Details of the terms of the Subscription Agreement are set out in a circular (the “ Circular ”) issued by the Company to the Shareholders (as such term is defined in the Circular) dated 27 May 2002, of which this letter forms part. Capitalized terms used in this letter shall have the same meanings ascribed to them in the Circular unless the context otherwise requires.

Hong Kong Satellite is a company in which Mr Chu Yu Lin David, a Director and substantial shareholder of the Company, and his associates have an aggregate controlling interest. The transactions contemplated under the Subscription Agreement, when aggregated with the Company’s previous acquisition of an approximately 1.99% interest in Hong Kong Satellite in October 2001, constitute a major and connected transaction for the Company under the Listing Rules and shall require, inter alia, the approval of the Independent Shareholders at a special general meeting of the Company (the “ SGM ”).

The Independent Board Committee comprising Mr Ko Ming Tung, Edward, Mr Tang Tin Sek and Mr Chung Chi Chiu, being independent non-executive Directors, has been established by the Company to advise the Independent Shareholders in relation to the Subscription Agreement. We, Chateron, have been appointed by the Company to advise the Independent Board Committee

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LETTER FROM CHATERON

in relation to the resolution to be proposed at the SGM to consider and, if thought fit, approve the Subscription Agreement. This letter contains our advice to the Independent Board Committee as to whether or not (i) the Subscription Agreement would be in the interests of the Company and the Independent Shareholders as a whole; and (ii) the terms and conditions of the Subscription Agreement are fair and reasonable so far as the interests of the Independent Shareholders are concerned.

In formulating our opinion and recommendation to the Independent Board Committee in relation to the Subscription Agreement, we have relied on the accuracy of the information and representations contained in the Circular which have been provided to us by the Directors and which the Directors consider to be complete and relevant. We have assumed that all statements, information and representations made or referred to in the Circular and for which the Directors are solely responsible, were true and correct in all respects at the time they were made and continued to be so as at the date of despatch of the Circular. We have also assumed that all statements of belief, opinion and intention made by the Directors in the Circular were reasonably made after due and careful enquiry and are based on honestly-held opinions. We have no reason to doubt the truth, accuracy and completeness of the information and representations provided to us by the Directors and we have been advised by the Directors that no material facts have been omitted from the information and representations provided in and referred to in the Circular. We consider that we have received sufficient information to enable us to reach an informed view and to justify our reliance on the accuracy of the information and representations contained in the Circular and to provide a reasonable basis for our opinion and recommendation. We have no reason to suspect that any material information has been withheld by the Company. We have not, however, carried out any independent verification of the information provided to us by the Directors, nor have we conducted an independent in-depth investigation into the affairs of the Group.

In formulating our opinion and recommendation, we have not considered the tax consequences on the Independent Shareholders as a result of their approval of the Subscription Agreement, since these are particular to the individual circumstances of any Independent Shareholder. It is emphasized that we will not accept responsibility for any tax effects on or liabilities of any person resulting from the approval of the Subscription Agreement. In particular, any Independent Shareholder who is in any doubt about his/her own tax position should consult his/her own professional adviser(s).

THE SUBSCRIPTION AGREEMENT

Principal factors and reasons considered

In arriving at our recommendation in relation to the Subscription Agreement, we have considered the following principal factors and reasons:–

1. The organization structure and business operations of Hong Kong Satellite

As referred to in the letter from the Chairman as set out on pages 4 to 13 of the Circular, as at the Latest Practicable Date, Hong Kong Satellite was beneficially owned as to approximately 1.99%, 32.34% and 16.92% by the Company, Mr Chu and Mrs Chu, respectively whilst, to the knowledge of the Directors, the remaining approximately 48.75% of the issued share capital of Hong Kong Satellite was beneficially owned by parties who are independent of and not connected with any of the directors, chief executive or substantial shareholders of the Company and its subsidiaries or any of their respective associates. Currently, the major operating business asset of Hong Kong Satellite is its 70% equity

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LETTER FROM CHATERON

interest in Hong Kong Satellite Technology Group Limited (“ HKSTG ”), which is a joint venture company incorporated in the British Virgin Islands. The remaining 30% equity interest of HKSTG is held by three other parties, each of whom is independent of and not connected with any of the directors, chief executive or substantial shareholders of the Company or its subsidiaries or any of their respective associates as at the Latest Practicable Date. These three other parties include (i) a major international satellite manufacturer (“ ISM ”); (ii) a space industry group in the PRC (“ CSIG ”); and (iii) a satellite operating company in the PRC (“ CSOC ”).

HKSTG is engaged in the development, manufacturing, marketing, sale and operation of medium-sized geosynchronous communication satellites with capacity of solar array power of between 3,500 and 5,500 watts. It is estimated by the management of Hong Kong Satellite that HKSTG would commence full commercial operation (i.e. being determined as the time when HKSTG’s two satellites (as referred to below) shall be launched and shall begin to recognize revenue for HKSTG) by the year 2005. The business mission of Hong Kong Satellite is to serve as the dominant satellite network operator for information, media, television and communication services in the Asia-Pacific region, and its business model comprises the followings:–

(i) the provision of a satellite communication network that covers the PRC in the Asia-Pacific region to telecommunications service providers and television operators, for direct-to-home television services, fixed-line and mobile phone connections, broadband Internet services and public transit communications system via satellite; and
(ii) the development and manufacture of satellites for sale and lease to potential customers both in the PRC and overseas.

Furthermore, pursuant to a shareholders’ agreement dated 11 April 2001 (the “ Shareholders’ Agreement ”) which was entered into between Hong Kong Satellite, ISM, CSIG and CSOC (being the shareholders of HKSTG), each shareholder of HKSTG assumes a specific functional responsibility as follows:–

(a) ISM will be the exclusive prime contractor for all customers’ orders and will provide a non-transferable, royalty-free worldwide exclusive licence in relation to the manufacture, operation, marketing and sale of satellites. ISM undertakes to sub-contract, on an exclusive basis, all assembly, integration and testing (“ AIT ”) work of all manufactured satellites to CSIG. Furthermore, ISM shall utilize its expertise in the research, development and manufacture of communications satellite, sub-systems, units and components which it has accumulated since the 1950’s, and will provide technical support for the marketing of satellites and training of marketing staffs.
(b) CSIG will be the permanent and exclusive sub-contractor to ISM for the AIT work of all the manufactured satellites and will provide AIT facilities, technical expertise and general testing equipments. In this regard, we were informed by the Directors that CSIG’s satellite development unit has accumulated extensive launch experiences given that it is also the exclusive launch contractor using Long March Series launch vehicles.

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LETTER FROM CHATERON

(c) CSOC will be the operation agent responsible for the tracking and control management and operation of the satellite transponders, and may cover services such as arranging satellite capacity and providing transmission facilities and other value-added services. In this regard, we were informed by the Directors that CSOC is one of the two companies in the PRC who is licensed to operate satellite network, and CSOC shall obtain the authorization for the use of orbit and perform relevant frequency co-ordination process and obtain the relevant approvals and permits for landing rights in the PRC.
(d) Hong Kong Satellite, being the controlling shareholder of HKSTG, is an investment holding company and currently has no major operating business assets other than its shareholding in HKSTG. Hong Kong Satellite is responsible for raising the requisite funding for HKSTG’s operations including the establishment, modification and upgrading of the AIT facility and the development of the satellite system. Furthermore, Hong Kong Satellite is responsible for providing ongoing working capital for HKSTG as well as the promotion of the business operations of HKSTG.

Therefore, we consider that the Shareholders’ Agreement enables full interaction between the shareholders of HKSTG, under which each shareholder of HKSTG shall be able to derive complementary and synergistic benefits from the functional responsibility, skills, know-hows, experience and expertise of any or all of the other shareholders. We also consider that HKSTG’s business model, which is largely built upon such interaction between HKSTG’s shareholders, is one under which satellites and transponders shall be manufactured adopting international technology and know-how, and that all AIT facilities and launch services shall be provided from within members of HKSTG on a “one-stop-shop” basis. We were informed by the Directors that they consider such a business model will effectively enable HKSTG to minimize its manufacturing and operating costs and thereby to maximize its profit margin.

In this regard, we noted that in January 2002, ISM (being one of the shareholders of HKSTG) and HKSTG entered into a satellite purchase contract (the “ Satellite Purchase Agreement ”). We have reviewed the Satellite Purchase Agreement pursuant to which, inter alia, HKSTG shall purchase two satellites from ISM for an aggregate consideration of US$180 million (equivalent to approximately HK$1,404 million). Based on the foregoing, we consider that the Satellite Purchase Agreement serves to secure the completion of HKSTG’s first two satellites within the next four years as well as the revenue stream which may arise therefrom when the first two satellites shall be applied for use in commercial activities (such as satellite data transmissions services and transponder leasing). In this connection, we were informed by the management of Hong Kong Satellite that the estimated production cost per satellite, being US$90 million (equivalent to approximately HK$702 million) as referred to above, is approximately 31% lower than the original estimated production cost in July 2001 of approximately US$130 million (equivalent to approximately HK$1,014 million) per satellite before the Satellite Purchase Agreement was executed. We were informed by the management of Hong Kong Satellite that the abovementioned cost savings are attributable to the existing business model and shareholding structure of HKSTG under which all the AIT works of the two satellites may be sub-contracted from ISM to CSIG, both being shareholders of HKSTG, and thus enabling a more favourable and efficient cost structure to be in place for the construction and development of the two satellites.

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LETTER FROM CHATERON

2. The growth and development potentials of the satellite industry in the PRC

Wider geographical penetration and coverage

We were informed by the Directors that HKSTG’s satellite network will be used to accommodate the existing cable and terrestrial networks in the PRC for the provision of direct-to-home television broadcasting, mobile telecommunications services and wireless Internet access and data transmission services. The advantages that are offered by satellite communications network over the existing optical fibre and coaxial cables include, inter alia, (i) a more extensive geographical coverage; (ii) the minimization of geographical limitations; (iii) spontaneous point to multi-point transmissions; (iv) simultaneous signal transmissions; and (v) simple alteration and maintenance process. We consider that these advantages are valuable to television broadcasting companies and/or telecommunications service providers in terms of expansion into relatively remote and untapped regions (such as small to medium cities as well as rural and agricultural regions in the PRC), and in enlarging their existing network coverage and capacities nationwide. We also consider that the satellite system would enable television broadcasting and telecommunications customers to employ cost-effective networking using small and relatively low-cost antennae on the ground (instead of optical fibre or coaxial cables which involve relatively expensive infrastructural costs), whilst high quality services would be generated to the customers. Therefore, we are of the view that in the longer run, the use of the satellite system would bring about a wider geographical penetration and coverage through broadcasting, telecommunications, wireless Internet and data transmission services.

Larger bandwidth and high-speed data transfer features

We noted that there had been a significant advancement in communications technology in recent years, which mainly comes from digital communications such as, amongst others, interactive TV, video-on-demand, digital broadcasting, video conferencing and wireless communications such as W-CDMA (Wideband Code Division Multiple Access) for wireless Internet access. We consider that such advancements in communications technology require large bandwidth and quality transmission signals which may not be completely handled by the existing terrestrial, cable and microwave infrastructures, the enhancement of which would otherwise involve significant replacement and investment costs as well as upgrading capital expenditures and maintenance costs by the operators concerned. On the other hand, satellite transmission offers larger bandwidth and high-speed data transfer, as well as quality transmitted signals using high transmission power and extensive transponder capacity with the effect of achieving a wider geographical coverage. We are of the view that transmissions through the satellite system may, over the course of time, gradually replace the existing terrestrial, cable and microwave infrastructures, in the light of continuing technological advancements which offer remote area coverage, instant network access and reasonable usage rates for consumers and thereby possibly resulting in a higher utilization rate of the satellite communication platform in the long run.

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LETTER FROM CHATERON

Expansion of the television industry in the PRC

We noted that the television industry in the PRC had undergone a major reform in recent years, in that there had been a consolidation between modern and efficient television operators which replaced less efficient ones. We consider that this would result in an increasing demand for television programmes in the PRC and hence an increase in television broadcasting capacity, in form of an increase in the number of programmes created and channels distributed to television viewers. Furthermore, we consider that the PRC’s entry to the World Trade Organization may relax the quota on foreign drama and movie programmes, as well as television programmes with international and regional contents. In this regard, we were informed by the Directors that satellite transmission provides a digitalized transmission mode which is ideal for television broadcasting programmes with international and regional contents to television viewers in the PRC, and for delivering additional television channels to cable television operators or microwave transmission stations for local re-distribution to television viewers. We consider that such development further enhances the increasing importance of satellite broadcasting in the PRC, as it provides incentives to both existing cable television operators and foreign television programme content providers and would thereby benefit all television viewers.

Capitalization on the growth in the Direct Broadcast Satellite (DBS) and wireless communications markets

We were informed by the Directors that there had been an active growth in the DBS and wireless communications markets in recent years, and the Directors believe that the satellite system would provide market players with the opportunity to enjoy cost-effective and high quality transponder coverage as a result of which costs and lead times associated with the development of ground stations would be significantly reduced. In this regard, we noted that although the DBS market in the PRC is currently subject to the regulatory control of the PRC government, we consider that (i) the gradual liberalization of the PRC’s television industry particularly following the PRC’s entry to the World Trade Organization as discussed above; and (ii) the support by the PRC government towards the development of a national satellite industry as discussed below, would collectively have the effect of opening up the DBS market in the PRC, and hence capable of generating commercial and economic benefits to the satellite industry in the PRC in the longer run.

Support by the PRC government towards the development of a national satellite industry

We noted a recent press release appearing in the Hong Kong Economic Journal in August 2001 which reported that the Bureau of Broadcasting and Telecommunications of the State Council (國家廣電局 ) of the PRC government had announced its plans to establish a unified satellite platform through CSOC, one of the shareholders of HKSTG, as a measure to strengthen the monitoring and control of broadband transmissions using facilities outside of the PRC. We consider that such a unified satellite platform, if implemented, would create further opportunities for PRC satellite operators and facilitate the use of domestic satellites in the PRC, and thereby enable HKSTG to gradually develop exclusive rights over the transmission of foreign contents via satellite to the PRC market.

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LETTER FROM CHATERON

Based on the foregoing, we consider that the support by the PRC government towards the development of a national satellite industry would favour the business growth and development of industry participants, such as HKSTG.

Effect on the business plans of Hong Kong Satellite

We consider that the abovementioned key features, which favour the growth and development of the satellite industry in the PRC, would be instrumental to the business plans of Hong Kong Satellite. In this regard, we were informed by the Directors that HKSTG plans to manufacture satellites (with the first two of which being contracted for under the Satellite Purchase Agreement) which adopt technology originated from ISM (being one of the shareholders of HKSTG) and which, by feature, is high in transmission capacity and low in weight. We were informed by the management of Hong Kong Satellite that as at the Latest Practicable Date, the technical product specifications for the first satellite (which is scheduled to be launched by 2004) have been finalized and that the first satellite will accommodate transmission under the Ku band which is used in the PRC on an extensive scale. Some transponders carried within the two satellites will be leased to independent television broadcasting and telecommunications companies whilst the rest will be reserved for HKSTG’s internal operation purposes. Under the terms of the Satellite Purchase Agreement, these two satellites will be manufactured by ISM for the initial hardware and software components, which would take about 18 months for the full assembly for a satellite and a satellite development unit of CSIG will carry out the AIT services and launch arrangements which is estimated by the Directors to take between another 14 and 18 months. Based on the above time schedule, we were informed by the Directors that Hong Kong Satellite is expected to become fully operational (i.e. being determined as the time when the two satellites shall be launched and shall begin to recognize revenue for HKSTG) by the year 2005.

In connection with the business plans of Hong Kong Satellite as referred to above, we have also discussed with the management of Hong Kong Satellite regarding their views about the development of the telecommunications and cable markets in the PRC, which may have bearing on the future growth and development of the satellite industry in the PRC. As far as the PRC telecommunications market is concerned, we were informed by the management of Hong Kong Satellite that following the PRC’s entry into the World Trade Organization, the PRC government is expected to open up the local telecommunications markets by allowing domestic and foreign firms to compete with the domestic telecommunications operators. It is expected that the PRC government would allow foreign investments of up to 49% in PRC telecommunications operators leading up to the next two to three years, and that the PRC government would also open up its domestic telecommunications leasing market within the next three years in order to enable foreign operators to rent capacity from the PRC telecommunications operators and to re-sell such services for both domestic and international telecommunications traffic. Furthermore, it is expected that the PRC government is likely to uplift any restrictions in the use of technologies by foreign operators when providing telecommunications services in the PRC. In view of the foregoing, we consider that these features would tantamount to a gradual liberalization of the telecommunications market, especially the mobile phone market, in the PRC. Furthermore, the announcement in early 2002 by the Ministry of Information Industry (“ MII ”) of the State Council of the PRC government regarding

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LETTER FROM CHATERON

the development of multi-service telecommunications operators (at the expense of issuing new licences by the MII to new telecommunications operators) would further suggest that telecommunications operators in the PRC would become better positioned by being able to provide a full range of telecommunications services which deploy latest technologies and efficiencies. In this regard, we consider that the liberalization of the PRC telecommunications industry and the deployment of new technologies would create opportunities for satellite operators in the PRC.

On the other hand, as far as the PRC cable market is concerned, we were informed by the management of Hong Kong Satellite that the existing operating environment of the PRC cable market is in a fragmented state, where cable operators are often localized by provincial/municipal operations instead of operating under a unified platform. Although we were informed by the Directors that HKSTG is not the first operator of satellite transmission facilities in the PRC, the application of satellite transmission facilities would enable possible co-operation between a cable operator and a satellite operator, which thereby enables the application of satellite transmissions to enrich the broadcasting contents of the cable operators. We consider that such a co-operation model would generate a significant market potential for satellite operators to be able to capitalize on the business opportunities offered from the PRC cable market in its existing state.

3. Reasons for entering into the Subscription Agreement

As referred to in the letter from the Chairman as set out on pages 4 to 13 of the Circular, the Group is principally engaged in property investment and development, property leasing and building management and agency services. Furthermore, as referred to in the Company’s annual report and accounts for the year ended 31 March 2001, the Group is committed to re-positioning itself to investing in businesses which could generate stable, sustainable and sufficient income in the long run and which is capable of bringing a new outlook to the overall business development and financial structure of the Group. We noted that, as a first step, the Group acquired in October 2001 an approximately 1.99% interest in Hong Kong Satellite which targets towards accomplishing the Group’s business objective as mentioned above. We consider that, upon the completion of the Subscription Agreement, the Group shall have an aggregate beneficial interest of approximately 3.9% in the issued share capital of Hong Kong Satellite (as enlarged by the issue of the 200 new shares in Hong Kong Satellite upon the completion of the Subscription Agreement) which may thereby provide the Group with a larger participation in an investment in the technology field, such as that represented by Hong Kong Satellite, the merits as well as the growth and development potentials of which are already discussed in the paragraph headed “The organization structure and business operations of Hong Kong Satellite” and the paragraph headed “The growth and development potentials of the satellite industry in the PRC” above, respectively. As referred to in the letter from the Chairman as set out on pages 4 to 13 of the Circular, the Directors have stated that to their knowledge, Hong Kong Satellite has no present plan to issue any new shares to any other parties, and that the Company may, in circumstances and on terms that it considers suitable and appropriate, acquire a further interest in Hong Kong Satellite in the future although the timing or terms of any such acquisition, if proceeded with, has not been determined at present. We were informed by the Directors that the Group intends to hold its interest in Hong Kong Satellite as a long term investment, as well as their view that the Group’s investment in Hong Kong Satellite would broaden and strengthen the Group’s income stream in the long run. In this regard, we have reviewed the cashflow projections of

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Hong Kong Satellite for a period of 13 years from 2002 to 2014, which were provided to us by the management of Hong Kong Satellite and in respect of which we wish to draw the attention of the Independent Shareholders to our discussions on the cashflow projections of Hong Kong Satellite as referred to in the paragraph headed “The consideration payable by the Company under the Subscription Agreement” below.

Furthermore, we noted that it is a term of the Subscription Agreement that Hong Kong Satellite has undertaken to the Company that, unless with the prior consent of the Company, Hong Kong Satellite shall not issue any new shares or other securities convertible or exercisable into new shares at an effective consideration per share that is less than the consideration payable by the Company per Subscription Share under the Subscription Agreement, until the expiry of a period of 12 months commencing from the date of the Subscription Agreement, i.e. 24 April 2003. In this regard, we consider that the Subscription Agreement offers protection to the Company in terms of the value of the consideration payable by the Company pursuant to the Subscription Agreement up to 24 April 2003, which is in the interests of the Company and the Shareholders (including the Independent Shareholders) as a whole.

4. The consideration payable by the Company under the Subscription Agreement

As referred to in the letter from the Chairman as set out on pages 4 to 13 of the Circular, the consideration payable by the Company for the Subscription Agreement is US$20 million (equivalent to approximately HK$156 million) (the “ Consideration ”) which shall be satisfied by part of the aggregate net proceeds derived from the Placing Agreements. In view of the fact that the Company shall acquire approximately 1.95% of the enlarged issued share capital of Hong Kong Satellite after the completion of the Subscription Agreement, the Consideration translates to an implied valuation of the entire business of Hong Kong Satellite (as represented by the entire issued share capital of Hong Kong Satellite) at approximately US$1,005 million (equivalent to approximately HK$7,840 million). We have also referred to an independent valuation by Grant Sherman Appraisal Limited (the “ Valuer ”), a firm of independent professional valuers, that the fair market value of the entire business of Hong Kong Satellite was stated at approximately HK$14,270 million as at 28 February 2002 (being the latest practicable date on which the valuation report of Hong Kong Satellite was prepared for the purpose of the Circular). The full text of the independent valuation report issued by the Valuer dated 7 May 2002, which also sets out the bases and assumptions on which such valuation is being determined, is set out in Appendix IV to the Circular. We noted that the business valuation of Hong Kong Satellite of approximately HK$14,270 million as at 28 February 2002 represents an increase of approximately 14% when compared with the corresponding independent business valuation of Hong Kong Satellite of approximately HK$12,500 million as at 31 July 2001 (as referred to in the Company’s circular dated 3 October 2001). In this regard, we have enquired with and were informed by the Valuer that such increase is mainly attributable to a reduction in the estimated production cost per satellite by about 31% as a result of the execution of the Satellite Purchase Agreement as discussed in the paragraph headed “The organization structure and business operations of Hong Kong Satellite” above, hence enabling an increase in profit margins from satellite sales. In other words, the implied valuation of the entire business of Hong Kong Satellite, being approximately HK$7,840 million as referred to above which is determined on the basis of the Consideration as grossed-up for a 100% equity interest in Hong Kong Satellite, represents a discount of approximately 45% to the fair market value of the entire business of Hong Kong Satellite as determined by the Valuer.

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We have discussed with and were informed by the Valuer that in determining the fair market value of the entire business of Hong Kong Satellite, the Valuer has adopted the discounted cashflow method over the net cashflows (being the projected revenue less the projected capital expenditures and operating costs) of Hong Kong Satellite during a period of 13 years from 2002 to 2014 (the “ Forecast Period ”). In this regard, we were informed by the Directors that the expected useful economic life of a satellite would be between 10 and 12 years and therefore we consider that it is reasonable to adopt the Forecast Period of 13 years under the discounted cashflow model, given that a satellite launched in 2005 (being the year in which Hong Kong Satellite is expected to commence commercial operations) shall have its useful economic life expiring by between 2015 and 2017. In view of the currently early stages of development in the business operations of Hong Kong Satellite whereby it has no assets (for instance, satellites capitalized as fixed assets or significant working capital assets attributable to Hong Kong Satellite’s business operations) and no earnings contribution (as commercial operation of Hong Kong Satellite is expected to commence by the year 2005), we consider that it would not be appropriate to perform a business valuation of Hong Kong Satellite based on either its net asset value or on a price/ earnings multiple basis. Accordingly, we consider that the discounted cashflow method, which takes into account the projected net cashflows to be generated from the business operations of Hong Kong Satellite during the Forecast Period (which is essentially the useful economic life per satellite), to be the most appropriate method of valuation. Furthermore, we have examined the projected cash inflows and outflows of Hong Kong Satellite as adopted by the Valuer from which we noted that (i) the majority of Hong Kong Satellite’s cash inflows during the Forecast Period from 2002 to 2014 is expected to be generated from direct point to multi-point television broadcasting, mobile phone and broadband transmissions as well as the sales of manufactured satellites; (ii) Hong Kong Satellite is expected to incur capital expenditures during the Forecast Period from 2002 to 2014 in relation to the control, maintenance and upgrading of satellites manufactured for own use; and (iii) Hong Kong Satellite’s cash outflows during the Forecast Period from 2002 to 2014 are expected to comprise sales and marketing expenses, management and administrative expenses and satellite systems maintenance expenses. We consider that the abovementioned cashflow items generally reflect the business model of Hong Kong Satellite based on our discussion with the management of Hong Kong Satellite regarding its business plans and operations as referred to in the preceding paragraphs. However, in this regard, we were informed by the Valuer that it has assumed adequate funding of such amount to be available to HKSTG, whether by way of project finance or other appropriate financing arrangements, over the course of the next three to four years to enable HKSTG to sustain its revenue and operating expenses in the model adopted by the Valuer during the Forecast Period from 2002 to 2014. In this respect, we noted that the satellite business is highly capital-intensive and there is no assurance that such financing arrangements will be available on terms acceptable to Hong Kong Satellite, as well as any variances in the cost of financing and the gearing level of Hong Kong Satellite (in the event debt financing were to be incurred by Hong Kong Satellite) which may have a possible impact on the overall business valuation of Hong Kong Satellite. We consider that this is a risk factor which should be taken into account by the Independent Shareholders in their evaluation of the merits of the Subscription Agreement.

We were further informed by the Valuer that it has applied a discount rate of approximately 25.4% (the “ Discount Rate ”) to the projected net cashflows (being the projected revenue less the projected capital expenditures and operating costs) of Hong Kong Satellite during the Forecast Period, and that the Discount Rate has been adopted as the cost

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of equity using the Capital Asset Pricing Model (“ CAPM ”). Under the CAPM, the Discount Rate has been determined by the Valuer having regard to the various risk factors inherent in the business operations and market environment of Hong Kong Satellite including, inter alia, (i) country risk; (ii) company size risk; (iii) start-up risk; (iv) technological risk; and (v) legal and regulatory risk inherent in the business of Hong Kong Satellite, as well as an equity risk premium over and above the risk-free rate of return which is calculated with reference to the ‘beta’ value, being the commonly adopted parameter for measuring risk premiums in CAPMs. We were further informed by the Valuer that, in adopting the ’beta’ value, it has made reference to the ‘beta’ values of a number of comparable satellite operators whose securities are listed on NASDAQ, New York Stock Exchange (“ NYSE ”) and the Stock Exchange as set out below:–

	Stock
	exchange
	on which		Market
	the issuer	Principal	capitalization*	Unlevered
Issuer	is listed	business activities	(million)	beta value
Globalstar	NASDAQ	Building and operation of	US$7	0.550
Telecommunications		worldwide satellite-based	(equivalent to
Limited		digital telecommunications	(approximately
		system; provision of	HK$55
		voice telephone and other	million)
		digital telecom services
		such as data transmission,
		paging, facsimile and position
		location
Loral Space &	NYSE	A satellite communications	US$667	0.833
Communications		company with substantial	(equivalent to
Limited		activities in satellite	(approximately
		manufacturing and	HK$5,203
		satellite-based	million)
		communications services
PanAmSat	NASDAQ	Provider of global video and	US$3,223	0.886
Corporation		data broadcasting services	(equivalent to
		via satellites	(approximately
			HK$25,139
			million)
Asia Satellite	Stock	Operating satellites for	HK$5,191	0.770
Telecommunications	Exchange	commercial services
Holdings Limited		primarily to broadcasting
		and telecommunications
		industries, with satellite
		capacity used for video,
		speed Internet, broadband
		multimedia and direct
		TV services

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	Stock
	exchange
	on which		Market
	the issuer	Principal	capitalization*	Unlevered
Issuer	is listed	business activities	(million)	beta value
APT Satellite	Stock	Maintenance and operating of	HK$1,321	0.553
Holdings Limited	Exchange	satellite-based
		telecommunications
		systems
Unlevered average
adjusted beta value
adopted by the Valuer
in determining the		For companies listed on NASDAQ and NYSE		0.795
Discount Rate		For companies listed on the	Stock Exchange	0.66

* Market capitalization of the issuer concerned as at 28 February 2002

In determining the Discount Rate of approximately 25.4%, we were informed by the Valuer that it had evaluated the discount rates applicable for satellite operators listed in the US and in Hong Kong using CAPM, and based on the risk-free rate of return and equity market premium as well as the unlevered average adjusted beta value for each of the US and Hong Kong markets as referred to above. In evaluating these discount rates, we were informed by the Valuer that it had, on a prudent basis, taken into account other specific risk premiums which include (i) a size premium of 1% and 2% for operators listed in Hong Kong and the US, respectively (in which case we consider it is reasonable for a higher premium to be attached to US-listed operators in view of the larger market capitalizations of the generality of companies listed in the US stock exchanges); and (ii) a country risk premium of 3% for operators listed in the US market only which takes into account the risk exposure which such US-based operations would otherwise encounter if their core business activities were to be based in the PRC, and which we consider to be reasonable. When applying the abovementioned discount rates for the US and Hong Kong markets in determining the Discount Rate for Hong Kong Satellite, we noted that the Valuer has further accommodated a pre-development risk premium of 10% which we consider to be reasonable in view of the uncertainties relating to Hong Kong Satellite’s business operations given its currently early stages of development. Furthermore, we were informed by the Valuer that a further discount of 15% has been made to the net present value of Hong Kong Satellite, which was determined using the discounted cashflow method based on Hong Kong Satellite’s net cashflow projections during the Forecast Period from 2002 to 2014 (and taking into account the terminal value of a satellite upon the expiry of its useful economic life of, say, 13 years from the date of launch) and using the Discount Rate of approximately 25.4%. In this connection, we were informed by the Valuer that the abovementioned 15% further discount to Hong Kong Satellite’s net present value was made to reflect the fact that Hong Kong Satellite is a private unlisted entity in its existing early stages of development, and that the Company may face marketability risk in not being able to realize its investment in Hong Kong Satellite in the open market. In this regard, we concur with the Valuer’s approach as we consider that such further 15% discount to Hong Kong Satellite’s net present value has been made on a prudent basis.

– 26 –

LETTER FROM CHATERON

Based on the foregoing, the entire business of Hong Kong Satellite was independently valued by the Valuer at approximately HK$14,270 million as at 28 February 2002. The implied valuation of the entire business of Hong Kong Satellite, being approximately HK$7,840 million which is determined on the basis of the Consideration of US$20 million (equivalent to approximately HK$156 million) as grossed-up for a 100% equity interest in Hong Kong Satellite, represents a discount of approximately 45% to the business valuation arrived at by the Valuer. We are of the view that, in doing so, the Company has further taken a prudent view in determining the amount of the Consideration in view of the inherent business risks and market risks associated with the business operations of Hong Kong Satellite (and for which various risks premiums have already been taken into account by the Valuer in determining the Discount Rate as discussed above), which we consider to be in the interests of the Company and the Shareholders (including the Independent Shareholders) as a whole.

5. Experience and expertise of key personnel within Hong Kong Satellite which are relevant to the satellite industry

We have discussed with and were informed by the Directors that, as at the Latest Practicable Date, Hong Kong Satellite has a total headcount of approximately 18 staff members of which the senior management of Hong Kong Satellite possesses a wealth of experience and expertise which are relevant to the satellite industry. The senior management of Hong Kong Satellite comprises, inter alia, the following key personnel whose experience and expertise are relevant to the satellite industry:–

(i) its managing director who possesses more than 10 years’ experience in satellite launching with China Aerospace in the PRC;
(ii) its deputy managing director who, between 1987 and 1993, worked with the systems design, engineering, planning and project management departments of the Ministry of Aerospace in the PRC and gained experience through attending training programmes with Deutsche Aerospace and European Space Agency in Europe, and who was subsequently responsible for the management of SINOSAT-1 satellite project in Germany covering such aspects as contract negotiation, financing arrangement and risk management;
(iii) its chief engineer who, between 1986 and 1994, was the chief designer for certain satellite and aerospace transmission products with China Aerospace in the PRC and was responsible for the technology aspects of the SINOSAT-1 satellite project in Germany, and who was subsequently appointed as a committee member of the China Academy for Space Technology between 1999 and 2001;
(iv) its assistant general manager who has substantial knowledge of software development and management information systems, especially regarding the Digital Video Broadcasting (DVB) system which includes the DVB-satellite system in the United States that utilizes satellite broadcasting transmission facilities to cover a range of day-to-day-applications; and
(v) its project manager who has over 20 years of experience in the satellite industry in the PRC, particularly with the Commission of Science, Technology and Industry for National Defence between 1992 and 1995, and with Sino Satellite Communications Company in the PRC between 1995 and 2002 in which he played an instrumental role in the launch, transport and ground technology of satellite projects.

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LETTER FROM CHATERON

We consider that the experience and expertise of the abovementioned key personnel within the senior management of Hong Kong Satellite would be of paramount importance to the future business growth and development of Hong Kong Satellite, being an investment in which the Company shall have an approximately 4% beneficial interest after the completion of the Subscription Agreement.

6. Financial effects on the Group as a result of the Subscription Agreement

On net asset value of the Group

As referred to in the statement of proforma adjusted consolidated net tangible assets of the Company as set out in Appendix III to the Circular, after the completion of the Placing Agreements and the Subscription Agreement, there would be an improvement in the Company’s proforma unaudited consolidated net tangible assets by approximately 62% from approximately HK$316.4 million before the completion of the Placing Agreements and the Subscription Agreement (being arrived at based on the Company’s unaudited consolidated net liabilities of approximately HK$197.0 million as at 30 September 2001 and as adjusted for (i) the issue of 390,000,000 new Shares for the acquisition of an approximately 1.99% of interest in Hong Kong Satellite in October 2001; (ii) the issue of an aggregate of 120,400,000 new Shares upon the exercise of the underlying share options between January 2002 and March 2002; (iii) the placing of 50,000,000 new Shares in January 2002; and (iv) the issue of an aggregate of 641,342,906 new Shares pursuant to the Company’s debt restructuring exercise as referred to in the Company’s shareholders’ circular dated 28 January 2002) to approximately HK$511.4 million after the completion of the Placing Agreements and the Subscription Agreement. On a per Share basis, the Company’s net asset backing per Share would be increased by approximately 40% from a consolidated net tangible asset value of approximately HK$0.0988 per Share (based on an aggregate of 3,201,020,651 Shares in issue before the completion of the Placing Agreements and the Subscription Agreement) to a consolidated net tangible asset value of approximately HK$0.1386 per Share (based on an aggregate of 3,688,520,651 Shares to be in issue after the completion of the Placing Agreements and the Subscription Agreement). In this regard, we consider that the improvement in the Company’s net asset backing per Share is attributable to, inter alia, (i) the funding to be derived from the Placing Agreements on which the completion of the Subscription Agreement is heavily reliant given that approximately 80% (approximately HK$156 million) of the amount of net proceeds to be derived from the Placing Agreements (of approximately HK$195 million) will be designated towards funding the Subscription Agreement; and (ii) the enlargement in the Company’s capital base as a result of the issue of an aggregate of 487,500,000 new Shares in relation thereto. We consider that such an improvement in the Company’s net asset backing per Share to be in the interests of the Company and the Shareholders (including the Independent Shareholders) as a whole.

On gearing level of the Group

As referred to in the Company’s interim report for the six months ended 30 September 2001, the Company recorded unaudited consolidated net deficiency of approximately HK$197.0 million and aggregate bank borrowings of approximately HK$591.8 million as at 30 September 2001. In other words, the Group was significantly over-geared (i.e. the Group’s aggregate bank borrowings had exceeded the Group’s

– 28 –

LETTER FROM CHATERON

net deficiency as at 30 September 2001) as at 30 September 2001 and we were informed by the Directors that following, inter alia, the assignment in January 2002 of the Group’s indebtedness by certain creditor banks of the Group of an aggregate amount of approximately HK$316 million to Mr Chu and the issue of 283 Preference Shares at a price equal to their nominal value of HK$1,000,000 each to Mr Chu to settle the corresponding amount of indebtedness assigned to him, the Group’s outstanding bank borrowings as at 31 March 2002 was reduced to approximately HK$269.1 million. Using this figure as a reference and based on the Company’s proforma consolidated adjusted unaudited net tangible asset value of approximately HK$511.4 million as referred to in the sub-paragraph headed “On net asset value of the Group” above, the Group’s resultant proforma gearing level after the completion of the Subscription Agreement would be approximately 53%. Therefore, we noted that there would be an improvement in the Group’s gearing level after the completion of the Subscription Agreement. Furthermore, we have reviewed the latest consolidated unaudited management accounts of Hong Kong Satellite as at 28 February 2002, which was made available to us by the Directors, from which we noted that Hong Kong Satellite did not have any bank borrowings as at 28 February 2002. Therefore, we consider that the completion of the Subscription Agreement would not result in any increase in the existing gearing level of the Group.

On the financial results of the Group

We noted that the Company recorded audited consolidated net loss attributable to Shareholders of approximately HK$323.3 million for the year ended 31 March 2001, and unaudited consolidated net loss attributable to Shareholders of approximately HK$40.0 million for the six months ended 30 September 2001.

As discussed above, we were informed by the Directors that Hong Kong Satellite is expected to become fully operational (i.e. being determined as the time when HKSTG’s two satellites shall be launched and shall begin to recognize revenue for HKSTG) by the year 2005. Therefore, we consider that the completion of the Subscription Agreement would not generate any immediate revenue or earnings contribution to the Group. However, we were informed by the Directors that during the present start-up stage of the business operations of Hong Kong Satellite before the commencement of commercial operations in 2005, the aggregate recurrent costs and expenses which are expected to be incurred by Hong Kong Satellite would largely comprise sales and marketing expenses, and that such costs and expenses are expected by the Directors to be absorbed by the available funding resources of Hong Kong Satellite. In this regard, we were further informed by the Directors that Hong Kong Satellite is in active discussions and negotiations with third party financiers regarding the advancement of project finance loans which, if proceeded with, would be of such amounts which are capable to cover (i) the estimated recurrent costs and expenses (being sales and marketing expenses) to be incurred by Hong Kong Satellite during the course of the next two to three years prior to commencement of full operation (i.e. being determined as the time when HKSTG’s two satellites shall be launched and shall begin to recognize revenue for HKSTG) by the year 2005; and (ii) the estimated running costs of Hong Kong Satellite upon commencement of full operation (i.e. being determined as the time when HKSTG’s two satellites shall be launched and shall begin to recognize revenue for HKSTG) by the year 2005, which are expected to comprise management and administration expenses, sales and marketing expenses and satellite systems maintenance expenses. We consider that in the interim stage

– 29 –

LETTER FROM CHATERON

prior to the successful procurement by Hong Kong Satellite of any project finance arrangements, the Group would only have a resultant approximately 4% beneficial shareholding in Hong Kong Satellite after the completion of the Subscription Agreement and that the Group’s attributable share of approximately 4% of Hong Kong Satellite’s aggregate costs and expenses is unlikely to generate any significant and adverse impact on the financial results of the Group.

7. Change in shareholding structure of the Company as a result of the Subscription Agreement

As referred to in the letter from the Chairman as set out on pages 4 to 13 of the Circular, the Consideration payable by the Company for the Subscription Agreement of US$20 million (equivalent to approximately HK$156 million) shall be satisfied by way of part of the proceeds to be derived from the Placing Agreements.

In this regard, we noted that as a result of the completion of the Placing Agreements (on which the completion of the Subscription Agreement is heavily reliant given that funding of the Consideration payable by the Company under the Subscription Agreement shall be derived from the proceeds of the Placing Agreements), (i) the beneficial interests of Mr Chu and his associates in the Company would be diluted by approximately 4.25% from approximately 32.22% to approximately 27.97%; and (ii) the Independent Shareholders’ interests (being the beneficial interests of the Shareholders other than Mr Chu and his associates) would be increased by approximately 4.25% from approximately 67.78% to approximately 72.03%. We consider that the dilution in the aggregate beneficial interest of Mr Chu and his associates in the Company as referred to above is attributable to the issue of an aggregate of 487,500,000 new Shares pursuant to the Placing Agreements, on which the completion of the Subscription Agreement is heavily reliant as the proceeds from the Placing Agreements provide the requisite funding in satisfying the Consideration payable by the Company under the Subscription Agreement. In this regard, we noted that Mr Chu and his associates shall remain to be the single largest shareholder of the Company after the completion of the Subscription Agreement who, also being collectively the controlling shareholder with an aggregate beneficial shareholding of approximately 48.30% in Hong Kong Satellite after the completion of the Subscription Agreement, shall continue to provide its stewardship function towards the growth and development of the Group’s businesses in the technology field such as the Group’s investment in Hong Kong Satellite. Therefore, we consider that given the mechanics of the Subscription Agreement, the change in the Company’s shareholding structure as referred to above to be acceptable.

RECOMMENDATION

We have considered the merits of the Subscription Agreement based on our evaluation in the preceding paragraphs of this letter, which can be summarized as follows:–

(i) the entering into by the Company of the Subscription Agreement would enable the Company to diversify its businesses into the satellite industry which possesses significant growth and development potentials, in view of the geographical penetration and coverage of satellite transmission usage in the PRC which capitalizes on the networks of the existing cable operators, Direct Broadcast Satellite (DBS) and wireless communications markets as well as the benefit of the support by the PRC government towards the development of a national satellite industry;

– 30 –

LETTER FROM CHATERON

(ii) the existing shareholding structure of HKSTG, which enables full interaction between the shareholders of HKSTG (namely, ISM, CSIG and CSOC) under which each shareholder of HKSTG shall be able to derive complementary and synergistic benefits from the functional responsibility, skills, know-hows, experience and expertise of any or all of the other shareholders on a “one-stopshop” basis. This effectively enables HKSTG to minimize its manufacturing and operating costs and thereby to maximize its profit margin, and hence potentials of revenue and earnings contributions to the Group;
(iii) the fact that the Group intends to hold its interest in Hong Kong Satellite as a long term investment which would broaden and strengthen the Group’s income stream in the long run;
(iv) the fact that the independent business valuation of Hong Kong Satellite as at 28 February 2002, being approximately HK$14,270 million as at 28 February 2002, demonstrates an increase of approximately 14% when compared with the corresponding independent business valuation of Hong Kong Satellite of approximately HK$12,500 million as at 31 July 2001, which we consider is mainly attributable to a reduction in the estimated production cost per satellite by about 31% as a result of the execution of the Satellite Purchase Agreement, hence enabling an increase in profit margins from satellite sales;
(v) the fact that the senior management of Hong Kong Satellite possesses a wealth of key personnel whose experience and expertise are relevant to the satellite industry, and which is therefore of paramount importance to the future growth and development of Hong Kong Satellite; and
(vi) the fact that there would be an improvement in the net asset value per Share of the Company by approximately 40% after the completion of (inter alia) the Subscription Agreement, which is mainly attributable to the funding derived from the Placing Agreements (and on which the completion of the Subscription Agreement is heavily reliant), as well as an overall improvement in the Group’s gearing level which would be brought down from an over-geared position (based on the Company’s consolidated accounts as at 30 September 2001) to about 53% mainly due to the enlargement in the Group’s net asset backing after the completion of (inter alia) the Subscription Agreement.

On the other hand, we also noted that the business operation of Hong Kong Satellite is currently in its early stages of development and that commercial operation of Hong Kong Satellite (i.e. being determined as the time when HKSTG’s two satellites shall be launched and shall begin to recognize revenue for HKSTG) is expected to commence by the year 2005. Furthermore, the satellite business is a capital-intensive business and we were informed by the Valuer that HKSTG would require adequate funding support over the next three to four years to enable it to sustain its revenue and operating expenses in the model adopted by the Valuer during the Forecast Period from 2002 to 2014. In addition, the Company shall have an approximately 4% interest in Hong Kong Satellite after the completion of the Subscription Agreement and, as referred to our discussion in the sub-paragraph headed “On gearing level of the Group” of the paragraph headed “Financial effects on the Group as a result of the Subscription Agreement” above, the Group was significantly over-geared with aggregate bank borrowings of approximately HK$591.8 million against a consolidated net deficiency of approximately HK$197.0 million as at 30 September 2001 and

– 31 –

LETTER FROM CHATERON

which feature was also supported by the qualification by the Company’s auditors over the going concern status of the Group as referred to in the auditors’ report for the year ended 31 March 2001, the text of which is set out in Appendix I to the Circular. Based on the foregoing, we have therefore identified the following risk factors inherent in the Subscription Agreement for the attention of the Independent Shareholders in the course of their evaluation of the Subscription Agreement:–

(i) the fact that HKSTG does not possess any proven track record of successful operation as at the Latest Practicable Date and therefore the Company’s investment in Hong Kong Satellite may be of a highly risky nature;
(ii) the satellite business is highly capital-intensive and there is no assurance that such financing arrangements will be available on terms acceptable to Hong Kong Satellite, as well as any variances in the cost of financing and the gearing level of Hong Kong Satellite (in the event debt financing were to be incurred by Hong Kong Satellite) which may have a possible impact on the overall business valuation of Hong Kong Satellite; and
(iii) considerations over the going concern status of the Group which may undermine the ability of the Group to provide continuing financial support to the future operations of Hong Kong Satellite, in the event where either the Company or HKSTG were to be unable to procure the relevant funding.

In the course of the Independent Shareholders’ evaluation of their decision as to whether or not to approve the Subscription Agreement at the SGM, we would recommend the Independent Board Committee to advise the Independent Shareholders to weigh carefully as to their acceptances between the merits and risk factors inherent in the Subscription Agreement as referred to above. However, we consider that there is a possibility whereby any or all of the risk factors as identified above may or may not materialize, whilst the merits of the Subscription Agreement are mostly our factual observations. Therefore, weighing between the respective certainties underlying the materialization of the merits and the risk factors inherent in the Subscription Agreement and having taken into account the principal factors and reasons referred to above in this letter, we consider that the Subscription Agreement is in the overall interests of the Company and the Shareholders (including the interests of the Independent Shareholders) as a whole, and that the terms and conditions of the Subscription Agreement are fair and reasonable so far as the interests of the Independent Shareholders are concerned. Accordingly, we would advise the Independent Board Committee to recommend the Independent Shareholders to vote in favour of the resolution to be proposed at the SGM to consider and, if thought fit, approve the Subscription Agreement at the SGM.

Yours faithfully, For and on behalf of

Chateron Corporate Finance Limited Christopher Wong Director

– 32 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

1. SHARE CAPITAL

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

HK$

Authorised:

6,840,000,000 Shares 684,000,000 316 Preference Shares 316,000,000 Issued and fully paid: 3,201,020,651 Shares as at the Latest Practicable Date 320,102,065 120 Preference Shares as at the Latest Practicable Date 120,000,000

Issued and fully paid:

Based on the issued share capital as at the Latest Practicable

Date and upon issue of Shares on completion of the Placing Agreements and the Sky Citi-Link Agreement and assuming that a maximum number of Shares are issued pursuant to the exercise in full of the Options, and conversion in full of the Preference Shares (assuming a conversion price of HK$0.40 per Share), the issued share capital will be:

3,201,020,651 Shares as at the Latest Practicable Date 487,500,000 Shares to be issued on completion of the Placing Agreements 107,272,727 Shares to be issued on completion of the Sky Citi-Link Agreement 78,500,000 Shares to be issued on exercise in full of the Options 300,000,000 Shares to be issued on conversion in full of the Preference Shares 4,174,293,378	320,102,065 48,750,000 10,727,273 7,850,000 30,000,000
	417,429,338

Options

On 11 September 1996, the Company adopted a share option scheme under which the Directors may, at their discretion, invite any employees or directors of the Group to take up options to subscribe for Shares at any time during the period of three years commencing on the expiry of six months after the date upon which the options are accepted. The maximum number of Shares in respect of which Options may be granted may not exceed 10% of the issued share capital of the Company excluding any Shares issued on the exercise of Options from time to time.

The number of Shares fall to be issued pursuant to an exercise of all outstanding Options as at the Latest Practicable Date was 78,500,000 with an exercise price of between HK$0.10 and HK$0.378 per Share.

– 33 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Preference Shares

Preference Shares in an aggregate principal amount of HK$283 million were issued in February 2002 to settle indebtedness of the Group assigned to Mr Chu as detailed in the circular of the Company dated 28 January 2002. The Preference Shares are convertible in whole or in part into Shares at a conversion price per Share equal to the lower of (i) HK$0.40 and (ii) the average of the 10 lowest daily closing prices per Share on the Stock Exchange during the 30 days immediately prior to the date of issue of the conversion notice (subject to adjustments) at any time from the business day after the date of issue of the Preference Shares but prior to the seventh business day before the third anniversary of the date of issue of the Preference Shares.

Unless previously converted, the Company may redeem all but not part of the Preference Shares at their total outstanding principal amount on the third anniversary from the date of issue of the Preference Shares.

The Preference Shares confer upon its holder the right to receive, in priority to the holders of any other class of shares in the capital of the Company, a fixed cumulative cash dividend payable on the principal amount outstanding under the Preference Shares at the rate of 1% per annum. On a return of capital on a winding-up or otherwise, the Preference Shares will rank in priority to any other class of shares in the capital of the Company, provided that the assets of the Company available for distribution to its members will be applied first towards arrears or accruals of the fixed dividend payable on the Preference Shares before repaying the capital paid up on any Preference Share or any other class of shares in the capital of the Company.

The Preference Shares do not entitle its holder to any voting rights at general meetings of the Company, except on a resolution of the Shareholders to vary or abrogate the rights of the holders of Preference Shares. The Preference Shares are not listed and may be assigned or transferred with the prior approval from the Stock Exchange, if so required.

As at the Latest Practicable Date, 120 Preference Shares are in issue and outstanding. Assuming full conversion of all such Preference Shares at a conversion price of HK$0.40 per Share, 300,000,000 Shares will fall to be issued.

– 34 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

2. FINANCIAL SUMMARY OF THE GROUP

Set out below is the financial summary of the Group for the three years ended 31 March 2001 extracted from the Company’s 2001 annual report.

FINANCIAL SUMMARY

Results

Turnover
Operating (loss) profit
Share of results of associates
(Loss) profit before taxation
Taxation (charge) credit
(Loss) profit before minority interests
Minority interests
(Loss) profit for the year
Financial position
Total assets
Total liabilities
Minority interests
Surplus (Deficiency) of
shareholders’ funds

For the year ended 31 March
1999
2000
2001
HK$’000
HK$’000
HK$’000
499,383
776,690
130,936
(561,026)
26,737
(314,711)
541
1,825
(8,761)
(560,485)
28,562
(323,472)
123
–
–
(560,362)
28,562
(323,472)
2,027
712
152
(558,335)
29,274
(323,320)
At 31 March
1999
2000
2001
HK$’000
HK$’000
HK$’000
1,439,592
793,724
398,181
(1,356,610)
(694,415)
(638,882)
(864)
(152)
–
82,118
99,157
(240,701)

Unqualified report was issued in 1999 and 2000 with particular attention was being drawn by auditors as regard to the fundamental uncertainties in relation to the going concern of the Group. Qualified report was issued by auditors in 2001, for details please see page 36 to page 64 of this circular.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Set out below is an extract from the audited financial statements of the Group for the year ended 31 March 2001 together with notes thereto. References to page numbers are to page numbers of such audited financial statements of the Company for the year ended 31 March 2001.

AUDITORS’ REPORT

==> picture [185 x 60] intentionally omitted <==

==> picture [81 x 52] intentionally omitted <==

TO THE SHAREHOLDERS OF WAH TAK FUNG HOLDINGS LIMITED

(incorporated in Bermuda with limited liability)

We have audited the financial statements on pages 21 to 60 which have been prepared in accordance with accounting principles generally accepted in Hong Kong.

Respective responsibilities of directors and auditors

The Company’s directors are responsible for the preparation of the financial statements which give a true and fair view. In preparing financial statements which give a true and fair view it is fundamental that appropriate accounting policies are selected and applied consistently.

It is our responsibility to form an independent opinion, based on our audit, on those statements and to report our opinion to you.

Basis of opinion

We conducted our audit in accordance with Statements of Auditing Standards issued by the Hong Kong Society of Accountants. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the circumstances of the Company and the Group, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to whether the financial statements are free from material misstatement. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. We believe that our audit provides a reasonable basis for our opinion.

Fundamental uncertainty relating to the going concern basis

In forming our opinion, we have considered the adequacy of the disclosures made in note 2 to the financial statements which explains that events of default have arisen under certain bank loans and credit facility agreements entered into by the Group. As a result, the relevant bank borrowings have become repayable on demand and have been reclassified as current liabilities. Accordingly, the Group is currently dependent upon the continued support of its bankers.

– 36 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Against this background the directors are taking active steps to refinance the Group. As explained in note 38 to the financial statements, since the year end the Group raised HK$79,000,000 by way of placing of shares in the Company. Also, the directors are currently in discussion with the Group’s bankers for the rescheduling of the Group’s borrowings. At the same time, the directors are seeking additional equity funds.

Provided that the Group’s bankers continue to support the Group until such time as rescheduling arrangements can be agreed and put in place, the directors are satisfied that the Group will be able to meet in full its financial obligations as they fall due for the foreseeable future. The financial statements have been prepared on a going concern basis, the validity of which depends upon rescheduling arrangements and future funding being available. The financial statements do not include any adjustments that may result from the failure to obtain such funding.

We consider that the appropriate disclosures have been made in respect of the above fundamental uncertainty. However, in view of the extent of the uncertainty relating to the Group’s rescheduling arrangements, we disclaim our opinion in respect of the fundamental uncertainty described in above.

Disclaimer of Opinion

Because of the significance of the fundamental uncertainty relating to the going concern basis, we are unable to form an opinion as to whether the financial statements give a true and fair view of the state of affairs of the Company and the Group at 31 March 2001 or of the loss and cash flows of the Group for the year then ended and as to whether the financial statements have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance.

Deloitte Touche Tohmatsu Certified Public Accountants

Hong Kong, 26 July 2001

– 37 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

CONSOLIDATED INCOME STATEMENT

For the year ended 31 March 2001

Notes Turnover 4 Cost of properties sold and services rendered Provision for estimated loss on properties held for sale Gross (loss) profit Other revenue Administrative expenses Property expenses Deficit arising from revaluation of investment properties (Loss) profit from operations 5 Impairment loss arising in respect of premium on acquisition of an associate 14 Impairment loss arising in respect of deposits for acquisition of investments 15 Gain on disposal of associates Investment income, net 6 Finance costs 7 Interest income Share of results of associates (Loss) profit before taxation Taxation 9 (Loss) profit before minority interests Minority interests Net (loss) profit for the year 10 (Loss) earnings per share 11 Basic Diluted	2001 HK$’000 130,936 (167,781) (29,261) (66,106) 3,709 (31,698) (8,775) (51,586) (154,456) (17,581) (45,835) 4,796 – (101,863) 228 (8,761) (323,472) – (323,472) 152 (323,320) (23.7 cents) N/A	2000 HK$’000 776,690 (632,192) (3,000) 141,498 6,548 (30,503) (16,803) – 100,740 – – – 768 (75,643) 872 1,825 28,562 – 28,562 712 29,274 3.7 cents 3.6 cents

– 38 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

BALANCE SHEETS

At 31 March 2001

Notes Non-current assets Tangible fixed assets 12 Interests in subsidiaries 13 Interests in associates 14 Deposits for acquisition of investments 15 Current assets Properties held for sale 16 Trade and other receivables 17 Taxation recoverable Bank balances and cash Current liabilities Trade and other payables 18 Deposits received Amount due to a related company 19 Bank borrowings – due within one year 20 Net current liabilities	The Group 2001 2000 HK$’000 HK$’000 278,634 593,323 – – 2,823 32,548 – 23,000 281,457 648,871 104,000 133,867 7,585 8,257 – 896 5,139 1,833 116,724 144,853 160,790 83,550 6,991 7,678 – 4,692 467,201 572,408 634,982 668,328 (518,258) (523,475) (236,801) 125,396	The Company 2001 2000 HK$’000 HK$’000 – – 228,769 505,957 – – – – 228,769 505,957 – – 222 251 – – 2,547 281 2,769 532 3,158 650 – – – – – – 3,158 650 (389) (118) 228,380 505,839

– 39 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Notes Capital and reserves Share capital 21 Reserves 23 Minority interests Non-current liabilities Bank borrowings – due after one year 20 Debentures 24 Amounts due to subsidiaries 25 Amount due to an associate 26	The Group 2001 2000 HK$’000 HK$’000 149,578 99,141 (390,279) 16 (240,701) 99,157 – 152 – 2,287 3,900 23,400 – – – 400 3,900 26,087 (236,801) 125,396	The Company 2001 2000 HK$’000 HK$’000 149,578 99,141 (390,279) (74,335) (240,701) 24,806 – – – – 3,900 23,400 465,181 457,633 – – 469,081 481,033 228,380 505,839

The financial statements on pages 21 to 60 were approved by the Board of Directors on 26 July 2001 and are signed on its behalf by:

Lu Xin Director

Chan King Hung Director

– 40 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

CONSOLIDATED STATEMENT OF RECOGNISED GAINS AND LOSSES

For the year ended 31 March 2001

(Deficit) surplus arising from revaluation of investment properties not recognised in the income statement Net (loss) profit for the year Total recognised (losses) gains	2001 HK$’000 (56,254) (323,320) (379,574)	2000 HK$’000 69,291 29,274
		98,565

– 41 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

CONSOLIDATED CASH FLOW STATEMENT

For the year ended 31 March 2001

Notes NET CASH INFLOW FROM OPERATING ACTIVITIES 28 RETURNS ON INVESTMENTS AND SERVICING OF FINANCE Interest paid Interest received Dividend received NET CASH OUTFLOW FROM RETURNS ON INVESTMENTS AND SERVICING OF FINANCE TAXATION Hong Kong Profits Tax refunded INVESTING ACTIVITIES Proceeds from disposal of associates Proceeds from disposal of tangible fixed assets other than properties Proceeds from disposal of investments in securities Deposits paid for acquisition of investments Purchase of tangible fixed assets Investment in an associate NET CASH OUTFLOW FROM INVESTING ACTIVITIES NET CASH INFLOW BEFORE FINANCING FINANCING 29 Repayments of bank loans Repayment to a related company Expenses on issue of shares and debentures Proceeds from issue of shares Proceeds from issue of debentures New bank loans raised NET CASH OUTFLOW FROM FINANCING	2001 HK$’000 96,351 (26,318) 228 838 (25,252) 896 7,341 – – (22,835) (234) – (15,728) 56,267 (109,392) (4,692) (3,650) 62,875 – – (54,859)	2000 HK$’000 619,885 (62,456) 872 – (61,584) 174 – 17,521 3,873 (23,000) (20,486) (5,000) (27,092) 531,383 (584,501) – (2,302) 29,060 23,400 2,755 (531,588)

– 42 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Notes INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR ANALYSIS OF THE BALANCES OF CASH AND CASH EQUIVALENTS Bank balances and cash Bank overdrafts	2001 HK$’000 1,408 445 1,853 5,139 (3,286) 1,853	2000 HK$’000 (205) 650 445 1,833 (1,388) 445

– 43 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 31 March 2001

1. GENERAL

The Company is incorporated in Bermuda as an exempted company under the Companies Act 1981 of Bermuda (as amended) and its shares are listed on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”).

The Company acts as an investment holding company. Its subsidiaries are principally engaged in property investment and development, provision of building management services and investment holding.

2. BASIS OF PREPARATION OF FINANCIAL STATEMENTS

In preparing the financial statements, the directors have given careful consideration to the going concern status of the Group in the context of the Group’s current liquidity difficulties.

Events of default have arisen under certain bank loans and credit facility agreements entered into by the Group. As a result, the relevant bank borrowings have become repayable on demand and have been reclassified as current liabilities. Accordingly, the Group is currently dependent upon the continued support of its bankers.

3. SIGNIFICANT ACCOUNTING POLICIES

The financial statements have been prepared under the historical cost convention, as modified for the revaluation of investment properties.

The financial statements have been prepared in accordance with accounting principles generally accepted in Hong Kong. The principal accounting policies which have been adopted are as follows:

Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries made up to March 31 each year.

The results of subsidiaries and associates acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate.

Goodwill or capital reserve arising on the acquisition of subsidiaries, which represents the difference between the fair value of the purchase consideration and the fair value ascribed to the separable net assets at the date of acquisition, is dealt with through reserves in the year of acquisition.

On the disposal of a subsidiary, the attributable amount of goodwill previously eliminated against or credited to reserves is included in the determination of the profit or loss on disposal of the subsidiary.

All significant inter-company transactions and balances within the Group have been eliminated on consolidation.

Revenue recognition

Revenue from sales of properties is recognised on the execution of a legally binding purchase and sales agreement.

Rental income, including rentals invoiced in advance from properties let under operating leases, is recognised on a straight line basis over the respective leases.

Building management and agency fees are recognised when services are rendered.

Dividend income from investments is recognised when the Group’s rights to receive payment have been established.

– 44 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Revenue from the sale of investments in securities is recognised on a trade day basis.

Interest income is accrued on a time basis by reference to the principal outstanding and at the interest rate applicable.

Subsidiaries

A subsidiary is an enterprise in which the Company, directly or indirectly, holds more than half of the issued share capital, or controls more than half of the voting power, or where the Company controls the composition of its board of directors or equivalent governing body.

Investments in subsidiaries are included in the Company’s balance sheet at cost, as reduced by any impairment losses recognised.

Associates

An associate is an enterprise over which the Group is in a position to exercise significant influence, including participation in financial and operating policy decisions.

The consolidated income statement includes the Group’s share of the post-acquisition results of its associates for the year. In the consolidated balance sheet, interests in associates are stated at the Group’s share of the net assets of the associates.

Tangible fixed assets

Tangible fixed assets, other than investment properties, are stated at cost less depreciation. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its present working condition and location for its intended use. Expenditure incurred after the asset has been put into operation, such as repairs and maintenance and overhaul costs, is normally charged to the income statement in the period in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the asset, the expenditure is capitalised as an additional cost of the asset.

The gain or loss arising from disposal or retirement of an asset is determined as the difference between the sale proceeds and the carrying amount of the asset and is recognised in the income statement.

Where the recoverable amount of an asset has declined below its carrying amount, the carrying amount is reduced to reflect the decline in value. In determining the recoverable amount of assets, expected future cash flows are not discounted to their present values.

Depreciation is provided to write off the cost of tangible fixed assets, other than investment properties, over their estimated useful lives and after taking into account their estimated residual value, using the straight line method, at the following rates per annum:

Furniture, fixtures and equipment	20%
Leasehold improvements	20%
Motor vehicles	20% – 25%

Investment properties

Investment properties are completed properties which are held for their investment potential, any rental income being negotiated at arm’s length.

Investment properties are stated at their open market value based on professional valuations at the balance sheet date. Any surplus or deficit arising from the revaluation of investment properties is credited or charged to the investment property revaluation reserve unless the balance of the reserve is insufficient to cover a deficit, in which case the excess of the deficit over the balance on the investment property revaluation reserve is charged to the income statement. When a deficit has previously been charged to the income statement and a revaluation surplus subsequently arises, this surplus is credited to the income statement to the extent of the deficit previously charged.

On subsequent disposal of an investment property, the balance on the investment property revaluation reserve attributable to that property is transferred to the income statement.

– 45 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

No depreciation is provided on investment properties except where the unexpired term of the relevant lease is 20 years or less.

Properties held for sale

Properties held for sale are stated at the lower of cost and net realisable value. Cost includes interest, finance charges, professional fees and other direct costs attributable to such properties until they reach a marketable state. Net realisable value represents the estimated selling price less all costs to completion and costs to be incurred in marketing and selling.

Taxation

The charge for taxation is based on the results for the year as adjusted for items which are non-assessable or disallowed. Certain items of income and expense are recognised for tax purposes in a different accounting period from that in which they are recognised in the financial statements. The tax effect of the resulting timing differences, computed under the liability method, is recognised as deferred taxation in the financial statements to the extent that it is probable that a liability or asset will crystallise in the foreseeable future.

Retirement benefits cost

The amount of contributions payable to the Group’s defined contribution retirement benefit scheme is charged to the income statement.

Cash equivalents

Cash equivalents represent short term, highly liquid investments which are readily convertible into known amounts of cash and which were within three months of maturity when acquired, less advances from banks repayable within three months from the date of the advances.

– 46 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

4. TURNOVER AND SEGMENTAL INFORMATION

The Group’s turnover and (loss) profit before taxation were entirely derived from activities carried out in Hong Kong. An analysis of the Group’s turnover and (loss) profit before taxation, analysed by principal activities are as follows:

Proceeds from sale of investment properties* Proceeds from sale of properties held for sale Rental income from properties Building management and agency fees Deficit arising from revaluation of investment properties Provision for estimated loss on properties held for sale Impairment loss arising in respect of premium on acquisition of an associate Impairment loss arising in respect of deposits for acquisition of investments Gain on disposal of associates Finance costs Interest income Share of results of associates Others (Loss) profit before taxation	Turnover 2001 2000 HK$’000 HK$’000 105,000 734,580 485 4,146 20,346 32,397 5,105 5,567 130,936 776,690	Contribution to (loss) profit before taxation 2001 2000 HK$’000 HK$’000 (62,175) 107,824 (121) (182 2,995 5,958 766 944 (58,535) 114,544 (51,586) – (29,261) (3,000 (17,581) – (45,835) – 4,796 – (101,863) (75,643 228 872 (8,761) 1,825 (15,074) (10,036 (323,472) 28,562	Contribution to (loss) profit before taxation 2001 2000 HK$’000 HK$’000 (62,175) 107,824 (121) (182 2,995 5,958 766 944 (58,535) 114,544 (51,586) – (29,261) (3,000 (17,581) – (45,835) – 4,796 – (101,863) (75,643 228 872 (8,761) 1,825 (15,074) (10,036 (323,472) 28,562
			114,544 – (3,000 – – – (75,643 872 1,825 (10,036
			28,562

* These amounts included proceeds from disposal of subsidiaries engaged in property holding business.

5. (LOSS) PROFIT FROM OPERATIONS

(Loss) profit from operations has been arrived at after charging: Auditors’ remuneration Depreciation Loss on disposal of tangible fixed assets other than properties Staff costs – Directors’ emoluments_(note 8)_ – Staff wages and salaries – Provident fund – Staff messing and welfare and after crediting: Rental income, net of outgoings of approximately HK$1,248,000 (2000: HK$1,401,000)	2001 HK$’000 610 1,422 661 10,494 11,069 358 82 22,003 19,098	2000 HK$’000 700 1,975 370 3,998 10,947 135 30
		15,110
		30,996

– 47 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

6. INVESTMENT INCOME, NET

Gain on disposal of listed investments in securities 7. FINANCE COSTS Interest on bank borrowings wholly repayable within five years Interest on debentures Interest on other borrowings 8. EMOLUMENTS OF DIRECTORS AND EMPLOYEES (a) Directors’ emoluments are analysed as follows: Fees: Executive Non-executive Independent non-executive Other emoluments to executive directors: Salaries and other benefits Total directors’ emoluments The emoluments of the directors were within the following bands: Nil to HK$1,000,000 HK$1,000,001 to HK$1,500,000 HK$2,000,001 to HK$2,500,000 HK$2,500,001 to HK$3,000,000 HK$3,500,001 to HK$4,000,000	2001 HK$’000 – 2001 HK$’000 (101,467) (142) (254) (101,863) 2001 HK$’000 – – 310 310 10,184 10,494 2001 Number of directors 12 – 1 1 1 15	2000 HK$’000 768 2000 HK$’000 (75,540) (45) (58) (75,643) 2000 HK$’000 – – 60 60 3,938 3,998 2000 Number of directors 13 2 – – – 15

– 48 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

(b) Employees’ emoluments

The five highest paid individuals included 3 (2000: 3) directors, details of whose emoluments are included in the amounts disclosed in (a) above. The emoluments of the remaining 2 (2000: 2) highest paid individuals are as follows:

Salaries and other benefits Retirement benefit scheme contributions	2001 HK$’000 1,705 54 1,759	2000 HK$’000 1,174 54
		1,228

The emoluments of each of the highest paid employees were within the band of nil to HK$1,000,000.

9. TAXATION

No provision for Hong Kong Profits Tax has been made in the financial statements as the Group incurred tax losses for both years.

Details of the unprovided deferred taxation are set out in note 27.

10. NET (LOSS) PROFIT FOR THE YEAR

Of the Group’s net loss for the year of approximately HK$323,320,000 (2000: net profit of HK$29,274,000), a net loss of approximately HK$344,232,000 (2000: HK$108,713,000) has been dealt with in the financial statements of the Company.

11. (LOSS) EARNINGS PER SHARE

The calculation of the basic and diluted (loss) earnings per share is based on the following data:

Earnings

(Loss) earnings for the purposes of basic (loss) earnings per share (net (loss) profit for the year) Effect of dilutive potential ordinary shares: Interest on debentures Earnings for the purposes of diluted earnings per share Number of shares Weighted average number of ordinary shares for the purposes of basic (loss) earnings per share Effect of dilutive potential ordinary shares: Share options Debentures Weighted average number of ordinary shares for the purposes of diluted earnings per share	2001 HK$’000 (323,320) 2001 ’000 1,365,365	2000 HK$’000 29,274 45
		29,319

		2000 ’000 788,695 10,809 22,377
		821,881

No diluted loss per share has been presented for the year ended 31 March 2001 as the exercise of the Company’s outstanding share options and debenture conversion rights would result in a decrease in loss per share.

– 49 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

12. TANGIBLE FIXED ASSETS

THE GROUP COST OR VALUATION At 1 April 2000 Additions Disposals Deficit arising from revaluation At 31 March 2001 Comprising: At cost At valuation – 2001 DEPRECIATION At 1 April 2000 Charge for the year Eliminated on disposals At 31 March 2001 NET BOOK VALUES At 31 March 2001 At 31 March 2000	Investment properties HK$’000 590,000 – (205,000) (107,840) 277,160 – 277,160 277,160 – – – – 277,160 590,000	Furniture, fixtures and equipment HK$’000 11,243 234 – – 11,477 11,477 – 11,477 10,082 725 – 10,807 670 1,161	Leasehold improve- ments HK$’000 5,043 – (1,102) – 3,941 3,941 – 3,941 2,945 633 (441) 3,137 804 2,098	Motor vehicles HK$’000 544 – – – 544 544 – 544 480 64 – 544 – 64	Total HK$’000 606,830 234 (206,102 (107,840
					293,122
					15,962 277,160
					293,122
					13,507 1,422 (441
					14,488
					278,634

					593,323

The net book value of the Group’s investment properties comprises:

Properties situated in Hong Kong and held under: – Long leases – Medium-term leases	2001 HK$’000 187,160 90,000 277,160	2000 HK$’000 465,000 125,000
		590,000

Investment properties amounting to approximately HK$191,791,000 (2000: HK$301,115,000) are rented out under operating leases. Particulars of the investment properties are set out on page 61 of the annual report.

The investment properties were revalued at 31 March 2001 by Castores Magi Surveyors Limited, a firm of professional surveyors, on an open market value basis. The net deficit of approximately HK$56,254,000 (2000: net surplus of HK$69,291,000) arising from revaluation has been (charged) credited to the investment property revaluation reserve.

– 50 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

13. INTERESTS IN SUBSIDIARIES

Unlisted shares, at cost Amounts due from subsidiaries _Less:_Impairment losses recognised	THE COMPANY 2001 2000 HK$’000 HK$’000 1,071,061 1,071,061 1,067,474 1,003,643 (1,909,766) (1,568,747) 228,769 505,957	THE COMPANY 2001 2000 HK$’000 HK$’000 1,071,061 1,071,061 1,067,474 1,003,643 (1,909,766) (1,568,747) 228,769 505,957
		505,957

The cost of the unlisted shares is based on the carrying values or the underlying net tangible assets of the subsidiaries attributable to the Group at the date on which the Company became the ultimate holding company of the Group under the group reorganisation taken place in September 1996.

The amounts due from subsidiaries are unsecured, non-interest bearing and do not have fixed repayment terms.

Particulars of the Company’s principal subsidiaries at 31 March 2001 are set out in note 35.

14. INTERESTS IN ASSOCIATES

Share of net assets Premium arising from acquisition of an associate Accumulated amortisation of premium Impairment loss recognised in respect of premium Amount due from an associate	THE GROUP 2001 2000 HK$’000 HK$’000 2,823 10,268 23,441 23,441 (5,860) (1,172) (17,581) – – 22,269 – 11 2,823 32,548	THE GROUP 2001 2000 HK$’000 HK$’000 2,823 10,268 23,441 23,441 (5,860) (1,172) (17,581) – – 22,269 – 11 2,823 32,548
		23,441 (1,172) –
		22,269
		11
		32,548

The Company’s directors have reviewed and examined the operations of the associates and their profitability potential, and are of the opinion that the premium arising on the acquisition of the associate is not recoverable. Accordingly, an impairment loss has been recognised in the current period.

Particulars of the Company’s associates at 31 March 2001 are set out in note 36.

15. DEPOSITS FOR ACQUISITION OF INVESTMENTS

The amount represents deposits paid for acquisition of equity interests in the following companies incorporated in the British Virgin Islands: Union View Investments Holdings Limited (“Union View”) Holdenby Enterprises Limited (“Holdenby”) Drury Profits Limited (“Drury Profits”)* _Less:_Impairment loss recognised	THE GROUP 2001 2000 HK$’000 HK$’000 20,000 20,000 16,004 3,000 9,831 – 45,835 23,000 (45,835) – – 23,000	THE GROUP 2001 2000 HK$’000 HK$’000 20,000 20,000 16,004 3,000 9,831 – 45,835 23,000 (45,835) – – 23,000
		23,000 –
		23,000

– 51 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

On 17 March 2000, a subsidiary of the Company entered into an agreement to acquire a 99% equity interest in Union View for a total consideration of HK$112,500,000. Union View had entered into an agreement with Shenzhen Holinet Industrial Co. Ltd., a company established in the People’s Republic of China (the “PRC”) and engaged in computer network safety systems, to establish a company in the PRC in which Union View would have a 25% equity interest. The agreement is conditional upon, among others, the approval of the shareholders of the Company. As this condition was not fulfilled, the agreement has become null and void and of no further force and effect. The Group is now undergoing legal proceedings to recover the deposit of HK$20,000,000 in respect of the acquisition of investments in Union View.
** On 14 April 2000, a subsidiary of the Company entered into an agreement to acquire a 40% equity interest in Holdenby for a total consideration of HK$32,000,000. Holdenby was in the process of acquiring a 51% equity interest in Hei Long Jiang Sida Paper Co., Ltd., whose principal business is the production and trading of various types of paper and related products. As at the balance sheet date, HK$16,004,000 (2000: HK$3,000,000) was paid as deposit for the investment.

On 29 June 2000, a subsidiary of the Company entered into an agreement to acquire a 60% equity interest in Drury Profits for a total consideration of HK$65,000,000. As represented by the vendor, Drury Profits owns a 85% equity interest in 黑龍江興達導航定位應用技術有限公司 which is principal engaged in the design, integration and operation of Global Positioning Systems Application Systems. As at the balance sheet date, HK$9,831,000 (2000: nil) was remained as deposit for the investment.

For both of the transactions stated above, the conditions precedent such as valuation of the business of and due diligence exercises on the joint ventures could not be fulfilled on or before the deadline for fulfilment of the conditions.

The agreements were lapsed pursuant to the agreements and the deposits should be refunded to the Group. The Group has been exploring every opportunity, including liaison with the relevant authorities in the PRC and seeking their assistance for the recovery of the deposits.

The Company’s directors consider the possibility of recovering the above amounts is doubtful, and therefore the carrying amount of the deposits has been reduced to their estimated recoverable amount of nil.

16. PROPERTIES HELD FOR SALE

THE GROUP

The properties are situated in Hong Kong and held under long leases.

The amount includes properties of approximately HK$104,000,000 (2000: HK$94,357,000) carried at net realisable value.

17. Trade and Other Receivables

Included in trade and other receivables are trade receivables of approximately HK$5,633,000, (2000: HK$5,057,000) comprising mainly rental receivables which are billed in advance and in respect of which settlement is expected upon receipt of billings. The following is an aged analysis of trade receivables at the balance sheet date:

Within 60 days Between 61 – 90 days Over 90 days	THE GROUP 2001 2000 HK$’000 HK$’000 3,174 1,642 276 1,202 2,183 2,213 5,633 5,057	THE GROUP 2001 2000 HK$’000 HK$’000 3,174 1,642 276 1,202 2,183 2,213 5,633 5,057
		5,057

– 52 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

18. Trade and Other Payables

The following is an analysis of trade and other payables at the balance sheet date:

Trade payables with age of 91 days or above Accrued bank loan interest Other payables	THE GROUP 2001 2000 HK$’000 HK$’000 11,501 13,285 141,748 66,203 7,541 4,062 160,790 83,550	THE GROUP 2001 2000 HK$’000 HK$’000 11,501 13,285 141,748 66,203 7,541 4,062 160,790 83,550
		83,550

19. AMOUNT DUE TO A RELATED COMPANY

THE GROUP

At 31 March 2000, the amount was due to Chaton Limited, a wholly owned subsidiary of a shareholder of the Company. The amount was unsecured, non-interest bearing and was fully repaid during the year.

20. BANK BORROWINGS

Bank loans Bank overdrafts Analysed as: Secured Unsecured The bank borrowings bear interest at prevailing market rates and were originally scheduled for repayment as follows: Within one year Between one to two years Between two to five years _Less:_Amounts due within one year and included in current liabilities Amounts due after one year	THE GROUP 2001 2000 HK$’000 HK$’000 463,915 573,307 3,286 1,388 467,201 574,695 462,228 571,620 4,973 3,075 467,201 574,695 345,351 337,595 61,037 147,750 60,813 89,350 467,201 574,695 (467,201) (572,408 – 2,287	THE GROUP 2001 2000 HK$’000 HK$’000 463,915 573,307 3,286 1,388 467,201 574,695 462,228 571,620 4,973 3,075 467,201 574,695 345,351 337,595 61,037 147,750 60,813 89,350 467,201 574,695 (467,201) (572,408 – 2,287
		574,695

		571,620 3,075
		574,695

		337,595 147,750 89,350
		574,695 (572,408
		2,287

– 53 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

21. SHARE CAPITAL

Shares of HK$0.1 each Authorised: At beginning of the year Increase during the year At the end of the year Issued and fully paid: At the beginning of the year Issue of shares Exercise of debenture conversion rights At the end of the year	Number of shares 2001 2000 ’000 ’000 2,000,000 2,000,000 2,000,000 – 4,000,000 2,000,000 991,411 690,000 360,000 301,411 144,370 – 1,495,781 991,411	Share capital 2001 2000 HK$’000 HK$’000 200,000 200,000 200,000 – 400,000 200,000 99,141 69,000 36,000 30,141 14,437 – 149,578 99,141	Share capital 2001 2000 HK$’000 HK$’000 200,000 200,000 200,000 – 400,000 200,000 99,141 69,000 36,000 30,141 14,437 – 149,578 99,141
			200,000
			69,000 30,141 –
			99,141

Changes in the share capital of the Company during the year are as follows:

(a) On 10 April 2000, the Company issued and allotted 90,000,000 shares of HK$0.1 each of the Company to independent investors through a placing agent at HK$0.3 per share. The net proceeds from this placing amounting to HK$26,225,000 were used for general working capital purposes. The new shares were issued under a general mandate granted to the board of directors at the special general meeting of the Company held on 11 February 2000 and ranked pari passu in all respects with the then existing shares of the Company.
(b) On 28 June 2000, the Company issued and allotted 75,000,000 shares of HK$0.1 each of the Company to independent investors through a placing agent at HK$0.165 per share. The net proceeds from this placing amounting to HK$11,919,000 were used for general working capital purposes. The new shares were issued under a general mandate granted to the board of directors on 28 April 2000 and ranked pari passu in all respects with the then existing shares of the Company.
(c) Pursuant to a subscription agreement on 23 June 2000, Mr. Ye Changqing subscribed for 60,000,000 new share of HK$0.1 each of the Company at HK$0.167 per share. The net proceeds from this subscription amounting to approximately HK$10,000,000 were used for repayment of bank borrowings and general working capital purposes. The new shares issued under a general mandate granted to the board of directors at the special general meeting of the Company held on 28 April 2000 and ranked pari passu in all respects with the then existing shares of the Company.
(d) On 1 September 2000, the Company issued and allotted 135,000,000 shares of HK$0.1 each of the Company to independent investors through a placing agent at HK$0.1 per share. The net proceeds from this placing amounting to approximately HK$11,081,000 were used for general working capital purposes. The new shares were issued under a general mandate granted to the board of directors at the special general meeting of the Company held on 28 July 2000 and ranked pari passu in all respects with the then existing shares of the Company.
(e) During the year, debentures with a nominal value of US$2,500,000 (equivalent to HK$19,500,000) were converted to 144,370,000 shares of HK$0.1 each of the Company. The converted shares ranked pari passu in all respects with the then existing shares of the Company.

22. SHARE OPTION SCHEME

The Company has a share option scheme (the “Scheme”) pursuant to which the board of directors of the Company may, at its discretion, grant options to eligible employees, including executive directors of the Company or any of its subsidiaries to subscribe for shares in the Company at a price equal to the higher of the nominal value of the shares and at a price not less than 80% of the average of the closing price of the shares on the Stock Exchange on the five trading days immediate preceding the date of grant of the options. The maximum number of shares in respect of which options may be granted under the Scheme shall not exceed 10% of the issued share capital of the Company from time to time.

– 54 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

The movements of the options granted under the Company’s share option scheme during the year are as follows:

	Number of option shares
Balance at 1 April 1999	–
Granted during the year	94,100,000
Balance at 31 March 2000	94,100,000
Cancelled upon resignation of a director	(14,000,000)
Granted during the year	55,000,000
Balance at 31 March 2001	135,100,000

The balance of outstanding options as at 31 March 2001 comprise:

		Number of total
Date of share		share options	Exercise
options granted	Exercisable period	granted	price
			HK$
20 October 1999	28 April 2000 to 27 April 2003	70,000,000	0.17
1 February 2000	28 August 2000 to 27 August 2003	10,100,000	0.228
2 March 2001	15 September 2001 to 14 September 2004	55,000,000	0.10

23. RESERVES

THE GROUP At 1 April 1999 Issue of shares Expenses on issue of shares and debentures Release upon disposal of investment properties Released upon disposal of subsidiaries Surplus arising from revaluation_(note 12) Net profit for the year At 31 March 2000 Issue of shares Expenses on issue of shares Released upon disposal of investment properties Deficit arising from revaluation(note 12)_ Net loss for the year At 31 March 2001 Reserves attributable to: The Company and subsidiaries Associates	Share premium account HK$’000 447,443 23,919 (2,302) – – – – 469,060 31,938 (3,650) – – – 497,348 497,348 – 497,348	Investment property revaluation Accumulated reserve losses HK$’000 HK$’000 159,256 (593,581) – – – – (204,212) – 70,928 – 69,291 – – 29,274 95,263 (564,307) – – – – (39,009) – (56,254) – – (323,320) – (887,627) – (878,869) – (8,758) – (887,627)	Total HK$’000 13,118 23,919 (2,302) (204,212) 70,928 69,291 29,274
			16 31,938 (3,650) (39,009) (56,254) (323,320)
			(390,279)

			(381,521) (8,758)
			(390,279)

– 55 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

THE COMPANY At 1 April 1999 Issue of shares Expenses on issue of shares and debentures Net loss for the year_(note 10) At 31 March 2000 Issue of shares Expenses on issue of shares Net loss for the year(note 10)_ At 31 March 2001	Share premium account HK$’000 447,443 23,919 (2,302) – 469,060 31,938 (3,650) – 497,348	Contributed Accumulated surplus losses HK$’000 HK$’000 1,029,761 (1,464,443) – – – – – (108,713) 1,029,761 (1,573,156) – – – – – (344,232) 1,029,761 (1,917,388)	Total HK$’000 12,761 23,919 (2,302) (108,713) (74,335) 31,938 (3,650) (344,232) (390,279)

Included in the Group’s accumulated losses above is the following amount which is attributable to the Group’s share of results of its associates:

At 1 April 1999 Share of results for the year At 31 March 2000 Share of results for the year Eliminated upon disposal of interest in associates At 31 March 2001	HK$’000 712 1,825 2,537 (8,761) (2,534) (8,758)

The contributed surplus of the Company represents the difference between the consolidated shareholders’ funds of the subsidiaries at the date on which they were acquired by the Company, and the nominal amount of the Company’s shares issued for the acquisition at the time of the group reorganisation prior to the listing of the Company’s shares on the Stock Exchange.

In addition to the retained profits, under the Companies Act 1981 of Bermuda (as amended), contributed surplus is also available for distribution. However, the Company cannot declare or pay a dividend, or make a distribution out of contributed surplus if:

(a) it is, or would after the payment be, unable to pay its liabilities as they become due; or
(b) the realisable value of its assets would thereby be less than the aggregate of its liabilities and its issued share capital and share premium account.

In the opinion of the directors, the Company had no reserves available for distribution to shareholders at 31 March 2001 and 2000.

– 56 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

24. DEBENTURES

	The Group
	and
	the Company
	HK$’000
Balance at 1 April 1999	–
Issued during the year	23,400
Balance at 31 March 2000	23,400
Exercise of debenture conversion rights	(19,500)
Balance at March 2001	3,900

The debentures bear interest at 3% per annum payable quarterly in arrears and are due in February 2003.

The debentures entitle the holders to convert into shares of HK$0.1 each in the share capital of the Company from the date of issue of debentures up to the maturity date. Subsequent to the balance sheet date, all the debentures were converted into shares of the Company.

The conversion price is the lesser of:

(a) 120% of the average closing price per share on the Stock Exchange over the 15 consecutive trading days prior to the signing of the subscription agreement; and
(b) the higher of 90% of the average closing price per share of the lowest 10 days on the Stock Exchange over the 30 consecutive trading days immediately prior to the date of the conversion notice and the HK$0.1 par value of the shares.

The converted shares shall, when allotted and issued, rank pari passu in all respects with all other shares in issue on the date of conversion.

25. AMOUNTS DUE TO SUBSIDIARIES

THE COMPANY

The amounts are unsecured, non-interest bearing and do not have fixed repayment terms. In the opinion of the directors, no part of the amounts will be repayable within the next twelve months and, accordingly, the amounts are shown as non-current liabilities.

26. AMOUNT DUE TO AN ASSOCIATE

THE GROUP

The amount is unsecured, non-interest bearing and fully repaid during the year.

– 57 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

27. UNPROVIDED DEFERRED TAXATION

At the balance sheet date, the Group had the following net deferred taxation asset which has not been recognised in the financial statements as it is not certain whether the potential taxation benefit will be realised in the foreseeable future.

The major components of the Group’s net deferred taxation asset not recognised are analysed as follows:

Tax effect of timing differences attributable to: Differences between tax allowances and accounting depreciation Tax losses available to set off future assessable profits Net deferred taxation asset not recognised	2001 HK$’000 401 83,007 83,408	2000 HK$’000 434 53,826
		54,260

The amount of net unprovided potential deferred taxation credit for the year is analysed as follows:

Tax effect of timing differences attributable to: Differences between tax allowances and accounting depreciation Tax losses incurred Net deferred taxation credit not recognised	2001 HK$’000 (33) 29,181 29,148	2000 HK$’000 1,026 4,077
		5,103

Deferred taxation has not been provided on the revaluation deficit or surplus arising from the valuation of the leasehold and investment properties as profits arising on the disposal of these assets would not be subject to taxation. Accordingly, the valuation deficit or surplus does not constitute a timing difference for taxation purpose.

The Company did not have any significant unprovided deferred taxation at the balance sheet date or during the year.

28. RECONCILIATION OF (LOSS) PROFIT BEFORE TAXATION TO NET CASH INFLOW FROM OPERATING ACTIVITIES

(Loss) profit before taxation Impairment loss arising in respect of deposits for acquisition of investments Impairment loss arising in respect of premium on acquisition of an associate Depreciation Interest expenses Interest income Investment income, net Gain on disposal of associates Loss on disposal of tangible fixed assets other than properties Deficit arising from revaluation of investment properties Provision for estimated loss on properties held for sale Release of investment property revaluation reserve upon disposal of investment properties Share of results of associates Decrease in investment properties Decrease in properties held for sale Decrease in trade and other receivables Increase in trade and other payables Decrease in deposits received Decrease in amount due to an associate Net cash inflow from operating activities	2001 HK$’000 (323,472) 45,835 17,581 1,422 101,863 (228) – (4,796) 661 51,586 29,261 (39,009) 8,761 205,000 606 672 1,695 (687) (400) 96,351	2000 HK$’000 28,562 – – 1,975 75,643 (872 (768 – 370 – 3,000 (133,284 (1,825 642,343 3,474 8,914 1,025 (8,672 –
		619,885

– 58 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

29. ANALYSIS OF CHANGES IN FINANCING DURING THE YEAR

At 1 April 1999 Disposal of subsidiaries Repayments during the year Advances during the year Issued for cash during the year Issued for the acquisition of an associate (note 30) Expenses on issue of shares and debentures At 31 March 2000 Exercise of debenture conversion rights Repayments during the year Issued for cash during the year Expenses on issue of shares At 31 March 2001	Share capital and premium HK$’000 516,443 – – – 29,060 25,000 (2,302) 568,201 19,500 – 62,875 (3,650) 646,926	Amount due to a related company HK$’000 4,692 – – – – – – 4,692 – (4,692) – – –	Bank loans HK$’000 1,253,910 (98,857) (584,501) 2,755 – – – 573,307 – (109,392) – – 463,915	Debentures HK$’000 – – – – – 23,400 –
				23,400 (19,500 – – –
				3,900

30. NON-CASH TRANSACTIONS

During the year ended 31 March 2000, bank loans amounting to approximately HK$98,857,000 were assigned to the purchaser upon disposal of subsidiaries engaged in property holding business. In addition, new shares were issued as fully paid at a total consideration of HK$25,000,000 as partial settlement for the acquisition of an associate.

31. PLEDGE OF ASSETS

The general credit facilities of the Group are secured by the Group’s investment properties and properties held for sale with an aggregate carrying value of approximately HK$381,160,000 (2000: HK$738,000,000).

32. CAPITAL COMMITMENTS

At the balance sheet date, the Group had the following capital commitments:

Authorised but not contracted for in respect of: Renovation work for investment properties Acquisition of investment Contracted for but not provided in the financial statements in respect of: Renovation work for investment properties Acquisition of investment	2001 HK$’000 – – – – – –	2000 HK$’000 21,642 29,000
		50,642

		1,093 92,500
		93,593

The Company did not have any significant capital commitments at the balance sheet date.

– 59 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

33. CONTINGENT LIABILITIES

At 31 March 2001, the Company provided guarantees to banks to the extent of approximately HK$268,100,000 (2000: HK$378,100,000) in respect of banking facilities granted to certain subsidiaries and an aggregate amount of approximately HK$268,100,000 (2000: HK$378,100,000) was utilised by those subsidiaries.

34. RELATED PARTY TRANSACTIONS

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

Name of company/director	Nature of transaction	2001	2000
		HK’000	HK$’000
Cymbeline Limited	Rental expenses paid by the Group	96	96
Good Harvest Securities	Rental income received by the Group	320	493
Company Limited
	Interest expenses paid by the Group	10	–
Thai Wa Trading Company	Rental income received by the Group	–	155
Mr. Chu Yu Lin, David	Rental income received by the Group	159	216

Mr. Chan King Hung has a beneficial interest in Cymbeline Limited.

Mrs. Chu Ho Miu Hing has a beneficial interest in Good Harvest Securities Company Limited.

Mr. Chan Fook Lai has a beneficial interest in Thai Wa Trading Company.

The above transactions were carried out with reference to the market price.

On 14 April 2000, a subsidiary of the Company entered into an agreement to acquire a 40% equity interest in Holdenby Enterprises Limited, a company wholly owned by a former chairman, Mr. He Chenguang, for total consideration of HK$32,000,000. As at the balance sheet date, HK$16,004,000 was paid as deposit for the investment.

On 29 June 2000, a subsidiary of the Company entered into an agreement to acquire a 60% equity interest in Drury Profits Limited, a company wholly owned by a former chairman, Mr. He Chenguang, for total consideration of HK$65,000,000. As at the balance sheet date, HK$9,831,000 was remained as deposit for the investment.

Subsequently, both of the above transactions were lapsed due to the fact that the conditions precedent could not be fulfilled. Pursuant to the above agreements, the deposit paid should be refunded by Mr. He Chenguang. On 6 March 2001, the Group issued a writ of summons against Mr. He Chenguang for the recovery of the deposits paid for the above investments amounting to HK$25,835,000.

On 18 October 2000, a subsidiary of the Company entered into heads of agreement to acquire a 40% equity interest in Regain Profits Limited, a company wholly owned by a former chairman, Mr. He Chenguang. Subsequently, a cancellation agreement has been signed on 30 October 2000.

In addition, certain banking facilities of the Group are secured by personal guarantees given by Messrs. Chan King Hung and Chu Yu Lin, David and Mrs. Chu Ho Miu Hing, on which no charge was paid by the Group.

– 60 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

35. SUBSIDIARIES

Particulars of the Company’s principal subsidiaries at 31 March 2001 are as follows:

		Percentage of nominal	Issued
	Place of	value of issued	and fully
	incorporation	share capital held	paid up	Principal
Name of subsidiary	and operation	by the Company	share capital	activities
Calorie Limited	Hong Kong	100%	Ordinary	Investment
			HK$20,000	holding
			Deferred*
			HK$14,000
Deep Plan Investments	Hong Kong	100%	Ordinary	Property
Limited			HK$10,000	investment
				and provision
				of building
				management
				services
Fine Point Properties	Hong Kong	100%	Ordinary	Property
Limited			HK$1,955	investment
			Deferred*	and provision
			HK$45	of building
				management
				services, but
				has become
				inactive during
				the year
Mass Come Development	Hong Kong	100%	Ordinary	Property
Limited			HK$200,000	investment
				and provision
				of building
				management
				services
Masterport Holdings	British Virgin	100%	Ordinary	Investment
Limited	Islands		US$2	holding
Pure Fair Investment	Hong Kong	55%	Ordinary	Property
Limited			HK$2	trading
Rich Mode Development	Hong Kong	100%	Ordinary	Property
Limited			HK$10,000	investment
				and provision
				of building
				management
				services
Sanmark Investments	Hong Kong	100%	Ordinary	Property
Limited			HK$200	trading
			Deferred*
			HK$82
Star Cherry Investments	British Virgin	100%	Ordinary	Investment
Limited	Islands		US$100	holding
Tucknam Property	Hong Kong	100%	Ordinary	Property
Management Limited			HK$10,000	management
WTF Digital Technology	British Virgin	100%	Ordinary	Investment
Limited	Islands		US$100	holding

– 61 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

		Percentage of nominal	Issued
	Place of	value of issued	and fully
	incorporation	share capital held	paid up	Principal
Name of subsidiary	and operation	by the Company	share capital	activities
Wah Tak Fung (B.V.I.)	British Virgin	100%	Ordinary	Investment
Limited **	Islands		US$1,000,000	holding
Wah Tak Fung	Hong Kong	100%	Ordinary	Provision of
Management &			HK$10,000	agency services
Agency Limited
WTF Technology	Hong Kong	100%	Ordinary	Investment
Limited			HK$2	holding
Well Trade Development	Hong Kong	100%	Ordinary	Property
Limited			HK$2	investment
			Deferred*	and provision
			HK$2	of building
				management
				services
WTF (Finance) Limited	Hong Kong	100%	Ordinary	Group
			HK$100	financing

The non-voting deferred shares practically carry no rights to dividends or to receive notice of or to attend or vote at any general meeting of the respective companies or to participate in any distributions on winding up.
** Directly held by the Company.

The directors are of the opinion that a complete list of the particulars of all subsidiaries would be of excessive length and therefore the above list discloses only the particulars of those subsidiaries as at 31 March 2001 which principally effect the results or assets of the Group.

None of the subsidiaries had any loan capital outstanding at the end of the year or at any time during the year.

36. ASSOCIATES

Particulars of the associates held indirectly by the Company at 31 March 2001 are as follows:

		Percentage of nominal	Issued
		value of issued share	and fully
	Place of	capital held indirectly	paid up	Principal
Name of associate	incorporation	by the Company	share capital	activities
Grand Million	Hong Kong	25%	Ordinary	Inactive
International Limited			HK$4
M.POS (HK) Limited	Hong Kong	25%	Ordinary	Provision of
			HK$10,000	mobile point
				of sale service

37. RETIREMENT BENEFIT SCHEME

With the implementation of Mandatory Provident Fund Scheme in Hong Kong on 1 December 2000, the Group has maintained the defined contribution scheme registered under the Occupational Retirement Schemes Ordinance (ORSO Scheme) and has obtained an exemption satisfying the requirements of the Mandatory Provident Fund Scheme Ordinance (MPFO).

To comply with MPFO, a Mandatory Provident Fund Scheme with voluntary contributions has been established. Existing ORSO Scheme Members has been given a one-off choice on the MPF Exempted ORSO Scheme and the MPF Scheme. New Employees must join MPF Scheme when it commenced on 1 December 2000.

The amount charged to the income statement represents contributions payable of HK$446,000 (2000: HK$293,000) to the schemes by the Group at rates specified in the rules of the schemes less forfeitures of HK$87,000 (2000: HK$158,000) arising from employees leaving the Group prior to completion of qualifying service period.

– 62 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

At the balance sheet date, the total amount of forfeited contributions, which arose upon employees leaving the retirement benefits schemes and which are available to reduce the contributions payable in future years was HK$7,000 (2000: HK$17,000).

38. POST BALANCE SHEET EVENTS

Pursuant to a subscription agreement on 8 May 2001, Quizzical Holdings Limited subscribed for 130,000,000 new shares of HK$0.1 each of the Company at HK$0.1 per share. The net proceeds from this subscription amounting to approximately HK$13,000,000 were used for repayment of bank borrowings and for general working capital purposes. The new shares were issued under a general mandate granted to the board of directors at the special general meeting of the Company held on 28 July 2000 and ranked pari passu in all respects with the then existing shares of the Company.

On 5 July 2001, the Company issued and allotted 330,000,000 shares of HK$0.1 each of the Company to independent investors at HK$0.2 per share. The net proceeds from this placing amounting to approximately HK$66,000,000 were used for general working capital purposes. The new shares were issued under a general mandate granted to the board of directors at the special general meeting of the Company held on 6 June 2001 and ranked pari passu in all respects with the then existing shares of the Company.

A subsidiary of the Company had on 10 July 2001 entered into a conditional sale and purchase agreement with an independent third party, pursuant to which the subsidiary of the Company shall purchase from the third party such number of shares representing 12% of the issued share capital of World Master Resources Limited whose principal activities are the provision of satellite broadband internet access services in Hong Kong and the PRC at a consideration of HK$25,000,000.

On 20 July 2001, the Company entered into a conditional agreement to acquire 1.5% equity interest in Hong Kong Satellite Technology Holdings Limited (“Hong Kong Satellite”) at a consideration of US$15 million from Mr. Chu Yu Lin, David and together with Mrs. Chu Ho Miu Hing held a total of 51% equity interest of Hong Kong Satellite. On the same date, the Company entered into a conditional subscription agreement to subscribe for 0.5% equity interest in Hong Kong Satellite for a total consideration of US$5 million.

– 63 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

PARTICULARS OF MAJOR PROPERTIES

At 31 March 2001

INVESTMENT PROPERTIES

Location Lease term Type Workingmond Commercial Building, Medium lease Commercial Nos. 5, 7 and 9 Observatory Court, Tsimshatsui, Kowloon Workington Tower, Long lease Commercial Nos. 76 and 80 Bonham Strand, on the Ground Floor and, No. 78 Bonham Strand, on the Upper Floors, Sheung Wan, Hong Kong 1st Floor, Long lease Commercial No. 66A Percival Street, Happy Mansion, Causeway Bay, Hong Kong Workingson Centre, Long lease Commercial Nos. 110 and 112 Chun Yeung Street, North Point, Hong Kong

Type

PROPERTIES HELD FOR SALE

				Percentage
				interest
				held by
Location	Lease term	Type	Floor	the Group
			(Square meter)
Workingbond Commercial Centre,	Long lease	Commercial	3,584	100%
No. 162 Prince Edward Road West,
Mongkok,
Kowloon
Workingview Commercial Building,	Long lease	Commercial	2,298	55%
No. 21 Yiu Wa Street,
Causeway Bay,
Hong Kong

– 64 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Set out below is the unaudited interim results of the Group for the six months ended 30 September 2001 extracted from the Company’s interim report for that period.

CONDENSED CONSOLIDATED INCOME STATEMENT

			Six	months ended
			30 September
			2001	2000
		(unaudited)		(unaudited)
	Note		HK$’000	HK$’000
Turnover			47,816	118,811
Cost of properties sold and services rendered			(36,655) (145,626)
Gross profit (loss)			11,161	(26,815)
Other revenue			2,038	1,885
Administrative expenses			(20,893) (18,106)
Property expenses			(4,027) (4,314)
Loss from operations			(11,721) (47,350)
Finance costs			(25,811) (67,733)
Interest income			389	47
Share of results of associates			(2,814) (3,275)
Loss before minority interests			(39,957) (118,311)
Minority interests			–	152
Net loss for the period			(39,957) (118,159)

Loss per share	1
Basic			(2.3 cents) (9.5 cents)

There were no recognised gains or losses other than the net loss for the period.

Note:–

(1) Loss per Share

The calculation of the basic loss per share is based on the net loss for the period of approximately HK$39,957,000 (six months ended 30 September 2000: net loss of HK$118,159,000) and on weighted average number of 1,769,146,338 (six months ended 30 September 2000: 1,244,670,293) shares in issue during the period.

Diluted loss per share has not been presented for the six months ended 30 September 2001 as the effect of the options granted would be anti-dilutive.

In addition, no disclosure of diluted loss per share for prior period has been made as the exercise price of the options during prior period was higher than the average market price of shares of the Company and the exercise of the Company’s convertible debentures would be anti-dilutive.

– 65 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

3. INFORMATION RELATING TO ACQUISITION OF AN APPROXIMATELY 1.99% INTEREST IN HONG KONG SATELLITE

On 20 July 2001, the Company entered into an agreement with Hong Kong Satellite and Mr Chu for the subscription by the Company of 50 new shares of US$1.00 each in Hong Kong Satellite, representing about 0.5% of its issued share capital as enlarged by these new shares, at a cash consideration of US$5 million (equivalent to about HK$39 million). On 20 July 2001, the Company also entered into an agreement with Mr Chu for the acquisition by the Company of 150 shares of US$1.00 each in Hong Kong Satellite, representing about 1.49% of its issued share capital as enlarged by the 50 new shares referred to above, at a consideration of US$15 million (equivalent to about HK$117 million) which was satisfied by an issue of 390,000,000 new Shares at a price of HK$0.30 each. Details of these transactions are set out in the circular of the Company to Shareholders dated 3 October 2001. Completion of each of these agreements took place in October 2001.

Hong Kong Satellite was incorporated on 15 November 2000. Its principal business activities are described in the section headed “Information on Hong Kong Satellite” in the letter from the Chairman set out in this circular.

The aggregate of the remuneration payable to and benefits in kind receivable by the Directors were not varied in consequence of this acquisition.

4. INFORMATION RELATING TO FINE STRAIGHT AGREEMENT

On 31 December 2001, the Company entered into the Fine Straight Agreement with Goldmile Pacific Limited to acquire the entire issued voting share capital of Fine Straight. Details of this acquisition are set out in the circular of the Company to Shareholders dated 28 January 2002. Completion of this acquisition took place on 5 March 2002.

Fine Straight was incorporated on 8 April 1988 whose sole business is the holding and letting of a property located at Nos. 10-12 Chatham Court, Tsimshatsui, Kowloon, Hong Kong.

The total consideration for the acquisition under the Fine Straight Agreement was HK$79 million which was satisfied by an issue of 197,500,000 new Shares credited as fully paid at HK$0.40 each.

The aggregate of the remuneration payable to and benefits in kind receivable by the Directors were not varied in consequence of the acquisition pursuant to the Fine Straight Agreement.

5. INFORMATION RELATING TO SKY CITI-LINK AGREEMENT

On 1 May 2002, the Company entered into the Sky Citi-Link Agreement with eCyberChina Holdings Limited and Teleinvest Holdings Limited to acquire 80% of the issued share capital of Sky Citi-Link and 80% of the shareholders’ loans granted to Sky Citi-Link. Details of this acquisition are set out in the joint announcement of eCyberChina Holdings Limited, the Company and Asia Tele-Net and Technology Corporation Limited dated 6 May 2002.

Sky Citi-Link was incorporated on 25 February 2000. Its subsidiary, Sky Citi-Link International Telecom Limited, is a traditional telecom carrier and one of the largest teleport operators in Asia holding an External Fixed Telecommunication Network Services Licence granted

– 66 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

by the Office of the Telecommunications Authority in Hong Kong which allows it to operate international telecommunication services with effect from 1 April 2000. In addition, through its subsidiary, Sky Citi-Link has acquired a 127,000 sq ft site at Tai Po Industrial Estate to develop an antenna farm and a high-tech intelligent building which enable the customers of Sky Citi-Link to link up redundancy fibre loop and ATM backbone to local major fixed networks which cover most of the areas in Hong Kong.

The total consideration for the acquisition under the Sky Citi-Link Agreement is HK$59 million to be satisfied on completion of the Sky Citi-Link Agreement by:

(a) an issue of 76,000,000 new Shares to eCyberChina Holdings Limited or as it may direct; and
(b) an issue of 31,272,727 new Shares to Asia Tele-Net and Technology Corporation Limited or as it may direct

all such Shares to be credited as fully paid at HK$0.55 each.

The aggregate of the remuneration payable to and benefits in kind receivable by the Directors will not be varied in consequence of the acquisition pursuant to the Sky Citi-Link Agreement.

– 67 –

ACCOUNTANTS’ REPORT

APPENDIX II

The following is the text of a report, prepared for the purpose of inclusion in this circular, received from the joint reporting accountants of Wah Tak Fung Holdings Limited, PricewaterhouseCoopers, Certified Public Accountants, Hong Kong, and Charles Chan, Ip & Fung CPA Ltd., Certified Public Accountants, Hong Kong.

PricewaterhouseCoopers Certified Public Accountants 22nd Floor Prince’s Building Central, Hong Kong

==> picture [33 x 47] intentionally omitted <==

Charles Chan, Ip & Fung CPA Ltd. 37th Floor, Hennessy Centre 500 Hennessy Road Causeway Bay, Hong Kong

27 May 2002

The Directors

Wah Tak Fung Holdings Limited

Dear Sirs,

We set out below our report on the financial information relating to Hong Kong Satellite Technology Holdings Limited (the “Company”) and its subsidiary (collectively referred to as the “Group”) for the period from 15 November 2000 (date of incorporation of the Company) to 31 December 2001 (the “Relevant Period”) for inclusion in the circular of Wah Tak Fung Holdings Limited (“Wah Tak Fung”) dated 27 May 2002 (the “Circular”) in connection with the subscription of 200 new shares of the Company, representing 1.99% of the existing issued share capital of the Company by Wah Tak Fung.

The Company was incorporated in British Virgin Islands under the International Business Companies Act on 15 November 2000. At the date of this report, the Company has direct interest in the following subsidiary, which has substantially similar characteristics to a private company incorporated in Hong Kong. Details of the subsidiary are as follows:

	Place	Issued and	Attributable	Principal activities
	and date of	paid up	equity	and place of
Company	incorporation	share capital	interest	operation
			%
Hong Kong Satellite	British Virgin Islands	10,000 ordinary	70	Manufacturing of
Technology Group	15 November 2000	shares of		medium size
Limited		US$1.00 each		commercial
				communications
				satellite and operating
				a satellite
				communications
				network in the
				People’s Republic
				of China (“China”).

– 68 –

ACCOUNTANTS’ REPORT

APPENDIX II

All companies now comprising the Group have adopted 31 December as their financial year end date.

We have acted as joint auditors of all companies comprising the Group since their respective dates of incorporation to 31 December 2001. We have examined the audited accounts of all companies comprising the Group for the Relevant Period and carried out such additional procedures as are necessary in accordance with the Auditing Guideline “Prospectuses and the Reporting Accountant” issued by the Hong Kong Society of Accountants.

The financial information as set out in Sections A to D (the “Financial Information”) has been prepared based on the audited accounts of all companies comprising the Group. The directors of the Company and its subsidiary are responsible for preparing the respective accounts, which give a true and fair view. In preparing these accounts, it is fundamental that appropriate accounting policies are selected and applied consistently.

The directors of the Company are responsible for the Financial Information. It is our responsibility to form an independent opinion on the Financial Information.

In our opinion, the Financial Information, for the purpose of this report, gives a true and fair view of the loss of the Group for the Relevant Period and of the state of affairs of the Group and the Company as at 31 December 2001.

A. CONSOLIDATED PROFIT AND LOSS ACCOUNT

For the period from 15 November 2000 (date of incorporation) to 31 December 2001

Notes of Section C Interest income 3 Staff costs Depreciation Waiver of amount due to a related company 18(b) Other operating expenses Operating loss 4 Minority interests Loss for the Relevant Period Loss per share 7	HK$ 109,874 (2,409,842) (61,304) 32,000,000 (41,634,939) (11,996,211) 2,954,829 (9,041,382) (904)

No consolidated statement of recognised gains and losses is presented as loss for the Relevant Period shown above is the only component.

– 69 –

ACCOUNTANTS’ REPORT

APPENDIX II

B. BALANCE SHEETS

As at 31 December 2001

Group Notes of Section C HK$ Fixed assets 10 680,718 Investment in a subsidiary 11 – Current assets Amounts due from directors 12 494,337 Loan to a related company 13 10,087,568 Amount due from a subsidiary 14 – Other receivables, deposits and prepayments 768,674 Bank balances and cash 16,720,116 28,070,695 Current liabilities Other payables and accruals 1,669,624 Net current assets 26,401,071 Total assets less current liabilities 27,081,789 Financed by: Share capital 15 78,390 Reserves 16 29,958,228 Shareholders’ funds 30,036,618 Minority interests (2,954,829) 27,081,789	Company HK$ 680,718
	54,600
	494,337 10,087,568 8,247,446 768,674 16,720,116
	36,318,141 122,240
	36,195,901
	36,931,219

	78,390 36,852,829
	36,931,219 –
	36,931,219

C. NOTES TO THE ACCOUNTS

1. Principal activities

The Group is principally engaged in manufacturing of medium size commercial communications satellite and operating a satellite communications network in China.

The Group has not generated revenue from these activities during the Relevant Period.

– 70 –

ACCOUNTANTS’ REPORT

APPENDIX II

2. Principal accounting policies

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

(a) Basis of preparation

The accounts have been prepared under the historical cost convention and in accordance with accounting principles generally accepted in Hong Kong and comply with accounting standards issued by the Hong Kong Society of Accountants.

(b) Consolidation

The consolidated accounts include the accounts of the Company and its subsidiaries made up to 31 December. Subsidiaries are those entities in which the Company, directly or indirectly, controls more than half of the voting power or issued share capital or controls the composition of the board of directors.

The results of subsidiaries acquired or disposed of during the period are included in the consolidated profit and loss account from the effective date of acquisition or up to the effective date of disposal, as appropriate.

All significant intercompany transactions and balances within the Group are eliminated on consolidation.

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

In the Company’s balance sheet, the investment in a subsidiary is stated at cost less provision for impairment loss. The results of the subsidiary are accounted for by the Company on the basis of dividends received and receivable.

(c) Fixed assets

Fixed assets are stated at cost less accumulated depreciation and accumulated impairment losses. Depreciation of fixed assets is calculated to write off their cost on a straight-line basis over their expected useful lives to the Group. The principal annual rates are as follows:–

Furniture and fixtures, computer and office equipment 20% Leasehold improvements 50%

Major costs incurred in restoring fixed assets to their normal working condition are charged to the profit and loss account. Improvements are capitalised and depreciated over their expected useful lives to the Group.

(d) Impairment

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

(e) Operating leases

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

(f) Deferred taxation

Deferred taxation is accounted for at the current taxation rate in respect of timing differences between profit as computed for taxation purposes and profit as stated in the accounts to the extent that a liability or an asset is expected to be payable or recoverable in the foreseeable future.

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ACCOUNTANTS’ REPORT

APPENDIX II

(g) Translation of foreign currencies

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

The balance sheet of a subsidiary expressed in foreign currency is translated at the rates of exchange ruling at the balance sheet date whilst the profit and loss is translated at an average rate. Exchange differences are dealt with as a movement in reserves.

(h) Revenue recognition

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

(i) Retirement benefit costs

The Group’s contributions to the retirement benefit scheme are expensed as incurred.

3. Turnover and revenues

The Group has not generated revenue from its principal activities during the Relevant Period. Revenues recognised during the Relevant Period were interest income from banks and a related company of HK$22,306 and HK$87,568 respectively.

4. Operating loss

The Group’s operating loss during Relevant Period is stated after charging the following:

==> picture [370 x 56] intentionally omitted <==

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

Group
HK$
Auditors’ remuneration 70,000
Operating leases in respect of land and buildings 594,962
Consultancy fee charged by a related company (note 18(a)) 32,000,000
----- End of picture text -----

5. Taxation

(a) No provision for profits tax has been made in the accounts as the Group has no assessable profit for the Relevant Period.
(b) There was no material unprovided deferred taxation for the Relevant Period.

6. Dividends

No dividends have been paid or declared by the Company during the Relevant Period.

7. Loss per share

The calculation of the loss per share for the Relevant Period is based on the loss for the Relevant Period and the weighted average of 10,007 ordinary shares. No diluted loss per share is presented because there were no dilutive potential ordinary shares during the Relevant Period.

8. Retirement benefit costs

The Group contributes to a Mandatory Provident Fund Scheme (“MPF”), which is available to employees in Hong Kong. Under the MPF scheme, the Group’s contributions are equal to 5% of employees’ basic salaries. The MPF contributions are fully and immediately vested to the employees as accrued benefits once they are paid. No contributions were payable to MPF at 31 December 2001.

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ACCOUNTANTS’ REPORT

APPENDIX II

9. Emoluments for directors and highest paid individuals

(a) The aggregate amounts of emoluments paid and payable to the directors of the Company during the Relevant Period are as follows:

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

Group
HK$
Fees –
Other emoluments
– Basic salaries, allowance and other benefits in kind 1,019,414
– Retirement benefit costs 4,000
1,023,414
----- End of picture text -----

During the Relevant Period, only one director received emoluments.

(b) The five individuals of the Group whose emoluments were the highest during the Relevant Period are as follows:

==> picture [341 x 38] intentionally omitted <==

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

Director 1
Employees 4
5
----- End of picture text -----

(c) Details of the emoluments of the employees of the Group as mentioned in note 9(b) above during the Relevant Period are as follows:

Basic salaries and allowances Retirement benefit costs	Group HK$ 1,075,666 4,000
	1,079,666

The emoluments of the above employees fall within the emolument band of nil to HK$1,000,000 during the Relevant Period.

During the Relevant Period, no directors nor the highest paid individuals mentioned above waived any emoluments. No emoluments have been paid to the directors or these highest paid individuals as compensation for loss of office or an inducement to join the Company or the Group.

10. Fixed assets – Company and Group

Leasehold improvements HK$ Cost Additions and at 31 December 2001 142,190 Accumulated depreciation Charge for the period and at 31 December 2001 20,313 Net book value At 31 December 2001 121,877	Furniture and fixtures HK$ 315,146 21,004 294,142	Computer and office equipment HK$ 284,686 19,987 264,699	Total HK$ 742,022 61,304
			680,718

– 73 –

ACCOUNTANTS’ REPORT

APPENDIX II

11. Investment in a subsidiary

Company HK$ Unlisted shares, at cost 54,600

12. Amounts due from directors – Company and Group

		Maximum amount	Amounts
		outstanding during	outstanding at
Name	Terms of loan	the Relevant Period	31 December 2001
		HK$	HK$
Mr. LI Chun	Unsecured, interest free and	1,515,099	456,110
	no fixed repayment term
Mr. CHU David	Unsecured, interest free and	39,780	38,227
Yu Lin	no fixed repayment term
			494,337

13. Loan to a related company – Company and Group

The loan to a related company also constituted a loan to an officer, Details are as follows:

			Maximum amount	Amount
			outstanding during	outstanding at
Name	Relationship	Terms of loan	the Relevant Period	31 December 2001
			HK$	HK$
WTF (Finance)	A company	Unsecured, interest	10,087,568	10,087,568
Limited	controlled by Mr. CHU David	bearing at Hong Kong prime rate
	Yu Lin, a director
	of the Company

The amount was repaid in January 2002 (note 18(c)).

14. Amount due from a subsidiary

The amount is unsecured, interest free and repayable on demand. With effect from 1 January 2002, the amount was interest bearing at rate of 5% per annum.

15. Share capital

Note No. of shares Authorised: On incorporation, ordinary shares of US$1.00 each (a) 10,000 Increase in authorised share capital (b) 10,000 At 31 December 2001 20,000 Issued and fully paid: Issued of shares of US$1.00 each (a), (c) 10,050	HK$ 78,000 78,000
	156,000

	78,390

(a) As at the date of incorporation, the Company’s initial authorised share capital was US$10,000 (HK$78,000) divided into 10,000 ordinary shares of US$1.00 each. On 4 May 2001, 10,000 ordinary shares of US$1.00 each were issued at par value to provide initial working capital for the company.
(b) On 29 October 2001, pursuant to a directors’ resolution, the authorised share capital was increased to US$20,000 (HK$156,000) divided into 20,000 ordinary shares of US$1.00 each.

– 74 –

ACCOUNTANTS’ REPORT

APPENDIX II

(c) On 30 October 2001, 50 ordinary shares of US$1.00 each were issued to Webster Group Limited for a cash consideration of US$5,000,000 (HK$39,000,000). Accordingly, US$4,999,950 (HK$38,999,610) was credited to surplus account (note 16). These shares rank pari passu with the existing ordinary shares. Webster Group Limited is a wholly owned subsidiary of Wah Tak Fung, a company listed on the Hong Kong Stock Exchange. Mr. CHU David Yu Lin, a director of the company is also the director of Webster Group Limited.

16. Reserves

Issue of shares_(note 15(c)) Waiver of amounts due to shareholders (note 18(a)) Cancellation of waiver of amounts due to shareholders(note 18(b)) Loss for the period Issue of shares(note 15(c)) Waiver of amounts due to shareholders (note 18(a)) Cancellation of waiver of amounts due to shareholders(note 18(b))_ Loss for the period	Surplus HK$ 38,999,610 – – – 38,999,610 Surplus HK$ 38,999,610 – – – 38,999,610	Group Capital Accumulated reserve losses HK$ HK$ – – 32,000,000 – (32,000,000) – – (9,041,382) – (9,041,382) Company Capital Accumulated reserve losses HK$ HK$ – – 32,000,000 – (32,000,000) – – (2,146,781) – (2,146,781)	Total HK$ 38,999,610 32,000,000 (32,000,000 (9,041,382
			29,958,228

			Total HK$ 38,999,610 32,000,000 (32,000,000 (2,146,781
			36,852,829

17. Commitment under operating leases

At 31 December 2001, the Company and the Group had future aggregate minimum lease payments under non-cancellable operating leases in respect of land and buildings as follows:

Within one year In the second to fifth years inclusive	HK$ 2,080,724 1,537,740
	3,618,464

18. Related party transactions

During the Relevant Period, the Company and the Group entered into the following material transactions with its related parties:

Note Income/(expense) Consultancy fee charged by a related company (a) Waiver of amount due to a related company (b) Interest income from WTF (Finance) Limited (c)	HK$ (32,000,000)

	32,000,000 87,568

– 75 –

ACCOUNTANTS’ REPORT

APPENDIX II

(a) The Company entered into a consultancy agreement with Mandino Industries Limited (“Mandino”) on 15 January 2001. Mandino is a related company in which Mr. LI Chun, a director of the Company is also a director of Mandino. Pursuant to the consultancy agreement, the Company agreed to pay consultancy fee of HK$32,000,000 to Mandino. The consultancy fee was for the consultation services rendered in China in connection with the satellite business including introduction of the business to the company, negotiation on behalf of the Company and line up of the relevant parties to finalise an agreement of the satellite business.
(b) On 20 September 2001, the Company, Mandino and all the shareholders of the Company entered into a deed of novation (the “Novation”), pursuant to which all the shareholders of the Company agreed to pay the consultancy fee of HK$32,000,000 and Mandino agreed to release and discharge the Company from any obligation in respect of the consultancy fee. The Company was not required to repay the amounts due to its shareholders and the amount was credited to capital reserve.

The Novation was subsequently cancelled by the Company, Mandino and all the shareholders of the Company with effect from 31 December 2001. Accordingly, the Company resumed the amount due to the related company of HK$32,000,000, and amount previously credited to capital reserve was reversed. In addition, Mandino has irrevocably and unconditionally waived all its rights to recover the amount due by the Company as at 31 December 2001 of HK$32,000,000. The amount was credited to the profit and loss account of the Company.

(c) On 30 October 2001, the Company entered into a loan agreement with WTF (Finance) Limited (“WTF (Finance)”). WTF (Finance) is a related company in which, Mr. CHU David Yu Lin, a director of the Company is also a director of WTF (Finance). Under the loan agreement, the Company had advanced HK$10,000,000 to WTF (Finance), and charged interest at Hong Kong prime rate. The loan was repaid in January 2002.

19. Subsequent event

On 17 January 2002, the Group entered into an agreement with Israel Aircraft Industries Limited (the “Seller”), whereby the Group undertook to purchase and take delivery from the Seller of two commercial communication satellites and certain related services for a consideration of approximately US$180 million.

Save as aforesaid, no other significant events took place subsequent to 31 December 2001.

D. SUBSEQUENT ACCOUNTS

No audited accounts have been prepared for Company and its subsidiary in respect of any period subsequent to 31 December 2001.

Yours faithfully,

PricewaterhouseCoopers Charles Chan, Ip & Fung CPA Ltd. Certified Public Accountants Certified Public Accountants Hong Kong Hong Kong Chan Wai Dune, Charles Practising Certificate Number: P00712.

– 76 –

FINANCIAL INFORMATION ON ENLARGED GROUP

APPENDIX III

1. INDEBTEDNESS

At the close of business on 31 March 2002, the latest practicable date for the purpose of ascertaining information relating to this indebtedness statement prior to the printing of this circular, the Group had total outstanding debts of approximately HK$309 million comprising secured bank loans of approximately HK$269 million and amount due to a director of approximately HK$40 million.

Save as aforesaid or as otherwise disclosed herein, and apart from intra-group liabilities, no member of the Group had outstanding at the close of business on 31 March 2002 any mortgages, charges, debentures or other loan capital or bank overdrafts, loans, debt securities or other similar indebtedness, or any obligations under hire purchase contracts or finance leases payable or any guarantees or other contingent liabilities.

To the knowledge of the Directors, there has been no material adverse change in the level of indebtedness of the Group since 31 March 2002.

2. PROFORMA STATEMENT OF ASSETS AND LIABILITIES OF THE ENLARGED GROUP

The following pro forma statement of assets and liabilities of the Enlarged Group is based on the audited balance sheet of the Group as at 31 March 2001, adjusted to take into account the Group’s unaudited interim results for the six months ended 30 September 2001, the previous acquisition of interest in Hong Kong Satellite by the Company as detailed in its circular dated 3 October 2001, the debt restructuring exercises of the Company as detailed in its circular dated 28 January 2002, various placements of new Shares and issuances of Shares on conversion of the Preference Shares and convertible debentures of the Company and exercises of the Options since 1 April 2001 and the Acquisition.

– 77 –

APPENDIX III FINANCIAL INFORMATION ON ENLARGED GROUP

Proforma financial effects of the Acquisition

Effect on net tangible assets

Before Completion

Audited consolidated net liabilities of the Group as at 31 March 2001 Add: Issue of new Shares – Exercise of debenture conversion rights – Exercise of Options – Placing of 130,000,000 new Shares on 16 May 2001 and 330,000,000 new Shares on 17 July 2001 Unaudited loss attributable to Shareholders for the six months ended 30 September 2001 Unaudited consolidated net liabilities of the Group at 30 September 2001 as disclosed in the unaudited interim results of the Group for the six months ended 30 September 2001 Add: Issue of new Shares – Issue of 390,000,000 new Shares on 31 October 2001 for the acquisition of interest in Hong Kong Satellite – Exercise of Options – Placing of 50,000,000 new Shares on 9 January 2002 – Issue of new Shares under the debt restructuring exercises as disclosed in the circular dated 28 January 2002 Adjusted proforma unaudited consolidated net tangible assets of the Group before the Placing and the Acquisition – Placing of 487,500,000 new Shares Adjusted proforma unaudited consolidated net tangible assets of the Group before the Acquisition Number of Shares in issue at the Latest Practicable Date and before the Placing and the Acquisition Number of Shares in issue at the Latest Practicable Date and after the Placing and before the Acquisition	3,900,000 766,000 79,000,000 101,400,000 15,927,000 19,528,000 376,537,000	HK$ (240,701,000) 83,666,000 (39,957,000) (196,992,000) 513,392,000 316,400,000 195,000,000 511,400,000 3,201,020,651 3,688,520,651

– 78 –

FINANCIAL INFORMATION ON ENLARGED GROUP

APPENDIX III

Adjusted proforma unaudited consolidated net tangible assets
of the Group per Share before the Placing and the Acquisition
Adjusted proforma unaudited consolidated net tangible assets
of the Group per Share after the Placing and before the Acquisition
After Completion
Adjusted proformaunauditedconsolidated net tangible assets
of the Group after the Acquisition
Number of Shares in issue at the Latest Practicable Date
and after the Acquisition
Adjusted proformaunauditedconsolidated net tangible assets
of the Group per Share after the Acquisition
Effect on loss per Share
Before Completion
Unaudited loss attributable to Shareholders for the six months
ended 30 September 2001 as announced in the Group’s
unaudited interim results
Weighted average number of Shares in issue
at the Latest Practicable Date
– Basic
– Diluted
Loss per Share
– Basic_(Note 1)
– Diluted(Note 2)_

HK$
9.88 cents
13.86 cents
HK$
511,400,000
3,688,520,651
13.86 cents
HK$
(39,957,000)
2,268,130,627
2,385,457,725
(1.76 cents)
(1.68 cents)

– 79 –

FINANCIAL INFORMATION ON ENLARGED GROUP

APPENDIX III

After Completion

HK$

Unaudited loss attributable to Shareholders for the six months ended 30 September 2001 as announced in the Group’s unaudited interim results (39,957,000)

Weighted average number of Shares in issue after the Placing and the Acquisition – Basic 2,391,588,068 – Diluted 2,553,497,234 Loss per Share – Basic (Note 1) (1.67 cents) – Diluted (Note 2) (1.56 cents)

Note 1: The calculation is based on (i) the issued share capital of the Company as enlarged by the new Shares issued between 1 October 2001 and the Latest Practicable Date; and (ii) the unaudited loss attributable to Shareholders for the six months ended 30 September 2001.
Note 2: The calculation is based on (i) the issued share capital of the Company as enlarged by the new Shares issued between 1 October 2001 and the Latest Practicable Date after taking into account the potential dilutive effects resulting from exercise of Options and conversion of Preference Shares into Shares; and (ii) the unaudited loss attributable to Shareholders for the six months ended 30 September 2001.

– 80 –

FINANCIAL INFORMATION ON ENLARGED GROUP

APPENDIX III

The proforma statement of assets and liabilities of the Enlarged Group is illustrated as follows:–

Audited Movements Balance Sheet during the at 31 March interim 2001 period HK$’000 HK$’000 Non-current assets Investment properties 277,160 Tangible fixed assets 1,474 (348 ) Interest in associates 2,823 (2,814 ) Investment in unlisted securities – – 281,457 Current assets Properties held for sale 104,000 (36,085 ) Trade and other receivables 7,585 46,623 Bank balances and cash 5,139 14,190 116,724 Current liabilities Trade and other payables 160,790 19,743 Deposits received 6,991 (1,145 ) Amount due to a director 0 Bank borrowings – due within one year 465,441 (35,837 ) Bank overdrafts 1,760 (1,004 ) 634,982 Net current liabilities (518,258 ) (236,801 ) Financed by: Share capital Ordinary shares 149,578 50,350 Preference Shares 0 149,578 Reserves (390,279 ) (6,641 ) (240,701 ) Non-current liabilities Debentures 3,900 (3,900 ) (236,801 )	Unaudited Interim Issued Balance Shares Sheet at 30 and September Preference 2001 Shares HK$’000 HK$’000 277,160 79,000 1,126 9 – 140,400 278,295 67,915 54,208 (39,000 ) 19,329 35,155 141,452 180,533 (8,939 ) 5,846 0 33,000 429,604 (321,298 ) 756 (600 ) 616,739 (475,287 ) (196,992 ) 199,928 120,174 0 120,000 199,928 (396,920 ) 273,218 (196,992 ) 0 (196,992 )	Immediately before the Placing and the The Acquisition Placing HK$’000 HK$’000 356,160 1,126 9 140,400 497,695 67,915 15,208 54,484 195,000 137,607 171,594 5,846 33,000 108,306 156 318,902 (181,295 ) 316,400 320,102 48,750 120,000 440,102 (123,702 ) 146,250 316,400 0 316,400	Immediately after the Placing and before the The Acquisition Acquisition HK$’000 HK$’000 356,160 1,126 9 140,400 156,000 497,695 67,915 15,208 249,484 (156,000 ) 332,607 171,594 5,846 33,000 108,306 156 318,902 13,705 511,400 368,852 120,000 488,852 22,548 511,400 0 511,400	Immediately after the Acquisition HK$’000 356,160 1,126 9 296,400 Note 653,695 67,915 15,208 93,484 176,607 171,594 5,846 33,000 108,306 156 318,902 (142,295 ) 511,400 368,852 120,000 488,852 22,548 511,400 0 511,400

Note: Investment in shares in Hong Kong Satellite is intended to be held for an identified long term purpose. The Directors of the Company have decided to adopt the benchmark treatment allowed under Statement of Standard Accounting Practice No. 24 “Accounting for investments in securities” issued by the Hong Kong Society of Accountants, pursuant to which such investment in securities is stated in the balance sheet at cost as reduced by any impairment loss which is expected other than temporary.

– 81 –

APPENDIX III FINANCIAL INFORMATION ON ENLARGED GROUP

It is of importance to note that the abovementioned proforma statement of assets and liabilities of the Enlarged Group are prepared based on the consolidated balance sheet as at 31 March 2001, after making appropriate adjustments for transactions subsequent to the year end date, to illustrate specific financial effects which are expected to result from the Acquisition and the Subscription Agreement only. These effects do not give an overall view insofar as the Group’s other businesses are concerned.

As the consideration is to be satisfied by cash to be raised by the issue of new Shares under the Placing, the Group’s net asset value, save for the increase in the net asset value of the Group by the Placing amount on the completion of the Placing, will remain unchanged after Completion.

3. WORKING CAPITAL

Taking into account the available banking facilities and the level of internal resources of the Enlarged Group, the Directors are of the opinion that the Enlarged Group will have sufficient working capital for its present operating requirements.

– 82 –

VALUATION REPORT

APPENDIX IV

The text of the valuation report on Hong Kong Satellite dated 7 May 2002 prepared by the Valuer is reproduced below.

==> picture [65 x 34] intentionally omitted <==

Room 904 9th Floor, Harbour Centre 25 Harbour Road Wanchai Hong Kong

7 May 2002

The Board of Directors Wah Tak Fung Holdings Limited 28/F-30/F., Workington Tower, 78 Bonham Strand East, Sheung Wan, Hong Kong

Dear Sirs/Madams,

In accordance with your instructions, we have made an appraisal of the fair market value of a 100 per cent. equity interest in the business enterprise of Hong Kong Satellite Technology Holdings Limited (referred to as “HKSTH”) as of 28 February 2002. HKSTH has a 70 per cent. equity interest in the business enterprise of Hong Kong Satellite Technology Group Limited (referred to as “HKSTG” or “the Company”) which plans to manufacture and operate commercial satellites that use Ku or Ka band in order to form a direct broadcast satellite network covering China and other Asia regions where one half of the world’s population resides. HKSTG will provide satellite network services including direct TV (“DirecTV”), direct PC, mobile and fixed telephone connection and data transmission primarily to telecommunication service providers and TV operators.

This letter identifies the business appraised, describes the basis of valuation and assumptions, explains the valuation methodology utilized, and presents our conclusion of value.

Business enterprise value is defined for this appraisal as the total invested capital, excluding debts but including shareholders’ loans, and is equivalent to shareholders’ equity plus shareholders’ loans. The fair market value of a 100 per cent. equity interest in the business enterprise of HKSTH is derived based on the expected future economic benefit to which the owner(s) of HKSTH will be effectively entitled to after accounting for the effect of a discount for lack of marketability.

The purpose of this appraisal is to express an independent opinion of the fair market value of a 100 per cent. equity interest in the business enterprise of HKSTH as of 28 February 2002. It is our understanding that this appraisal will be used for acquisition purposes.

– 83 –

VALUATION REPORT

APPENDIX IV

INTRODUCTION

Company Background

HKSTH is a holding company incorporated in British Virgin Islands on 15 November 2000. According to the representation of the Directors and Management of HKSTH (“the Management”), the major operating business asset of HKSTH is a 70 per cent. equity interest in HKSTG, a joint venture company incorporated in British Virgin Islands. The remaining 30 per cent. equity interest of HKSTG is are held by three other independent parties outside of Hong Kong, one is a major international satellite manufacturer (“ISM”), one is a Chinese satellite operating company (“CSOC”) and one is a Chinese space industry group (“CSIG”).

HKSTG engages in the development, manufacturing, marketing, sale and operating of medium size geosynchronous communication satellites with capacity of solar array power of 3,500 to 5,500 watts. The Company will provide a satellite communication network that covers China in the AsiaPacific region to telecommunication service providers and TV operators for direct to home television services, fixed-line and mobile phone connection, broadband Internet services and public transit communication system via satellite. In addition, HKSTG will develop and manufacture satellites for sale and lease to potential customers. The Company’s mission is to serve as the dominant satellite network operator for information, media, TV and communication services in the AsiaPacific region.

The shareholders agreement (“Shareholders Agreement”) signed on 11 April 2001 by all shareholders listed out the responsibilities of each shareholder as follows:

ISM will be the exclusive prime contractor and will provide a non-transferable, royalty-free worldwide exclusive license in relation to manufacturing, operation, marketing and sale of satellites. It shall utilize its expertise in communication satellite, sub-systems, units and components and provide technical support for the marketing of satellites and training of marketing staffs.

CSIG will be the permanent and exclusive sub-contractor to ISM for the assembly, integration and testing (“AIT”) of all the satellites and will provide AIT facilities, technical expertise and general testing equipments. CSIG shall assist and support marketing of transponders. CSIG is also the exclusive launch contractor using Long March Series launch vehicles. CSIG’s satellite development unit has extensive launch experiences.

CSOC is the operation agent responsible for the tracking and control management and operating of the satellite transponders. These services may include arranging satellite capacity and providing transmission facilities and other value-added services. CSOC is one of the two licensed companies in China that operates satellite network and shall obtain the authorization for the use of orbit and perform relevant frequency coordination process and obtain the relevant approvals and permits for landing rights in China.

HKSTH will be responsible for the needed funding for the establishment, modification and upgrading of the AIT facility that has an annual production capacity of 4 to 6 units of satellites. HKSTH will be responsible for providing ongoing working capital and promote business of HKSTG and raise funds for the development of the satellite system.

– 84 –

VALUATION REPORT

APPENDIX IV

Business Strategies

The Company’s satellite communication network will be used to accommodate the existing cable and terrestrial networks in China for the provision of direct-to-home television broadcasting, mobile communication services and wireless Internet access and data transmission services. The Company’s strategy for achieving its objective to be the preferred satellite operator in China is to:

• Provide a superior communication network over existing cable and terrestrial networks

The advantage of satellite communication network over the existing optical fibre and coaxial cables includes: (1) greater coverage area, (2) point to multi-point transmissions, (3) simultaneous signal transmissions, (4) simple alteration and maintenance process, and (5) minimal geographic limitations. These factors provide immense values to TV broadcasting companies and telecommunication service providers in terms of expanding into currently untapped markets and/or enlarging their existing coverage networks and capacities. Nowadays, there are over 30 million households across the nation are without TV access, and about 190 million households are using the traditional terrestrial network. Most of these households are from small-to-medium cities, rural and agricultural regions, where the penetration rates for TV and telecommunication services are relatively low compared to those in urban cities. The existing cable network covers only 50 per cent. of the regions in China, leaving the rest of the region without any cable broadcasting services. The current market situation along with the unique characteristics of the satellite system will enable TV broadcasting and telecommunication service operators to employ cost-effective networks using small and relatively low-cost antennae on the ground and provide high quality services to their customers. The simple alteration and maintenance characteristic of the satellite system will enable the operators to be responsive to the needs of their customers.

• Facilitate technological advancements

Advances in communication technology will increase the demand for information carrying capacity and reduce transmission and equipment costs, which may, in turn, stimulate demand for satellite communication services. These advances may come from digital communication such as interactive TV, video-on-demand, digital broadcasting, video conferencing, etc., and wireless communication such as W-CDMA (Wideband Code Division Multiple Access) for wireless Internet access. All of these advancements require tremendous bandwidth and quality transmission signals that may not be completely handled by the existing terrestrial, cable and microwave infrastructures. Currently, cable operators are replacing the existing cable system from analogue to digital, but the replacement appears to be very costly. Fixed-line operators are expanding their networks, but investment costs seem unjustified in less populous and distant areas. Mobile phone operators are expanding their networks through microwave systems that are proved to be inefficient for long distance communication or broadcasting and are limited to one discrete area. Satellite communication, on the other hand, could offer large bandwidth and high-speed data transfer, quality transmitted signals to a large coverage area with limited geographical boundaries using high transmission power and extensive transponder capacity. Owing to the remote geography and low population density of China’s vast interior and remote outlying regions, satellite communication technology has particular applicability. The advantages of remote area coverage, combined with instant network access and reasonable usage rates should be reflected in high utilization rates of the satellite communication platform by new technological advancements.

– 85 –

VALUATION REPORT

APPENDIX IV

Cope with the expansion of China television industry

In recent years, the entire media industry in China is undergoing a massive restructuring, or more accurately, a consolidation between modern and efficient operators with less efficient ones. Such a move is expected to lead to a simplification of the existing fragmented cable infrastructure and an increase in broadcasting capacity to cope with the increasing demand for television programming in China, which is evident both by the number of programmes created and the number of channels distributed to viewers. It is expected that once all cable distribution networks are digitalized, viewers will be able to receive as many as 170 different channels, a significant increase from the current average capacity of 40 channels. Though some cable television networks are now being upgraded from analogue to digital, most of them remain on analogue system with simple and easily replicable set-top boxes and unsophisticated hardware. As a result, the ability to satisfy the increasing demand for content at this moment is very limited. In particular, international and regional content is extremely limited to public viewers due to technical difficulties and political restrictions on foreign content. However, it is expected that Chinese government may ease the quota on foreign drama and movie programmes as China enters the WTO to comply with the excess demand in the television markets. Satellites, on the other hand, are ideal for broadcasting international and regional content to national viewers and for delivering additional television channels to cable operators or microwave transmission stations for local redistribution. Broadcasting via satellite will be the dominant force in China’s television industry in years to come as it provides incentive to both existing cable operators and foreign content providers and benefits all television viewers.

Capitalize on tremendous growth in DBS and wireless communication markets

The Management foresees that there will be enormous opportunities in the fastgrowing Direct Broadcast Satellites (“DBS”) and wireless communication markets, in which the Company’s satellite system will provide the market players with their communication needs. The Management believes that these market players will utilize its satellite system for cost-effective and high quality transponder coverage to reduce the costs and lead time associated with the development of ground stations. Though the growth of the DBS market in China is restrained by government regulations that strictly control public DBS services, the Management is confident that liberalization of the television industry, together with the government support of its satellite system, will enable the Company to tap into the DBS markets.

Leverage shareholders’ relationships with and support from governments

The relationship established by the Company’s shareholders with their government provides the Company with unique opportunities to satisfy the needs of China’s broadcasting and telecommunication customers. A recent press release suggests that the Chinese government intends to form a unified satellite platform through one of the shareholders of the Company, CSOC, to facilitate use of domestic satellites. The intended reform will allow the Company to have exclusive rights to foreign content transmitted via satellite to China’s markets.

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The Satellites and Related Facilities

The satellites that HKSTG will produce are the AMOS-HP/DFH-2000 series of communication satellites originated from ISM which has extensive knowledge and experience in the field of satellite engineering. The AMOS satellite is a proven technology that is high in capacity, low in dimension and weight. The satellite will carry a total weight of 2,360 kilogram and a capacity in terms of solar array power in the range of 3,500 watts to 5,500 watts. It will have 16 Ku or Ka band transponders each at 150 watts, with a total uplink bandwidth of 14.0 giga-hertz (GHz) to 14.5 GHz and a total downlink bandwidth of 12.25 GHz to 12.75 GHz (all suitable for direct TV broadcasting and telecommunication purposes). Some transponders will be leased to independent broadcasting and telecommunication companies, whereas the remainder will be reserved for internal operations. Each satellite will have an economic life of 10 to 12 years. The total cost of the construction and launch of the AMOS satellite, including launch insurance, ground facilities and related expenses, is approximately US$90 million. CSIG will take advantages of its existing fully equipped facilities and technologies to provide AIT services for AMOS satellites.

Initial Planning

HKSTG plans to launch a total of two Ku or Ka band satellites (named HKSAT 1 & 2), one by the end of 2004 and the other by 2005, primarily for supporting the operations of the internal satellite platform. With the first satellite, i.e. HKSAT 1, HKSTG will be able to provide its clients with a total of 16 transponders of 54 mega-hertz of bandwidth on each transponder. The production of the first two satellites will be carried out by ISM for the initial hardware and software components. The production will then shift to CSIG for AIT and launch arrangements which may take as much as 14 to 18 months. The Management believes that full operations of the satellite platform will commence at the beginning of 2005. As of the appraisal date, the Company has signed a memorandum of understanding (MOU) with Guangdong South Satellite Telecommunications Service Company Limited (“GSST”) and a co-operation agreement with World Master Resources Limited (“WMR”), for which HKSTG is conditionally obligated to offer and WMR is conditionally obligated to use not less than 15 transponder capacity for the use of broadband services over satellite.

Market Development

The telecommunication sector in China has experienced dramatic changes during the second half of 2001, and the trend continues in the first quarter of 2002. Following its admission into the World Trade Organization (“WTO”), China is expected to open up the local telecommunication markets to allow domestic and foreign firms to compete against the existing operators. To be consistent with the China-US agreement, China will allow 49 per cent. foreign investment in all services and 50 per cent. foreign ownership for value-added services in two years, and paging services in three years. In addition, China will open its leasing market within three years to allow foreign firms to rent capacity from Chinese operators and re-sell it, for both domestic and international telecommunication traffic. Furthermore, China has agreed to technology-neutral scheduling, meaning that foreign investors can use any technology they choose to provide telecommunication services.

The mobile phone market in China has witnessed phenomenal growth in recent years, attaining the position of the world’s largest market, with 145 million subscribers registered by the end of 2001, according to figures declared by Ministry of Information Industry (“MII”). As this tremendous growth continues, along with China’s WTO commitment, the mobile industry is likely to move towards liberalization. In early 2002, MII announced that instead of issuing new operator licenses for reselling mobile services in order to create competition in the current duopoly market,

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the ministry will nurture four multi-service operators and allow them to offer customers all telecommunication services. It is very likely that the spun-off units of China Telecom will benefit from this change as they can offer mobile services as well as fixed-line services once they become integrated operators. On the other hand, existing mobile operators such as China Mobile and China Unicom can win over customers from fixed-line providers, particularly in unconnected remote and rural areas.

Cable telephony, along with convergence systems that combine various digital services, is set to develop rapidly once the regulatory confusion over the sector resolved. The sector’s growth is currently hindered by long-running regulatory debate on the issuance of telecom licenses to cable operators and vice versa. Once the resolution is settled, the inflow of capital that will result from an affirmative policy change in this area will certainly help modernize China’s extensive but underdeveloped cable network. In late 2001, the State Administration of Radio, Film and Television (“SARFT”) embarked on a mega-merger of media and cable companies, which in the end could see a huge subscriber base controlled by a universal cable operator. This consolidation can pose a significant challenge to existing fixed-line networks.

The emergence of state satellite operator, China Satellite Communications Corporation (“ChinaSat”), on 19 December 2001 will nonetheless challenge HKSTG for the dominant player in the satellite communications area. ChinaSat was formed by a merger of satellite-based telecom companies, including China Telecommunications Broadcast Satellite Corporation, China Orient Telecom Satellite Company and ChinaSat of China Telecom. ChinaSat is engaged in the provision of broadcasting and mobile satellite telecommunications services, satellite-based voice, data and multi-media telecommunications services and domestic VSAT services. It plans to provide a general network service, broadband access service, IP basic service and IP value-added service within one or two years.

For existing and potential investors, the implications of these changes in the telecommunication sector will be a change in setting that will induce more competition and resale opportunities for investors to exploit. From the standpoint of an integrated satellite network provider, HKSTG shall be the beneficiary of the future development, which will result in more demand for network services from operators who expand into new areas of business.

BASIS OF VALUATION AND ASSUMPTIONS

We have appraised the business enterprise of HKSTH on the basis of fair market value. Fair market value is defined as the estimated amount at which the business enterprise might be expected to exchange between a willing buyer and a willing seller, neither being under compulsion, each having reasonable knowledge of all relevant facts, and with the buyer and seller contemplating retention of the business at its present location for continuation of current operations unless the break-up of the business or the sale of its assets would yield greater investment returns.

Our investigation included discussions with the Management in relation to the history, operations and prospects of the business and a review of the business plan (“the Business Plan”) and the financial projection (“the Projection”) provided to us by the Management, as well as a review of other relevant documents. We have assumed that the data, information, opinions and

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representation provided to us by the Management in the course of the valuation are true and accurate. Before arriving at our opinion of value, we have considered the following principal factors:

The nature of the business of HKSTH and HKSTG from inception;
The financial condition of HKSTH and HKSTG;
The global economic outlook in general and the specific economic and competitive elements affecting HKSTG’s business, the telecommunication service industry and its markets;
The nature and prospect of the Satellite Communications Industry in China and other Asia regions;
The market-derived investment returns of entities engaged in a similar line of business and returns from other similar types of projects;
The stage of development of HKSTG in China and the country where ISM is originated;
The technology applied in the AMOS-HP/DFH-2000 series of communication satellites and the related AIT and launch facilities;
The market acceptance towards telecommunication services like DirecTV, fixed-line, mobile and Internet access via satellite in China;
The market potential supported by the number of existing and prospective TV household population, mobile phone users, fixed-line users, and Internet users; and
The business risks and the projected operating results of HKSTG.

Due to the changing environment in which HKSTG is operating, a number of assumptions have to be established in order to sufficiently support our concluded value of the business enterprise. The major assumptions adopted in this appraisal are:

There will be no major changes in the existing political, legal, fiscal and economic conditions in China and the country where ISM is originated in which HKSTG carries on its business or to which it exports or from which it imports or sources supplies;
There will be no major changes in the current taxation law in China in which HKSTG operates, that the rates of tax payable remain unchanged and that all applicable laws and regulations will be complied with;
Exchange rates and interest rates will not differ materially from those presently prevailing;
The Business Plan and the Projection have been prepared on a reasonable basis, reflecting estimates which have been arrived at after due and careful consideration by the Management;

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The Shareholders Agreement with respect to HKSTG and its operation are legal, valid and enforceable in accordance with the legal terms and will be renewed on expiry by all shareholders who will fulfill their responsibilities as prescribed in the agreement;
The satellite purchase contract (“Satellite Purchase Contract”) signed in 17 January 2002 between ISM and HKSTG with respect to the allocation of production workload and lead times, payment terms and other construction arrangements is legal, valid and enforceable in accordance with the legal terms and conditions;
CSOC will obtain the authorization to use the intended orbits and the necessary approvals and permits for landing rights in China;
All approvals, licenses, certificates and contractual agreements with respect to HKSTG and its operation will be legal, valid and enforceable in accordance with the legal terms and will be renewed on expiry if necessary;
Service agreements (“Service Agreements”) engaged by HKSTG with its customers will be enforceable in accordance with the legal terms, and that HKSTG will have the legal right to launch its products and services in China, and to receive the revenues generated from its operation as contemplated under the Projection;
MOUs signed by HKSTG and its partners will be replaced by legally binding contracts with similar terms and conditions;
HKSTG will successfully secure co-operation agreements (“Co-operation Agreements”) with its potential business partners, i.e. TV and cable operators, telecommunication service companies, Internet service providers (“ISPs”) and public transit operators on similar terms and conditions as prescribed in the Business Plan and Projection;
HKSTG will obtain endorsement from relevant government authorities to carry on its business in the territory and maintain its relationship with its business partners in China;
The availability of finance will not be a constraint on the forecast growth of HKSTG’s operation in accordance to the Business Plan and the Projection;
HKSTH and HKSTG have no debt or other interest-bearing liabilities in the current capital structure and will not incur any in the future;
The intellectual property of HKSTG’s products and services will not be infringed upon in a manner which would materially affect the economic benefits attributable to the Company;
The technology to be utilized by HKSTG in implementing its Business Plan will be viable and successfully deployed;
HKSTG and its shareholders can keep abreast of the latest technological development of their industries such that the competitiveness and profitability of the Company can be sustained;

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APPENDIX IV

The technology of the set-top boxes will be provided by ISM at no additional cost to CSOC who will be responsible for assembling the devices;
The launching of satellites will be successfully deployed without any failure or delay that will severely affect the future cash flow position of HKSTG;
There will not be any significant defects or damages to the satellites caused by the environment in the space that will shorten the life of the satellite;
HKSTG will be able to replace or upgrade its operational, administrative and technical facilities to expand and enhance its sales;
HKSTG will retain and have competent management, key personnel, and technical staff to implement its Business Plan and to support its ongoing operation; and
Industry trends and market conditions for related industries will not deviate significantly from economic forecasts.

Some assumptions adopted in this valuation are related to the basic requirements of business conditions such as the obtaining of relevant licenses, permits and rights to operate the satellite network, and the legality and validity of the Shareholders Agreement, Satellite Purchase Contract, Co-operation and Service Agreements. In the absence of the validity of these basic assumptions, the business of the Company will not commence by any means, which does not translate to any value of the Company.

Other adopted assumptions are related to the uncertainty of operations and prospects of the Company due to macro-economic, industry and specific company factors that define the reward and risk tradeoff of the business. In arriving at our conclusion of value, we have made reference to research reports and other relevant sources with regards to the global satellite communications industry, future demand and development trends of relevant markets. We have reviewed the assumptions in the Projection and considered them reasonable to reflect the uncertainties that may arise from the above-mentioned factors under the circumstances on and before the appraisal date.

VALUATION METHODOLOGY

The fair market value of HKSTH was developed through the application of the income approach technique known as the discounted cash flow (“DCF”) method. In this method, value depends on the present worth of future economic benefits to be derived from ownership of equity and shareholders’ loans. Thus, an indication of value is established by discounting future free cash flows available for distribution to shareholders and for servicing shareholders’ loans to their present worth at market-derived rates of return appropriate for the risks and hazards of similar business.

When calculating the discount rate to apply to the future economic income streams attributable to shareholders, the discount rate is the cost of equity. The cost of equity was developed using the Capital Asset Pricing Model (“CAPM”), with reference to the required rates of return demanded by investors for similar projects, and other specific risks related to the Company.

The CAPM states that an investor requires excess returns to compensate for any risk that is correlated to the risk in the return from the stock market as a whole, but requires no excess return

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for other risks. Risks that are correlated with the return from the stock market are referred to as systematic; other risks are referred to as nonsystematic. According to the CAPM, the cost of equity is equal to the return on risk-free securities, plus the average comparative company’s systematic risk (beta) multiplied by the market risk premium, adjusted for increments for risk differentials of the business being valued versus those of the comparative companies, which include risk adjustments for size and other risk factors in relation to the comparative companies.

Small Capitalization Risk Premium

Small capitalization risk premium is the excess return that an investor would demand in order to compensate for the additional risk over that of the entire stock market when investing in a small capitalization company. This premium reflects the fact that cost of capital increases with decreasing size of the company.

A number of studies were conducted in the U.S., which concludes that the risk premium associated with a small company is over and above the amount that would be warranted just as a result of the company’s systematic risk derived from the CAPM model.

Discount for Lack of Marketability

The concept of marketability deals with the liquidity of an ownership interest, that is, how quickly and easily it can be converted to cash if the owner chooses to sell. The lack of marketability discount reflects the fact that there is no ready market for shares in a closely held corporation. Ownership interests in closely held companies are typically not readily marketable compared to similar interests in public companies. Therefore, a share of stock in a privately held company is usually worth less than an otherwise comparable share in a publicly held company.

A number of studies were conducted in the U.S. in an attempt to determine average levels of discounts for lack of marketability. These studies all fall into one of two basic categories, depending on the type of market transaction data on which they are based:

Restricted (“letter”) stock studies
Studies of transactions in closely held stocks prior to initial public offerings (IPOs).

We were furnished, for the purpose of this appraisal, with unaudited financial data as well as other records, documents and projections. We have reviewed and examined the financial information and have no reason to doubt the truth and accuracy of the information contained therein. We have also consulted public sources of financial and business information to supplement the information provided by the Management. In arriving at our opinion of value, we have relied to a very considerable extent on the above-mentioned information and discussions held with the Management and other representatives from ISM, CSOC and CSIG.

OTHER CONSIDERATIONS

Readers of this report should note that this valuation is based on many assumptions that could not be easily assessed due to the minimal operating history of HKSTH and HKSTG. The valuation of HKSTH is based on many assumptions, such as the projected market penetration rate and market share for TV, mobile, Internet and fixed-line, satellite manufacturing orders, transponder rental demand, and the estimated cost data, which form the basis of the projected cash flows. The

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success of the Company will largely hinge on its ability to gain first mover advantage in the Satellite Communications Industry in China, the acceptance of its products and services by customers, and its ability to establish long term relationship with its strategic partners. The risks associated with the business relate to the successful establishment and implementation of the Business Plan. Uncertainties result from limited operating history, technology and implementation risks, qualities of services to be delivered, increasing competition and other risks that may not currently be contemplated. This valuation is based on the hypothesis that HKSTG will operate in accordance with its projected timetable as prescribed in the Business Plan and Projection.

CONCLUSION OF VALUE

Based upon the investigation and analysis outlined above and on the appraisal method employed, it is our opinion that as of 28 February 2002, the fair market value of a 100 per cent. equity interest in the business enterprise of Hong Kong Satellite Technology Holdings Limited after accounting for the effect of a discount for lack of marketability, is reasonably stated by the amount of HONG KONG DOLLARS FOURTEEN BILLION TWO HUNDRED AND SEVENTY MILLION (HKD14,270,000,000) ONLY.

This conclusion of value was based on generally accepted valuation procedures and practices that rely extensively on the use of numerous assumptions and the consideration of many uncertainties, not all of which can be easily quantified or ascertained.

We have not investigated the title to or any liabilities against the property appraised.

We hereby certify that we have neither present nor prospective interests in HKSTH, HKSTG, ISM, CSOC and CSIG or the value reported.

Respectfully submitted, For and on behalf of GRANT SHERMAN APPRAISAL LIMITED Keith C.C. Yan, ASA Managing Director

Note : Mr. Keith C.C. Yan is an Accredited Senior Appraiser (Business Valuation) and he has been conducting business valuation in the Greater China region for various purposes since 1988.

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GENERAL INFORMATION

APPENDIX V

1. RESPONSIBILITY STATEMENT

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

2. DISCLOSURE OF INTERESTS

(a) Interests of the Directors

As at the Latest Practicable Date, the interests of the Directors in the equity or debt securities of the Company or any of its associated corporations (within the meaning of the SDI Ordinance) which were required to be notified to the Company and Stock Exchange pursuant to Section 28 of the SDI Ordinance (including any interest which any such Director would be deemed or taken to have under Section 31 of or Part I of the Schedule to the SDI Ordinance) or which are required, pursuant to Section 29 of the SDI Ordinance, to be entered in the register referred to therein or which were required, pursuant to the Model Code for Securities Transactions by Directors of Listed Companies established by the Stock Exchange, to be notified to the Company and Stock Exchange were as follows:

		Number of Shares held in	Number of Shares held in	the Company
		Personal	Family	Corporate
Name of Directors	Notes	interests	interests	interests
Chu David Yu Lin	(1)	612,876,297	241,425,668	152,000,000
Chu Ho Miu Hing	(2)	241,425,668	764,876,297	–
Chan King Hung		5,000,000	–	–

Notes:

(1) 152,000,000 Shares are held by Quizzical Holdings Limited, a company which is 50% owned by Hunter Valley Group Limited. Hunter Valley Group Limited is 100% owned by Manta Corporation, a corporation holds such shares as trustee on trust for The Manta Trust, a discretionary trust and the eligible beneficiaries of which include Mr. Chu David Yu Lin and his present children. The family interests of 241,425,668 shares represent the interests of Mrs. Chu Ho Miu Hing, the wife of Mr. Chu David Yu Lin.
(2) The family interests of 764,876,297 Shares represent the personal interests and corporate interests of Mr. Chu David Yu Lin, the husband of Mrs. Chu Ho Miu Hing.

As at the Latest Practicable Date, Mr Chu was interested in 120 Preference Shares which are convertible into Shares at an initial conversion price equal to the lower of (i) HK$0.40 and (ii) the average of the 10 lowest daily closing prices per Share on the Stock Exchange during the 30 days immediately prior to the date of issue of the conversion notice (subject to adjustments). Assuming that the entire principal amount of HK$120 million under these Preference Shares are converted at a conversion price of HK$0.40 per Share, a total of 300,000,000 Shares will fall to be issued to Mr Chu.

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APPENDIX V

The personal beneficial interests of the Directors in the non-voting deferred shares of the Company’s subsidiaries as at the Latest Practicable Date were as follows:

			Number of
			non-voting
Name of Subsidiary	Note	Name of Director	deferred shares
Calorie Limited	(1)	Chu David Yu Lin	20

Note:

(1) The non-voting deferred shares practically carry no rights to dividends or to receive notice of or to attend or vote at any general meeting of Calorie Limited or to participate in any distributions on winding-up.

As at the Latest Practicable Date, the Directors and chief executives of the Company held the following outstanding Options:

				Number of
				Shares issuable
			Exercise	under the
Name of Director	Date of grant	Exercisable period	price	share options
			(HK$)
Chu David Yu Lin	01.08.2001	01.02.2002 to	0.255	5,800,000
		31.01.2005
Chan King Hung	20.10.1999	28.04.2000 to	0.17	20,000,000
		27.04.2003
	01.02.2000	28.08.2000 to	0.228	3,000,000
		27.08.2003
	02.03.2001	15.09.2001 to	0.1	1,000,000
		14.09.2004
	16.05.2001	18.11.2001 to	0.1	7,600,000
		17.11.2004
	01.08.2001	01.02.2002 to	0.255	5,800,000
		31.01.2005
Chu Ho Miu Hing	01.02.2000	28.08.2000 to	0.228	1,600,000
		27.08.2003
	01.08.2001	01.02.2002 to	0.255	5,800,000
		31.01.2005
Chan Fook Lai	01.02.2000	28.08.2000 to	0.228	1,100,000
		27.08.2003
	02.03.2001	15.09.2001 to	0.1	2,000,000
		14.09.2004
	01.08.2001	01.02.2002 to	0.255	5,800,000
		31.01.2005
Lu Xin	16.05.2001	18.11.2001 to	0.1	5,800,000
		17.11.2004
	01.08.2001	01.02.2002 to	0.255	5,800,000
		31.01.2005

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APPENDIX V

Save as disclosed herein, as at the Latest Practicable Date, none of the Directors had any interest in the shares or other securities of the Company or any of its associated corporations which would have to be notified to the Company and the Stock Exchange or pursuant to Section 28 of the SDI Ordinance (including interests which they were deemed or taken to have under Section 31 or Part I of the Schedule to the SDI Ordinance), or which were required, pursuant to Section 29 of the SDI Ordinance, to be entered in the register referred to therein, or which were required, pursuant to the Model Code for Securities Transactions by Directors of Listed Companies established by the Stock Exchange, to be notified to the Company and the Stock Exchange.

(b) Interests of substantial shareholders

As at the Latest Practicable Date, the following interests of 10% or more of the share capital of the Company were recorded in the register of interests required to be kept by the Company pursuant to Section 16(1) of the SDI Ordinance:

		Number of Shares
Name	Notes	held in the Company
Chu David Yu Lin	(1)	1,006,301,965

Notes:

(1) The interests disclosed herein include 612,876,297 Shares directly held by Mr. Chu David Yu Lin, 241,425,668 Shares held by Mrs Chu Ho Miu Hing, the wife of Mr Chu, and 152,000,000 Shares being the corporate interests of Mr. Chu David Yu Lin as referred to in note (1) under the section headed “Interests of the Directors” above.

According to the register of interests kept by the Company under Section 16(1) of the SDI Ordinance and so far as is known to the Directors other than the interests disclosed herein, there are no other persons (other than a director or chief executive of the Company) who, as at the Latest Practicable Date were, directly or indirectly, beneficially 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 member of the Group or in any options in respect of such capital.

3. MATERIAL CONTRACTS

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

(a) a placing agreement entered into on 19 June 2000 among the Company, Quizzical Holdings Limited, Kingsway SW Securities Limited and Kingsway Capital Limited for the placing of 75,000,000 Shares at a price of HK$0.165 per Share;
(b) a subscription agreement entered into on 19 June 2000 between the Company and Quizzical Holdings Limited for the subscription of 75,000,000 new Shares at a price of HK$0.165 per Share;
(c) a subscription agreement entered into on 23 June 2000 between the Company and Mr. Ye Changqing for the issue of 60,000,000 new Shares at a price of HK$0.167 per Share;

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(d) a conditional sale and purchase agreement entered into on 29 June 2000 between Global Ideas Technology Limited, a wholly owned subsidiary of the Company, and Mr. He Chenquang for the acquisition of shares in Drury Profits Limited which subsequently lapsed due to the conditions precedent contained in this agreement not being fulfilled prior to the deadline for fulfillment of these conditions;
(e) a subscription agreement entered into on 28 August 2000 between the Company and Quizzical Holdings Limited for the issue by the Company of 135,000,000 new Shares at a price of HK$0.10 per Share;
(f) heads of agreement entered into 18 October 2000 by a subsidiary of the Company to acquire a 40% equity interest in Regain Profits Limited, a company wholly owned by Mr. He Chenquang, which was cancelled on 30 October 2000;
(g) a subscription agreement entered into on 8 May 2001 between the Company and Quizzical Holdings Limited for the issue by the Company of 130,000,000 new Shares at a price of HK$0.10 per Share;
(h) a non-legally binding Memorandum of Understanding entered into on 12 June 2001 between the Company and Hong Kong Satellite relating to negotiations on establishing a strategic alliance with a view to jointly develop satellite and related business operations to be undertaken by a joint venture company in which Hong Kong Satellite has a 70% interest;
(i) subscription agreements entered into on 5 July 2001 between the Company and various independent investors for the issue by the Company of 330,000,000 new Shares at a price of HK$0.20 per Share;
(j) a conditional sale and purchase agreement entered into on 10 July 2001 by a subsidiary of the Company with an independent third party for the acquisition by such subsidiary of 12% of the issued share capital of World Master Resources Limited, whose principal activities are the provision of satellite broadband internet access services in Hong Kong and the PRC at a consideration of HK$25 million, which had lapsed due to the conditions precedent contained therein not being fulfilled prior to the deadline for the fulfilment of these conditions;
(k) an agreement entered into on 20 July 2001 between the Company and Mr Chu for the acquisition by the Company of 150 shares of US$1.00 each in Hong Kong Satellite at a consideration of US$15 million (equivalent to about HK$117 million) which was satisfied by an issue of 390,000,000 new Shares at a price of HK$0.3 per Share;
(l) an agreement entered into on 20 July 2001 between the Company, Hong Kong Satellite and Mr Chu for the subscription by the Company of 50 new shares of US$1.00 each in Hong Kong Satellite at a cash consideration of US$5 million (equivalent to about HK$39 million);

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(m) a settlement agreement entered into on 27 December 2001 between the Company and an independent third party creditor for (i) the issue of 10,000,000 new Shares at a price of HK$0.40 per Share to such creditor to settle HK$4 million of the indebtedness of the Group assigned to it; and (ii) at the option of such creditor, the issue of up to another 9,431,899 new Shares at a price of HK$0.40 per Share to settle the remaining indebtedness of up to approximately HK$3.77 million assigned to such creditor;
(n) a settlement agreement entered into on 27 December 2001 between the Company and an independent third party creditor for the issue of 16,911,007 new Shares at a price of HK$0.40 per Share to such creditor to settle HK$6.76 million of the indebtedness of the Group owed to it;
(o) the Fine Straight Agreement;
(p) a deed of assignment entered into on 4 January 2002 between Rich Mode Development Limited, a wholly owned subsidiary of the Company, Dao Heng Bank Limited and Mr Chu for the assignment to Mr Chu of certain indebtedness of Rich Mode Development Limited owed to Dao Heng Bank Limited;
(q) a deed of assignment entered into on 4 January 2002 between Mass Come Development Limited, Pure Fair Investment Limited, both wholly owned subsidiaries of the Company, Bank of China (Hong Kong) Limited and Mr Chu for the assignment to Mr Chu of certain indebtedness of Mass Come Development Limited and Pure Fair Investment Limited owed to Bank of China (Hong Kong) Limited;
(r) a subscription agreement entered into on 4 January 2002, as supplemented by a supplemental agreement entered into on 24 January 2002, between the Company and Mr Chu for (i) the subscription by Mr Chu of 283 Preference Shares at a consideration of HK$283 million which was satisfied by way of set-off of an equivalent amount of indebtedness of the Group assigned to Mr Chu; and (ii) the grant of an option to Mr Chu to subscribe up to a further 33 Preference Shares at a price of HK$1 million each to be satisfied by way of set-off of an equivalent amount of indebtedness of the Group assigned to Mr Chu;
(s) a subscription agreement entered into on 4 January 2002 between the Company and Mr Chu for the subscription by Mr Chu of up to 50,000,000 new Shares at a price of HK$0.40 per Share;
(t) the Placing Agreements;
(u) the Subscription Agreement; and
(v) the Sky Citi-Link Agreement.

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APPENDIX V

4. LITIGATION

On 17 March 2000, Star Cherry Investments Limited (a subsidiary of the Company), Costa Investments Limited and the Company entered into a conditional sale and purchase agreement for the acquisition of 99 shares in Union View Investments Holdings Limited. As some of the conditions contained in the agreement were not fulfilled, the agreement had lapsed whereupon a deposit of HK$20 million and all other sums paid by Star Cherry Investments Limited to Costa Investments Limited became refundable to Star Cherry Investments Limited. The Company and Star Cherry Investments Limited are currently involved in legal proceedings with Costa Investments Limited for the purpose of recovering the deposits paid. As at the Latest Practicable Date, preparation of witness statements from the parties involved are underway.

On 14 April 2000, a subsidiary of the Company entered into an agreement with Mr He Chenquang to acquire a 40% equity interest in Holdenby Enterprises Limited, a company wholly owned by Mr He Chenquang, for a total consideration of HK$32 million. HK$16 million was paid as a deposit under this agreement. This agreement lapsed due to the non-fulfilment of a condition precedent in the agreement. Pursuant to the agreement, all deposits paid should be refunded by Mr He Chenquang. On 6 March 2001, the subsidiary of the Company issued a writ of summons against Mr He Chenquang to claim for a return of the deposit, interest and costs. The solicitors for Mr He Chenquang took out a Summons on 27 December 2001 seeking security for costs against the subsidiary of the Company. The hearing of the Summons was adjourned to 10 June 2002.

On 29 June 2000, a subsidiary of the Company entered into an agreement with Mr He Chenquang to acquire a 65% equity interest in Drury Profits Limited, a company wholly owned by Mr He Chenquang, for a total consideration of HK$65 million. HK$9,831,000 was paid as a deposit under this agreement. This agreement lapsed due to the non-fulfilment of a condition precedent in the agreement. Pursuant to this agreement, all deposits paid should be refunded by Mr He Chenquang. On 6 March 2001, the subsidiary of the Company issued a writ of summons against Mr He Chenquang to claim for a return of the deposit, interest and costs. The solicitors for Mr He Chenquang took out a Summons on 27 December 2001 seeking security for costs against the subsidiary of the Company. The hearing of the Summons was adjourned to 10 June 2002.

Save as disclosed, so far as the Directors are aware, none of the members of the Enlarged Group is engaged in any litigation or arbitration or claims which is in the opinion of the Directors of material importance and no litigation or claims which is in the opinion of the Directors of material importance is known to the Directors to be pending or threatened by or against any member of the Enlarged Group.

5. MATERIAL CHANGES

There has been no material adverse change in the financial position or prospects of the Group since 31 March 2001, the date to which the latest published audited financial statements of the Group were made up.

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GENERAL INFORMATION

APPENDIX V

6. SERVICE CONTRACTS

On 28 December 2000, each of Mr Chan Fook Lai, Mr Chan King Hung and Mr Chu entered into a service contract with the Company which will continue unless and until terminated by either party.

Saved as disclosed above, as at the Latest Practicable Date, none of the Directors had entered into any service contracts with any member of the Group (excluding contracts expiring or determinable by the employer within one year without payment of compensation (other than statutory compensation)).

7. ARRANGEMENTS AFFECTING DIRECTORS

On 20 July 2001, the Company entered into an agreement with Mr Chu to acquire from him 150 shares of US$1.00 each in Hong Kong Satellite at a consideration of US$15 million (equivalent to about HK$117 million) which was satisfied by an issue of 390,000,000 new Shares at a price of HK$0.3 each.

On 20 July 2001, the Company also entered into an agreement with Hong Kong Satellite and Mr Chu for the subscription by the Company of 50 new shares of US$1.00 each in Hong Kong Satellite at a cash consideration of US$5 million (equivalent to about HK$39 million).

Mr Chu is a Director and, together with Mrs Chu and their respective associates, a substantial shareholder of the Company. Mr Chu is also a director of and, together with Mrs Chu, a controlling shareholder of Hong Kong Satellite. Details relating to these transactions are set out in a circular of the Company to Shareholders dated 3 October 2001.

Save as disclosed above and save for the Subscription Agreement:

(a) as at the Latest Practicable Date, none of the Directors was materially interested in any contract or arrangement entered into by any member of the Group subsisting at the Latest Practicable Date which was significant in relation to the business of the Group; and
(b) since 31 March 2001, the date to which the latest published audited financial statements of the Group were made up, none of the Directors has any direct or indirect interest in any assets acquired or disposed of by or leased to any member of the Group or proposed to be acquired or disposed of by or leased to any member of the Group.

8. EXPERTS

Chateron, the Accountants, Deloitte and the Valuer have given and have not withdrawn their written consent to the issue of this circular with the inclusion of their letters and reference to their names in the form and context in which they appear.

Chateron, the Accountants, Deloitte and the Valuer are not beneficially interested in the share capital of any member of the Group and have no right, whether legally enforceable or not, to subscribe for or to nominate persons to subscribe for securities in any member of the Group.

– 100 –

GENERAL INFORMATION

APPENDIX V

Since 31 March 2001, the date to which the latest published audited financial statements of the Group were made up, none of Chateron, the Accountants, Deloitte and the Valuer has any direct or indirect interest in any assets acquired or disposed of by or leased to any members of the Group or proposed to be acquired or disposed of by or leased to any members of the Group.

9. GENERAL

(a) The transfer office of the Company is Secretaries Limited, 5th Floor, Wing On Centre, 111 Connaught Road Central, Hong Kong.
(b) The secretary of the Company is Mr. Navin Aggarwal, Solicitor.
(c) The English text of this circular shall prevail over the Chinese text.

10. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection during normal business hours at the principal place of business of the Company in Hong Kong, 28th to 30th Floors, Workington Tower, 78 Bonham Strand, Sheung Wan, Hong Kong up to 5:00 p.m. on 14 June 2002:

(a) the memorandum of association and bye-laws of the Company;
(b) the annual reports of the Company for each of the two years ended 31 March 2000 and 31 March 2001;
(c) the material contracts referred to in the paragraph headed “Material Contracts” in this appendix;
(d) the Directors’ service contracts referred to in the paragraph headed “Service Contracts” in this appendix;
(e) the letter of advice from Chateron set out on pages 15 to 32 of this circular;
(f) the Accountants’ report set out in Appendix II to this circular;
(g) the valuation report set out in Appendix IV to this circular;
(h) the consent letters referred to in the section headed “Experts” in this appendix;
(i) the circulars of the Company dated 3 October 2001 and 28 January 2002; and
(j) the Subscription Agreement.

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NOTICE OF SPECIAL GENERAL MEETING

WAH TAK FUNG HOLDINGS LIMITED

(Incorporated in Bermuda with limited liability)

NOTICE IS HEREBY GIVEN that a special general meeting of Wah Tak Fung Holdings Limited (the “Company”) will be held at Hennessy Room, Level 7, Conrad Hong Kong, Pacific Place, 88 Queensway, Hong Kong on Monday, 17 June 2002 at 10:00 a.m. for the purposes of considering and, if thought fit, passing, with or without modifications, the following resolution which will be proposed as an ordinary resolution:

ORDINARY RESOLUTION

“ THAT the agreement dated 25 April 2002 (the “Agreement”) made between the Company, Hong Kong Satellite Technology Holdings Limited (“Hong Kong Satellite”) and Mr Chu David Yu Lin for the subscription by the Company of 200 shares of US$1.00 each in the capital of Hong Kong Satellite for a total consideration of US$20 million, a copy of which has been produced to the meeting marked “A” and have been signed by the Chairman of the meeting for the purpose of identification, be and is hereby approved, ratified and confirmed; and the directors of the Company or any one of them be and are hereby authorised on behalf of the Company:

(a) to sign, seal, execute, perfect and deliver all such documents and do all such deeds, acts, matters and things as they may in their discretion consider necessary or desirable for the purpose of or in connection with the implementation of the Agreement;
(b) to exercise or enforce all of the rights of the Company under the Agreement; and
(c) to complete the Agreement in accordance with its terms.”

By Order of the Board Navin Aggarwal Company Secretary

Hong Kong, 27 May 2002

Notes:–

A member entitled to attend and vote at the meeting is entitled to appoint one or more proxies to attend and vote in his stead. A proxy need not be a member of the Company.
A form of proxy in respect of the meeting is enclosed. Whether or not you intend to attend the meeting in person, you are requested to complete and return the form of proxy in accordance with the instructions printed thereon.
To be valid, the form of proxy, together with any power of attorney or other authority (if any) under which it is signed or a notarially certified copy of that power of attorney or authority must be lodged at the principal place of business of the Company in Hong Kong at 28th to 30th Floors, Workington Tower, 78 Bonham Strand, Sheung Wan, Hong Kong, not less than 48 hours before the time appointed for the meeting or any adjournment thereof.
Where there are joint registered holders of a share of the Company, any one of such holders may vote at the meeting either personally or by proxy in respect of such share as if he was solely entitled thereto, but if more than one of such holders be present at the meeting personally or by proxy, that one of such holders so present whose name stands first on the register of members of the Company in respect of such share shall alone be entitled to vote in respect thereof.

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AI assistant

CWT International Limited — Proxy Solicitation & Information Statement 2002

49269_rns_2002-05-27_e27ba6be-dbdd-41b7-a2ae-5259e662512b.pdf

IMPORTANT

WAH TAK FUNG HOLDINGS LIMITED

MAJOR AND CONNECTED TRANSACTION

CHATERON

DEFINITIONS

WAH TAK FUNG HOLDINGS LIMITED

MAJOR AND CONNECTED TRANSACTION

Subscription for further shares in Hong Kong Satellite Technology Holdings Limited

INTRODUCTION

SUBSCRIPTION AGREEMENT

Assets to be acquired

Consideration

Amount

Source of Funding

Payment

Basis

Conditions

Completion

INFORMATION ON HONG KONG SATELLITE

REASONS FOR THE ACQUISITION

LETTER FROM THE CHAIRMAN

FINANCIAL EFFECTS OF THE ACQUISITION

Proforma financial effects of the Acquisition

Effect on net tangible assets

Before Completion

FUTURE PLANS AND PROSPECTS

GENERAL

SPECIAL GENERAL MEETING

ADDITIONAL INFORMATION

WAH TAK FUNG HOLDINGS LIMITED

MAJOR AND CONNECTED TRANSACTION

Subscription for further shares in Hong Kong Satellite Technology Holdings Limited

CHATERON

CONNECTED TRANSACTION – SUBSCRIPTION AGREEMENT

INTRODUCTION

THE SUBSCRIPTION AGREEMENT

Principal factors and reasons considered

1. The organization structure and business operations of Hong Kong Satellite

2. The growth and development potentials of the satellite industry in the PRC

Effect on the business plans of Hong Kong Satellite

3. Reasons for entering into the Subscription Agreement

4. The consideration payable by the Company under the Subscription Agreement

LETTER FROM CHATERON

5. Experience and expertise of key personnel within Hong Kong Satellite which are relevant to the satellite industry

6. Financial effects on the Group as a result of the Subscription Agreement

On the financial results of the Group

RECOMMENDATION

1. SHARE CAPITAL

Options

Preference Shares

2. FINANCIAL SUMMARY OF THE GROUP

FINANCIAL SUMMARY

Results

AUDITORS’ REPORT

TO THE SHAREHOLDERS OF WAH TAK FUNG HOLDINGS LIMITED

Respective responsibilities of directors and auditors

Basis of opinion

Fundamental uncertainty relating to the going concern basis

Disclaimer of Opinion

CONSOLIDATED INCOME STATEMENT

BALANCE SHEETS

CONSOLIDATED STATEMENT OF RECOGNISED GAINS AND LOSSES

CONSOLIDATED CASH FLOW STATEMENT

NOTES TO THE FINANCIAL STATEMENTS

1. GENERAL

2. BASIS OF PREPARATION OF FINANCIAL STATEMENTS

3. SIGNIFICANT ACCOUNTING POLICIES

Basis of consolidation

Revenue recognition

Subsidiaries

Associates

Tangible fixed assets

Investment properties

Properties held for sale

Taxation

Retirement benefits cost

Cash equivalents

CWT International Limited Proxy Solicitation & Information Statement 2002