Design Capital Limited - Proxy Solicitation & Information Statement 2007

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

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

If you have sold or transferred all your shares in Swank International Manufacturing Company Limited, you should at once hand this circular to the purchaser or transferee or to the bank, licensed securities dealer or other agents through whom the sale or transfer was effected for transmission to the purchaser or transferee.

This circular is addressed to the Shareholders for information in connection with the extraordinary general meeting of the Company to be held on 23 August 2007. This circular is not and does not constitute an offer of, nor is it intended to invite offers for, securities of the Company.

Swank International Manufacturing Company Limited

(incorporated in Hong Kong with limited liability) (Stock Code: 663)

CONTINUING CONNECTED TRANSACTIONS AND

MAJOR TRANSACTION

Financial adviser to the Company

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Independent financial adviser to the Independent Board Committee and the Shareholders

A letter from the board of directors of Swank International Manufacturing Company Limited is set out on pages 6 to 19 of this circular. A letter from the Independent Board Committee (as defined herein) is set out on page 20 of this circular. A letter from Partners Capital International Limited containing its advice to the Independent Board Committee (as defined herein) and the Independent Shareholders (as defined herein) is set out on pages 21 to 48 of this circular.

A notice convening an EGM to be held at Suite 1102, 11/F., ICBC Tower, Citibank Plaza, 3 Garden Road, Central, Hong Kong on 23 August 2007 is set out on pages 115 to 118 of this circular. If you are not able to attend the EGM, you are requested to complete the form of proxy in accordance with the instructions printed thereon and return the same to the Company’s share registrar in Hong Kong, Secretaries Limited at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong not less than 48 hours before the time appointed for the holding the relevant meeting. Completion and return of the form of proxy will not prevent the Shareholders from attending and voting in person at the EGM or any adjournment thereof should they so wish.

8 August 2007

		Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		1
Letter from the Board
1.	Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
2.	Background of the Continuing Connected Transactions and
	the Major Transaction
	2.1 Yunnan Factories Coal Supply Contract . . . . . . . . . . . . . . . . . . . . . . . .	7
	2.2. The Phosphorus Ancillary Materials Procurement Agreement . . . . . . . .	8
	2.3 The PVC Leasing Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	9
	2.4 The PVC Ancillary Materials Procurement Agreement . . . . . . . . . . . . .	13
	2.5 The PVC Distribution Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	14
3.	Reasons for and benefits of the Continuing Connected Transactions and
	the Major Transaction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	15
4.	Financial and trading prospects of the Group . . . . . . . . . . . . . . . . . . . . . . . .	16
5.	Information on Yunphos . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	17
6.	EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	17
7.	Procedures to demand a poll by Shareholders. . . . . . . . . . . . . . . . . . . . . . . .	18
8.	Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	18
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . .		20
Letter from Partners Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		21
Appendix	I – Financial information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	49
Appendix	II – Valuation report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	98
Appendix	III – General information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	108
Notice of	EGM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	115

– i –

DEFINITIONS

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

“Agency Agreement”
an agency agreement entered into between a company wholly owned by Mr. Wang and a wholly owned subsidiary of the Company to provide agency services for the sale of chemical products
“Announcement”
the announcement of the Company dated 9 July 2007 relating to the Continuing Connected Transactions
“associates” the term bearing the meanings ascribed to it under the Listing Rules
“Board” the board of Directors
“Company” or “Swank International”
Swank International Manufacturing Company Limited, a company listed on the main board of the Stock Exchange
“Connected Person(s)”
connected person(s) of the Company as defined in the Listing Rules, i.e., in relation to the Company, means a director, chief executive or substantial shareholder of the Company or any of its subsidiaries or an associate of any of them
“Continuing Connected Transaction(s)”
the transactions contemplated under the Yunnan Factories Coal Supply Contract, the Phosphorus Ancillary Materials Procurement Agreement, the PVC Leasing Agreement, the PVC Ancillary Materials Procurement Agreement, the PVC Distribution Agreement
“China Time”
China Time Investment Holdings Limited, a company incorporated in the British Virgin Islands with limited liability, which owned approximately 60% of the Company’s issued capital as at the Latest Practicable Date
“Directors” the directors of the Company
“EGM”
extraordinary general meeting of the Company to be held at Suite 1102, 11/F., ICBC Tower, Citibank Plaza, 3 Garden Road, Central, Hong Kong at 4:30 p.m. on 23 August 2007 to approve, inter alia, the Continuing Connected Transactions and the Major Transaction
“Group”

the Company and its subsidiaries from time to time

– 1 –

DEFINITIONS

“Guangxi Agency Agreement”
“Guangxi Distribution Agreement”
“Guangxi Leasing Agreement”
“Guangxi Premises”
“Guangxi Raw Materials Purchase Agreement”
“Huahai”
“Independent Board Committee”
the agency agreement entered into between Huahai and Yunphos on 11 May 2006 in relation to the provision of agency services by Yunphos to Huahai for the sale of the phosphoric acid manufactured by the Guangxi Premises and stored in tanks for bulk shipment mainly in Indonesia, Thailand, Australia and the United States on behalf of Huahai
the distribution agreement entered into between Huahai and Yunphos on 11 May 2006, pursuant to which Yunphos will purchase the phosphoric acid manufactured by the Guangxi Premises and packed in drums for distribution from Huahai for onward distribution to its customers
the leasing agreement entered into between Huahai and Yunphos Fangcheng on 11 May 2006 in relation to the lease of the Guangxi Premises and the machinery and equipment located and/or installed in/on the Guangxi Premises for the production of phosphoric acid by Yunphos Fangcheng to Huahai
the production factory and the ancillary structures located at Huagang Road, Yu Zhou Cheng Industrial Zone, Gangkou District, Fangchenggang City, Guangxi Zhuang Zu Autonomous Region, the PRC for the production of phosphoric acid manufactured by the Guangxi Premises and packed in drums for distribution and the phosphoric acid manufactured by the Guangxi Premises and stored in tanks for bulk shipment
the supply agreement entered into between Huahai and Yunphos on 11 May 2006 in relation to the supply of raw materials including yellow phosphorus by Yunphos to Huahai for the production of the phosphoric acid manufactured by the Guangxi Premises and stored in tanks for bulk shipment
(Fangcheng Huahai Chemicals
Co., Ltd.*), an indirect wholly-owned subsidiary of Swank International incorporated in the PRC
independent board committee of the Company, comprising Mr. Choi Tze Kit, Sammy, Mr. Wu Bin and Mr. Tam King Ching, Kenny, all existing independent non-executive Directors

– 2 –

DEFINITIONS

“Independent Shareholders”
“Independent Third Party(ies)”
“Latest Practicable Date”
“Listing Rules”
“Major Transaction”
“Mr. Wang”
“Partners Capital”
“Phosphorus Ancillary Materials Procurement Agreement”
“PRC”
“PVC”
“PVC Ancillary Materials Procurement Agreement”

the shareholders of the Company other than Mr. Wang, China Time and their respective associates

the independent third party or parties who is/ are not connected with any of the Directors, chief executive and substantial shareholders of the Company or any of its subsidiaries or an associate of any of them
7 August 2007, being the latest practicable date prior to the printing of this circular for ascertaining certain information in this circular
the Rules governing the Listing of Securities on the Stock Exchange of Hong Kong
the transaction contemplated under the PVC Leasing Agreement
Mr. Wang An Kang ( ), being the sole shareholder of China Time and the ultimate controlling Shareholder
Partners Capital International Limited, a licensed corporation registered under the SFO to carry out types 1 and 6 regulated activities and the independent financial adviser to the Independent Board Committee and Independent Shareholders
the phosphorus ancillary materials procurement agreement entered into between Huahai and Yunphos on 9 July 2007, pursuant to which Huahai agrees to purchase from Yunphos and, or its associates ancillary materials for repairing and, or maintaining production facilities for phosphorus products.
the People’s Republic of China
polyvinyl chloride which is a form of plastic

the PVC ancillary materials procurement agreement entered into between Huahai and Yunphos on 9 July 2007, pursuant to which Huahai agrees to purchase ancillary materials for its PVC operations

– 3 –

DEFINITIONS

“PVC Distribution Agreement”
the PVC distribution agreement entered into between Huahai and Yunphos on 9 July 2007, pursuant to which Huahai has appointed Yunphos and, or its associates as its distributor to distribute sodium tripolyphosphate produced at the PVC Premises to customers outside the PRC
“PVC Leasing Agreement” the PVC leasing agreement entered into between Huahai and Yunphos on 9 July 2007, pursuant to which Huahai agrees to lease the PVC Premises and the machinery and equipment at the PVC Premises
“PVC Premises”
the production factory and the ancillary structures located in Jin Suo Industrial Small District, Xundian Hui Zu Yi Zu Autonomous County, Kunming City, Yunnan Province, the PRC for the production of PVC and other chemical products
“SFC”

the Securities and Futures Commission of Hong Kong

“SFO”
the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) as amended from time to time
“Share(s)”

the ordinary share(s) of HK$0.01 each in the issued share capital of the Company

“Shareholder(s)”

the shareholder(s) of the Company

“Stock Exchange”

The Stock Exchange of Hong Kong Limited

“Yunnan Factories Coal Supply Contract”

the coal supply contract entered into between Huahai and Yunphos on 9 July 2007, pursuant to which Huahai agrees to purchase up to approximately 150,000 tonnes of coal each year from Yunphos and, or its associates for use at the power generation plant at the Group’s yellow phosphorus production facilities at Yunnan Province, the PRC

“Yunnan Leasing Agreement”

the leasing agreement entered into between Huahai and Yunphos Xundian on 11 May 2006 in relation to the lease of the production factory and the ancillary structures located in Jin Suo Xiang Industrial Small District, Xundian County, Kunming City, Yunnan Province, the PRC for the production of the Yunnan Products (“Yunnan Premises”) and the machinery and equipment located and/or installed in/on the Yunnan Premises for the production for yellow phosphorus by Yunphos Xundia to Huahai

– 4 –

DEFINITIONS

“Yunphos Fangcheng” (Yunphos (Fangcheng) Chemicals Co. Ltd*), a company incorporated in the PRC with limited liability and owned as to 95% by Mr. Wang
“Yunphos Xundian” (Yunphos Xundian Phosphorus & Electricity Co., Ltd.*), a company incorporated in the PRC with limited liability and owned as to 85% by an associate of Mr. Wang and 15% by Mr. Wang
“Yunphos “ (Yunnan Phosphorus Group Co., Ltd.*), a company incorporated in the PRC with limited liability and owned as to approximately 99.56% by Mr. Wang and his associates
“HK$” Hong Kong dollars, the lawful currency of Hong Kong “RMB” Renminbi, the lawful currency of the PRC “US$” US dollars, the lawful currency of the United States “sq. m.” square meter “%” per cent.

For the purpose of illustration only, the translation of RMB into Hong Kong dollars is based on the exchange rate of HK$1.00 to RMB0.97.

– 5 –

LETTER FROM THE BOARD

Swank International Manufacturing Company Limited

(incorporated in Hong Kong with limited liability)

(Stock Code: 663)

Executive Directors: Mr. Wang An Kang Mr. Zhao Jun Mr. Li Wei Ms. Zhou Jing

Registered office: Suite 1102, 11/F ICBC Tower, Citibank Plaza 3 Garden Road, Central Hong Kong

Independent non-executive Directors: Mr. Choi Tze Kit, Sammy Mr. Wu Bin Mr. Tam King Ching, Kenny

Principal place of business in Hong Kong: 2/F, Koon Wah Mirror Factory (3rd) Industrial Building 5-9 Ka Hing Road Kwai Chung New Territories Hong Kong

8 August 2007

To the Shareholders

Dear Sir or Madam,

CONTINUING CONNECTED TRANSACTIONS AND MAJOR TRANSACTION

1. INTRODUCTION

On 9 July 2007, Huahai, a subsidiary of Swank International and Yunphos, an associate of Mr. Wang (the controlling shareholder of Swank International), entered into (i) the Yunnan Factories Coal Supply Contract; and (ii) the Phosphorus Ancillary Materials Procurement Agreement relating to the phosphorus business of the Group.

On 9 July 2007, Huahai and Yunphos entered into (i) the PVC Leasing Agreement; (ii) the PVC Ancillary Materials Procurement Agreement; and (iii) the PVC Distribution Agreement. These agreements, if approved by the Independent Shareholders, will enable the Group to diversify into the production and sale of PVC products.

– 6 –

LETTER FROM THE BOARD

The entering into the abovementioned agreements constitute continuing connected transactions of Swank International under the Listing Rules, and are subject to the announcement, reporting and the independent shareholders’ approval requirements under the Listing Rules.

The PVC Leasing Agreement also constitutes a major transaction of the Company under Rule 14.04(1)(d) of the Listing Rules. Accordingly, the PVC Leasing Agreement is subject to the disclosure and independent shareholders’ approval requirements under the Listing Rules. An independent board committee of Swank International comprising all the independent non-executive Directors has been formed to consider and advise the Independent Shareholders on the terms of the Major Transaction, the Continuing Connected Transactions and the related annual cap amounts. Partner Capital has been appointed to advise the Independent Board Committee and the Independent Shareholders.

Subject to the approval by the Independent Shareholders, the Continuing Connected Transactions and the Major Transaction described in this circular may or may not proceed. Shareholders and potential investors in Swank International are advised to exercise caution when dealing in the shares of the Company.

The purpose of this circular is to provide you with, among others, (i) the details of the Continuing Connected Transactions and the Major Transaction; (ii) the recommendation from the Independent Board Committee to the Shareholders on the Continuing Connected Transactions and the Major Transaction; (iii) the recommendation from Partners Capital to the Independent Board Committee and the Independent Shareholders on Continuing Connected Transactions and the Major Transaction; and (iv) the notice of EGM.

2. BACKGROUND OF THE CONTINUING CONNECTED TRANSACTIONS AND THE MAJOR TRANSACTION

2.1 The Yunnan Factories Coal Supply Contract

Date: 9 July 2007 Parties: Yunphos (which is an associate of Mr. Wang who is the controlling shareholder of the Company) as the supplier Huahai as the purchaser Terms: Huahai agrees to purchase up to approximately 150,000 tonnes of coal each year from Yunphos and, or its associates for use at the power generation plant at the Group’s yellow phosphorus production facilities at Yunnan Province, the PRC for a term commencing from the effective date of the Yunnan Factories Coal Supply Contract up to 31 December 2008.

– 7 –

LETTER FROM THE BOARD

The quantity and specification of coal to be supplied by Yunphos and, or its associates to Huahai will be subject to the individual orders to be placed by Huahai from time to time. The unit price of coal payable by Huahai to Yunphos and, or its associates will be no less favourable than the unit price offered to Huahai by independent suppliers for the same type of coal. The amount payable by Huahai to Yunphos and, or its associates shall be settled within 30 days upon receipt of the coal purchased.

Conditions of the The Yunnan Factories Coal Supply Contract is conditional agreement: upon obtaining approvals by the respective board of directors and shareholders of Huahai and Yunphos as well as the Independent Shareholders at the EGM. In the event that any of the conditions precedent is not fulfilled by 31 December 2007, the Yunnan Factories Coal Supply Contract shall lapse and the parties to the agreement shall be released from all obligations and liabilities thereunder.
Annual cap: The Company estimates that the annual cap amount of coal to be purchased under the Yunnan Factories Coal Supply Contract will be approximately RMB15.7 million (approximately HK$16.2 million) for each of the two financial years ending 31 December 2008. Such estimates are determined with reference to the unit price of coal offered to the Group by independent suppliers and the quantity of coal to be supplied under the Yunnan Factories Coal Supply Contract.

2.2 The Phosphorus Ancillary Materials Procurement Agreement

Date: 9 July 2007

Parties: Yunphos as the supplier of phosphorus ancillary materials Huahai as the purchaser of phosphorus ancillary materials

– 8 –

LETTER FROM THE BOARD

Terms:

Huahai agrees to purchase from Yunphos and, or its associates ancillary materials for repairing and, or maintaining production facilities for phosphorus products. The agreement will be for a term commencing from the effective date of the Phosphorus Ancillary Materials Procurement Agreement up to 31 December 2008. The quantity and specification of ancillary materials to be supplied by Yunphos and, or its associates to Huahai will be subject to individual order placed by Huahai from time to time. The price payable by Huahai to Yunphos and, or its associates will be the same price payable by Yunphos to third parties in acquiring the same and no less favourable than that offered to Huahai by independent suppliers for the same type of material. The purchase will be settled within 30 days from the end of each month.

Conditions of the The Phosphorus Ancillary Materials Procurement agreement: Agreement is conditional upon obtaining approvals by the respective board of directors and shareholders of Huahai and Yunphos as well as the Independent Shareholders at the EGM. In the event that any of the conditions precedent is not fulfilled by 31 December 2007, the Phosphorus Ancillary Materials Procurement Agreement shall lapse and the parties to the agreement shall be released from all obligations and liabilities thereunder.

Annual cap:

The Company estimates that the annual cap amounts in respect of ancillary materials and components to be purchased by Huahai from Yunphos and, or its associates will be approximately RMB3.6 million (approximately HK$3.7 million) for each of the two financial years ending 31 December 2008. Such estimates are determined with reference to the expected amount of ancillary materials and components required and to be purchased from Yunphos and, or its associates for use at the Group’s phosphorus production facilities at Yunnan Province and Guangxi Zhuang Zu Autonomous Region, the PRC.

2.3 The PVC Leasing Agreement

Date: 9 July 2007

Parties: Huahai as the lessee

Yunphos as the lessor

– 9 –

LETTER FROM THE BOARD

Terms:

Huahai agrees to lease the PVC Premises and the machinery and equipment at the PVC Premises for a term commencing from the effective date of the PVC Leasing Agreement up to 31 December 2009. The annual rental will be RMB75 million (approximately HK$77.3 million) payable quarterly in four equal amounts subject to the rental reduction and waiver mechanism described below. Rental for the first quarter after the PVC Leasing Agreement becomes effective shall be calculated on a pro-rata basis with respect to the number of days leased during that quarter and, after deducting the installment of RMB 2 million (approximately HK$2.1 million) to be paid by Huahai to Yunphos, subject to the rental reduction and waiver mechanism described below.

Huahai has an exclusive right to require Yunphos to renew the lease term for another three years by serving a written notice one month before the expiry of the PVC Leasing Agreement. The renewal terms shall be determined by both parties with reference to the then prevailing market rental and at a term that is no less favourable than rent offered by an independent third party.

Rental reduction and waiver mechanism

If Huahai records unaudited net losses in respect of its PVC operations during the first quarter (the “First Quarter”) after the PVC Leasing Agreement becomes effective, Yunphos agrees that Huahai’s obligation to pay the rental of RMB18.75 million (approximately HK$19.3 million) for that quarter will be deferred to the following quarter (the “Second Quarter”). The actual rental payable by Huahai will be determined according to the following: Scenario I: In case Huahai’s PVC operations record an unaudited aggregate net profit for the First Quarter and the Second Quarter, the cumulative rental payments for the two quarters will be RMB37.5 million (approximately HK$38.7 million), as adjusted rateably to the number of days leased during the First Quarter and after deducting the installment of RMB2 million (approximately HK$2.1 million) paid by Huahai to Yunphos.

– 10 –

LETTER FROM THE BOARD

Scenario II:

If Huahai’s PVC operations record an unaudited combined net loss for the First Quarter and the Second Quarter, the cumulative rental payments for the two quarters will be reduced by an amount equivalent to such net loss.

The amount of rental payable in any subsequent consecutive two quarters during the term of the PVC Leasing Agreement will be subject to the adjustment described above and based on the unaudited results of Huahai’s PVC operations for the relevant quarter.

The maximum amount of quarterly rental waived, if any, by Yunphos will not exceed the rental payable by Huahai for the corresponding period. If the unaudited combined net loss of Huahai’s PVC operations for the First Quarter and Second Quarter, and, or if any subsequent consecutive two quarters exceed the amount of rental payable for the corresponding two quarters, Huahai has the right to terminate the PVC Leasing Agreement with effect from the beginning of the next quarter by giving one weeks written notice to Yunphos. Upon termination of the PVC Leasing Agreement, Huahai will be released from all the obligations and liabilities thereunder.

– 11 –

LETTER FROM THE BOARD

Conditions precedent:

The PVC Leasing Agreement will become effective upon satisfying a number of conditions precedent including,

(i) obtaining the approval by the Independent Shareholders of the PVC Leasing Agreement,
(ii) the PVC Ancillary Materials Procurement Agreement and the PVC Distribution Agreement becoming effective in accordance with their respective terms;
(iii) payment of the installment of RMB2 million (approximately HK$2.1 million) by Huahai to Yunphos within 12 months from the date the PVC Leasing Agreement is approved by the Independent Shareholders; and
(iv) the supply and to the satisfaction of Huahai of all relevant land title certificates in respect of the PVC Premises.

In the event that any of the conditions precedent is not fulfilled by 31 December 2007, or such other later date as Yunphos and Huahai may agree in writing, the PVC Leasing Agreement shall lapse and the parties to the agreement shall be released from all obligations and liabilities thereunder.

PVC Premises:

Annual cap:

The PVC Premises occupy a gross floor area of approximately 103,967.23 square metre located at Jin Suo Industrial Small District, Xundian Hui Zu Yi Zu Autonomous County, Kunming City, Yunnan Province. These premises comprise 58 factory buildings for the production of PVC and other chemical products and power generation facilities. As at the Latest Practicable Date, the construction work of the PVC Premises has been substantially completed. The Company intends to recruit the existing management and technicians currently working at the PVC Premises when the PVC Leasing Agreement becomes effective.

On the basis of the rental payable under the PVC Leasing Agreement, the Directors estimate that the annual cap amounts for the rental of the PVC Premises and the machinery and equipment at the PVC Premises for the year ending 31 December 2007 will be RMB37.5 million (approximately HK$38.7 million) and for each of the two years ending 31 December 2009 will be RMB75 million (approximately HK$77.3 million).

– 12 –

LETTER FROM THE BOARD

2.4 The PVC Ancillary Materials Procurement Agreement

Date: 9 July 2007

Parties: Yunphos as the supplier

Huahai as the purchaser

Terms:

Huahai agrees to purchase ancillary materials for its PVC operations, for a term commencing from the effective date of the PVC Ancillary Materials Procurement Agreement up to 31 December 2009. These materials will be used for repairing and, or maintaining the production facilities of PVC products. The quantity and specification of ancillary materials to be supplied by Yunphos and, or its associates to Huahai will be subject to individual order placed by Huahai from time to time. The unit price payable by Huahai to Yunphos and, or its associates will be the same price payable by Yunphos to third parties in acquiring the same and no less favourable than the unit price offered by independent suppliers to Huahai for the same material or component. The purchases will be settled by means of telegraphic transfer within 30 days upon receipt of the materials or components purchased.

Conditions precedent:

The PVC Ancillary Materials Agreement is conditional upon (i) obtaining the approval by the Independent Shareholders of the PVC Ancillary Materials Procurement Agreement, and (ii) the PVC Leasing Agreement and the PVC Distribution Agreement becoming effective according to their respective terms. In the event that any of the conditions precedent is not fulfilled by 31 December 2007, or such other later date as Yunphos and Huahai may agree in writing, the PVC Ancillary Materials Procurement Agreement shall lapse and the parties thereto shall be released from all obligations and liabilities thereunder.

– 13 –

LETTER FROM THE BOARD

Annual cap:

The Company estimates that the annual cap amount of ancillary materials and components to be purchased by Huahai from Yunphos and, or its associates to be approximately RMB5.05 million (approximately HK$5.2 million), RMB10.1 million (approximately HK$10.4 million) and approximately RMB10.1 million (approximately HK$10.4 million) for each of the three financial years ending 31 December 2009, respectively. Such estimates were determined with reference to the expected consumption of ancillary materials and components required for Huahai’s PVC operations and the current market price of such materials and components.

2.5 The PVC Distribution Agreement

Date: 9 July 2007

Parties: Huahai as the supplier

Yunphos as the distributor

Terms:

Huahai has appointed Yunphos and, or its associates as its distributor to distribute sodium tripolyphosphate produced at the PVC Premises to customers outside the PRC. The PVC Distribution Agreement will commence from the effective date of the PVC Distribution Agreement up to 31 December 2008. The selling price of the sodium tripolyphosphate will be no less favourable than the price offered by Huahai to any independent customers for the same product. Yunphos is entitled to mark up the prices of sodium tripolyphosphate upon distributing to its own customers with reference to the administrative, marketing and finance costs incurred by it. Yunphos agrees to settle the payment within 30 days from the date Yunphos received the products.

Conditions precedent:

The PVC Distribution Agreement is conditional upon (i) obtaining the approval by the Independent Shareholders of the PVC Distribution Agreement and (ii) the PVC Ancillary Materials Procurement Agreement and the PVC Leasing Agreement becoming effective according to their respective terms. In the event that any of the conditions is not fulfilled by 31 December 2007, or such other later date as Yunphos and Huahai may agree in writing, the PVC Distribution Agreement shall lapse and the parties thereto shall be released from all obligations and liabilities thereunder.

– 14 –

LETTER FROM THE BOARD

Annual cap:

The Directors estimate the annual cap amounts of the sale of sodium tripolyphosphate to Yunphos and, or its associates under the PVC Distribution Agreement to be approximately RMB87.5 million (approximately HK$91.2 million) for each of the two years ending 31 December 2008. These cap amounts were determined mainly based on (i) estimated saleable quantity of 40,000 tonnes of sodium tripolyphosphate per year; (ii) recent market prices of approximately US$565 (approximately HK$4,400) per tonne of sodium tripolyphosphate as indicated by China Chamber of Commerce of Metals Minerals and Chemicals Importers and Exporters, an independent industry association; and (iii) estimated export sales order for sodium tripolyphosphate.

3. REASONS FOR AND BENEFITS OF THE CONTINUING CONNECTED TRANSACTIONS AND THE MAJOR TRANSACTION

The Group is principally engaged in the manufacture and sale of optical products, trading of optical equipment and accessories and the manufacture and sale of phosphoric acid. The new phosphorus business, which started in July, 2006 has improved the turnover and cash flow of the Group. For the year ended 31 December 2006, total turnover of the Group increased by approximately 60% to HK$235.2 million when compared with 2005.

By entering into the Yunnan Factories Coal Supply Contract, the Group can ensure a stable and reliable supply of coal required for its phosphorus operations. The Group will also benefit from a lower transportation cost for the supply of coal as Yunphos has its own coal mines within the vicinity of the Group’s yellow phosphorus production facilities at Yunnan Province, the PRC.

By entering into the Phosphorus Ancillary Materials Procurement Agreement, the Company can ensure a stable and reliable supply of ancillary materials and components for use in its phosphorus operations.

The Directors believe that there is significant growth potential in the demand of PVC products given their extensive applications ranging from construction building materials to water pipes and flooring material. The entering into the PVC Leasing Agreement allows the Group to diversify into the PVC business without having to make substantial capital commitment. In addition, the rental reduction and waiver mechanism under the PVC Leasing Agreement minimises the Group’s financial exposure if the PVC business is not profitable.

The entering into the PVC Ancillary Materials Procurement Agreement ensures a stable and reliable supply of ancillary materials and components required for the Group’s PVC operations. Further, the Directors believes that it will be cost effective for the Group to distribute sodium tripolyphosphate produced at the PVC Premises via Yunphos which has extensive experience in product distribution and a broad customers network.

– 15 –

LETTER FROM THE BOARD

4. FINANCIAL AND TRADING PROSPECTS OF THE GROUP

Optical business

According to the Company’s 2006 annual report, for the two years ended 31 December 2006, the turnover of the optical business was approximately HK$152.2 million and HK$118.4 million, respectively. The loss of the optical business segment recorded for the two years ended 31 December 2006 was approximately HK$21.5 million and HK$40.0 million, respectively. Following the consolidation of the two manufacturing plants into one in the Dongguan production centre, the Group is laying a solid foundation for a well-aligned and re-energized factory with manufacturing capabilities in metal, plastic hand-made and plastic injection molded frames. The Group expects such unification will give the management a renewed focus with a clear direction, also enhance inter-production plants effectiveness and cost efficiency and boost loyalty amongst the staff. The Group will focus to provide one-stop services to its key customers and at the same time improve its ability to produce high-end optical products.

Phosphorus and PVC businesses

Further to the introduction of the agency services business in 2005 in relation to the sale of chemicals including phosphorus and other related materials, the Group successfully launched its new manufacturing and sale businesses of phosphoric acid and yellow phosphorus in the second half of 2006 and the beginning of 2007 respectively. These new projects enable the Group to build up a solid platform to gain further experience in operating and managing chemical business and to provide the Group a vertically integrated structure for its phosphorus business to enhance profitability.

In light of the growing economy and rich phosphorus resources in the PRC in recent years, the Group is optimistic about the future of its phosphorus related chemical industry segments. The Group will further strengthen and expand its existing sales team for its phosphorus products. The expanded sales team will be responsible for soliciting new customers and maintaining relationships with existing customers in both domestic and international markets. This will enable the Group to further extend its existing sales networks. Given the fact that the Board possesses considerable expertise in international trade and in light of the extensive application of yellow phosphorus, the Board is confident that the Group will gradually establish its presence in the phosphorus related chemical industrial segments to further broaden its income base and enhance profitability.

The Board, with its experience in the chemical industry together with the Group’s existing platform, will continue identifying opportunities to further develop its business into other chemical industry segments in the PRC. In particular, the Group intends to further diversify into the business of the manufacturing and sale of PVC in the PRC.

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LETTER FROM THE BOARD

5. INFORMATION ON YUNPHOS

Yunphos is principally engaged in the development, manufacturing, import and export, and sale of phosphorus related products such as yellow phosphorus.

6. EGM

As at the Latest Practicable Date, Yunphos is held as to approximately 99.6 % by Mr. Wang and his associates, approximately 0.16% by Mr. Zhao Jun, approximately 0.16% by Mr. Chen Zhi Kang and approximately 0.11% by an independent third party. Accordingly, Yunphos is a connected person of Swank International within the meaning of the Listing Rules. The entering into the agreements described above therefore constitutes continuing connected transactions of Swank International under the Listing Rules. As the aggregate annual cap of these continuing connected transactions exceeds 2.5% of the applicable percentage ratios, these transactions are subject to the announcement, reporting and the independent shareholders’ approval requirements under the Listing Rules.

In addition, as the PVC Leasing Agreement, the Yunnan Leasing Agreement and the Guangxi Agreement (the last two agreements being previously approved by Independent Shareholders, the details of which are set out in the announcement of the Company dated 11 May, 2006) are all entered into between Huahai and Yunphos and, or its associates, they are aggregated pursuant to Rules 14.22 and 14.23 of the Listing Rules for the purpose of calculating the percentage ratios under Rule 14.07 of the Listing Rules. As the aggregate annual rental under each of the PVC Leasing Agreement, the Yunnan Leasing Agreement and the Guangxi Leasing Agreement results in a percentage increase of more than 200% in the Group’s existing operating lease payment, the PVC Leasing Agreement also constitutes a major transaction of the Company under Rule 14.04(1)(d) of the Listing Rules. Accordingly, the PVC Leasing Agreement is subject to the disclosure and independent shareholders’ approval requirements under the Listing Rules.

The Directors consider that the terms of the Continuing Connected Transactions and their respective cap amounts and the Major Transaction are fair and reasonable so far as the Independent Shareholders are concerned.

An EGM will be held to approve the Continuing Connected Transactions, the related annual cap amounts together with the Major Transaction described in this circular. China Time and its associates, which together hold approximately 60% of the issued share capital of the Company, will abstain from voting at the EGM on the ordinary resolutions in connection with the Continuing Connected Transactions and the Major Transaction. The voting will be taken by way of poll in accordance with the Listing Rules and the poll results will be published after the EGM.

An independent board committee of Swank International comprising all the independent non-executive Directors has been formed to consider and advise the Independent Shareholders on the terms of the Major Transaction, the Continuing Connected Transactions and the related annual cap amounts. Partner Capital has been appointed to advise the Independent Board Committee and the Independent Shareholders.

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LETTER FROM THE BOARD

A form of proxy is enclosed for use at the EGM. If you are unable to attend and vote at the EGM in person, you are requested to complete and return the enclosed form of proxy in accordance with the instructions printed thereon and return it to the Company’s share registrar in Hong Kong, Secretaries Limited at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong as soon as possible, but in any event not less than 48 hours before the time appointed for holding such meeting or any adjourned meeting. Completion and return of the form of proxy will not preclude you from attending and voting in person at the EGM or any adjourned meeting should you so wish.

7. PROCEDURES TO DEMAND A POLL BY SHAREHOLDERS

Pursuant to the articles of association of the Company, at any general meeting a resolution put to the vote of the meeting shall be decided on a show of hands unless a poll is (before or on the declaration of the result of the show of hands or on the withdrawal of any other demand for a poll) demanded:

(i) by the Chairman of the meeting; or
(ii) by at least three Shareholders present in person or by proxy for the time being entitled to vote at the meeting; or
(iii) by any Shareholder(s) present in person or by proxy and representing not less than one-tenth of the total voting rights of all the members having the right to vote at the meeting; or
(iv) by any Shareholder(s) present in person or by proxy and holding shares in the Company conferring a right to vote at the meeting being Shares on which an aggregate sum has been paid up equal to not less than one-tenth of the total sum paid up on all the Shares conferring that right; or
(v) if required by the Listing Rules, by any Director or Directors who, individually or collectively, hold proxies in respect of Shares representing five percent (5%) or more of the total voting rights at such meeting.

8. RECOMMENDATION

Your attention is drawn to (i) the letter from the Independent Board Committee set out on page 19 of this circular which contains the recommendation of the Independent Board Committee to the Independent Shareholders concerning the Continuing Connected Transactions and the respective annual cap amounts and the Major Transaction; (ii) the letter from Partners Capital set out on pages 21 to 48 of this circular which contains its recommendation to the Independent Board Committee and the Independent Shareholders on

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LETTER FROM THE BOARD

the Continuing Connected Transactions and the respective annual cap amounts and the Major Transaction and the principal factors and reasons considered by Partners Capital in arriving at its recommendation.

Having considered the above principal factors and reasons, the Board is of the opinion that the terms of the Continuing Connected Transaction and the respective annual cap amounts and the Major Transaction are fair and reasonable so far as the Independent Shareholders are concerned. Accordingly, the Board recommends the Independent Shareholders to vote in favour of the ordinary resolutions to be proposed at the EGM to approve the Continuing Connected Transaction and the respective annual cap amounts and the Major transaction.

Your attention is drawn to the Appendix of this circular setting out the general information of the Company.

By order of the Board Swank International Manufacturing Company Limited Zhao Jun Chairman

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

The following is the text of the letter of recommendation, prepared for the purpose of incorporation in this circular, from the Independent Board Committee to the Shareholders regarding the Continuing Connected Transactions and the Major Transaction:

Swank International Manufacturing Company Limited (incorporated in Hong Kong with limited liability)

(Stock Code: 663)

8 August 2007

To the Independent Shareholders

Dear Sirs or Madams,

CONTINUING CONNECTED TRANSACTIONS AND MAJOR TRANSACTION

We refer to the circular of the Company dated 8 August 2007 (the “Circular”) of which this letter forms part. Unless the context specifies otherwise, capitalized terms and herein have the same meanings as defined in the Circular.

We have been appointed by the Board as the Independent Board Committee to advise the Shareholders as to whether the terms of the Continuing Connected Transactions and the Major Transaction are fair and reasonable insofar as the Independent Shareholders are concerned and whether the Continuing Connected Transactions are in the interest of the Company and the Shareholders as a whole. Partners Capital has been appointed as the independent financial adviser to advise you and us in this respect.

RECOMMENDATION

We wish to draw your attention to the letter from the Board and the letter from Partners Capital to the Independent Board Committee and the Independent Shareholders which contains its advice to us in relation to the Continuing Connected Transactions and the Major Transaction as set out in the Circular.

Having taken into account the principal reasons and factors considered by, and the advice of, Partners Capital as set out in its letter of advice on pages 21 to 48 of the Circular, we are of the opinion that the terms of the Continuing Connected Transactions and the Major Transaction are fair and reasonable and in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend the Independent Shareholders to vote in favour of the ordinary resolutions to be proposed at the EGM to approve, inter alia, the Continuing Connected Transactions and the Major Transaction.

Yours faithfully, For and on behalf of

The Independent Board Committee Wu Bin

Choi Tze Kit, Sammy

Tam King Ching, Kenny

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LETTER FROM PARTNERS CAPITAL

Partners Capital International Limited Unit 3906, 39/F, COSCO Tower 183 Queen’s Road Central Hong Kong

8 August 2007

To the Independent Board Committee and the Independent Shareholders

Dear Sirs,

CONTINUING CONNECTED TRANSACTIONS AND MAJOR TRANACTION

INTRODUCTION

We refer to our engagement to advise the Independent Board Committee and the Independent Shareholders in respect of the terms of (i) the Yunnan Factories Coal Supply Contract; (ii) the Phosphorus Ancillary Materials Procurement Agreement; (iii) the PVC Leasing Agreement; (iv) the PVC Ancillary Materials Procurement Agreement; and (v) the PVC Distribution Agreement, each executed between Huahai a subsidiary of the Company, and Yunphos (an associate of Mr. Wang, being the controlling shareholder of the Company) for a term commencing from the respective effective date of the relevant agreement up to 31 December 2008 or 2009, particulars of which are set out in this circular to the Shareholders dated 8 August 2007 (the “Circular”) and in which this letter is reproduced. Unless the context requires otherwise, capitalised terms used in this letter shall have the same meanings as given to them under the definitions section of the Circular.

As set out in the letter from the Board (the “Letter from the Board”), the entering into of the abovementioned agreements constitute continuing connected transactions of the Company under the Listing Rules, and are subject to the announcement, reporting and the independent shareholders’ approval requirements under the Listing Rules. The PVC Leasing Agreement also constitutes a major transaction of the Company under Rule 14.04(1)(d) of the Listing Rule, and is accordingly subject to the disclosure and independent shareholders’ approval requirements under the Listing Rules.

In formulating our opinion, we have relied on the accuracy of the information and representations contained in the Circular and have assumed that all information and representations made or referred to in the Circular were true at the time they were made and continue to be true as at the date of the Circular. We have also relied on our discussion with the management of the Company regarding the Group and the respective terms of the agreements, including the information and representations contained in the Circular. We have also assumed that all statements of belief, opinion and intention made by the executive Directors and the Company in the Circular were reasonably made after due enquiry. We consider that we have reviewed sufficient information to reach an informed view, to justify our reliance on the accuracy of the information contained in the Circular and to provide a reasonable basis for our advice. We have no reason to suspect that any material facts have

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LETTER FROM PARTNERS CAPITAL

been omitted or withheld from the information contained or opinions expressed in the Circular nor to doubt the truth, accuracy and completeness of the information and representations provided to us by the executive Directors. We have not, however, conducted an independent in-depth investigation into the business and affairs of the Group (including the Company and Huahai), Yunphos and their respective associates nor have we carried out any independent verification of the information supplied.

PRINCIPAL FACTORS AND REASONS CONSIDERED FOR THE YUNNAN FACTORIES COAL SUPPLY CONTRACT

In arriving at our opinion regarding the terms of the Yunnan Factories Coal Supply Contract, we have considered the following principal factors and reasons:

1. Background of and reasons for entering into the Yunnan Factories Coal Supply Contract

The Group is principally engaged in the manufacture and sale of optical products, trading of optical equipment and accessories and the manufacture and sale of phosphoric acid. Upon review of the history and development of the Group, we summarise a brief chronological background prior to the execution the Yunnan Factories Coal Supply Contract as follows:

Date	Document signed	Signing parties	Signing parties	Subject matter
2005	Sale and purchase	➢	China Time	China Time Investment
	agreement		Investment	Holdings Limited (an
			Holdings	associate of Mr. Wang)
			Limited	completed an
		➢	previous	unconditional mandatory
			controlling	cash offer, thereby
			Shareholder	becoming the new
				controlling shareholder of
				the Company
2005	Agency Agreement	➢	a company	The Group entered into
	for continuing		wholly owned	an agency agreement in
	connected		by the	2005 with a company
	transaction		Company	wholly owned by Mr.
		➢	a company	Wang to provide agency
			wholly owned	services for the sale of
			by Mr. Wang	chemical products
				including red phosphorus,
				yellow phosphorus,
				phosphoric acid and
				related products to Italy,
				Japan and Korea in return
				for an agency fee with a
				view to broadening its
				income base.

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LETTER FROM PARTNERS CAPITAL

Date	Document signed	Signing parties	Signing parties	Subject matter
2006	Five agreements for	➢	Huahai	The Group entered into
	continuing connected	➢	Yunphos,	five continuing connected
	transactions	➢	Yunphos	transactions with
			Fangcheng,	Yunphos, Yunphos
		➢	Yunphos	Fangcheng, Yunphos
			Xundian	Xundian (associates of
				Mr. Wang), thereby
				tapping into the
				manufacture and sale of
				phosphoric acid and
				yellow phosphorus

The new phosphorus business, which started in July 2006, has improved the turnover and cash flow of the Group. Upon review of the annual reports of the Company, we summarise the relevant improvement in financial data of the Group as follows:

	Year	ended 31 December
	2005	2006	Change
	HK$’000	HK$’000
Turnover	146,983	235,201	+60%
Cashflow	(7,833)	6,421	+182%
Segment result
– Optical	(21,500)	(39,993)	–86%
– Phosphorus	–	22,639	N/A

In essence, we note that for the year ended 31 December, 2006, the segmental result of the Group’s new phosphorus business was profitable at approximately HK$22.6 million (2005: nil), which contrasted sharply with the ongoing loss-making segmental result of the Group’s optical business of approximately (HK$40.0 million) (2005: (HK$21.5 million)).

As set out in the Letter from the Board, by entering into the Yunnan Factories Coal Supply Contract, the Group can ensure a stable and reliable supply of coal required for its phosphorus operations. The Group will also benefit from a lower transportation cost for the supply of coal as Yunphos has its own coal mines within the vicinity of the Group’s yellow phosphorus production facilities at Yunnan Province, the PRC.

Upon enquiry, we understand from the executive Directors that the coal mines of Yunphos group are situated within 20 kilometres of Yunnan Premises. By sourcing the coal from Yunphos group’s own coal mines, the Group’s phosphorus operations may enjoy cost benefits, secure stable coal supplies, and improve its supply chain logistics at the Yunnan Premises which are presently leased by Group. On the above basis, we concur with the executive Directors’ belief that there is an acceptable rationale for the Group to enter into the Yunnan Factories Coal Supply Contract.

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LETTER FROM PARTNERS CAPITAL

2. Key terms of the Yunnan Factories Coal Supply Contract

(i) Subject matter

Pursuant to the Yunnan Factories Coal Supply Contract, Huahai agrees to purchase up to approximately 150,000 tonnes of coal each year from Yunphos and, or its associates for use at the power generation plant at the Group’s yellow phosphorus production facilities at Yunnan Province, the PRC for a term commencing from the effective date of the Yunnan Factories Coal Supply Contract up to 31 December 2008. The quantity and specification of coal to be supplied by Yunphos and, or its associates to Huahai will be subject to individual order placed by Huahai from time to time.

(ii) Pricing policy

The unit price of coal payable by Huahai to Yunphos and, or its associates will be no less favourable than the unit price offered to Huahai by independent suppliers for the same type of coal.

To this end, according to the Yunnan Factories Coal Supply Contract and as further advised by the executive Directors, price quotations will be sought by Huahai as appropriate from five local independent suppliers on the relevant date of procurement; and (ii) upon comparison, the open market price quotation from those independent suppliers will be chosen as the price payable by Huahai to Yunphos (and/or its subsidiaries) under the Yunnan Factories Coal Supply Contract.

(iii) Settlement policy

Pursuant to the Yunnan Factories Coal Supply Contract, the amount payable by Huahai to Yunphos and, or its associates shall be settled within 30 days upon receipt of the coal purchased.

Upon enquiry, we have reviewed quotations/contracts between Huahai (as purchaser) and Independent Third Party suppliers for similar coal which have been confirmed as representative samples according to the executive Directors. We have been confirmed by the executive Directors that the settlement days under the Yunnan Factories Coal Supply Contract are generally not less favourable than those offered by Independent Third Party suppliers.

(iv) Inter-conditionality

We note that the Yunnan Factories Coal Supply Contract is not conditional on the Phosphorus Ancillary Materials Procurement Agreement becoming effective in accordance with their respective terms. Upon enquiry, we have been confirmed by the executive Directors that the manufacture and sale of yellow phosphorus and phosphoric acid by the Group may still continue with no adverse impact in the absence of the ancillary material supply by Yunphos.

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LETTER FROM PARTNERS CAPITAL

3. Annual cap of the coal to be purchased

The Company estimates that the annual cap amount of coal to be purchased under the Yunnan Factories Coal Supply Contract will be approximately RMB15.7 million (approximately HK$16.2 million) for each of the two financial years ending 31 December 2008. Such estimates are determined with reference to the unit price of coal offered to the Group by independent suppliers and the quantity of coal to be supplied under the Yunnan Factories Coal Supply Contract.

For the purpose of assessing whether such maximum cap is justifiable, we analyse the basis of arriving at such cap amount in terms of two constituting components, namely “quantity” and “price”:

(i) Quantity

Upon enquiry, we have been advised by the executive Directors that the relevant “quantity” component constituting the cap amount can be summarised as follows:

		Year ended 31 December	Year ended 31 December
Coal		2007	2008
		Tonnes	Tonnes
Expected	quantity to be supplied under the
Yunnan	Factories Coal Supply Contract	150,000	150,000

We have been further advised by the executive Directors that the estimated maximum quantity of coal to be procured is derived on the basis of (i) the annual maximum supply capacity of Yunphos’ coal mines available to Huahai; and (ii) the annual actual demand for coal for electricity generation as required by Huahai’s leased Yunnan Premises of 530,000 tonnes for the year ended 31 December 2006.

On the above basis, we consider that there is a pre-determined basis (with reference to the annual maximum supply capacity of Yunphos’ coal mines available to Huahai and the annual actual demand for coal for electricity generation as required by Huahai’s leased Yunnan Premises) in arriving at the quantity of coal to be purchased by Huahai from Yunphos from 2007 to 2008 for the purpose of determining the annual cap.

(ii) Price

As set out in the Letter from the Board and as further advised by the executive Directors, the price of coal to be purchased by Huahai from Yunphos for the purpose of arriving at the cap from 2007 to 2008 is RMB105.3 per tonne, being the quotation of price range of coal by Yunphos at around the date of the

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LETTER FROM PARTNERS CAPITAL

Yunnan Factories Coal Supply Contract. We have also reviewed and compared the market price of comparable coal as shown in invoices issued by Independent Third Party which is higher than that of Yunphos issued to the Company.

On the above basis, we consider that there is a pre-determined basis in arriving at the price of coal to be purchased by Huahai from Yunphos from 2007 to 2008 for the purpose of determining the annual cap.

(iii) Maximum cap

Having regard to

(i) the pre-determined basis of estimating the quantity of coal to be purchased by Huahai from Yunphos;
(ii) the pre-determined basis in arriving at the price of coal to be purchased by Huahai from Yunphos from 2007 to 2008; and
(iii) the fact that the purchases under the Yunnan Factories Coal Supply Contract are subject to certain conditions as set out in the following paragraph headed “The conditions” which is regarded as a mechanism to protect the interest of the Independent Shareholders,

we consider that the maximum cap for each of the two financial years ending 31 December 2008 respectively is acceptable for the purpose of accommodating the purchases under the Yunnan Factories Coal Supply Contract.

(iv) The conditions

Pursuant to the Listing Rules, the Company will seek the approval by the Independent Shareholders of the Yunnan Factories Coal Supply Contract (including the annual cap) for the two financial years ending 31 December 2008 subject to the following conditions:

The transactions contemplated under the Yunnan Factories Coal Supply Contract will be:
(a) entered into in the ordinary and usual course of the business of the Group;
(b) conducted on normal commercial terms or, if there are no sufficient comparable transactions to judge whether they are on normal commercial terms, on terms no less favourable to the Company than terms available from Independent Third Parties; and

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LETTER FROM PARTNERS CAPITAL

(c) entered into in accordance with the terms of the Yunnan Factories Coal Supply Contract that are fair and reasonable and in the interests of the Shareholders as a whole;
The aggregate amount of the purchase under the Yunnan Factories Coal Supply Contract shall not exceed approximately RMB15.7 million (approximately HK$16.2 million) for each of the two financial years ending 31 December 2008; and
The Company will comply with all other relevant requirements under the Listing Rules.

Taking into account of the conditions attached to the transactions contemplated under the Yunnan Factories Coal Supply Contract, in particular (i) the restriction by way of setting the annual cap; and (ii) the compliance with all other relevant requirements under the Listing Rules (which include the annual review and/or confirmation by the independent non-executive Directors and auditors of the Company on the actual execution of the transactions contemplated under the Yunnan Factories Coal Supply Contract pursuant to Rule 14A.37 and 14A.38 of the Listing Rules), we consider that the Company has taken appropriate measures to govern the Company in carrying out the transactions contemplated under the Yunnan Factories Coal Supply Contract, thereby safeguarding the interests of the Shareholders thereunder. In particular, we note that the transactions contemplated under the Yunnan Factories Coal Supply Contract are, by virtue of the requirements under Rule 14A.37 of the Listing Rules, conditional upon being carried out by the Company in the ordinary and usual course of its business, on normal commercial terms, fair and reasonable and in the interests of the Shareholders as a whole.

RECOMMENDATION FOR THE YUNNAN FACTORIES COAL SUPPLY CONTRACT

Having considered the above factors, in particular,

(i) the background of and the reasons for carrying out the transactions contemplated under the Yunnan Factories Coal Supply Contract (namely, to ensure a stable and reliable supply of coal required for its phosphorus operations);
(ii) the price of coal to be procured under the Yunnan Factories Coal Supply Contract will be no less favourable than the unit price offered to Huahai by independent suppliers for the same type of coal;
(iii) the basis of setting the annual cap as a function of the pre-determined maximum quantity and the pre-determined price level of coal to be purchased from 2007 to 2008; and
(iv) the conditions attached to carrying out the transactions contemplated under the Yunnan Factories Coal Supply Contract as a mechanism to protect the interest of the Independent Shareholders,

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LETTER FROM PARTNERS CAPITAL

we consider that the terms of the Yunnan Factories Coal Supply Contract (including the annual cap) are fair and reasonable so far as the Independent Shareholders are concerned and are in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend the Independent Board Committee to advise the Independent Shareholders, and we advise the Independent Shareholders, to vote in favour of the resolution to approve the transactions contemplated under the Yunnan Factories Coal Supply Contract.

PRINCIPAL FACTORS AND REASONS CONSIDERED FOR THE PHOSPHORUS ANCILLARY MATERIALS PROCUREMENT AGREEMENT

In arriving at our opinion regarding the terms of the Phosphorus Ancillary Materials Procurement Agreement, we have considered the following principal factors and reasons:

1. Background of and reasons for entering into the Phosphorus Ancillary Materials Procurement Agreement

As set out in the Letter from the Board, by entering into the Phosphorus Ancillary Materials Procurement Agreement, the Company can ensure a stable and reliable supply of ancillary materials and components for use in its phosphorus operations. Upon enquiry for a full list of specification of the relevant ancillary materials under the Phosphorus Ancillary Materials Procurement Agreement, we have been confirmed by the executive Directors that they represent mainly screws, steel, electrical components, sensors, cable/wires, lubricants and other repair and maintenance components essential for the smooth and continuing operation of Yunnan Premises.

Upon further enquiry, we understand from the executive Directors that Yunphos is used to leverage on a better bargaining power by way of adopting central procurement of ancillary materials commonly used by its members. By sourcing the relevant ancillary materials centrally procured by Yunphos, the Group’s phosphorus operations may secure stable ancillary material supplies, and improve its supply chain logistics at the Yunnan Premises which are presently leased by the Group. On the above basis, we concur with the executive Directors’ belief that there is an acceptable rationale for the Group to enter into the Phosphorus Ancillary Materials Procurement Agreement.

2. Key terms of the Phosphorus Ancillary Materials Procurement Agreement

(i) Subject matter

Pursuant to the Phosphorus Ancillary Materials Procurement Agreement, Huahai agrees to purchase from Yunphos and, or its associates ancillary materials for repairing and, or maintaining production facilities for phosphorus products. The agreement will be for a term commencing from the effective date of the Phosphorus Ancillary Materials Procurement Agreement up to 31 December 2008. The quantity and specification of ancillary materials to be supplied by Yunphos and, or its associates to Huahai will be subject to individual order placed by Huahai from time to time.

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LETTER FROM PARTNERS CAPITAL

(ii) Pricing policy

The price payable by Huahai to Yunphos and, or its associates will be the same price payable by Yunphos to third parties in acquiring the same and no less favourable than that offered to Huahai by independent suppliers for the same type of material.

To this end and in practice, we have been confirmed by the executive Directors that Huahai will seek for price quotation among the independent suppliers in the market and will only accept the price chargeable by Yunphos if it is assessed by Huahai to be no less favourable than that offered to Huahai by independent suppliers for the same type of material. Meanwhile, we have been confirmed by the executive Directors that no mark-up on pricing will be charged by Yunphos to Huahai because Yunphos will be supplying the ancillary materials at cost to Huahai.

(iii) Settlement policy

Pursuant to the Phosphorus Ancillary Materials Procurement Agreement, the purchase will be settled within 30 days from the end of each month.

In this regard, we have been confirmed by the executive Directors that the settlement days under the Phosphorus Ancillary Materials Procurement Agreement are not unreasonable.

(iv) Inter-conditionality

We note that the Phosphorus Ancillary Materials Procurement Agreement is not conditional on the Yunnan Factories Coal Supply Contract becoming effective in accordance with their respective terms. Upon enquiry, we have been confirmed by the executive Directors that the manufacture and sale of yellow phosphorus and phosphoric acid by the Group may still continue with no adverse impact in the absence of the coal supply by Yunphos.

3. Annual cap of the ancillary materials to be purchased

The Company estimates that the annual cap amounts in respect of ancillary materials and components to be purchased by Huahai from Yunphos and, or its associates will be approximately RMB3.6 million (approximately HK$3.7 million) for each of the two financial years ending 31 December 2008.

(i) Maximum cap

Upon enquiry, we have been confirmed by the executive Directors that the Yunnan Premises actually managed to consume approximately RMB3.6 million worth of ancillary materials for the year ended 31 December 2006, approximately

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LETTER FROM PARTNERS CAPITAL

equal to the estimated total of RMB3.6 million (approximately HK$3.7 million) worth of ancillary materials required for use at the Group’s phosphorus production facilities for each of the two years ending 31 December 2008.

On the above basis, we consider that there is a pre-determined basis (with reference to latest actual consumption data) in arriving at the maximum cap of ancillary materials to be purchased by Huahai from Yunphos for each of the two financial years ending 31 December 2008 respectively is acceptable for the purpose of accommodating the purchases under the Phosphorus Ancillary Materials Procurement Agreement.

(ii) The conditions

Pursuant to the Listing Rules, the Company will seek the approval by the Independent Shareholders of the Phosphorus Ancillary Materials Procurement Agreement (including the annual cap) for the two financial years ending 31 December 2008 subject to the following conditions:

The transactions contemplated under the Phosphorus Ancillary Materials Procurement Agreement will be:
(a) entered into in the ordinary and usual course of the business of the Group;
(b) conducted on normal commercial terms or, if there are no sufficient comparable transactions to judge whether they are on normal commercial terms, on terms no less favourable to the Company than terms available from Independent Third Parties; and
(c) entered into in accordance with the terms of the Phosphorus Ancillary Materials Procurement Agreement that are fair and reasonable and in the interests of the Shareholders as a whole;
The aggregate amount of the purchase under the Phosphorus Ancillary Materials Procurement Agreement shall not exceed approximately RMB3.6 million (approximately HK$3.7 million) for each of the two financial years ending 31 December 2008; and
The Company will comply with all other relevant requirements under the Listing Rules.

Taking into account of the conditions attached to the transactions contemplated under the Phosphorus Ancillary Materials Procurement Agreement, in particular (i) the restriction by way of setting the annual cap; and (ii) the compliance with all other relevant requirements under the Listing Rules (which include the annual review and/or confirmation by the independent non-executive Directors and auditors of the Company on the actual execution of the transactions

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LETTER FROM PARTNERS CAPITAL

contemplated under the Phosphorus Ancillary Materials Procurement Agreement pursuant to Rule 14A.37 and 14A.38 of the Listing Rules), we consider that the Company has taken appropriate measures to govern the Company in carrying out the transactions contemplated under the Phosphorus Ancillary Materials Procurement Agreement, thereby safeguarding the interests of the Shareholders thereunder. In particular, we note that the transactions contemplated under the Phosphorus Ancillary Materials Procurement Agreement are, by virtue of the requirements under Rule 14A.37 of the Listing Rules, conditional upon being carried out by the Company in the ordinary and usual course of its business, on normal commercial terms, fair and reasonable and in the interests of the Shareholders as a whole.

RECOMMENDATION FOR THE PHOSPHORUS ANCILLARY MATERIALS PROCUREMENT AGREEMENT

Having considered the above factors, in particular,

(i) the background of and the reasons for carrying out the transactions contemplated under the Phosphorus Ancillary Materials Procurement Agreement (namely, to ensure a stable and reliable supply of ancillary materials and components for use in its phosphorus operations);
(ii) the price of ancillary materials to be procured under the Phosphorus Ancillary Materials Procurement Agreement will be no less favourable than that offered to Huahai by independent suppliers for the same type of material;
(iii) the basis of setting the annual cap as a function of the pre-determined maximum quantity and the pre-determined price level of ancillary materials to be purchased from 2007 to 2008; and
(iv) the conditions attached to carrying out the transactions contemplated under the Phosphorus Ancillary Materials Procurement Agreement as a mechanism to protect the interest of the Independent Shareholders,

we consider that the terms of the Phosphorus Ancillary Materials Procurement Agreement (including the annual cap) are fair and reasonable so far as the Independent Shareholders are concerned and are in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend the Independent Board Committee to advise the Independent Shareholders, and we advise the Independent Shareholders, to vote in favour of the resolution to approve the transactions contemplated under the Phosphorus Ancillary Materials Procurement Agreement.

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LETTER FROM PARTNERS CAPITAL

PRINCIPAL FACTORS AND REASONS CONSIDERED FOR THE PVC LEASING AGREEMENT

In arriving at our opinion regarding the terms of the PVC Leasing Agreement, we have considered the following principal factors and reasons:

1. Background of and reasons for entering into the PVC Leasing Agreement

As set out in the letter from the Board, the executive Directors believe that there is significant growth potential in the demand of PVC products given their extensive applications ranging from construction building materials to water pipes and flooring material. According to (www.ccaon.com), the PVC market of the PRC in recent years is summarised as follows:

	For the		For the		For the
	four months	Change	12 months		12 months
	ended	(Period-	ended	Change	ended
	30 April	on-	31 December	(Year-	31 December
	2007	Period)	2006	on-Year)	2005
	(’000 tones)		(’000 tones)		(’000 tones)
Production	2,976	+22.8%	8,239	+24%	6,654
Export	278	+108%	460	+287%	119
Import	350	–15%	1,147	–12%	1,307

Source: (www.ccaon.com, a portal website focusing on Chinese chlor-alkali market (which was invested by China Chlor-Alkali Industry Association, an industry association, and two major producers namely Beijing Huaer Co., Ltd and Shanghai Chlor-Alkali Chemical Co., Ltd. Save as being a member of China Chlor-Alkali Industry Association, the Company have confirmed that each of China Chlor-Alkali Industry Association, Beijing Huaer Co., Ltd and Shanghai Chlor-Alkali Chemical Co., Ltd are Independent Third Party.)

Upon enquiry, we have been advised by the executive Directors that yellow phosphorus presently produced by the Group at the Yunnan Premises (as leased by the Group under the continuing connected transactions since 2006) is an upstream raw material for sodium tripolyphosphate to be produced at the PVC Premises. No yellow phosphorus can be produced at the PVC Premises. Given the market potential of PVC products, and by way of leveraging on the Group’s existing phosphorus business which is capable of supplying the necessary raw material for downstream PVC products, we consider that there is an acceptable rationale for the Group to enter into the PVC Leasing Agreement, which is to vertically integrate and diversify the Group into the manufacture and sale of PVC products (thereby broadening the revenue source of the Group). Through the mode of operating lease, the PVC Leasing Agreement enables the Group to be equipped with the assets for the manufacture of PVC products immediately without delay and without having to incur substantial capital commitment (as in the case of outright construction or acquisition of a similar production factory) on the part of the Group. In addition, the rental reduction and waiver mechanism under the PVC Leasing Agreement minimises the Group’s financial exposure if the PVC business is not profitable.

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2. Key terms of the PVC Leasing Agreement

(i) Subject matter

Pursuant to the PVC Leasing Agreement, Huahai agrees to lease the PVC Premises and the machinery and equipment at the PVC Premises for a term commencing from the effective date of the PVC Leasing Agreement up to 31 December 2009. The PVC Premises occupy a gross floor area of approximately 103,967.23 square metre located at Jin Suo Industrial Small District, Xundian Hui Zu Yi Zu Autonomous County, Kunming City, Yunnan Province. These premises comprise 58 factory buildings for the production of PVC and other chemical products and power generation facilities.

Upon enquiry, we have been advised by the executive Directors that the PVC Premises commenced its trial production in early 2007 by Mr. Wang. For the six months ended 30 June 2007, the executive Directors advise that the actual production volume of PVC resin and sodium tripolyphosphate at the PVC Premises was approximately 13,000 tonnes and 12,000 tonnes respectively (with an utilization rate of less than approximately 50%). By contrast, assuming an utilization rate of approximately 100%, the annual maximum production capacity of PVC resin and sodium tripolyphosphate at the PVC Premises is expected to be 130,000 tonnes and 60,000 tonnes respectively for the year ending 31 December 2007. As at the Latest Practicable Date, construction work at the PVC Premises has been substantially completed. The Company intends to recruit existing management and technicians working at the PVC Premises when the PVC Leasing Agreement becomes effective.

(ii) Rental

Pursuant to the PVC Leasing Agreement and Letter from the Board, subject to the rental reduction and waiver mechanism described in the next section,

(i) the annual rental will be RMB75 million (approximately HK$77.3 million) payable quarterly in four equal amounts; and
(ii) rental for the first quarter after the PVC Leasing Agreement becomes effective shall be calculated on a pro-rata basis with respect to the number of days leased during that quarter and, after deducting the installment of RMB2 million (approximately HK$2.1 million) to be paid by Huahai to Yunphos.

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LETTER FROM PARTNERS CAPITAL

The rental payable under the PVC Leasing Agreement was determined after arm’s length negotiation and with reference to an independent professional valuation of the annual rental by B.I. Appraisals Limited of the PVC Premises and the machinery and equipment at the PVC Premises, at RMB85 million (approximately HK$87.6 million) as at 30 June 2007. Upon enquiry, we understand that the applications for (i) the Certificates of Building Ownership regarding the buildings in the Power Plant Phase II and (ii) the Certificate of State-owned Land Use and Certificates of Buildings Ownership in respect of the land and buildings of the PVC Premises have been made but not yet obtained as at the Latest Practicable Date. We consider such lack of land/building titles may render Yunphos from possessing the necessary and legitimate authority to lease the PVC Premises to the Group. However, we note that “the supply and to the satisfaction of Huahai of all relevant land title certificates in respect of the PVC Premises” is one of the conditions precedent to the PVC Leasing Agreement, without the fulfillment of which the PVC Leasing Agreement cannot become effective (and hence the PVC Ancillary Materials Procurement Agreement and the PVC Distribution Agreement which are inter-conditional). We have further obtained confirmation from the executive Directors that the PVC Leasing Agreement will not proceed in case the lack of land/building titles of the PVC Premises still prevails. For reference purpose, the PRC legal adviser appointed by the Company confirms that there are no legal impediment for Yunphos to obtain the relevant Certificate of State-owned Land Use and Certificates of Buildings Ownership for the PVC Premises.

According to the “Valuation Report” as set out in Appendix II to the Circular, owing to the nature of the buildings and structures erected on and the machinery installed at the PVC Premises which are specifically designed for the production of PVC resin, caustic soda and, pentetic acid and other chemical products and for which there are no readily identifiable comparable leasing transactions, the market ’rent’ of the PVC Premises and the PVC Machinery and Equipment cannot be valued by comparison with open market transactions. Therefore, B.I. Appraisals Limited has resorted to adopt the Investment Approach by firstly assessing the market values to the PVC Premises and the PVC Machinery and Equipment respectively, and then applying appropriate yields to the market values arrived.

B.I. Appraisals Limited has arrived at the market ‘values’ of the PVC Premises and the PVC Machinery and Equipment by way of adopting the Depreciated Replacement Cost Approach (“DRC Approach”). We have interviewed with B.I. Appraisals Limited on this valuation methodology and further understand that both the market comparable approach and the income capitalization approach were not applied for the purpose of valuing the PVC Premises and the PVC

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Machinery and Equipment. Details of the valuation methodologies considered by B.I. Appraisals Limited in arriving at the market value of PVC Premises and the PVC Machinery and Equipment are summarised as follows:

			Market comparable	Market comparable	Income capitalization	Income capitalization
	DRC Approach		approach		approach
PVC	�	Considered the cost to reproduce or	�	Not applied	�	Not applied
Premises		replace in new condition the		because DRC		because DRC
		buildings and structures being valued		Approach		Approach
		in accordance with current		generally		generally
		construction costs for similar		furnishes the		furnishes the
		property in the locality, with		most reliable		most reliable
		allowance for accrued depreciation		indication of		indication of
		as evidenced by observed condition		value for		value for
		or obsolescence present, whether		property in the		property in the
		arising from physical, functional or		absence of a		absence of a
		economics causes		known market		known market
				based on		based on
				comparable		comparable
				sales		sales
PVC	�	For the assets of standard	�	Not applied due	�	Not applied due
Machinery		manufacture, used current		to absence of		to absence of
and		manufacturers’ price lists, price		identified active		identifiable
Equipment		quotations and price catalogs to		used-equipment		income stream
		determine the cost of replacement.		market in the		can be
		Allowances for freight and		PRC that		attributed to a
		installation were sometimes required.		provides		specific piece of
				information on		equipment or a
	�	For the assets of special design or		recent		group of
		fabrication, used current market		transactions of		equipment
		price for labor, current market price		comparable
		for materials, manufactured		items
		components, design fees, engineering
		fees and contractors’ overhead, profit
		and fee to determine the cost of
		replacement new. Allowances for
		freight and installation were
		sometimes required.
	�	Adopted the assets index factor to
		estimate the cost of reproduction
		new of special design or fabrication
		machinery and equipment. An index
		factor is applied to the historical
		cost of appraised equipment in order
		to estimate the current cost of the
		assets being appraised.
	�	The deductions for physical
		deterioration, functional
		obsolescence, and economic
		obsolescence have reflected observed
		condition; past maintenance and
		rebuilding history, if any; current
		use; and planned future utilization.

On the above basis, and taking into account of the confirmation by B.I. Appraisals Limited that its valuations have been carried out in accordance with The HKIS Valuation Standards on Properties (1st Edition 2005) issued by the Hong Kong Institute of Surveyors and under generally accepted valuation procedures and practices, which are in compliance with the Listing Rules, we

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LETTER FROM PARTNERS CAPITAL

concur with B.I. Appraisals Limited that the valuation methodology adopted thereby is generally in line with market practice of valuing the market value and market rent of tangible assets such as buildings and equipments.

On the basis that the annual rental of RMB75 million (approximately HK$77.3 million) represents approximately 12% discount to the fair rental of approximately RMB85 million (approximately HK$87.6 million) as appraised by B.I. Appraisals Limited as at 30 April 2007, we consider that the annual rental under the PVC Leasing Agreement is acceptable so far as the interests of the Independent Shareholders are concerned.

(iii) Rental reduction and waiver mechanism

Pursuant to the PVC Leasing Agreement, if Huahai records unaudited net losses in respect of its PVC operations during the first quarter (the “First Quarter”) after the PVC Leasing Agreement becomes effective, Yunphos agrees that Huahai’s obligation to pay the rental of RMB18.75 million (approximately HK$19.3 million) for that quarter will be deferred to the following quarter (the “Second Quarter”). The actual rental payable by Huahai will be determined according to the following:

Scenario I: In case Huahai’s PVC operations record an unaudited aggregate net profit for the First Quarter and the Second Quarter, the cumulative rental payments for the two quarters will be RMB37.5 million (approximately HK$38.7 million), as adjusted rateably to the number of days leased during the First Quarter and after deducting the installment of RMB2 million (approximately HK$2.1 million) paid by Huahai to Yunphos.

Scenario II: If Huahai’s PVC operations record an unaudited combined net loss for the First Quarter and the Second Quarter, the cumulative rental payments for the two quarters will be reduced by an amount equivalent to such net loss.

The maximum amount of quarterly rental waived, if any, by Yunphos will not exceed the rental payable by Huahai for the corresponding period. If the unaudited combined net loss of Huahai’s PVC operations for the First Quarter and Second Quarter, and, or if any subsequent consecutive two quarters exceed the amount of rental payable for the corresponding two quarters, Huahai has the right to terminate the PVC Leasing Agreement with effect from the beginning of the next quarter by giving one week written notice to Yunphos. Upon termination of the PVC Leasing Agreement, Huahai will be released from all the obligations and liabilities thereunder.

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LETTER FROM PARTNERS CAPITAL

We consider the rental reduction and waiver mechanism under the PVC Leasing Agreement is a safeguarding measure serving to:

(i) mitigate the Group’s potential losses attributable to the PVC operation, up to an extent of the rental payable by Huahai for the corresponding period (on a half-year scale); and
(ii) allow the Group to exit altogether from the PVC operation at its own discretion in case the Group’s actual losses attributable thereto exceed the rental payable by Huahai for the corresponding period (on a half-year scale).

We consider such safeguarding measure vital and necessary, especially after taking into account of the risk factor associated with the limited track record of the PVC operations of the PVC Premises and the PVC Machinery and Equipment. We have been confirmed by the executive Directors that the results of the PVC Premises for the six months ended 30 June 2007 were not meaningful because the PVC Premises were then still under trial-run production with an utilisation rate of less than approximately 50%. The executive Directors expect that the utilisation rate of the PVC Premises will increase to about 80% in August 2007 and further to 100% in December 2007, resulting in improvement of their financial performance.

(iv) Inter-conditionality

We note that the PVC Leasing Agreement is conditional (amongst others) on the PVC Ancillary Materials Procurement Agreement and the PVC Distribution Agreement becoming effective in accordance with their respective terms. Upon enquiry, we have been confirmed by the executive Directors that the intended manufacture and sale of PVC products by the Group may not otherwise be smooth by way of leasing the PVC Premises/machinery and equipment alone without the package of the procurement and distribution services to be offered by Yunphos. The executive Directors have also confirmed that, although the Group can still sell sodium tripolyphosphate and purchase ancillary materials and components required for the Group’s PVC operations from Independent Third Parties, it will be in the Group’s advantages to have Yunphos cooperating in light of familiarity and cost effectiveness.

RECOMMENDATION FOR THE PVC LEASING AGREEMENT

In view of the limited track record of the PVC operations of the PVC Premises and the PVC Machinery and Equipment for the six months ended 30 June 2007 (due to trial-run production according to the executive Director’s explanation), we consider that there is a risk factor on the part of the Group as lessee under the PVC Leasing Agreement. However, such risk could be mitigated by the rental reduction and waiver mechanism whereby the Group is allowed to exit altogether from the PVC operation in case the Group’s actual losses attributable thereto exceed the rental payable by Huahai for the corresponding period (on a half-year scale).

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LETTER FROM PARTNERS CAPITAL

Having further considered the above factors, in particular,

(i) the background of and the reasons for carrying out the transactions contemplated under the PVC Leasing Agreement (namely, to vertical integrate and diversify the Group into the manufacture and sale of PVC products); and
(ii) the annual rental of the PVC Premises and the PVC Machinery and Equipment, which represents approximately 12% discount to the fair rental as appraised by B.I. Appraisals Limited as at 30 April 2007.

we consider that the terms of the PVC Leasing Agreement are, on balance, fair and reasonable so far as the Independent Shareholders are concerned and are in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend the Independent Board Committee to advise the Independent Shareholders, and we advise the Independent Shareholders, to vote in favour of the resolution to approve the transactions contemplated under the PVC Leasing Agreement.

PRINCIPAL FACTORS AND REASONS CONSIDERED FOR THE PVC ANCILLARY MATERIALS PROCUREMENT AGREEMENT

In arriving at our opinion regarding the terms of the PVC Ancillary Materials Procurement Agreement, we have considered the following principal factors and reasons:

1. Background of and reasons for entering into the PVC Ancillary Materials Procurement Agreement

As set out in the Letter from the Board, the entering into the PVC Ancillary Materials Procurement Agreement ensures a stable and reliable supply of ancillary materials and components required for the Group’s PVC operations. Upon enquiry for a full list of specification of the relevant ancillary materials under the PVC Ancillary Materials Procurement Agreement, we have been confirmed by the executive Directors that they represent mainly ionic exchange membranes, pipelines, valves, screws, spacers, motors, electric equipment and bearing, roller, impellers and other repair and maintenance components essential for smooth and continuing operation of PVC Machinery and Equipment.

By sourcing the relevant ancillary materials procured by Yunphos as the landlord of the PVC Premises and the PVC Machinery and Equipment, the Group’s PVC operations may secure stable ancillary material supplies, and improve its supply chain logistics at the PVC Premises which shall be leased by Group. On the above basis, we concur with the executive Directors’ belief that there is an acceptable rationale for the Group to enter into the PVC Ancillary Materials Procurement Agreement.

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LETTER FROM PARTNERS CAPITAL

2. Key terms of the PVC Ancillary Materials Procurement Agreement

(i) Subject matter

Pursuant to the PVC Ancillary Materials Procurement Agreement, Huahai agrees to purchase ancillary materials for its PVC operations, for a term commencing from the effective date of the PVC Ancillary Materials Procurement Agreement up to 31 December 2009. These materials will be used for repairing and, or maintaining the production facilities of PVC products. The quantity and specification of ancillary materials to be supplied by Yunphos and, or its associates to Huahai will be subject to individual order placed by Huahai from time to time.

(ii) Pricing policy

The unit price payable by Huahai to Yunphos and, or its associates will be the same price payable by Yunphos to third parties in acquiring the same and no less favourable than the unit price offered by independent suppliers to Huahai for the same material or component.

(iii) Settlement policy

Pursuant to the PVC Ancillary Materials Procurement Agreement, the purchases will be settled by means of telegraphic transfer within 30 days upon receipt of the materials or components purchased.

In this regard, we have been confirmed by the executive Directors that the settlement days under the PVC Ancillary Materials Procurement Agreement are not unreasonable.

(iv) Inter-conditionality

We note that the PVC Ancillary Materials Procurement Agreement is conditional (amongst others) on the PVC Distribution Agreement and the PVC Leasing Agreement becoming effective in accordance with their respective terms. Upon enquiry, we have been confirmed by the executive Directors that the intended manufacture and sale of sodium tripolyphosphate by the Group may not otherwise be smooth by way of procurement from Yunphos alone without the package of the leasing and distribution services to be offered by Yunphos. The

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LETTER FROM PARTNERS CAPITAL

executive Directors have also confirmed that, although the Group can still sell sodium tripolyphosphate and may be able to lease PVC premises with machinery and equipment from Independent Third Parties, it will be in the Group’s advantages to have Yunphos cooperating in light of familiarity and cost effectiveness.

3. Annual cap of the ancillary materials to be purchased

(i) Maximum cap

Upon enquiry, we have been confirmed by the executive Directors that the maximum cap of ancillary materials to be purchased by Huahai from Yunphos is derived with reference to the estimated annual demand for repair and maintenance components necessary for maintaining the ongoing operations of the PVC Premises and the PVC Machinery and Equipment of approximately RMB11.6 million, details of which are set out in a formal feasibility report dated April 2005 which was issued in accordance with by , an independent PRC chemical engineering expert certified with . Upon further enquiry, we have managed to obtain from the Company an estimated list of ancillary materials underlying and summing up to the proposed annual caps for the three years ending 31 December 2009. Upon review, we have obtained confirmation from the executive Directors that a majority (about 60%) under the estimated list of ancillary materials/components are ionic exchange membranes, pipelines, valves, screws, spacers, motors, electric equipment and bearing, roller, impellers, with a minority portion (about 40%) representing steel, carbon steel, stainless steel, transducer, sensors, meters, cables and wires, plastic, transformer’s oil, lubricants and others. We have been confirmed by the executive Directors that the maximum cap of ancillary materials to be purchased by Huahai from Yunphos appears to be lower than that under the estimation of the feasibility report because some miscellaneous items were excluded under the PVC Ancillary Materials Procurement Agreement.

On the above basis, we consider that there is a pre-determined basis (with reference to formal feasibility report) in arriving at the maximum cap of ancillary materials to be purchased by Huahai from Yunphos for each of the three financial years ending 31 December 2009 respectively is acceptable for the purpose of accommodating the purchases under the PVC Ancillary Materials Procurement Agreement.

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LETTER FROM PARTNERS CAPITAL

(ii) The conditions

Pursuant to the Listing Rules, the Company will seek the approval by the Independent Shareholders of the PVC Ancillary Materials Procurement Agreement (including the annual cap) for the three financial years ending 31 December 2009 subject to the following conditions:

The transactions contemplated under the PVC Ancillary Materials Procurement Agreement will be:
(a) entered into in the ordinary and usual course of the business of the Group;
(b) conducted on normal commercial terms or, if there are no sufficient comparable transactions to judge whether they are on normal commercial terms, on terms no less favourable to the Company than terms available from Independent Third Parties; and
(c) entered into in accordance with the terms of the PVC Ancillary Materials Procurement Agreement that are fair and reasonable and in the interests of the Shareholders as a whole;
The aggregate amount of the purchase under the PVC Ancillary Materials Procurement Agreement shall not exceed approximately RMB5.05 million (approximately HK$5.2 million), RMB10.1 million (approximately HK$10.4 million) and approximately RMB10.1 million (approximately HK$10.4 million) for each of the three financial years ending 31 December 2009, respectively; and
The Company will comply with all other relevant requirements under the Listing Rules.

Taking into account of the conditions attached to the transactions contemplated under the PVC Ancillary Materials Procurement Agreement, in particular (i) the restriction by way of setting the annual cap; and (ii) the compliance with all other relevant requirements under the Listing Rules (which include the annual review and/or confirmation by the independent non-executive Directors and auditors of the Company on the actual execution of the transactions contemplated under the PVC Ancillary Materials Procurement Agreement pursuant to Rule 14A.37 and 14A.38 of the Listing Rules), we consider that the Company has taken appropriate measures to govern the Company in carrying out the transactions contemplated under the PVC Ancillary Materials Procurement Agreement, thereby safeguarding the interests of the Shareholders thereunder. In particular, we note that the transactions contemplated under the PVC Ancillary Materials Procurement Agreement are, by virtue of the requirements under Rule

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LETTER FROM PARTNERS CAPITAL

14A.37 of the Listing Rules, conditional upon being carried out by the Company in the ordinary and usual course of its business, on normal commercial terms, fair and reasonable and in the interests of the Shareholders as a whole.

RECOMMENDATION FOR THE PVC ANCILLARY MATERIALS PROCUREMENT AGREEMENT

Having considered the above factors, in particular,

(i) the background of and the reasons for carrying out the transactions contemplated under the PVC Ancillary Materials Procurement Agreement (namely, to ensures a stable and reliable supply of ancillary materials and components required for the Group’s PVC operations);
(ii) the price of ancillary materials to be procured under the PVC Ancillary Materials Procurement Agreement will be no less favourable than the unit price offered by independent suppliers to Huahai for the same material or component;
(iii) the basis of setting the annual cap as a function of the pre-determined maximum quantity and the pre-determined price level of ancillary materials to be purchased from 2007 to 2009; and
(iv) the conditions attached to carrying out the transactions contemplated under the PVC Ancillary Materials Procurement Agreement as a mechanism to protect the interest of the Independent Shareholders,

we consider that the terms of the PVC Ancillary Materials Procurement Agreement (including the annual cap) are fair and reasonable so far as the Independent Shareholders are concerned and are in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend the Independent Board Committee to advise the Independent Shareholders, and we advise the Independent Shareholders, to vote in favour of the resolution to approve the transactions contemplated under the PVC Ancillary Materials Procurement Agreement.

PRINCIPAL FACTORS AND REASONS CONSIDERED FOR THE PVC DISTRIBUTION AGREEMENT

In arriving at our opinion regarding the terms of the PVC Distribution Agreement, we have considered the following principal factors and reasons:

1. Background of and reasons for entering into the PVC Distribution Agreement

As set out in the Letter from the Board, the executive Directors believe that it will be cost effective for the Group to distribute sodium tripolyphosphate produced at the PVC Premises via Yunphos which has extensive experience in product distribution and a broad customer network. Upon enquiry, we have been confirmed by the executive Directors that the Group has no customer base for oversea sale of sodium tripolyphosphate. By contrast, Yunphos has built up long-term relationships over the

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LETTER FROM PARTNERS CAPITAL

last decade with numerous international customers in the Middle East and ASEAN countries. On such basis, the executive Directors confirmed to us that the PVC Distribution Agreement facilitates the distribution of sodium tripolyphosphate through Yunphos which is in essence willing to take up all the risks and rewards in the capacity as the ultimate customer of the Group under the PVC Distribution Agreement.

Against all the background as stated above, we consider that there is an acceptable rationale for the Group to enter into the PVC Distribution Agreement, which is to facilitate the sales and distribution of sodium tripolyphosphate as manufactured at the PVC Premises to be leased by the Group.

2. Key terms of the PVC Distribution Agreement

(i) Subject matter

Pursuant to the PVC Distribution Agreement, Huahai has appointed Yunphos and, or its associates as its distributor to distribute sodium tripolyphosphate produced at the PVC Premises to customers outside the PRC. The PVC Distribution Agreement will commence from the effective date of the PVC Distribution Agreement up to 31 December 2008.

Upon enquiry for a full list of specification of the relevant sodium tripolyphosphate under the PVC Distribution Agreement, we have been confirmed by the executive Directors that they can be utilized for cleaning purpose.

(ii) Pricing policy

Although Yunphos is entitled to mark up the prices of sodium tripolyphosphate upon distributing to its own customers with reference to the administrative, marketing and finance costs incurred by it, the selling price of sodium tripolyphosphate will be no less favourable than the price offered by Huahai to any independent customers for the same product pursuant to the PVC Distribution Agreement.

To this end, according to the PVC Distribution Agreement and as further advised by the executive Directors, the median of the price quotations of sodium tripolyphosphate as published on (www.cccmc.org.cn, an industry association) will be sought and deemed as the market price acceptable by independent customers of Huahai.

(iii) Settlement policy

Pursuant to the PVC Distribution Agreement, Yunphos agrees to settle the payment within 30 days from the date Yunphos received the product.

Upon enquiry, we have been confirmed by the executive Directors that so far all sales invoices for sodium tripolyphosphate manufactured and sold by the PVC Premises have been issued to Yunphos as the sole customer of the PVC Premises.

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Accordingly, we have resorted to review one distribution agreement between Yunphos (as principal) and Independent Third Party customer (as distributor), which have been confirmed as representative samples of PVC Premises’ sales via distribution arrangement according to the executive Directors. Upon review and as confirmed by the executive Directors, we note that the settlement policy under the PVC Distribution Agreement is generally not less favourable than those from comparable distribution agreements.

(iv) Inter-conditionality

We note that the PVC Distribution Agreement is conditional (amongst others) on the PVC Ancillary Materials Procurement Agreement and the PVC Leasing Agreement becoming effective in accordance with their respective terms. Upon enquiry, we have been confirmed by the executive Directors that the intended manufacture and sale of sodium tripolyphosphate by the Group may not otherwise be smooth by way of appointing Yunphos as distributor alone without the package of the leasing and procurement services to be offered by Yunphos. The executive Directors have also confirmed that, although the Group can still purchase ancillary materials and components required for the Group’s PVC operations and may be able to lease PVC premises with machinery and equipment from Independent Third Parties, it will be in the Group’s advantages to have Yunphos cooperating in light of familiarity and cost effectiveness.

3. Annual cap of the sale of sodium tripolyphosphate

The executive Directors estimate the annual cap amounts of the sale of sodium tripolyphosphate to Yunphos and, or its associates under the PVC Distribution Agreement to be approximately RMB87.5 million (approximately HK$91.2 million) for each of the two years ending 31 December 2008.

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LETTER FROM PARTNERS CAPITAL

(i) Quantity

As set out in the Letter from the Board and as advised by the executive Directors, the relevant “quantity” component constituting the cap amount represents the estimated export sales order to be handled by Yunphos, which is summarized in the table below and is within both (i) the estimated saleable quantity and (ii) the maximum production capacity of sodium tripolyphosphate at the PVC Premises:

Sodium tripolyphosphate	Year ending 31 December	Year ending 31 December
	2007 (note 1)	2008
	Tonnes	Tonnes
Estimated maximum export sales order
– handled by Yunphos	20,000	20,000
– handled by the Group’s own sales
channel to be developed	0	20,000
Estimated saleable quantity	20,000	40,000
Maximum production capacity	60,000	60,000

Note 1: Up to the Latest Practicable Date, the PVC Premises were still under trial-run production.

Upon enquiry, Yunphos as distributor has secured from its own customers over 20,000 tonnes worth of sales orders for sodium tripolyphosphate for the year ending 31 December 2007 according to the executive Directors. Further, we have been confirmed by the executive Directors that the PVC Premises actually managed to produce and sell approximately 12,000 tonnes of sodium tripolyphosphate for the six months ended 30 June 2007, already representing 60% of the total estimated saleable quantity of 20,000 tonnes for the year ending 31 December 2007.

On the above basis, we consider that there is a pre-determined basis (with reference to latest actual sales data and production capacity) in arriving at the quantity of sodium tripolyphosphate to be sold by Huahai to Yunphos of 20,000 tonnes per annum from 2007 to 2008 for the purpose of determining the annual cap.

(ii) Price

As set out in the Letter from the Board, the price of sodium tripolyphosphate for the purpose of arriving at the cap from 2007 to 2008 is US$565 (approximately HK$4,400) per tonne, which approximates the latest market price

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LETTER FROM PARTNERS CAPITAL

available around the date of the PVC Distribution Agreement, as indicated by China Chamber of Commerce of Metals Minerals and Chemicals Importers and Exporters, an independent industry association.

On such basis, we consider that there is a pre-determined basis in arriving at the price of sodium tripolyphosphate to be sold by Huahai to Yunphos from 2007 to 2008 for the purpose of determining the annual cap.

(iii) Maximum cap

Having regard to

(i) the pre-determined basis of determining the maximum quantity of sodium tripolyphosphate to be sold by Huahai to Yunphos with reference to the latest actual sales data and production capacity of the PVC Premises for the six months ended 30 June 2007;
(ii) the pre-determined basis in arriving at the price of sodium tripolyphosphate to be sold by Huahai to Yunphos from 2007 to 2008; and
(iii) the fact that the sales under the PVC Distribution Agreement are subject to certain conditions as set out in the following paragraph headed “The conditions” which is regarded as a mechanism to protect the interest of the Independent Shareholders,

we consider that the maximum cap for each of the two financial years ending 31 December 2008 respectively is acceptable for the purpose of accommodating the sales of sodium tripolyphosphate under the PVC Distribution Agreement.

(iv) The conditions

Pursuant to the Listing Rules, the Company will seek the approval by the Independent Shareholders of the PVC Distribution Agreement (including the annual cap) for the two financial years ending 31 December 2008 subject to the following conditions:

The transactions contemplated under the PVC Distribution Agreement will be:
(a) entered into in the ordinary and usual course of the business of the Group;
(b) conducted on normal commercial terms or, if there are no sufficient comparable transactions to judge whether they are on normal commercial terms, on terms no less favourable to the Company than terms available from Independent Third Parties; and

– 46 –

LETTER FROM PARTNERS CAPITAL

(c) entered into in accordance with the terms of the PVC Distribution Agreement that are fair and reasonable and in the interests of the Shareholders as a whole;
The aggregate amount of the sales under the PVC Distribution Agreement for each of the two years ending 31 December 2008 shall not exceed approximately RMB87.5 million (approximately HK$91.2 million) for each of the two years ending 31 December 2008; and
The Company will comply with all other relevant requirements under the Listing Rules.

Taking into account of the conditions attached to the transactions contemplated under the PVC Distribution Agreement, in particular (i) the restriction by way of setting the annual cap; and (ii) the compliance with all other relevant requirements under the Listing Rules (which include the annual review and/or confirmation by the independent non-executive Directors and auditors of the Company on the actual execution of the transactions contemplated under the PVC Distribution Agreement pursuant to Rule 14A.37 and 14A.38 of the Listing Rules), we consider that the Company has taken appropriate measures to govern the Company in carrying out the transactions contemplated under the PVC Distribution Agreement, thereby safeguarding the interests of the Shareholders thereunder. In particular, we note that the transactions contemplated under the PVC Distribution Agreement are, by virtue of the requirements under Rule 14A.37 of the Listing Rules, conditional upon being carried out by the Company in the ordinary and usual course of its business, on normal commercial terms, fair and reasonable and in the interests of the Shareholders as a whole.

RECOMMENDATION FOR THE PVC DISTRIBUTION AGREEMENT

Having considered the above factors, in particular,

(i) the background of and the reasons for carrying out the transactions contemplated under the PVC Distribution Agreement (namely, to capitalise on the strong international customer base of Yunphos for oversea sale of sodium tripolyphosphate);
(ii) the selling price of sodium tripolyphosphate will be no less favourable than the price offered by Huahai to any independent customers for the same product;
(iii) the basis of setting the annual cap as a function of the pre-determined maximum quantity and the pre-determined price level of sodium tripolyphosphate to be sold from 2007 to 2008; and
(iv) the conditions attached to carrying out the transactions contemplated under the PVC Distribution Agreement as a mechanism to protect the interest of the Independent Shareholders,

– 47 –

LETTER FROM PARTNERS CAPITAL

we consider that the terms of the PVC Distribution Agreement (including the annual cap) are fair and reasonable so far as the Independent Shareholders are concerned and are in the interests of the Company and the Shareholders as a whole Accordingly, we recommend the Independent Board Committee to advise the Independent Shareholders, and we advise the Independent Shareholders, to vote in favour of the resolution to approve the transactions contemplated under the PVC Distribution Agreement.

Yours faithfully, For and on behalf of Partners Capital International Limited Alan Fung Harry Yu Managing Director Executive Director

– 48 –

FINANCIAL INFORMATION

APPENDIX I

I. SUMMARY OF THREE YEARS FINANCIAL RESULTS

The following is a summary of the audited financial information of the Group for the three financial years ended 31 December 2004, 2005 and 2006. The financial statements of the Group have been prepared in accordance with all applicable Hong Kong Financial Reporting Standards issued by the Hong Kong Institute of Certified Public Accountants.

Consolidated Income Statement

2006 HK$’000 235,201 (208,793)	2005 HK$’000 146,983 (140,874)	2004 HK$’000 174,890 (155,905) 18,985 2,866 (14,304) (14,220) – – 4,700 6,200 (1,033) 3,194 (13,567) – – – 2,791 (7,582) – (7,582) (5,259) (2,323) (7,582) (HK0.2 cent) N/A
26,408 5,582 (20,852) (18,753) (182) (4,988) – – (11,093) (23,878) (13,867) 3,608 (162) – 20,265 (14,034) (476)	6,109 6,191 (16,432) (16,251) – – – – (3,776) (24,159) (13,057) – – 67,662 8,271 38,717 –	18,985 2,866 (14,304 (14,220 – – 4,700 6,200 (1,033
		3,194 (13,567 – – – 2,791
		(7,582 –
(14,510)	38,717
(5,632) (8,878)	45,938 (7,221)	(5,259 (2,323
(14,510) (HK0.2 cents) N/A	38,717 HK1.5 cents N/A

– 49 –

APPENDIX I

FINANCIAL INFORMATION

Consolidated Balance Sheet

2006 HK$’000 54,825 – 50,100	2005 HK$’000 80,408 7,869 35,825	2004 HK$’000 85,635 8,362 37,220 131,217 43,955 574 2,638 23,321 378 38,429 109,295 240,512 31,249 (98,328) (67,079) 44,582 (22,497)
104,925 29,750 78 12,619 43,258 29,991 7,404 123,100	124,102 43,762 314 3,690 22,931 13,092 17,882 101,671	131,217 43,955 574 2,638 23,321 378 38,429
		109,295
228,025	225,773
31,249 (23,167) 8,082 (16,866)	31,249 (53,136) (21,887) 36,561	31,249 (98,328
		(67,079 44,582
(8,784)	14,674

– 50 –

FINANCIAL INFORMATION

APPENDIX I

2006 HK$’000 53,579 – 115	2005 HK$’000 49,703 112,285 176	2004 HK$’000 46,594 75,000 379 121,973 12,647 – 17,061 10,420 100,058 850 141,036 263,009 240,512 (31,741) 99,476
53,694 6,729 11,460 20,570 16,176 127,335 845 183,115	162,164 4,014 11,023 12,590 15,404 5,059 845 48,935	121,973
		12,647 – 17,061 10,420 100,058 850
		141,036
236,809 228,025 (60,015) 44,910	211,099 225,773 52,736 176,838

– 51 –

FINANCIAL INFORMATION

APPENDIX I

Balance Sheet

2006 HK$’000 9 –	2005 HK$’000 5 –	2004 HK$’000 5 – 5 110,343 356 779 111,478 111,483 31,249 (97,151) 65,902 2,285 – 42 100,058 102,385 75,000 177,385 111,483 9,093
9 – 574 13 587	5 – 47 12 59	5
		110,343 356 779
		111,478
596	64
31,249 (40,026)	31,249 (34,063)	31,249 (97,151
(8,777)	(2,814)
7,809 – 1,564 – 9,373 –	1,246 586 1,046 – 2,878 –	2,285 – 42 100,058
		102,385 75,000
9,373 596 (8,786)	2,878 64 (2,819)

– 52 –

FINANCIAL INFORMATION

APPENDIX I

Consolidated Statement of Changes in Equity

			Attributable to equity shareholders of the Company	Attributable to equity shareholders of the Company	Attributable to equity shareholders of the Company	Attributable to equity shareholders of the Company	Attributable to equity shareholders of the Company
Share capital HK$’000 31,249 – – – – –	Share premium account HK$’000 723,462 – – – – –	Property revaluation reserve HK$’000 21,169 – – – (1,248) –	Exchange fluctuation reserve HK$’000 9,968 855 (211) (193) – –	Capital reserve HK$’000 8 – – – – –	Special reserve HK$’000 341,800 – – – – –	Share option reserve HK$’000	Accumu- lated losses HK$’000 (1,188,679) – – – – (5,259)	Total HK$’000 (61,023) 855 (211) (193) (1,248) (5,259)	Minority interests HK$’000 47,247 – – 193 (535) (2,323)	Total equity HK$’000 (13,776 855 (211 – (1,783 (7,582
31,249	723,462	19,921	10,419	8	341,800		(1,193,938)	(67,079)	44,582	(22,497

31,249 – – – –	723,462 – – – –	19,921 – 1,122 – –	10,419 1,105 – (2,973) –	8 – – – –	341,800 – – – –	– – – – –	(1,193,938) – – – 45,938	(67,079) 1,105 1,122 (2,973) 45,938	44,582 (800) – – (7,221)	(22,497 305 1,122 (2,973 38,717
31,249	723,462	21,043	8,551	8	341,800	–	(1,148,000)	(21,887)	36,561	14,674

31,249 – – – –	723,462 – – – –	21,043 (21,043) – – –	8,551 – – – –	8 – – – –	341,800 – – – –	– – – – 52	(1,148,000) 20,508 (5,632) 36,084 –	(21,887) (535) (5,632) 36,084 52	36,561 535 (8,878) (45,084) –	14,674 – (14,510 (9,000 52
31,249	723,462	–	8,551	8	341,800	52	(1,097,040)	8,082	(16,866)	(8,787

– 53 –

FINANCIAL INFORMATION

APPENDIX I

Consolidated Cash Flow Statement

CASH FLOWS FROM OPERATING ACTIVITIES (Loss)/profit before taxation Adjustments for: Equity compensation benefit Finance costs Share of results of associates Gain on disposal of land use rights and buildings Gain arising from disposal of interest in associates Bank interest income Deficit on revaluation of property, plant and equipment Gain/(loss) on disposal of property, plant and equipment Depreciation Amortisation of land use rights Provision for impairment of property, plant and equipment Provision for impairment on investment in an associate Impairment of trade receivables and other receivables Impairment of inventories Exchange differences Waiver of debt and accrued interest under a Loan Restructuring Agreement Operating loss before working capital changes Decrease/(increase) in trade receivables Decrease in bills receivable Increase in prepayments, deposits and other receivables Increase in inventories Increase/(decrease) in net amounts due to associates Increase in amount due to a related company Increase/(decrease) in trade payables Increase in accruals and other payables Decrease in provision for long service payments	2006 HK$’000 (14,034) 52 13,867 (20,265) (3,608) – (1,094) 182 (1,035) 11,245 246 4,988 162 352 5,788 – –	2005 HK$’000 38,717 – 13,057 (8,271) – – (371) 542 6 11,355 493 – – 1,571 1,942 (2,673) (67,662)	2004 HK$’000 (7,582) – 13,567 (2,791) – (10,900) (66) – (29) 12,427 491 – – 238 (143) – 5,212 2,675 1,081 490 (1,900) 3,648 – (8,931) (7,313) (111)
	(3,154) 13,664 236 (8,933) (26,115) 543 437 7,980 772 (61)	(11,294) (1,378) 260 (1,052) (1,552) (2,967) 11,023 (4,471) 4,984 (203)	5,212 2,675 1,081 490 (1,900 3,648 – (8,931 (7,313 (111

– 54 –

FINANCIAL INFORMATION

APPENDIX I

2006 HK$’000 (14,631) (476)	2005 HK$’000 (6,650) –	2004 HK$’000 (5,149) – (5,149) 66 5,000 – (3,000) 21 – 4,700 6,977 1,828 36,979 38,807 38,429 378 38,807
(15,107) 1,094 8,000 (9,000) (7,621) 1,055 28,000 – 21,528 6,421 30,974	(6,650) 371 4,000 – (5,554) – – – (1,183) (7,833) 38,807	(5,149
		66 5,000 – (3,000 21 – 4,700
		6,977
		1,828 36,979
37,974	30,974
7,404 29,991	17,882 13,092	38,429 378
37,395	30,974

– 55 –

FINANCIAL INFORMATION

APPENDIX I

II. AUDITED CONSOLIDATED FINANCIAL STATEMENT

The following is a summary of the audited consolidated income statements, consolidated cash flow statements and consolidated statements of changes in equity of the Group for the two years ended 31 December 2005 and 2006, the audited consolidated balance sheet of the Group as at 31 December 2005 and 2006, the audited balance sheet of the Company as at 31 December 2006 together with accompany notes extracted from the audited financial statements of the Group:

Consolidated income statement

Note Turnover 6 Cost of sales Gross profit Other income 7 Selling and distribution costs Administrative expenses Deficit on revaluation of property, plant and equipment Provision for impairment of property, plant and equipment 18 Other operating expenses Loss from operations 9 Finance costs 10 Gain on disposal of land use rights and buildings Provision for impairment on investment in an associate 8 Waiver of debt and accrued interest under a Loan Restructuring Agreement 11 Share of results of associates (Loss)/profit before taxation Income tax 14 (Loss)/profit for the year Attributable to: Equity shareholders of the Company 15 Minority interests (Loss)/profit for the year Dividends 16 (Loss)/earnings per share 17 – Basic – Diluted	2006 HK$’000 235,201 (208,793)	2005 HK$’000 146,983 (140,874) 6,109 6,191 (16,432) (16,251) – – (3,776) (24,159) (13,057) – – 67,662 8,271 38,717 – 38,717 45,938 (7,221) 38,717 – HK1.5 cents N/A
	26,408 5,582 (20,852) (18,753) (182) (4,988) (11,093) (23,878) (13,867) 3,608 (162) – 20,265 (14,034) (476)	6,109 6,191 (16,432 (16,251 – – (3,776
		(24,159 (13,057 – – 67,662 8,271
		38,717 –
	(14,510)
	(5,632) (8,878)	45,938 (7,221
	(14,510) – (HK0.2 cents) N/A

– 56 –

FINANCIAL INFORMATION

APPENDIX I

Consolidated balance sheet

As at 31 December 2006

Note ASSETS Non-current assets Property, plant and equipment 18 Land use rights 19 Interests in associates 21 Other receivables 22 Current assets Trade receivables 23 Bills receivable Prepayments, deposits and other receivables Inventories 24 Fixed deposits Cash and bank balances Total assets EQUITY Share capital 32 Reserves Shareholders’ funds/(deficits) Minority interests Total equity LIABILITIES Non-current liabilities Amount due to a shareholder, Probest 26 Non-current portion of promissory note payable 28 Provision for long service payments 29	2006 HK$’000 54,825 – 50,100 – 104,925	2005 HK$’000 80,408 7,869 35,825 – 124,102 43,762 314 3,690 22,931 13,092 17,882 101,671 225,773 31,249 (53,136) (21,887) 36,561 14,674 49,703 112,285 176 162,164
	29,750 78 12,619 43,258 29,991 7,404 123,100
		43,762 314 3,690 22,931 13,092 17,882
		101,671
	228,025
	31,249 (23,167) 8,082 (16,866)	31,249 (53,136
		(21,887 36,561
	(8,784)
	53,579 – 115 53,694	49,703 112,285 176
		162,164

– 57 –

FINANCIAL INFORMATION

APPENDIX I

Note Current liabilities Amounts due to associates 25 Amount due to a related company 30 Trade payables 27 Accruals and other payables Current portion of promissory note payable 28 Tax payable Total liabilities Total equity and liabilities Net current (liabilities)/assets Total assets less current liabilities	2006 HK$’000 6,729 11,460 20,570 16,176 127,335 845 183,115 236,809 228,025 (60,015) 44,910	2005 HK$’000 4,014 11,023 12,590 15,404 5,059 845 48,935 211,099 225,773 52,736 176,838

– 58 –

FINANCIAL INFORMATION

APPENDIX I

Balance sheet

As at 31 December 2006

Note ASSETS Non-current assets Investments in subsidiaries 20 Other receivables 22 Current assets Prepayments, deposits and other receivables Cash and bank balances Total assets EQUITY Share capital 32 Reserves 34 Total equity LIABILITIES Current liabilities Amount due to a subsidiary 25 Amount due to a related company 30 Other payables and accruals Total liabilities Total equity and total liabilities Net current liabilities	2006 HK$’000 9 – 9	2005 HK$’000 5 – 5 47 12 59 64 31,249 (34,063) (2,814) 1,246 586 1,046 2,878 64 (2,819)
	574 13 587
		47 12
		59
	596 31,249 (40,026) (8,777) 7,809 – 1,564 9,373 596 (8,786)

– 59 –

FINANCIAL INFORMATION

APPENDIX I

Consolidated statement of change in equity

	Attributable to equity shareholders of the Company	Attributable to equity shareholders of the Company	Attributable to equity shareholders of the Company	Attributable to equity shareholders of the Company	Attributable to equity shareholders of the Company	Attributable to equity shareholders of the Company
Share capital HK$’000 31,249 – –	Share premium Account Property revaluation reserve HK$’000 HK$’000 723,462 19,921 – – – 1,122 – 1,122 – – – – – –		Exchange fluctuation reserve HK$’000 10,419 1,105 –	Capital reserve HK$’000 8 – –	Special reserve HK$’000 341,800 – –	Share option reserve HK$’000 – – –	Accumu- lated losses Total Minority interests Total Equity HK$’000 HK$’000 HK$’000 HK$’000 (1,193,938) (67,079) 44,582 (22,497 – 1,105 (800) 305 – 1,122 – 1,122 – 2,227 (800) 1,427 – (2,973) – (2,973 45,938 45,938 (7,221) 38,717 45,938 42,965 (7,221) 35,744
–			1,105	–	–	–	–	2,227
– – –					– – –	– – –	– 45,938 45,938
31,249	723,462	21,043	8,551	8	341,800	–	(1,148,000) (21,887) 36,561			14,674

31,249 – – – – – –	723,462 – – – – – –	21,043 (21,043) (21,043) – – – –	8,551 – – – – – –	8 – – – – – –	341,800 – – – – – –	– – – – – – 52	(1,148,000) (21,887) 36,561 14,674 20,508 (535) 535 – 20,508 (535) 535 – (5,632) (5,632) (8,878) (14,510 (5,632) (5,632) (8,878) (14,510 36,084 36,084 (45,084) (9,000 – 52 – 52
31,249	723,462	–	8,551	8	341,800	52	(1,097,040) 8,082		(16,866) (8,784

Note: In accordance with the judgement of the capital reduction of the Company approved by the High Count on 29 July 2003, the Company provided an undertaking that in the event of its making any future recoveries in respect of the assets of which provision for diminution in value or depreciation was made in the accounts of the Company for the accounting periods up to and including the period ending on 31 December 2002, beyond their written down value in the Company’s audited accounts as at 31 December 2002, all such recoveries beyond that written down value up to an amount of approximately HK$341,800,000 was credited to a special capital reserve in the accounting records of the Company (the “Special Reserve”) and that so long as there shall remain outstanding any debt of or claim against the Company which, if the date on which the reduction of capital became effective was the date of the commencement of the winding up of the Company, would be admissible to proof in such winding up and the persons entitled to the benefit of such debts or claims shall not have agreed otherwise, such reserve shall not be treated as realised profits for the purposes of Section 79B of the Companies Ordinance and shall be treated as an undistributable reserve of the Company for the purposes of Section 79C of the Companies Ordinance.

– 60 –

FINANCIAL INFORMATION

APPENDIX I

Consolidated cash flow statement

For the year ended 31 December 2006

Note CASH FLOWS FROM OPERATING ACTIVITIES (Loss)/profit before taxation Adjustments for: Equity compensation benefit Finance costs Share of results of associates Gain on disposal of land use rights and buildings Bank interest income Deficit on revaluation of property, plant and equipment Gain/(loss) on disposal of property, plant and equipment Depreciation Amortisation of land use rights Provision for impairment of property, plant and equipment Provision for impairment on investment in an associate Impairment of trade receivables and other receivables Impairment of inventories Exchange differences Waiver of debt and accrued interest under a Loan Restructuring Agreement Operating loss before working capital changes Decrease/(increase) in trade receivables Decrease in bills receivable Increase in prepayments, deposits and other receivables Increase in inventories Increase/(decrease) in net amounts due to associates Increase in amount due to a related company Increase/(decrease) in trade payables Increase in accruals and other payables Decrease in provision for long service payments CASH USED IN OPERATIONS Overseas tax paid	2006 HK$’000 (14,034) 52 13,867 (20,265) (3,608) (1,094) 182 (1,035) 11,245 246 4,988 162 352 5,788 – –	2005 HK$’000 38,717 – 13,057 (8,271) – (371) 542 6 11,355 493 – – 1,571 1,942 (2,673) (67,662) (11,294) (1,378) 260 (1,052) (1,552) (2,967) 11,023 (4,471) 4,984 (203) (6,650) –
	(3,154) 13,664 236 (8,933) (26,115) 543 437 7,980 772 (61) (14,631) (476)	(11,294 (1,378 260 (1,052 (1,552 (2,967 11,023 (4,471 4,984 (203
		(6,650 –

– 61 –

FINANCIAL INFORMATION

APPENDIX I

Note NET CASH USED IN OPERATING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES Interest received Dividends received from associates Acquisition of additional investment in a subsidiary 39 Purchase of property, plant and equipment Proceeds from disposal of property, plant and equipment Proceeds from disposal of land use rights and buildings NET CASH FROM/(USED IN) INVESTING ACTIVITIES NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR CASH AND CASH EQUIVALENTS AT END OF YEAR ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS Cash and bank balances Fixed deposits with original maturity of less than three months when acquired	2006 HK$’000 (15,107)	2005 HK$’000 (6,650) 371 4,000 – (5,554) – – (1,183) (7,833) 38,807 30,974 17,882 13,092 30,974
	1,094 8,000 (9,000) (7,621) 1,055 28,000 21,528 6,421 30,974
		371 4,000 – (5,554) – –
		(1,183) (7,833) 38,807
	37,395
	7,404 29,991	17,882 13,092
	37,395

– 62 –

FINANCIAL INFORMATION

APPENDIX I

Notes to accounts

1. GENERAL INFORMATION

The principal activity of Swank International Manufacturing Company Limited (the “Company”) is investment holding. During the year, the principal activities of its subsidiaries (the Company and its subsidiaries are collectively referred to the “Group”) are the trading and manufacturing of phosphoric acid, design, manufacturing and sale of optical products.

The Company is a limited liability company incorporated in Hong Kong. The address of its registered office is Suite 1102, 11/F, ICBC Tower, Citibank Plaza, 3 Garden Road, Central, Hong Kong.

The financial statements are presented in Hong Kong dollars which is also the functional currency of the Company.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Going concern concept

The financial statements have been prepared on a going concern basis. The Group had a loss of approximately HK$14,510,000 and net liabilities of approximately HK$8,784,000 and its continuance in business as a going concern is dependent upon the Group having future profitable operations and continuing financial support from the shareholder of the Group (“Probest”). The financial statements have been prepared on a going concern basis as Probest has agreed to provide continuing financial support to the Group.

(b) Statement of compliance

These financial statements have been prepared in accordance with applicable Hong Kong Financial Reporting Standards (“HKFRSs”), which collective term includes all applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (“HKASs”) and interpretations issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”), accounting principles generally accepted in Hong Kong and the Hong Kong Companies Ordinance. These financial statements also comply with the applicable disclosure provisions of Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (“Listing Rule”). A summary of the significant accounting policies adopted by the Group is set out below.

The HKICPA has issued certain new and revised HKFRSs that are first effective or available for early adoption for the current accounting period of the Group and the Company. Note 3 provides information on the changes in accounting policies resulting from initial application of these developments to the extent that they are relevant to the Group for the current and prior accounting periods reflected in these consolidated financial statements.

(c) Basis of preparation of the consolidated financial statements

The consolidated financial statements for the year ended 31 December 2006 comprise the Company and its subsidiaries and the Group’s interests in associates. The consolidated financial statements have been prepared under the historical cost convention except that the following asset is stated at their fair value as explained in the accounting policies set out below:

Property, plant and equipment (see note 2(f))

The preparation of financial statements in conformity with HKFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

– 63 –

FINANCIAL INFORMATION

APPENDIX I

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects that period, or in the period of the revision and future periods if the revision affects both current and future periods.

(d) Subsidiary

Subsidiaries are entities controlled by the Group. Control exists when the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable are taken into account.

An investment in a subsidiary is consolidated into the consolidated financial statements from the date that control commences until commences until the date that control ceases. Intra-group balances and transactions and any unrealised profits arising from intra-group transactions are eliminated in full in preparing the consolidated financial statements. Unrealised losses resulting from intra-group transactions are eliminated in the same way as unrealised gains but only to the extent that there is no evidence of impairment.

Minority interests represent the portion of the net asset of subsidiaries attributable to interests that are not owned by the Company, whether directly or indirectly through subsidiaries, and in respect of which the Group has not agreed any additional terms with the holders of those interests which would result in the Group as a whole having a contractual obligation in respect of those interests that meets the definition of a financial liability. Minority interests are presented in the consolidated balance sheet within equity, separately from equity attributable to the equity shareholders of the Company. Minority interests in the results of the Group are presented on the face of the consolidated income statement as an allocation of the total profit or loss for the year between minority interests and the equity shareholders of the Company.

Where losses applicable to the minority exceed the minority’s interest in the equity of a subsidiary, the excess, and any further losses applicable to the minority, are charged against the Group’s interest except to the extent that the minority has a binding obligation to, and is able to, make additional investment to cover the losses. If the subsidiary subsequently reports profits, the Group’s interest is allocated all such profits until the minority’s share of losses previously absorbed by the Group has been recovered.

In the Company’s balance sheet, an investment in a subsidiary is stated at cost less impairment losses (see note 2 (h) (i)), unless the investment is classified as held for sale (or included in a disposal group that is classified as held for sales).

(e) Associate

An associate is an entity in which the Group and the Company has significant influence, but not control or joint control, over its management, including participation in the financial and operating policy decisions.

An investment in associate is accounted for in the consolidated financial statements under the equity method and is initially recorded at cost and adjusted thereafter for the post-acquisition change in the Group’s share of net assets of the associate. The consolidated income statement of the Group includes its share of the post-acquisition, post-tax results of the associate for the year, including any impairment loss on goodwill relating to the investment in associate recognised for the year.

When the Group’s share of losses exceeds its interest in the associate, the Group discontinues recognising its share of further losses. The interest in an associate is the carrying amount of the investment in the associate under the equity method together with any long-term interests that, in substance, form part of the Group’s net investment in the associate. After the Group’s interest is reduced to zero, additional losses are provided for, and a liability is recognised, only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate.

– 64 –

FINANCIAL INFORMATION

APPENDIX I

Profits and losses resulting from the Group’s transactions with the associate are eliminated to the extent of the Group’s relevant interests in the associate, except where the losses provide evidence of an impairment of the asset transferred in which case losses are recognised immediately for the impairment.

(f) Property, plant and equipment

Buildings comprise mainly factories and offices. Buildings are stated at their revalued amounts, being their fair values at the date of revaluation, less accumulated depreciation and accumulated impairment losses. Buildings are shown at fair value, based on periodic, but at least annual, valuations by external independent valuers, less subsequent depreciation. Any accumulated depreciation at the date of revaluation is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount of the asset. All other property, plant and equipment are stated at historical cost less accumulated depreciation and impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Cost may include transfers from equity of any gains/losses on qualifying cash flow hedges of foreign currency purchases of property, plant and equipment.

Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are expensed in the income statement during the financial period in which they are incurred.

Increases in the carrying amount arising on revaluation of properties are credited to property revaluation reserves in shareholders’ equity. Decreases that offset previous increases of the same asset are charged against property revaluation reserve directly in equity, all other decreases are expensed in the income statement. Each year the difference between depreciation based on the revalued carrying amount of the asset expensed in the income statement and depreciation based on the asset’s original cost is transferred from property revaluation reserve to accumulated losses.

Depreciation of property, plant and equipment is calculated using the straight-line method to allocate cost or revalued amounts less their residual values over their estimated useful lives as follows:

Buildings Over the lease term Plant and machinery 10 – 15 years Furniture and fixtures 10 years Motor vehicles 5 years

The asset’s residue values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.

An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.

(g) Operating leases

Leases where substantially all the rewards and risk of ownership remain with the lessor are accounted for as operating leases. Rentals payable under the operating leases are charged to the consolidated income statement on the straight-line basis over the lease terms.

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(h) Impairment of assets

i) Impairment of assets

Internal and external sources of information are reviewed at each balance sheet date to identify indications that the following assets may be impaired or an impairment loss previously recognised no longer exists or may have decreased:

property, plant and equipment (other than buildings which carried at revalued amounts); and
investments in subsidiaries and associates.

If any such indication exists, the asset’s recoverable amount is estimated. An impairment loss is recognised whenever the carrying amount of an asset exceeds its recoverable amount.

I) Calculation of recoverable amount

The recoverable amount of an asset is the greater of its net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of time value of money and the risks specific to the asset. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest Group of assets that generates cash inflows independently (i.e. a cash-generating unit).

II) Recognition of impairment losses

An impairment loss is recognised in the consolidated income statement whenever the carrying amount of an assets, or the cash-generating unit to which it belongs, exceeds its recoverable amount. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit (or group of units) and then, to reduce the carrying amount of the other assets in the unit (or group of units) and then, to reduce the carrying amount of the other assets in the unit (or group of units) on a pro rata basis, except that the carrying value of an asset will not be reduced below its individual fair value less costs to sell, or value in use, if determinable.

III) Reversals of impairment losses

In respect of assets other than goodwill, an impairment loss is reversed if there has been a favorable change in the estimates used to determine the recoverable amount. An impairment loss in respect of goodwill is not reversed.

A reversal of impairment losses is limited to the asset’s carrying amount that would have been determined had no impairment loss been recognised in prior years. Reversals of impairment losses are credited to the consolidated income statement in the year in which the reversals are recognised.

ii) Interim financial reporting and impairment

Under the Listing Rules, the Group is required to prepare an interim financial report in compliance with HKAS 34, Interim financial reporting, in respect of the first six months of the financial year. At the end of the interim period, the Group applies the same impairment testing, recognition, and reversal criteria as it would at the end of the financial year (see note 2(h)(i)).

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Impairment losses recognised in an interim period in respect of unquoted equity securities carried at cost are not reversed in a subsequent period. This is the case even if no loss, or a smaller loss, would have been recognised had the impairment been assessed only at the end of the financial year to which the interim period relates.

(i) Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined using the weighted average basis, comprises all costs of purchases, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

(j) Trade and other receivables

Trade and other receivables are initially recognised at fair value and thereafter stated at amortised cost using the effective interest method, less impairment losses for bad and doubtful debts, except where the receivables are interest-free loans made to related parties without any fixed repayment terms or the effect of discounting would be immaterial. In such cases, the receivables are stated at cost less impairment losses for bad and doubtful debts. A provision for impairment of trade and other receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the future cash flows, discounted at the effective interest rate. The amount of the provision is recognised in the income statement.

(k) Interest-bearing borrowings

Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of borrowings using the effective interest method.

(l) Trade and other payables

Trade and other payables are initially recognised at fair value. Trade and other payables are subsequently stated at amortised cost unless the effect of discounting would be immaterial, in which case they are stated at cost.

(m) Cash and cash equivalents

Cash and cash equivalents comprise cash at bank and on hand, demand deposits with banks and other financial institutions, and short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of change in value, having been within three months of maturity at acquisition. Bank overdrafts, if any, that are repayable on demand and form an integral part of the Group’s cash management are also included as a component of cash and cash equivalents for the purpose of the consolidated cash flow statement.

(n) Income tax

Income tax for the year comprises current tax and movements in deferred tax assets and liabilities. Current tax and movements in deferred tax assets and liabilities are recognised in the income statement except to the extent that they relate to items recognised directly in equity, in which case they are recognised in equity.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

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Deferred tax assets and liabilities arise from deductible and taxable temporary differences respectively, being the differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Deferred tax assets also arise from unused tax losses and unused tax credits.

Apart from certain limited exceptions, all deferred tax liabilities, and all deferred tax assets to the extent that it is probable that future taxable profits will be available against which the asset can be utilised, are recognised. Future taxable profits that may support the recognition of deferred tax assets arising from deductible temporary differences include those that will arise from the reversal of existing taxable temporary differences, provided those differences relate to the same taxation authority and the same taxable entity, and are expected to reverse either in the same period as the expected reversal of the deductible temporary difference or in periods into which a tax loss arising from the deferred tax asset can be carried back or forward. The same criteria are adopted when determining whether existing taxable temporary differences support the recognition of deferred tax assets arising from unused tax losses and credits, that is, those differences are taken into account if they relate to the same taxation authority and the same taxable entity and are expected to reverse in a period, or periods, in which the tax loss or credit can be utilised.

The limited exceptions to recognition of deferred tax assets and liabilities are those temporary differences arising from goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit (provided they are not part of a business combination), and temporary differences relating to investments in subsidiaries to the extent that, in the case of taxable differences, the Group controls the timing of the reversal and it is probable that the differences will not reverse in the foreseeable future, or in the case of deductible differences, unless it is probable that they will reverse in the future.

The amount of deferred tax recognised is measured based on the expected manner of realisation or settlement of the carrying amount of the assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. Deferred tax assets and liabilities are not discounted.

The carrying amount of a deferred tax asset is reviewed at each balance sheet date and is reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow the related tax benefit to be utilised. Any such reduction is reversed to the extent that it becomes probable that sufficient taxable profits will be available.

Additional income taxes that arise from the distribution of dividends are recognised when the liability to pay the related dividends is recognised.

Current tax balances and deferred tax balances, and movements therein, are presented separately from each other and are not offset. Current tax assets are offset against current tax liabilities, and deferred tax assets against deferred tax liabilities, if the Company or Group has the legally enforceable right to set off current tax assets against current tax liabilities and the following additional conditions are met:

i) in the case of current tax assets and liabilities, the Company or the Group intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously; or
ii) in the case of deferred tax assets and liabilities, if they relate to income taxes levied by the same taxation authority on either:
the same taxable entity; or
different taxable entities, which, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered, intend to realise the current tax assets and settle the current tax liabilities on a net basis or realise and settle simultaneously.

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(o) Provisions and contingent liabilities

Provisions are recognised for other liabilities of uncertain timing or amount when the Group or Company has a legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made. Where the time value of money is material, provisions are stated at the present value of the expenditure expected to settle the obligation.

Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.

(p) Foreign currency transactions

i) Functional and presentation currency

Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The consolidated financial statements are presented in Hong Kong dollars, which is the Company’s functional and presentation currency.

ii) Group companies

The results and financial position of all group entities that have functional currency different from the presentation currency are translated into the presentation currency as follows:

I) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet.
II) income and expenses for each income statement are translated at average rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of transactions); and
III) all resulting exchange differences are recognised as a separate component of equity.

On consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders’ equity. When a foreign operation is sold, exchange differences that were recorded in equity are recognised in the income statement as part of gain or loss on sale.

(q) Employee benefits

i) Employment Ordinance long service payments

Certain employees of the Group have completed the required number of years of service under the Employment Ordinance, Chapter 57 of the Laws of Hong Kong (the “Employment Ordinance”) to be eligible for long service payments upon termination of their employment. The Group is only liable to make such payments where the termination meets the required circumstances specified in the Employment Ordinance.

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APPENDIX I

ii) Paid leave carried forward

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

iii) Retirement benefits scheme

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

iv) Share-based compensation

The Group operated an equity-settled, share-based compensation plan. The fair value of the employee services received in exchange for the grant of the options was recognised as an expense with a corresponding increase in a share option reserve with equity. The total amount to be expensed over the vesting period was determined by reference to the fair value of the options granted, excluding the impact of any non-market vesting conditions (for example profitability and sales growth targets). Non-market vesting conditions were included in assumptions about the number of options that were expected to become exercisable. At each balance sheet date, the entity revised its estimates of the number of options that were expected to become exercisable. It recognised the impact of the revision of original estimates, if any, in the consolidated income statement with a corresponding adjustment to equity.

The equity amount is recognised in the share option reserve until either the option is exercised (when it is transferred to the share premium account) or the options expire (when it is released directly to accumulated losses).

(r) Revenue recognition

Provided it is probable that the economic benefits will flow to the Group and the revenue and costs, if applicable, can be measured reliably, revenue is recognised in the income statement as follows:

i) Sales of goods

Revenue from sales of goods is recognised on the transfer of risks and rewards of ownership, which generally coincides with the time when the goods are delivered to customers and title has passed. Revenue includes value added tax or other sales taxes and is after deduction of any trade discounts.

ii) Sales of services

Commission and management fee income are recognised when the related services are rendered.

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APPENDIX I

iii) Interest income

Interest income is recognised as it accrues using the effective interest method.

iv) Dividend income

Dividend income is recognised when the right to receive payment is established.

v) Rental income from operating leases

Rental income receivable under operating leases is recognised in profit or loss in equal instalments over the periods covered be the lease term, except where an alternative basis is more representative of the pattern of benefits to be derived from the use of the lease asset. Leases incentive granted are recognised in the income statement as an integral part of the aggregate net lease payments receivable. Contingent rentals are recognised as income in the accounting period in which they are earned.

(s) Related parties

Parties are considered to be related to the Group if the party has the ability, directly or indirectly through one or more intermediaries, to control the Group or exercise significant influence over the Group in making financial and operating decisions, or has joint control over the Group or vice verse, or where the Group and the party are subject to common control or common significant influence. Related parties may be individuals (being members of key management personnel, significant shareholders and/or their close family members) or other entities and include entities which are under the significant influence of related parties of the Group where these parties are individuals, and post-employment benefit plans which are for the benefit of employees of the Group or of any entity that is a related party of the Group.

(t) Segment reporting

A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. A geographical segment is engaged in providing products and services within a particular economic environment that are subject to risks and returns that are different from those of segments operating in other economic environments.

3. CHANGES IN ACCOUNTING POLICIES

The HKICPA has issued certain new and revised HKFRSs that are first effective or available for early adoption for the current accounting period of the Group.

Note 2 summarises the accounting policies of the Group after the adoption of these developments to the extent that they are relevant to the Group. The adoption of the new HKFRSs had no material effect on how the results for the current or prior accounting periods have been prepared and presented. Accordingly, no prior period adjustment has been required.

The Group has not applied any new standard or interpretation that is not yet effective for the current accounting period (see note 38) except for HK(IFRIC) 10, Interim financial reporting and impairment, which is effective for accounting periods beginning on or after 1 November 2006.

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APPENDIX I

4. FINANCIAL RISK MANAGEMENT

(a) Financial risk factors

Exposure to credit, liquidity, interest rate and currency risks arises in the normal course of the Group’s business. These risks are limited to the Group’s financial management policies and practices described below:

(i) Credit risk

The Group has no significant concentrations of credit risk. It has policies in place to ensure that sales of goods are made to customers with an appropriate credit history.

(ii) Liquidity risk

The Group’s policy is to maintain sufficient cash and cash equivalents or have available funding through an adequate amount of committed credit facilities to meeting its trading, manufacturing and other business operations.

(iii) Interest rate risk

The Group is exposed to interest rate risk through the impact of rate changes on interest bearing financial assets and liabilities. Interest bearing financial assets are mainly balances with banks which are all short term in nature. Interest bearing financial liabilities is include other borrowings with floating interest rates. Therefore, any future variations in interest rate will have a minimal impact on the results of the Group.

iv) Fair values

All financial instruments are carried at amounts not materially different from their fair values as at 31 December 2006 and 2005.

(b) Estimation of fair values

The following summaries the major methods and assumptions used in estimating the fair values of the following financial instrument.

Interest-bearing loans and borrowings

The fair value is estimated as the present value of future cash flows, discounted at current market interest rates for similar financial instrument.

(c) Sensitivity analysis

In managing interest rate and foreign currency risks that the Group aims to reduce the impact of short- term fluctuations on the Group’s earnings. Over the longer term, however, permanent changes in foreign exchange and interest rates would have an impact on consolidated earnings.

At 31 December 2006, it is estimated that a general increase of one percentage point in interest rates would decrease/increase the Group’s (loss)/profit before taxation by approximately HK$1,558,000 (2005: HK$1,558,000) respectively so far as the effect on interest-bearing financial instruments is concerned.

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APPENDIX I

(d) Critical accounting estimates and judgements

The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the actual related results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below:

(i) Estimated useful lives of plant and equipment

The Group’s management determines the estimated useful lives and related depreciation charges of its plant and equipment. This estimate is based on the historical experience of the actual useful lives of plant and equipment of similar nature and functions. Management will increase the depreciation charge where useful lives are less than previously estimates lives, or it will write-off or write-down technically obsolete or non-strategic assets that have been abandoned or sold.

(ii) Estimated provision of impairment of receivables

The Group makes provision for impairment of receivables based on an assessment of the collectibility of trade and other receivables. Provisions for impairment are applied to trade and other receivables when events or changes in circumstances indicate that the balances may not be collectible. The identification of doubtful debts requires the use of judgement and estimates. Where the expectation is different from the original estimate, such differences will have an impact on the carrying value of receivables and doubtful debts expenses in the period such estimate has been changed.

5. SEGMENT INFORMATION

The Group is principally in trading and manufacturing of phosphoric acid, design, manufacturing and sale of optical products. The directors of the Company regard the business segment as the primary reporting format because it reflect the Group’s risks and returns. The secondary segment format, representing the principal markets of the Group’s products, is mainly divided into six geographical areas, namely the United States of America, Europe, East Asia, Hong Kong, The People’s Republic of China (“Mainland PRC”) and others.

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

(a) Business segments

The Group comprises the following main business segments:

(i) Phosphorus business: manufacture and sell of phosphoric acid for domestic and commercial use;

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FINANCIAL INFORMATION

APPENDIX I

(ii) Optical business: design, manufacture and sell of optical products.

Optical Business 2006 2005 HK$’000 HK$’000 115,641 146,983 2,791 5,277 118,432 152,260	Optical Business 2006 2005 HK$’000 HK$’000 115,641 146,983 2,791 5,277 118,432 152,260	Phosphorus Business 2006 2005 HK$’000 HK$’000 119,560 – 1,697 – 121,257 –	Phosphorus Business 2006 2005 HK$’000 HK$’000 119,560 – 1,697 – 121,257 –	Unallo 2006 HK$’000 – – –	cated 2005 HK$’000 – 914 914	To 2006 HK$’000 235,201 4,488 239,689	To 2006 HK$’000 235,201 4,488 239,689	tal 2005 HK$’000 146,983 6,191
								153,174

(39,993) 20,265	(21,500) 8,271	22,639 –	– –	– –	– –	(17,354) (6,524) (23,878) (13,867) (162) – 3,608 20,265 (476)		(21,500
								(2,659 (24,159 (13,057 – 67,662 – 8,271 –
(11,471) (11,848) (20) – (4,988) – – – (162) – – – (7,620) (3,513) – – Optical Business Phosphorus Business 2006 2005 2006 2005 HK$’000 HK$’000 HK$’000 HK$’000 149,233 180,997 28,105 – 50,100 35,825 – – (38,371) (31,137) (15,115) – 7,607 5,554 14 –					(14,510) 38,717 Total 2006 2005 HK$’000 HK$’000 177,338 180,997 50,100 35,825 587 8,951 228,025 225,773			38,717

							225,773

					(53,486) (183,323)		(31,137 (179,962
					(236,809)		(211,099

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APPENDIX I

(b) Geographical segments

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

Geographical segments

The following table presents the information of the revenue and certain assets and expenditure in respect of the Group’s geographical segments:

==> picture [356 x 158] intentionally omitted <==

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

United States of
America Europe East Asia Hong Kong Mainland PRC Others Consolidated
2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005
HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Segment revenue:
Sales to external
customers 45,970 77,979 69,126 43,729 37,367 – 4,402 6,815 57,100 8,917 21,236 9,543 235,201 146,983
Other segment information:
Segment assets 9,784 25,345 14,698 11,403 – – 21,865 25,888 179,833 160,208 1,845 2,303 228,025 226,147
Capital expenditure – – – – – – 41 1,068 7,579 4,486 – – 7,620 5,554
----- End of picture text -----

6. TURNOVER

Turnover represents the gross invoiced value of goods sold, net of returns and allowances.

7. OTHER INCOME

Bank interest income Commission income received from a related company Management fee income received from an associate Sales of obsolete inventories Gain on disposal of property, plant and equipment Rental income Gain on deregistration of a subsidiary Sales of materials to an associate Others	2006 HK$’000 1,094 1,696 426 682 1,035 347 – 78 224 5,582	2005 HK$’000 371 904 613 594 – 410 2,973 – 326
		6,191

8. PROVISION FOR IMPAIRMENT ON INVESTMENT IN AN ASSOCIATE

The directors has reviewed the carrying amount of its interest in an associate which was being under the process of being struck off. Impairment loss of approximately HK$162,000 was recognised in the consolidated income statement.

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APPENDIX I

9. LOSS FROM OPERATIONS

Loss from operations is stated after charging the following:

Cost of inventories* Depreciation Amortisation of land use rights Minimum lease payments under operating leases in respect of land and buildings Staff costs (including directors’ remuneration – note 12): Salaries, allowance and benefits in kind Equity compensation benefits Pension contributions Less: Forfeited contributions Net pension contributions Exchange loss, net Auditors’ remuneration – Current year – Over-provision in prior years Loss on disposal of plant and equipment Impairment of inventories Impairment of trade receivables and other receivables Share of tax of associates (included in share of results of associates)	2006 HK$’000 208,793 11,245 246 2,956 51,919 52 615 – 615	2005 HK$’000 140,874 11,355 493 1,471 48,546 – 544 (56) 488 49,034 183 640 (20) 620 6 1,942 1,571 –
	52,586	49,034
	1,230 770 (20) 750 – 5,788 352 168

The cost of inventories includes HK$43,556,000 (2005: HK$44,369,000) relating to staff costs and depreciation, which are also included in the respective total amounts disclosed above for each of these types of expenses.

For current year, the Group had no forfeited contributions available to reduce its contributions to the pension scheme in future years.

10. FINANCE COSTS

Interest charged by a shareholder, Probest in relation to: Loan therefrom A promissory note	2006 HK$’000 3,876 9,991 13,867	2005 HK$’000 3,109 9,948
		13,057

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11. WAVIER OF DEBT AND ACCRUED INTEREST UNDER A LOAN RESTRUCTURING AGREEMENT

(a) On 20 January 2005, an agreement (as amended by the Supplemental Agreement) (the “Disposal Agreement”) was made between Probest Holdings Inc (“Probest”), amongst the others, an independent third party, China Time Investment Holdings Limited (“China Time”), pursuant to which Probest, disposed of approximately 46% existing issued shares of the Company to China Time.
Upon completion of the Sale and Purchase Agreement on 3 June 2005, Probest holds approximately 5% of the existing issued shares of the Company which in turn owns 70% issued capital of Profitown Investment Corporation (“Profitown”), and 30% issued capital of Profitown.
(b) On 20 January 2005, the Company, Probest and Profitown entered into the Loan Restructuring Agreement (“Loan Restructuring Agreement”), pursuant to which Probest agreed to waive an outstanding principal of the Debt under the Old Promissory Note due by Swank to Probest with over and above the Remaining Debt of HK$112,167,732 due and owing by Profitown to the Company (“Profitown/Swank Loan), the interest and the default interest on the Debt for the period from 5 November 2004 up to and inclusive of date of the Share Disposal Agreement as referred to (a) above, in the amount of approximately HK$12,669,995 and any further interest which may be accrued on the Debt up to and inclusive of the effective date when the conditions of the Loan Restructuring Agreement were fulfilled. Profitown issued the New Promissory Note with the principal amount of HK$112,285,435 in favour of Probest, in consideration of Probest waiving portion of the outstanding Debt under the Old Promissory Note and releasing the Company from all future obligations and liabilities under the Old Promissory Note.

In addition, the Company executed a guarantee in favour of Probest (“Swank Guarantee”) that if and whenever Profitown defaults for any reason in payment of the principal sum due under the New Promissory Note issued to Probest, the Company will upon demand by Probest unconditionally pay and satisfy all the interest which Profitown is liable to pay under the New Promissory Note on and after such default. The obligations of the Company under the Swank Guarantee are unsecured and will cease to be effective if the Put Option is exercised and the transaction contemplated under the Put Option is completed.

(c) On 3 June 2005, the Company, Probest and its holding company, Tomorrow International Holdings Limited and Profitown entered into a shareholder agreement to regulate the management of Profitown (“Shareholders Agreement”). Pursuant to principal terms of the Shareholders Agreement, the Company will have the right to request Probest or an independent third party procured by Probest to purchase (the “Put Option”) all (but not part of only) of its shares, being 70% of all the existing issued shares of Profitown exercisable at any time before the expiry of 30 months from the Completion Date of the Sale and Purchase Agreement at a price equal to the net tangible asset value of Profitown as at the date of exercise of such put option attributable to such shares and such purchaser will assume all the liabilities due from the Company to any member of the Profitown Group incurred prior to the date of the Shareholders Agreement at nil consideration. If the net tangible asset value of Profitown as determined on the same basis and accounting policies adopted by Profitown in its latest audited accounts shall fall below zero during the 30 months period from the Completion Date, Probest will indemnify Profitown on demand for the deficit in the event that such deficit exceeds the outstanding principal amount of the New Promissory Note due to Probest and the interest accrued. The Put Option and such indemnity by Probest will cease and Probest shall have no further obligations in respect thereto if (i) the aggregate shareholding of China Time in the Company falls below 51%; (ii) there is any change to the majority of the board of directors of China Time since the date of and as disclosed in the Sale and Purchase Agreement; and (iii) Mr. Wang An Kang cease to be the legal and beneficial owner of at least 75% of and in China Time.

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APPENDIX I

Further details of the above Disposal Agreement, Loan Restructuring Agreement, Shareholders Agreement and the issue of the New Promissory Note are set out in a circular dated 10 May 2005.

After completion all of the abovementioned transactions, a net gain of approximately HK$67,662,000 on the waiver of debt principal and accrued interest due to Probest under the Loan Restructuring Agreement was resulted and credited to the consolidated income statement for the year ended 31 December 2005.

12. DIRECTORS’ REMUNERATION

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

Executive directors Zhao Jun Li Wei Zhou Jing Wang An Kang Independent non-executive directors Choi Tze Kit, Sammy Wu Bin Tam King Ching, Kenny	Directors’ fees HK$’000 – – – – 180 180 180 540	Salaries, allowances and benefits in kind HK$’000 600 500 480 480 – – – 2,060	Pension contribution HK$’000 12 12 12 – – – – 36	2006 Total HK$’000 612 512 492 480 180 180 180
				2,636

During the year, no emoluments were paid by the Group to the directors as an inducement to join, or upon joining the Group, or as compensation for loss of office.

– 78 –

APPENDIX I

FINANCIAL INFORMATION

Directors’ fees HK$’000 Executive directors Zhao Jun (note i) – Li Wei (note i) – Zhou Jing (note i) – Wang An Kang (note i) – Yau Tak Wah, Paul (note iii) – Louie Mei Po (note iii) – Wong Shin Ling, Irene (note iii) – Tam Wing Kin (note iii) – Cheung Wah Hing (note iii) – Independent non-executive directors Hahn Ka Fai, Mark (note iii) 61 Shum Wai Ting, Rebecca (note iii) 61 Wu Wang Li (note iii) 61 Choi Tze Kit, Sammy (note i) 88 Wu Bin (note i) 88 Tam King Ching, Kenny (note ii) 64 423 Note (i): appointed on 5 July 2005 Note (ii): appointed on 24 August 2005 Note (iii): resigned on 5 July 2005 Directors’ fees: Executive Independent non-executive Other emoluments: Executive: Salaries, allowances and benefits in kind Compensation for loss of office Pension contributions Independent non executive	Salaries, allowances and benefits in kind HK$’000 294 245 235 235 – – – – – – – – – – – 1,009	Pension contribution HK$’000 2 1 1 – – – – – – – – – – – – 4 2006 HK$’000 – 540	2005 Total HK$’000 296 246 236 235 – – – – – 61 61 61 88 88 64
			1,436

			2005 HK$’000 – 423
		540 2,060 – 36 – 2,096	423 1,009 – 4 –
			1,013
		2,636	1,436

There was no arrangement under which a director waived or agreed to waive any remuneration during the year (2005: Nil).

– 79 –

FINANCIAL INFORMATION

APPENDIX I

13. INDIVIDUALS WITH HIGHEST EMOLUMENTS

The five highest paid employees during the year include one director (2005: Nil). Details of the remuneration of the remaining four (2005: five) non-directors, highest paid employee is as follows:

Salaries, allowances and benefits in kind Equity compensation benefits Pension contributions	2006 HK$’000 2,930 52 46 3,028	2005 HK$’000 2,666 – 59
		2,725

The remuneration of above remaining four (2005: five) non-directors, highest paid employees fell within the following bands:

Nil – HK$1,000,000 14. INCOME TAX Under-provision in prior years	Number of employees 2006 2005 4 5 2006 2005 HK$’000 HK$’000 476 –	Number of employees 2006 2005 4 5 2006 2005 HK$’000 HK$’000 476 –

		2005 HK$’000 –

No Hong Kong profits tax and overseas tax has been provided in the financial statements as the companies within the Group have either accumulated tax losses brought forward, which exceed the estimated assessable profits for the year, or did not have any assessable profits for the year.

The charge for the years can be reconciled to the (loss)/profit per the consolidated income statement as follows:

(Loss)/profit before taxation Notional tax on (loss)/profit before taxation, calculated at the rates applicable to (loss)/profit in the countries concerned Income not subject to taxation Expenses not deductible for taxation purposes Under-provision in prior years Unrecognised tax losses Utilisation of previously unrecognised tax losses Taxation charge	2006 HK$’000 (14,034)	2005 HK$’000 38,717

	(3,121) (11,076) 4,684 476 9,665 (152)	7,038 (12,608) 1,017 – 5,106 (553)
	476	–

– 80 –

FINANCIAL INFORMATION

APPENDIX I

15. (LOSS)/PROFIT ATTRIBUTABLE TO EQUITY SHAREHOLDERS OF THE COMPANY

The consolidated (loss)/profit attributable to equity shareholders of the Company includes a loss of approximately HK$6,015,000 (2005: profit of approximately HK$63,088,000) which has been dealt with in the financial statements of the Company.

16. DIVIDENDS

No dividend was paid or proposed for the years ended 31 December 2006 and 2005, nor has any dividend been proposed since the balance sheet date.

17. (LOSS)/EARNINGS PER SHARE

(a) Basic (loss)/earnings per share

The calculation of basic (loss)/earnings per share is based on the loss attributable to ordinary equity shareholders of the Company for the year of approximately HK$5,632,000 (2005: profit of approximately HK$45,938,000) and the weighted average of 3,124,862,734 (2005: 3,124,862,734) ordinary shares in issue during the year.

(b) Diluted (loss)/earnings per share

Diluted (loss)/earnings per share for the years ended 31 December 2006 and 2005 have not been disclosed as no dilutive events existed during these years.

– 81 –

FINANCIAL INFORMATION

APPENDIX I

18. PROPERTY, PLANT AND EQUIPMENT

Group

Buildings HK$’000 35,910 – (17,310) (1,013)	Plant and machinery HK$’000 169,391 3,308 (11,624) –	Furniture, fixtures and equipment HK$’000 67,968 4,313 (21,189) –	Motor vehicles HK$’000 2,189 – (647) –	Total HK$’000 275,458 7,621 (50,770) (1,013) 231,296 195,050 11,245 (33,981) 4,988 (831) 176,471 54,825 213,709 17,587 231,296
17,587 – 1,372 (541) – (831) –	161,075 140,755 7,037 (11,624) 4,214 – 140,382	51,092 52,106 2,836 (21,169) 774 – 34,547	1,542 2,189 – (647) – – 1,542	231,296
				195,050 11,245 (33,981 4,988 (831
				176,471
17,587	20,693	16,545	–
– 17,587	161,075 –	51,092 –	1,542 –	213,709 17,587
17,587	161,075	51,092	1,542

Note: Property, plant and equipment of the Group amounted to approximately HK$4,988,000 were determined to be impaired. These assets were belonged to a subsidiary being under the process of winding up as at the balance sheet date. The factors of the Group considered in the determining whether the financial assets were impaired are disclosed in note 2 (h)(i).

– 82 –

FINANCIAL INFORMATION

APPENDIX I

Group

Buildings HK$’000 38,600 – – (2,690)	Plant and machinery HK$’000 168,256 1,135 – –	Furniture, fixtures and equipment HK$’000 63,557 4,419 (8) –	Motor vehicles HK$’000 2,189 – – –	Total HK$’000 272,602 5,554 (8) (2,690) 275,458 186,967 11,355 (2) (3,270) 195,050 80,408 239,548 35,910 275,458
35,910 1,506 1,764 – (3,270) –	169,391 135,204 5,551 – – 140,755	67,968 48,068 4,040 (2) – 52,106	2,189 2,189 – – – 2,189	275,458
				186,967 11,355 (2 (3,270
				195,050
35,910	28,636	15,862	–
– 35,910	169,391 –	67,968 –	2,189 –	239,548 35,910
35,910	169,391	67,968	2,189

All buildings of the Group are situated in Mainland PRC.

All the Group’s buildings, which are held for own use in Dongguan (2005: in Dongguan and Shenzhen) of Mainland PRC, were revalued as at 31 December 2006 at their open market value by reference to recent market transactions in comparable properties. The valuations were carried out by B.I. Appraisals Limited, who is an associate member of Hong Kong Institute of Surveyors, at approximately HK$17,587,000 (2005: HK$35,910,000). Revaluation deficit of approximately HK$182,000 (2005: revaluation deficit of HK$542,000 and revaluation surplus of HK$1,122,000) resulting from the revaluation have been debited to the consolidated income statement and the property revaluation reserve, respectively.

As at 31 December 2006, the Group has buildings with a net book value of approximately HK$17,587,000 situated on the land of which no land use rights certificates has been obtained.

Had the Group’s buildings stated at valuation been carried at historical cost less accumulated depreciation and impairment losses, their carrying amounts would have been approximately HK$38,154,000 (2005: HK$42,307,000).

– 83 –

FINANCIAL INFORMATION

APPENDIX I

19. LAND USE RIGHTS

The Group’s interests in land use rights represent prepaid operating lease payments and their net book value are as follows:

	Group	Group
	2006	2005
	HK$’000	HK$’000
Outside Hong Kong, held on:
Leases of between 10 to 50 years	–	7,869

The Group had not obtained land use right certificates situated in the Mainland PRC with a net book value of approximately HK$7,869,000 at 31 December 2005.

20. INVESTMENTS IN SUBSIDIARIES

Unlisted shares, at cost Less: Impairment loss	Company 2006 2005 HK$’000 HK$’000 1,090 1,086 (1,081) (1,081) 9 5	Company 2006 2005 HK$’000 HK$’000 1,090 1,086 (1,081) (1,081) 9 5
		5

The following is a list of the principal subsidiaries at 31 December 2006:

	Country/
	place of		Nominal value
	incorporation/		of issued
	establishment		ordinary/	Proportion
	and	Principal	registered	of owership
Name	operation	activities	share capital	interest held
				Directly	Indirectly
Anchorage Trading	Hong Kong	Sales agent of	HK$1	100%		–
Limited		an overseas
		principal
Artland Manufactory	Hong Kong	Investment	HK$2	–	70%
Limited		holding
Bestway Development	Hong Kong	Representative	HK$2	–	70%
Limited		office in
		trading
Dongguan De Bao	Mainland	Manufacture of	HK$58,550,910	–	35%
Optical Co., Ltd.	PRC	multi-coating	(Note i)		_(Note _	iii)
(“De Bao”)		lenses
Dongguan Hamwell	Mainland	Manufacture of	HK$62,504,800	–	58%
Glasses Co., Ltd.	PRC	optical	(Note ii)
(“Dongguan		products
Hamwell”)

– 84 –

APPENDIX I

FINANCIAL INFORMATION

		Country/
		place of		Nominal value
		incorporation/		of	issued
		establishment		ordinary/		Proportion
		and	Principal	registered		of owership
Name		operation	activities	share capital		interest held
						Directly	Indirectly
Global	Origin Limited	Hong Kong	Investment	HK$75,000,000		–	63%
			holding
Golden	Cadilac	Hong Kong	Investment	HK$20		–	70%
Company Limited			holding
Hamwell International		Hong Kong	Investment	HK$10,000		–	63%
Limited			holding
Profit Trend		Hong Kong	Investment	HK$1,000,000		–	35%
International Limited			holding				_(Note _	iii)
Profitown Investment		The British	Investment	US$1,000		70%		–
Corporation		Virgin	holding
		Islands
		(“BVI”)
Prowin	Commercial &	Hong Kong	Property		HK$2	–	70%
Industrial Limited			holding in
			Mainland
			PRC
Swank	International	BVI	Trade mark		US$1	–	70%
Group BVI Limited			holding
Swank	International	Hong Kong	Investment	HK$20		–	70%
Limited			holding
Swank	International	Hong Kong	Provision of		HK$2	–	70%
Management			accounting
Company Limited			and
			secretarial
			service
Swank	International	Hong Kong	Trading of	HK$100,000		–	70%
Optical Company			optical
Limited			products
Toey Limited		BVI	Investment		US$1	–	70%
			holding
		Mainland PRC	Sales and manufacture	HK$5,000,000 (Note iv)		–	100%
			of phosphoric
			acid
Shenzhen Henggang		Mainland	Manufacture of	US$30,000,000		–	57%
Swank Optical		PRC	optical	(Note v)
Industrial Co., Ltd.			products
(“Henggang”)

– 85 –

FINANCIAL INFORMATION

APPENDIX I

Notes:

(i) De Bao is registered as a wholly foreign owned enterprise under the Mainland PRC law. The registered capital of De Bao is HK$118,100,000. At the balance sheet date, plant and machinery amounting to HK$58,550,910 has been contributed by the Group towards meeting the registered capital requirement. The outstanding amount of approximately HK$59,549,000 was due for contribution on 18 March 1999 in accordance with De Bao’s articles of association. The Group has been in discussion with the relevant authorities to modify the original terms of the articles of association, including the amount of total registered capital. Up to the date of this Annual Report, the Group has not yet obtained the approval from the relevant authorities.
(ii) Dongguan Hamwell is a sino-foreign owned joint venture enterprise under the Mainland PRC law. The registered capital of Dongguan Hamwell is HK$67,940,000. At the balance sheet date, plant and machinery amounting to approximately HK$62,505,000 has been contributed by the Group to Dongguan Hamwell towards meeting the registered capital requirement. The remaining registered capital of HK$5,435,000 has not yet been contributed by the minority shareholder of Dongguan Hamwell as at 31 December 2006.
(iii) The Company has the power to cast the majority of votes at meetings of the board of directors of these entities and therefore they are regarded as subsidiaries of the Company.
(iv) is registered as a wholly foreign owned enterprise under the Mainland PRC law. The registered capital of is HK$5,000,000. At the balance sheet date, cash amounting to HK$750,000 has been contributed by the Group towards meeting the registered capital requirement. The outstanding amount of approximately HK$4,250,000 has not yet been contributed by the Group as at 31 December 2006.
(v) The subsidiary was under the process of winding up.

The carrying amount of the investments in subsidiaries is reduced to their recoverable amounts which are determined by reference to the estimation of future cash flows expected to be generated from the respective subsidiaries.

21. INTERESTS IN ASSOCIATES

Share of net assets Less: Impairment loss Amounts due from associates	Group 2006 2005 HK$’000 HK$’000 145,412 133,147 (100,191) (100,029) 45,221 33,118 4,879 2,707 50,100 35,825	Group 2006 2005 HK$’000 HK$’000 145,412 133,147 (100,191) (100,029) 45,221 33,118 4,879 2,707 50,100 35,825
	45,221 4,879	33,118 2,707
	50,100

(a) The amounts due from associates are unsecured, interest free and not repayable within the next 12 months from the balance sheet date.

– 86 –

FINANCIAL INFORMATION

APPENDIX I

(b) The following is a list of the principal associates at 31 December 2006:

			Country/		Percentage of
			place of		interest in
			incorporation/		ownership/
			establishment		voting power
	Business	Class of	and	Principal	held
Name	structure	shares held	operations	activities	indirectly
Dongguan Yueheng	Corporate	Contributed	Mainland PRC	Manufacture of	50%
Optical Co., Ltd		capital		optical lenses
Dongguan Yueheng	Corporate	Ordinary	Hong Kong	Trading of optical	50%
Optical (HK)				products
Company Limited
Dongguan Yueheng	Corporate	Ordinary	BVI	Financial	50%
Optical (BVI)				servicing and
Company Limited				marketing of
				optical products

(c) The directors reviewed the carrying amount of its interests in associates and determined the amount of approximately HK$100,191,000 (2005: HK$100,029,000) to be impaired and full provision had been made on two associates. These two associates were being under process of struck off and lost control.

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

Note: Dongguan Yueheng Optical Co., Ltd. is a sino-foreign owned joint venture enterprise under Mainland PRC law.

Summary of financial information on associates

Total assets Total liabilities Net assets Group’s share of net assets of associates Revenue Profit/(loss) for the year Group’s share of results of associates for the year	2006 HK$’000 109,199 (8,862) 100,337 45,221 127,542 38,091 20,265	2005 HK$’000 80,243 (3,917)
		76,326

		33,118

		75,515

		(18,583)

		8,271

– 87 –

FINANCIAL INFORMATION

APPENDIX I

22. OTHER RECEIVABLES

Other receivables Less: Impairment loss	Group and 2006 HK$’000 96,343 (96,343) –	Company 2005 HK$’000 96,339 (96,339)
		–

Other receivables represent the loans owed by independent third parties, Hanmy (Holding) Limited and its related companies (collectively “Hanmy”), to the Group. The Group has commenced legal proceedings against Hanmy for recovery of the amounts due. Impairment loss has been fully provided for these debts by the Group, as in the opinion of the directors, it is uncertain whether the debts will be recovered following the conclusion of the legal proceedings.

23. TRADE RECEIVABLES

As at 31 December 2006, trade receivable of the Group amounting to approximately HK$1,919,000 (2005: HK$1,571,000) were determined to be impaired and full provision had been made. These receivables were determined to be impaired and full provision had been made. These receivables were due from companies with financial difficulties. The ageing analysis of the Group’s trade receivables, based on payment due date and net of provisions, is as follows:

Current to 30 days 31 to 60 days 61 to 90 days More than 90 days Less: Provision for impairment of receivables	Group 2006 2005 HK$’000 HK$’000 26,354 40,530 1,811 1,964 517 1,565 2,987 1,274	Group 2006 2005 HK$’000 HK$’000 26,354 40,530 1,811 1,964 517 1,565 2,987 1,274
	31,669 (1,919)	45,333 (1,571)
	29,750	43,762

Included in trade receivables are the following amounts denominated in a currency other than the functional currency of the entity to which they related:

Original currency United State Dollars (“US$”) Euro Renminbi (“RMB”)	Group 2006 2005 ’000 ’000 3,462 5,160 148 94 3,068 212

The normal credit period granted by the Group to customers ranges from 30 days to 120 days. All of the trade receivables are expected to be recovered within one year.

– 88 –

FINANCIAL INFORMATION

APPENDIX I

Included in trade receivables of the amount of approximately HK$1,744,000 (2005: Nil) due from a related company, (“Yunphos”), a company owned over 50% by Mr. Wang An Kang and Mr Zhao Jun, executive directors of the Company, is unsecured, interest free and repayable on demand with maximum outstanding balance owed during the year amounted to approximately HK$1,799,000 (2005: Nil).

24. INVENTORIES

Raw materials Work in progress Finished goods	Group 2006 2005 HK$’000 HK$’000 19,512 13,341 13,431 5,028 10,315 4,562 43,258 22,931	Group 2006 2005 HK$’000 HK$’000 19,512 13,341 13,431 5,028 10,315 4,562 43,258 22,931
		22,931

All inventories were carried at net realisable value as at 31 December 2005.

The Group recognised a loss of approximately HK$5,788,000 (2005: HK$1,942,000) for the impairment of its inventories during the year.

25. AMOUNTS DUE TO ASSOCIATES/A SUBSIDIARY

The amounts are unsecured, interest free and repayable on demand.

26. AMOUNT DUE TO A SHAREHOLDER, PROBEST

The amount due to Probest is unsecured, bearing interest at a rate equivalent to 1% over the prevailing Hong Kong prime rate per annum and has no fixed repayment terms. In the opinion of the directors of the Company, the amount due to Probest will not be repayable within the next 12 months from the balance sheet date.

27. TRADE PAYABLES

The ageing analysis of the Group’s trade payables, based on payment due date, is as follows:

Current to 30 days 31 to 60 days 61 to 90 days More than 90 days	Group 2006 2005 HK$’000 HK$’000 15,885 10,028 3,062 887 941 527 682 1,148 20,570 12,590	Group 2006 2005 HK$’000 HK$’000 15,885 10,028 3,062 887 941 527 682 1,148 20,570 12,590
		12,590

– 89 –

APPENDIX I

FINANCIAL INFORMATION

Included in trade payables are the following amounts denominated in a currency other than the functional currency of the entity to which they related:

	Group
	2006	2005
Original currency	’000	’000
US$	504	564
Euro	74	38
Japanese Yen	6,505	9,079
New Taiwan Dollars	201	38
RMB	9,638	3,325

28. PROMISSORY NOTE PAYABLE

Interest payable on demand Principal repayable: Within 1 year Payable after 1 year but within 2 years After 2 years but within 5 years Total Amount due to Probest under promissory note Portion classified as current liabilities Non-current portion	Group and 2006 HK$’000 15,050 112,285 – – 127,335	Company 2005 HK$’000 5,059 – 112,285 –
		117,344

	127,335 (127,335)	117,344 (5,059)
	–	112,285

The promissory note payable to Probest is unsecured with maturity date on 2 December 2007 and bearing interest at the rate equivalent to 1% over the prevailing Hong Kong prime rate per annum on the principal amount.

29. PROVISION FOR LONG SERVICE PAYMENTS

At 1 January Amount utilised during the year At 31 December Portion classified as current liabilities Non-current portion	Group 2006 2005 HK$’000 HK$’000 176 379 (61) (203) 115 176 – – 115 176	Group 2006 2005 HK$’000 HK$’000 176 379 (61) (203) 115 176 – – 115 176

		176 –

		176

The Group provides for the probable future long service payments expected to be made to employees under the Employment Ordinance, as further explained under the heading “Employee benefits” in note 2(q) to the financial statements. The provision is based on the best estimate of the probable future payments, which have been earned by the employees from their service to the Group rendered for the balance sheet date.

– 90 –

FINANCIAL INFORMATION

APPENDIX I

30. AMOUNT DUE TO A RELATED COMPANY

The amount due to a related company, a company wholly owned by Mr. Wang An Kang, an executive director of the Company, is unsecured, interest free and repayable on demand.

31. DEFERRED TAXATION

The principal component of the Group’s and the Company’s net deferred tax asset position not recognised in the financial statements is as follows:

			Group		Company
			2006	2005	2006	2005
			HK$’000	HK$’000	HK$’000	HK$’000
Unused	tax	losses	136,145	126,748	33,099	32,073

No deferred tax has been provided on the revaluation surplus of the Group’s properties situated in the Mainland PRC because the Group has sufficient estimated unused tax losses to offset the temporary differences. Included in unused tax losses are losses from Mainland PRC subsidiaries that will expire in 2011. The Group and the Company have no significant potential deferred tax liabilities for which provision has not been made.

32. SHARE CAPITAL

Authorised: 300,000,000,000 ordinary shares of HK$0.01 each Issued and fully paid: 3,124,862,734 ordinary shares of HK$0.01 each	2006 HK$’000 3,000,000 31,249	2005 HK$’000 3,000,000

		31,249

33. SHARE OPTION SCHEME

The Company operates a share option scheme (the “Scheme”) for the purpose of providing incentives and rewards to eligible participants who contribute to the success of the Group’s operations. Eligible participants of the Scheme include the Company’s directors, including independent non-executive directors, other employees of the Group, suppliers of goods or services to the Group, customers of the Group, and any minority shareholder in the Company’s subsidiaries. The Scheme became effective on 28 May 2004 and, unless otherwise cancelled or amended, will remain in force for 10 years from that date.

The maximum number of unexercised share options currently permitted to be granted under the Scheme is an amount equivalent, upon their exercise, up to 10% of the shares of the Company in issue at any time. The maximum number of shares issuable under share options to each eligible participant in the Scheme within any 12-months period is limited to 1% of the shares of the Company in issue at any time. Any further grant of share options in excess of this limit is subject to shareholders’ approval in a general meeting.

Share options granted to a director, chief executive or substantial shareholder of the Company, or to any of their associates, are subject to approval in advance by the independent non-executive directors. In addition, any share options granted to a substantial shareholder or an independent non-executive director of the Company, or to any of their associates, in excess of 0.1% of the shares of the Company in issue at any time or with an aggregate value (based on the price of the Company’s shares at the date of the grant) in excess of HK$5 million, within any 12-months period, are subject to shareholders’ approval in advance in a general meeting.

– 91 –

FINANCIAL INFORMATION

APPENDIX I

The offer of a grant of share options may be accepted within 21 days from the date of the offer, upon payment of a nominal consideration of HK$1 in total by the grantee. The share option may be exercised under the Scheme at any time during a period of 3.5 years after the date when the scheme option is granted and expiring on the last date of such period.

The exercise price of the share options is determinable by the directors, but may not be less than the higher of (i) the Stock Exchange closing price of the Company’s shares on the date of the offer of the share options; (ii) the average Stock Exchange closing price of the Company’s shares for the five trading days immediately preceding the date of the offer; and (iii) the nominal value of an ordinary share.

Share options do not confer rights on the holders to dividends or to vote at shareholders’ meetings.

The following table shows the movement of the Company’s share options during the years ended 31 December 2006 and 2005.

Employees

			Outstanding
			at the	Granted	Exercise	Outstanding
Date of share		Exercise	beginning of	during the	during the	at the end of
options granted	Exercise price	period	the year	year	year	the year
15/12/2005	HK$0.10	24/2/2008 –	10,000,000	–	–	10,000,000
		23/8/2011
Number of options	exercisable at 31 December 2006					–

In assessing the theoretical aggregate value of the share options granted and fully accepted during the year, the Black-Scholes option pricing model has been used. In current year, an amount of share option expense of approximately HK$52,000 (2005: Nil) has been recognised.

Share options granted and fully accepted during the year ended 31 December 2006:

Date of Grant: 15/12/2005 Vesting Period: 15/12/2005 - 23/02/2008 Exercise Period: 24/02/2008 - 23/08/2011 Exercise Price: HK$0.10 per share Share options value at 15/12/2005 (note ii): HK$112,000

Notes:

i) The closing price of the Ordinary Shares of the Company immediately before the date on which the options were granted was HK$0.75.
ii) According to the Black-Scholes model, the theoretical aggregate value of the options was estimated at HK$112,000 as at 15 December 2005 (when the options were granted) with the following variables and assumptions:

Risk Free Rate : 3.97%, being the approximate yield of the 3.5 - year Exchange Fund Note traded on 15/12/2005 Expected Volatility : 24.67%, being the annualised standard deviations of the continuously compounded rates of return on the share prices of three other comparable listed Hong Kong companies with similar business operations Expected Life of the Options : 3.5 years from the date of granting Expected dividend : 0%

– 92 –

FINANCIAL INFORMATION

APPENDIX I

iii) Options forfeited, if any, before the expiry of the options will be treated as lapsed options which will be added back to the number of Ordinary Shares available to be issued under the relevant share option scheme.

34. RESERVES

(a) Group

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

(b) Company

At 1 January 2005 Profit for the year (note 15) At 31 December 2005 and 1 January 2006 Recognition of equity compensation benefits Loss for the year (note 15) At 31 December 2006	Share premium account HK$’000 723,462 –	Special reserve HK$’000 341,800 –	Share option reserve Accumulated losses HK$’000 HK$’000 – (1,162,413) – 63,088	Share option reserve Accumulated losses HK$’000 HK$’000 – (1,162,413) – 63,088	Total HK$’000 (97,151 63,088
	723,462 – –	341,800 – –	– 52 –	(1,099,325) – (6,015)	(34,063 52 (6,015
	723,462	341,800	52	(1,105,340)	(40,026

35. COMMITMENTS

(a) Operating lease commitment

At 31 December 2006, the Group and the Company had commitments for future minimum lease under non-cancellable operating leases in respect of land and buildings which fall due as follows:

Within one year In the second to fifth year inclusive	Group 2006 2005 HK$’000 HK$’000 3,155 1,424 – 842 3,155 2,266	Company 2006 2005 HK$’000 HK$’000 285 622 – 285 285 907	Company 2006 2005 HK$’000 HK$’000 285 622 – 285 285 907
			907

The Group leases certain of its office properties and warehouses under operating lease arrangements. Leases for office properties and warehouses are negotiated for terms ranging from 1 to 2 years.

(b) Capital commitment

The Group has no material capital commitments as at 31 December 2006 (2005: capital commitment in respect of acquisition of property, plant and equipment contracted but not provided for amounted to approximately HK$2,819,000).

– 93 –

FINANCIAL INFORMATION

APPENDIX I

36. RELATED PARTY TRANSACTIONS

(a) Key management personnel remuneration

Remuneration for key management personnel of the Group, including amounts paid to the Company’s directors as disclosed in note 12 and certain of the highest paid employees as disclosed in note 13, is as follows:

Short-term employee benefits Post-employment benefits Equity compensation benefits	2006 HK$’000 4,426 70 52 4,548	2005 HK$’000 1,941 20 –
		1,961

Total remuneration is included in “staff costs” (see note 9).

(b) Other related party transactions

In addition to the transactions and balances detailed elsewhere in these financial statements, the Group had the following material transactions with related and connected parties during the year:

Note
Sales of finished goods to
– associates
(i)
– a related company
(i)
Purchases of raw materials and finished goods from
– associates
(ii)
– related companies
(ii)
Sales of materials to an associate
Management fee income received from an associate
(iii)
Commission income received from a related
company
(v)
Interest expense charged by a shareholder, Probest
Annual rental paid to
– a joint venture partner
(iv)
– related companies
Commission paid to a related company
(vi)
Amount due to a shareholder, Probest (note 26)
Amounts due to associates
Amounts due from associates (note 21)
Amount due to a related company (note 30)
Amount due from a related company (note 23)
Promissory note payable to Probest (note 28)
Loan principal and interests waived by Probest
(note 11)

Group
2006
2005
HK$’000
HK$’000
10,742
8,256
45,222
–
12,015
13,180
93,262
–
78
–
426
613
1,696
904
13,867
13,057
2,299
2,853
1,289
–
2,068
–
53,579
49,703
6,729
4,014
4,879
2,707
11,460
–
1,744
–
127,335
112,285
–
67,662

Notes:

(i) The sales to associates and a related company were made according to the published prices, terms and conditions offered to the major customers of the Group.

– 94 –

FINANCIAL INFORMATION

APPENDIX I

(ii) The purchases from associates and related companies were made according to the published prices, terms and conditions offered by the associates to their major customers.
(iii) The management fee income was charged according to the management’s estimation on costs of office premises and utilities used by the associates.
(iv) The annual rental was paid to a joint venture partner in Mainland PRC and accordingly the Group is entitled to all of the profits and bears all of the losses of Henggang.
(v) The commission income was received from Rightlink Trading Limited(“Rightlink”), a Company wholly owned by Mr Wang An Kang, an executive director of the Company. The commission was charged at 3% of the invoiced amount on products sold by Rightlink.
(vi) The commission was paid to a related company, Yunphos, a company owned over 50% by Mr Wang An Kang and Mr Zhao Jun, executive directors of the Company.

37. CONTINGENT LIABILITIES

At the balance sheet date, there were contingent liabilities in respect of the following:

(a) A single guarantee issued by the Company to a shareholder of the Group in respect of interest payment amounted to approximately HK$15,050,000 (2005: HK$5,059,000) under the promissory note payable by a subsidiary of the Group.
(b) The Group has contingent liabilities of RMB9,500,000 (2005: Nil) equivalent to approximately HK$9,450,000 (2005: Nil) in relation to the provision of a guarantee issued by a subsidiary to minority interests of another subsidiary of the Group regarding any potential loss that may be borne by the minority interests during the winding up process of the subsidiary.

38. POSSIBLE IMPACT OF AMENDMENTS, NEW STANDARDS AND INTERPRETATIONS ISSUED BUT NOT YET EFFECTIVE FOR THE YEAR ENDED 31 DECEMBER 2006

Up to the date of issue of these financial statements, the HKICPA has issued a number of amendments, new standards and interpretations which are not yet effective for the year ended 31 December 2006 and which have not been adopted in these financial statements.

The Group is in the process of making an assessment of what the impact of these amendments, new standards and new interpretations is expected to be in the period of initial application. So far it has concluded that the adoption of them is unlikely to have a significant impact on the Company’s results of operations and financial position.

– 95 –

FINANCIAL INFORMATION

APPENDIX I

In addition, the following developments may result in new or amended disclosures in the financial statements:

		Effective for
		accounting periods
		beginning on or after
HKAS 1 (Amendment)	Presentation of financial statements:	1 January 2007
	Capital
	Disclosures
HKFRS 7	Financial Instruments: Disclosures	1 January 2007
HKFRS 8	Operating Segments	1 January 2009
HK(IFRIC) – Int 8	Scope of HKFRS 2	1 May 2006
HK(IFRIC) – Int 9	Reassessment of Embedded Derivatives	1 June 2006
HK(IFRIC) – Int 11	HKFRS 2 – Group and Treasury Share	1 May 2007
	Transactions

39. ACQUISITION OF ADDITIONAL INVESTMENT IN A SUBSIDIARY

During the year, the leasehold land and buildings located in Shenzhen of Mainland PRC held by a subsidiary of the Group with net book value amounting to approximately HK$24,392,000, the land was being early countermanded by the local Mainland PRC government of which led to the Group decided to wind up the subsidiary in Shenzhen. Since the subsidiary was not wholly owned by the Group, the Group had to compensate the loss suffered by the minority shareholders of which the Group had purchased back all the shares held by the minority shareholders at a consideration of approximately HK$9,000,000 and also guaranteed the minority shareholders for any further loss suffered (see note 37(b) for details).

40. ULTIMATE HOLDING COMPANY

The directors regard China Time Investment Holdings Limited, a company incorporated in the British Virgin Islands, as being the ultimate holding company. This entity does not produce financial statements available for public use.

– 96 –

FINANCIAL INFORMATION

APPENDIX I

III. INDEBTEDNESS

Borrowings

At the close of business on 30 June 2007, being the latest practicable date for ascertaining certain information relating to this indebtedness statement, the Group had the following borrowings:

(i) unsecured interest bearing borrowings from a shareholder, Probest Holdings Inc, of approximately HK$167,765,000; and
(ii) unsecured non-interest bearing borrowings from a shareholder, Probest Holdings Inc, of approximately HK$19,922,000.

Save as aforesaid, at the close of business on 30 June 2007, the Group did not have any debt securities issued and outstanding, and authorised or otherwise created but unissued, and term loans.

Contingent liabilities

As at close of business on 30 June 2007, the Group had total contingent liabilities of RMB9.5 million in relation to the provision of a guarantee issued by a subsidiary to minority interests of another subsidiary of the Group regarding any potential loss that may be borne by the minority interests during the winding up process of the subsidiary

Capital commitment

As at 30 June 2007, the Group had no material capital commitments.

Disclaimers

Save as disclosed above and apart from intra-group liabilities, at the close of business on 30 June 2007, the Group did not have any outstanding loan capital issued and outstanding or agreed to be issued, bank overdrafts, loans or other similar indebtedness, liabilities under acceptances (other than normal trade bills) or acceptance credits, debentures, mortgages, charges, finance lease or hire purchase commitments, guarantees or other material contingent liabilities.

– 97 –

VALUATION REPORT

APPENDIX II

The following are the texts of a letter and the valuation report received from B.I. Appraisals Limited, an independent property valuer, prepared for the purpose for incorporation in this circular.

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

==> picture [197 x 83] intentionally omitted <==

8 August 2007

The Directors Swank International Manufacturing Company Limited Suite 1102, 11th Floor ICBC Tower, Citibank Plaza 3 Garden Road Central Hong Kong

Dear Sirs,

Re: The fixed assets in an industrial complex located at Jin Suo Industrial Small District, Xundian Hui Zu Yi Zu Autonomous County, Kunming City, Yunnan Province, the People’s Republic of China (the “PRC”)

In accordance with the instructions from Swank International Manufacturing Company Limited (hereinafter referred to as the “Company”) for us to assess the market rent of the fixed assets (hereinafter referred to as the “Fixed Assets”), which include land and buildings (hereinafter referred to as the “Property) and machines and equipment (hereinafter referred to as the “Machinery”), and which are held by Yunnan Phosphorus Group Co., Ltd. and/or its subsidiaries (hereinafter collectively referred to as the “Yunphos Group”) for the production of PVC resin, caustic soda, sodium tripolyphosphate and other chemical products, we confirm that we have carried out inspections, made relevant enquiries and obtained such further information as we consider necessary for the purpose of providing you with our opinion of the market rent of the Fixed Assets as at 30 June 2007 (hereinafter referred to as the “Date of Valuation”).

It is our understanding that this valuation document is to be used for disclosure purpose in relation to the connected transaction regarding the proposed leasing of the Fixed Assets by the Company and/or its subsidiaries (hereinafter together referred to as the “Group”).

This letter, forming part of our valuation report, identifies the property being valued; explains the basis and methodology of our valuation; lists out the assumptions, the title investigation and the limiting conditions made in the course of our valuation; and states our opinion of value.

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VALUATION REPORT

APPENDIX II

BASIS OF VALUATION AND ASSUMPTIONS

The valuation is our opinion of the market rent of the Fixed Assets currently held by Yunphos Group in Yunnan. The market rent is defined as “the estimated amount for which an asset should lease on the date of valuation between a willing lessor and a willing lessee in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.”

The market rent in continued existing use is further defined as market rent of an asset based on continuation of its existing use as part of an on-going business, assuming the asset could be sold in the open market for its existing use, and otherwise in keeping with the market value definition regardless of whether or not the existing use represents the highest and best use of the asset.

The opinion of the market rent in continued existing use is not necessarily intended to represent the amount that might be realized from piecemeal leasing of the Fixed Assets or from some other alternate uses.

We have valued the Property and the Machinery on the basis that each of them is considered individually. Our valuation of the Fixed Assets is the aggregate value of the Property and the Machinery and we have not applied any bulk discount.

This investigation is concerned solely with the value of the Fixed Assets. Excluded from this investigation are inventories, materials on hand and all other tangible assets of current nature and intangible assets that might exist. Our opinion of value is not related to the earning capacity of the business. It is assumed that prospective earnings are adequate to support the concluded value of the Fixed Assets plus the value of other assets not included in this valuation, and sufficient net working capital. This report does not attempt to arrive at the value of the Yunphos Group as a total business entity.

Our valuation on the market rent of the Fixed Assets has been made on the assumption that the Fixed Assets have been completely built and/or installed as at the Date of Valuation and is leased on the open market without the benefit of a deferred terms contract, joint venture, management agreement or any similar arrangement that would serve to affect the rent of the Fixed Assets. In addition, no account has been taken of any option or right of pre-emption concerning or effecting lettings of the Fixed Assets.

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

Other specific assumptions, if any, have been stated in the footnotes of the valuation certificate.

– 99 –

VALUATION REPORT

APPENDIX II

VALUATION METHODOLOGY & PROCEDURES

In arriving at the market rent of the Fixed Assets, which are designed for the production of PVC resin, caustic soda, sodium tripolyphosphate and other chemical products, owing to the nature of the buildings and structures erected thereon and the machinery installed therein, there are no readily identifiable comparable leasing transactions; the Fixed Assets cannot be valued by comparison with open market transactions. Therefore, we have adopted the Investment Approach by firstly assessing the market values to the Property and Machinery respectively and applying appropriate yields to the market values arrived.

In assessing the market value of the Property, we have adopted the Depreciated Replacement Cost (“DRC”) Approach. The DRC Approach is based on an estimate of the market value for the existing use of the land in the Property, and the costs to reproduce or replace in new conditions the buildings and structures being valued in accordance with current construction costs for similar buildings and structures in the locality, with allowance for accrued depreciation as evidenced by observed condition or obsolescence present, whether arising from physical, functional or economic causes. The DRC Approach generally furnishes the most reliable indication of value for property in the absence of a known market based on comparable sales.

In arriving at our opinion of the market value of the Machinery, we have considered the three generally accepted approaches to value: the Depreciated Replacement Cost Approach, Market Comparable Approach and Income Capitalization Approach. The theory of these approaches is outlined as follows:

1) The Depreciated Replacement Cost Approach

The Depreciated Replacement Cost Approach establishes value based on the cost of reproducing or replacing in new condition the assets valued in accordance with current market prices for similar assets, with allowance for accrued depreciation arising from condition, utility, age, wear and tear, or physical deterioration and obsolescence present (functional or economic) taking into account past and present maintenance policy and rebuilding history.

Reproduction Cost New is defined as the estimated current cost of reproducing a new replica of an asset with the same or closely similar materials.

Replacement Cost New is defined as the estimated current cost of the new asset having the nearest equivalent utility as the asset being valued.

Physical Deterioration is the loss in value of an asset from wear and tear of asset in operation and exposure to various elements.

Functional Obsolescence is the loss in value due to factors inherent in the asset itself and changes in design, materials, or process that result in inadequacy, over capacity, excess construction, lack of functional utility or excess operating costs, etc.

– 100 –

VALUATION REPORT

APPENDIX II

Economic Obsolescence is an incurable loss in value caused by unfavorable external conditions.

When market transactions of comparable assets are not available, when data cannot be extrapolated from larger transactions, or when transactions are non-existent, under premise of continued use and assuming adequate earnings, the Depreciated Replacement Cost Approach is the preferred valuation procedure.

2) The Market Comparable Approach

The Market Comparable Approach involves the collection of market data pertaining to the subject assets being valued. The primary intent of the Market Comparable Approach is to determine the desirability of the assets through recent sales or offerings of similar assets currently on the market in order to arrive at an indication of the most probable selling price for the assets being valued. If the comparable sales are not exactly similar to the asset being valued, adjustments must be made to bring them as closely in line as possible with the subject asset.

Under the premise of continued use assuming adequate earnings, consideration is given to the cost to acquire similar equipment in the used-equipment market; an allowance then is made to reflect the costs for freight and installation.

3) The Income Capitalization Approach

The Income Capitalization Approach considers value in relation to the present worth of future benefits derived from ownership and is usually measured through the capitalization of a specific level of income. This approach is most applicable to investment and general-use properties where there is an established and identifiable rental market.

In any valuation study, all three approaches to value must be considered, as one or more approaches may be applicable to value the subject machinery and equipment. In some situations, elements of two or three approaches may be combined to reach an opinion of value.

In assessing the Machinery, since there is no identified active used-equipment market in the PRC that provides information on recent transactions of comparable items, the Market Comparable Approach was not applied. On the other hand, since no identifiable income stream can be attributed to a specific piece of equipment or a group of equipment, the Income Capitalization Approach to value was not applied. Therefore, we conclude that the Depreciated Replacement Cost Approach is deemed to be the most appropriate method of assessing the Machinery under premise of continued use.

For the assets of standard manufacture, we used current manufacturers’ price lists, price quotations and price catalogs to determine the cost of replacement new. Allowances for freight and installation were sometimes required.

– 101 –

VALUATION REPORT

APPENDIX II

For the assets of special design or fabrication, we used current market price for labor, current market price for materials, manufactured components, design fees, engineering fees and contractors’ overhead, profit and fee to determine the cost of replacement new. Allowances for freight and installation were sometimes required.

Also, we adopted the assets index factor to estimate the cost of reproduction new of special design or fabrication machinery and equipment. An index factor is applied to the historical cost of valued equipment in order to estimate the current cost of the assets being valued.

The deductions for physical deterioration, functional obsolescence, and economic obsolescence have reflected observed condition; past maintenance and rebuilding history, if any; current use; and planned future utilization.

TITLE INVESTIGATION

We have not been provided with any documents in relation to the title to the interest in the Property but have been advised by the Yunphos Group that applications for title documents regarding the property interest have been made and are being processed by the relevant government authorities.

We have been provided with copies of the purchase contracts regarding the major items of the Machinery and are not able to verify the ownership of the Machinery. We have assumed no responsibility for the title to the Machinery. Unless otherwise stated, it is assumed that individual items of the Machinery are free from encumbrances, restrictions and outgoings of an onerous nature which could affect their values. It is further assumed that there are no hidden or unapparent conditions of the Machinery, which would render them more or less valuable.

In the course of our valuation, we have relied on the legal opinion dated 8 August 2007 prepared by Yunnan Xingyuan Law Firm ( ), the Group’s Legal Advisor on PRC law (hereinafter referred to as the “PRC Legal Advisor”), regarding to the title to the Property and the advice given by the Group regarding the title to the Machinery.

LIMITING CONDITIONS

Our valuation has been carried out in accordance with The HKIS Valuation Standards on Properties (1st Edition 2005) issued by the Hong Kong Institute of Surveyors and under generally accepted valuation procedures and practices, which are in compliance with the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited.

We have inspected the exterior and, where possible, the interior of the Property. However, no structural survey has been made nor have any tests been carried out on any of the building services provided in the Property. We are, therefore, not able to report that the Property is free from rot, infestation or any other structural defects. Yet, in the course of our inspection, we did not note any serious defects.

– 102 –

VALUATION REPORT

APPENDIX II

We have not conducted detailed on-site measurement to verify the correctness of the site and floor area of the Property but have assumed that the area shown on the documents made available to us are correct. Dimensions, measurements and areas included in the valuation certificate attached are based on information contained in the documents provided to us by the Group and are therefore approximations only.

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

At the time of our inspections, installations of the Machinery were still in progress. However, per the advice from the Company, test-run of the Machinery has been conducted. We have assumed that the Machinery can perform efficiently according to the purposes for which it was designed and built.

We have accepted the records of the Machinery furnished to us by the Yunphos Group as properly describing the Machinery, their costs and their acquisition dates. We have relied to a considerable extent on such records, listings, specifications and documents in arriving at our opinion of value.

Any deferred maintenance, physical wear and tear, operating malfunctions, lack of utility, or other observable conditions distinguishing the Machinery from assets of like kind in new condition were noted and made part of our judgment in arriving at the value.

We have not investigated any industrial safety environmental and health-related regulations in association with this particular manufacturing process. It is assumed that all-necessary licenses, procedures, and measures were implemented in accordance with the government legislation and guidance.

We have not investigated any financial data pertaining to the present or prospective earning capacity of the operation in which the Machinery is used. It was assumed that prospective earnings would provide a reasonable return on the fair market value of the Machinery, plus the value of any assets not included in this valuation, and adequate net working capital.

This valuation reflects facts and conditions existing at the Date of Valuation. Subsequent events have not been considered and we are not required to update our report for such events and conditions.

To the best of our knowledge, all data set forth in this report are true and accurate. The data, opinions, or estimates identified as being furnished by others which have been used in formulating this analysis are gathered from reliable sources, yet, no guarantee is made nor liability assumed for their accuracy.

– 103 –

APPENDIX II

VALUATION REPORT

We have relied to a considerable extent on the information and advices made available to us by the Company and the Yunphos Group on such matters as planning approvals, statutory notices, easements, tenure, particulars of occupancy, site and floor areas and all other relevant matters in the identification of the Property. We have not seen original planning consents and have assumed that the Property will be erected, occupied and used in accordance with such consents.

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

REMARKS

Unless otherwise stated, all monetary amounts stated in the valuation certificate are in Renminbi (RMB).

We hereby confirm that we have neither present nor prospective interests in the Company, the Yunphos Group, or the values reported herein.

Our valuation certificate is attached.

Yours faithfully, For and on behalf of B.I. APPRAISALS LIMITED William C. K. Sham Registered Professional Surveyor (G.P.) China Real Estate Appraiser MRICS, MHKIS, MCIREA Executive Director

Note: Mr. William C. K. Sham is a qualified valuer on the approved List of Property Valuers for Undertaking Valuation for Incorporation or Reference in Listing Particulars and Circulars and Valuations in Connection with Takeovers and Mergers published by the Hong Kong Institute of Surveyors. Mr. Sham has over 25 years’ experience in the valuation of properties in Hong Kong and has over 10 years’ experience in the valuation of properties in the People’s Republic of China and the Asia Pacific regions.

– 104 –

VALUATION REPORT

APPENDIX II

Fixed Assets

The fixed assets in an industrial complex located at Jin Suo Industrial Small District, Xundian Hui Zu Yi Zu Autonomous County, Kunming City, Yunnan Province, the PRC

Description and tenure

The Fixed Assets comprises land and buildings together with machines and equipment within an industrial complex (the “Industrial Complex”) being erected on a roughly rectangular- shaped site having a site area of approximately 218,933.00 sq.m. (2,356,595 sq.ft.) and buildings, machines and equipment of Phase II of a power plant (the “Power Plant Ph. II”) erected on a site forming part of a parcel of land with a site area of approximately 63,799.08 sq.m. (686,733 sq.ft.).

Market rent in existing state as at 30 June 2007

Particulars of occupancy

The Fixed Assets is RMB85,000,000 occupied by the Yunphos per annum Group for productions of PVC resin, caustic soda, sodium tripolyphosphate and other chemical products.

The Industrial Complex, completed in about 2007, comprises 50 blocks of buildings and structures for workshop and warehouse uses and various ancillary buildings and structures for office, dormitory and other ancillary facilities uses.

The Power Plant Ph. II comprises 8 blocks of buildings and structures, completed in about September 2006, for workshop, warehouse, office and other ancillary facilities uses.

The total gross floor area of the building in the Property is approximately 103,967.23 sq.m. (1,119,103 sq.ft.).

The land use rights of the land on which the Power Plant Ph. II was erected have been granted for industrial use for a term due to expire on 30th August 2044.

The Machinery comprises machines and equipment for the electricity generation and for the production of PVC resin, caustic soda, sodium tripolyphosphate and other chemical products in the Power Plant and the Industrial Complex respectively.

– 105 –

APPENDIX II

VALUATION REPORT

Fixed Assets

Description and tenure Major items of the Machinery include generators, boilers, electricity transformers, electrolytic cells, reaction tanks, falling-film evaporators, cranes, various components raw material transport system, vacuum-filtrate system, the water recycling system and the cooling system, pumps, storage tanks, boiler, air-compressors, piping and trenches, office equipment, vehicles. Major items of equipment for caustic soda production are imported from Japan and Switzerland; others are mainly PRC-made with. The Machinery was acquired within the period from 2005 to 2006.

Particulars of occupancy

Market rent in existing state as at 30 June 2007

Notes:

(1) Pursuant to the Certificate for State-owned Land Use , (Xun Guo Yong (2005) Zi No. 203) issued by Xundian Hui Zu Yi Zu Autonomous County State-owed Land Resources Bureau on 28th April 2005, the land use rights of a parcel of land in the Property having a site area of 63,799.08 sq.m. has been granted to Yunnan Yunphos Group Xundian Phosphorus & Electricity Co., Ltd. for a term due to expire on 30th August 2044 for industrial use.
(2) As advised by the Yunphos Groups, applications for the Certificates of Building Ownership regarding the buildings in the Power Plant Ph. II and Certificate of State-owned Land Use and Certificates of Building Ownership in respect of the land and buildings of the Industrial Complex have been made.
(3) The opinion of the PRC Legal Advisor stated, inter alia, that:
a) The Yunphos Group has obtained the land use rights of the Property through a proper legal way. Although the Yunphos Group has not obtained the land use certificate, the fact that the Yunphos Group will have the ultimate ownership of the land use right in the Property will not be materially affected as the land management bureau has confirmed that the procedure for issuing the land use certificate is in process.
b) As the ownership of the land use right in the Property can be identify, the possibility that the ownership of buildings erected thereon will not be held by the Yunphos Group can be predicted and controlled.
c) As confirmed by the Yunphos Group, the buildings in the Property are not subject to any action from any department, institution, judiciary organization and there is no objection from a third party regarding the Yunphos Group’s ownership on the buildings in the Property.
d) The Yunphos Group further confirmed that there was not any incident of claim on outstanding fees by the main contractor of the construction of the Property and that there is no unauthorized structure in the Property.
e) There will not be any legal impediments for the Yunphos Group to obtain the relevant building ownership certificates for the buildings in the Property.

– 106 –

VALUATION REPORT

APPENDIX II

(4) We have relied on the information provided by the Company and the Yunphos Group and the aforesaid legal opinion and prepared our valuation on the following assumptions:
a) The land use rights of the land in the Property will be granted for industrial use a term of 50 years with the Certificate of State-owned Land Use to be issued to the Yunphos Group.
b) The Property has been constructed, occupied and used in full compliance with, and without contravention of all ordinances, except only where otherwise stated.
c) Certificates of Building Ownership for the buildings in the Property will be obtained by the Yunphos Group.
d) All consents, approvals, required licences, permits, certificates and authorizations will have been obtained, except only where otherwise stated, for the use of the Property upon which our valuation is based.
(5) The status of title and grant of major approvals, consents or licences in accordance with the information provided by to us the Company are as fo1lows:

Certificate of State-owned Land Use (the Power Plant Ph. II only) Yes Certificates of Building Ownership No

– 107 –

GENERAL INFORMATION

APPENDIX III

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. DIRECTORS’ INTERESTS

As at the Latest Practicable Date, the interests or short positions of each Director and the Company’s chief executive in the shares, underlying shares or debentures of the Company or any associated corporation (within the meaning of Part XV of the SFO) which (a) were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they are taken or deemed to have under such provision of the SFO); or (b) were required pursuant to Section 352 of the SFO to be entered in the register referred to therein; or (c) were required pursuant to the Model Code for Securities Transactions by Directors of Listed Companies to be notified to the Company and the Stock Exchange are as follows:

Director	Nature of interest	Number of Shares
Mr. Wang	Personal	1,878,799,680

Save as disclosed above, as at the Latest Practicable Date, none of the Directors and chief executive of the Company was interested, or deemed to be interested in the long and short positions in the shares, underlying shares and debentures of the Company or any associated corporation (within the meaning of the SFO) which (a) were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO; or (b) were required pursuant to section 352 of the SFO to be entered in the register referred to therein; or (c) were required pursuant to the Model Code for Securities Transactions by Directors of Listed Companies to be notified to the Company and the Stock Exchange.

– 108 –

GENERAL INFORMATION

APPENDIX III

3. SUBSTANTIAL SHAREHOLDERS

As at the Latest Practicable Date, so far as it is known to any Directors, chief executives of the Company, Shareholders (other than Directors or chief executive of the Company) who have interests or short positions in the Shares or underlying shares of the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO or which were required, pursuant to section 336 of Part XV of the SFO, to be entered in the register referred to therein, or who is interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meeting of any other member of the Group were as follows:

(a) Interest in Shares of the Company

		Approximate
		percentage of the
	Number of	Company’s issued
Name	Shares held	share capital
China Time Investment Holdings	1,878,799,680	60
Limited	(note 1)
Mr. Wang	1,878,799,680	60
	(note 1)
Ms. Mu Yucun	1,878,799,680	60
	(note 2)
Choi Koon Shum, Jonathan	188,702,795	6
(“Mr. Choi”)	(note 3)
Kwan Wing Kum, Janice (“Ms Kwan”)	188,702,795	6
	(note 3)
Lam William Ka Chung (“Mr. Lam”)	188,702,795	6
	(note 3)
Lam Wong Yuk Sin, Mary (“Mrs. Lam”)	188,702,795	6
	(note 3)
Kingsway International Holdings	188,702,795	6
Limited (“Kingsway International”)	(note 3)
Innovation Assets Limited	188,702,795	6
(“Innovation”)	(note 3)
World Developments Limited	188,702,795	6
(“World Developments”)	(note 3)
SW Kingsway Capital Holdings Limited	188,702,795	6
(“SW Kingsway”)	(note 3)
Festival Developments Limited	188,702,795	6
(“Festival Developments”)	(note 3)

Notes:

Mr. Wang is the sole shareholder of China Time Investment Holdings Limited.
Ms. Mu Yucun is Mr. Wang’s spouse and she is deemed to be interested in Mr. Wang’s interest in the Shares.

– 109 –

GENERAL INFORMATION

APPENDIX III

Mr. Choi and his spouse Ms. Kwan were deemed to be interested in 188,702,795 ordinary shares in the Company by virtue of their 46% shareholding in Kingsway International. Mr. Lam and his spouse Mrs. Lam were deemed to be interested in 188,702,795 ordinary shares in the Company by virtue of their 40% shareholding in Kingsway International. Kingsway International, in turn, held 100% shareholding in Innovation. Innovation, in turn, held 100% shareholding in World Developments. World Developments, in turn, held 74% shareholding in SW Kingsway. SW Kingsway, in turn, held 100% direct shareholdings in Festival Developments.

(b) Substantial shareholders of other members of the Group

		Percentage of
	Name of substantial	existing share
Name of subsidiary	shareholders	capital
Profitown Investment Corporation	Probest Holding Inc	30%
Global Origin Limited	All-Success International	10%
	Limited
Profit Trend International Limited	Wischance Investments	50%
	Limited
Shenzhen Hengang Swank Optical	Hengang Zheng Stock	19%
Industrial Co. Ltd.	Investment Co. Ltd

Save as disclosed above, as at the Latest Practicable Date, the Directors are not aware of any person who is, directly or indirectly, interested in 5% or more of the issued share capital of the Company, has short positions on the Shares or underlying Shares, or has any rights to subscribe for Shares in respect of such capital.

4. SERVICE CONTRACTS

As at the Latest Practicable Date, no Director has a service contract with the Company which is not determinable by the Company within one year without payment of compensation, other than statutory compensation.

5. COMPETING INTEREST

The Group is currently engaged in the production and sales of yellow phosphorous and phosphoric acid through the continuing connected transactions as described in the Company’s announcement dated 11 May 2006. Should the Continuing Connected Transactions satisfy all the conditions precedent for their respective execution and become effective, the Group would commence its engagement in, among others, the production and sales of PVC. Pursuant to Rule 14A.59(11) of the Listing Rules, as at the Latest Practicable Date, interest of the Directors in businesses which are likely to compete, either directly or indirectly with the phosphorus business (principally the production and domestic sales of

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GENERAL INFORMATION

APPENDIX III

yellow phosphorous) which the Group currently engaged through the continuing connected transactions as described in the Company’s announcement dated 11 May 2006 were as follows:

==> picture [400 x 279] intentionally omitted <==

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

|||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
|Entity|whose|Business(es)|
|may|compete|or|are|likely|
|to|compete|with|the|Nature|of|interest|
|businesses|of|the|Group|Description|of|businesses|of|of|the|Director|in|
|(the|“Entity”)|the|Entity|Name|of|Director|the|Entity|
|Principally|engaged|in|the|Mr.|Zhao|Jun|statutory|
|(Luliang|Phosphorus|production|and|overseas|sales|of|representative|
|Chemical|Co.,|Ltd.)|yellow|phosphorous|
|Principally|engaged|in|the|Mr.|Zhao|Jun|director|
|(Songming|Tiannan|production|and|overseas|sales|of|
|Phosphorus|Chemicals|yellow|phosphorous|
|Co.,|Ltd.)|
|Principally|engaged|in|the|Mr.|Wang|substantial|
|(Luoping|Phosphorus|production|and|overseas|sales|of|shareholder|
|Chemicals|Co.,|Ltd.)|yellow|phosphorous|
|Principally|engaged|in|the|Ms.|Zhou|Jing|director|
|production|and|overseas|sales|of|
|(Yunnan|Xundian|yellow|phosphorous|
|Italphos|YP|Co.,|Ltd.)|

----- End of picture text -----

Save as disclosed above, as at the Latest Practicable Date, none of the Directors and his associates had any interests which competes or was likely to compete, either directly or indirectly, with the Company’s businesses.

6. MATERIAL CHANGE

The Directors confirm that, as at the Latest Practicable Date, the Directors were not aware of any material adverse change in the financial or trading position of the Company since 31 December 2006, being the date to which the latest published audited financial statements of the Company were made up.

7. WORKING CAPITAL STATEMENT

The Directors are of the opinion that, after taking into account the financial resources available to the Group, its internal generated funds, promissory notes issued to a shareholder of the Company and in the absence of unforeseen circumstances, the Group has sufficient working capital to satisfy its requirements for at least the next twelve months from the date of this circular.

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GENERAL INFORMATION

APPENDIX III

8. EXPERTS AND CONSENT

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

Name Qualification

B.I. Appraisals Limited registered professional surveyors, valuers and property advisers Partners Capital a licensed corporation registered under the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) to carry out types 1 and 6 regulated activities Yunnan Xingyuan Law Firm legal advisers of the Company as to PRC laws

Each of B.I. Appraisals Limited, Partners Capital and Yunnan Xingyuan Law Firm has given and has not withdrawn its written consent to the issue of this circular with the inclusion herein of its letter or references to its name in the form and context in which they respectively appear.

As at the Latest Practicable Date, none of B.I. Appraisals Limited, Partners Capital and Yunnan Xingyuan Law Firm had any shareholding in any member of the Group or the right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group, and none of B.I. Appraisals Limited, Partners Capital and Yunnan Xingyuan Law Firm had any direct or indirect interest in any assets which have been or proposed to be acquired or disposed of by or leased to any member of the Group since 31 December 2006, being the date to which the latest published audited accounts of the Company were made up.

9. INTERESTS IN ASSETS

As at the Latest Practicable Date, save for the Guangxi Premises, the Yunnan Premises and the PVC Premises, none of the Directors had any direct or indirect interest in any asset which had been, since 31 December 2006, being the date to which the latest published audited financial statements of the Company were made up, acquired or disposed of by or leased to any member of the Group.

10. DIRECTORS’ INTERESTS IN CONTRACTS

Save for the Agency Agreement as set out in the Company’s circular dated 10 May 2005, the Guangxi Agency Agreement, Guangxi Distribution Agreement, Guangxi Leasing Agreement, Guangxi Raw Materials Purchase Agreement and Yunnan Leasing Agreement as set out in the Company’s circular dated 2 June 2006 and Yunnan Factories Coal Supply Contract, Phosphorous Ancillary Materials Procurement Agreement, PVC Leasing Agreement, PVC Ancillary Materials Procurement Agreement and PVC Distribution Agreement as set out in this circular, there was no contract of significance in relation to the Group’s business to which the Company, its subsidiaries, its fellow subsidiaries or its holding company was a party and in which a Director had a material interest, whether directly or indirectly, subsisting as at the Latest Practicable Date.

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GENERAL INFORMATION

APPENDIX III

11. MATERIAL CONTRACTS

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

(a) Requisition and compensation agreements dated 2 June 2006 entered into between the Artland Manufactory Limited (a subsidiary of the Company), Heng Gang Zheng Stock Investment Co., Ltd., Shenzhen Heng Gang Swank Optical Industries Co., Ltd. and with Shenzhen Zhonglianyin Guarantee Co., Ltd. and Shenzhen Xinyi Property Development Co., Ltd.; and
(b) a winding-up agreement dated 2 June 2006 entered into between Artland Manufactory Limited and Heng Gang Zheng Stock Investment Co., Ltd.

12. LITIGATION MATERIAL CONTRACTS

As at the Latest Practicable Date, no member of the Group was engaged in any material litigation, claim or arbitration of material importance and no litigation, claim or arbitration of material importance is known to the Directors to be pending or threatened against any member of the Group.

13. GENERAL

The secretary and the qualified accountant of the Company appointed pursuant to Rule 3.24 of the Listing Rules is Mr. Tang Suk Ngo, Raymond, who is an associate member of the Institute of Chartered Accountants in England and Wales.

The share registrar and transfer office of the Company in Hong Kong is Secretaries Limited at Level 25, Three Pacific Place, 1 Queen’s Road East, Hong Kong.

14. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection at the offices of the Company at Suite 1102, 11/F., ICBC Tower, Citibank Plaza, 3 Garden Road, Central, Hong Kong, during normal business hours up to and including at least 14 days from the date of this circular:

(a) Yunnan Factories Coal Supply Contract;
(b) Phosphorous Ancillary Materials Procurement Agreement
(c) PVC Leasing Agreement
(d) PVC Ancillary Materials Procurement Agreement;
(e) PVC Distribution Agreement;

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GENERAL INFORMATION

APPENDIX III

(f) the articles of association of the Company;
(g) the annual report of the Company for the two financial years ended 31 December 2006;
(h) the letter from the Independent Board Committee contained in this circular;
(i) the letter of advice from Partners Capital contained in this circular;
(j) the written consents referred to in the section headed “Experts and consent” of this appendix;
(k) the letter and valuation report prepared by B.I. Appraisals Limited, the text of which is set out in Appendix II to this circular;
(l) the legal opinion in respect of the PVC Leasing Agreement issued by Yunnan Xingyuan Law Firm; and
(m) this circular.

15. MISCELLANEOUS

The English version of this circular shall prevail over the Chinese text.

– 114 –

NOTICE OF EGM

Swank International Manufacturing Company Limited

(incorporated in Hong Kong with limited liability)

(Stock Code: 663)

NOTICE IS HEREBY GIVEN that an extraordinary general meeting of Swank International Manufacturing Company Limited (the “Company”) will be held at Suite 1102, 11/F., ICBC Tower, Citibank Plaza, 3 Garden Road, Central, Hong Kong at 4:30 p.m. on 23 August 2007 or any adjournment thereof for the purpose of considering and, if thought fit, passing, with or without amendment or modification, the following resolutions as ordinary resolutions of the Company to be taken by way of a poll:

ORDINARY RESOLUTIONS

(1) “ THAT

(a) the coal supply contract dated 9 July 2007 entered into between (Fangcheng Huahai Chemicals Co., Ltd.)
(“ Huahai ”), and (Yunnan Phosphorus Group Co., Ltd.) (“ Yunphos ”), a copy of which is tabled at the meeting and marked “A” and initialled by the chairman of the meeting for identification purpose, pursuant to which Huahai agrees to purchase coal from Yunphos and, or its associates for power generation purposes (the “ Yunnan Factories Coal Supply Contract ”) be and is hereby approved, ratified and confirmed;
(b) the cap amounts in relation to the Yunnan Factories Coal Supply Contract for each of the two financial years ending 31 December 2008 of RMB15.7 million (equivalent to approximately HK$16.2 million) and RMB15.7 million (equivalent to approximately HK$16.2 million), respectively, be and are hereby approved;
(c) any one director of the Company (the “ Director ”) be and is/are hereby authorised for and on behalf of the Company to execute all such other documents, instruments and agreements and to do all such acts or things deemed by him/her to be incidental to, ancillary to or in connection with the matters contemplated in the Yunnan Factories Coal Supply Contract.”
(2) “ THAT
(a) the phosphorus ancillary materials procurement agreement dated 9 July 2007 entered into between Huahai and Yunphos, a copy of which is tabled at the meeting and marked “B” and initialled by the chairman of the meeting for identification purpose, pursuant to which Huihai agrees to purchase ancillary materials from Yunphos and, or its associates for repairing and, or

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NOTICE OF EGM

maintaining production facilities for phosphorus products (the “ Phosphorus Ancillary Materials Procurement Agreement ”) be and is hereby approved, ratified and confirmed;

(b) the cap amounts in relation to the Phosphorus Ancillary Materials Procurement Agreement for each of the two financial years ending 31 December 2008 of RMB3.6 million (equivalent to approximately HK$3.7 million) and RMB3.6 million (equivalent to approximately HK$3.7 million), respectively, be and are hereby approved;
(c) any one Director be and is/are hereby authorised for and on behalf of the Company to execute all such other documents, instruments and agreements and to do all such acts or things deemed by him/her to be incidental to, ancillary to or in connection with the matters contemplated in the Phosphorus Ancillary Materials Procurement Agreement.”
(3) “ THAT
(a) the PVC leasing agreement dated 9 July 2007 entered into between Huahai and Yunphos, a copy of which is tabled at the meeting and marked “C” and initialled by the chairman of the meeting for identification purpose, pursuant to which Huahai agrees to lease certain premises, machinery and equipment from Yunphos for the production of PVC and other chemical products (the “ PVC Leasing Agreement ”) be and is hereby approved, ratified and confirmed;
(b) the cap amounts in relation to the PVC Leasing Agreement for the period ending 31 December 2007 of RMB37.5 million (equivalent to approximately HK$38.7 million) and each of the two financial years ending 31 December 2009 of RMB75 million (equivalent to approximately HK$77.3 million) and RMB75 million (equivalent to approximately HK$77.3 million), respectively, be and are hereby approved;
(c) any one Director be and is/are hereby authorised for and on behalf of the Company to execute all such other documents, instruments and agreements and to do all such acts or things deemed by him/her to be incidental to, ancillary to or in connection with the matters contemplated in the PVC Leasing Agreement.”
(4) “ THAT
(a) the PVC ancillary materials procurement agreement dated 9 July 2007 entered into between Huahai and Yunphos, a copy of which is tabled at the meeting and marked “D” and initialled by the chairman of the meeting for identification purpose, pursuant to which Huahai agrees to purchase ancillary materials from Yunphos and, or its associates for repairing and, or

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NOTICE OF EGM

maintaining the production facilities of PVC products (the “ PVC Ancillary Materials Procurement Agreement ”) be and is hereby approved, ratified and confirmed;

(b) the cap amounts in relation to the PVC Ancillary Materials Procurement Agreement for the period ending 31 December 2007 of RMB5.05 million (equivalent to approximately HK$5.2 million) and each of the two financial years ending 31 December 2009 of RMB10.1 million (equivalent to approximately HK$10.4 million) and RMB10.1 million (equivalent to approximately HK$10.4 million), respectively, be and are hereby approved;
(c) any one Director be and is/are hereby authorised for and on behalf of the Company to execute all such other documents, instruments and agreements and to do all such acts or things deemed by him/her to be incidental to, ancillary to or in connection with the matters contemplated in the PVC Ancillary Materials Procurement Agreement.”
(5) “ THAT
(a) the PVC distribution agreement dated 9 July 2007 entered into between Huahai and Yunphos, a copy of which is tabled at the meeting and marked “E” and initialled by the chairman of the meeting for identification purpose, pursuant to which Huahai has appointed Yunphos and, or its associates as its distributor to distribute sodium tripolyphosphate produced at the premises under the PVC Leasing Agreement to customers outside the People’s Republic of China (the “ PVC Distribution Agreement ”) be and is hereby approved, ratified and confirmed;
(b) the cap amounts in relation to the PVC Distribution Agreement for each of the two financial years ending 31 December 2008 of RMB87.5 million (equivalent to approximately HK$91.2 million) and RMB87.5 million (equivalent to approximately HK$91.2 million), respectively, be and are hereby approved;
(c) any one Director be and is/are hereby authorised for and on behalf of the Company to execute all such other documents, instruments and agreements and to do all such acts or things deemed by him/her to be incidental to, ancillary to or in connection with the matters contemplated in the PVC Distribution Agreement.”

By order of the Board

Swank International Manufacturing Company Limited

Zhao Jun Chairman

Hong Kong, 8 August 2007

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NOTICE OF EGM

Principal place of business in Hong Kong:

2/F, Koon Wah Mirror Factory (3rd) Industrial Building

5-9 Ka Hing Road

Kwai Chung New Territories Hong Kong

Notes:

A member entitled to attend and vote at the above meeting is entitled to appoint one or more than one proxy to attend and to vote instead of him. A proxy need not be a member of the Company.
Where there are joint registered holders of any share, any one of such persons may vote at the above meeting, either personally or by proxy, in respect of such share as if he were solely entitled to it; but if more than one such joint holders are present at the above meeting personally or by proxy, that one of such persons so present whose name stands first on the Register of Members of the Company in respect of such share will alone be entitled to vote in respect of such share.
A form of proxy of the meeting is enclosed. If the appointer is a corporation, the form of proxy must be under its common seal or, under the hand of an officer or attorney duly authorized on its behalf.
To be valid, a form of proxy must be deposited at the Company share registrar in Hong Kong, Secretaries Limited, 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong, as soon as possible and in any event not later than 48 hours before the time appointed for the holding of the extraordinary general meeting or any adjournment thereof.

– 118 –

AI assistant

Design Capital Limited — Proxy Solicitation & Information Statement 2007

49990_rns_2007-08-07_5a564212-754e-45d8-8d2d-41e1e13966b3.pdf

Swank International Manufacturing Company Limited

CONTINUING CONNECTED TRANSACTIONS AND

MAJOR TRANSACTION

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

Swank International Manufacturing Company Limited

CONTINUING CONNECTED TRANSACTIONS AND MAJOR TRANSACTION

1. INTRODUCTION

2. BACKGROUND OF THE CONTINUING CONNECTED TRANSACTIONS AND THE MAJOR TRANSACTION

2.1 The Yunnan Factories Coal Supply Contract

LETTER FROM THE BOARD

2.2 The Phosphorus Ancillary Materials Procurement Agreement

LETTER FROM THE BOARD

2.3 The PVC Leasing Agreement

LETTER FROM THE BOARD

Rental reduction and waiver mechanism

LETTER FROM THE BOARD

LETTER FROM THE BOARD

2.4 The PVC Ancillary Materials Procurement Agreement

LETTER FROM THE BOARD

2.5 The PVC Distribution Agreement

3. REASONS FOR AND BENEFITS OF THE CONTINUING CONNECTED TRANSACTIONS AND THE MAJOR TRANSACTION

4. FINANCIAL AND TRADING PROSPECTS OF THE GROUP

Optical business

Phosphorus and PVC businesses

5. INFORMATION ON YUNPHOS

6. EGM

7. PROCEDURES TO DEMAND A POLL BY SHAREHOLDERS

8. RECOMMENDATION

CONTINUING CONNECTED TRANSACTIONS AND MAJOR TRANSACTION

RECOMMENDATION

LETTER FROM PARTNERS CAPITAL

CONTINUING CONNECTED TRANSACTIONS AND MAJOR TRANACTION

INTRODUCTION

LETTER FROM PARTNERS CAPITAL

PRINCIPAL FACTORS AND REASONS CONSIDERED FOR THE YUNNAN FACTORIES COAL SUPPLY CONTRACT

LETTER FROM PARTNERS CAPITAL

2. Key terms of the Yunnan Factories Coal Supply Contract

(i) Subject matter

(ii) Pricing policy

(iii) Settlement policy

(iv) Inter-conditionality

3. Annual cap of the coal to be purchased

(i) Quantity

(ii) Price

(iii) Maximum cap

(iv) The conditions

LETTER FROM PARTNERS CAPITAL

RECOMMENDATION FOR THE YUNNAN FACTORIES COAL SUPPLY CONTRACT

PRINCIPAL FACTORS AND REASONS CONSIDERED FOR THE PHOSPHORUS ANCILLARY MATERIALS PROCUREMENT AGREEMENT

1. Background of and reasons for entering into the Phosphorus Ancillary Materials Procurement Agreement

2. Key terms of the Phosphorus Ancillary Materials Procurement Agreement

(ii) Pricing policy

(iii) Settlement policy

(iv) Inter-conditionality

3. Annual cap of the ancillary materials to be purchased

(i) Maximum cap

LETTER FROM PARTNERS CAPITAL

(ii) The conditions

LETTER FROM PARTNERS CAPITAL

RECOMMENDATION FOR THE PHOSPHORUS ANCILLARY MATERIALS PROCUREMENT AGREEMENT

PRINCIPAL FACTORS AND REASONS CONSIDERED FOR THE PVC LEASING AGREEMENT

1. Background of and reasons for entering into the PVC Leasing Agreement

LETTER FROM PARTNERS CAPITAL

2. Key terms of the PVC Leasing Agreement

(i) Subject matter

(ii) Rental

LETTER FROM PARTNERS CAPITAL

LETTER FROM PARTNERS CAPITAL

(iii) Rental reduction and waiver mechanism

(iv) Inter-conditionality

RECOMMENDATION FOR THE PVC LEASING AGREEMENT

PRINCIPAL FACTORS AND REASONS CONSIDERED FOR THE PVC ANCILLARY MATERIALS PROCUREMENT AGREEMENT

Design Capital Limited Proxy Solicitation & Information Statement 2007