THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

If you are in any doubt as to any aspect of this circular, 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 Dong Fang Gas Holdings Limited, you should at once hand this circular and the accompanying form of proxy to the purchaser or the transferee or to the bank, a licensed securities dealer or other agent through whom the sale or transfer was effected for transmission to the purchaser or transferee.

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.

DONG FANG GAS HOLDINGS LIMITED

(Incorporated in Bermuda with limited liability)

(Stock Code: 432)

PROPOSED ACQUISITION OF VARIOUS PROPERTY INTERESTS OF PCCW LIMITED AND PROPOSED CAPITAL REORGANISATION

MAJOR TRANSACTION

APPLICATION FOR SHARE WHITEWASH WAIVER FROM THE OBLIGATION TO MAKE A MANDATORY GENERAL OFFER TO ACQUIRE SHARES IN DONG FANG GAS HOLDINGS LIMITED

PROPOSED INCREASE IN AUTHORISED SHARE CAPITAL

PROPOSED AMENDMENT TO BYE-LAWS

PROPOSED CHANGE OF COMPANY NAME AND CHANGE OF BOARD LOT SIZE

Financial adviser to Dong Fang Gas Holdings Limited

SOMERLEY LIMITED

Independent financial adviser to the independent board committee of Dong Fang Gas Holdings Limited

Goldbond Capital (Asia) Limited

A letter from the board of directors of Dong Fang Gas Holdings Limited is set out on pages 8 to 46 of this circular. A letter from the Independent Board Committee (as defined herein) containing its advice to the independent Shareholders (as defined herein) in connection with the Transaction (as defined herein) and the Share Whitewash Waiver (as defined herein) is set out on pages 47 to 48 of this circular. A letter from Goldbond Capital (Asia) Limited, the independent financial adviser to the Independent Board Committee, containing its advice to the Independent Board Committee in connection with the Transactions and the Share Whitewash Waiver is set out on pages 49 to 80 of this circular.

A notice convening the SGM (as defined herein) to be held at 11th Floor, Paul Y. Centre, 51 Hung To Road, Kwun Tong, Kowloon, Hong Kong at 10:30 a.m. on Wednesday, 28 April 2004 is set out on pages 204 to 213 of this circular. Whether or not you are able to attend the SGM, you are strongly urged to complete and return the enclosed form of proxy in accordance with the instructions printed thereon, and to lodge it with the branch share registrar of Dong Fang Gas Holdings Limited in Hong Kong, Standard Registrars Limited, at Ground Floor, Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong, as soon as possible but in any event not later than 48 hours before the time appointed for the holding of the SGM or any adjourned meeting (as the case may be). Completion and return of the form of proxy will not preclude you from attending and voting in person at the SGM or any adjourned meeting should you so wish.

2 April 2004

				Page
Definitions . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . .	.	. . . . . . . . . . . . . . . . . . . .	1
Expected timetable . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . .	.	. . . . . . . . . . . . . . . . . . . .	7
Letter from the DFG Board . . . . . . . .	. . . . . . . . . . . . . . . . . . . .	.	. . . . . . . . . . . . . . . . . . . .	8
Introduction . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . .	.	. . . . . . . . . . . . . . . . . . . .	9
The Acquisition Agreement . . . . . .	. . . . . . . . . . . . . . . . . . . .	.	. . . . . . . . . . . . . . . . . . . .	11
Summary of the terms and conditions of the Convertible Notes			. . . . . . . . . . . . . . . . . . .	17
Shareholding structure prior to and	after Completion . . . . . .	.	. . . . . . . . . . . . . . . . . . . .	20
Connection among the parties . . . .	. . . . . . . . . . . . . . . . . . . .	.	. . . . . . . . . . . . . . . . . . . .	22
Information on the Property Group	and the Sale Assets . . . .	.	. . . . . . . . . . . . . . . . . . . .	23
Information on the DFG Group . . .	. . . . . . . . . . . . . . . . . . . .	.	. . . . . . . . . . . . . . . . . . . .	31
Reasons for and benefits of the Transaction . . . . . . . . . . . . .		.	. . . . . . . . . . . . . . . . . . . .	32
Effect of the Transaction on the financial position of the DFG			Group . . . . . . . . . . . . . . .	33
Risks related to the Property Group’s business . . . . . . . . . . .		.	. . . . . . . . . . . . . . . . . . . .	34
Takeovers Code Implications of the	Transaction . . . . . . . . . .	.	. . . . . . . . . . . . . . . . . . . .	35
Maintenance of the listing of DFG	. . . . . . . . . . . . . . . . . . . .	.	. . . . . . . . . . . . . . . . . . . .	37
Intention regarding the DFG Group	. . . . . . . . . . . . . . . . . . .	.	. . . . . . . . . . . . . . . . . . . .	38
Appointment of new directors to the DFG Board . . . . . . . . .		.	. . . . . . . . . . . . . . . . . . . .	39
Proposed Capital Reorganisation . .	. . . . . . . . . . . . . . . . . . . .	.	. . . . . . . . . . . . . . . . . . . .	40
Change of board lot size . . . . . . . .	. . . . . . . . . . . . . . . . . . . .	.	. . . . . . . . . . . . . . . . . . . .	42
Trading arrangement and free exchange of new share certificates . . . . . . . . . . . . . . . . . .				42
Increase in authorised share capital	. . . . . . . . . . . . . . . . . . .	.	. . . . . . . . . . . . . . . . . . . .	43
Proposed amendment to Bye-Laws	. . . . . . . . . . . . . . . . . . . .	.	. . . . . . . . . . . . . . . . . . . .	44
Proposed change of name of DFG .	. . . . . . . . . . . . . . . . . . . .	.	. . . . . . . . . . . . . . . . . . . .	44
SGM . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . .	.	. . . . . . . . . . . . . . . . . . . .	45
Recommendation . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . .	.	. . . . . . . . . . . . . . . . . . . .	45
Additional information . . . . . . . . .	. . . . . . . . . . . . . . . . . . . .	.	. . . . . . . . . . . . . . . . . . . .	46
Letter from Independent Board Committee . . . . . . . . . . . . . . . .		.	. . . . . . . . . . . . . . . . . . . .	47
Letter from Goldbond . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . .	.	. . . . . . . . . . . . . . . . . . . .	49
Appendix I — Accountants’ Report of the Property Group			. . . . . . . . . . . . . . . . . . .	81
Appendix II — Financial information on the DFG Group		.	. . . . . . . . . . . . . . . . . . . .	119
Appendix III — Proforma financial information on the Enlarged DFG Group . . . . . .				179
Appendix IV — Property valuation on the Property Group			. . . . . . . . . . . . . . . . . . . .	183
Appendix V — General information . . . . . . . . . . . . . . . . .		.	. . . . . . . . . . . . . . . . . . . .	194
Notice of Special General Meeting . . .	. . . . . . . . . . . . . . . . . . . .	.	. . . . . . . . . . . . . . . . . . . .	204

— i —

DEFINITIONS

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

“Acquisition Agreement” the agreement dated 5 March 2004 under which DFG has conditionally agreed to acquire the Sale Shares and the Sale Assets from PCCW; “Announcement” the joint announcement issued by PCCW and DFG dated 5 March 2004 in relation to, among other things, the Transaction, the Whitewash Waivers and the Capital Reorganisation; “associate” shall have the meaning ascribed to such term under the Listing Rules; “Business Day” a day on which banks in Hong Kong are generally open for business (excluding Saturday); “Bye-Laws” the current bye-laws of DFG; “Capital Reorganisation” the reduction in value by cancelling HK$0.39 of the capital paid up on each issued Existing DFG Share of HK$0.40 so as to form (after a 10:1 share consolidation) one DFG Share of HK$0.10, the cancellation of each unissued Existing DFG Share and the Share Premium Cancellation;

“CCASS” the Central Clearing and Settlement System established and operated by HKSCC;
“Completion” completion of the sale and purchase of the Sale Shares and the Sale Assets in accordance with the Acquisition Agreement;
“Concert Parties” in respect of a person, means parties acting in concert (within the meaning ascribed to that term under the Takeovers Code) with such person in relation to the voting rights of DFG Shares;
“Consideration Shares” 1,648,333,333 new DFG Shares of par value of HK$0.10 each (after implementation of the Capital Reorganisation) to be allotted and issued at HK$1.80 per share to PCCW (or as it may direct) to satisfy in part the consideration for the Sale Shares and the Sale Assets;

“Convertible Note Whitewash a waiver of the obligation of PCCW to make a mandatory Waiver” offer for all the DFG Shares under Rule 26 of the Takeovers Code as a result of the issue of new DFG Shares to PCCW (or as it may direct) pursuant to a partial or full exercise of the Convertible Notes or any of them;

— 1 —

DEFINITIONS

“Convertible Notes”	the Tranche A Note and the Tranche B Note, to be issued by
	DFG entitling the holder thereof to convert the principal
	amount thereof into new DFG Shares, which is to be issued by
	DFG to PCCW (or as it may direct) to satisfy in part the
	consideration for the Sale Shares and the Sale Assets;
“CSH”	China Strategic Holdings Limited, the controlling shareholder
	of DFG and whose shares are listed on the Stock Exchange;
“Cyberport Developer”	Cyber-Port Limited, a member of the Property Group and the
	developer of the Cyberport Project;
“Cyberport Loan”	the unsecured non-interest bearing and non-recourse loans
	owing by the Cyberport Developer to the PCCW Group
	(which was approximately HK$4,503 million as at 31 January
	2004);
“Cyberport Project”	the project known as Cyberport to provide specially designed
	commercial space dedicated to high-technology industries
	with related retail, residential, recreational and educational
	facilities;
“DFG”	Dong Fang Gas Holdings Limited, a company incorporated in
	Bermuda, whose shares are listed on the Stock Exchange;
“DFG Board”	the board of directors of DFG;
“DFG Director(s)”	the director(s) of DFG;
“DFG Group”	DFG and its subsidiaries;
“DFG Share(s)”	share(s) in the share capital of DFG of par value HK$0.10
	each immediately following the Capital Reorganisation
	(including a 10:1 share consolidation) becoming
	unconditional and effective;
“Dr. Chan”	Dr. Chan Kwok Keung, Charles, the chairman and an
	executive director of DFG;
“EGM”	the extraordinary general meeting of PCCW to be held to seek
	the PCCW Shareholders’ approval of the Transaction;
“Enlarged DFG Group”	the DFG Group, together with the Property Group;
“Enlarged DFG Group Proforma	the unaudited proforma net tangible assets of the Enlarged
NTA”	DFG Group after completion of the Transaction as set out in
	the section headed “Unaudited proforma statement of adjusted
	consolidated net tangible assets of the Enlarged DFG Group
	after Completion” in appendix III to this circular;

— 2 —

DEFINITIONS

“Exchange Company”	PCCW-HKT Telephone Limited, being a wholly-owned
	subsidiary of PCCW which uses the Telephone Exchanges;
“Executive”	the Executive Director of the Corporate Finance Division of
	the Securities and Futures Commission, or any delegate for
	the time being of the Executive Director;
“Existing DFG Share(s)”	existing share(s) of HK$0.40 each in the share capital of
	DFG;
“Goldbond”	Goldbond Capital (Asia) Limited, a licensed corporation for
	types 1 and 6 regulated activities under the SFO;
“Government”	the Government of Hong Kong Special Administrative
	Region;
“HKSCC”	Hong Kong Securities Clearing Company Limited;
“Hong Kong”	Hong Kong Special Administrative Region of the People’s
	Republic of China;
“Independent Board Committee”	an independent board committee of the DFG Board
	comprising Mr. Zhang Shi Chen, the executive director of
	DFG and Mr. Zhao Wenfu, the independent non-executive
	director of DFG;
“Latest Practicable Date”	31 March 2004, being the latest practicable date prior to the
	printing of this circular for ascertaining certain information
	contained herein;
“Listing Rules”	the Rules Governing the Listing of Securities on the Stock
	Exchange before the new amendments which took effect on 31
	March 2004;
“Loans”	approximately HK$3,529 million, in aggregate, of interest-
	bearing loans owing by the relevant members of the Property
	Group to PCCW (comprising of HK$2,359 million and
	US$150 million of such loans);
“Paramount Properties”	the 18th and 20th floors (each including lavatories, lift lobby
	and corridor), roof and car parking spaces nos. 5-8, L3-L5 on
	the 1st floor of Paramount Building situated at No. 12 Ka Yip
	Street, Chai Wan, Hong Kong;
“PCCW”	PCCW Limited, a company incorporated in Hong Kong and
	whose shares are listed on the Stock Exchange;
“PCCW Board”	the board of directors of PCCW;

— 3 —

	DEFINITIONS
“PCCW Group”	PCCW and its subsidiaries;
“PCCW Shareholder(s)”	holder(s) of share(s) of HK$0.25 each in the capital of PCCW;
“PCCW Tower”	PCCW Tower at TaiKoo Place in Quarry Bay, Hong Kong,
	where TaiKoo Place is situated on the north-eastern side of
	King’s Road with Tong Chong Street at its northern side;
“PCP Beijing”	Pacific Century Place Beijing, situated at No. 2A Worker’s
	Stadium Road North, about 50 metres west of Dong San Huan
	Road in Chaoyang District of Beijing, the PRC;
“PRC”	the People’s Republic of China;
“Property Group”	Property Holdco and its subsidiaries at Completion, being the
	group of companies holding PCP Beijing, PCCW Tower, other
	investment properties and related property and facilities
	management companies of the PCCW Group and includes the
	Cyberport Developer. Details of the property interests held by
	the Property Holdco and its subsidiaries are set out in the
	valuation report in appendix IV to this circular;
“Property Holdco”	Ipswich Holdings Limited, being a company incorporated in
	the British Virgin Islands, a wholly-owned subsidiary of
	PCCW and the holding company of the Property Group;
“Queen’s Road Exchange”	the property situated at Ko Shing Street and Wo Fung Street,
	Western, Hong Kong, which are erected on Subsection 3 of
	Section F of Marine Lot No.58, Subsection 5 of Section F of
	Marine Lot No.58, The Remaining Portion of Section F of
	Marine Lot No.58, Subsection 2 of Section F of Marine Lot
	No.58 and Subsection 1 of Section C of Marine Lot No.58;
“Redevelopment Right”	the right of first refusal to participate in a joint venture
	between a wholly-owned subsidiary of Property Holdco and
	the Exchange Company (or, if applicable, another member of
	the PCCW Group) to redevelop each relevant Telephone
	Exchange if and when that member of the PCCW Group
	obtains such redevelopment rights in the future;
“Revised Listing Rules”	the amended Listing Rules as announced by the Stock
	Exchange on 30 January 2004 which has taken effect on 31
	March 2004;
“Sale Assets”	the Loans and the Queen’s Road Exchange;
“Sale Shares”	the entire issued share capital of Property Holdco;
“SFO”	the Securities and Futures Ordinance (Chapter 571 of the
	Laws of Hong Kong);

— 4 —

DEFINITIONS

“SGM”	the special general meeting of DFG convened to be held at
	10:30 a.m. on Wednesday, 28 April 2004 for the purpose of
	considering and, if thought fit, approving, among other
	things, the Transaction, the Share Whitewash Waiver, the
	Capital Reorganisation, the proposed increase in the
	authorised share capital of DFG, the proposed amendment to
	Bye-Laws and the proposed change of name of DFG
	(including any adjourned meeting);
“Share Premium Cancellation”	the proposed cancellation of an amount of approximately
	HK$47.14 million standing to the credit of the share premium
	account of DFG and the transfer of the amount so cancelled to
	the contributed surplus account of DFG;
“Share Whitewash Waiver”	a waiver of the obligation of PCCW to make a mandatory
	offer for all the DFG Shares under Rule 26 of the Takeovers
	Code as a result of the issue of the Consideration Shares to
	PCCW (or as it may direct);
“Shareholder(s)”	holder(s) of Existing DFG Share(s) or, where appropriate,
	DFG Share(s);
“Somerley”	Somerley Limited, a corporation deemed licensed under the
	transitional arrangements to carry out, among other things,
	Type 6 (advising on corporate finance) regulated activity for
	the purposes of the SFO and the financial adviser to DFG;
“Stock Exchange”	The Stock Exchange of Hong Kong Limited;
“Takeovers Code”	the Hong Kong Code on Takeovers and Mergers;
“Telephone Exchanges”	the premises which are mostly held at present under private
	treaty grants from the Government and used by the Exchange
	Company primarily for the purpose of allowing telephone
	lines to be connected to one another for the provision of
	telecommunications services to the public (excluding the
	Queen’s Road Exchange);
“Tranche A Note”	Convertible Notes, with a face value of HK$1,170 million,
	which are convertible into new DFG Shares, details of which
	are set out in the section “Summary of the Terms and
	Conditions of the Convertible Notes” in the letter from the
	DFG Board contained in this circular;
“Tranche B Note”	Convertible Notes, with a face value of HK$2,420 million,
	which are convertible into new DFG Shares, details of which
	are set out in the section “Summary of the Terms and
	Conditions of the Convertible Notes” in the letter from the
	DFG Board contained in this circular;

— 5 —

	DEFINITIONS
“Transaction”	the transactions contemplated under the Acquisition
	Agreement;
“Waived”	in respect of item 4 in the section headed “Conditions
	Precedent” in the letter from the DFG Board concerning the
	Share Whitewash Waiver, means the Share Whitewash Waiver
	being waived by PCCW (in the event that approval by the
	independent DFG Shareholders is not granted) subject to
	PCCW having demonstrated to the satisfaction of the
	Executive that it has sufficient financial resources to fulfil its
	obligations under Rule 26 of the Takeovers Code;
“Whitewash Waivers”	the Share Whitewash Waiver and the Convertible Note
	Whitewash Waiver;
“%”	per cent;
“HK$”	Hong Kong dollars, the lawful currency of Hong Kong;
“RMB”	Renminbi, the lawful currency of the PRC; and
“US$”	United States dollars, the lawful currency of the United States
	of America.

For the purposes of illustration only, amounts denominated in US$ have been translated into HK$ at the rate of US$1.00 to HK$7.80; amounts denominated in RMB have been translated into HK$ at the rate of RMB1.06 to HK$1.00.

— 6 —

EXPECTED TIMETABLE

The following timetable is subject to changes, depending on the date on which Completion is to take place.

2004

Latest time for lodging forms of proxy for the SGM . . . . . . . . . . 10:30 a.m. on Monday, 26 April SGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10:30 a.m. on Wednesday, 28 April

This assumes all conditions precedent for Completion are fulfilled or waived on 29 April 2004 and Completion takes place on 6 May 2004.

Capital Reorganisation (Note 1) becomes effective . . . . . . . . . . . . . . . . . . . . . . . . Thursday, 6 May Proposed change of name (Note 2) becomes effective . . . . . . . . . . . . . . . . . . . . . . Thursday, 6 May

Closure of original counter for trading in Existing DFG Shares in board lots of 5,000 (represented by peach colour share certificates for Existing DFG Shares) . . . . . . . . . . . . . . . . . 9:30 a.m. on Thursday, 6 May
Establishment of temporary counter for trading in DFG Shares in board lots of 500 (represented by peach colour share certificates for Existing DFG Shares) . . . . . . . 9:30 a.m. on Thursday, 6 May

First day of operation of odd lot trading facility . . . . . . . . . . . . . . . . . . . . . . . . . Thursday, 6 May First day of free exchange of existing peach colour share certificates for new green colour share certificates (Note 3) . . . . . . . . . . . . . . . Thursday, 6 May Original counter for trading in DFG Shares represented by new green colour share certificates in board lots of 1,000 re-opens . . . . . . . . . . . . . . . . . . . . . . . . . 9:30 a.m. on Thursday, 20 May Parallel trading commences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9:30 a.m. on Thursday, 20 May

Closure of temporary counter for trading in DFG Shares in board lots of 500 (represented by peach colour share certificates for existing Shares) . . . . . . . . . . . . 4:00 p.m. on Friday, 11 June

Parallel trading ends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4:00 p.m. on Friday, 11 June

Last day of operation of odd lot trading facility . . . . . . . . . . . . . . . . . . . . . . . . . . . Friday, 11 June Last day of free exchange of existing peach colour share certificates for new green colour share certificates . . . . . . . . . . . . . . . . . . . Wednesday, 16 June

No assurance is however given that Completion will take place on 6 May 2004 or at all. Shareholders will be informed of any changes to the expected timetable by press announcement(s).

Notes:

1. If Completion does not take place on or before 30 June 2004, then the Capital Reorganisation will become effective on 30 June 2004.

2. This also assumes that the Registrar of Companies in Bermuda enters the new name of DFG in the register of companies on the date of Completion.

3. It is expected that new certificates for the new DFG Shares will be available for collection within a period of ten Business Day after the submission of certificates for the Existing DFG Shares to the share registrar and transfer office of DFG for exchange.

— 7 —

LETTER FROM THE DFG BOARD

DONG FANG GAS HOLDINGS LIMITED

(Incorporated in Bermuda with limited liability)

Executive Directors:

Dr. Chan Kwok Keung, Charles (Chairman) Dr. Yap, Allan (Vice Chairman) Mr. Chan Kwok Hung Mr. Zhang Shi Chen

Registered office : Clarendon House 2 Church Street Hamilton HM 11 Bermuda

Independent Non-executive Directors: Mr. Tsang Link Carl, Brian Mr. Zhao Wenfu

Principal place of business in Hong Kong: 9th Floor Paul Y. Centre 51 Hung To Road Kwun Tong Kowloon Hong Kong

2 April 2004

To the Shareholders

Dear Sir or Madam,

PROPOSED ACQUISITION OF VARIOUS PROPERTY INTERESTS OF PCCW LIMITED AND PROPOSED CAPITAL REORGANISATION

MAJOR TRANSACTION

APPLICATION FOR SHARE WHITEWASH WAIVER FROM THE OBLIGATION TO MAKE A MANDATORY GENERAL OFFER TO ACQUIRE SHARES IN DONG FANG GAS HOLDINGS LIMITED

PROPOSED INCREASE IN AUTHORISED SHARE CAPITAL

PROPOSED AMENDMENT TO BYE-LAWS

PROPOSED CHANGE OF COMPANY NAME

AND CHANGE OF BOARD LOT SIZE

— 8 —

LETTER FROM THE DFG BOARD

INTRODUCTION

On 5 March 2004, PCCW and DFG jointly announced that DFG has conditionally agreed to purchase the Sale Shares and the Sale Assets from PCCW.

The aggregate consideration for the Sale Shares and the Sale Assets, which amounts to HK$6,557 million, will be satisfied:

(i) as to HK$2,967 million, by the allotment and issue of approximately 1,648 million new DFG Shares by DFG to PCCW (or as it may direct) credited as fully paid at an issue price of HK$1.80 per DFG Share (taking into account the effect of the 10:1 share consolidation in the Capital Reorganisation); and
(ii) as to the remaining HK$3,590 million, by the issue of the Convertible Notes by DFG to PCCW (or as it may direct).

Based on the average closing price of HK$0.365 per Existing DFG Share during the period of 30 trading days up to 23 February 2004, the Consideration Shares and the approximately 1,192.2 million new DFG Shares to be issued if the Convertible Notes are fully converted at their initial conversion prices would have a market value of approximately HK$6,016.4 million and HK$4,351.6 million respectively after accounting for the 10:1 share consolidation in the Capital Reorganisation. Based on the closing price of HK$0.48 per Existing DFG Share on the Latest Practicable Date, the Consideration Shares and the approximately 1,192.2 million new DFG Shares to be issued if the Convertible Notes are fully converted at their initial conversion prices would have market value of approximately HK$7,912.0 million and HK$5,772.7 million respectively after accounting for the 10:1 share consolidation in the Capital Reorganisation.

The Sale Shares and the Sale Assets represent, in essence, the PCCW Group’s ownership of the companies holding PCP Beijing, PCCW Tower, other investment properties and related property and facilities management companies, including the Cyberport Developer and its interests in the Cyberport Project. The total consideration for the Transaction does not involve any payment by DFG for the Cyberport Project, as the consideration for that part of the Transaction is only represented by the Cyberport Developer’s obligation to repay the Cyberport Loan on a non-recourse basis. In addition, PCCW will grant the Redevelopment Right to DFG (through the Property Group), where the total consideration for the Transaction also does not involve any payment by DFG for the Redevelopment Right itself.

Save for the 15 Existing DFG Shares held by a director of certain subsidiaries of PCCW (who is presumed to be acting in concert with PCCW under the Takeovers Code), the PCCW Group and its Concert Parties currently holds no interests in the issued share capital of DFG. Immediately after the issue of the Consideration Shares at Completion, but before any exercise of the conversion rights under the Convertible Notes, and on the assumption that there are no other changes in DFG’s issued share capital after the Latest Practicable Date, the shareholding of the PCCW Group in DFG is expected to become approximately 93.4%. As a result, an obligation to make a mandatory general offer will arise under the Takeovers Code, unless the Share Whitewash Waiver is obtained.

— 9 —

LETTER FROM THE DFG BOARD

Further, upon the issue and allotment of DFG Shares pursuant to a partial or full exercise of the conversion rights under the Convertible Notes, the shareholding of the PCCW Group in DFG may increase by more than 2% from its lowest collective percentage shareholding in the then preceding 12 month period. In such event, and if such lowest collective percentage shareholding is at or above 30% but at or below 50%, an obligation to make a mandatory general offer will arise as a result, unless the Convertible Note Whitewash Waiver is obtained. As the Convertible Notes have a conversion term of up to 10 years, it is uncertain whether the PCCW Group’s shareholding in DFG may drop below any particular level at any particular time. Thus, the Convertible Note Whitewash Waiver was contemplated in order to protect PCCW’s conversion rights under the Convertible Notes. As the Executive has indicated that it will not consider granting such a waiver without, amongst others, sufficient information on the shareholding structure of DFG prior to and after such conversion, PCCW has stated in its circular dated 26 March 2004 that it will waive the Convertible Note Whitewash Waiver as a condition precedent to Completion before the SGM.

If the Share Whitewash Waiver is not available for any reason, the Transaction will not become unconditional and will not proceed (unless that condition is waived by PCCW, but PCCW cannot waive that condition unless it has demonstrated to the satisfaction of the Executive that it has sufficient financial resources to fulfil its obligations under Rule 26 of the Takeovers Code).

An application has been made to the Executive for the Share Whitewash Waiver under Note 1 of the Notes on dispensation from Rule 26 of the Takeovers Code. The Executive has indicated its agreement, subject to the approval by an independent vote (within the meaning of Note 1 of the Notes on dispensations from Rule 26 of the Takeovers Code or as may be required by the Executive) of the Shareholders by poll, to waive any obligation of PCCW and its Concert Parties to make a general offer which might result from the issue of the Consideration Shares to PCCW (or as it may direct).

DFG also intends to put forward for approval by the Shareholders at the SGM resolution(s) to approve the Capital Reorganisation pursuant to which the credit to the contributed surplus account of DFG created as a result of the Capital Reorganisation will be used to set off against the accumulated losses of DFG. According to the audited consolidated financial statements of DFG Group as at 31 March 2003, the accumulated losses of DFG as at that date amounted to approximately HK$559.34 million. The DFG Board also proposes to amend the Bye-Laws and change the name of DFG. The DFG Board also resolved to change the board lot size for trading in the shares of DFG.

Under the Listing Rules, the Transaction constitutes a major transaction for DFG, which requires Shareholders’ approval. Somerley has been appointed as the financial adviser to DFG.

Dr. Chan was involved in the negotiation of the Transaction with PCCW. Mr. Chan Kwok Hung is a brother of Dr. Chan. In addition, Dr. Yap, Allan and Mr. Chan Kwok Hung were involved in the discussion of the Transaction on the DFG Board. Mr. Tsang Link Carl, Brian, an independent non-executive director of DFG, is a partner of a law firm which provides legal advice and services to DFG. Accordingly, the aforesaid DFG Directors are not considered to be independent for the purpose of the Takeovers Code to advise the independent Shareholders on the Transaction and the Share Whitewash Waiver. The Independent Board Committee constituted by Mr. Zhang Shi Chen, an

— 10 —

LETTER FROM THE DFG BOARD

executive director of DFG and Mr. Zhao Wenfu, an independent non-executive director of DFG, has been established to advise the independent Shareholders in relation to the Transaction and the Share Whitewash Waiver. Goldbond has been appointed as the independent financial adviser to advise the Independent Board Committee in relation to the Transaction and the Share Whitewash Waiver.

The purpose of this circular is to provide you with further details of the Transaction, the Whitewash Waivers, the Capital Reorganisation, the proposed increase in the authorised share capital of DFG, the proposed amendment to Bye-Laws, the proposed change of name of DFG and the change of board lot size, to set out the advice of Goldbond to the Independent Board Committee in respect of the Transaction and the Share Whitewash Waiver, to set out the opinion of the Independent Board Committee and to give you notice of the SGM at which resolutions will be proposed in order to seek Shareholders’ approval of the Transaction, the Share Whitewash Waiver, the Capital Reorganisation, the proposed increase in the authorised share capital of DFG, the proposed amendment to Bye-Laws and the proposed change of name of DFG.

THE ACQUISITION AGREEMENT

Date:

5 March 2004

Parties:

PCCW (as vendor)

DFG (as purchaser)

Subject matter of sale and purchase:

The Sale Shares and the Sale Assets.

The Sale Shares and the Sale Assets are warranted to be sold or procured to be sold by PCCW free from any encumbrance or other security.

The Sale Shares and the Sale Assets represent, in essence, the PCCW Group’s ownership of companies holding PCP Beijing, PCCW Tower, other investment properties and related property and facilities management companies, including the Cyberport Developer and its interests in the Cyberport Project, which assets will, prior to Completion, be transferred to the Property Group by the PCCW Group. In addition, PCCW will grant the Redevelopment Right to DFG (through the Property Group). Information on the assets and companies to be acquired by DFG pursuant to the Acquisition Agreement is set out in the section headed “Information on the Property Group and the Sale Assets” below.

— 11 —

LETTER FROM THE DFG BOARD

Consideration:

The aggregate consideration for the sale and purchase of the Sale Shares and the Sale Assets amounts to HK$6,557 million, which will be satisfied as to HK$2,967 million by the issue and allotment of the Consideration Shares at an issue price of HK$1.80 per DFG Share (credited as fully paid) by DFG to PCCW (or as it may direct); and as to the remaining HK$3,590 million, by the issue of the Convertible Notes, credited as fully paid at its full face value, by DFG to PCCW (or as it may direct) at Completion. The consideration was determined after arm’s length negotiations, taking into account the independent valuations of the underlying properties of the Property Group and the Queen’s Road Exchange performed by CB Richard Ellis Limited, an independent firm of professional surveyors, of approximately HK$6,756.5 million as at 31 December 2003.

As part of the Property Group, PCCW will also transfer ownership of the Cyberport Developer to DFG along with the Cyberport Developer’s continuing role in the development of the Cyberport Project (though the obligations of the Cyberport Developer and PCCW in the Cyberport Project will remain the same following Completion). Except for the terms of the Acquisition Agreement that the Cyberport Developer is obliged to repay the Cyberport Loan on a non-recourse basis, as described in the paragraph headed “Loans and Cyberport Loan” below, no part of the total consideration for the Transaction was ascribed to the transfer from the PCCW Group to the DFG Group of the Cyberport Developer which was granted the development right of the Cyberport Project under an agreement signed between the Government, PCCW and the Cyberport Developer in May 2000. In addition, PCCW will grant the Redevelopment Right to DFG (through the Property Group), where the total consideration for the Transaction also does not involve any payment by DFG for the Redevelopment Right itself.

The number of the Consideration Shares (i.e. approximately 1,648 million new DFG Shares after completion of the Capital Reorganisation) represent approximately 1,419.4% of the existing issued share capital of DFG (and approximately 93.4% of the issued share capital of DFG as enlarged by the issue of the Consideration Shares), taking into account the effect of the 10:1 share consolidation in the Capital Reorganisation. Application will be made to the Stock Exchange for the listing of, and permission to deal in, the Consideration Shares.

— 12 —

LETTER FROM THE DFG BOARD

The issue price of the Consideration Shares of HK$1.80 per new DFG Share (taking into account the effect of the 10:1 share consolidation in the Capital Reorganisation) represents:

(i) a discount of approximately 62.5% to the adjusted closing price of the Existing DFG Shares of HK$4.80 on the Stock Exchange on 23 February 2004, being the last trading day before the suspension of trading of the Existing DFG Shares prior to the issue of the Announcement;
(ii) a discount of approximately 63.0% to the adjusted average closing price of the Existing DFG Shares of HK$4.87 on the Stock Exchange during the period of the last 10 trading days up to 23 February 2004;
(iii) a discount of approximately 50.7% to the adjusted average closing price of the Existing DFG Shares of HK$3.65 on the Stock Exchange during the period of the last 30 trading days up to 23 February 2004;
(iv) a discount of approximately 62.5% to the adjusted closing price of the Existing DFG Shares of HK$4.80 on the Stock Exchange on the Latest Practicable Date;
(v) a premium of approximately 13.2% over the latest audited net tangible asset value as at 31 March 2003 of the DFG Group of HK$1.59 attributable to each DFG Share after accounting for the 10:1 share consolidation in the Capital Reorganisation;
(vi) a premium of approximately 215.8% over the unaudited proforma adjusted consolidated net tangible asset value as at 30 September 2003 of the DFG Group of HK$0.57 attributable to each DFG Share after accounting for the 10:1 share consolidation in the Capital Reorganisation; and
(vii) a premium of approximately 42.9% over the unaudited proforma net tangible asset value of the Enlarged DFG Group of HK$1.26 per DFG Share after accounting for the issuance of the Consideration Shares but before conversion of the Convertible Notes.
Note: The closing prices of the Existing DFG Shares referred to above have been adjusted to take into account the effect of the 10:1 share consolidation in the Capital Reorganisation, as the Consideration Shares to be issued are new DFG Shares after implementation of the Capital Reorganisation.

The issue price for the Consideration Shares has been determined based on arm’s length negotiations between DFG and PCCW with reference to the underlying audited net asset value as at 31 March 2003 of HK$1.59 attributable to each DFG Share after accounting for the effect of 10:1 share consolidation in the Capital Reorganisation. Although the issue price for the Consideration Shares is at a discount to the recent market price of the Existing DFG Shares, it is at a premium of 13.2% to the underlying net tangible asset value attributable to each DFG Share, being approximately HK$1.59 as at 31 March 2003. As the Existing DFG Shares have been thinly traded on the Stock

— 13 —

LETTER FROM THE DFG BOARD

Exchange, with monthly turnover recorded for the twelve months ended 31 January 2004 being less than 0.3% of the issued share capital of DFG at the end of each corresponding month, the market price may not reflect the fair value of Existing DFG Shares. The DFG Board considers the issue price of the Consideration Shares, in the context of the Transaction as a whole, to be fair and reasonable.

A summary of the terms of the Convertible Notes is set out in the section headed “Summary of the terms and conditions of the Convertible Notes” below.

Conditions precedent:

Completion is subject to, among others, a number of conditions precedent, the principal ones are summarised as follows:

the passing of resolutions by the Shareholders at a general meeting including approving the Capital Reorganisation and the increase in the authorised share capital of DFG from HK$11,612,654.06 to HK$1,000,000,000.0 by the creation of an additional 9,883,873,460 DFG Shares and the Capital Reorganisation becoming effective;
approval by the Shareholders of: (a) the acquisition by DFG of the Sale Shares and the Sale Assets; (b) the issue and allotment of the Consideration Shares to PCCW (or as it may direct); (c) the issue of the Convertible Notes to PCCW (or as it may direct); (d) the issue and allotment of DFG Shares which may be issued upon any exercise of the conversion rights under the Convertible Notes; and (e) all other transactions contemplated under the Acquisition Agreement, at a general meeting of DFG;
approval by the PCCW Shareholders of: (a) the disposal by PCCW of the Sale Shares and the Sale Assets; and (b) all other transactions contemplated under the Acquisition Agreement, at a general meeting of PCCW;
the passing of an ordinary resolution by an independent Shareholders’ vote (within the meaning of Note 1 of the Notes on dispensations from Rule 26 of the Takeovers Code or as may be required by the Executive) taken by way of a poll approving the Share Whitewash Waiver, and the Executive granting such a waiver;
the passing of an ordinary resolution by an independent Shareholders’ vote (within the meaning of Note 1 of the Notes on dispensations from Rule 26 of the Takeovers Code or as may be required by the Executive) taken by way of a poll approving the Convertible Note Whitewash Waiver, and the Executive granting such a waiver;
the Listing Committee of the Stock Exchange granting the listing of and permission to deal in the Consideration Shares and the DFG Shares which may be issued upon any exercise of the conversion rights under the Convertible Notes;
the compliance with announcement and Shareholders’ approval requirements under the Listing Rules or otherwise of the Stock Exchange in relation to present and future

— 14 —

LETTER FROM THE DFG BOARD

transactions contemplated at present with PCCW and/or any of its subsidiaries and/or their respective associates (both present and immediately after Completion) which will constitute connected transactions of DFG following Completion, including, if required, the approval by independent Shareholders in respect of those connected transactions;
the fulfilment by DFG of any other requirements of the Stock Exchange in relation to the sale and purchase of the Sale Shares and the Sale Assets, the issue of the Consideration Shares, the issue of the Convertible Notes and the other transactions contemplated under the Acquisition Agreement;
(where required) the Bermuda Monetary Authority granting its permission for the issue of the Consideration Shares and the Convertible Notes and the issue of DFG Shares which may be issued upon any exercise of the conversion rights under the Convertible Notes;
the obtaining of all licences, consents, approvals, authorisations, permissions, waivers, orders or exemptions (the “Consents”) from government or regulatory authorities or third parties which are necessary or desirable in connection with the execution and performance of the Acquisition Agreement and any of the transactions contemplated under the Acquisition Agreement;
completion of legal and financial due diligence on the DFG Group to the reasonable satisfaction of PCCW;
completion of legal and financial due diligence on the Property Group to the reasonable satisfaction of DFG; and
all the Consents referred to above remaining in full force and effect as at Completion.

PCCW and DFG may jointly waive the condition precedent in item 10 above at any time if it is agreed that the Consents which have not been obtained are not material to the business of the DFG Group and the Property Group taken as a whole.

The conditions precedent in items 4, 5 and 11 can be waived by PCCW and item 12 can be waived by DFG, respectively. All the other conditions precedent above cannot be waived (unless PCCW and DFG so agree), but the conditions precedent in items 1 to 3 and 6 will not be waived in any event (except the part concerning the Capital Reorganisation) and the condition precedent in item 4 cannot be waived by PCCW unless it has demonstrated to the satisfaction of the Executive that it has sufficient financial resources to fulfil its obligations under Rule 26 of the Takeovers Code.

As the Executive has indicated that it will not consider granting the Convertible Note Whitewash Waiver (without, amongst others, sufficient information on the shareholding structure of DFG prior to and after such conversion), PCCW has stated in its circular dated 26 March 2004 that it will waive that requirement as a condition precedent to Completion before the SGM.

— 15 —

LETTER FROM THE DFG BOARD

Completion:

Completion is to take place on the fifth Business Day after all the conditions precedent have either been fulfilled or waived. It is expected that Completion would take place within 75 days after the date of the Acquisition Agreement.

If any of the conditions precedent to Completion has not been fulfilled (or waived by the parties) by 30 June 2004 (or such other date as the parties to the Acquisition Agreement may agree), the Acquisition Agreement will lapse and be terminated and thereafter all rights, obligations and liabilities of all parties thereto will cease and determine except for antecedent breaches.

Additional matters:

Loans and Cyberport Loan

The Loans of approximately HK$3,529 million to be assigned to DFG at Completion represent part of the shareholder loans owing by the relevant members of the Property Group to PCCW. After Completion, the Loan will be owed to DFG.

However, the unsecured Cyberport Loan will continue to be owed by the Cyberport Developer to the PCCW Group and is repayable on demand. Pursuant to the Acquisition Agreement, DFG has undertaken to procure that the Cyberport Loan is repaid in priority to all other debts of the Cyberport Developer as and when the Cyberport Developer has the funds to repay all or part of the Cyberport Loan. The Cyberport Loan was used to part finance the development of the Cyberport Project. Since this is an unsecured non-interest bearing and non-recourse loan, PCCW and DFG have agreed that the financing arrangement stays in place. The Cyberport Loan is non-recourse in that DFG has no obligation under it other than the obligation to procure the repayment on the basis set out above. Such arrangement will not be subject to any disclosure or Shareholders’ approval requirement pursuant to Rule 14A.65(4) of the Revised Listing Rules. The Cyberport Loan amounted to approximately HK$4,503 million as at 31 January 2004.

Redevelopment Right

As part of the Transaction, PCCW has undertaken to procure that the Redevelopment Right is granted to a wholly-owned subsidiary of Property Holdco, subject to and with effect from Completion.

Accrued Profit

When the Cyberport Loan has been repaid, the Cyberport Developer will also pay, out of its surplus funds, an amount equivalent to its audited accounting profit (accrued up to the date of Completion) in respect of the Cyberport Project to PCCW.

— 16 —

LETTER FROM THE DFG BOARD

SUMMARY OF THE TERMS AND CONDITIONS OF THE CONVERTIBLE NOTES

The principal terms of the Convertible Notes are summarised below:

Issuer:

DFG

Principal amount:

HK$1,170 million of Tranche A Note and HK$2,420 million of Tranche B Note, credited as fully paid at their face values as satisfaction in part of the consideration for the Sale Shares and the Sale Assets.

Maturity date:

Unless previously converted, the outstanding principal amount of the Convertible Notes (together with all unpaid and accrued interest) will be repaid by DFG upon its maturity on the seventh (in the case of the Tranche A Note) or tenth (in the case of the Tranche B Note) anniversary of the date of issue of the Convertible Notes. The Tranche A Note will be redeemed at 100% of the then outstanding principal amount, whilst the Tranche B Note will be redeemed at 120% of the then outstanding principal amount.

Coupon:

The Tranche A Note will bear no interest, but the Tranche B Note will bear a coupon from its date of issue at the rate of 1% per annum, which will be payable once every six months in arrears on the principal amount of the Tranche B Note outstanding from time to time.

Conversion rights:

The outstanding principal amount of the Convertible Notes or any part thereof may, at the discretion of the holder, be converted into new DFG Shares to be issued to the holder of the Convertible Notes (or as it may direct) at any time and from time to time on or after the date of issue (but on or prior to the maturity date) at the relevant conversion price (which is initially HK$2.25 per DFG Share in the case of the Tranche A Note and HK$3.60 per new DFG Share in the case of the Tranche B Note, subject to adjustment).

No fraction of a DFG Share will be issued on conversion, but (except in case where any such cash payment would amount to less than HK$10) a cash payment will be made to the holder of the Convertible Notes in respect of such fraction.

Assuming that the entire principal amount of the Convertible Notes is converted at their initial conversion price, a total of approximately 1,192.2 million new DFG Shares will be issued (representing approximately 1,026.7% of the existing issued capital of DFG and approximately

— 17 —

LETTER FROM THE DFG BOARD

40.32% of DFG’s issued share capital as enlarged by the issue of the Consideration Shares and the new DFG Shares to be issued upon the exercise of all conversion rights attaching to the Convertible Notes on that basis, taking into account the effect of the 10:1 share consolidation in the Capital Reorganisation).

Ranking of shares to be issued upon conversion:

The DFG Shares to be issued by DFG upon any exercise of the conversion rights under the Convertible Notes will rank pari passu in all respects with all other DFG Shares in issue on the date of the conversion notice and will be entitled to all dividends, bonuses and other distributions the record date of which falls on a date on or after the date of the conversion notice.

Conversion price:

The initial conversion price of HK$2.25 and HK$3.60 per new DFG Share (in respect of the Tranche A Note and the Tranche B Note respectively), subject to adjustment in accordance with the terms of the Convertible Notes (e.g. for dilutive events such as DFG issuing shares or other securities convertible into shares, where such shares are to be issued at less than 95% of the then market price), was determined after arm’s length negotiations.

The initial conversion price of HK$2.25 and HK$3.60 per new DFG Share (taking into account the effect of the 10:1 share consolidation in the Capital Reorganisation) respectively represents:

(i) a discount of approximately 53.1% and 25.0% to the adjusted closing price of the Existing DFG Shares of HK$4.80 on the Stock Exchange on 23 February 2004, being the last trading day before the suspension of trading of the Existing DFG Shares prior to the issue of this announcement;
(ii) a discount of approximately 53.8% and 26.1% to the adjusted average closing price of the Existing DFG Shares of HK$4.87 on the Stock Exchange during the period of the last 10 trading days up to 23 February 2004;
(iii) a discount of approximately 38.4% and 1.4% to the adjusted average closing price of the Existing DFG Shares of HK$3.65 on the Stock Exchange during the period of the last 30 trading days up to 23 February 2004;
(iv) a discount of approximately 53.1% and 25.0% to the adjusted closing price of the Existing DFG Shares of HK$4.80 on the Stock Exchange on the Latest Practicable Date;
(v) a premium of approximately 41.5% and 126.4% over the latest audited net tangible asset value as at 31 March 2003 of HK$1.59 attributable to each DFG Share after accounting for the 10:1 share consolidation in the Capital Reorganisation;
(vi) a premium of approximately 294.7% and 531.6% over the unaudited proforma adjusted consolidated net tangible asset value as at 30 September 2003 of HK$0.57 attributable to each DFG Share after accounting for the 10:1 share consolidation in the Capital Reorganisation; and

— 18 —

LETTER FROM THE DFG BOARD

(vii) a premium of approximately 78.6% and 185.7% over the unaudited proforma net tangible asset value of the Enlarged DFG Group of HK$1.26 attributable to each DFG Share after accounting for the issuance of the Consideration Shares but before conversion of the Convertible Notes.
Note: The closing prices of the Existing DFG Shares referred to above have been adjusted to take into account the effect of the 10:1 share consolidation in the Capital Reorganisation, as the shares to be issued upon the exercise of conversion rights attaching to the Convertible Notes are the new DFG Shares after implementation of the Capital Reorganisation.

The conversion price for the Convertible Notes has been determined based on arm’s length negotiations between DFG and PCCW with reference to the underlying audited net tangible asset value as at 31 March 2003 of HK$1.59 attributable to each DFG Share after accounting for the effect of 10:1 share consolidation in the Capital Reorganisation. Although the conversion price for the Convertible Notes is at a discount to the recent market price of the Existing DFG Share, it is at a premium to the underlying net tangible asset value attributable to each DFG Share, being approximately HK$1.59 as at 31 March 2003. As the Existing DFG Shares have been thinly traded on the Stock Exchange, with monthly turnover recorded for the twelve months ended 31 January 2004 being less than 0.3% of the issued share capital of DFG at the end of each corresponding month, the market price may not reflect the fair value of Existing DFG Shares. Besides, the two tranches of the Convertible Notes as part of the consideration payable by DFG will not strain its liquidity but provide it with extra flexibility. In fact, the two tranches of the Convertible Notes with respective maturity of seven years and ten years and of zero coupon and 1% interest per annum respectively will free up the long-term funding for the DFG Group. The DFG Board considers the conversion prices of the Convertible Notes, in the context of the Transaction as a whole, to be fair and reasonable.

Voting:

The holder of the Convertible Notes will not be entitled to receive notice of, attend or vote at general meetings of DFG by reason only of it being a holder of the Convertible Notes.

Transferability:

Subject to the relevant laws and other requirements, the Convertible Notes are freely transferable. The outstanding principal amount of the Convertible Notes may be transferred in full or in part (but only in multiples of HK$1,000,000 if in part).

DFG has undertaken to the Stock Exchange to promptly notify it upon DFG becoming aware of any dealings with the Convertible Notes by any connected person (as defined in the Listing Rules) of DFG.

Listing:

No application will be made for the listing of the Convertible Notes on the Stock Exchange or any other stock exchange. Application will be made to the Stock Exchange for the listing of, and permission to deal in, the new DFG Shares falling to be issued on any exercise of the conversion rights attaching to the Convertible Notes.

— 19 —

LETTER FROM THE DFG BOARD

SHAREHOLDING STRUCTURE PRIOR TO AND AFTER COMPLETION

The following charts show the respective shareholding structures of Property Holdco and DFG immediately prior to Completion:

==> picture [380 x 186] intentionally omitted <==

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

PCCW Dr. Chan
100% 33.58%
Property Sale ITC
Holdco Assets
55.06% 24.55%
Paul Y. Hanny
29.36% 29.36%
CSH Dr. Chan Public
43.06% 0.22% 56.72%
DFG
----- End of picture text -----

The following chart shows the shareholding structures of Property Holdco and DFG immediately following Completion, but before any exercise of the conversion rights under the Convertible Notes:

==> picture [238 x 227] intentionally omitted <==

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

Dr. Chan
33.58%
ITC
55.06% 24.55%
Paul Y. Hanny
29.36% 29.36%
PCCW CSH Dr. Chan Public
93.42% 2.83% 0.01% 3.74%
DFG
100%
Property Sale
Holdco Assets
----- End of picture text -----

— 20 —

LETTER FROM THE DFG BOARD

The following chart shows the proforma shareholding structures of Property Holdco and DFG immediately following Completion, as if the Convertible Notes are fully converted at their initial conversion prices:

Holders of shares PCCW and its Concert Parties (Note (v)) CSH Dr. Chan Public Total issued shares	96.07% 1.69% 0.01% 2.23% 100% 29.36% 29.36% 55.06% 24.55% 33.58% CSH Dr. Chan Public DFG PCCW Property Holdco Sale Assets Paul Y. Hanny ITC Dr. Chan As at the Latest Practicable Date After the issue of Consideration Shares upon Completion (accounting for the effect of the proposed 10:1 share consolidation) After the issue of Consideration Shares and full conversion of the Convertible Notes (accounting for the effect of the proposed 10:1 share consolidation) No. of Existing DFG Shares % of existing issued share capital No. of DFG Shares % of enlarged issued share capital No. of DFG Shares % of enlarged issued share capital 15 — 1,648,333,335 93.42 2,840,555,557 96.07 500,000,000 43.06 50,000,000 2.83 50,000,000 1.69 2,520,900 0.22 252,090 0.01 252,090 0.01 658,744,491 56.72 65,874,449 3.74 65,874,449 2.23 1,161,265,406 100.00 1,764,459,874 100.00 2,956,682,096 100.00	96.07% 1.69% 0.01% 2.23% 100% 29.36% 29.36% 55.06% 24.55% 33.58% CSH Dr. Chan Public DFG PCCW Property Holdco Sale Assets Paul Y. Hanny ITC Dr. Chan As at the Latest Practicable Date After the issue of Consideration Shares upon Completion (accounting for the effect of the proposed 10:1 share consolidation) After the issue of Consideration Shares and full conversion of the Convertible Notes (accounting for the effect of the proposed 10:1 share consolidation) No. of Existing DFG Shares % of existing issued share capital No. of DFG Shares % of enlarged issued share capital No. of DFG Shares % of enlarged issued share capital 15 — 1,648,333,335 93.42 2,840,555,557 96.07 500,000,000 43.06 50,000,000 2.83 50,000,000 1.69 2,520,900 0.22 252,090 0.01 252,090 0.01 658,744,491 56.72 65,874,449 3.74 65,874,449 2.23 1,161,265,406 100.00 1,764,459,874 100.00 2,956,682,096 100.00
		100.00

Notes:

(i) All of the above charts and table assume that there are no other changes in DFG’s issued share capital after the Latest Practicable Date.

— 21 —

LETTER FROM THE DFG BOARD

(ii) CSH’s existing holding of DFG Shares immediately after Completion will be regarded as being held in public hands under the Listing Rules, as it would no longer be a substantial shareholder of DFG.
(iii) Dr. Chan holds 2,520,900 Existing DFG Shares (equivalent to 252,090 DFG Shares after the Capital Reorganisation). Besides, Dr. Chan is the controlling shareholder of ITC Corporation Limited (“ITC”), which is the holding company of Paul Y.�ITC Construction Holdings Limited (“Paul Y.”). Hanny Holdings Limited (“Hanny”) is an associated company of ITC but is not controlled by ITC for the purposes of the Listing Rules and the Takeovers Code. Paul Y. and Hanny each has an approximately 29.36% equity interest in CSH. Therefore, Dr. Chan is deemed to be interested in approximately 29.36% of the issued share capital of CSH as at the Latest Practicable Date.
(iv) Save as stated in (iii) above and (v) below, none of the directors, chief executive or substantial shareholders of DFG or PCCW, nor any of the respective subsidiaries of DFG or PCCW, nor any of their respective associates or PCCW’s Concert Parties, had any interest in the securities of DFG.
(v) Save for Mr. Sin Kit, Adams (“Mr. Sin”), a director of certain subsidiaries of the PCCW Group (who is presumed to be acting in concert with PCCW under the Takeovers Code), who held 15 Existing DFG Shares which were acquired about ten years ago, as at the Latest Practicable Date, none of PCCW, its directors nor any of PCCW’s Concert Parties held any Existing DFG Shares (so far as PCCW is aware). The PCCW Board confirms that the extremely small shareholding of this presumed concert party was only identified after the release of the Announcement and therefore such information was not disclosed therein. As PCCW has an obligation to maintain confidentiality before release of the public announcement and Mr. Sin is only a director of certain subsidiaries of PCCW, he was not aware of and had no knowledge on the Transaction prior to the publication of the Announcement.

It is the intention of PCCW to maintain the listing of the DFG Shares on the Stock Exchange after Completion. Accordingly, PCCW and DFG have each undertaken to the Stock Exchange to use their best endeavours to take appropriate steps to ensure that, as soon as possible following issuance of the Consideration Shares upon Completion, the public float of DFG will not be less than 25% after Completion. Further details are set out in the section “Maintenance of the listing of DFG” below.

CONNECTION AMONG THE PARTIES

The PCCW Group currently holds no interests in the issued share capital of DFG or any member of the DFG Group.

No director of PCCW or PCCW’s subsidiaries is also a director of DFG or DFG’s subsidiaries.

PCCW is not a connected person of DFG and is independent of and not connected or acting in concert with DFG or any of the directors, chief executive or substantial shareholders of DFG or its subsidiaries or any of their respective associates. DFG is not a connected person of PCCW and is independent of and not connected or acting in concert with PCCW or any of the directors, chief executive or substantial shareholders of PCCW or its subsidiaries or any of their respective associates.

The PCCW Group has not engaged in any dealings in the securities of DFG in the period commencing from six months before the date of the Announcement and ending on the Latest Practicable Date. So far as PCCW is aware, save as disclosed in the section headed “Interests in DFG and associated corporations” in appendix V to this circular, PCCW’s Concert Parties currently hold no interests in the issued share capital of DFG and have not engaged in any dealings in the securities of DFG in the period commencing from six months before the date of the Announcement and ending on the Latest Practicable Date.

— 22 —

LETTER FROM THE DFG BOARD

INFORMATION ON THE PROPERTY GROUP AND THE SALE ASSETS

Business Overview

The Property Group manages an infrastructure and property portfolio in Hong Kong and Greater China including all of the property development, investment, property and facilities management functions for the PCCW Group.

After the Transaction, PCCW is not expected to directly engage in any property related businesses or compete with DFG. The DFG Group will continue to provide existing property and facilities management functions and lease premises to the PCCW Group.

The Property Group’s property portfolio includes:

— Property Development Cyberport

In May 2000, PCCW and the Cyberport Developer signed an agreement with the Government under which the Cyberport Developer was granted the exclusive right and obligation to design, develop, construct and market the Cyberport, a project which is located on approximately 24 hectares at Telegraph Bay on Hong Kong Island. The Cyberport consists of specially designed commercial space dedicated to high-technology industries with related retail, residential, recreational and educational facilities.

This technology-themed project is being built to create a business environment with which Hong Kong can attract and retain promising information technology and related businesses. The Cyberport contains a wide range of information technology facilities including a network operations center, a digital media center and a central data exchange, all connected by an internal private network.

Under the project agreement, the Government has provided the site, while the Cyberport Developer is responsible for the provision and procurement of funds to complete the project. PCCW and the Cyberport Developer did not acquire or pay for the Government’s land and, accordingly, does not have title to the site.

The Cyberport Project consists of two “Portions” and several phases. The “Cyberport Portion” includes office towers, a retail center, a hotel and ancillary facilities. This portion will be handed over to the Government on completion. Other than the right to develop the Cyberport Portion, neither PCCW nor the Cyberport Developer has ownership rights in it nor will they receive rental or other project income from it.

— 23 —

LETTER FROM THE DFG BOARD

The first two phases of the Cyberport Portion, consisting of office and retail premises, were completed on schedule in 2002. The remaining of the Cyberport campus, comprising office space, the retail centre and Le Meridien Cyberport, will be completed before the end of 2004.

Construction of the “Residential Portion” commenced in 2002. It consists of approximately 2,900 units, which are expected to be completed in phases between 2004 and 2007. The development right entitles the Cyberport Developer to receive a percentage of the surplus proceeds from the sale of units in the Residential Portion. These proceeds will be shared by the Government and the Cyberport Developer based on a ratio determined by their respective contributions to the Cyberport Project as described below. The residential units may be pre-sold prior to their completion. Pre-sales of units for the initial phase commenced in the first quarter of 2003.

Pursuant to the project agreement dated 17 May 2000, PCCW and the Cyberport Developer have agreed to design, develop and construct the Cyberport Project for a maximum fixed cost of approximately HK$15.8 billion, subject to certain adjustments, in accordance with an agreed timetable. PCCW’s role under the project agreement is to guarantee due performance by the Cyberport Developer of its obligations under that agreement. The maximum fixed cost was based on a cost assessment conducted by professional quantity surveyors. PCCW and the Cyberport Developer are obligated to fund the entire cost of the Cyberport Project, as well as other project expenses, to the extent that these costs and expenses are not funded by the sale or pre-sale proceeds from units in the Residential Portion or other specified project income. PCCW and the Cyberport Developer are also obligated to fund certain other expenses and any cost overruns, which include any costs above the maximum fixed cost. Cost overruns and these other expenses must be funded by PCCW and the Cyberport Developer using their own resources and cannot be funded by pre-sale or sale proceeds from the units in the Residential Portion or other project income.

PCCW has so far invested by way of the Cyberport Loan (through the Cyberport Developer) approximately HK$4.5 billion in the Cyberport Project. Under the project agreement, proceeds from the sale of the Residential Portion units and other agreed project income will be used to pay: (i) construction costs of the Cyberport Portion first, and then construction costs of the Residential Portion; and (ii) certain other agreed project expenses and other items, all in priorities specified in the project agreement. After the payment of these items and setting aside agreed reserves, and after completion of the Cyberport Portion, the surplus of the proceeds arising from the sale of the units in the Residential Portion will be shared between the Cyberport Developer and the Government based on the ratio of their respective contributions to the Cyberport Project.

Various members of the PCCW Group have been retained under contracts entered into between June 2001 to December 2003 (inclusive) by members of the Property Group involved in the Cyberport Project to provide information technology (IT) for the design, construction and/or implementation of specific IT systems/network on a project basis. They also provide certain IT maintenance services. Contracts for these services were awarded either through public tender or selected after comparison of terms of services from various providers or, in the case of information technology services, obtained by the Cyberport Project management company within the Property Group, by direct appointment after arms’ length negotiations of the terms of services between the relevant parties. Other than costs incurred by the Cyberport Project management company mentioned above, all of the costs payable by the Cyberport Developer under these contracts form part of the project costs of the

— 24 —

LETTER FROM THE DFG BOARD

Cyberport Project. These are all one-off transactions and are currently expected to be completed by 2008. Accordingly, provided that there are no material change to the terms of these information technology services contracts, no announcement or shareholders’ approval of these transactions are required under the Revised Listing Rules.

Two wholly-owned subsidiaries of Paul Y.-ITC Construction Holdings Limited, a company whose shares are listed on the Stock Exchange and which is an associate of Dr. Chan under the Listing Rules, are contractors in respect of certain parts of the construction works and entrustments works which commenced on dates between September 1999 to February 2003 (inclusive) pursuant to contracts all of which but one were awarded through public tender. That remaining one contract for a temporary structure was awarded after arms’ length negotiations of the terms of services between the parties. These are all one-off transactions and are currently expected to be completed by 2005. Accordingly, provided that there are no material change to the terms of these construction contracts, no announcement or shareholders’ approval of these transactions are required under the Revised Listing Rules.

Performance of the above contracts will continue after Completion.

Property Group Investment Portfolio — Key buildings

PCP Beijing

PCP Beijing is a prestigious development occupying a site area of approximately 29,350 sq. m. The main building of the development consists of two office blocks (Towers A and B) and two residential blocks (Towers C and D), all located on a common 6-storey commercial podium (of which the upper basement forms part) and a lower basement for car parking purposes. There is an ancillary block with 7 car park floors. The complex including car park has approximately 212,712 sq.m. of gross area. The four towers and the ancillary car park block were completed between 1998 and 2000 and the commercial podium was opened for business in 2001.

Members of the PCCW Group currently lease 3 units and part of the corridor on the 6th floor and 6 units on the 13th floor of Tower A for terms commencing in 2001 and 2002 and expiring on dates between 28 February 2005 and 31 January 2006 (both dates inclusive) at an aggregate monthly rental of approximately HK$363,000 (exclusive of management charges which are to be borne by the relevant tenant).

PCCW Tower

PCCW Tower was completed in 1994 and forms part of an office and commercial complex in TaiKoo Place, Quarry Bay, Hong Kong. A portion of the ground to the 3rd floors, the whole of the 4th to the 18th floors, the 20th to 42nd floors, as well as certain basement car parks and the apportioned common areas of PCCW Tower, totalling approximately 620,147 sq.ft. gross floor areas, are held by the PCCW Group.

— 25 —

LETTER FROM THE DFG BOARD

Currently, a member of the PCCW Group leases 10 whole floors and part of the 20th floor and the 32nd floor of PCCW Tower for terms all commencing in 2003 and all expiring on 31 December 2005 at an aggregate monthly rental of approximately HK$3,184,000 (exclusive of Government rates, air conditioning and management charges which are to be borne by the tenant) and licences the use of car parking spaces for the period from 1 May 2004 to 31 December 2004 at a monthly licence fee of HK$135,000.

Other investment property

Queen’s Road Exchange is a building, with a floor area of approximately 50,000 sq.ft., being used as a Telephone Exchange and other uses. With the existing surplus plot ratio, the site can be redeveloped into a commercial/residential property with additional floor area. Both the government lease and outline zoning permit such redevelopment.

It is a term of the sale by PCCW-HKT Telephone Limited, a wholly-owned subsidiary of PCCW, to the DFG Group of the Queen’s Road Exchange (forming part of the Sale Assets under the Acquisition Agreement) that, upon Completion, the Queen’s Road Exchange (except those parts which are then subject to third party licences, tenancies and lettings) will be leased back to the PCCW Group for the remaining term of the government lease (less 1 day) at a monthly rental of approximately HK$248,000 per calendar month (exclusive of Government rates, air conditioning and management charges which are to be borne by the tenant). The existing government lease is for a term of 999 years from 26 June 1843. The tenant may terminate the leaseback by not less than 6 months prior notice. The landlord (being on Completion a member of the DFG Group) has the right to terminate the leaseback for redevelopment purposes by giving not less than 2 years prior notice. If there is to be redevelopment, the leaseback will also provide that the redeveloped building must provide designated space for a telephone exchange and continued lease of that space to the tenant at the open market rent on otherwise the same basis as described above. DFG will comply with the Revised Listing Rules in respect of the leaseback if there is to be redevelopment.

The property portfolio of the Property Group also includes the whole of 18th and 20th floors, the roof and 7 car parking spaces in the Paramount Building.

Currently, Pacific Century Matrix (HK) Limited, an associate of PCCW has leased 3 units on the 18th floor and licensed the use of space on the roof for 5 satellite dishes, for terms commencing in 2001 and 2002 and expiring on 31 August 2007, for aggregate monthly rental/licence fees of approximately HK$56,000 (exclusive of Government rates, air conditioning and management charges which are to be borne by the tenant) and leases on a monthly basis one lorry parking space at HK$2,500 per month on monthly renewal term. The lease for one of the units on the 18th floor is renewable for a further term of 3 years at market rate by the associate of PCCW by giving 6 months notice. The lease for the other units on the 18th floor is renewable for a further term of 6 years at market rate by the associate of PCCW by giving 3 months notice.

The PCCW Group itself has also leased the entire 20th floor since 2003 (with an option to renew for another 3 years by giving 6 months notice) and licensed the use of space on the roof for 10 satellite dishes, for terms commencing in 2003 and on 1 January 2004 and expiring on 31 December 2005 (in respect of the office space) and 31 December 2004 (in respect of the licence of roof space), for

— 26 —

LETTER FROM THE DFG BOARD

aggregate monthly rental/licence fees of approximately HK$157,000 (exclusive of Government rates, air conditioning and management charges which are to be borne by the tenant) and leases on a monthly basis 3 car parking spaces and 2 lorry parking spaces at a total rental of HK$11,000 per month on monthly renewal term.

Redevelopment Right of Telephone Exchanges

Most of the existing Telephone Exchange sites being used primarily by the Exchange Company were granted by the Government by way of private treaty. In the future, the PCCW Group may seek the Government’s approval for redeveloping the sites to allow other uses. The Property Group will have a right of first refusal to jointly re-develop all of the PCCW Group’s local Telephone Exchanges if and when the PCCW Group is permitted by the Government to redevelop the local Telephone Exchanges for other use.

Negotiations for the redevelopment of the Telephone Exchanges have not yet commenced, and there is no assurance that any such redevelopment right may be obtained and, if obtained, whether the terms of such redevelopment right are commercially acceptable to the Property Group.

As part of the Transaction, PCCW has undertaken to procure that the Redevelopment Right is granted to a wholly-owned subsidiary of Property Holdco, subject to and with effect from Completion. As the Redevelopment Right is in the nature of a right of first refusal to participate in any redevelopment of each relevant Telephone Exchange (if and when the relevant member of the PCCW Group obtains such redevelopment right in the future), it is uncertain whether DFG will (through that subsidiary of Property Holdco) exercise the right to participate. If the Redevelopment Right is not exercised, such decision has to be approved by the independent non-executive directors of DFG and an announcement would be made by DFG if and when appropriate. In that event, the PCCW Group may consider proceeding with the redevelopment of the relevant site itself or together with other parties.

Since the total consideration for the Transaction does not involve any payment by DFG for the Redevelopment Right, the DFG Board considers such right is beneficial to DFG as it would grant at nil consideration to the DFG Group an option to participate in any future redevelopment of the Telephone Exchange whenever the DFG Board believes it is advantageous to do so.

Ongoing business arrangements and leases/licences

Apart from those which are one-off transactions mentioned above, the various business arrangements and leases/licences referred to above, if they were to continue after Completion would constitute continuing connected transactions of DFG under the Revised Listing Rules as PCCW will become a connected person of DFG and Paul Y.-ITC Construction Holdings Limited is an associate of Dr. Chan (who will have been a director of DFG within the 12 months preceding Completion). So far as the leases/licences of the properties referred to above, CBRE Richard Ellis Limited has confirmed that the respective terms of these leases/licences are fair and reasonable and reflect

— 27 —

LETTER FROM THE DFG BOARD

prevailing market rates as at the commencement dates of the respective leases or licences. An announcement will be made or relevant approval by Shareholders will be sought (where appropriate) by DFG in respect of continuing connected transactions as required by the Revised Listing Rules on or before Completion.

Property and Facilities Management

The Property Group’s property and facilities management operations provide support to the information technology and communications network of the PCCW Group and an associated company of PCCW, as well as to the investment property portfolio and other premises occupied by the PCCW Group in Hong Kong and Greater China.

Continuing relationship with the PCCW Group

In addition to the lease arrangements described above, after Completion, the DFG Group may (as mentioned above) continue to provide from time to time property and facilities management services to members of the PCCW Group or their associates and may also receive corporate support services from the PCCW Group. These arrangements, if any, will be disclosed by way of announcement by DFG on or before Completion in accordance with the Revised Listing Rules, depending on their size, these arrangements may be subject to announcement and shareholders’ approval requirements under chapter 14A of the Revised Listing Rules. DFG will comply with the relevant Revised Listing Rules requirements as and when appropriate.

Summary of financial information

The audited results of the Property Group for the years ended 31 December 2002 and 31 December 2003 show a combined net profit after tax of HK$95 million and HK$3 million respectively (and a combined net profit before tax of HK$155 million and HK$33 million respectively). The accountants’ report of the Property Group for the three years ended 31 December 2003 is set out in appendix I to this circular.

As at 31 December 2003, the audited combined net liabilities of the Property Group amounted to HK$372 million, which, among others, included the Cyberport Loan of approximately HK$4,503 million, an amount due to ultimate holding company (i.e. PCCW) of HK$2,441 million and other interest-bearing loans of approximately HK$2,359 million owed to the PCCW Group, but not the surplus of HK$305 million arising from the revaluation of certain properties of the Property Group (which has a net book value of approximately HK$6,294 million) or the value of Queen’s Road Exchange (which is not currently owned by the Property Group but by the Exchange Company). Pursuant to the Acquisition Agreement, the loan of HK$2,441 million owed to ultimate holding company will be capitalised as equity prior to Completion.

— 28 —

LETTER FROM THE DFG BOARD

Also included in the audited combined net liabilities of the Property Group as at 31 December 2003 are deferred tax liabilities of HK$506 million, substantially all of which are related to PCP Beijing and PCCW Tower. The deferred tax liabilities would be realised when the relevant properties are disposed of. In March 2004, PCCW made a further advance of US$150 million (approximately HK$1,170 million) to one of its subsidiary holding PCP Beijing, of which approximately HK$1,151 million was used to repay a bank loan and the excess of approximately HK$19 million be retained by that subsidiary.

DFG’s view on the worth of the Sale Shares and Sale Assets

As PCP Beijing and PCCW Tower are to be held for investment purpose and are income generating, the likely timing of realisation of the deferred tax liabilities of HK$506 million is not expected. Accordingly, the shareholders’ worth of the Property Group as at 31 December 2003 would be, in the view of the DFG Board, be improved by HK$506 million if the provision of the deferred tax liabilities of HK$506 million were to be added back to the worth of the Sale Shares. It is agreed under the Acquisition Agreement that, in addition to the Sale Shares, the Sale Assets comprising the Loans of approximately HK$3,529 million and Queen’s Road Exchange (which has an independent valuation of approximately HK$158 million) will be transferred to DFG as well. Pursuant to the Acquisition Agreement, the consideration for the Sale Assets is allocated as follows: the Loans (which will be assigned to DFG at its face value) will be satisfied by the issue of the Tranche A Note (in the principal amount of HK$1,170 million) and part of the Tranche B Note (in the principal amount of HK$2,359 million) and the Queen’s Road Exchange will be satisfied as to HK$97 million by the issue of approximately 53.9 million new DFG Shares, being part of the Consideration Shares and as to the remaining balance of HK$61 million by part of the Tranche B Note in the principal amount of HK$61 million.

A statement on the unaudited proforma assets and liabilities of the Enlarged DFG Group after Completion is set out in appendix III to this circular. The said proforma statement shows that the proforma combined net assets as at 31st December, 2003 of the Property Group and Queen’s Road Exchange to be acquired by DFG amount to HK$2,166 million, which accounts for Queen’s Road Exchange at a net value of HK$97 million (which is equal to the cost of investment of HK$158 million of Queen’s Road Exchange less the HK$61 million Tranche B Note to be issued to PCCW in respect of the acquisition of the Queen’s Road Exchange).

The unaudited proforma combined net assets of the Property Group and Queen’s Road Exchange of HK$2,166 million to be acquired by DFG, as shown in the unaudited proforma statement of assets and liabilities of the Enlarged DFG Group after Completion, do not take into account the aforesaid revaluation surplus on the properties of the Property Group of HK$305 million. Thus, taking into account the revaluation surplus and also adding back the deferred tax liabilities of HK$506 million (after considering the likely timing of realisation as discussed above), the proforma adjusted worth of the Property Group and Queen’s Road Exchange to be acquired by DFG would be HK$2,977 million. This, together with the Convertible Notes in the total amount of HK$3,590 million to be issued to PCCW in consideration for the Loans of approximately HK$3,529 million and part of the cost of the

— 29 —

LETTER FROM THE DFG BOARD

Queen’s Road Exchange of HK$61 million as discussed above, would give a value of HK$6,567 million to the Sale Shares and Sale Assets to be acquired by DFG under the Acquisition Agreement, which exceeds the total consideration of HK$6,557 million payable to PCCW by DFG by HK$10 million, and is considered by the DFG Board to be favourable to DFG on the above basis.

On the other hand, if the deferred tax liabilities were not to be added back, the total consideration of HK$6,557 million for the Transaction would exceed the worth of the Sale Shares and Sale Assets by HK$496 million. However, given the DFG Board has no intention to dispose PCP Beijing and PCCW Tower, the DFG Board considers it appropriate to add back the deferred tax liabilities in the evaluation of the value of the Transaction.

The following sets out a comparison between the consideration for the Transaction and the value of the Sale Shares and Sale Assets as considered by DFG:

		HK$ million
Unaudited proforma net asset value of the Property Group and
Queen’s Road Exchange as at 31 December 2003		2,166
Add:	Unrecorded revaluation surplus of properties held by
	the Property Group	305
	Deferred tax liabilities	506
	Proforma adjusted worth of the Property Group and
	the Queen’s Road Exchange	2,977
	Principal amount of the Loans	3,529
	Part consideration of Queen’s Road Exchange is to be
	satisfied by the issue of part of the Tranche B Note
	in the principal amount of HK$61 million	61
Perceived value of the Sale Shares and Sale Assets		6,567
Less:	Consideration for the Transaction	(6,557)
Excess	of perceived value of the Sale Shares and Sale Assets
over	consideration for the Transaction	10

— 30 —

LETTER FROM THE DFG BOARD

If the deferred tax liabilities were to be realised in future and not to be added back to the above table of reconciliation, the comparison between the consideration for the Transaction and the value of the Sale Shares and the Sale Assets would be as follows:

	HK$’ million
Perceived value of the Sale Shares and Sale Assets
referred to in the above computation	6,567
Less: Deferred tax liabilities	(506)
	6,061
Less: Consideration for the Transaction	(6,557)
Premium representing the excess of the consideration for the
Transaction over value of the Sale Shares and Sale Assets	(496)

Details of the unaudited proforma statement of assets and liabilities of the Property Group before Completion and the Enlarged DFG Group after Completion is set out in appendix III to this circular.

INFORMATION ON THE DFG GROUP

Business Overview

DFG is an investment holding company and its subsidiaries have been engaging in the manufacturing and trading of building materials, particularly ceramic tiles, and securities trading. Since July 2003, the DFG Group diversified into natural gas supply, storage and related services.

Summary Financial Information

The audited results of the DFG Group for the years ended 31 March 2002 and 31 March 2003 show a consolidated net loss after tax and minority interests of approximately HK$459.0 million and approximately HK$113.2 million respectively (and a consolidated net loss before tax of approximately HK$489.3 million and approximately HK$126.1 million respectively). The unaudited results of DFG for the six months ended 30 September 2003 show a consolidated net loss after tax and minority interests of approximately HK$12.3 million (and a consolidated net loss before tax of approximately HK$10.7 million).

The audited consolidated net asset value of the DFG Group was approximately HK$184.6 million as at 31 March 2003 and the unaudited consolidated net asset value of DFG was approximately HK$172.4 million as at 30 September 2003.

— 31 —

LETTER FROM THE DFG BOARD

REASONS FOR AND BENEFITS OF THE TRANSACTION

The local economy and the property market have recently shown signs of recovery after facing severe downturn in early 2003. The DFG Board is optimistic about the prospects of the property market and considers that the Transaction will provide a solid ground for DFG to invest in prime residential and hospitality projects. The DFG Board also believes that the Transaction will enlarge the DFG Group’s business scope, broaden its revenue stream and bring a positive contribution to the DFG Group’s overall earnings in future.

The DFG Group at present participates in the property market indirectly through its principal activities of manufacture and trading of building materials, particularly ceramic tiles. The Transaction affords the DFG Group the opportunity to take a significant direct position in the property and property development markets in Hong Kong.

Based on its present business, the DFG Group has made substantial losses attributable to Shareholders for the past three financial years ended 31 March 2003. For the six months ended 30 September 2003, losses persisted although at a reduced level (HK$12.3 million compared to HK$43.4 million for the six months ended 30 September 2002). Some encouraging signs can be seen in the DFG Group’s interim results for 2003/04. Turnover increased by about 6% and there was a return to profitability at the operating level (before finance costs), following, among other measures, a 44% reduction in administrative expenses. The acquisition of Beijing Continental Gas Co. Ltd. from an independent third party was completed on 30 July 2003 and this company made its first contribution to turnover and profits in the 2003/04 interim results. Nevertheless, the operating environment in the building materials industry remains highly competitive. The DFG Board has been considering further business rationalisation and has also targeted suitable investment opportunities when available.

Despite the progress noted above, the DFG Board considers it may well take considerable time before the present businesses of the DFG Group can generate a substantial return for Shareholders. By entering into the Transaction, the DFG Group has the opportunity to acquire in a single step a well established and profitable property business and increase its asset base and market capitalisation very substantially. Realistically, it would take many years to achieve a comparable standing by organic growth and acquisitions of a size which the DFG Group could fund from its existing resources. The DFG Board considers that the DFG Group is acquiring both substantial and high quality assets, with the potential to enhance the DFG Group’s standing and reputation and to promote its future growth.

The scope of business of the DFG Group will be expanded by virtue of the Transaction, where property development would then form a substantial part of its business. It is the intention of PCCW that DFG will continue the existing principal business of DFG after Completion and PCCW has no plan to inject any assets or businesses of its own into the DFG Group or to redeploy any assets or businesses of the DFG Group after Completion. PCCW will appoint new members who have expertise in property development and management to join the DFG Board.

Based on the above reasons, the DFG Board believes that the Transaction will be beneficial to DFG.

— 32 —

LETTER FROM THE DFG BOARD

EFFECT OF THE TRANSACTION ON THE FINANCIAL POSITION OF THE DFG GROUP

(i) Profits

As set out in appendix II to this circular, the DFG Group has incurred substantial losses for recent years and for the six months ended 30 September 2003 and it is uncertain when the DFG Group would return to profit. The Property Group made its first profits in the year 2002 of approximately HK$95.5 million. Turnover of the Property Group for the year ended 31 December 2002 was mainly generated by rental income from its investment properties. The significant increase in turnover of the Property Group for the year ended 31 December 2003 was mainly contributed by the sales of the Residential Portion of the Cyberport Project. The cost of sales and the operating expenses also increase drastically in 2003 as certain construction and establishment costs of the Cyberport Project capitalised in prior years were recognised as cost of sales during the year. Besides, significant publicity and promotion expenses were incurred for the pre-sale of the Residential Portion of the Cyberport Project during 2003. As a result, the net profit decreased significantly in 2003 despite that there was an increase in turnover. The DFG Board considers the above not unusual. The Transaction involves the acquisition of a business which is profit making. However, the results of the Enlarged DFG Group for 2004 and onwards will be affected by interest payments of HK$24.2 million and accrual of the redemption premium of HK$48.4 million annually on the Tranche B Convertible Note and amortisation of goodwill arising on the Transaction.

(ii) Net tangible asset value

The unaudited proforma adjusted consolidated net tangible asset value of the DFG Group as at 30 September 2003 is set out in appendix III of this circular. It shows a net tangible asset value of approximately HK$65.6 million representing a net tangible asset value attributable to each DFG Share of approximately HK$0.57.

— 33 —

LETTER FROM THE DFG BOARD

The unaudited proforma statement of assets and liabilities of the Enlarged DFG Group after Completion is set out in appendix III to this circular, which is summarised as follows:

	Proforma
	HK$ million
Fixed assets	6,579
Properties held for/under development	3,769
Goodwill	143
Other non-current assets	30
Current assets	6,137
	16,658
Less: Current liabilities	(3,696)
	12,962
Less: Cyberport Loan	(4,503)
Deferred tax liabilities	(506)
Provision	(1,941)
Convertible Notes	(3,590)
Minority interests and others	(47)
Unaudited proforma net asset value	2,375
Less: Goodwill	(143)
Unaudited proforma net tangible asset value of the Enlarged DFG
Group upon Completion but before conversion of the Convertible
Notes	2,232

As at 31 December 2003, the Property Group had proforma net asset value of HK$2,166 million without considering the potential values of the Cyberport Project and the Redevelopment Right. After Completion but before conversion of the Convertible Notes, the unaudited proforma adjusted consolidated net tangible asset value per DFG Share (after accounting for the 10:1 share consolidation in the Capital Reorganisation) will increase from HK$0.57 as at 30 September 2003 to approximately HK$1.26.

RISKS RELATED TO THE PROPERTY GROUP’S BUSINESS

Presently, the DFG Group is principally engaged in the manufacturing and trading of building materials, securities trading and natural gas supply, storage and related services. Upon Completion, the majority of the DFG Group’s assets and business will be dominated by property development and

— 34 —

LETTER FROM THE DFG BOARD

investment. The Transaction will take the DFG Group into a new sphere of operations, in which the present DFG Board, when deciding to enter into the Transaction, has no direct experience. The proposed new DFG Directors to be nominated by PCCW would, however, have expertise in property development and property investment.

The property development business involves various risks including the risks that government approvals may take more time and resources to obtain than expected; that construction may not be completed on schedule or within budget; and that the properties may not achieve anticipated sales, rent or occupancy levels. No assurance can be given that such events will not occur in such a way as to affect adversely the business or results of the Property Group.

Projects such as the Cyberport Project undertaken by the Property Group typically require substantial capital expenditure during construction. In many cases it may take many months, and some years, before the projects can be pre-sold, pre-leased or completed to generate positive cash flow. The time taken and costs involved in completing the construction projects can be hindered by many factors like: shortages of materials, equipment or skilled labour; poor weather conditions; natural disasters; disputes with labours or sub-contractors; industrial accidents and changes in government policies or regulations. Any of these could give rise to delays in the completion of a project and result in cost overruns. Delays in the process of obtaining requisite governmental licences, permits or approvals can also increase the cost, or delay or prevent the pre-sale or completion of a project. Construction delays can result in the loss of income. The failure to complete construction of a project to its planned specifications or on schedule may result in liabilities and/or less desirable returns.

The profitability and value of the Property Group’s investment properties are influenced by a number of factors, including international, regional and local economic climate; real estate conditions; perceptions by businessmen, retailers or shoppers as to the convenience and attractiveness of the development projects; the proximity and quality of competing projects and changes in market rates for rentals and sales of comparable projects. In addition, property investment projects are also affected by fluctuations in interest rates and exchange rates; the availability of financing; changes in governmental regulations; changes in tax laws or rates; and potential environmental or other legal liabilities.

However, in view of the premium-grade investment properties portfolio owned by the Property Group, the DFG Board considers the potential rewards of the Transaction outweigh the risks and the business of the existing DFG Group is itself by no means risk-free.

TAKEOVERS CODE IMPLICATIONS OF THE TRANSACTION

Immediately after the issue of the Consideration Shares at Completion but before any exercise of the conversion rights under the Convertible Notes, the aggregate shareholding of the PCCW Group in DFG will become approximately 93.4%, assuming that there have been no other changes in shareholding in DFG since the Latest Practicable Date. As a result, under the Takeovers Code, PCCW will have an obligation to make a mandatory general offer following Completion to acquire all the DFG Shares other than those already owned or agreed to be acquired by the PCCW Group, unless the Share Whitewash Waiver is obtained.

— 35 —

LETTER FROM THE DFG BOARD

Even if the percentage shareholding of the PCCW Group at Completion is lower than that level because of any other changes in shareholding in DFG (including any transactions to maintain the public float of DFG Shares as referred to in the section “Maintenance of the Listing of DFG” below), as long as the aggregate percentage shareholding in DFG held by the PCCW Group and its Concert Parties is 30% or above, that obligation to make a mandatory general offer will still arise under the Takeovers Code following Completion, unless the Share Whitewash Waiver is obtained. As the terms of the possible placing (including the timing, the size and the price) by DFG and/or PCCW have not yet been finalised as at the Latest Practicable Date, it is uncertain whether the PCCW Group’s shareholding in DFG will drop below any particular level at any particular time.

In addition, upon the issue and allotment of DFG Shares to the PCCW Group pursuant to a partial or full exercise of the conversion rights under the Convertible Notes, the shareholding of the PCCW Group in DFG may increase by more than 2% from its lowest collective percentage shareholding in the then preceding 12 month period. In such event, and if such lowest collective percentage shareholding is at or above 30% but at or below 50%, under the Takeovers Code, PCCW will have an obligation to make a mandatory general offer to acquire all the DFG Shares other than those already owned or agreed to be acquired by the PCCW Group, unless the Convertible Note Whitewash Waiver is obtained. As the Convertible Notes have a conversion term of up to 10 years, it is uncertain whether the PCCW Group’s shareholding in DFG may drop below any particular level at any particular time. Thus, the Convertible Note Whitewash Waiver is sought to protect PCCW’s conversion rights under the Convertible Notes. As the Executive has indicated that it will not consider granting such a waiver (without, amongst others, sufficient information on the shareholding structure of DFG prior to and after such conversion), PCCW has stated in its circular dated 26 March 2004 that it will waive the Convertible Note Whitewash Waiver as a condition precedent to Completion before the SGM.

It is a condition precedent to Completion that the Share Whitewash Waiver be obtained. If the Share Whitewash Waiver is not available for any reason, the Transaction will not become unconditional and will not proceed (unless that condition is Waived). In the circumstances, a mandatory offer will not be made by PCCW (unless that condition is Waived).

An application has been made to the Executive for the Share Whitewash Waiver under Note 1 of the Notes on dispensation from Rule 26 of the Takeovers Code. The Executive has indicated its agreement to grant the Share Whitewash Waiver, subject to the approval by an independent vote (within the meaning of Note 1 of the Notes on dispensations from Rule 26 of the Takeovers Code or as may be required by the Executive) of the DFG Shareholders by way of poll, to waive any obligation of PCCW to make a general offer which might result from the issue of the Consideration Shares to PCCW (or as it may direct).

CSH is the controlling shareholder of DFG holding approximately 43.06% of the DFG’s issued share capital. The Chairman of DFG, Dr. Chan, also holds beneficially approximately 0.22% of the issued share capital of DFG. Dr. Chan is also the Chairman of CSH. There are two common directors on the board of both CSH and DFG, namely Dr. Chan and Dr. Yap, Allan. Besides, Mr. Chan Kwok Hung, a director of DFG who is a brother of Dr. Chan and also acts as alternate director to Dr. Chan on the CSH Board. Each of Dr. Yap, Allan and Mr. Chan Kwok Hung has no shareholding in DFG. Accordingly, except for Dr. Chan who has a direct personal interest in DFG and who was involved in

— 36 —

LETTER FROM THE DFG BOARD

the negotiation of the Transaction with PCCW in his capacity as chairman of DFG, no other shareholders of DFG are interested in the Transaction (other than as a Shareholder). The representatives of the board of directors of CSH including Dr. Chan, Dr. Yap, Allan and Mr. Chan Kwok Hung were only involved in the discussion of the Transaction on the DFG Board in their capacity as directors or employees of DFG.

All Shareholders are entitled to vote on the Transaction, except that any Shareholders who are PCCW’s Concert Parties will not be allowed to vote on the Share Whitewash Waiver. Further, any Shareholders who are involved in or interested in the Transaction, other than as a Shareholder, and parties acting or presumed to be acting in concert with them, will not be allowed to vote on the Share Whitewash Waiver. In addition, any shareholders who are involved or interested in the Transaction together with their Concert Parties will not be allowed to vote on the Share Whitewash Waiver. As Dr. Chan was involved in the negotiation regarding the Transaction, both Dr. Chan and CSH (being presumed to be acting in concert with Dr. Chan under the Takeovers Code) and their respective concert parties will not vote on the Share Whitewash Waiver.

Immediately after Completion, the percentage shareholding of PCCW and its Concert Parties in DFG will be above 50%, assuming no other changes in shareholding in DFG since the Latest Practicable Date and no further transaction relating to DFG Shares committed before the date of the SGM which would have the effect of reducing such shareholding to 50% or below. On such basis, the PCCW Group and its Concert Parties may further increase their shareholding in DFG without incurring any obligation under Rule 26 of the Takeovers Code to make a general offer unless such collective percentage shareholding subsequently falls to 50% or below.

MAINTENANCE OF THE LISTING OF DFG

The PCCW Group currently holds no interest in the issued share capital of DFG. Immediately after the issue of the Consideration Shares at Completion but before any exercise of the conversion rights under the Convertible Notes, and assuming that there have been no other changes in the issued share capital of DFG after the Latest Practicable Date, the PCCW Group will hold approximately 93.4% of DFG’s issued share capital as enlarged by the issue and allotment of the Consideration Shares. Accordingly, in the absence of other changes in the shareholdings in DFG, DFG will become a subsidiary of PCCW immediately after Completion.

It is the intention of PCCW to maintain the listing of the DFG Shares on the Stock Exchange after Completion. It is the intention of PCCW that DFG will continue the existing principal business of DFG after Completion.

Accordingly, PCCW and DFG have each undertaken to the Stock Exchange to use their best endeavours to take appropriate steps to ensure that, as soon as possible following issuance of the Consideration Shares upon Completion, the public float of DFG will not be less than 25% after Completion.

PCCW has also undertaken to the Stock Exchange not to exercise the conversion rights under the Convertible Notes to the extent that such conversion would result in insufficient public float of DFG.

— 37 —

LETTER FROM THE DFG BOARD

The Stock Exchange has stated that if, at the date of Completion, less than 25% of the DFG Shares are held by the public or if the Stock Exchange believes that:

a false market exists or may exist in the trading in the DFG Shares; or
there are too few DFG Shares in public hands to maintain an orderly market,

then it will consider exercising its discretion to suspend trading in the DFG Shares until a sufficient public float is attained. In this connection, it should be noted that upon Completion, there may be insufficient public float for the DFG Shares and therefore trading in the DFG Shares may be suspended until a sufficient level of public float is attained. Under Rule 8.08 of the Revised Listing Rules, the Stock Exchange will normally require suspension of trading in an issuer’s securities where the percentage of its public float falls below 15% (or 10% in case of an issuer that has been granted a public float waiver under Rule 8.08(1)(d) at the time of listing). The Stock Exchange has indicated that no waiver on compliance with Rule 8.08 of the Revised Listing Rules will be granted in respect of insufficient public float.

If DFG remains a listed company, the Stock Exchange will closely monitor all future acquisitions or disposals of assets by DFG. The Stock Exchange has indicated that it has the discretion to require DFG to issue an announcement and a circular to the Shareholders irrespective of the size of the proposed transactions, particularly when such proposed transactions represent a departure from the principal activities of DFG. The Stock Exchange also has the power, pursuant to the Listing Rules, to aggregate a series of transactions of DFG and any such transactions may result in DFG being treated as if it were a new listing applicant as set out in the Listing Rules.

INTENTION REGARDING THE DFG GROUP

The scope of the business of the DFG Group will be expanded by virtue of the acquisition of the Property Group. PCCW’s intention is that the Enlarged DFG Group will focus on investment in prime property projects. Other than that, DFG has been informed that PCCW has no intention to effect any major changes in relation to the business, including any redeployment of the fixed assets, of DFG Group or the existing employment of the staff of DFG Group after Completion.

— 38 —

LETTER FROM THE DFG BOARD

APPOINTMENT OF NEW DIRECTORS TO THE DFG BOARD

With immediate effect after the Completion, Messrs. Li Tzar Kai, Richard, Yuen Tin Fan, Francis, Alexander Anthony Arena, Lee Chi Hong, Robert and Chak Hubert will be appointed to the DFG Board. The biography and information of each of the new executive DFG Directors to be appointed is set out below:

LI Tzar Kai, Richard, aged 37, is chairman of PCCW. He is also chairman and chief executive of the Pacific Century Group and chairman of Singapore-based Pacific Century Regional Developments Limited. Mr. Li is a governor of the World Economic Forum for Information Technologies and Telecommunications and a member of the Center for Strategic and International Studies’ International Councillors’ Group in Washington, DC. Mr. Li is also a member of the Global Information Infrastructure Commission and an advisor of the United Nations Information and Communication Technologies Task Force.

YUEN Tin Fan, Francis, aged 51, joined the Pacific Century Group in 1996 as deputy chairman and is currently a deputy chairman of PCCW. He is also a member of PCCW’s Executive Committee and chairman of Pacific Century Insurance Holdings Limited. From 1988 to 1991, he was chief executive of the Stock Exchange. Mr. Yuen was also a founding director of Hong Kong Securities Clearing Company Limited. He served from 1992 to 1994 as a member of the International Markets Advisory Board of NASDAQ in the United States. He served as managing director of Citicorp Scrimgeour Vickers Hong Kong Limited in October 1986, and was appointed to the firm’s main board in London in 1987. Mr. Yuen worked for Wardley, a merchant bank, from 1977 to 1985. Mr. Yuen is chairman of the Board of Trustees of the Hong Kong Center for Economic Research, a member of the Shanghai People’s Political Consultative Committee and a member of the Board of Trustees of Shanghai’s Fudan University. He received a Bachelor of Arts degree in economics from the University of Chicago and is currently a member of the Board of Trustees of the university.

Alexander Anthony ARENA, aged 53, is an executive director of PCCW, deputy chairman of PCCW’s Executive Committee, group chief financial officer of PCCW, a director of Pacific Century Regional Developments Limited and a director of Pacific Century Insurance Holdings Limited. He joined the Pacific Century Group in 1998. Prior to joining the Pacific Century Group, Mr. Arena was a Special Policy Adviser to the Government from 1997 to 1998. From 1993 to 1997, he was director-general of telecommunications in the Office of the Telecommunications Authority of Hong Kong, as well as a member of the Broadcasting Authority. Before his appointment as director-general, Mr. Arena was recruited to plan a reform program for the liberalization of Hong Kong’s telecommunications sector. Prior to his appointment to the Government, he was an inaugural member of the Australian Telecommunications Authority, where he served for four years. Mr. Arena has had an extensive career in public administration, specializing in high technology and infrastructure industries. From a practising radio/communications engineer to a public policy maker, his experience spans such diverse areas as the commercialization of government-owned business enterprises and deregulation in the aviation, transport, telecommunications and postal industries. Mr. Arena graduated from the University of New South Wales, Australia, with a bachelor’s degree in electrical engineering. He completed a MBA at Melbourne University, Australia, and is a Fellow of the Hong Kong Institution of Engineers.

— 39 —

LETTER FROM THE DFG BOARD

LEE Chi Hong, Robert, aged 52, joined PCCW on 19 August 2002, and is the chairman of PCCW Infrastructure. He is also an executive director of PCCW and is a member of the Executive Committee. Mr. Lee was previously an executive director of Sino Land Company Limited, where his responsibilities included sales, finance, acquisitions, investor relations, marketing and property management. Prior to Sino Land, Mr. Lee was a senior partner at Deacons in Hong Kong, where he specialized in banking, property development, corporate finance and dispute resolution in Hong Kong and mainland China. Prior to Deacons, Mr. Lee was a solicitor with the London firm of Pritchard Englefield & Tobin. He was enrolled as a solicitor in the UK in 1979 and admitted as a solicitor in Hong Kong in 1980. Mr. Lee became a Notary Public in Hong Kong in 1991. He is also a member of the panel of arbitrators of the China International Economic and Trade Arbitration Commission of the China Council for the Promotion of International Trade in Beijing, PRC. Mr. Lee graduated in 1975 with a bachelor’s degree in Political Science from Cornell University.

CHAK Hubert, aged 42, joined PCCW in October 1999. He is currently the company secretary and the director of mergers and acquisitions of PCCW. Mr. Chak has extensive experience in corporate finance transactions and has previously worked for a number of international investment banks and a well-known CPA firm in Hong Kong. Mr. Chak received a Master of Business Administration degree and a Bachelor of Science degree in Mechanical Engineering from Cardiff University in the United Kingdom.

All the existing members of the DFG Board would resign after Completion and announcement will be made by DFG whenever there is any change in its directorship.

PROPOSED CAPITAL REORGANISATION

DFG intends to put forward for approval by the Shareholders at the SGM resolution(s) to approve, subject to the conditions set out below, the Capital Reorganisation pursuant to which:

(a) every issued Existing DFG Share of HK$0.40 each will be reduced in value by cancelling HK$0.39 of the capital paid up on each issued Existing DFG Share so as to form (after a 10:1 consolidation) one DFG Share of HK$0.10 and the cancellation of each unissued Existing DFG Share;
(b) an amount of approximately HK$47.14 million standing to the credit of the share premium account of DFG as at 5 March 2004 will be cancelled; and
(c) the aggregate amount of the credit balance of the share premium account of DFG as at 5 March 2004 and the credit arising from the Capital Reorganisation, which is expected to be approximately HK$500.03 million, will be transferred to the contributed surplus account of DFG. That credit will be used to set off against the accumulated losses of DFG. According to the audited accounts of DFG as at 31 March 2003, the accumulated losses of DFG as at that date amounted to approximately HK$559.34 million.

— 40 —

LETTER FROM THE DFG BOARD

Conditions of the Capital Reorganisation

The Capital Reorganisation will be conditional upon:
(i) the passing at the SGM of a special resolution approving the Capital Reorganisation;
(ii) the Listing Committee of the Stock Exchange granting listing of, and permission to deal in, the DFG Shares in issue; and
(iii) compliance by DFG with the requirements of Section 46(2) of the Companies Act 1981 of Bermuda.

None of the above conditions are waivable if the Capital Reorganisation proceeds. It is a condition precedent of Completion that the Capital Reorganisation is approved, but that part of the condition precedent may be waived (for the purpose of Completion) with the consent of both PCCW and DFG.

Reasons for the Capital Reorganisation

The DFG Board believes that the Capital Reorganisation is beneficial to DFG. For the Shareholders, the transaction costs and the registration costs incurred by the Shareholders for the same number of Existing DFG Shares after the implementation of the Capital Reorganisation might be lower.

The nominal value of Existing DFG Shares is HK$0.40 each and is close to the current trading price of each Existing DFG Share. Under Bermuda law, a company cannot issue shares at a discount to the nominal value of shares. After the completion of the Capital Reorganisation, the market value of the DFG Shares is expected to be above the nominal value of the DFG Shares of HK$0.10 each. The DFG Board is of the opinion that maintaining the nominal value of the DFG Shares at HK$0.10 each will provide DFG with greater flexibility for the issue of new DFG Shares in the future and is thus in the interests of DFG and the Shareholders as a whole. The DFG Board intends that the credit to the contributed surplus account of DFG arising from the Capital Reorganisation will be used to set off the accumulated losses of DFG. The audited consolidated financial statements of DFG Group as at 31 March 2003 showed that DFG had accumulated losses of approximately HK$559.34 million. The DFG Board believes that it is unlikely that DFG will generate sufficient profits from its existing operations in the immediate future to eliminate this accumulated losses and that it would be inappropriate for DFG to pay dividends while the losses remain. The Capital Reorganisation will allow DFG to eliminate the accumulated losses to facilitate the making of dividend distributions, if considered appropriate, in the near future. On that basis, the DFG Board considers that it is appropriate to effect the Capital Reorganisation. Shareholders should note that the Capital Reorganisation is not conditional on the completion of the Transaction, but the implementation of the Capital Reorganisation is one of the conditions precedent to Completion.

Effect of the Capital Reorganisation

The DFG Board is of the view that save for the expenses to be incurred in relation to the Capital Reorganisation, the implementation of the Capital Reorganisation will not, by itself, alter the net asset value, business operations, management or financial position of the DFG Group or the proportionate interests of Shareholders and is in the interests of DFG and the Shareholders as a whole.

— 41 —

LETTER FROM THE DFG BOARD

Listing and Dealings

The DFG Shares will rank pari passu in all respects with each other.

Application will be made to the Listing Committee of the Stock Exchange for the granting of the listing of, and permission to deal in, the DFG Shares in issue upon the Capital Reorganisation becoming effective.

Subject to the granting of the listing of, and permission to deal in, the DFG Shares on the Stock Exchange, the DFG Shares will be accepted as eligible securities by HKSCC for deposit, clearance and settlement in CCASS with effect from the effective date of the Capital Reorganisation or such other date as determined by HKSCC. Settlement of transactions between participants of the Stock Exchange on any trading day is required to take place on the second trading day thereafter. All activities under CCASS are subject to the General Rules of CCASS and CCASS Operational Procedures in effect from time to time.

Dealings in the DFG Shares may be settled through CCASS. You should seek the advice of a licensed securities dealer or other professional adviser for details of those settlement arrangements and how such arrangements will affect your rights and interest.

CHANGE OF BOARD LOT SIZE

Currently the Existing DFG Shares are traded in a board lot of 5,000 Existing DFG Shares. To correspond with the Share Consolidation, the DFG Directors have resolved to change the board lot for trading on the Stock Exchange to 1,000 DFG Shares upon the Capital Reduction and Share Consolidation becoming effective, and subject to the Listing Committee of the Stock Exchange granting listing of, and permission to deal in, the new DFG Shares.

TRADING ARRANGEMENT AND FREE EXCHANGE OF NEW SHARE CERTIFICATES

The DFG Shares will be traded in board lots of 1,000 each. Subject to the Capital Reorganisation becoming effective on 6 May 2004, dealings in the DFG Shares are expected to commence on the same day. Parallel trading arrangements will be established with the Stock Exchange and parallel trading will be permitted from Thursday, 20 May 2004 to Friday, 11 June 2004, both days inclusive, at the counters mentioned in (a) and (b) below:

(a) with effect from 9:30 a.m. on Thursday, 6 May 2004, a temporary counter for trading in the new DFG Shares (represented by peach colour share certificates for the Existing DFG Shares in board lot of 500 new DFG Shares) will be established and only peach colour share certificates for Existing DFG Shares can be traded at this counter. Each peach colour share certificate for Existing DFG Shares will be valid for settlement and delivery for trading transacted at this counter on the basis of ten Existing DFG Shares for one new DFG Share. The original counter for trading in the Existing DFG Shares in board lot of 5,000 shares will be temporarily closed with effect from 9:30 a.m. on Thursday, 6 May 2004;

— 42 —

LETTER FROM THE DFG BOARD

(b) with effect from 9:30 a.m. on Thursday, 20 May 2004, the original counter will be re-opened and will become a counter for trading in the new DFG Shares in board lot of 1,000 new DFG Shares. Only new green colour share certificates for the new DFG Shares can be traded at this counter; and the temporary counter for trading in the new DFG Shares (represented by peach colour share certificates for the Existing DFG Shares in board lot of 500 new DFG Shares) will be removed after the close of business on Friday, 11 June 2004. The peach colour share certificates for the Existing DFG Shares will continue to be good evidence of legal title on the basis of ten Existing DFG Shares for one new DFG Share, but will not be acceptable for trading and settlement purposes thereafter.

Subject to the Capital Reorganisation becoming effective on 6 May 2004, Shareholders may, during 6 May 2004 to 16 June 2004, submit certificates for the Existing DFG Shares to the share registrar and transfer office of DFG, Standard Registrars Limited at Ground Floor, Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong for exchange, at the expense of DFG, for certificates for the new DFG Shares. Thereafter, certificates for the Existing DFG Shares will be accepted for exchange only on payment of a fee of HK$2.50 (or such higher amount as may from time to time be allowed by the Stock Exchange) for each new certificate issued for the new DFG Shares, or for each certificate for the Existing DFG Share submitted for cancellation, whichever the number is greater. Nevertheless, the peach colour certificates for the Existing DFG Shares will continue to be good evidence of legal title and may be exchanged for certificates for the new DFG Shares at any time.

It is expected that new certificates for the new DFG Shares will be available for collection within a period of ten Business Day after the submission of certificates for the Existing DFG Shares to the share registrar and transfer office of DFG for exchange. Unless otherwise instructed, new share certificates will be issued in board lots of 1,000 new DFG Shares each.

DFG has appointed Tai Fook Securities Company Limited as an agent to match the sale and purchase of odd lots of the new DFG Shares arising from the Share Consolidation from 6 May 2004 up to and including 11 June 2004. Such arrangement is to facilitate Shareholders who wish to dispose of or top up their odd lots of new DFG Shares. Shareholders who wish to take advantage of the facility should contact Ms. Eon Lee of Tai Fook Securities Company Limited at 25th Floor, New World Tower, 16-18 Queen’s Road Central, Hong Kong (Tel: 2160 9983). Such Shareholders are reminded that in order to effect the transactions, they will have to lodge with such broker the relevant Share certificate(s) and duly signed and completed transfer form(s) and, if any, other documents of title. Shareholders should note that the matching of the sale and purchase of odd lots of new DFG Shares are not guaranteed.

INCREASE IN AUTHORISED SHARE CAPITAL

The authorised share capital of DFG consists of 1,500,000,000 Existing DFG Shares, of which 1,161,265,406 Existing DFG Shares were in issue as at the Latest Practicable Date. There are no outstanding warrants, options or other securities convertible into shares of DFG.

As part of the Capital Reorganisation, the authorised but unissued share capital of DFG will be cancelled. Accordingly, in order to allow for the issue of the Consideration Shares, the DFG Shares which fall to be issued upon conversion of the Convertible Notes and any other future issues of DFG

— 43 —

LETTER FROM THE DFG BOARD

Shares, the DFG Board proposes to increase (upon the Capital Reorganisation becoming effective) the authorised share capital of DFG from HK$11,612,654.06 to HK$1,000,000,000.0 by the creation of an additional 9,883,873,460 DFG Shares. As at the Latest Practicable Date, there is no concrete plan if there would be any possible issue of new shares by DFG.

PROPOSED AMENDMENT TO BYE-LAWS

DFG also proposed that conditional upon the Capital Reorganisation becoming effective, an amendment to Bye-Law 3(1) be made to reflect the new par value of the DFG Shares.

In addition, due to the recent enactment of the SFO and taking into account of the latest changes to the requirements of the Listing Rules, DFG also proposes to put forward to the Shareholders for approval at the SGM resolutions to amend the Bye-Laws of DFG to, among other things:

(a) to amend the definition of “clearing house”;
(b) to allow corporate communications by electronic means and provision of summary financial reports in place of annual reports and accounts;
(c) to require that the minimum seven-day period for lodgment by shareholders of the notice to nominate a director to commence no earlier than the day after the despatch of the notice of the meeting appointed for such election and end no later than seven days before the date of such meeting;
(d) to prohibit directors from voting at and being counted towards the quorum of the board meeting on any matter in which any of his associates has a material interest; and
(e) to exclude the votes cast by a shareholder in contravention of a requirement or restriction under the Listing Rules.

Set out in the notice of SGM in special resolution No. 5 on pages 207 to 213 of this circular are specific amendments to the Bye-Laws that are proposed.

PROPOSED CHANGE OF NAME OF DFG

The DFG Board proposes that upon approval by the Shareholders, and subject to and conditional upon (a) completion of the Acquisition Agreement; and (b) the approval of the Registrar of Companies in Bermuda, the name of DFG be changed to “Pacific Century Premium Developments Limited”. The proposed name change is to signify the new identity of DFG following the Completion and will take effect from the date on which the new name is entered on the register by the Registrar of Companies in Bermuda in place of the current name.

The proposed change of name of DFG will not affect any of the rights of the Shareholders. All existing peach colour share certificates for the Existing DFG Shares in issue bearing the current name of DFG will continue to be evidence of title to the shares of DFG under the new name and will not require replacement as a result of the change of name becoming effective. It is currently intended that

— 44 —

LETTER FROM THE DFG BOARD

the change of name will take effect on the same date when the Capital Reorganisation becomes effective, which is expected to be on 6 May 2004. The new green share certificates for the DFG Shares referred to in the paragraph headed “Trading arrangement and free exchange of new share certificates” above will bear the new company name “Pacific Century Premium Developments Limited” on the basis that the proposed change of name takes effect at Completion and Completion occurs on or before 30 June 2004.

If the change of name takes effect on a date different from the effective date of the Capital Reorganisation, further announcement will be made by DFG on the free exchange of shares certificates arrangement. The SGM has been convened at which a special resolution will be proposed to consider, and if thought fit, to approve the change of name of DFG.

SGM

There is set out on pages 204 to 213 of this circular a notice convening the SGM to be held at 11th Floor, Paul Y. Centre, 51 Hung To Road, Kwun Tong, Kowloon, Hong Kong at 10:30 a.m. on Wednesday, 28 April 2004 at which resolutions will be proposed to the Shareholders to approve, among other things, the Transaction, the Share Whitewash Waiver, the Capital Reorganisation, the proposed increase in the authorised share capital of DFG, the proposed amendment to Bye-Laws and the proposed change of name of DFG. The Share Whitewash Waiver will be voted on by poll by an independent vote (within the meaning of Note 1 of the Notes on dispensations from Rule 26 of the Takeovers Code or as may be required by the Executive) of the Shareholders. PCCW and its Concert Parties, Dr. Chan and CSH and this respective concert parties will not vote on the Share Whitewash Waiver. At the SGM, other resolutions will also be proposed for the approval of the Capital Reorganisation, the proposed increase in the authorised share capital of DFG, the proposed amendment to Bye-Laws and the proposed change of name of DFG and all Shareholders are eligible to vote on those resolutions.

A form of proxy for use at the SGM is also enclosed. Whether or not you are able to attend the SGM, you are strongly urged to complete and return the enclosed form of proxy in accordance with the instructions printed thereon, and to lodge it with the branch share registrar of DFG in Hong Kong, Standard Registrars Limited, at Ground Floor, Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong, as soon as possible but in any event not later than 48 hours before the time appointed for the holding of the SGM or any adjourned meeting (as the case may be). Completion and return of the form of proxy will not preclude you from attending and voting in person at the SGM or any adjourned meeting should you so wish.

RECOMMENDATION

The DFG Board believes that the resolutions approving the Transaction, the Share Whitewash Waiver, proposed Capital Reorganisation, the proposed increase in authorised share capital of DFG, the proposed amendment to Bye-Laws and the proposed change of name of DFG are in the interests of DFG and recommend Shareholders to vote in favour of such resolutions to be proposed at the SGM.

— 45 —

LETTER FROM THE DFG BOARD

The Independent Board Committee, having taken into account the advice from Goldbond, considers that the terms of the Transaction and the Share Whitewash Waiver are fair and reasonable so far as the independent Shareholders are concerned. Accordingly, the Independent Board Committee recommends the independent Shareholders to vote in favour of the resolution to be proposed at the SGM to approve, among others, the Transaction and the Share Whitewash Waiver.

ADDITIONAL INFORMATION

Your attention is drawn to the letter of advice from the Independent Board Committee and the letter from Goldbond containing its advice to the Independent Board Committee in relation to the Transaction and the Share Whitewash Waiver set out on pages 47 to 48 and pages 49 to 80 of this circular respectively.

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

Yours faithfully, By Order of the Board Dong Fang Gas Holdings Limited Dr. Chan Kwok Keung, Charles Chairman

— 46 —

LETTER FROM INDEPENDENT BOARD COMMITTEE

DONG FANG GAS HOLDINGS LIMITED

(Incorporated in Bermuda with limited liability)

2 April 2004

To the independent Shareholders

PROPOSED ACQUISITION OF VARIOUS PROPERTY INTERESTS OF PCCW LIMITED AND PROPOSED CAPITAL REORGANISATION

MAJOR TRANSACTION

APPLICATION FOR SHARE WHITEWASH WAIVER FROM THE OBLIGATION TO MAKE A MANDATORY GENERAL OFFER TO ACQUIRE SHARES IN DONG FANG GAS HOLDINGS LIMITED

PROPOSED INCREASE IN AUTHORISED SHARE CAPITAL

PROPOSED AMENDMENT TO BYE-LAWS PROPOSED CHANGE OF COMPANY NAME

AND CHANGE OF BOARD LOT SIZE

Dear Sir or Madam,

We refer to the document of DFG to the Shareholders dated 26 March 2004 (“Circular”), of which this letter forms part. Terms defined herein shall have the same meanings as defined in the Circular unless the context otherwise requires.

The Independent Board Committee has been established to give a recommendation to the independent Shareholders in respect of the Transaction and the Share Whitewash Waiver. Goldbond has been appointed as the independent financial adviser to advise us in connection with the Transaction and the Share Whitewash Waiver. Details of its advice, together with the principal factors and reasons taken into consideration in arriving at such advice, are set out in their letter on pages 49 to 80 of the Circular.

— 47 —

LETTER FROM INDEPENDENT BOARD COMMITTEE

Your attention is also drawn to the “Letter from the DFG Board” set out on pages 8 to 46 of and the additional information set out in the appendices to the Circular.

Having taken into account the terms of the Transaction and the Share Whitewash Waiver, the interests of the independent Shareholders and the advice of Goldbond, we consider that the terms of the Transaction and the Share Whitewash Waiver are fair and reasonable so far as the independent Shareholders are concerned. Accordingly, we recommend the independent Shareholders to vote in favour of the resolution to approve, among others, the Transaction and the Share Whitewash Waiver.

Yours faithfully,

The Independent Board Committee Zhao Wenfu Zhang Shi Chen Independent non-executive Director Executive Director

— 48 —

LETTER FROM GOLDBOND

==> picture [109 x 57] intentionally omitted <==

Goldbond Capital (Asia) Limited 3902B, 39/F., Tower 1, Lippo Centre 89 Queensway Hong Kong

2 April 2004

Independent Board Committee Dong Fang Gas Holdings Limited 9th Floor, Paul Y. Centre

51 Hung To Road Kwun Tong Kowloon Hong Kong

Dear Sirs,

MAJOR TRANSACTION FOR DONG FANG GAS HOLDINGS LIMITED PROPOSED ACQUISITION OF VARIOUS PROPERTY INTERESTS OF PCCW LIMITED APPLICATION FOR SHARE WHITEWASH WAIVER

INTRODUCTION

We refer to our appointment as the independent financial adviser to the Independent Board Committee in relation to the Transaction and the Share Whitewash Waiver, details of which are contained in the circular to the shareholders of DFG dated 2 April 2004 (the “Circular”), of which this letter forms part. Capitalised terms used herein shall have the same meanings as defined in the Circular.

BACKGROUND OF THE TRANSACTION

Pursuant to the Acquisition Agreement, DFG will acquire the Sale Shares and the Sale Assets from PCCW at an aggregate consideration of HK$6,557 million. The Sale Shares and the Sale Assets represent, in essence, the PCCW Group’s ownership of the companies holding PCP Beijing, PCCW Tower, other investment properties and related property and facilities management companies, including the Cyberport Developer and its interests in the Cyberport Project, which assets will, prior to Completion, be transferred to the Property Group by the PCCW Group. No part of the total consideration for the Transaction was ascribed to the transfer from the PCCW Group to the DFG Group of the Cyberport Developer which was granted the development right of the Cyberport Project under an agreement signed between the Government, PCCW and the Cyberport Developer in May 2000, on the basis that the consideration for that part of the Transaction is to be represented by the Cyberport Developer’s obligation to repay the Cyberport Loan on a non-recourse basis. In addition, PCCW will grant the Redevelopment Right to DFG (through the Property Group), where the total consideration for the Transaction also does not involve any payment by DFG for the Redevelopment Right itself.

— 49 —

LETTER FROM GOLDBOND

As stated in the letter from the DFG Board of the Circular (the “Letter from the Board”), save for the 15 Existing DFG Shares held by a director of certain subsidiaries of PCCW (who is presumed to be acting in concert with PCCW under the Takeovers Code), the PCCW Group and its Concert Parties currently holds no interests in the issued share capital of DFG. Immediately after the issue of the Consideration Shares at Completion, but before any exercise of the conversion rights under the Convertible Notes, and on the assumption that there are no other changes in DFG’s issued share capital after the Latest Practicable Date, the shareholding of the PCCW Group in DFG is expected to become about 93.4%. As PCCW and its Concert Parties will increase its shareholding in DFG to above 30%, PCCW will have an obligation pursuant to Rule 26 of the Takeovers Code to make a mandatory general offer following Completion to acquire all the DFG Shares other than those already owned or agreed to be acquired by the PCCW Group and its Concert Parties, unless the Share Whitewash Waiver is obtained.

The Transaction also involves the issue of the Convertible Notes, which upon the issue and allotment of DFG Shares to the PCCW Group pursuant to a partial or full exercise of the conversion rights under the Convertible Notes, the shareholding of the PCCW Group in DFG may increase by more than 2% from its lowest collective percentage shareholding in the then preceding 12-month period. In such event, and if such lowest collective percentage shareholding is at or above 30% but at or below 50%, under the Takeovers Code, PCCW will have an obligation to make a mandatory general offer to acquire all the DFG Shares other than those already owned or agreed to be acquired by the PCCW Group and its Concert Parties, unless the Convertible Note Whitewash Waiver is obtained. As the Convertible Notes have a conversion term of up to 10 years, it is uncertain whether the PCCW Group’s shareholding in DFG may drop below any particular level at any particular time. Thus, as stated in the Circular of PCCW dated 26 March 2004, the Convertible Note Whitewash Waiver was contemplated in order to protect PCCW’s conversion rights under the Convertible Notes. As stated in the Letter from the Board and the circular of PCCW dated 26 March 2004 regarding the Transaction, as the Executive has indicated that it will not consider granting the Convertible Note Whitewash Waiver without, amongst others, sufficient information on the shareholding structure of DFG prior to and after such conversion, PCCW will waive the Convertible Note Whitewash Waiver as a condition precedent to Completion before the SGM.

An application has been made by PCCW to the Executive for the Share Whitewash Waiver under Note 1 of the Notes on dispensation from Rule 26 of the Takeovers Code. The Executive has indicated its agreement, subject to the approval by an independent vote (within the meaning of Note 1 of the Notes on dispensations from Rule 26 of the Takeovers Code or as may be required by the Executive) of the Shareholders by poll, to waive any obligation of PCCW and its Concert Parties to make a general offer which might result from the issue of the Consideration Shares to PCCW (or as it may direct).

If the Share Whitewash Waiver is not available for any reason, the Transaction will not become unconditional and will not proceed (unless that condition is waived by PCCW, but PCCW cannot waive that condition unless it has demonstrated to the satisfaction of the Executive that it has sufficient financial resources to fulfill its obligations under Rule 26 of the Takeovers Code).

Approval by independent Shareholders is required for the Share Whitewash Waiver. The Independent Board Committee will make a recommendation to the independent Shareholders on these matters and we have been appointed as the independent financial adviser to advise the Independent Board Committee in relation thereon.

— 50 —

LETTER FROM GOLDBOND

INDEPENDENT BOARD COMMITTEE

Dr. Chan was involved in the negotiation of the Transaction with PCCW. Mr. Chan Kwok Hung is a brother of Dr. Chan. In addition, Dr. Yap, Allan and Mr. Chan Kwok Hung were involved in the discussion of the Transaction on the DFG Board. Mr. Tsang Link Carl, Brian, an independent non-executive director of DFG, is a partner of a law firm which provides legal advice and services to DFG. Accordingly, the aforesaid DFG Directors are not considered to be independent for the purpose of advising the independent Shareholders on the Transaction and the Share Whitewash Waiver. The Independent Board Committee comprising Mr. Zhang Shi Chen, an executive director of DFG and Mr. Zhao Wenfu, an independent non-executive director of DFG, has been established to give advice and recommendation to the independent Shareholders on the Transaction and the Share Whitewash Waiver.

BASES AND ASSUMPTION OF THE ADVICE

In formulating our advice, we have relied on the information and facts supplied, and the opinions expressed, by the DFG Directors, which we have assumed to be true and accurate at the time they were made and continue to be true and accurate at the date of the despatch of the Circular. We have reviewed the published information of DFG, including, its audited financial statements for the three years ended 31 March 2003 and the interim report for the six months ended 30 September 2003 and the Acquisition Agreement. We have been advised by the DFG Directors that no material facts have been omitted from the information supplied and opinions expressed by them.

We have also reviewed the accountants’ report of the Property Group for the three years ended 31 December 2003. We have discussed the information supplied with the management of PCCW. We have been advised by the management of PCCW that as far as they are aware no material facts have been omitted from the information supplied and opinions expressed by them.

As stated in Appendix II to the Circular, the DFG Board is of the opinion that after taking into account of the DFG Group’s present internal resources and banking and other borrowing facilities, the DFG Group has sufficient working capital for its present requirements. Likewise, the PCCW Board is of the opinion that after taking into account the Property Group’s internal resources and available borrowing facilities, the Property Group has sufficient working capital for its requirements. We were informed by the DFG Board that it is not aware of any matter or fact which will render the Enlarged DFG Group not having sufficient working capital for its requirements after Completion.

We have reviewed the past performance of the DFG Shares on the Stock Exchange. We have also had the opportunity to discuss with the independent firm of professional surveyors, CB Richard Ellis Limited (“CBRE”), the valuation of the properties prepared by it. These valuations are set out in Appendix IV to the Circular.

We have been advised by the DFG Directors and believe that no material facts have been omitted from the Circular. We have also assumed that the opinion made CBRE, in its valuation report has been prepared after due care and consideration.

— 51 —

LETTER FROM GOLDBOND

We consider that we have reviewed sufficient information to reach an informed view, to justify reliance on the accuracy of the information contained in the Circular and to provide a reasonable basis for our recommendation. We have no reason to doubt the truth, accuracy and completeness of the information and representations provide to us by the DFG Directors and the management of PCCW or that any material facts have been omitted or withheld. We have not, however, conducted an independent in-depth investigation into the businesses and affairs of the DFG, PCCW or any of their respective subsidiaries or associates.

We have undertaken no research on the rental market and the prospect of the property markets in the PRC or in Hong Kong. In addition, we refer you to the letters and appendices in the Circular, of which this letter forms part.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In arriving at our opinion in respect of the fairness and reasonableness of the terms of the Transaction and the Share Whitewash Waiver, we have considered the following principal factors and reasons:

1. Reasons for entering into the Acquisition Agreement

As stated in the Letter from the Board, the local economy and the property market have recently shown signs of recovery after facing severe downturn in early 2003. We understand from the DFG Directors that they are optimistic about the prospects of the property market and consider that the Transaction will provide a solid ground for DFG to invest in prime residential and hospitality projects. The DFG Directors also believe that the Transaction will enlarge DFG Group’s business scope and broaden its revenue stream.

The DFG Group at present participates in the property market indirectly through its principal activities of manufacturing and trading of building materials, particularly ceramic tiles. The Transaction affords the DFG Group the opportunity to take a significant direct position in the property and property development markets in Hong Kong.

As mentioned in the Letter from the Board, the DFG Group has been loss making since the financial year ended 31 March 2001. A summary of the DFG Group’s operating results for the two years ended 31 March 2003, the six months ended 30 September 2002 and the six months ended 30 September 2003 are as follows:

	Year ended 31 March	Year ended 31 March	Six months ended 30 September	Six months ended 30 September
	2002	2003	2002	2003
	(Audited)	(Audited)	(Unaudited)	(Unaudited)
	HK$’000	HK$’000	HK$’000	HK$’000
Turnover	258,265	136,196	79,456	84,199
Operating profit/(loss)	(274,232)	(57,225)	(21,771)	1,046
Net loss	(458,994)	(113,214)	(43,433)	(12,292)

— 52 —

LETTER FROM GOLDBOND

The DFG Directors informed us that the DFG Group has made substantial losses attributable to Shareholders for the past three financial years ended 31 March 2003. For the six months ended 30 September 2003, losses persisted although at a reduced level (HK$12.3 million compared to HK$43.4 million for the six months ended 30 September 2002). Some encouraging signs can be seen in the DFG Group’s interim results for 2003/04. Compared to the interim results for 2002/03, turnover for the six months ended 30 September 2003 increased by about 6% and there was a return to profitability at the operating level (before finance costs) following, among other measures, a 44% reduction in administrative expenses. For the six months ended 30 September 2003, the DFG Group had operating profits of approximately HK$1.0 million while during the comparable period in 2002, the DFG Group had an operating loss of approximately HK$21.8 million. The acquisition of Beijing Continental Gas Co. Ltd. by the DFG Group from an independent third party was completed on 30 July 2003 and this company made its first contribution to turnover and results for the six months ended 30 September 2003. Turnover contributed by the operations of Beijing Continental Gas Co. Ltd. amounted to approximately HK$2.7 million, and represented about 3.2% of the DFG Group’s total turnover for the six months ended 30 September 2003. Such operation recorded a net profit of approximately HK$0.7 million during the same period.

The DFG Group started exploring the natural gas business in the PRC in 2002 and in November 2002, the DFG Group entered into an agreement to acquire effectively 49% of the equity interest in Nanning City Gas Co. Ltd. However, there have been certain disputes between the DFG Group and the vendor relating to the satisfaction of the conditions of the acquisition agreement. We understand from the DFG Directors that the DFG Group will continue to negotiate with the vendor to resolve the disputes and is considering appropriate action to take. Details of this transaction were set out in the announcement of DFG dated 2 January 2003. The acquisition has not yet been completed as at the Latest Practicable Date. As mentioned above, the DFG Group acquired Beijing Continental Gas Co. Ltd. from an independent third party on 30 July 2003.

The DFG Board has been considering further business rationalisation and has also targeted suitable investment opportunities when available. By entering into the Transaction, the DFG Group has the opportunity to acquire in a single step a well established and profitable property business and increase its asset base and market capitalisation very substantially. DFG will become a much more sizeable company after the Transaction, the Enlarged DFG Group Proforma NTA, as set out in Appendix III to the Circular, amounts to HK$2,232 million after Completion. Although the building materials business has improved, it is unlikely that it can propel DFG to a size comparable to the effect of the Transaction. Realistically, the DFG Directors believe it would take many years to achieve a comparable standing by organic growth and acquisitions of a size which the DFG Group could fund from its existing resources. The DFG Board considers that the DFG Group is acquiring both substantial and high quality assets, with the potential to enhance the DFG Group’s corporate status and reputation and to promote its future growth.

The scope of the business of the DFG Group will be expanded by virtue of the Transaction, where property development would then form a substantial part of its business. It is the current intention of PCCW that the DFG Group will continue to engage in its existing principal business after Completion and PCCW has no plan to inject any assets or businesses of its own into the DFG Group or to redeploy any assets or businesses of the DFG Group after Completion. PCCW will appoint new members who have property development and management expertise to the DFG Board.

— 53 —

LETTER FROM GOLDBOND

Having considered the DFG Group’s current scope of business, its recent financial positions and performance, the recent building material market conditions and the opportunity to acquire a well established and profitable property business which will increase DFG Group’s assets base and market capitalisation, we concur with the DFG Directors that the Transaction will be beneficial to the DFG Group.

2. The Property Group and the Queen’s Road Exchange

(a) Financial information of the Property Group and the Queen’s Road Exchange

The accountants report on the Property Group for the three years ended 31 December 2003 is set out in Appendix I to the Circular.

(i) Balance sheet

The accountants’ report on the Property Group for the three years ended 31 December 2003, the financial information on the DFG Group and the pro-forma financial information on the Enlarged DFG Group are set out in Appendix I, II and III to the Circular respectively.

As stated in the Letter from the Board, the pro-forma net asset value of the Property Group and the Queen’s Road Exchange before Completion was approximately HK$2,166 million. As set out in Appendix III to the Circular, the pro-forma value of the fixed assets of the Property Group and the Queen’s Road Exchange and the pro-forma value of the properties held for/under development of the Property Group as at 31 December 2003 amounted to approximately HK$6,452 million and HK$3,769 million respectively. Certain parts of the PCCW Tower and PCP Beijing are occupied by the PCCW Group and thus were recorded as fixed assets at net book value according to the accounting principles generally accepted in Hong Kong. Except for approximately HK$305 million of unrecorded revaluation surplus related to these properties, the aggregate values of the fixed assets and properties held for/under development of HK$10,221 million included in the proforma net asset value of the Property Group and the Queen’s Road Exchange has taken into account the market value of the other parts of PCCW Tower and PCP Beijing, the Paramount Properties and the Queen’s Road Exchange as at 31 December 2003. The valuation report on PCCW Tower, PCP Beijing, Paramount Properties and the Queen’s Road Exchange is set out in Appendix IV to the Circular. Neither the interests in the Cyberport Project nor the Redevelopment Right has been valued in the preparation of such pro-forma adjusted net asset value.

As disclosed in Appendix III to the Circular, the pro-forma total liabilities of the Property Group and the Queen’s Road Exchange before the Transaction amounted to approximately HK$13,750 million as at 31 December 2003, of which approximately HK$3,529 million represented the Loans to be assigned to DFG upon Completion, approximately HK$4,503 million represented the then outstanding balance of the Cyberport Loan and about HK$61 million represented the part of the consideration of the Queen’s Road Exchange (being part of the Sale Assets) to be satisfied by the issue of the principal amount of HK$61 million in the Tranche B Note. The remaining pro-forma liabilities

— 54 —

LETTER FROM GOLDBOND

of approximately HK$5,657 million included an amount payable to the Government regarding the Cyberport Project of approximately HK$3,700 million, other current liabilities of approximately HK$1,420 million, deferred tax liabilities of approximately HK$506 million and other long-term liabilities of approximately HK$31 million.

(ii) Profit and loss account

Below is a summary of the audited combined profit and loss account of the Property Group for the three years ended 31 December 2003:

	31 December	31 December	31 December
	2001	2002	2003
	HK$ million	HK$ million	HK$ million
Turnover	1,105	496	4,528
Profit from operations	139	267	193
Profit before taxation	115	155	33
(Loss)/Profit after taxation	(23)	95	3

As disclosed in Appendix I to the circular, turnover for the year ended 31 December 2001 represented rental income received from investment properties, revenue from construction contracts and amounts received or receivable for properties sold. Turnover for the year ended 31 December 2002 mainly represented rental income received from the Property Group’s investment properties. Turnover for the year ended 31 December 2003 increased significantly primarily because of the revenue of approximately HK$4,111 million recorded for sales in respect of the Residential Portion of the Cyberport Project during the year. Cost of sales and operating expenses increased significantly for the year ended 31 December 2003 mainly because certain construction and establishment costs of the Cyberport Project previously capitalised were recognised as cost of sales during the year. In addition, the Property Group has incurred significant publicity and promotion expenses for the pre-sale of the Residential Portion of the Cyberport Project. As a result, even though turnover for the year ended 31 December 2003 increased significantly compared to that for the year ended 31 December 2002, net profit for year 2003 decreased significantly compared to year 2002.

As disclosed in Note 3 of the accountants’ report of the Property Group as set out in Appendix I to the Circular, total turnover generated from the transactions with related companies for the two years ended 31 December 2003 amounted to approximately HK$118 million and HK$131 million respectively, represented approximately 23.8% and 2.9% of its total turnover during these two years. We have been informed by the management of PCCW that these transactions were conducted at market rates and have accordingly assumed the results truly reflect the results of the operations of the Property Group.

— 55 —

LETTER FROM GOLDBOND

(b) Prospects of the Property Group

As stated in the Letter from the Board, the local economy and the property market have recently shown signs of recovery after facing severe downturn in early 2003. The DFG Directors are optimistic about the prospects of the property market and considers that the Transaction will provide a solid ground for DFG to invest in prime residential and hospitality projects.

Detailed description of the properties are set out under the section headed “Information on the Property Group and the Sale Assets” in the Letter from the Board.

— (i) Property development Cyberport

A summary and the status of development of the Cyberport Project is stated in the subsection headed “Property development — Cyberport” in the Letter from the Board. Construction of the “Residential Portion” commenced in 2002. It consists of approximately 2,900 units with a total saleable area of about 4.5 million square feet which are expected to be completed in phases between 2004 and 2007. A total of 1,204 units, being the total units of the first and second phases of the Residential Portion, with a total saleable areas of about 1.9 million square feet, have been pre-sold.

It should be noted that though PCCW will transfer ownership of the Cyberport Developer to DFG along with the Cyberport Developer’s continuing role in the development of the Cyberport Project, the obligations of PCCW and the Cyberport Developer in the Cyberport Project will remain the same following Completion. No part of the total consideration for the Transaction was ascribed to the transfer from the PCCW Group to the DFG Group of the Cyberport Developer which was granted the development right of the Cyberport Project under an agreement signed between the Government, PCCW and the Cyberport Developer in May 2000, on the basis that the consideration for that part of the Transaction is to be represented by the Cyberport Developer’s obligation to repay the Cyberport Loan on a non-recourse basis, as described in the Letter from the Board. Pursuant to the project agreement dated 17 May 2000, PCCW and the Cyberport Developer have agreed to design, develop and construct the Cyberport Project for a maximum fixed cost of approximately HK$15.8 billion subject to certain adjustments, in accordance with an agreed timetable. PCCW’s role under the project agreement is to guarantee due performance by the Cyberport Developer of its obligations under the agreement. The maximum fixed cost was based on a cost assessment conducted by professional quantity surveyors. PCCW and the Cyberport Developer are obligated to fund the entire cost of the Cyberport Project, as well as other project expenses, to the extent that these costs and expenses are not funded by the sale or pre-sale proceeds from units in the Residential Portion or other specified project income. PCCW and the Cyberport Developer are also obligated to fund certain other expenses and any cost overruns, which include any costs above the maximum fixed cost. Cost overruns and these other expenses must be funded by PCCW and the Cyberport Developer using their own resources and cannot be funded by pre-sale or sale proceeds from the units in the Residential Portion or other project income. PCCW has so far invested by way of the Cyberport Loan (through the Cyberport Developer) approximately HK$4.5 billion in the Cyberport Project. Under the project agreement,

— 56 —

LETTER FROM GOLDBOND

proceeds from the sale of the Residential Portion units and other agreed project income (which includes any money received in relation to the Residential Portion of the Cyberport Project, including, without limitation, interest income earned from sale proceeds, forfeited deposits, late interest payments, handling charges from purchasers and other income arising from residential works) will be applied in the following order: (i) construction costs of the Cyberport Portion first, and then construction costs of the Residential Portion; and (ii) certain other agreed project expenses and other items, all in priorities specified in the project agreement. After the payment of these items and setting aside agreed reserves, and after completion of the Cyberport Portion, the surplus of the proceeds arising from the sale of the units in the Residential Portion will be shared between the Government and the Cyberport Developer based on the ratio of their respective contributions to the Cyberport Project. In the event that the Cyberport Loan is not fully repaid owing to a shortage of proceeds from the project, the other members of the Enlarged DFG Group are not obligated to repay any such amount on behalf of the Cyberport Developer.

We were informed by the management of PCCW that PCCW and the Cyberport Developer are obligated to fund the entire cost of the Cyberport Project and DFG is not currently expected to make any capital contribution to the development of the Cyberport Project, assuming the prevailing property market conditions do not deteriorate. We were further informed by the DFG Directors that with the above arrangement, assuming no significant change in prevailing property market conditions, DFG’s downside risk of the development of the Cyberport Project, apart from the risks stated under section 8 below, is limited. However, independent Shareholders should note that in the event of an adverse change in property market conditions, the Cyberport Developer may incur a loss in the future development of the Cyberport Project and thus adversely affect the consolidated results of the Enlarged DFG Group. Based on the analysis of consideration below, we consider the basis on which the consideration for the Transaction is fair and reasonable and the fact that the Cyberport Loan is non-recourse to DFG is beneficial to the Shareholders. However, we have not been provided with information to assess the future potential of the Cyberport Project and thus we are unable to opine on this aspect. Nonetheless, since the Cyberport Developer will become part of the Enlarged DFG Group, we believe the Transaction provides a significant ongoing property development opportunity for the DFG Group.

(ii) Property Group Investment Portfolio — Key buildings

PCP Beijing

The DFG Directors consider PCP Beijing a prestigious development in a prime location in Beijing. We are advised by CBRE that PCP Beijing has an occupancy rate of approximately 86.9% as at 31 December 2003 and a rental yield of approximately 5.1%. We had discussed and were informed by CBRE that the rental yield is comparable to the market of similar properties.

PCCW Tower

We are advised by CBRE that PCCW Tower has an occupancy rate of approximately 94.2% as at 31 December 2003 and a rental yield of approximately 4.7%. We had discussed and were informed by CBRE that the rental yield is comparable to the market of similar properties.

— 57 —

LETTER FROM GOLDBOND

Other investment property

Queen’s Road Exchange is a building with a floor area of approximately 53,000 square feet, primarily used as a Telephone Exchange.

According to the property valuation report prepared by CBRE, the current site area of Queen’s Road Exchange, including the right-of-way, is approximately 12,284 square feet with a plot ratio of 4.31. We also noted from the property valuation report that, according to the Building (Planning) Regulations, the maximum permitted plot ratios are 8.0 for a domestic building and 15.0 for a non-domestic building. With the existing surplus ratio, the site can be redeveloped into a commercial/residential property with additional floor area. Both the government lease and outline zoning permit such redevelopment.

Redevelopment Right of Telephone Exchanges

We were informed by the management of PCCW Board that about 60 Telephone Exchange sites being primarily used by the Exchange Company were granted by the Government by way of private treaty. In the future, the PCCW Group may seek the Government’s approval for redeveloping the sites granted under private treaty to allow for other uses. The Property Group will have a right of first refusal to jointly re-develop all of the PCCW Group’s local Telephone Exchanges granted under private treaty if and when the PCCW Group is permitted by the Government to redevelop these local Telephone Exchanges for other use.

Negotiations for the redevelopment of the Telephone Exchanges granted under private treaty have not yet commenced, and there is no assurance that any such Redevelopment Right may be obtained and, if obtained, whether the terms of such Redevelopment Right are commercially acceptable to the Property Group.

Since the total consideration for the Transaction does not involve any payment by DFG for the Redevelopment Right, we were informed by the DFG Directors that they consider such right is beneficial to DFG as it would grant at nil consideration for the DFG Group an option to participate in any future redevelopment of the Telephone Exchange whenever the DFG Directors believe it is advantageous to do so. The DFG Directors have not evaluated the potential value of the Redevelopment Right and no information has been provided to us, therefore we are unable to determine whether there is any potential value that could be generated from the Redevelopment Right.

— 58 —

LETTER FROM GOLDBOND

Assuming no significant change in the prevailing property market conditions, we are of the view that the acquisition of PCP Beijing, PCCW Tower, other investment properties and related property and facilities management companies including the Cyberport Developer and its interest in the Cyberport Project by DFG and the grant of the Redevelopment Right to DFG is potentially beneficial to the DFG Group because it is an established and profitable property business with a combination of (i) premium-grade investment properties portfolio; (ii) on-going significant property development project; (iii) steady rental income from the investment properties of the Property Group; and (iv) the future development opportunities that may arise from the Redevelopment Right.

(c) Ongoing business arrangements, leases or licences

As stated in the Letter from the Board, after Completion, there will be various business arrangements, leases or licences between the Property Group and the PCCW Group. These arrangements were all entered into by the Property Group and the PCCW Group prior to Completion. CBRE has confirmed that the terms of the leases and licences arrangements are fair and reasonable and reflect prevailing market rates as at the commencement dates of the respective leases or licences. As these transactions have been concluded prior to Completion, no Shareholders’ approval is required. If these transactions were entered into after Completion, they would constitute connected transactions of DFG under the Listing Rules as PCCW will become a connected person of DFG and its associates. We are of the view that these transactions have provided a stable income source and if these transactions were terminated, the Property Group would lose rental income during the vacant period and incur additional costs and risks in securing new tenants to occupy such areas.

3. Future intention regarding the Enlarged DFG Group

As discussed in the Letter from the Board, the scope of business of the DFG Group will be expanded by virtue of the Transaction. PCCW’s intention is that the Enlarged DFG Group will focus on investment in prime property projects. The management of PCCW has informed us that PCCW has no intention to effect any major changes in relation to the business, including any redeployment of the fixed assets of the DFG Group or the existing employment of the staff or DFG Group after Completion.

After the Transaction, save for the obligations in the Cyberport Project which will remain the same following Completion, PCCW is not expected to directly engage in any property related businesses or compete with DFG. DFG will become a vehicle for PCCW to actively pursue property investment and development opportunities.

4. The Acquisition Agreement

(a) Consideration

As referred to in the Letter from the Board, the aggregate consideration for the sale and purchase of the Sale Shares and the Sale Assets amounts to HK$6,557 million, which will be satisfied as to HK$2,967 million by the issue and allotment of the Consideration Shares at an

— 59 —

LETTER FROM GOLDBOND

issue price of HK$1.80 per DFG Share (taking into account the effect of the proposed 10 for 1 share consolidation in the Capital Reorganisation) by DFG to PCCW (or as it may direct) and as to the remaining HK$3,590 million by the issue of the Convertible Notes by DFG to PCCW (or as it may direct) at Completion.

As part of the Property Group, PCCW will also transfer ownership of the Cyberport Developer to DFG along with the Cyberport Developer’s continuing role in the development of the Cyberport Project (though the obligations of the Cyberport Developer and PCCW in the Cyberport Project will remain the same following Completion). No part of the consideration for the Transaction was ascribed to the transfer from the PCCW Group to the DFG Group of the Cyberport Developer which was granted the development right of the Cyberport Project under an agreement signed between the Government, PCCW and the Cyberport Developer in May 2000, on the basis that the consideration for that part of the Transaction is to be represented by the Cyberport Developer’s obligation to repay the Cyberport Loan on a non-recourse basis. In addition, PCCW will grant the Redevelopment Right to DFG (through the Property Group), where the total consideration for the Transaction also does not involve any payment by DFG for the Redevelopment Right itself.

We are advised by the DFG Directors that the consideration was determined after arm’s length negotiations, taking into account the independent valuations of the underlying properties of the Property Group and Queen’s Road Exchange as at 31 December 2003 performed by CBRE of approximately HK$6,756.5 million. We have discussed the property valuations with CBRE to understand the valuation methods used.

In considering whether the consideration for the Transaction is fair and reasonable, we have considered the following factors:

(i) Basis of the consideration — Pro-forma combined net asset value of the Property Group and the Queen’s Road Exchange

As disclosed in the Letter from the Board, the perceived value of the Sale Shares and Sale Assets acquired under the Transaction can be analysed as the sum of (i) the pro-forma combined net asset value of the Property Group and the Queen’s Road Exchange as at 31 December 2003 of HK$2,166 million; (ii) the Loans of approximately HK$3,529 million to be assigned to DFG; (iii) the part of the consideration of the Queen’s Road Exchange to be satisfied by the issue of the principal amounts of HK$61 million in the Tranche B Note; (iv) the revaluation surplus of part of PCCW Tower and PCP Beijing of HK$305 million; and (v) the deferred tax liabilities of HK$506 million. The sum of the above items amounted to HK$6,567 million, which is HK$10 million larger than the consideration for the Transaction of HK$6,557 million.

We have researched acquisition transactions in Hong Kong since 2003 where investment properties or shareholding interests of company engaging in property development were acquired and we noted that considerations in all of the transactions were determined with reference to the underlying net asset value of the properties or the property

— 60 —

LETTER FROM GOLDBOND

development company acquired. As it is a market practice to determine consideration for transactions involving acquisition of properties or property companies based on net asset value, we consider it is fair and reasonable to consider the pro-forma combined net asset value of the Property Group and the Queen’s Road Exchange as the basis of the consideration for the Transaction.

Regarding the Loans of approximately HK$3,529 million to be assigned to DFG, as subsequent to the assignment, DFG will be entitled to all the repayments of these loans, therefore we consider it is reasonable to take into consideration these loans in rationalising the consideration for the Transaction.

For the HK$61 million which represented part of the consideration of the Queen’s Road Exchange to be satisfied by the issue of the principal amount of HK$61 million in the Tranche B Note, we have discussed with the management of PCCW and the DFG Directors and understand that the acquisition of the Queen’s Road Exchange will be satisfied as to HK$97 million by the issue of approximately 53.9 million new DFG Shares, being part of the Consideration Shares, and as to the remaining balance of HK$61 million by part of the Tranche B Note. As disclosed in Appendix III to the Circular, the pro-forma combined net asset value of the Property Group and the Queen’s Road Exchange as at 31 December 2003 prior to Completion includes the market value of approximately HK$158 million of the Queen’s Road Exchange and the principal amount of HK$61 million in the Tranche B Note which will be used to partly settle the acquisition of the Queen’s Road Exchange. As such, the market value of the Queen’s Road Exchange was reduced by the principal amount of HK$61 million in the Tranche B Note and only HK$97 million is included in the pro-forma combined net asset value of HK$2,166 million. Since we are assessing the perceived value of the Sale Shares and Sale Assets, we consider it is necessary to add the HK$61 million back to the pro-forma combined net asset value of the Property Group and the Queen’s Road Exchange as at 31 December 2003 of HK$2,166 million so that the total market value of the Queen’s Road Exchange, i.e. approximately HK$158 million, is taken into consideration.

For the revaluation surplus of HK$305 million, we have discussed with the management of PCCW and we were informed that certain part of PCCW Tower and PCP Beijing are occupied by the PCCW Group. According to the accounting principles generally accepted in Hong Kong, these properties are recorded as fixed assets of the Property Group at their respective net book values. As such, market values of these properties were not reflected in the pro-forma combined net asset value of the Property Group and the Queen’s Road Exchange as at 31 December 2003. However, should the Enlarged DFG Group decide to sell these properties, it would be able to enjoy the full market value of these properties, assuming current property market conditions prevail. Therefore, we are of the view that the revaluation surplus should be taken into account when rationalisation the consideration for the Transaction.

Regarding the deferred tax liabilities of HK$506 million, as stated in the Letter from the Board, substantially all the deferred tax liabilities are related to PCP Beijing and PCCW Tower. The deferred tax liabilities would be realised when the relevant properties are

— 61 —

LETTER FROM GOLDBOND

disposed of. We were informed by the DFG Directors that PCCW’s intention for the Enlarged DFG Group is for it to focus on investment in prime property projects. As PCP Beijing and PCCW Tower are to be held for investment purpose and are income generating, the likely timing of disposal of these properties and thus the realisation of the deferred tax liabilities is not expected. As such, we concur with the DFG Directors that the deferred tax liabilities of HK$506 million should be added back to the pro-forma combined net asset value of the Property Group and the Queen’s Road Exchange of HK$2,166 million when considering the perceived value of the Sale Shares.

The aggregate amount of the above items of HK$6,567 million represents the perceived value of the Sale Shares and the Sale Assets to be transferred to DFG. This amount exceeds the consideration of HK$6,557 million and is considered as favourable to DFG by the DFG Directors, which we concur.

Based on the above analysis, we consider the basis of the consideration for the Transaction is fair and reasonable.

(ii) Cyberport Project

No part of the total consideration for the Transaction was ascribed to the transfer from the PCCW Group to the DFG Group of the Cyberport Developer which was granted the development right of the Cyberport Project under an agreement signed between the Government, PCCW and the Cyberport Developer in May 2000, on the basis that the consideration for that part of the Transaction is to be represented by the Cyberport Developer’s obligation to repay the Cyberport Loan on a non-recourse basis. The funding arrangement of the Cyberport Project is discussed in detail under section 2 above.

(iii) Redevelopment Right

Pursuant to the Acquisition Agreement, PCCW will grant the Redevelopment Right to DFG (through the Property Group), where the total consideration for the Transaction does not involve any payment by DFG for the Redevelopment Right itself. We were informed by the management of PCCW that about 60 Telephone Exchange sites were granted by the Government by way of private treaty. The DFG Board has not evaluated the potential value of the Redevelopment Right and no information has been provided to us that can be used to analyse such value, therefore we are unable to determine whether there is any potential value that could be generated from the Redevelopment Right. Nonetheless, we are of the view that the Redevelopment Right presents the Enlarged DFG Group with future redevelopment potential.

(iv) Method of payment

Pursuant to the Acquisition Agreement, all of the consideration for the sale and purchase of the Sale Shares and the Sale Assets will be satisfied by the Consideration Shares and the Convertible Notes. The Transaction does not involve any cash payment and

— 62 —

LETTER FROM GOLDBOND

no financing arrangements are required to be in place. As a result of the Transaction, DFG is able to acquire substantial and high quality assets, with the potential to enhance the DFG Group’s corporate status and reputation and to promote its future growth. If the Transaction requires cash consideration, DFG would not be able to afford such an acquisition.

Although the unaudited pro-forma combined net asset value of the Property Group and the Queen’s Road Exchange is only HK$2,166 million while the consideration for the Transaction is HK$6,557 million, the DFG Directors consider the consideration for the Transaction is fair and reasonable as (i) taking into account of the revaluation surplus of HK$305 million, the deferred tax liabilities of HK$506 million, the Loans of approximately HK$3,529 million to be assigned to DFG after Completion and the part of the consideration of the Queen’s Road Exchange to be satisfied by the issue of the principal amount of HK$61 million in the Tranche B Note, the value of assets to be acquired by DFG worth HK$6,567 million, which exceeds the consideration for the Transaction of HK$6,557 million; (ii) the consideration does not involve any payment by DFG for the development right of the Cyberport Project and the Redevelopment Right, and (iii) no cash payment is required to be paid by DFG and yet through the Transaction, DFG is able to acquire substantial and high quality assets, which we concur. Furthermore, based on recent comparables transaction prices from December 2003 to March 2004 we obtained from CBRE, we have noticed an increase in value in the properties in Hong Kong since 31 December 2003. Therefore, we believe that the properties acquired under the Transaction as a whole would currently be worth more than the valuation of HK$6,756.5 million as at 31 December 2003 indicated. Based on the above reasons, we consider the consideration under the Acquisition Agreement as fair and reasonable.

(b) The issue price of the Consideration Shares (the “Issue Price”) and the conversion price of the Convertible Notes
(i) The Issue Price

The Issue Price of the Consideration Shares of HK$1.80 per new DFG Shares (taking into account the effect of the 10 for 1 share consolidation in the Capital Reorganisation) represents:

(a) a discount of approximately 62.5% to HK$4.80, being the adjusted closing price of the Existing DFG Shares, taking into account the effect of the 10 for 1 share consolidation in the Capital Reorganisation, on the Stock Exchange on 23 February 2004, being the last trading day before the suspension of trading of the Existing DFG Shares prior to the issue of the Announcement (the “Last Trading Date”);
(b) a discount of approximately 63.0% to HK$4.87, being the adjusted average closing price of the Existing DFG Shares, taking into account the effect of the 10 for 1 share consolidation in the Capital Reorganisation, on the Stock Exchange during the period of 10 trading days up to the Last Trading Date;

— 63 —

LETTER FROM GOLDBOND

(c) a discount of approximately 50.7% to HK$3.65, being the adjusted average closing price of the Existing DFG Shares, taking into account the effect of the 10 for 1 share consolidation in the Capital Reorganisation, on the Stock Exchange during the period of 30 trading days up to the Last Trading Date;
(d) a discount of approximately 62.5% to HK$4.80, being the adjusted closing price of the Existing DFG Shares, taking into account the effect of the 10 for 1 share consolidation in the Capital Reorganisation, on the Stock Exchange on the Latest Practicable Date;
(e) a premium of approximately 53.1% to the latest audited net tangible assets value as at 31 March 2003 of HK$1.59, being the adjusted value after taking into account the effect of the 10 for 1 share consolidation in the Capital Reorganisation, attributable to each DFG Share;
(f) a premium of approximately 215.8% over the unaudited pro-forma adjusted consolidated net tangible asset value as at 30 September 2003 of HK$0.57, being the adjusted value after taking into account the effect of the 10 for 1 share consolidation in the Capital Reorganisation, attributable to each DFG Shares;
(g) a premium of approximately 42.9% over the unaudited pro-forma net tangible asset value of the Enlarged DFG Group of HK$1.26 attributable to each DFG Share after accounting for the issuance of the Consideration Shares but before conversion of the Convertible Notes; and
(h) a premium of approximately 4.7% over the pro-forma net tangible asset value of the Enlarged DFG Group further adjusting for the revaluation surplus of HK$305 million and the deferred tax liabilities of HK$506 million of HK$1.72 attributable to each DFG Share after accounting for the issuance of the Consideration Shares but before conversion of the Convertible Notes.

As stated in the Letter from the Board, the Issue Price has been determined based on arm’s length negotiations between DFG and PCCW with reference to the underlying audited net asset value as at 31 March 2003 of HK$1.59 attributable to each DFG Share (after accounting for the effect of 10 for 1 share consolidation in the Capital Reorganisation).

(ii) The conversion price of the Convertible Notes

The initial conversion price of HK$2.25 and HK$3.60 per new DFG Share (taking into account the effect of the 10 for 1 share consolidation in the Capital Reorganisation) respectively represents:

(a) a discount of approximately 53.1% and 25.0% to HK$4.80, being the adjusted closing price of the Existing DFG Shares, taking into account the effect of the 10 for 1 share consolidation in the Capital Reorganisation, on the Stock Exchange on the Last Trading Date;

— 64 —

LETTER FROM GOLDBOND

(b) a discount of approximately 53.8% and 26.1% to HK$4.87, being the adjusted average closing price of the Existing DFG Shares, taking into account the effect of the 10 for 1 share consolidation in the Capital Reorganisation, on the Stock Exchange during the period of 10 trading days up to the Last Trading Date;
(c) a discount of approximately 38.4% and 1.4% to HK$3.65, being the adjusted average closing price of the Existing DFG Shares, taking into account the effect of the 10 for 1 share consolidation in the Capital Reorganisation, on the Stock Exchange during the period of 30 trading days up to the Last Trading Date;
(d) a discount of approximately 53.1% and 25.0% to HK$4.80, being the adjusted closing price of the Existing DFG Shares, taking into account the effect of the 10 for 1 share consolidation in the Capital Reorganisation, on the Stock Exchange on the Latest Practicable Date;
(e) a premium of approximately 41.5% and 126.4% over the latest audited net tangible assets value as at 31 March 2003 of HK$1.59, being the adjusted value after taking into account the effect of the 10 for 1 share consolidation in the Capital Reorganisation, attributable to each DFG Share;
(f) a premium of approximately 294.7% and 531.6% over the unaudited pro-forma adjusted consolidated net tangible asset value as at 30 September 2003 of HK$0.57, being the adjusted value after taking into account the effect of the 10 for 1 share consolidation in the Capital Reorganisation, attributable to each DFG Shares;
(g) a premium of approximately 78.6% and 185.7% over the unaudited pro-forma net tangible asset value of the Enlarged DFG Group of HK$1.26 attributable to each DFG Share after accounting for the issuance of the Consideration Shares but before conversion of the Convertible Notes; and
(h) a premium of approximately 30.8% and 109.3% over the pro-forma net tangible asset value of the Enlarged DFG Group further adjusting for the revaluation surplus of HK$305 million and the deferred tax liabilities of HK$506 million of HK$1.72 attributable to each DFG Share after accounting for the issuance of the Consideration Shares but before conversion of the Convertible Notes.

As stated in the Letter from the Board, the conversion price of the Convertible Notes has been determined based on arm’s length negotiations between DFG and PCCW with reference to the prevailing market prices of the DFG Shares and the underlying audited net asset value as at 31 March 2003 of HK$1.59 attributable to each DFG Share (after accounting for the effect of 10 for 1 share consolidation in the Capital Reorganisation).

— 65 —

LETTER FROM GOLDBOND

(iii) Share price performance and trading volume

In relation to the discounts represented by the Issue Price and the conversion price of the Convertible Notes to the historic prices of the Existing DFG Shares as referred to above, we have reviewed the share price performances and average daily trading volume of the Existing DFG Shares from 1 January 2003 to the Last Trading Date and up to and including the Latest Practicable Date (the “Comparison Period”).

	HKD	HKD
	1.1
	1.0
	0.9														Announcement			of the Transaction
	0.8
Closing price	0.4 0.5 0.6 0.7			Announcement of annual results												Conversion price of Tranche B Note Announcement of interim results
	0.3																			Conversion price of Tranche A Note
	0.2							Acquisition of 73% of the share capital of Top Power Holdings Limited, which												Issue price	of Consideration Shares
	0.1							owns 70% of the share capital of					Beijing
								Continental Gas Co. Ltd.
	0
		2-Jan-03	27-Jan-03	21-Feb-03 18-Mar-03 12-Apr-03 7-May-03 1-Jun-03	26-Jun-03		21-Jul-03		15-Aug-03	9-Sep-03		4-Oct-03	29-Oct-03			23-Nov-03	18-Dec-03		12-Jan-04	6-Feb-04 2-Mar-04	27-Mar-04
									Date
				Date							Closing				price		Highest price				Lowest	price
														(HK$)						(HK$)		(HK$)
				23 February 2004
				(Last Trading Date)											0.48					0.75		0.475
				8 March 2004
				_(Date of resumption _		_of _	trading
				after the Announcement)											1.03					1.90		0.95
				9 March 2004											0.90					1.26		0.80
				10 March 2004											0.71					0.93		0.71
				11 March 2004											0.67					0.75		0.63
				12 March 2004											0.67					0.69		0.61
				15 March 2004											0.64					0.71		0.64
				16 March 2004											0.63					0.65		0.61
				17 March 2004											0.66					0.68		0.64
				18 March 2004											0.61					0.67		0.61
				19 March 2004											0.61					0.63		0.59
				22 March 2004											0.60					0.60		0.58
				23 March 2004											0.60					0.61		0.59
				24 March 2004											0.63					0.64		0.60
				25 March 2004											0.60					0.63		0.60
				26 March 2004											0.57					0.62		0.56
				29 March 2004											0.58					0.60		0.56
				30 March 2004											0.54					0.59		0.53
				31 March 2004
				_(Latest Practicable _	Date)										0.48					0.53		0.475

— 66 —

LETTER FROM GOLDBOND

Apart from the share price performance, we have also reviewed the average daily trading volume of the Existing DFG Shares during the Comparison Period. The average daily trading volume and average daily trading volume as a percentage to the Existing DFG Shares at the end of the corresponding month were as follows:

		% to the total
	Average daily	issued share
Month	trading volume	capital of DFG
	(’000 shares)
January 2003	488	0.001
February 2003	173	0.001
March 2003	147	0.013
April 2003	36	0.003
May 2003	71	0.006
June 2003	119	0.010
July 2003	112	0.010
August 2003	28	0.002
September 2003	154	0.013
October 2003	70	0.006
November 2003	25	0.002
December 2003	47	0.004
January 2004	53	0.005
2 February 2004 to 23 February 2004	984	0.085
8 March 2004 to 31 March 2004, being the
Latest Practicable Date	40,446	3.483

The Issue Price and the conversion price for the Convertible Notes have been determined based on arm’s length negotiations between DFG and PCCW with reference to prevailing market prices of the Existing DFG Shares and the underlying audited net asset value of DFG as at 31 March 2003.

We note from the above share price performance chart and table and the trading volume table of the Existing DFG Shares that during the period from 1 January 2003 to the Last Trading Date, the Existing DFG Shares traded between a range of HK$0.16 to HK$0.75, with an average closing price of HK$0.34. During the same time frame, the Existing DFG Shares were consistently thinly traded with monthly average daily trading volume of less than 1% of the issued share capital of DFG at the end of the corresponding month. During the three months period prior and up to 31 January 2004, the Existing DFG Shares were thinly traded at the price range of HK$0.25 and HK$0.33 and the average closing price during such period was HK$0.29. We noted a neutral response from the share price to the improved 2003/04 interim performance which was announced on 18 December 2003.

During the period from 2 February 2004 to the Last Trading Date, the share price of the Existing DFG Shares has increased by about 100% up to a highest closing price of HK$0.60 and closed at HK$0.48 on the Last Trading Day. Trading volume of the Existing

— 67 —

LETTER FROM GOLDBOND

DFG Shares during such period also increased significantly. The DFG Directors advised us that they were not aware of any reason for the increase in the trading price and trading volume. We are of the view that such increase in share price had not been supported by the business fundamentals of the DFG Group.

We have also compared the Issue Price with the adjusted average closing price of the DFG Shares (after taking into account the effect of the 10 for 1 share consolidation in the Capital Reorganisation) during the period of 30, 60, 90 and 120 trading days up to and including the Last Trading Date, and the discounts to these adjusted average closing prices were about 50.7%, 44.7%, 44.7% and 46.0% respectively. The DFG Share price rose up to HK$1.90 and closed at HK$1.03 on 8 March 2004, the date of resumption of trading after the Announcement (“Resumption Trading Date”). During the period from the Resumption Trading Date to the Latest Practicable Date, the Existing DFG Shares traded at a range of HK$0.475 to HK$1.90, with an average closing price of HK$0.65. Trading of the Existing DFG Shares was more active during this period with an average daily trading volume of about 40.4 million shares. The Existing DFG Share price closed at HK$0.48 on the Latest Practicable Date. The above suggests that the Transaction has been well received by the market in general. Due to the volatility of the share price of the Existing DFG Shares in the period shortly before the Last Trading Date, we are of the view that it is not appropriate to place much weight on a comparison of the Issue Price to the prevailing short-term market price of the Existing DFG Shares.

We have researched acquisition transactions in Hong Kong since 2002 where the consideration shares issued represented a very substantial portion of the issued shares of the relevant companies at the time of the relevant transactions and we noted that the issue price ranged from a discount of about 94% to a premium of 25%. Accordingly, the discount of the issue price of the Consideration Shares as compared to the closing price of the Last Trading Date falls within such range. However, as the range is so wide, we are of the view that it is not representative. Furthermore, the underlying business fundamental and trading pattern of the shares of the companies involved, and the fundamental of the assets acquired, are different from DFG and the Property Group, we are of the opinion that although these data could be used as a reference, it could not be used as direct comparables when considering the terms of the Transaction. As DFG has been loss making business in recent years and the DFG Shares were thinly traded, we consider that it is reasonable to use its net tangible asset value to assess its fair market value. As stated above, the issue price of the Consideration Shares represents a significant premium of about 215.8% to the unaudited net tangible assets of DFG as at 30 September 2003.

The net tangible asset value per DFG Share as at 30 September 2003 was approximately HK$0.57 (after taking into account the effect of the 10 for 1 share consolidation in the Capital Reorganisation). The DFG Group incurred continuous losses in recent years which has resulted in the depletion of its net tangible asset value from approximately HK$184.6 million as at 31 March 2003 to approximately HK$65.6 million as at 30 September 2003. After the Transaction, the pro-forma net tangible asset value of the Enlarged DFG Group will increase to HK$1.26 per DFG Share and the pro-forma net tangible asset value of the Enlarged DFG Group further adjusting for the revaluation

— 68 —

LETTER FROM GOLDBOND

surplus of HK$305 million and the deferred tax liabilities of HK$506 million will increase to HK$1.72 per DFG Share. Given (i) the DFG Group has been loss making in recent years; (ii) the keen competition facing the building material market in Hong Kong and the United States; (iii) the low liquidity of the Existing DFG Shares; and (iv) the volatility of the DFG Shares during the period leading up to the Last Trading Date, we consider that the market price may not reflect the fair value of Existing DFG Shares prior to the entering into the Transaction and there is no fundamental benchmark to substantiate the current price level of the Existing DFG Shares. Due to the above reasons, the DFG Directors consider in determining the consideration for the Transaction, it is more appropriate to make reference to the underlying asset value instead of market price of the DFG Share, which we concur. Comparing to the underlying net tangible asset value attributable to each DFG Shares, being approximately HK$1.59 (after taking into account the effect of the 10 for 1 share consolidation in the Capital Reorganisation) as at 31 March 2003, the Issue Price is at a premium of 13.2%. The premium is about 215.8% if we compare the Issue Price to the unaudited pro-forma adjusted consolidated net tangible asset value per DFG Share of HK$0.57 as at 30 September 2003.

As discussed above, the consideration for the Transaction does not involve any payment by DFG for the Redevelopment Right and the Cyberport Project, and our observation that the properties to be acquired under the Transaction would currently be of a higher value than the valuation as at 31 December 2003 indicated. In addition, the aggregate consideration of the Transaction represents approximately 5.5 times of the market capitalisation for DFG as at 8 March 2004, being the Resumption Trading Date. Accordingly, if DFG were to finance the Transaction by way of a placing, the huge size of the placing, if at all feasible, would demand a very steep discount to the average closing price of DFG.

Based on (i) our analysis of the basis of the consideration for the Transaction; (ii) our analysis of the recent price performance and trading volume of the Existing DFG Shares; (iii) our research and comparison performed on the discount or premium on the issue price of consideration shares in the acquisition transactions in Hong Kong since 2002; (iv)our comparison of the Issue Price to the net tangible asset value per DFG Share; (v) our observation in the recent property market conditions; and (vi) the fact that the consideration does not involve any payment by DFG for the Redevelopment Right and the Cyberport Project, we concur, with the view of the DFG Board that the Issue Price, in the context of the Transaction as a whole, is fair and reasonable.

Based on the same reasons stated above, and taking into consideration the flexibility provided by the Convertible Notes and the fact that the Convertible Notes will not strain the DFG Group’s liquidity, the DFG Board considers that the conversion price of the Convertible Notes, in the context of the Transaction as a whole, is fair and reasonable which we concur.

— 69 —

LETTER FROM GOLDBOND

5. Pro-forma effects on the financial position of the DFG Group

(a) Earnings

The DFG Group incurred net losses of approximately HK$113.2 million for the year ended 31 March 2003 and HK$12.3 million for the six months ended 30 September 2003. For the two years ended 31 December 2003, the Property Group recorded a net profit of approximately HK$95 million and HK$3.0 million respectively. Consequently, the Transaction involves the acquisition of a profit-making business. As stated in the Letter from the Board, based on the unaudited net book value of the net assets of DFG as at 30 September 2003, upon Completion, a goodwill of approximately HK$36 million will arise and such goodwill will be amortised on a straight line basis, thus the profit and loss accounts of the Enlarged DFG Group upon consolidation will be affected by the amortisation of goodwill. Also, the results of the Enlarged DFG Group will be affected by interest payments on the Tranche B Note of approximately HK$24.2 million annually, assuming no conversion before maturity. Lastly, the results of the Enlarged DFG Group will also be affected by the amortisation of the redemption premium of HK$48.4 million of the Tranche B Note which will be debited to the profit and loss account according to current accounting principles generally accepted in Hong Kong.

Assuming there is no deterioration in the occupancy rate and rental charged from the underlying properties of the Property Group, given the steady stream of rental income provided by the underlying properties of the Property Group, the property market potential in Hong Kong and the PRC, the redevelopment potentials of the Telephone Exchanges and the significant ongoing property development opportunity provided by the Cyberport Project, the DFG Directors consider the Transaction represents a reasonable opportunity for the DFG Group to enlarge its business scope and broaden its revenue stream.

(b) Net tangible asset value

The unaudited pro-forma adjusted consolidated net tangible asset value of the DFG Group was approximately HK$65.6 million as at 30 September 2003, which translates into approximately HK$0.57 per DFG Share, after taking into account for the 10 for 1 share consolidation in the Capital Reorganisation. As set out in Appendix III to the Circular, the unaudited pro-forma net tangible assets of the Enlarged DFG Group amounts to approximately HK$2,232 million. Accordingly, after the Transaction but before conversion of the Convertible Notes, the pro-forma net tangible asset value of the Enlarged DFG Group per DFG Share amounts to approximately HK$1.26.

(c) Gearing

As a result of the Transaction, there will be a substantial increase in the assets of the Enlarged DFG Group as the underlying properties of the Property Group and the Queen’s Road Exchange will be added to the Enlarged DFG Group at their respective market value as at 31 December 2003. However, there will also be a substantial increase in liabilities with the addition of the Cyberport Loan of approximately HK$4,503 million as at 31 January 2004 (amount subject to adjustment at Completion). The Cyberport Loan is an unsecured non-interest bearing and non-recourse loan, which will continue to be owed by the Cyberport Developer to the PCCW

— 70 —

LETTER FROM GOLDBOND

Group. Pursuant to the Acquisition Agreement, DFG has undertaken to procure that the Cyberport Developer repays the Cyberport Loan in priority to all other debts of the Cyberport Developer as and when the Cyberport Developer has the funds to repay all or part of the Cyberport Loan. The total debt to tangible assets ratio, debt to equity ratio and gearing ratio of the DFG Group as at 31 March 2003 and 30 September 2003 and the pro-forma total debt to total tangible assets ratio, debt to equity ratio and gearing ratio of the Enlarged DFG Group are as follow:

	DFG	Group
	As at	As at	Pro-forma of
	31 March	30 September	the Enlarged
	2003	2003	DFG Group
Debt to tangible assets ratio (Note 1)	0.35	0.44	0.51
Debt to equity ratio (Note 1)	1.22	1.54	3.53
Gearing ratio (Notes 1, 2)	0.35	0.38	0.50

Notes:

Debt used in computing the debt to tangible assets ratio, debt to equity ratio and gearing ratio for the DFG Group as at 31 March 2003 and 30 September 2003 include amount due to related companies, bank borrowings and other borrowings. Debt used in computing the three ratios for the Enlarged DFG Group include the Cyberport Loan, the Convertible Note, short term borrowings, amount due to related companies and other long-term liabilities.
Gearing ratio is computed by dividing debt (as defined in Note 1 above) by total assets.

Prior to the Transaction, the DFG Group only had minimal debts. Total debt (including amount due to related companies, bank borrowings and other borrowings) of the DFG Group amounted to approximately HK$224.4 million and HK$265.6 million as at 31 March 2003 and 30 September 2003 respectively. As a result of the Transaction, total debt of the Enlarged DFG Group will increase significantly due to the Cyberport Loan of approximately HK$4,503 million as at 31 January 2004 and the Convertible Notes of HK$3,590 million to be issued to PCCW (or as it may direct) as part of the consideration for the Transaction. Therefore, even though the asset value of the Enlarged DFG Group will increase due to the addition of the underlying properties of the Property Group and the Queen’s Road Exchange, the total debt to tangible asset ratio, debt to equity ratio and gearing ratio will be worsen as a result of the Transaction. Nevertheless, it should be noted that the outstanding principal amount of the Convertible Notes (unless previously converted) will not be repaid by DFG until its maturity on the seventh (in the case of the Tranche A Note) and the tenth (in the case of the Tranche B Note) anniversary of the date of issue of the Convertible Notes, which means the Enlarged DFG Group should not have significant immediate repayment requirements. Also, the underlying properties of the Property Group and Queen’s Road Exchange are not geared, accordingly, should the Enlarged DFG Group need additional funding to repay its existing debts, these properties can be used as securities to raise new debts. As the Cyberport Loan is non-recourse to DFG, we consider that the financial status of the Enlarged DFG Group is healthier than the ratios suggest.

— 71 —

LETTER FROM GOLDBOND

(d) Working capital and liquidity

The current ratio of the DFG Group was 1.14 and 0.89 as at 31 March 2003 and 30 September 2003 respectively. The pro-forma current ratio of the Enlarged DFG Group is 1.66. According to the Acquisition Agreement, since the consideration will be satisfied by the issue of the Consideration Shares and the Convertible Notes, apart from the interest payable to PCCW (or as it may direct) on the Tranche B Note at a rate of 1% per annum (which will be payable once every six months in arrears on the principal amount of the Tranche B Note outstanding from time to time), DFG is not required to pay any cash at Completion. As stated in Appendix II to the Circular, the DFG Board is of the opinion that after taking into account the DFG Group’s present internal resources and banking and other borrowing facilities, the DFG Group has sufficient working capital for its present requirements. Likewise, the PCCW Board is of the opinion that after taking into account the Property Group’s internal resources and available banking facilities, the Property Group has sufficient working capital for its requirements. We were informed by the DFG Board that it is not aware of any matter or fact which will render the Enlarged DFG Group not having sufficient working capital for its requirements after Completion.

The management of PCCW has further informed us that PCCW and the Cyberport Developer are obligated to fund the entire cost of the Cyberport Project and DFG is not currently expected to make any capital contribution to the development of the Cyberport Project assuming the current property market does not deteriorate. Also, as mentioned above, since the underlying properties of the Property Group and Queen’s Road Exchange are not geared, accordingly, should the Enlarged DFG Group need additional funding to meet its working capital requirements, these properties can be used as securities to raise new debts.

6. Dilution and potential dilution of existing Shareholders

The following charts show the respective shareholding structures of Property Holdco and DFG immediately prior to Completion:

==> picture [380 x 185] intentionally omitted <==

— 72 —

LETTER FROM GOLDBOND

The following chart shows the shareholding structures of Property Holdco and DFG immediately following Completion, but before exercise of any conversion rights under the Convertible Notes:

==> picture [238 x 227] intentionally omitted <==

The following chart shows the pro-forma shareholding structures of Property Holdco and DFG immediately following Completion, as if the Convertible Notes are fully converted at their initial conversion prices:

==> picture [238 x 227] intentionally omitted <==

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

Dr. Chan
33.58%
ITC
55.06% 24.55%
Paul Y. Hanny
29.36% 29.36%
PCCW CSH Dr. Chan Public
96.07% 1.69% 0.01% 2.23%
DFG
100%
Property Sale
Holdco Assets
----- End of picture text -----

— 73 —

LETTER FROM GOLDBOND

						After the issue of
				After the issue of		Consideration Shares
				Consideration Shares upon		and full conversion of
				Completion (accounting		the Convertible Notes
				for the effect	of	(accounting for the effect
	As at the Latest			the proposed 10	for 1	of the proposed 10 for 1
	Practicable	Date		share consolidation)		share consolidation)
			% of		% of	% of
		existing		enlarged		enlarged
		issued			issued	issued
	No. of Existing		share	No. of DFG	share	No. of DFG share
Holders of shares	DFG Shares	capital		Shares	capital	Shares capital
PCCW and its Concert
Parties (Note (vi))	15		—	1,648,333,335	93.42	2,840,555,557 96.07
CSH	500,000,000		43.06	50,000,000	2.83	50,000,000 1.69
Dr. Chan	2,520,900		0.22	252,090	0.01	252,090 0.01
Public	658,744,491		56.72	65,874,449	3.74	65,874,449 2.23
Total issued shares	1,161,265,406	100.00		1,764,459,874	100.00	2,956,682,096 100.00

Notes:

(i) The percentage figures shown in all of the above charts are approximate percentages rounded to 2 decimal places.
(ii) All of the above charts and table assume that there are no other changes in DFG’s issued share capital after the Latest Practicable Date.
(iii) CSH’s holding of DFG Shares immediately after Completion will be regarded as being held in public hands under the Listing Rules, as it would no longer be a substantial shareholder of DFG.
(iv) Dr. Chan holds 2,520,900 Existing DFG Shares (equivalent to 252,090 DFG Shares after the Capital Reorganisation). Besides, Dr. Chan is the controlling shareholder of ITC Corporation Limited (“ITC”), which is the holding company of Paul Y. - ITC Construction Holdings Limited (“Paul Y”). Hanny Holdings Limited (“Hanny”) is an associated company of ITC but is not controlled by ITC for the purposes of the Listing Rules and the Takeovers Code. Paul Y. and Hanny each has an approximately 29.36% equity interest in CSH. Therefore, Dr. Chan is deemed to be interested in approximately 29.36% of the issued share capital of CSH as at the Latest Practicable Date.
(v) Save as stated in (iv) above and (vi) below, none of the directors, chief executive or substantial shareholders of DFG or PCCW, nor any of the respective subsidiaries of DFG or PCCW, nor any of their respective associates or PCCW’s Concert Parties, had any interest in the securities of DFG.
(vi) Save for Mr. Sin Kit, Adams (“Mr. Sin”), a director of certain subsidiaries of PCCW (who is presumed to be acting in concert with PCCW under the Takeovers Code), who held 15 Existing DFG Shares which were acquired about ten years ago, as at the Latest Practicable Date, none of PCCW, its directors nor any of PCCW’s Concert Parties held any Existing DFG Shares (so far as PCCW is aware). The PCCW Board confirms that the extremely small shareholding of this presumed concert party was only identified after the release of the Announcement and therefore such information was not disclosed therein. As PCCW has an obligation to maintain confidentiality before release of the public announcement and Mr. Sin is only a director of certain subsidiaries of PCCW, he was not aware of and had no knowledge of the Transaction prior to the publication of the Announcement.

— 74 —

LETTER FROM GOLDBOND

The shareholding in DFG of the Shareholders will be substantially diluted from about 56.72% to about 3.74% before exercise of any conversion rights under the Convertible Notes. However, the Shareholders have in exchange holding in a much improved company with strong controlling shareholder support for future development with no negative impact on the net tangible asset value per share. The unaudited pro-forma adjusted consolidated net tangible asset value per DFG Share increases from HK$0.57 as at 30 September 2003 to HK$1.26 after Completion. We regard that, so far as the DFG Shareholders are concerned, it would be in their interests for the DFG Group to develop a more favourable business with better growth potential and prospects. Diversification through the Transaction provides a potentially highly attractive business opportunity for DFG and its Shareholders which is unlikely to be achieved from the present resources of DFG. As the Transaction would also provide an opportunity for the DFG Group to enlarge its business scope and increase the sources of revenue, we consider the business potential and prospects of the Enlarged DFG Group to be more viable than the DFG Group.

The Shareholders should also note, at Completion, PCCW will hold an about 93.4% interest in DFG. It is the intention of PCCW to maintain the listing of the DFG Shares on the Stock Exchange after Completion. PCCW and DFG has each undertaken to the Stock Exchange to use their best endeavours to take appropriate steps to ensure that, as soon as possible following issuance of the Consideration Shares upon Completion, the public float of DFG will not be less than 25% after Completion. PCCW has also undertaken to the Stock Exchange not to exercise the conversion rights under the Convertible Notes to the extent that such conversion would result in insufficient public float of DFG.

In assessing the fairness and reasonableness of the Transaction to the Independent Shareholders and to the Shareholders generally, an evaluation is also necessary of the benefits that the new controlling shareholder, i.e. PCCW, can bring to DFG. PCCW is one of Hong Kong’s largest and most reputable business groups and we believe that its involvement in DFG will have a beneficial impact on the value of investment in DFG of the existing shareholders. This has in fact been the consequence as, since the Announcement, the Existing DFG Shares have traded in a range substantially above the closing price on the Last Trading Date and the average closing price of the Existing DFG Shares during the period from 1 January 2004 to the Last Trading Date.

It is currently intended that steps will be taken with a view to increasing the public float, including effecting a possible placing of DFG Shares by DFG and/or PCCW. Arrangements relating to the possible placing by DFG and/or PCCW may be entered into at any time from the Latest Practicable Date to Completion, or thereafter. Should DFG decides to place new Shares to investors by itself only to maintain the minimum public float of 25%, DFG will need to issue approximately 433 million new Shares which represent about 24.6% of its issued share capital or 3.73 times of the public float after Completion but before conversion of the Convertible Notes, as a result, Shareholders’ interest will be further diluted from 3.74% to 3.0%. Therefore, the placement may impose a short-term downward pressure on the price of the DFG Shares. Nevertheless, we are of the view that the potential commercial benefits provided by the Transaction can outweigh the shareholding dilution effect. In addition, if the new DFG Shares are placed at its current price range or at a price that is higher than the net asset value per share before the Transaction, there will be net asset value enhancement. Therefore, even if there is dilution in the earnings per share, there will be an improvement in terms of net asset value per share to existing Shareholders as compared to pre-Transaction.

— 75 —

LETTER FROM GOLDBOND

Due to the above reasons, we consider that the Transaction is fair and reasonable and the shareholding dilution effect arising thereof to be acceptable so far as DFG and the independent Shareholders are concerned.

Should the Shareholders become skeptical of the expansion into the property business, given the share price performance and the relatively active trading activities of the Existing DFG Shares since the Resumption Trading Date, there were ample opportunities for the Shareholders to realise their Existing DFG Shares for cash at a price higher than the Issue Price of HK$1.80 (after adjusting for the effect of the 10 for 1 share consolidation in the Capital Reorganisation) in the market. In fact, we noted that an daily average of 40.4 million Existing DFG Shares, representing 6.1% of the Existing DFG Shares in the hands of the public, were traded on the Stock Exchange during the period from the Resumption Trading Date to the Latest Practicable Date.

7. Whitewash Waivers

Upon Completion, after the issue of the Consideration Shares and before the exercise of any conversion rights under the Convertible Notes, PCCW and its Concert Parties will be beneficially interested in an aggregate of approximately 93.4% of the voting rights of DFG assuming that there have been no other changes in the shareholdings in DFG since the Latest Practicable Date. In such circumstances, pursuant to Rule 26 of the Takeovers Code, PCCW would be required to make a mandatory general offer for all issued Shares not held by or agreed to be acquired by the PCCW Group and its Concert Parties on Completion, unless the Share Whitewash Waiver is granted.

In addition, upon the issue and allotment of DFG Shares to the PCCW Group pursuant to a partial or full exercise of the conversion rights under the Convertible Notes, the shareholding of the PCCW Group in DFG may increase by more than 2% from its lowest collective percentage shareholding in the then preceding 12-month period. In such event, and if such lowest collective percentage shareholding is at or above 30% but at or below 50%, under the Takeovers Code, PCCW will have an obligation to make a mandatory general offer to acquire all the DFG Shares other than those already owned or agreed to be acquired by the PCCW Group and its Concert Parties, unless the Convertible Note Whitewash Waiver is obtained. As the Convertible Notes have a conversion term of up to 10 years, it is uncertain whether the PCCW Group’s shareholding in DFG may drop below any particular level at any particular time. Thus, as stated in the circular of PCCW dated 26 March 2004, the Convertible Note Whitewash Waiver was contemplated in order to protect PCCW’s conversion rights under the Convertible Notes. As stated in the Letter from the Board and the circular of PCCW dated 26 March 2004 regarding this Transaction, as the Executive has indicated that it will not consider granting the Convertible Note Whitewash Waiver without, amongst others, sufficient information on the shareholding structure of DFG prior to and after such conversion, PCCW will waive the Convertible Note Whitewash Waiver as a condition precedent to Completion before the SGM.

It is one of the conditions precedent to Completion that the Share Whitewash Waiver be obtained. An application has been made by PCCW to the Executive for the Share Whitewash Waiver under Note 1 of the Notes on dispensation from Rule 26 of the Takeovers Code. The Executive has indicated its agreement to the granting of the Share Whitewash Waiver, subject to the independent vote (within the

— 76 —

LETTER FROM GOLDBOND

meaning of Note 1 of the Notes on dispensation from Rule 26 of the Takeovers Code or as may be required by the Executive) of the independent Shareholders by way of poll, to waive any obligation of PCCW to make a general offer which might result from the issue of the Consideration Shares to PCCW (or as it may direct).

As stated in the Circular, all Shareholders are entitled to vote on the Share Whitewash Waiver, except that any Shareholders who are PCCW’s Concert Parties will not be allowed to vote on the Share Whitewash Waiver. Further, any Shareholders who are otherwise involved in or interested in the Transaction, other than as a Shareholder, and parties acting or presumed to be acting in concert with them, will not be allowed to vote on the Share Whitewash Waiver. As Dr. Chan was involved in the negotiations regarding the Transaction, both Dr. Chan and CSH (presumed to be acting in concert with Dr. Chan) and their respective Concert Parties will not vote on the Share Whitewash Waiver.

If the Share Whitewash Waiver is not available for any reason, the Transaction will not become unconditional and will not proceed (unless that condition is waived by PCCW). In the circumstances, a mandatory offer will not be made by PCCW (unless that condition is waived by PCCW).

Immediately after Completion, the percentage shareholding of PCCW in DFG will be above 50%, assuming no other changes in the shareholdings in DFG since the Latest Practicable Date and no further transaction relating to DFG Shares committed before the date of the SGM which would have the effect of reducing such shareholding to 50% or below. On such basis, the PCCW Group may further increase its shareholding in DFG without incurring any obligation under Rule 26 of the Takeovers Code to make a general offer unless such collective percentage shareholding subsequently falls to 50% or below.

Between 8 March 2004 and the Latest Practicable Date, the share price of the Existing DFG Shares has traded in the range of HK$0.475 to HK$1.90, without taking into account the effect of the 10 for 1 share consolidation in the Capital Reorganisation. These prices were between about 163.9% and 955.6% higher than the price at which PCCW would be required to extend a mandatory offer if the Share Whitewash Waiver were not to be approved. Since the rise in the price of the Existing DFG Shares commencing from 8 March 2004 has been, in our opinion, due almost entirely to the expectation of investors of the benefits which will follow the Completion, failure by the independent Shareholders to approve the Share Whitewash Waiver will in all likelihood result in an immediate decline in the price of the Existing DFG Shares to a level closer to that prevailed during the period before the Announcement.

8. Risk factors

As referred to in the Letter from the Board, upon Completion, the majority of DFG’s assets and business will be dominated by property development and investment. The Transaction will take DFG into a new sphere of operations, namely the property development sector, in which the present DFG Board has no direct experience. The proposed new DFG Directors to be nominated by PCCW would, however, have expertise in property development and investment. Nevertheless, the property development business involves various risks including the risks that (i) government approvals may take more time and resources to obtain than expected; (ii) construction may not be completed on

— 77 —

LETTER FROM GOLDBOND

schedule or within budget; and (iii) properties may not achieve anticipated sales, rent or occupancy levels. No assurance can be given that such events will not occur which can adversely affect the business and results of the Property Group. Construction project such as the Cyberport Project typically require substantial capital expenditure during construction. In many cases, it may take many months, and sometimes years, before the projects can be pre-sold, pre-leased or completed to generate positive cash flow. The time taken and costs involved in completing the construction projects can be hindered by many factors like shortages of materials, equipment or skilled labour, poor weather conditions, natural disasters, disputes with labours or subcontractors, industrial accidents and changes in government policies and regulations. Any of these could give rise to delays in the completion of a project and result in cost overruns. Delays in the process of obtaining requisite governmental licenses, permits or approvals can also increase the cost, or delay or prevent the pre-sale or completion of a project. Construction delays can result in the loss of income. The failure to complete construction of a project to its planned specifications or on schedule may result in liabilities and / or less desirable returns. Apart from the above risks, the profitability and value of the investment properties of the Property Group are influenced by other factors beyond management controls such as international, regional and local economic climate, real estate conditions, perceptions by businessmen, retailers or shoppers as to the convenience and attractiveness of the development projects, the proximity and quality of competing projects and changes in market rates for rentals and sales of comparable projects. In addition, property investment projects are also affected by fluctuations in interest rates and exchange rates, the availability of financing, changes in governmental regulations, changes in tax laws or rates, and potential environmental or other legal liabilities.

Specifically regarding the Redevelopment Right of the Telephone Exchanges, Shareholders should note that negotiations for the redevelopment of the Telephone Exchanges have not yet commenced, and there is no assurance that any such Redevelopment Right may be obtained and the Government will permit the PCCW Group to redevelop the local Telephone Exchanges and, even if obtained, whether the terms of such Redevelopment Right are commercially acceptable to the Property Group. Also, even though the Property Group will have a right of first refusal to jointly re-develop all of the PCCW Group’s local Telephone Exchanges, it is uncertain whether DFG will (through the subsidiary of Property Holdco) exercise the right to participate. If the Redevelopment Right is not exercised, such decision has to be approved by the independent non-executive directors of DFG and an announcement would be made by DFG if and when appropriate. In that event, the PCCW Group may consider proceeding with the redevelopment of the relevant site itself or together with other parties.

For the Cyberport Project, pursuant to the project agreement dated 17 May 2000, PCCW and the Cyberport Developer have agreed to design, develop and construct the Cyberport Project for a maximum fixed cost of approximately HK$15.8 billion, subject to certain adjustments, in accordance with an agreed timetable. PCCW’s role under the project agreement is to guarantee due performance by the Cyberport Developer of its obligations under the agreement. The maximum fixed cost was based on a cost assessment conducted by professional quantity surveyors. PCCW and the Cyberport Developer are obligated to fund the entire cost of the Cyberport Project, as well as other project expenses, to the extent that these costs and expenses are not funded by the sale or pre-sale proceeds from units in the Residential Portion or other specified project income. PCCW and the Cyberport Developer are also obligated to fund certain other expenses and any cost overruns, which include any costs above the maximum fixed cost. At this stage, it is impossible to project any cost overruns and

— 78 —

LETTER FROM GOLDBOND

the extent of additional costs that may be required to finish the entire Cyberport Project. In addition, under the project agreement, proceeds from the sale of the Residential Portion units and other agreed project income will be used to pay: (i) construction costs of the Cyberport Portion first, and then construction costs of the Residential Portion; and (ii) certain other agreed project expenses and other items, all in priorities specified in the project agreement. After the payment of these items and setting aside agreed reserves, and after completion of the Cyberport Portion, the surplus of the proceeds arising from the sale of the units in the Residential Portion will be shared between the Government and the Cyberport Developer based on the ratio of their respective contributions to the Cyberport project.

As regarding the potential dilution in shareholding in DFG, it should be noted that both PCCW and DFG have each undertaken to the Stock Exchange to use their best endeavours to take appropriate steps to ensure that, as soon as possible following issuance of the Consideration Shares upon Completion, the public float of DFG will not be less than 25% after Completion. In the event that PCCW does not sell its Consideration Shares and only DFG issues new Shares to maintain the minimum public float, DFG will need to issue approximately 433 million new Shares which represent about 24.6% of its issued share capital or 3.73 times of the public float after Completion but before conversion of the Convertible Notes, as a result, Shareholders’ interest will be further diluted from 3.74% to 3.0%. The size of the placement solely by PCCW or solely by DFG or a combination by both of them to maintain public float will be so significant that it may impose a short-term downward pressure on the price of the DFG Shares.

RECOMMENDATION

Having considered all the principal factors as set out in this letter, in particular:

the current scope of business of the DFG Group, its recent financial position and performance and the recent building material market condition;
the opportunity provided by the Transaction for DFG to acquire a well established and profitable property business which will enhance its asset base and market capitalisation and enhance its position for future growth and expansion;
the potential benefits that may be provided by the Redevelopment Right, which PCCW will grant to DFG (through the Property Group) at nil consideration;
the fairness and reasonableness of the Issue Price and the aggregate consideration for the Transaction;
the steady rental income flow from the underlying properties of the Property Group; the enhancement of net tangible asset value per DFG Share and the acceptable level of increase in gearing of the Enlarged DFG Group; and
the acceptable dilution of shareholding interest given the potential commercial benefits provided by the Transaction;

— 79 —

LETTER FROM GOLDBOND

we consider the Transaction is in the interests of DFG and the independent Shareholders and that the terms are fair and reasonable so far as DFG and the independent Shareholders are concerned. Further, given the recent price performance of the Existing DFG Shares, we believe the failure by independent Shareholder to approve the Share Whitewash Waiver may result in an immediate decline in the price of the Existing DFG Shares to a level closer to that prevailed during the period before the Announcement. Therefore, independent Shareholders should support the approval of the Share Whitewash Waiver, which is a condition to Completion. Accordingly, we recommend the Independent Board Committee to recommend the independent Shareholders to vote in favour of the resolutions to implement the Transaction and to approve the Share Whitewash Waiver.

Yours faithfully, For and on behalf of Goldbond Capital (Asia) Limited Stacey Wong Managing Director

— 80 —

APPENDIX I ACCOUNTANTS’ REPORT OF THE PROPERTY GROUP

The following is the text of a report, prepared for the purpose of inclusion in this circular, from the auditors and reporting accountants of the Property Group, PricewaterhouseCoopers, Certified Public Accountants, Hong Kong.

PricewaterhouseCoopers 22nd Floor, Prince's Building Central, Hong Kong Telephone (852) 2289 8888 Facsimile (852) 2810 9888

2 April 2004

The Directors

Ipswich Holdings Limited Dong Fang Gas Holdings Limited

Dear Sirs,

We set out below our report on the financial information relating to Ipswich Holdings Limited (the “Company”) and the companies which will become its subsidiaries as part of the group reorganisation (the “Reorganisation”) described in note (a) under Section III below, (herein collectively referred to as the “Group”) for each of the three years ended 31 December 2001, 2002 and 2003 (the “Relevant Periods”) for inclusion in the circular of Dong Fang Gas Holdings Limited dated 2 April 2004 (the “DFG Circular”) in connection with the proposed acquisition of the entire share capital of the Company by Dong Fang Gas Holdings Limited (the “Proposed Acquisition”) pursuant to the Sale and Purchase agreement dated 5 March 2004 between PCCW Limited (“PCCW’) and Dong Fang Gas Holdings Limited (“Sale and Purchase Agreement”).

The Company was incorporated in the British Virgin Islands (“BVI”) on 18 February 2000 with limited liability. The Company and the companies which will become its subsidiaries (the “Subsidiary Companies”) will undergo the Reorganisation prior to completion of the Proposed Acquisition pursuant to which the Company will become the holding company of the Subsidiary Companies. On completion of the Reorganisation, the Company will have direct and indirect interests in the following subsidiaries, all of which are private companies:

	Place and date	Issued/Registered	Attributable
	of incorporation	and fully paid	equity	Principal
Company	/establishment	share capital	interests	activities
Subsidiary Companies
Interests held directly:
ACCA Investment Limited	Hong Kong,	HK$2,	100%	Property
	29 September 1992	2 ordinary shares		holding
		of HK$1 each

— 81 —

ACCOUNTANTS’ REPORT OF THE PROPERTY GROUP

APPENDIX I

	Place and date	Issued/Registered	Attributable
	of incorporation	and fully paid	equity	Principal
Company	/establishment	share capital	interests	activities
Subsidiary Companies
Interests held directly:
Carmay Investment Limited	Hong Kong,	HK$2,	100%	Property
	9 July 1992	2 ordinary shares		holding
		of HK$1 each
Cyber-Port Management	Hong Kong,	HK$2,	100%	Management
Limited	12 January 2000	2 ordinary shares		services
		of HK$1 each
Extra Lite International	British Virgin Islands,	US$1,	100%	Investment
Limited	6 August 1999	1 ordinary share		holding
		of US$1 each
Excel Bright Properties	British Virgin Islands,	US$1,	100%	Investment
Limited	16 November 2001	1 ordinary share		holding
		of US$1 each
Island South Property	Hong Kong,	HK$2,	100%	Property
Management Limited	24 January 2003	2 ordinary shares		management
		of HK$1 each
Madeline Investments	Hong Kong,	HK$2,	100%	Property
Limited	9 February 2000	2 ordinary shares		holding
		of HK$1 each
Midgre Properties Limited	British Virgin Islands,	US$1,	100%	Investment
	5 January 2000	1 ordinary share		holding
		of US$1 each
PCCW Properties (HK)	Hong Kong,	HK$2,	100%	Management
Limited	10 May 1999	2 ordinary shares		services
		of HK$1 each
PCCW Property	British Virgin Islands,	US$1,	100%	Investment
Management Limited	10 August 1998	1 ordinary share		holding
		of US$1 each
PCCW Real Estate Agency	Hong Kong,	HK$2,	100%	Property sales
Limited	6 March 2000	2 ordinary shares		agency
		of HK$1 each
Pride Pacific Limited	Hong Kong,	HK$2,	100%	Financing
	5 February 2003	2 ordinary shares
		of HK$1 each
Smart Phoenix Limited	British Virgin Islands,	US$1,	100%	Developer of
	22 January 2004	1 ordinary share		telephone
		of US$1 each		exchange

— 82 —

ACCOUNTANTS’ REPORT OF THE PROPERTY GROUP

APPENDIX I

	Place and date	Issued/Registered	Attributable
	of incorporation	and fully paid	equity	Principal
Company	/establishment	share capital	interests	activities
Subsidiary Companies
Interests held directly:
Talent Master Investments	British Virgin Islands,	US$1,	100%	Property
Limited	8 January 2004	1 ordinary share		holding
		of US$1 each
Subsidiary Companies
Interests held indirectly:
Atkins Developments	British Virgin Islands,	US$1,	100%	Investment
Limited	30 July 1999	1 ordinary share		holding
		of US$1 each
Beijing Jing Wei House	The People’s	US$50,000,000	100%	Property
and Land Estate	Republic of China,			development
Development Co., Ltd.	29 November 1993
Beijing Jingwei Property	The People’s	US$150,000	100%	Property
Management Co., Ltd.	Republic of China,			management
	29 July 1999
Carlyle International	Hong Kong,	HK$2,	100%	Entrustment
Limited	18 August 1999	2 ordinary shares		work
		of HK$1 each
Cyber-Port Limited	Hong Kong,	HK$2,	100%	Property
	12 March 1999	2 ordinary shares		development
		of HK$1 each
Gain Score Limited	British Virgin Islands,	US$1,	100%	Investment
	5 February 1997	1 ordinary share		holding
		of US$1 each
Monance Limited	Hong Kong,	HK$1,000,	100%	Inactive
	22 August 1991	100 ordinary shares
		of HK$10 each
Partner Link Investments	British Virgin Islands,	US$1,	100%	Property
Limited	26 March 2002	1 ordinary share		investment
		of US$1 each
PCCW Facilities	Hong Kong,	HK$2,	100%	Property
Management Limited	14 July 2000	2 ordinary shares		management
		of HK$1 each		services
Wise Union Enterprises	British Virgin Islands,	US$1,	100%	Investment
Limited	12 April 2002	1 ordinary share		holding
		of US$1 each

— 83 —

ACCOUNTANTS’ REPORT OF THE PROPERTY GROUP

APPENDIX I

No audited financial statements have been prepared by the Company, Atkins Developments Limited, Extra Lite International Limited, Midgre Properties Limited, PCCW Property Management Limited, Smart Phoenix Limited, Talent Master Investments Limited and Wise Union Enterprises Limited since their respective dates of incorporation as there is no statutory requirement for these entities to prepare audited financial statements. We have, however, reviewed all the relevant transactions of these companies for the Relevant Periods or since their respective dates of incorporation, whichever period is shorter.

We acted as the auditors of Excel Bright Properties Limited, Island South Property Management Limited, Partner Link Investments Limited, PCCW Real Estate Agency Limited and Pride Pacific Limited for each of the three years ended 31 December 2001, 2002 and 2003 or since their respective dates of incorporation, whichever period is shorter.

We acted as auditors of ACCA Investment Limited, Carmay Investment Limited, Carlyle International Limited, Cyber-Port Limited, Cyber-Port Management Limited, Gain Score Limited, Madeline Investments Limited, PCCW Facilities Management Limited and PCCW Properties (HK) Limited for the years ended 31 December 2002 and 2003. The financial statements of these companies for the year ended 31 December 2001 were audited and reported on by Arthur Andersen & Co.

We acted as auditors of Monance Limited for the year ended 31 December 2003. The financial statements of Monance Limited for the years ended 31 December 2001 and 2002 were audited and reported on by KPMG.

The statutory financial statements of Beijing Jing Wei House and Land Estate Development Co., Ltd. (“BJJW”) and Beijing Jingwei Property Management Co., Ltd. (“BJPM”) for the years ended 31 December 2001, 2002 and 2003 were prepared in accordance with accounting rules and regulations in Mainland China (“PRC GAAP”). The statutory financial statements of BJJW for the Relevant Periods and the statutory financial statements of BJPM for the year ended 31 December 2001 were audited by Beijing JingDu Certified Public Accountants Co., Ltd. The statutory financial statements of BJPM for the years ended 31 December 2002 and 2003 were audited by Hua-Ander Certified Public Accountants. For the purpose of this report, we have carried out an independent audit of the financial statements of BJJW and a review of the financial statements of BJPM for the Relevant Periods, in order to restate these financial statements to comply with accounting principles generally accepted in Hong Kong (“HK GAAP”) for inclusion in the financial information of the Group.

For the purpose of this report, we have examined the audited financial statements or, where appropriate, the unaudited management accounts of all the companies that will comprise the Group for the Relevant Periods and have carried out such additional procedures as are necessary in accordance with the Auditing Guideline “Prospectuses and the Reporting Accountant” issued by the Hong Kong Society of Accountants.

The financial information as set out in sections I to IV below (the “Financial Information”) has been prepared based on the audited combined financial statements of the Group for the Relevant Periods on the basis set out in Note 1 under Section II below after making such adjustments as are appropriate. The directors of the Company are responsible for preparing the combined financial statements which give a true and fair view. In preparing the combined financial statements, it is fundamental that appropriate accounting policies are selected and applied consistently.

— 84 —

ACCOUNTANTS’ REPORT OF THE PROPERTY GROUP

APPENDIX I

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

In our opinion, the Financial Information, for the purpose of this report, and prepared on the basis set out in Note 1 of Section II below, gives a true and fair view of the combined state of affairs of the Group and the state of affairs of the Company as at 31 December 2001, 2002 and 2003, and of the combined results and cash flows of the Group for the Relevant Periods.

I FINANCIAL INFORMATION

(a) Combined Income Statement

The following is a summary of the combined income statements of the Group for the Relevant Periods, prepared on the basis as set out in Note 1 under Section II below, after making such adjustments as are appropriate:

For the year ended 31 December 2001 2002 2003 (In HK$ million) 1,105 496 4,528 255 207 152 (11) (4) — (105) 64 41 139 267 193 (24) (112) (160) 115 155 33 (138) (60) (30) (23) 95 3 (23) 95 3	For the year ended 31 December 2001 2002 2003 (In HK$ million) 1,105 496 4,528 255 207 152 (11) (4) — (105) 64 41 139 267 193 (24) (112) (160) 115 155 33 (138) (60) (30) (23) 95 3 (23) 95 3	For the year ended 31 December 2001 2002 2003 (In HK$ million) 1,105 496 4,528 255 207 152 (11) (4) — (105) 64 41 139 267 193 (24) (112) (160) 115 155 33 (138) (60) (30) (23) 95 3 (23) 95 3
255 (11) (105) 139 (24) 115 (138)	207 (4) 64 267 (112) 155 (60)	152 — 41
		193 (160
		33 (30
(23) (23)	95 95

— 85 —

ACCOUNTANTS’ REPORT OF THE PROPERTY GROUP

APPENDIX I

(b) Combined Balance Sheet

The following is a summary of the combined balance sheets of the Group as at 31 December 2001, 2002 and 2003, prepared on the basis as set out in Note 1 under Section II below, after making such adjustments as are appropriate:

As at 31 December 2001 2002 2003 (In HK$ million) 5,962 6,002 6,294 2,012 4,334 3,769 — 8 20 7,974 10,344 10,083 — — 286 — — 2,402 — — 2,701 214 101 121 63 25 22 170 337 124 447 463 5,656 (142) (76) (94) (85) (285) (372) (735) (526) (1,041) (48) (10) — (9) (3) (5) (4,384) (2,503) (2,441) — — (1,759) (50) (50) (2) (5,453) (3,453) (5,714) (5,006) (2,990) (58) 2,968 7,354 10,025	As at 31 December 2001 2002 2003 (In HK$ million) 5,962 6,002 6,294 2,012 4,334 3,769 — 8 20 7,974 10,344 10,083 — — 286 — — 2,402 — — 2,701 214 101 121 63 25 22 170 337 124 447 463 5,656 (142) (76) (94) (85) (285) (372) (735) (526) (1,041) (48) (10) — (9) (3) (5) (4,384) (2,503) (2,441) — — (1,759) (50) (50) (2) (5,453) (3,453) (5,714) (5,006) (2,990) (58) 2,968 7,354 10,025	As at 31 December 2001 2002 2003 (In HK$ million) 5,962 6,002 6,294 2,012 4,334 3,769 — 8 20 7,974 10,344 10,083 — — 286 — — 2,402 — — 2,701 214 101 121 63 25 22 170 337 124 447 463 5,656 (142) (76) (94) (85) (285) (372) (735) (526) (1,041) (48) (10) — (9) (3) (5) (4,384) (2,503) (2,441) — — (1,759) (50) (50) (2) (5,453) (3,453) (5,714) (5,006) (2,990) (58) 2,968 7,354 10,025
7,974 — — — 214 63 170 447 (142) (85) (735) (48) (9) (4,384) — (50) (5,453) (5,006) 2,968	10,344 — — — 101 25 337 463 (76) (285) (526) (10) (3) (2,503) — (50) (3,453) (2,990) 7,354	10,083
		286 2,402 2,701 121 22 124
		5,656
		(94 (372 (1,041 — (5 (2,441 (1,759 (2
		(5,714
		(58
		10,025

— 86 —

ACCOUNTANTS’ REPORT OF THE PROPERTY GROUP

APPENDIX I

(b) Combined Balance Sheet (continued)

Note Non-current liabilities Long-term liabilities 18 Deferred taxation 23 Provisions 19 Amount due to ultimate holding company 3(c) Loan from ultimate holding company 3(b) Loan from a fellow subsidiary 3(b) Defined benefit liability 20 Other long-term liabilities Net liabilities REPRESENTING: Share capital 21 Deficit 22 Shareholder’s deficit	As at 31 December 2001 2002 2003 (In HK$ million) (1,001) (1,126) (1,057) (433) (462) (506) — — (1,941) (1,740) (3,955) (4,503) — (359) (359) — (2,000) (2,000) — — (4) (51) (87) (27) (3,225) (7,989) (10,397) (257) (635) (372) — — — (257) (635) (372) (257) (635) (372)	As at 31 December 2001 2002 2003 (In HK$ million) (1,001) (1,126) (1,057) (433) (462) (506) — — (1,941) (1,740) (3,955) (4,503) — (359) (359) — (2,000) (2,000) — — (4) (51) (87) (27) (3,225) (7,989) (10,397) (257) (635) (372) — — — (257) (635) (372) (257) (635) (372)	As at 31 December 2001 2002 2003 (In HK$ million) (1,001) (1,126) (1,057) (433) (462) (506) — — (1,941) (1,740) (3,955) (4,503) — (359) (359) — (2,000) (2,000) — — (4) (51) (87) (27) (3,225) (7,989) (10,397) (257) (635) (372) — — — (257) (635) (372) (257) (635) (372)
	— (257)	— (635)	— (372
	(257)	(635)

— 87 —

APPENDIX I ACCOUNTANTS’ REPORT OF THE PROPERTY GROUP

(c) Balance Sheet

The following is a summary of the balance sheets of the Company as at 31 December 2001, 2002 and 2003:

As at 31 December 2001 2002 2003 (In HK$) 2 2 2 8 8 8 (2) (12,872) (17,162) 6 (12,864) (17,154) 8 (12,862) (17,152) 8 8 8 — (12,870) (17,160) 8 (12,862) (17,152)	As at 31 December 2001 2002 2003 (In HK$) 2 2 2 8 8 8 (2) (12,872) (17,162) 6 (12,864) (17,154) 8 (12,862) (17,152) 8 8 8 — (12,870) (17,160) 8 (12,862) (17,152)	As at 31 December 2001 2002 2003 (In HK$) 2 2 2 8 8 8 (2) (12,872) (17,162) 6 (12,864) (17,154) 8 (12,862) (17,152) 8 8 8 — (12,870) (17,160) 8 (12,862) (17,152)
8 (2) 6	8 (12,872) (12,864)	8
		(17,162
		(17,154
8	(12,862)
8 —	8 (12,870)	8 (17,160
8	(12,862)

— 88 —

ACCOUNTANTS’ REPORT OF THE PROPERTY GROUP

APPENDIX I

(d) Combined Cash Flow Statement

The following is a summary of the combined cash flows of the Group for the Relevant Periods, prepared on the basis as set out in Note 1 under Section II below, after making such adjustments as are appropriate:

For the year ended 31 December 2001 2002 2003 (In HK$ million) (1,035) (2,076) (545) (174) (3) (14) — — 6 (174) (3) (8) 150 1,196 26 1,180 2,660 389 (188) (1,137) (75) (9) (473) — 1,133 2,246 340 (76) 167 (213) 246 170 337 170 337 124	For the year ended 31 December 2001 2002 2003 (In HK$ million) (1,035) (2,076) (545) (174) (3) (14) — — 6 (174) (3) (8) 150 1,196 26 1,180 2,660 389 (188) (1,137) (75) (9) (473) — 1,133 2,246 340 (76) 167 (213) 246 170 337 170 337 124	For the year ended 31 December 2001 2002 2003 (In HK$ million) (1,035) (2,076) (545) (174) (3) (14) — — 6 (174) (3) (8) 150 1,196 26 1,180 2,660 389 (188) (1,137) (75) (9) (473) — 1,133 2,246 340 (76) 167 (213) 246 170 337 170 337 124
(174) — (174) 150 1,180 (188) (9) 1,133 (76) 246	(3) — (3) 1,196 2,660 (1,137) (473) 2,246 167 170	(14 6
		(8
		26 389 (75 —
		340
		(213 337
170	337

— 89 —

APPENDIX I ACCOUNTANTS’ REPORT OF THE PROPERTY GROUP

(e) Combined Statements of Changes in Equity

The following is a summary of the combined statements of changes in equity of the Group for the Relevant Periods, prepared on the basis as set out in Note 1 under Section II below, after making such adjustments as are appropriate:

Note Total shareholder’s deficit at 1 January (Deficit)/surplus on revaluation of investment properties, net of deferred taxation 22 Translation exchange difference 22 Net (losses)/gains not recognised in income statement Net (loss)/profit for the year 22 Dividends distribution 12 Total shareholder’s deficit at 31 December	For the year ended 31 December 2001 2002 2003 (In HK$ million) (113) (257) (635) (112) — 263 — — (3) (112) — 260 (23) 95 3 (9) (473) — (257) (635) (372)	For the year ended 31 December 2001 2002 2003 (In HK$ million) (113) (257) (635) (112) — 263 — — (3) (112) — 260 (23) 95 3 (9) (473) — (257) (635) (372)	For the year ended 31 December 2001 2002 2003 (In HK$ million) (113) (257) (635) (112) — 263 — — (3) (112) — 260 (23) 95 3 (9) (473) — (257) (635) (372)
	(112) (23) (9)	— 95 (473)	260 3 —
	(257)	(635)

— 90 —

ACCOUNTANTS’ REPORT OF THE PROPERTY GROUP

APPENDIX I

II NOTES TO THE FINANCIAL INFORMATION

(Amount expressed in Hong Kong dollars unless otherwise stated)

1 BASIS OF PREPARATION

Pursuant to the Reorganisation which will be completed prior to the completion of the Proposed Acquisition, the Company will acquire the entire issued share capital of ACCA Investment Limited, Carmay Investment Limited, Cyber-Port Management Limited, Extra Lite International Limited, Excel Bright Properties Limited, Island South Property Management Limited, Midgre Properties Limited, PCCW Properties (HK) Limited, PCCW Property Management Limited, PCCW Real Estate Agency Limited, Pride Pacific Limited, Smart Phoenix Limited and Talent Master Investments Limited and become the holding company of the Group.

The Reorganisation is accounted for using merger accounting. Accordingly, the Financial Information of the Group as at and for the years ended 31 December 2001, 2002 and 2003 has been prepared as if the Company had been the holding company of the companies in the Group since 1 January 2001 or since the respective dates of incorporation of the companies, if this is a shorter period.

At 31 December 2003, the Group had net liabilities of HK$372 million including loans from PCCW and its subsidiaries of HK$9,303 million. PCCW has confirmed that HK$2,441 million of the loans will be capitalised into shares of the Company prior to the completion of the Proposed Acquisition. As at 31 December 2003, excluding the loan of HK$2,441 million to be capitalised, the Group owed PCCW Central Resources Limited, a wholly owned subsidiary of PCCW, and PCCW of approximately HK$2,000 million and HK$359 million, respectively. PCCW has undertaken not to demand repayment of these loans prior to completion of the Proposed Acquisition and will transfer the loan from PCCW Central Resources Limited of approximately HK$2,000 million and the loan from PCCW of approximately HK$359 million to DFG as part of the Proposed Acquisition. In addition, PCCW has also undertaken that it will not demand repayment of the loan of HK$4,503 million owed to it by Cyber-Port Limited until Cyber-Port Limited has excess proceeds available from the sale of the Cyber-Port residential units to make the repayment. Consequently, the directors have prepared the Financial Information on a going concern basis.

2 PRINCIPAL ACCOUNTING POLICIES

The Financial Information has been prepared in accordance with HK GAAP and complies with accounting standards issued by the Hong Kong Society of Accountants. The Financial Information is prepared under the historical cost convention modified by the revaluation of investment properties.

a. Basis of combination

The Financial Information includes the assets, liabilities, profits and losses and cash flows of the companies which will comprise the Group on completion of the Reorganisation for the Relevant Periods or since their respective dates of incorporation, whichever period is shorter. All significant intra-group transactions and balances have been eliminated on combination.

b. 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 properties

Revenue and income arising from sales of completed properties is recognised upon completion of the sale when title passes to the purchaser.

— 91 —

ACCOUNTANTS’ REPORT OF THE PROPERTY GROUP

APPENDIX I

Revenue and income arising from the pre-sale of properties under development is recognised on the percentage of construction completion basis when legally binding unconditional sales contracts are signed and exchanged, provided that the construction work has progressed to a stage where the ultimate realisation of profit can be reasonably determined and on the basis that the total estimated profit is apportioned over the entire period of construction to reflect the progress of the development.

ii. Rental income from operating leases

Rental income receivable from investment properties under operating leases is recognised in the income statement in equal instalments over the accounting periods covered by the lease term, except where an alternative basis is more representative of the pattern of benefits to be derived from the leased asset. Lease incentives 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.

iii. Contract revenue

Revenue from a fixed price contract is recognised using the percentage of completion method, measured by reference to the percentage of estimated value of work done to date to total contract revenue.

iv. Interest income

Interest income from bank deposits is accrued on a time-apportioned basis by reference to the principal outstanding and the rate applicable.

c. Operating leases

Leases of assets under which the lessor has not transferred all the risks and benefits of ownership are classified as operating leases.

i. Assets held for use in operating leases

Where the Group leases out assets under operating leases, the assets are included in the balance sheet according to their nature and, where applicable, are depreciated in accordance with the Group’s depreciation policies, as set out in note 2(d). Impairment losses are accounted for in accordance with the accounting policy as set out in note 2(f). Revenue arising from operating leases is recognised in accordance with the Group’s revenue recognition policies, as set out in note 2(b)(ii).

ii. Operating lease charges

Where the Group has the use of assets under operating leases, payments made under the leases are charged to the income statement in equal instalments over the accounting periods covered by the lease term. Lease incentives received are recognised in the income statement as an integral part of the aggregate net lease payments made. Contingent rentals are charged to the income statement in the accounting period in which they are incurred.

d. Fixed assets and depreciation

Fixed assets, excluding investment properties, are stated in the balance sheet at cost less accumulated depreciation and impairment losses (see note 2(f)). The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Subsequent expenditure relating to a fixed

— 92 —

ACCOUNTANTS’ REPORT OF THE PROPERTY GROUP

APPENDIX I

asset that has already been recognised is added to the carrying amount of the asset and is depreciated over the original remaining useful life of the asset when it is probable that future economic benefits, in excess of the originally assessed standard of performance of the existing asset, will flow to the Group. All other subsequent expenditure, such as repairs and maintenance and overhaul costs, is recognised as an expense in the period in which it is incurred.

Depreciation is calculated to write off the cost on a straight-line basis over their estimated useful lives as follows:

Land and buildings Over the shorter of the lease term and the estimated useful lives Other plant and equipment Over the shorter of 2 to 10 years and the term of lease

Gains or losses arising from the retirement or disposal of a fixed asset are determined as the difference between the estimated net disposal proceeds and the carrying amount of the asset and are recognised in the income statement on the date of retirement or disposal.

e. Investment properties

Investment properties are interests in land and buildings in respect of which construction work and development have been completed and which are held for their investment potential and for the long term.

Investment properties with an unexpired lease term of more than 20 years are stated in the balance sheet at their open market value, on the basis of an annual valuation by professionally qualified executives of the Group and by independent valuers at intervals of not more than three years. Changes arising on the revaluation of investment properties are generally dealt with in the property revaluation reserve unless the following circumstances arise:

when a deficit arises on revaluation, it will be charged to the income statement, if and to the extent that it exceeds the amount held in the reserve in respect of the portfolio of investment properties, immediately prior to the revaluation; and
when a surplus arises on revaluation, it will be credited to the income statement, if and to the extent that a deficit on revaluation in respect of the portfolio of investment properties, had previously been charged to the income statement.

Upon the disposal of an investment property, the relevant portion of the revaluation reserve realised in respect of previous valuations is released from the property revaluation reserve to the income statement as part of the gain or loss on disposal of the investment property.

No depreciation is provided on investment properties unless the unexpired lease term is 20 years or less, in which case depreciation is provided on their carrying value over the unexpired lease term.

f. Impairment of assets

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

fixed assets; and
investments in subsidiaries.

— 93 —

ACCOUNTANTS’ REPORT OF THE PROPERTY GROUP

APPENDIX I

If any such indication exists, the asset’s recoverable amount is estimated. An impairment loss is recognised in the income statement 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 its value in use. Net selling price is the amount obtainable from the sale of an asset in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal. 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 the 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. Reversals of impairment losses

An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount.

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 income statement in the year in which the reversals are recognised.

g. Properties held for development

Properties held for development represent interests in land where construction has not yet commenced. Properties held for development are stated at cost less any provision for impairment in value. Costs include original land acquisition costs, costs of land use rights, and any direct development costs incurred attributable to such properties.

h. Properties under development

Properties under development represent interests in land and buildings under construction. Properties under development for long-term purposes are stated at cost less any provision for impairment in value. Properties under development for sale, pre-sales of which have not yet commenced are carried at the lower of cost and the estimated net realisable value. Properties under development for sale for which pre-sales have commenced are stated at cost plus attributable profits less sale deposits, instalments received and receivable and any foreseeable losses.

Cost includes original land acquisition costs, costs of land use rights, construction expenditure incurred and other direct development costs attributable to such properties, including interest incurred on loans directly attributable to the development prior to the completion of construction.

Properties under development for long-term retention, on completion, are transferred to fixed assets or investment properties.

Properties under development for sale with occupancy permits expected to be granted within one year from the balance sheet date, which have either been pre-sold or are intended for sale, are classified under current assets.

i. Subsidiaries

A subsidiary is a company in which the Company, directly or indirectly, holds more than half of the issued share capital, or controls more than half of the voting power, or controls the composition of the board of directors. Subsidiaries are considered to be controlled if the Company has the power, directly or indirectly, to govern its financial and operating policies, so as to obtain benefits from their activities.

— 94 —

ACCOUNTANTS’ REPORT OF THE PROPERTY GROUP

APPENDIX I

In the Company’s balance sheet, investments in subsidiaries are stated at cost less any impairment loss (see note 2 (f)). The results of subsidiaries are recognised by the Company to the extent of dividends received and receivable at the balance sheet date.

j. Properties held for sale

Properties held for sale are stated at the lower of cost and the estimated net realisable value. Cost includes development and construction expenditure incurred, interest incurred during the construction period and other direct costs attributable to such properties. Net realisable value is estimated by the directors based on prevailing market prices, on an individual property basis, less any further costs expected to be incurred in selling the property.

k. Construction contracts

The accounting policy for contract revenues is set out in note 2(b)(iii) above. When the outcome of a construction contract can be estimated reliably, contract costs are recognised as expenses by reference to the stage of completion of the contract activity at the balance sheet date. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately. When the outcome of a construction contract cannot be estimated reliably, revenue is recognised only to the extent that it is probable that the contract costs incurred will be recoverable and contract costs are recognised as an expense in the period in which they are incurred.

Construction contracts in progress at the balance sheet date are recorded in the balance sheet at the net amount of costs incurred plus recognised profits less recognised losses and estimated value of work performed, and are presented in the balance sheet as “Gross amounts due from customers for contract work” (as an asset) or “Gross amounts due to customers for contract work” (as a liability), as applicable. Progress billings for work performed on a contract not yet paid by customers are included in the balance sheet under “Accounts receivable”.

l. 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 changes in value, having been within three months of maturity at acquisition, less bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management, and also advances from banks repayable within three months from the dates of advances.

m. Provisions and contingent liabilities

Provisions are recognised for liabilities of uncertain timing or amount when the Company or Group has a present obligation (legal or constructive) as a result of a past event, it is probable (i.e. more likely than not) that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made. Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate of amount required. Where the time value of money is material, provisions are stated at the present value of the expenditures 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.

— 95 —

ACCOUNTANTS’ REPORT OF THE PROPERTY GROUP

APPENDIX I

n. Borrowing costs

Borrowing costs are expensed in the income statement in the period in which they are incurred, except to the extent that they are capitalised as being directly attributable to the acquisition, construction or production of an asset which necessarily takes a substantial period of time to get ready for its intended use or sale.

The capitalisation of borrowing costs as part of the cost of a qualifying asset commences when expenditures for the asset are being incurred, borrowing costs are being incurred and activities that are necessary to prepare the asset for its intended use or sale are in progress. Capitalisation of borrowing costs is suspended or ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are interrupted or complete.

Discounts or premiums relating to borrowings, ancillary costs incurred in connection with arranging borrowings and exchange differences arising from foreign currency borrowings, to the extent that they are regarded as adjustments to interest costs, are recognised as expenses over the period of the borrowing.

o. Income tax
i. Income tax for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.
ii. 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 year.
iii. Deferred tax assets and liabilities arise from deductible and taxable temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the tax bases respectively. Deferred tax assets also arise from unused tax losses and unused tax credits.

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.

The amount of deferred tax provided is 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.

p. Employee benefits

i. Salaries, annual bonuses, annual leave entitlements, leave passage and the cost to the Group of non-monetary benefits are accrued in the year in which the associated services are rendered by employees of the Group. Where payment or settlement is deferred and the effect would be material, provisions are made for the estimated liability as a result of services rendered by employees up to the balance sheet date.
ii. Defined benefit and defined contribution retirement schemes (including the Mandatory Provident Fund) are offered to employees of the Group. The schemes are operated by PCCW and the assets of which are generally held in separate trustee - administered funds. The schemes are generally funded by payments from the relevant companies of the PCCW Group and, in some cases, employees themselves, taking account of the recommendations of independent qualified actuaries.

The Group’s contributions to the defined contribution schemes are recognised as an expense in the income statement in the period to which the contributions relate.

— 96 —

APPENDIX I

ACCOUNTANTS’ REPORT OF THE PROPERTY GROUP

Retirement costs under defined benefit retirement schemes are assessed using the projected unit credit method. Under this method, the cost of providing defined benefits is charged to the income statement so as to spread the regular cost over the service lives of employees in accordance with the advice of the actuaries who carry out a full valuation of the schemes on an annual basis. The defined benefit obligation is measured as the present value of the estimated future cash outflows using interest rates determined by reference to market yields at the balance sheet date based on Exchange Fund Notes, which have terms to maturity approximating the terms of the related liability. Scheme assets are measured at fair value. Actuarial gains and losses, to the extent that the amount is in excess of 10 percent of the greater of the present value of the defined benefit obligations and the fair value of the scheme assets, are recognised in the income statement over the expected average remaining service lives of the participating employees. Past service costs are recognised as an expense on a straight-line basis over the average period until the benefits become vested.

iii. Employee termination benefits are recognised when, and only when, the Group demonstrably commits itself to terminate employment or to provide benefits as a result of voluntary redundancy by having a detailed formal plan which is without realistic possibility of withdrawal.

q. Foreign currencies

Companies comprising the Group maintain their books and records in the primary currencies of their operations (the “respective reporting currencies”).

In the financial statements of individual companies, transactions in other currencies during the year are translated into the respective reporting currencies at the exchange rates ruling at the transaction dates. Monetary assets and liabilities denominated in other currencies are translated into the respective reporting currencies at the exchange rates ruling at the balance sheet date. Exchange gains and losses are dealt with in the income statement.

For the purposes of preparing these combined financial statements, the financial statements of the individual companies with reporting currencies other than Hong Kong dollars are translated into Hong Kong dollars using the net investment method. Under this method, assets and liabilities of these individual companies are translated into Hong Kong dollars at the rates of exchange ruling at the balance sheet date. Income and expenses are translated at the average exchange rates for the year. Share capital and other reserves are translated into Hong Kong dollars at historical rates. Exchange differences arising on translation are dealt with as movements in reserves.

r. Management estimates

The presentation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

s. Segment reporting

A segment is a distinguishable component of the Group that is engaged either in providing particular products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), and which is subject to risks and rewards that are different from those of other segments.

The directors consider that the Group operates in one business segment being investment in and development of properties. Accordingly, the Group uses geographical segment information as the primary reporting format for the purposes of these financial statements.

— 97 —

ACCOUNTANTS’ REPORT OF THE PROPERTY GROUP

APPENDIX I

3 RELATED PARTY TRANSACTIONS

For the purposes of these financial statements, parties are considered to be related to the Group if the Group has the ability, directly or indirectly, to control the party or exercise significant influence over the party in making financial and operating decisions, or vice versa, or where the Group and the party are subject to common control or common significant influence. Related parties may be individuals or other entities.

a. During the Relevant Periods, the Group had the following significant transactions with related companies:

		The Group
	2001	2002	2003
		(In HK$ million)
Interest expenses paid or payable to a fellow
subsidiary and the ultimate holding company	—	33	97
Corporate expenses recharged by a fellow
subsidiary	76	47	42
Accommodation expenses recharged by a fellow
subsidiary	—	—	12
Amount received and receivable in respect of
services rendered	—	2	71
Amount received and receivable from the rental of
investment properties to fellow subsidiaries	136	116	60
System integration charges paid or payable to
a fellow subsidiary	—	83	34

The above transactions were carried out after negotiations between the Group and the related parties in the ordinary course of business. In respect of transactions for which the price or volume has not yet been agreed with the relevant related parties, the directors have determined the relevant amounts based on their best estimation.

b. Loans of HK$2,359 million as at 31 December 2003 (2002: HK$2,359 million; 2001: Nil) from ultimate holding company and a fellow subsidiary are unsecured, bear interest at 2.69 percent per annum over Hong Kong Inter-bank Offered rates and are not repayable within one year.
c. Balances with related parties other than as specified in this note are unsecured, non-interest bearing and have no fixed repayment terms.
d. PCCW operates a share option scheme where the board of directors of PCCW may, at their discretion, grant options to subscribe for the shares of PCCW to directors and employees of PCCW Group, including employees of the Group. No compensation costs are recognised in the income statement of the Group in respect of the share option scheme.

During the year ended 31 December 2002, certain wholly-owned subsidiaries of PCCW each established two employee share incentive award schemes (namely the Purchase Scheme and the Subscription Scheme) under which employees of PCCW Group including employees of the Group may be selected to participate in these schemes that are relevant to their employment and which can lead to the vesting and transfer of the shares of PCCW subject to the terms and conditions specified therein. Where cost of shares are recharged to the Group, they are recognised in the balance sheet as prepaid expenses at the date of grant and amortised over the respective vesting period and recognised in the income statement as staff costs. During the years ended 31 December 2002 and 2003, PCCW has not recharged the cost of shares to the Group therefore no costs were recognised in the combined financial statements of the Group in respect of these schemes.

— 98 —

ACCOUNTANTS’ REPORT OF THE PROPERTY GROUP

APPENDIX I

e. Part of the office premise currently occupied by the Group in Hong Kong is on a cost sharing basis. The lease is entered into by a fellow subsidiary with the landlord. The Group shares the rental and other accommodation costs according to the area it occupies.

4 TURNOVER

Amounts received and receivable in respect of properties sold Amounts received and receivable from the rental of investment properties and fixed assets Revenues from construction contracts Amounts received and receivable in respect of services rendered	The Group 2001 2002 (In HK$ million) 218 — 392 430 495 63 — 3 1,105 496	2003 4,111 346 — 71
		4,528

5 SEGMENT INFORMATION

Segment information is presented in respect of the Group’s geographical segments.

Geographical segments

The Group’s businesses are operated in two principal economic environments. In presenting information on the basis of geographical segments, segment revenue is based on the geographical location of customers. Segment assets and capital expenditure are based on the geographical location of the assets.

Combined 2001 2002 2003 (In HK$ million) 1,105 496 4,528	Combined 2001 2002 2003 (In HK$ million) 1,105 496 4,528	Combined 2001 2002 2003 (In HK$ million) 1,105 496 4,528
139 (24) 115 (138)	267 (112) 155 (60)	193 (160)
		33 (30)
(23)	95	3

— 99 —

APPENDIX I

ACCOUNTANTS’ REPORT OF THE PROPERTY GROUP

Hong Kong Mainland China 2001 2002 2003 2001 2002 2003 (In HK$ million) (In HK$ million) ASSETS Segment assets 4,393 6,729 11,695 4,028 4,070 4,024 Deferred taxation Total assets LIABILITIES Segment liabilities 611 661 4,936 308 247 208 Provision for taxation Deferred taxation Bank loans Unallocated liabilities Total liabilities OTHER INFORMATION Capital expenditure (including fixed assets) incurred during the year 1 1 1 493 1 14 Depreciation and amortisation 19 17 18 2 5 5 Impairment loss recognised in income statement 11 4 — — — — (Deficit)/Surplus on revaluation of investment properties (charged)/credited to income statement (105) 64 41 — — — Significant non-cash expenses (excluding depreciation, amortisation and impairment loss and (deficit)/surplus on revaluation) — — — 2 34 2	Combined 2001 2002 2003 (In HK$ million) 8,421 10,799 15,719 — 8 20 8,421 10,807 15,739 919 908 5,144 50 50 2 433 462 506 1,143 1,202 1,151 6,133 8,820 9,308 8,678 11,442 16,111	Combined 2001 2002 2003 (In HK$ million) 8,421 10,799 15,719 — 8 20 8,421 10,807 15,739 919 908 5,144 50 50 2 433 462 506 1,143 1,202 1,151 6,133 8,820 9,308 8,678 11,442 16,111
		15,739
		5,144 2 506 1,151 9,308
		16,111

— 100 —

ACCOUNTANTS’ REPORT OF THE PROPERTY GROUP

APPENDIX I

6 OPERATING PROFIT BEFORE PROVISIONS FOR IMPAIRMENT LOSSES AND (DEFICIT)/SURPLUS ON REVALUATION OF INVESTMENT PROPERTIES

Turnover Cost of sales Other income General and administrative expenses Operating profit before provisions for impairment losses and (deficit)/surplus on revaluation of investment properties	The Group 2001 2002 (In HK$ million) 1,105 496 (680) (137) — 2 (170) (154) 255 207	2003 4,528 (4,085) 7 (298) 152

7 PROFIT FROM OPERATIONS

Profit from operations is stated after crediting and charging the following:

		The Group
	2001	2002	2003
		(In HK$ million)
Crediting:
Gross rental income	392	430	346
Less: outgoings	(34)	(63)	(38)
Surplus on revaluation of investment properties (note 14)	—	64	41
Charging:
Deficit on revaluation of investment properties (note 14)	105	—	—
Provision for impairment of fixed assets (note 14)	11	4	—
Depreciation, included in:
— cost of sales	19	19	18
— general & administrative expenses	2	3	5
Staff costs (excluding directors’ emoluments (note 9) and
retirement costs for other staff), included in:
— cost of sales	—	2	44
— general & administrative expenses	23	28	42
Retirement costs for other staff
— contributions to defined contribution retirement
scheme (note 20), included in:
— cost of sales	—	—	3
— general & administrative expenses	1	2	2
Cost of properties sold	205	—	3,951
Auditors’ remuneration	1	1	1
Operating lease rental
— land and buildings	1	2	2
Provision for doubtful debts	2	34	2

— 101 —

ACCOUNTANTS’ REPORT OF THE PROPERTY GROUP

APPENDIX I

8 FINANCE COSTS, NET

The Group 2001 2002 (In HK$ million) 95 — — 81 — 34 — —	The Group 2001 2002 (In HK$ million) 95 — — 81 — 34 — —	2003 73 — 97 —
95 (66) 29 (5)	115 — 115 (3)	170 —
		170 (10)
24	112	160

Finance costs of HK$170 million (2002: HK$115 million; 2001: HK$29 million) include arrangement fees of approximately HK$10 million (2002: HK$8 million; 2001: HK$23 million) incurred in respect of the bank loans of the Group.

During the year ended 31 December 2001, the capitalisation rate used to determine the amount of interest eligible for capitalisation was approximately 6.2%.

9 DIRECTORS’ AND SENIOR EXECUTIVES’ EMOLUMENTS

a. Details of directors’ emoluments are set out below:

Fees Salaries, allowances, other allowances and benefits in kind Pension scheme contributions Bonuses paid and payable Total	The Group 2001 2002 (In HK$ million) — — 12 16 1 2 7 14 20 32	2003 — 16 2 13
		31

Certain directors are remunerated as executives of the ultimate holding company and the above amounts consist of remuneration borne by the ultimate holding company.

— 102 —

ACCOUNTANTS’ REPORT OF THE PROPERTY GROUP

APPENDIX I

The emoluments of the directors analysed by the number of directors and emolument ranges are as follows:

Up to HK$1,000,000 HK$1,000,001 - HK$1,500,000 HK$2,000,001 - HK$2,500,000 HK$3,000,001 - HK$3,500,000 HK$5,500,001 - HK$6,000,000 HK$6,500,001 - HK$7,000,000 HK$7,000,001 - HK$7,500,000 HK$10,000,001 - HK$10,500,000 HK$10,500,001 - HK$11,000,000 HK$11,000,001 - HK$11,500,000	Number of directors The Group 2001 2002 1 — — 2 — — 1 — 1 — — 1 — — 1 — — — — 2 4 5	2003 1 1 2 — 1 — 1 — 1 —
		7

No directors waived the right to receive emoluments during the Relevant Periods.

(b) Details of five highest paid individuals’ emoluments are set out below:

During the Relevant Periods, the five individuals whose emoluments were the highest in the Group include three directors, whose emoluments are included in note 9 (a) above. The emoluments payable to the remaining two individuals during the Relevant Periods are as follows:

HK$3,000,001 - HK$3,500,000 HK$3,500,001 - HK$4,000,000 HK$4,500,001 - HK$5,000,000 HK$10,000,001 - HK$10,500,000 HK$10,500,001 - HK$11,000,000	Number of individuals The Group 2001 2002 1 — 1 — — 1 — — — 1 2 2	2003 — 1 — 1 —
		2

— 103 —

ACCOUNTANTS’ REPORT OF THE PROPERTY GROUP

APPENDIX I

10 TAXATION

In March 2003, the Government of Hong Kong (the “Government”) announced an increase in the Profits Tax rate applicable to the Group’s operations in Hong Kong from 16 percent to 17.5 percent. Accordingly, Hong Kong Profits Tax has been provided at the rate of 17.5 percent (2002: 16 percent; 2001: 16 percent) on the estimated assessable profits for the year.

Overseas taxation has been calculated on the estimated assessable profits for the year at the rates prevailing in the respective jurisdictions.

The Company and subsidiaries: Hong Kong Profits Tax — Provision for current year Overseas tax — Provision for current year Deferred taxation relating to the origination and reversal of temporary differences (note 23)	The Group 2001 2002 (In HK$ million) 32 39 48 — 58 21 138 60	2003 — — 30
		30

The taxation on the Group’s profit before taxation differs from the theoretical amount that would arise using the Hong Kong Profits Tax rate of 16 percent for the years ended 31 December 2001 and 2002 and 17.5 percent for the year ended 31 December 2003 as follows:

Profit before taxation Calculated at Hong Kong Profits Tax rate Income not subject to taxation Expenses not deductible for taxation purposes Tax losses not recognised Utilisation of tax losses not previously recognised Increase in deferred tax asset resulting from increase in tax rate Effect of different tax rate of subsidiaries operating in Mainland China Reversal of revaluation surplus of properties Taxation charge	The Group 2001 2002 (In HK$ million) 115 155	The Group 2001 2002 (In HK$ million) 115 155	2003 33
	18 (11) 54 4 (2) — 14 61	25 (10) 6 33 — — 6 —	6 (7) 4 20 — (1) 8 —
	138	60	30

— 104 —

ACCOUNTANTS’ REPORT OF THE PROPERTY GROUP

APPENDIX I

11 (LOSS)/EARNINGS PER SHARE

The calculation of basic (loss)/earnings per share is based on the Group’s loss of HK$23 million for the year ended 31 December 2001 and profit of HK$95 million and HK$3 million for the years 31 December 2002 and 2003, respectively, and on the one share in issue during the Relevant Periods.

Diluted loss per share amounts for the Relevant Periods has not been shown because there were no dilutive potential ordinary shares during the Relevant Periods.

12 DIVIDENDS

No dividend has been paid or declared by the Company since its incorporation. Dividends paid represented dividends paid by subsidiaries of the Company to their shareholders prior to the Reorganisation.

13 LOSS ATTRIBUTABLE TO SHAREHOLDER

Loss of HK$4,290 (2002: Loss of HK$12,870; 2001: Nil) attributable to shareholder was dealt with in the financial statements of the Company.

— 105 —

ACCOUNTANTS’ REPORT OF THE PROPERTY GROUP

APPENDIX I

14 FIXED ASSETS

			Other plant
	Investment	Land and	and
	properties	buildings	equipment	Total
		(In HK$ million)
Cost or valuation
At 1 January 2001	3,642	406	63	4,111
Additions	—	24	14	38
Transfers from properties under development	2,050	—	—	2,050
Transfers	(240)	209	31	—
Deficit on revaluation charged to:
— income statement (note 7)	(105)	—	—	(105)
— property revaluation reserve	(37)	—	—	(37)
At 31 December 2001	5,310	639	108	6,057
Additions	—	—	2	2
Transfers	111	(95)	(16)	—
Surplus on revaluation credited to income statement
(note 7)	64	—	—	64
At 31 December 2002	5,485	544	94	6,123
Additions	—	—	15	15
Disposals	(6)	—	—	(6)
Transfers	(52)	45	7	—
Surplus on revaluation credited to:
— income statement (note 7)	41	—	—	41
— property revaluation reserve	265	—	—	265
At 31 December 2003	5,733	589	116	6,438
Accumulated depreciation and impairment
At 1 January 2001	—	38	25	63
Charge for the year (note 7)	—	14	7	21
Provision for impairment in value (note 7)	—	11	—	11
At 31 December 2001	—	63	32	95
Charge for the year (note 7)	—	14	8	22
Provision for impairment in value (note 7)	—	4	—	4
At 31 December 2002	—	81	40	121
Charge for the year (note 7)	—	17	6	23
At 31 December 2003	—	98	46	144
Net book value
At 31 December 2003	5,733	491	70	6,294
At 31 December 2002	5,485	463	54	6,002
At 31 December 2001	5,310	576	76	5,962

— 106 —

ACCOUNTANTS’ REPORT OF THE PROPERTY GROUP

APPENDIX I

The carrying amount of investment properties and land and buildings of the Group is analysed as follows:

		Investment properties			Land and buildings
	2001	2002	2003	2001	2002	2003
		(In HK$ million)			(In HK$ million)
Held in Hong Kong
On long lease
(over 50 years)	1,418	1,594	1,845	515	408	438
On medium-term lease
(10-50 years)	7	6	—	21	17	16
Held outside Hong Kong
On medium-term lease
(10-50 years)	3,885	3,885	3,888	40	38	37
	5,310	5,485	5,733	576	463	491

Investment properties held in Hong Kong were revalued at 31 December 2001 and 2002 by a professionally qualified surveyor of the Group who is an associate member of the Hong Kong Institute of Surveyors and at 31 December 2003 by independent valuer, CB Richard Ellis Limited. Investment properties held outside Hong Kong, were revalued at 31 December 2001, 2002 and 2003 by an independent valuer, CB Richard Ellis Limited. The basis of valuation for investment properties was open market value.

Approximately HK$3,888 million (2002: HK$3,833 million; 2001: HK$2,703 million) of the investment properties were mortgaged as collateral for banking facilities of the Group.

Land and buildings with net book value of approximately HK$37 million (2002: HK$58 million; 2001: HK$21 million) were mortgaged as collateral for banking facilities of the Group.

15 PROPERTIES UNDER DEVELOPMENT

Properties under development Less: Properties under development classified as current assets Total	The Group 2001 2002 (In HK$ million) 2,012 4,334 — — 2,012 4,334	2003 4,055 (286)
		3,769

Pursuant to an agreement dated 17 May 2000 entered into with the Government (“Cyberport Project Agreement”), the Group was granted an exclusive right and obligation to design, develop, construct and market the Cyberport Project at Telegraph Bay on the Hong Kong Island. The Cyberport Project consists of commercial and residential portion. Pre-sales of residential portion of the Cyberport Project commenced in February 2003.

— 107 —

ACCOUNTANTS’ REPORT OF THE PROPERTY GROUP

APPENDIX I

16 INVESTMENT IN SUBSIDIARY

					The Company
				2001	2002	2003
					(In HK$)
Unlisted	shares,	at	cost	2	2	2

Dividends from the subsidiaries operating in Mainland China will be declared based on the profits in the statutory financial statements of these subsidiaries. Such profits will be different from the amounts reported under HK GAAP.

As at 31 December 2003, the Group had financed the operations of certain of its subsidiaries in Mainland China in the form of shareholders’ loans amounting to approximately US$198 million, (2002: US$191 million; 2001: US$191 million) which have not been registered with the State Administration of Foreign Exchange. As a result, remittances in foreign currency of these amounts outside Mainland China may be restricted.

17 CURRENT ASSETS AND LIABILITIES

a. Sales proceeds held in stakeholders’ accounts

The balance represents proceeds from sale of residential portion of the Cyberport Project retained in bank accounts opened and maintained by stakeholders which will be transferred to specific bank accounts, which are restricted in use as described in note (b) below, pursuant to certain conditions and procedures as stated in the Cyberport Project Agreement.

b. Restricted cash

Pursuant to the Cyberport Project Agreement, the Group has a restricted cash balance of approximately HK$2,701 million as at 31 December 2003 (2002: Nil; 2001: Nil) held in specific bank accounts. The uses of the funds are specified in the Cyberport Project Agreement.

— 108 —

ACCOUNTANTS’ REPORT OF THE PROPERTY GROUP

APPENDIX I

c. Accounts receivable, net

An aging analysis of trade receivables is set out below:

0 - 30 days 31 - 60 days 61 - 90 days 91 - 120 days Over 120 days Less: Provision for doubtful debts	The Group 2001 2002 (In HK$ million) 36 21 3 2 19 — 1 — 6 38	The Group 2001 2002 (In HK$ million) 36 21 3 2 19 — 1 — 6 38	2003 19 2 — — 29
	65 (2)	61 (36)	50 (28)
	63	25	22

The normal credit period granted by the Group ranges up to 30 days from the date of invoice.

d. Accounts payable

An aging analysis of accounts payable is set out below:

0 - 30 days 31 - 60 days 61 - 90 days 91 - 120 days Over 120 days	The Group 2001 2002 (In HK$ million) 33 116 — — — — 11 24 41 145 85 285	2003 93 3 — 45 231
		372

— 109 —

ACCOUNTANTS’ REPORT OF THE PROPERTY GROUP

APPENDIX I

e. Gross amounts due to customers for contract work

Contract costs incurred plus attributable profits less foreseeable losses Less: estimated value of work performed	The Group 2001 2002 (In HK$ million) 700 801 (748) (811) (48) (10)	2003 809 (809) —

The total amount of progress billings, included in the estimated value of work performed as at 31 December 2003, is approximately HK$776 million (2002: HK$753 million; 2001: HK$591 million).

18 LONG-TERM LIABILITIES

Bank loans repayable within a period — not exceeding one year — over one year, but not exceeding two years — over two years, but not exceeding five years — over five years Less: Amounts repayable within one year included under current liabilities Secured Unsecured	The Group 2001 2002 (In HK$ million) 142 76 — 94 1,001 396 — 636	The Group 2001 2002 (In HK$ million) 142 76 — 94 1,001 396 — 636	2003 94 113 944 — 1,151 (94) 1,057 1,151 —
	1,143 (142)	1,202 (76)	1,151 (94
	1,001 1,143 —	1,126 1,202 —

— 110 —

ACCOUNTANTS’ REPORT OF THE PROPERTY GROUP

APPENDIX I

19 PROVISIONS

The Group Payment to the Government Others (In HK$ million) At 1 January 2003 — — Additional provisions included within properties under development 3,680 — Additional provisions made — 20 3,680 20 Less: amount classified as current liabilities (1,739) (20) End of year 1,941 —	The Group Payment to the Government Others (In HK$ million) At 1 January 2003 — — Additional provisions included within properties under development 3,680 — Additional provisions made — 20 3,680 20 Less: amount classified as current liabilities (1,739) (20) End of year 1,941 —	The Group Payment to the Government Others (In HK$ million) At 1 January 2003 — — Additional provisions included within properties under development 3,680 — Additional provisions made — 20 3,680 20 Less: amount classified as current liabilities (1,739) (20) End of year 1,941 —	Total — 3,680 20 3,700 (1,759) 1,941
	3,680 (1,739)	20 (20)	3,700 (1,759
	1,941	—

Pursuant to the Cyberport Project Agreement, the Government shall be entitled to receive payments based on certain terms and conditions. Provision for payment to the Government is included within properties under development as the amount is considered as a part of the development costs for the Cyberport Project. The provision is based on estimated sales proceeds of residential portion and the estimated development costs of the Cyberport Project. The estimated amount to be paid to the Government during the forthcoming year is classified as current liabilities.

20 EMPLOYEE RETIREMENT BENEFITS

a. Defined benefit retirement schemes

A small number of employees of the Group are entitled to join the defined benefit retirement schemes (“DB Schemes”), operated by PCCW, which provide lump sum benefits to employees upon resignation and retirement. The DB Schemes are final salary defined benefit schemes. The scheme assets are administered by independent trustees and are maintained independently of the PCCW Group’s finances.

The defined benefit pension expense recognised in the income statement for the year ended 31 December 2003 was HK$33,000 (2002: Nil; 2001: Nil). As at 31 December 2003, the defined benefit liability of the Group was HK$4 million (2002: Nil; 2001: Nil).

b. Defined contribution retirement scheme

Employees of the Group are also entitled to join the defined contribution schemes operated by PCCW, including the Mandatory Provident Fund Scheme (“the MPF scheme”) under the Hong Kong Mandatory Provident Fund Schemes Ordinance, for employees employed under the jurisdiction of the Hong Kong Employment Ordinance and not previously covered by the defined benefit retirement scheme. The schemes are administered by independent trustees.

Under the defined contribution scheme, the employer is required to make contributions to the scheme at rates specified under the rules of the scheme. Where employees leave the scheme prior to the full vesting of the employer’s contributions, the amount of forfeited contributions is used to reduce the contributions payable by the Group.

Under the MPF scheme, the employer and its employees are each required to make contributions to the scheme at 5 percent of the employees’ relevant income, subject to a cap of monthly relevant income of HK$20,000. Contributions to the scheme vest immediately upon the completion of the service in the relevant service period.

— 111 —

ACCOUNTANTS’ REPORT OF THE PROPERTY GROUP

APPENDIX I

21 SHARE CAPITAL

As at 31 December 2001 2002 (In HK$) Authorised: 1 Ordinary shares of US$1 each 8 8 Issued: 1 Ordinary shares of US$1 each 8 8 22 DEFICIT Property revaluation reserve Currency translation reserve Deficit (In HK$ million) THE GROUP At 1 January 2001 112 3 (228) Deficit on revaluation of investment properties, net of taxation (112) — — Loss for the year — — (23) Dividends (note 12) — — (9) Attributable to: — The Company and subsidiaries — 3 (260) At 1 January 2002 — 3 (260) Profit for the year — — 95 Dividends (note 12) — — (473) Attributable to: — The Company and subsidiaries — 3 (638) At 1 January 2003 — 3 (638) Surplus on revaluation of investment properties, net of taxation 263 — — Translation exchange difference — (3) — Profit for the year — — 3 Attributable to: — The Company and subsidiaries 263 — (635)	As at 31 December 2001 2002 (In HK$) Authorised: 1 Ordinary shares of US$1 each 8 8 Issued: 1 Ordinary shares of US$1 each 8 8 22 DEFICIT Property revaluation reserve Currency translation reserve Deficit (In HK$ million) THE GROUP At 1 January 2001 112 3 (228) Deficit on revaluation of investment properties, net of taxation (112) — — Loss for the year — — (23) Dividends (note 12) — — (9) Attributable to: — The Company and subsidiaries — 3 (260) At 1 January 2002 — 3 (260) Profit for the year — — 95 Dividends (note 12) — — (473) Attributable to: — The Company and subsidiaries — 3 (638) At 1 January 2003 — 3 (638) Surplus on revaluation of investment properties, net of taxation 263 — — Translation exchange difference — (3) — Profit for the year — — 3 Attributable to: — The Company and subsidiaries 263 — (635)	As at 31 December 2001 2002 (In HK$) Authorised: 1 Ordinary shares of US$1 each 8 8 Issued: 1 Ordinary shares of US$1 each 8 8 22 DEFICIT Property revaluation reserve Currency translation reserve Deficit (In HK$ million) THE GROUP At 1 January 2001 112 3 (228) Deficit on revaluation of investment properties, net of taxation (112) — — Loss for the year — — (23) Dividends (note 12) — — (9) Attributable to: — The Company and subsidiaries — 3 (260) At 1 January 2002 — 3 (260) Profit for the year — — 95 Dividends (note 12) — — (473) Attributable to: — The Company and subsidiaries — 3 (638) At 1 January 2003 — 3 (638) Surplus on revaluation of investment properties, net of taxation 263 — — Translation exchange difference — (3) — Profit for the year — — 3 Attributable to: — The Company and subsidiaries 263 — (635)	2003 8 8 Total (113) (112) (23) (9) (257) (257) 95 (473) (635) (635) 263 (3) 3 (372)
— — —	3 — —	(260) 95 (473)	(257 95 (473
—	3	(638)
— 263 — —	3 — (3) —	(638) — — 3	(635 263 (3 3
263	—	(635)

— 112 —

ACCOUNTANTS’ REPORT OF THE PROPERTY GROUP

APPENDIX I

23 DEFERRED TAXATION

a. Movement in deferred tax liabilities during the Relevant Periods is as follows:

The Group Accelerated tax depreciation Revaluation of properties Others (in HK$ million) THE GROUP As at 1 January 2001 25 267 8 Charged to income statement during the year (note 10) 57 — 1 Charged to property revaluation reserve — 75 — As at 31 December 2001 82 342 9 Charged to income statement during the year (note 10) 29 — — As at 31 December 2002 111 342 9 Charged to income statement during the year (note 10) 42 — — Charged to property revaluation reserve — 2 — As at 31 December 2003 153 344 9	The Group Accelerated tax depreciation Revaluation of properties Others (in HK$ million) THE GROUP As at 1 January 2001 25 267 8 Charged to income statement during the year (note 10) 57 — 1 Charged to property revaluation reserve — 75 — As at 31 December 2001 82 342 9 Charged to income statement during the year (note 10) 29 — — As at 31 December 2002 111 342 9 Charged to income statement during the year (note 10) 42 — — Charged to property revaluation reserve — 2 — As at 31 December 2003 153 344 9	The Group Accelerated tax depreciation Revaluation of properties Others (in HK$ million) THE GROUP As at 1 January 2001 25 267 8 Charged to income statement during the year (note 10) 57 — 1 Charged to property revaluation reserve — 75 — As at 31 December 2001 82 342 9 Charged to income statement during the year (note 10) 29 — — As at 31 December 2002 111 342 9 Charged to income statement during the year (note 10) 42 — — Charged to property revaluation reserve — 2 — As at 31 December 2003 153 344 9	Total 300 58 75
82 29 111 42 —	342 — 342 — 2	9 — 9 — —	433 29
			462 42 2
153	344	9	506

b. Deferred income tax assets are recognised for tax loss carry forward to the extent that realisation of the related tax benefit through utilisation against future taxable profits is probable. The Group has not recognised any deferred tax assets during the year ended 31 December 2001. Movement in deferred tax assets during the year ended 31 December 2002 and 2003 is as follows:

	The Group
	Tax Losses
	(in HK$ million)
As at 1 January 2002	—
Credited to income statement during the year (note 10)	8
As at 31 December 2002	8
Credited to income statement during the year (note 10)	12
As at 31 December 2003	20

c. The Group has unutilised estimated tax losses of HK$192 million (2002: HK$150 million; 2001: HK$32 million) to carry forward for deduction against future taxable income. Estimated tax losses of HK$181 million (2002: HK$97 million; 2001: Nil) will expire within four to five years from 31 December 2003. The remaining portion of the tax losses mainly related to Hong Kong companies and can be carried forward indefinitely.

— 113 —

ACCOUNTANTS’ REPORT OF THE PROPERTY GROUP

APPENDIX I

24 NOTES TO THE COMBINED CASH FLOW STATEMENT

a. Reconciliation of profit before taxation to net cash outflow from operating activities

The Group 2001 2002 (in HK$ million) 115 155 (5) (3) 6 107 23 8 21 22 11 4 2 34 105 (64)	The Group 2001 2002 (in HK$ million) 115 155 (5) (3) 6 107 23 8 21 22 11 4 2 34 105 (64)	2003 33 (10) 160 10 23 — 2 (41) 177 286 1 (20) (2,402) (2,701) 4,265 (10) 2 (56) (458) (66) 10 (14) (17) (545)
278 (1,260) 62 (116) — — 36 48 1 51 (900) (76) 5 (56) (8)	263 (2,204) 4 113 — — (142) (38) (6) 36 (1,974) (71) 3 (28) (6)	177 286 1 (20 (2,402 (2,701 4,265 (10 2 (56
		(458 (66 10 (14 (17
(1,035)	(2,076)

— 114 —

ACCOUNTANTS’ REPORT OF THE PROPERTY GROUP

APPENDIX I

b. Analysis of cash and cash equivalents

Cash and bank balances Restricted cash Cash and cash equivalents as at 31 December 25 COMMITMENTS a. Capital Authorised and contracted for Authorised but not contracted for An analysis of the above capital commitments by nature is as Investment properties Property development (note i) Acquisition of fixed assets	The Group 2001 2002 (in HK$ million) 170 337 — — 170 337 The Group 2001 2002 (in HK$ million) 2,862 4,020 10,987 7,222 13,849 11,242 follows: The Group 2001 2002 (in HK$ million) — — 13,849 11,241 — 1 13,849 11,242	2003 2,825 (2,701) 124 2003 2,741 3,084 5,825 2003 82 5,743 — 5,825

i. The capital commitment as disclosed above represented management’s best estimate of total construction costs for the Cyberport Project.

— 115 —

ACCOUNTANTS’ REPORT OF THE PROPERTY GROUP

APPENDIX I

26 CONTINGENT LIABILITIES

b. Operating leases

The total future minimum lease payments under non-cancellable operating leases are payable as at each period of 31 December of the Relevant Periods as follows:

Land and buildings

Within 1 year After 1 year but within 5 years	The Group 2001 2002 (in HK$ million) — 4 — 7 — 11	2003 4 3
		7

The total future minimum lease receipts under non-cancellable operating leases are receivable as at 31 December of the Relevant Periods as follows:

Land and buildings

Within 1 year After 1 year but within 5 years After 5 years	The Group 2001 2002 (in HK$ million) 243 283 488 407 241 193 972 883	2003 254 420 146
		820

			The Group			The Company
		2001	2002	2003	2001	2002	2003
			(in HK$ million)			(in HK$ million)
Performance	guarantee	8	8	1	—	—	—

— 116 —

ACCOUNTANTS’ REPORT OF THE PROPERTY GROUP

APPENDIX I

27 BANKING FACILITIES

Aggregate banking facilities as at 31 December 2003 were HK$1,147 million (2002: HK$1,222 million; 2001: HK$1,137 million) of which the unused facilities amounted to Nil (2002: HK$26 million; 2001: Nil).

Security pledged for certain banking facilities includes:

		The Group
	2001	2002	2003
		(In HK$ million)
Investment properties	2,703	3,833	3,888
Land and buildings	21	58	37
	2,724	3,891	3,925

a. As at 31 December 2002, Cyber-Port Limited, an indirect wholly-owned subsidiary of the Company, had been granted a standby letter of credit facility amounting to approximately HK$720 million (2001: HK$1,405 million) from a bank for the purpose of providing a cashflow guarantee covering an amount equal to the 6-month forecast net cashflow requirements of the Cyberport Project, defined in and pursuant to the terms of the Cyberport Project Agreement. Such facility was secured by a bank fixed deposit of approximately HK$722 million (2001: HK$1,405 million) placed by PCCW. There was no such standby letter of credit facility as at 31 December 2003.
b. Gain Score Limited, a subsidiary of Company, has pledged its investment in a subsidiary of approximately HK$312 million as at 31 December 2003 (2002: HK$312 million; 2001: Nil) to secure certain banking facility.

III SUBSEQUENT EVENTS

a. On 5 March 2004, PCCW and Dong Fang Gas Holdings Limited signed a Sale and Purchase Agreement under which PCCW agreed to transfer its holdings in the Company and the Subsidiary Companies and certain loans owed to it by the Subsidiary Companies to DFG at a consideration of HK$6,557 million. Prior to completion of the Proposed Acquisition, the Company and the Subsidiary Companies will undergo the Reorganisation whereby the Company will become the holding company of the Group.
b. On 1 March 2004, Beijing Jing Wei House and Land Estate Development Co., Ltd., prepaid the outstanding principal amount of RMB1,220 million (approximately HK$1,151 million) under the RMB1,300 million loan facility using funds advanced by PCCW.

— 117 —

ACCOUNTANTS’ REPORT OF THE PROPERTY GROUP

APPENDIX I

IV SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements have been prepared by the Company or the Subsidiary Companies in respect of any period subsequent to 31 December 2003.

PricewaterhouseCoopers

Certified Public Accountants

Hong Kong, 2 April 2004

— 118 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

1. SHARE CAPITAL

The authorised and issued share capitals of DFG as at the Latest Practicable Date were as follows:

Authorised: 1,500,000,000 Existing DFG Shares Issued and fully paid: 1,161,265,406 Existing DFG Shares	HK$ 600,000,000
	464,506,162

All the existing DFG Shares rank pari passu in all respects including all rights as to dividends, voting and return of capital.

Under the share option scheme adopted by DFG on 17 March 2003, the DFG Directors may at their discretion grant option to eligible participants to take up options for DFG Shares, subject to the terms and conditions stipulated therein, which in aggregate may not exceed 30% of the DFG Shares from time to time. There were no outstanding options as at the Latest Practicable Date.

DFG has no options, warrants and conversion rights convertible into DFG Shares as at the Latest Practicable Date.

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

Since 31 March 2003, being the last financial year end date of DFG, no new Existing DFG Shares have been issued by DFG.

— 119 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

2. FINANCIAL SUMMARY

The following is a summary of the audited consolidated profit and loss accounts and condensed consolidated balance sheet of the DFG Group extracted from the relevant annual reports of DFG.

For the year ended 31 March 2003 2002 2001 HK$’000 HK$’000 HK$’000 (Note a) 136,196 258,265 524,334 (127,105) (230,250) (654,217) 9,091 28,015 (129,883) 15,163 6,085 29,020 (13,932) (10,107) (12,347) (44,368) (78,242) (78,139) (23,179) (93,699) (167,490) — (43,326) (47,366) — (47,693) — — (11,865) — — (23,400) — (57,225) (274,232) (406,205) (29,429) (33,712) (28,997) (6,554) 189 — — 2,928 7,811 (691) (11,325) 52 (28,363) (60,499) — (1,664) — — — — (34,694) — (24,433) — (2,129) (88,227) (295,793) (126,055) (489,311) (757,826) (161) 9,854 (5,036) (126,216) (479,457) (762,862) 13,002 20,463 (3,142) (113,214) (458,994) (766,004) HK$(0.18) HK$(12.66) HK$(61.63)	For the year ended 31 March 2003 2002 2001 HK$’000 HK$’000 HK$’000 (Note a) 136,196 258,265 524,334 (127,105) (230,250) (654,217) 9,091 28,015 (129,883) 15,163 6,085 29,020 (13,932) (10,107) (12,347) (44,368) (78,242) (78,139) (23,179) (93,699) (167,490) — (43,326) (47,366) — (47,693) — — (11,865) — — (23,400) — (57,225) (274,232) (406,205) (29,429) (33,712) (28,997) (6,554) 189 — — 2,928 7,811 (691) (11,325) 52 (28,363) (60,499) — (1,664) — — — — (34,694) — (24,433) — (2,129) (88,227) (295,793) (126,055) (489,311) (757,826) (161) 9,854 (5,036) (126,216) (479,457) (762,862) 13,002 20,463 (3,142) (113,214) (458,994) (766,004) HK$(0.18) HK$(12.66) HK$(61.63)	For the year ended 31 March 2003 2002 2001 HK$’000 HK$’000 HK$’000 (Note a) 136,196 258,265 524,334 (127,105) (230,250) (654,217) 9,091 28,015 (129,883) 15,163 6,085 29,020 (13,932) (10,107) (12,347) (44,368) (78,242) (78,139) (23,179) (93,699) (167,490) — (43,326) (47,366) — (47,693) — — (11,865) — — (23,400) — (57,225) (274,232) (406,205) (29,429) (33,712) (28,997) (6,554) 189 — — 2,928 7,811 (691) (11,325) 52 (28,363) (60,499) — (1,664) — — — — (34,694) — (24,433) — (2,129) (88,227) (295,793) (126,055) (489,311) (757,826) (161) 9,854 (5,036) (126,216) (479,457) (762,862) 13,002 20,463 (3,142) (113,214) (458,994) (766,004) HK$(0.18) HK$(12.66) HK$(61.63)
9,091 15,163 (13,932) (44,368) (23,179) — — — — (57,225) (29,429) (6,554) — (691) (28,363) (1,664) — — (2,129) (126,055) (161) (126,216) 13,002	28,015 6,085 (10,107) (78,242) (93,699) (43,326) (47,693) (11,865) (23,400) (274,232) (33,712) 189 2,928 (11,325) (60,499) — — (24,433) (88,227) (489,311) 9,854 (479,457) 20,463	(129,883 29,020 (12,347 (78,139 (167,490 (47,366 — — —
		(406,205 (28,997 — 7,811 52 — — (34,694 — (295,793
		(757,826 (5,036
		(762,862 (3,142
(113,214) HK$(0.18)	(458,994) HK$(12.66)

— 120 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

		As at 31 March
Assets and Liabilities	2003	2002	2001
	HK$’000	HK$’000	HK$’000
			(Note a)
Total assets	638,977	341,222	811,699
Total liabilities and minority interests	454,334	489,359	493,997
Balance (deficiency) of shareholders’ funds	184,643	(148,137)	317,702

Note a: The amounts have been adjusted to reflect the change in accounting policy for the adoption of new and revised Statements of Standard Accounting Practices issued by the Hong Kong Society of Accountants during the year ended 31 March 2002.

b: For each of the three years ended 31 March 2003, the DFG Group had not incurred any extraordinary items or exceptional items in the consolidated profit and loss account and had not declared any dividends.

3. INDEBTEDNESS

Borrowings

At the close of business on 31 January 2004, (being the latest practicable date for the purpose of this indebtedness statement prior to the printing of this circular), the DFG Group had outstanding borrowings of approximately HK$293 million, comprising secured bank loans of approximately HK$108 million, secured margin loans payable of approximately HK$16 million, unsecured bank loans of approximately HK$5 million, amounts due to minority shareholders of approximately HK$7 million, amount due to a related company of HK$25 million, guaranteed convertible loan with principal amount of approximately US$12 million (equivalent to approximately HK$92 million) and other borrowings of approximately HK$40 million. The other borrowings comprise secured loans payable of approximately HK$30 million and unsecured loans payable of approximately HK$10 million. The unsecured bank loans are guaranteed by minority shareholders of DFG’s subsidiaries.

Debt securities

At the close of business on 31 January 2004, the DFG Group had a convertible loan with a principal amount of approximately US$12 million (equivalent to approximately HK$92 million).

Securities and guarantees

The secured borrowings as shown above were secured by certain property, plant and equipment of the DFG Group with an aggregate net book value of approximately HK$91 million, investments in securities of approximately HK$10 million, properties held for sale of approximately HK$7 million, accounts receivable of approximately HK$21 million and bank deposits of approximately HK$32 million.

— 121 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

Contingent liabilities

At the close of business on 31 January 2004, save as the litigations as set out under the section headed “Litigations” in appendix V to this circular, the DFG Group had no material contingent liabilities.

Disclaimer

Save as aforesaid and apart from intra-group liabilities, the DFG Group did not have, at the close of business on 31 January 2004, any loan capital issued and outstanding or agreed to be issued, bank overdrafts, loans or other similar indebtedness, liabilities under acceptances or acceptance credits, debentures, mortgages, charges, obligations under hire purchases contracts or finance leases, guarantees, or other material contingent liabilities.

Foreign currency amounts have been translated into Hong Kong dollars at the exchange rates prevailing at the close of business on 31 January 2004.

The directors have confirmed that there has been no material change in the indebtedness and contingent liabilities of the DFG Group since 31 January 2004 and up to the Latest Practicable Date.

4. WORKING CAPITAL

The DFG Board is of the opinion that after taking into account the DFG Group’s present internal resources and banking and other borrowing facilities, the DFG Group has sufficient working capital for its present requirements.

The PCCW Board is of the opinion that after taking into account the Property Group’s internal resources and available borrowing facilities, the Property Group has sufficient working capital for its requirements.

Based on the above, the DFG Board is not aware of any matter or fact which will render the Enlarged DFG Group not having sufficient working capital for its requirements after completion of the Transactions.

5. MATERIAL CHANGE

Save as disclosed in the “Post balance sheet events” in the 2003 Annual Report of DFG, the 2003/04 interim report of DFG, the “Litigation” section set out in appendix V to this Circular and the Acquisition Agreement, the DFG Board is not aware of any material changes in the financial or trading position or prospects of the DFG Group since 31 March 2003, the date to which the latest audited financial statements of the DFG Group were made up.

— 122 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

6. AUDITED CONSOLIDATED FINANCIAL STATEMENTS

Set out below is the audited financial statements of the DFG Group for the year ended 31 March 2003 as extracted from DFG’s 2003 annual report. In this section, references to the page number are referred to the page number in DFG’s 2003 annual report.

Consolidated Income Statement

For the year ended 31 March 2003

Notes Turnover 4 Cost of sales Other operating income 6 Distribution cost Administrative expenses Allowance for bad and doubtful debts Impairment loss recognised in respect of properties under development held for sale Impairment loss recognised in respect of property, plant and equipment Impairment loss recognised in respect of factory under construction Provision for an onerous contract 7 Loss from operations 8 Finance cost 9 (Loss) gain on disposal of subsidiaries Gain on deemed disposal of an associate Loss on disposal of associates Allowance for amounts due from associates Allowance for amount due from a minority shareholder Impairment loss recognised on interest in an associate Share of loss of associates Loss before taxation Taxation (charge) credit 12 Loss before minority interests Minority interests Net loss for the year Loss per share — Basic 13	2003 HK$’000 136,196 (127,105)	2002 HK$’000 258,265 (230,250) 28,015 6,085 (10,107) (78,242) (93,699) (43,326) (47,693) (11,865) (23,400) (274,232) (33,712) 189 2,928 (11,325) (60,499) — (24,433) (88,227) (489,311) 9,854 (479,457) 20,463 (458,994) HK$(12.66)
	9,091 15,163 (13,932) (44,368) (23,179) — — — — (57,225) (29,429) (6,554) — (691) (28,363) (1,664) — (2,129) (126,055) (161) (126,216) 13,002	28,015 6,085 (10,107 (78,242 (93,699 (43,326 (47,693 (11,865 (23,400
		(274,232 (33,712 189 2,928 (11,325 (60,499 — (24,433 (88,227
		(489,311 9,854
		(479,457 20,463
	(113,214) HK$(0.18)

— 123 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

Consolidated Balance Sheet

At 31 March 2003

2003 Notes HK$’000 Non-Current Assets Property, plant and equipment 14 126,447 Interests in associates 16 — Deposit paid for acquisition of an associate 17 10,000 Investments in securities 18 467 136,914 Current Assets Inventories 19 24,714 Properties under development held for sale 20 — Properties held for sale 21 6,500 Investments in securities 18 14 Loans receivable 22 — Amounts due from associates 23 — Amounts due from minority shareholders 24 — Amounts due from customers for contract work 25 — Trade receivables 26 49,142 Other debtors, deposits and prepayments 16,736 Pledged bank deposits 26,593 Bank balances and cash 378,364 502,063 Current Liabilities Bills payable and import loans 17,147 Rentals and sales deposits received 10,000 Unclaimed dividends — Trade payables 27 41,754 Other creditors and accruals 112,287 Provision 7 23,400 Amounts due to customers for contract work 25 — Taxation payable 3,362 Amounts due to minority shareholders 24 6,599 Amounts due to related companies 28 1,065 Bank borrowings — due within one year 29 91,697 Other borrowings 30 131,642 438,953 Net Current Assets (Liabilities) 63,110 200,024	2003 Notes HK$’000 Non-Current Assets Property, plant and equipment 14 126,447 Interests in associates 16 — Deposit paid for acquisition of an associate 17 10,000 Investments in securities 18 467 136,914 Current Assets Inventories 19 24,714 Properties under development held for sale 20 — Properties held for sale 21 6,500 Investments in securities 18 14 Loans receivable 22 — Amounts due from associates 23 — Amounts due from minority shareholders 24 — Amounts due from customers for contract work 25 — Trade receivables 26 49,142 Other debtors, deposits and prepayments 16,736 Pledged bank deposits 26,593 Bank balances and cash 378,364 502,063 Current Liabilities Bills payable and import loans 17,147 Rentals and sales deposits received 10,000 Unclaimed dividends — Trade payables 27 41,754 Other creditors and accruals 112,287 Provision 7 23,400 Amounts due to customers for contract work 25 — Taxation payable 3,362 Amounts due to minority shareholders 24 6,599 Amounts due to related companies 28 1,065 Bank borrowings — due within one year 29 91,697 Other borrowings 30 131,642 438,953 Net Current Assets (Liabilities) 63,110 200,024	2002 HK$’000 179,975 3,920 — 467 184,362 41,719 13,380 — 7 222 12,776 1,924 246 54,295 12,885 — 19,406 156,860 26,379 10,492 273 35,090 82,509 23,400 562 3,090 5,635 — 71,073 196,400 454,903 (298,043) (113,681)
	136,914 24,714 — 6,500 14 — — — — 49,142 16,736 26,593 378,364 502,063 17,147 10,000 — 41,754 112,287 23,400 — 3,362 6,599 1,065 91,697 131,642 438,953 63,110	184,362
		41,719 13,380 — 7 222 12,776 1,924 246 54,295 12,885 — 19,406
		156,860
		26,379 10,492 273 35,090 82,509 23,400 562 3,090 5,635 — 71,073 196,400
		454,903
		(298,043
	200,024

— 124 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

Consolidated Balance Sheet (cont’d)

At 31 March 2003

Notes Capital and Reserves Share capital 31 Reserves Minority Interests Non-Current Liabilities Bank borrowings — due after one year 29 Deferred taxation 35	2003 HK$’000 464,506 (279,863) 184,643 15,381 — — — 200,024	2002 HK$’000 14,506 (162,643) (148,137) 28,383 6,070 3 6,073 (113,681)

— 125 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

Balance Sheet

At 31 March 2003

Notes Non-Current Assets Property, plant and equipment 14 Investments in subsidiaries 15 Amounts due from subsidiaries — due after one year 15 Current Assets Amounts due from subsidiaries — due within one year 15 Deposits and prepayments Bank balances Current Liabilities Other creditors and accruals Provision 7 Amounts due to subsidiaries 15 Other borrowings 30 Net Current Assets (Liabilities) Capital and Reserves Share capital 31 Reserves 34	2003 2002 HK$’000 HK$’000 8 — — 63,641 120,356 — 120,364 63,641 240,080 — 928 — 20,055 4 261,063 4 11,988 5,807 23,400 23,400 246 — — 60,000 35,634 89,207 225,429 (89,203) 345,793 (25,562) 464,506 14,506 (118,713) (40,068) 345,793 (25,562)	2003 2002 HK$’000 HK$’000 8 — — 63,641 120,356 — 120,364 63,641 240,080 — 928 — 20,055 4 261,063 4 11,988 5,807 23,400 23,400 246 — — 60,000 35,634 89,207 225,429 (89,203) 345,793 (25,562) 464,506 14,506 (118,713) (40,068) 345,793 (25,562)
	120,364 240,080 928 20,055 261,063 11,988 23,400 246 — 35,634 225,429	63,641
		— — 4
		4
		5,807 23,400 — 60,000
		89,207
		(89,203
	345,793
	464,506 (118,713)	14,506 (40,068
	345,793

— 126 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

Consolidated Statement of Changes in Equity

For the year ended 31 March 2003

Share capital r cons HK$’000 14,506 — — —	Capital eserve on olidation HK$’000 33,545 — (6) (6,157)	Share premium HK$’000 47,140 — — —	Special reserve Capital redemption reserve Enterprises expansion reserve HK$’000 HK$’000 HK$’000 694,583 572 199 — — — — — — — — —	Special reserve Capital redemption reserve Enterprises expansion reserve HK$’000 HK$’000 HK$’000 694,583 572 199 — — — — — — — — —	Special reserve Capital redemption reserve Enterprises expansion reserve HK$’000 HK$’000 HK$’000 694,583 572 199 — — — — — — — — —	Revenue reserve Exchange reserves Co HK$’000 HK$’000 199 — — (682) — — — —	Revenue reserve Exchange reserves Co HK$’000 HK$’000 199 — — (682) — — — —	ntributed surplus A HK$’000 130,555 — — —	ccumulated losses Total HK$’000 HK$’000 (603,597) 317,702 — (682) — (6) — (6,157)	ccumulated losses Total HK$’000 HK$’000 (603,597) 317,702 — (682) — (6) — (6,157)
— — 14,506 — — — 450,000 —	(6,163) — 27,382 — (10) (10) — —	— — 47,140 — — — — —	— — 694,583 — — — — —	— — 572 — — — — —	— — 199 — — — — —	— — 199 — — — — —	(682) — (682) (3,996) — (3,996) — —	— — 130,555 — — — — —	—	(6,845)

Included in capital reserve on consolidation as at 31 March 2003, HK$31,587,000 (2002: HK$31,597,000) represented negative goodwill arising from acquisition of subsidiaries.

Included in capital reserve on consolidation as at 31 March 2003, HK$4,215,000 (2002: HK$4,215,000) represented goodwill arising from acquisition of subsidiaries.

The special reserve of the Group represents the difference between share capital, share premium and capital redemption reserve of Companion Building Material (Holdings) Limited and the nominal amount of share capital issued by the Company pursuant to the scheme of arrangement on 24 December 1999.

— 127 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

Consolidated Cash Flow Statement

For the year ended 31 March 2003

2003 HK$’000 OPERATING ACTIVITIES Loss from operations (57,225) Adjustments for: Loss on disposal of club debenture — Gain on disposal of other securities (50) Interest income (7,091) Depreciation 23,866 (Gain) loss on disposal of property, plant and equipment (3,807) Impairment loss recognised on properties under development held for sale — Impairment loss recognised on property, plant and equipment — Impairment loss recognised on factory under construction — Provision for an onerous contract — Write back of unclaimed dividends (273) Allowance for inventories 3,550 Allowance for bad and doubtful debts 23,179 Unrealised loss on trading securities — Operating cash flows before movements in working capital (17,851) Decrease in inventories 13,455 (Increase) decrease in trading securities (7) Decrease in loans receivable 222 Decrease in amounts due from customers for contract work — Increase in trade receivables, other debtors, deposits and prepayments (44,344) (Decrease) increase in bills payable and import loans (9,232) Increase (decrease) in rental and sales deposits received 88 Increase in trade payables, other creditors and accruals 10,610 Decrease in amounts due to customers for contract work — Net cash (used in) from operations (47,059) Interest paid (1,048) Hong Kong Profits Tax refunded (paid) 131 Overseas tax refunded — NET CASH (USED IN) FROM OPERATING ACTIVITIES (47,976)	2003 HK$’000 OPERATING ACTIVITIES Loss from operations (57,225) Adjustments for: Loss on disposal of club debenture — Gain on disposal of other securities (50) Interest income (7,091) Depreciation 23,866 (Gain) loss on disposal of property, plant and equipment (3,807) Impairment loss recognised on properties under development held for sale — Impairment loss recognised on property, plant and equipment — Impairment loss recognised on factory under construction — Provision for an onerous contract — Write back of unclaimed dividends (273) Allowance for inventories 3,550 Allowance for bad and doubtful debts 23,179 Unrealised loss on trading securities — Operating cash flows before movements in working capital (17,851) Decrease in inventories 13,455 (Increase) decrease in trading securities (7) Decrease in loans receivable 222 Decrease in amounts due from customers for contract work — Increase in trade receivables, other debtors, deposits and prepayments (44,344) (Decrease) increase in bills payable and import loans (9,232) Increase (decrease) in rental and sales deposits received 88 Increase in trade payables, other creditors and accruals 10,610 Decrease in amounts due to customers for contract work — Net cash (used in) from operations (47,059) Interest paid (1,048) Hong Kong Profits Tax refunded (paid) 131 Overseas tax refunded — NET CASH (USED IN) FROM OPERATING ACTIVITIES (47,976)	2002 HK$’000 (274,232) 125 (145) (322) 31,392 7,720 43,326 47,693 11,865 23,400 — 18,554 93,699 2 3,077 24,518 5,693 9,837 51 (26,881) 8,041 (3,701) 12,181 (255) 32,561 (29,475) (160) 687 3,613
	(17,851) 13,455 (7) 222 — (44,344) (9,232) 88 10,610 — (47,059) (1,048) 131 — (47,976)	3,077 24,518 5,693 9,837 51 (26,881 8,041 (3,701 12,181 (255
		32,561 (29,475 (160 687
		3,613

— 128 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

Consolidated Cash Flow Statement (cont’d)

For the year ended 31 March 2003

Consolidated Cash Flow Statement (cont’d) For the year ended 31 March 2003
		2003	2002
	Notes	HK$’000	HK$’000
INVESTING ACTIVITIES
Purchase of property, plant and equipment		(3,187)	(5,338)
Purchase of other securities		(30,000)	—
Deposit paid for acquisition of an associate		(10,000)	—
(Increase) decrease in amounts due from associates		(15,587)	7,185
Proceeds from disposal of property, plant and equipment		22,287	5,851
Proceeds from disposal of subsidiaries (net of cash and
cash equivalents disposed of)	36	28,184	94
Expenditure on properties under development held for sale		—	(1,706)
Proceeds from disposal of associates		1,100	1,869
Repayment from minority shareholders		260	452
Increase in pledged bank deposits		(26,593)	—
Proceeds from disposal of other securities		30,050	1,111
Interest received		7,091	322
NET CASH FROM INVESTING ACTIVITIES		3,605	9,840
FINANCING ACTIVITIES
Issue of shares		450,000	—
Advance from minority shareholders		964	—
Advance from related companies		1,065	—
Repayment of amounts due to minority shareholders		—	(1,723)
New bank loans raised		72,921	23,173
Repayment of bank loans		(62,459)	(38,509)
Decrease in amount due to an investee company		—	(1,081)
Repayment of obligation under finance leases		—	(62)
New other borrowings raised		751	5,000
Repayment of other borrowings		(65,509)	(4,978)
NET CASH FROM (USED IN) FINANCING ACTIVITIES		397,733	(18,180)
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS		353,362	(4,727)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
THE YEAR		15,072	20,737
EFFECT OF FOREIGN EXCHANGE RATE CHANGES		764	(938)
CASH AND CASH EQUIVALENTS AT END OF
THE YEAR		369,198	15,072
ANALYSIS OF THE BALANCES OF CASH AND
CASH EQUIVALENTS
Bank balances and cash		378,364	19,406
Bank overdraft		(9,166)	(4,334)
		369,198	15,072

— 129 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

Notes to the Financial Statements

For the year ended 31 March 2003

1. GENERAL

The Company is incorporated in Bermuda as an exempted company with limited liability and its securities are listed on The Stock Exchange of Hong Kong Limited (the “Hong Kong Stock Exchange”).

The Company is an investment holding company. The activities of its principal subsidiaries and associates are set out in notes 15 and 16 respectively.

2. ADOPTION OF NEW AND REVISED STATEMENTS OF STANDARD ACCOUNTING PRACTICE

During the year, the Group has adopted, for the first time, a number of new and revised Statements of Standard Accounting Practice (“SSAPs”) issued by the Hong Kong Society of Accountants, which has resulted in the adoption of the following new and revised accounting policies. The adoption of these SSAPs has resulted in a change in the format of presentation of the cash flow statement and the statement of changes in equity but has had no material effect on the results for the current or prior accounting periods. Accordingly, no prior period adjustment is required.

Foreign Currencies

The revisions to SSAP 11 “Foreign Currency Translation” have eliminated the choice of translating the income statements of overseas subsidiaries at the closing rate for the year, the policy previously followed by the Group. They are now required to be translated at an average rate. This change in accounting policy has not had any material effect on the results for the current or prior accounting periods.

Employee Benefits

In the current year, the Group has adopted SSAP 34 “Employee Benefits”, which introduces measurement rules for employee benefits, including retirement benefit plans. Because the Group participates only in defined contribution retirement benefit schemes, the adoption of SSAP 34 has not had any material impact on the financial statements.

3. SIGNIFICANT ACCOUNTING POLICIES

The financial statements have been prepared under the historical cost convention, as modified for the revaluation of investments in securities.

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

Basis of consolidation

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

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

— 130 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

Goodwill

Goodwill arising on consolidation represents the excess of the cost of acquisition over the Group’s interest in the fair value of the identifiable assets and liabilities of a subsidiary or an associate at the date of acquisition.

Goodwill arising on acquisition prior to 1 April 2001 continues to be held in reserves, and will be charged to the income statement at the time of disposal of the relevant subsidiary or an associate or at such time as the goodwill is determined to be impaired.

Goodwill arising on acquisition since 1 April 2001 is capitalised and amortised on a straight-line basis over its useful economic life. Goodwill arising on the acquisition of an associate is included within the carrying amount of the associate. Goodwill arising on the acquisition of subsidiaries is presented separately in the balance sheet.

On disposal of a subsidiary or an associate, the attributable amount of unamortised goodwill/goodwill previously eliminated against reserve is included in the determination of the profit or loss on disposal.

Negative goodwill

Negative goodwill represents the excess of the Group’s interest in the fair value of the identifiable assets and liabilities of a subsidiary or an associate at the date of acquisition over the cost of acquisition.

Negative goodwill arising on acquisition prior to 1 April 2001 continues to be held in reserves and will be credited to income at the time of disposal of the relevant subsidiary or associate.

Negative goodwill arising on acquisition since 1 April 2001 is presented as deduction from assets and will be released to income based on an analysis of the circumstances from which the balance resulted.

To the extent that the negative goodwill is attributable to losses or expenses anticipated at the date of acquisition, it is released to income in the period in which those losses or expenses arise. The remaining negative goodwill is recognised as income on a straight-line basis over the remaining average useful life of the identifiable acquired depreciable assets. To the extent that such negative goodwill exceeds the aggregate fair value of the acquired identifiable non-monetary assets, it is recognised in income immediately.

Negative goodwill arising on the acquisition of an associate is deducted from the carrying value of that associate. Negative goodwill arising on the acquisition of subsidiaries is presented separately in the balance sheet as a deduction from assets.

On disposal of a subsidiary or an associate, the attributable amount of negative goodwill not released to income/negative goodwill held in reserve is included in the determination of the profit or loss on disposal.

Investments in subsidiaries

Investments in subsidiaries are included in the Company’s balance sheet at cost less any identified impairment

loss.

Interests in associates

The consolidated income statement includes the Group’s share of the post-acquisition results of its associates for the year. In the consolidated balance sheet, interest in associates is stated at the Group’s share of the net assets of the associates less any identified impairment loss.

— 131 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

Revenue recognition

Sales of goods are recognised when goods are delivered and title has passed.

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

Sales proceeds on dealing of listed trading securities are recognised on trade date.

Rental income under operating leases is recognised on a straight-line basis over the term of the relevant lease.

Property, plant and equipment

Property, plant and equipment are stated at cost less depreciation and any accumulated impairment losses.

Depreciation is provided to write off the cost of property, plant and equipment over their estimated useful lives and after taking into account their estimated residual values, using the straight-line method, at the following rates per annum:

Land		Over the remainder of lease terms
Buildings
—	Long lease in Hong Kong and	2%
	the People’s Republic of China
	(the “PRC”)
—	Medium-term lease in Hong Kong	2% or the term of the lease, if shorter
—	Medium-term lease in the PRC	4.5%
Plant	and machinery	9% - 15%
Leasehold improvements
—	Owned premises	15%
—	Leased premises	Over the unexpired term of the lease
Furniture, fixtures and equipment		15% - 20%
Motor vehicles		18% - 30%
Computer software		15% - 33.33%

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

Impairment

At each balance sheet date, the Group reviews the carrying amounts of its assets to determine whether there is any indication that those assets have suffered an impairment loss. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. Impairment loss is recognised as an expense immediately.

Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but such that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised as income immediately.

— 132 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

Investments in securities

Investments in securities are recognised on a trade-date basis and are initially measured at cost.

At subsequent reporting dates, investments in securities are measured at fair value. Where securities are held for trading purposes, unrealised gains and losses are included in net profit or loss for the period. For other securities, unrealised gains and losses are dealt with in equity, until the security is disposed of or is determined to be impaired, at which time the cumulative gain or loss is included in net profit or loss for the period.

Inventories

Inventories are stated at the lower of cost or net realisable value. Cost is calculated using the weighted average method.

Properties under development held for sale

Properties under development held for sale are stated at the lower of cost or net realisable value. Cost is determined by apportionment of the total development costs, including borrowing costs capitalised, attributable to unsold units. Net realisable value represents the estimated selling price less direct selling expenses, if any.

Properties held for sale

Properties held for sale are stated at the lower of cost and net realisable value. Net realisable value is calculated at the actual or estimated selling price less related costs of marketing and selling.

Construction contracts

When the outcome of a construction contract can be estimated reliably, contract costs are charged to the income statement by reference to the stage of completion of the contract activity at the balance sheet date, as measured by reference to the value of work carried out to date bears the estimated total value of work carried out for each contract.

When the outcome of a construction contract cannot be estimated reliably, contract costs are recognised as an expense in the period in which they are incurred.

When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately.

When a contract covers a number of assets, the construction of each asset is treated as a separate contract when separate proposals have been submitted for each asset, each asset has been separately negotiated and the costs and revenues of each asset can be separately identified. A group of contracts, performed concurrently or in a continuous sequence, is treated as a single construction contract when they were negotiated as a single package and are so closely inter-related that they constitute a single project with an overall profit margin.

Operating leases

Rentals receivable and payable under operating leases are credited and charged respectively to the income statement on a straight-line basis over the term of the relevant lease.

— 133 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

Retirement benefit schemes

The retirement benefit costs charged in the income statement represent the contributions payable in respect of the current year to the Group’s defined contribution schemes or Mandatory Provident Fund Scheme in Hong Kong and the Central Pension Scheme in the PRC.

Taxation

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

Foreign currencies

Transactions in foreign currencies are translated at the rates ruling on the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are re-translated at the rates ruling on the balance sheet date. Profits and losses arising on exchange are dealt with in the income statement.

On consolidation, the assets and liabilities of the Group’s operation outside Hong Kong are translated at the exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rate for the year. Exchange differences arising, if any, are classified as equity and transferred to the Group’s exchange reserve. Such translation differences are recognised as income or as expenses in the year in which the operation is disposed of.

Convertible loans

Convertible loans are separately disclosed and regarded as liabilities until conversion actually occurs. The finance cost, including the premium payable upon the final redemption of the convertible loans, recognised in the income statement in respect of the convertible loans is calculated so as to produce a constant periodic rate of charge on the remaining balances of the convertible loans for each accounting period.

4. TURNOVER

Turnover represents the net amounts received and receivable for goods sold by the Group to outside customers less discounts allowed and goods returned, interest income on money lending and sale proceeds of short-term listed securities during the year.

		2003	2002
		HK$’000	HK$’000
Trading	of building materials	134,400	257,110
Trading	of marketable securities	1,796	970
Interest	income on money lending	—	185
		136,196	258,265

— 134 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

5. BUSINESS AND GEOGRAPHICAL SEGMENTS

Business segments

The Group is mainly engaged in trading of building materials and securities trading and investment holding. These divisions are the basis on which the Group reports its primary segment information.

For the year ended 31 March 2003

		Securities
	Trading of	trading and
	building	investment
	materials	holding	Consolidated
	HK$’000	HK$’000	HK$’000
TURNOVER
External sales	134,400	1,796	136,196
RESULT
Segment results	(66,013)	(6)	(66,019)
Other operating income			15,163
Unallocated corporate expenses			(6,369)
Loss from operations			(57,225)
Finance cost			(29,429)
Loss on disposal of subsidiaries	(6,554)	—	(6,554)
Loss on disposal of associates	(691)	—	(691)
Allowance for amounts due from associates	(28,363)	—	(28,363)
Allowances for amount due from
a minority shareholder	(1,664)	—	(1,664)
Share of loss of associates	(2,129)	—	(2,129)
Loss before taxation			(126,055)
Taxation charge			(161)
Loss before minority interests			(126,216)
Minority interests			13,002
Net loss for the year			(113,214)

— 135 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

Assets and liabilities as at 31 March 2003

		Securities
	Trading of	trading and
	building	investment
	materials	holding	Consolidated
	HK$’000	HK$’000	HK$’000
Assets
Segment assets	115,674	481	116,155
Unallocated corporate assets			522,822
Consolidated total assets			638,977
Liabilities
Segment liabilities	215,614	—	215,614
Unallocated corporate liabilities			223,339
Consolidated total liabilities			438,953

Other information for the year ended 31 March 2003

		Securities
	Trading of	trading and
	building	investment
	materials	holding	Consolidated
	HK$’000	HK$’000	HK$’000
Additions of property, plant and equipment	1,137	2,050	3,187
Depreciation of property, plant and equipment	23,649	217	23,866
Allowance for bad and doubtful debts	23,179	—	23,179
Allowance for amounts due from associates	28,363	—	28,363
Allowance for amount due from a minority
shareholder	1,664	—	1,664
Allowance for inventories	3,550	—	3,550

— 136 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

For the year ended 31 March 2002

		Securities
	Trading of	trading and
	building	investment
	materials	holding	Consolidated
	HK$’000	HK$’000	HK$’000
TURNOVER
External sales	257,110	1,155	258,265
RESULT
Segment results	(205,487)	(5,512)	(210,999)
Other operating income			6,085
Unallocated corporate expenses			(2,592)
Impairment loss recognised in respect of properties
under development held for sale			(43,326)
Provision for an onerous contract			(23,400)
Loss from operations			(274,232)
Finance cost			(33,712)
Gain on disposal of subsidiaries	189	—	189
Gain on deemed disposal of an associate	2,928	—	2,928
Loss on disposal of associates	(11,325)	—	(11,325)
Allowance for amounts due from associates	(60,499)	—	(60,499)
Impairment loss recognised on interest in an
associate	(24,433)	—	(24,433)
Share of loss of associates	(88,227)	—	(88,227)
Loss before taxation			(489,311)
Taxation credit			9,854
Loss before minority interests			(479,457)
Minority interests			20,463
Net loss for the year			(458,994)

— 137 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

Assets and liabilities as at 31 March 2002

		Securities
	Trading of	trading and
	building	investment
	materials	holding	Consolidated
	HK$’000	HK$’000	HK$’000
Assets
Segment assets	321,489	247	321,736
Interests in associates			3,920
Unallocated corporate assets			15,566
Consolidated total assets			341,222
Liabilities
Segment liabilities	189,514	3,989	193,503
Unallocated corporate liabilities			267,473
Consolidated total liabilities			460,976

Other information for the year ended 31 March 2002

		Securities
	Trading of	trading and
	building	investment
	materials	holding	Unallocated	Consolidated
	HK$’000	HK$’000	HK$’000	HK$’000
Additions of property, plant and equipment	5,338	—	—	5,338
Depreciation of property, plant and
equipment	31,340	4	48	31,392
Impairment losses recognised on interest in
associates	—	—	24,433	24,433
Loss on disposal of property, plant and
equipment	7,720	—	—	7,720
Allowance for bad and doubtful debts	90,340	3,359	—	93,699
Allowance for amounts due from associates	—	—	60,499	60,499
Allowance for inventories	18,554	—	—	18,554
Provision for an onerous contract	—	—	23,400	23,400
Impairment loss recognised	59,558	—	43,326	102,884

— 138 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

Geographical segments

The following table provides an analysis of the Group’s sales by geographic markets, irrespective of the origin of the goods/services:

Hong Kong Other regions of the PRC USA	Turnover 2003 2002 HK$’000 HK$’000 4,977 150,288 81,361 79,165 49,858 28,812 136,196 258,265	Turnover 2003 2002 HK$’000 HK$’000 4,977 150,288 81,361 79,165 49,858 28,812 136,196 258,265
		258,265

The following is an analysis of the carrying amount of segment assets, and capital additions analysed by the geographical area in which the assets are located:

	Carrying amount	Capital additions	Capital additions
	of segment assets	For the	year ended
	At 31 March	31	March
	2003 2002	2003	2002
	HK$’000 HK$’000	HK$’000	HK$’000
Hong Kong	299,609 112,051	10	838
The PRC	339,368 229,171	3,177	4,500
	638,977 341,222	3,187	5,338

6. OTHER OPERATING INCOME

Interest income Gain on disposal of property, plant and equipment Rental income, net of outgoings of HK$2,000 (2002: HK$2,000) Write back of unclaimed dividends Gain on disposal of other securities Commission income Transportation income Sundry income	2003 HK$’000 7,091 3,807 378 273 50 — — 3,564 15,163	2002 HK$’000 322 — 298 — 145 1,007 1,248 3,065
		6,085

— 139 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

7. PROVISION FOR AN ONEROUS CONTRACT

On 20 April 2000, the Company entered into an agreement with a third party (“Purchaser”) pursuant to which the Company granted to the Purchaser an option to require the Company to purchase certain shares of Skynet Limited (“Shares of Skynet”) for a consideration of US$3,000,000 during the period commencing on 15 May 2000 and ending on 15 May 2003. The put option was lapsed on 15 May 2003.

During the year ended 31 March 2002, a provision of HK$23,400,000, representing the full amount of the exercise price was made for the put option granted to the Purchaser in the prior year to require the Company to purchase the Shares of Skynet.

8. LOSS FROM OPERATIONS

Loss from operations has been arrived at after charging: Staff costs — Directors’ fee (note 10) — Directors’ other emoluments (note 10) — Retirement benefits schemes contribution, net of forfeiture of HK$73,000 (2002: HK$868,000) — Others Allowance for inventories Auditors’ remuneration — Current year — Underprovision in prior years Depreciation — Owned assets — Asset held under a finance lease Loss on disposal of club debentures Loss on disposal of property, plant and equipment Net foreign exchange loss and after crediting: Rental income, net of outgoings of HK$2,000 (2002: HK$2,000)	2003 HK$’000 — 370 589 12,929	2002 HK$’000 20 8,688 424 26,199
	13,888	35,331
	3,550 794 180 23,866 — — — 1,412 378	18,554 1,422 — 31,370 22 125 7,720 512 298

— 140 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

9. FINANCE COST

Interest on: Bank and other borrowings wholly repayable within five years Bank and other borrowings not wholly repayable within five years Convertible loan Obligations under a finance lease 10. DIRECTORS’ EMOLUMENTS Directors’ fees: Executive Independent non-executive Other emoluments - Executive: Salaries and other benefits Contributions to retirement benefits scheme Emolument paid to former directors: Compensation for loss of office paid to former directors by a Company’s subsidiary The emoluments of the directors were within the following bands: HK$Nil to HK$1,000,000 HK$1,000,001 to HK$1,500,000 HK$1,500,001 to HK$2,000,000 HK$2,000,001 to HK$2,500,000 HK$2,500,001 to HK$3,000,000 HK$3,000,001 to HK$3,500,000	2003 HK$’000 14,150 — 15,279 — 29,429 2003 HK$’000 — — —	2002 HK$’000 18,975 86 14,647 4
		33,712
		2002 HK$’000 — 20
		20
	354 16 370 —	4,724 104
		4,828
		3,860
	370 2003 Number of directors 11 — — — — — 11	8,688
		2002 Number of directors 12 — — 2 — 1
		15

During the year, no emoluments were paid by the Group to the directors as an inducement to join or upon joining the Group. None of the directors has waived any emoluments during the year.

— 141 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

11. EMPLOYEES’ EMOLUMENTS

Of the five individuals with the highest emoluments in the Group, one (2002: four) was a director of the Company whose emoluments are included in the disclosures in note 10 above. The emoluments of the remaining four (2002: one) individuals were as follows:

	2003	2002
	HK$’000	HK$’000
Salaries and other benefits	2,134	1,355
Contributions to retirement benefits scheme	108	36
	2,242	1,391
Their emoluments were within the following bands:
	2003	2002
	Number of	Number of
	individuals	individuals
HK$Nil to HK$1,000,000	4	—
HK$1,000,001 to HK$1,500,000	—	1
	4	1
TAXATION (CHARGE) CREDIT
	2003	2002
	HK$’000	HK$’000
The (charge) credit comprises:
Taxation in other jurisdictions
— Current year	(161)	(968)
— Overprovision in prior years	—	7,919
	(161)	6,951
Deferred taxation
— Current year (note 35)	—	2,584
Taxation attributable to the Company and its subsidiaries	(161)	9,535
Share of taxation attributable to associates	—	319
	(161)	9,854

12. TAXATION (CHARGE) CREDIT

No provision for Hong Kong Profits Tax has been made in the financial statements as the Company and its subsidiaries had no assessable profit in either year. Taxation in other jurisdictions is calculated at the rates prevailing in the respective jurisdictions.

Details of the deferred taxation provided for in the year are set out in note 35.

— 142 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

13. LOSS PER SHARE

The calculation of the basic loss per share is based on the net loss for the year of HK$113,214,000 (2002: HK$458,994,000) and on the adjusted weighted average of 631,128,400 (2002: adjusted 36,265,314) ordinary shares in issue during the year, after adjustment for the effect of the share consolidation as set out in note 31(e).

No diluted loss per share for both years have been presented as the exercise of the potential ordinary shares under convertible loan would result in a reduction in loss per share.

14. PROPERTY, PLANT AND EQUIPMENT

Land and buildings Plant and machinery Leasehold improvements Furniture, fixtures and equipment HK$’000 HK$’000 HK$’000 HK$’000 140,917 277,291 6,703 13,023 — 1,094 1,167 880 19 (19) — — (24,558) — — — (59,560) (91,974) (3,807) (2,740) (1,678) — (2,896) (2,227) (2,575) (2,295) — (107)	Land and buildings Plant and machinery Leasehold improvements Furniture, fixtures and equipment HK$’000 HK$’000 HK$’000 HK$’000 140,917 277,291 6,703 13,023 — 1,094 1,167 880 19 (19) — — (24,558) — — — (59,560) (91,974) (3,807) (2,740) (1,678) — (2,896) (2,227) (2,575) (2,295) — (107)	Land and buildings Plant and machinery Leasehold improvements Furniture, fixtures and equipment HK$’000 HK$’000 HK$’000 HK$’000 140,917 277,291 6,703 13,023 — 1,094 1,167 880 19 (19) — — (24,558) — — — (59,560) (91,974) (3,807) (2,740) (1,678) — (2,896) (2,227) (2,575) (2,295) — (107)	Land and buildings Plant and machinery Leasehold improvements Furniture, fixtures and equipment HK$’000 HK$’000 HK$’000 HK$’000 140,917 277,291 6,703 13,023 — 1,094 1,167 880 19 (19) — — (24,558) — — — (59,560) (91,974) (3,807) (2,740) (1,678) — (2,896) (2,227) (2,575) (2,295) — (107)	Motor vehicles HK$’000 7,863 — — — (1,528) — (291)	Computer software HK$’000 308 46 — — (308) — —	Computer software HK$’000 308 46 — — (308) — —
52,565 77,037 2,336 — (18,058) (44,611) (147) (108) 16,449	184,097 164,163 20,598 — — (88,670) — (328) 95,763	1,167 5,165 98 — — (3,783) (1,384) — 96	8,829 12,540 584 71 — (2,717) (2,161) (50) 8,267	6,044 7,124 217 (71) — (1,528) — (22) 5,720	46 101 33 — — (128) — — 6	252,748
						266,130 23,866 — (18,058 (141,437 (3,692 (508
						126,301

— 143 —

APPENDIX II

FINANCIAL INFORMATION ON THE DFG GROUP

Land and buildings Plant and machinery Leasehold improvements Furniture, fixtures and equipment HK$’000 HK$’000 HK$’000 HK$’000 — — — —	Land and buildings Plant and machinery Leasehold improvements Furniture, fixtures and equipment HK$’000 HK$’000 HK$’000 HK$’000 — — — —	Land and buildings Plant and machinery Leasehold improvements Furniture, fixtures and equipment HK$’000 HK$’000 HK$’000 HK$’000 — — — —	Land and buildings Plant and machinery Leasehold improvements Furniture, fixtures and equipment HK$’000 HK$’000 HK$’000 HK$’000 — — — —	Motor vehicles HK$’000 —	Computer software HK$’000 10	Computer software HK$’000 10
—	—	—	—	—	2	2
	— — above comprises:		—

— 144 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

Amounts due from subsidiaries — due after one year

The amounts are unsecured, non-interest bearing and have no fixed terms of repayment. In the opinion of the directors, the amounts are unlikely to be repaid within one year from the balance sheet date and are therefore shown as non-current.

Amounts due from (to) subsidiaries — due within one year

The amounts are unsecured, non-interest bearing and repayable on demand.

Details of the principal subsidiaries of the Company as at 31 March 2003 are as follows:

						Paid up	Proportion of	Proportion of
						issued/	nominal value of
				Place/country		registered	issued	capital/
				of incorporation/	Class of	ordinary	registered capital
Name of subsidiary				registration	shares held	share capital	by the Company		Principal activities
							Directly	Indirectly
							%	%
Operate in Hong Kong:
Companion Building Material				Hong Kong	Ordinary	HK$490,385,924	—	100	Investment holding
(Holdings)	Limited								and trading of
									ceramic tiles and
									sundry building
									materials
Companion-China Limited				Hong Kong	Ordinary	HK$137,839,000	—	100	Investment holding
									and trading of
									ceramic titles
Companion-China (Supplies) Limited				Hong Kong	Ordinary	HK$2	—	100	Investment holding
Companion Finance Limited				British Virgin Islands	Ordinary	US$100	—	100	Money lending
Crown Rise Investments			Limited	Hong Kong	Ordinary	HK$2	—	100	Property investment
Dong Fang Gas		Limited		Hong Kong	Ordinary	HK$2	—	100	Investment holding
Dong Fang Gas		(B.V.I.)	Limited	British Virgin Islands	Ordinary	US$1	100	—	Investment holding
Dong Fang Gas		Management Limited		Hong Kong	Ordinary	HK$2	—	100	Investment holding
									and service agent
Ellca Company		Limited		Hong Kong	Ordinary	HK$10,000	—	100	Property investment
King Unity Investments			Limited	Hong Kong	Ordinary	HK$20,000	—	80	Investment holding
Placemakers Limited				British Virgin Islands	Ordinary	US$100	—	100	Investment holding
Saint Galerie Trading				Hong Kong	Ordinary	HK$4,000	—	100	Provision of agency
Company Limited									services
Saint Galerie Tiles Limited				Hong Kong	Ordinary	HK$13,750,000	—	100	Manufacturing and
									trading of ceramic
									tiles
Super Trend Limited				Republic of Liberia	Ordinary	US$4	—	100	Investment holding
Success Trinity		Limited		British Virgin Islands	Ordinary	US$1	—	100	Investment holding
Operate in PRC:
Chongqing Golden Unity				PRC	Registered	RMB46,750,000	—	56	Manufacturing of
Ceramics Co., Ltd.					capital			(note a	ceramic tiles
								and b)
Wenzhou Xishan United			Ceramics	PRC	Registered	RMB46,360,148	—	73.5	Manufacturing of
Company Limited ( )				PRC	capital Registered capital	RMB14,280,640	—	(note b) 100 (note c)	ceramic tiles Polishing of ceramic tiles

— 145 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

Notes:

(a) The subsidiary was an equity joint venture company established by the Group and an independent third party in the PRC. Under the management agreements with the Chinese party, the Group is responsible for all of the assets and liabilities of the equity joint venture company and is entitled to all of the net profit or loss of the operation (after payment of fixed amount as management fee to the Chinese party) each year during the term of the management agreement.
(b) This is a PRC sino-foreign equity joint venture.
(c) This is a PRC subsidiary established as wholly foreign owned enterprise.

The above table lists the subsidiaries of the Company at 31 March 2003 which, in the opinion of the directors, principally affected the results or assets of the Group. To give details of other subsidiaries would, in the opinion of the directors, results in particulars of exercise length.

None of the subsidiaries had any debt securities outstanding during the year and at the end of the year.

16. INTERESTS IN ASSOCIATES

Share of net assets Impairment loss recognised	The Group 2003 2002 HK$’000 HK$’000 — 28,353 — (24,433) — 3,920

Details of the principal associates of the Group as at 31 March 2003 are as follows:

					Proportion of
					nominal value
	Form of		Principal		of issued capital/
	business	Place/country	place of	Class of	registered capital
Name of associate	structure	of registration	operation	shares held	by the Company	Nature of business
					Directly Indirectly
					% %
Asean Fortune	Incorporated	British Virgin	Hong Kong	Ordinary	— 50	Investment holding
Corporation		Islands
Yixing United	Incorporated	PRC	PRC	Capital	— 47.56	Manufacturing of
Ceramics Co., Ltd.						ceramic tiles

The above table lists the associates of the Group at 31 March 2003 which, in the opinion of the directors, principally affected the results and assets of the Group. To give details of other associates would in the opinion of directors, result in particulars of exercise length.

— 146 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

17. DEPOSIT PAID FOR ACQUISITION OF AN ASSOCIATE

During the year, China Crystal Investment Limited (“China Crystal”), an indirect wholly-owned subsidiary of the Company, entered into an agreement (“Acquisition Agreement”) with a third party (“Vendor”) to acquire 63% of the entire issued share capital of WIT International Group Limited (“WIT”) at a consideration of HK$120,000,000. WIT shall hold 49% equity interest in Nanning City Gas Co. Ltd., which is mainly engaged in the business of the construction and operation of the gas pipelines in Nanning, the PRC, and the provision of the related equipment, apparatus and other ancillary services. During the year, deposit of HK$10,000,000 was made by the Group.

On 2 January 2003, the Company announces that there have been certain disputes between the Vendor and China Crystal relating to the satisfaction of the conditions of the Acquisition Agreement and the Company received a notice dated 20 December 2002 from the solicitors acting for the Vendor purporting to rescind the Acquisition Agreement and forfeit the deposit of HK$10,000,000 paid by the Group upon signing of the Acquisition Agreement on 8 November 2002. China Crystal has, through its solicitors, issued written reply denying any breach of the Acquisition Agreement on the part of China Crystal and reiterated the right of China Crystal to receive the refund of the deposit in full under the terms of the Acquisition Agreement.

The Group will continue its attempt to negotiate with the Vendor to resolve the disputes and is considering appropriate action to take. Details of these are set out in the announcement of the Company dated on 2 January 2003. The acquisition has not yet completed up to the report date.

18. INVESTMENTS IN SECURITIES

Trading securities Equity securities Listed in Hong Kong, at market price Club debenture	The Group 2003 2002 HK$’000 HK$’000 14 7 467 467	The Group 2003 2002 HK$’000 HK$’000 14 7 467 467
		467

19. INVENTORIES

Raw materials Work in progress Finished goods	The Group 2003 2002 HK$’000 HK$’000 10,154 13,581 240 511 14,320 27,627 24,714 41,719	The Group 2003 2002 HK$’000 HK$’000 10,154 13,581 240 511 14,320 27,627 24,714 41,719
		41,719

Included above are finished goods of HK$14,137,000 (2002: HK$16,343,000) carried at net realisable value.

— 147 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

20. PROPERTIES UNDER DEVELOPMENT HELD FOR SALE

At 1 April Additions Disposal of subsidiaries Impairment loss recognised At 31 March	The Group 2003 2002 HK$’000 HK$’000 13,380 55,000 — 1,706 (13,380) — — (43,326) — 13,380	The Group 2003 2002 HK$’000 HK$’000 13,380 55,000 — 1,706 (13,380) — — (43,326) — 13,380
		13,380

The properties were situated in Hong Kong and held under medium-term leases and were disposed of during the year as a result of the disposal of subsidiaries.

21. PROPERTIES HELD FOR SALE

At 1 April Transfer from property, plant and equipment (note 14) At 31 March, at net realisable value	The Group 2003 2002 HK$’000 HK$’000 — — 6,500 — 6,500 —	The Group 2003 2002 HK$’000 HK$’000 — — 6,500 — 6,500 —
		—

The properties held for sale were situated in Hong Kong under medium-term leases. The properties held for sale were pledged to banks to secure general banking facilities to the Group.

22. LOANS RECEIVABLE

Unsecured Less: Allowance for doubtful debts	The Group 2003 2002 HK$’000 HK$’000 — 2,250 — (2,028) — 222	The Group 2003 2002 HK$’000 HK$’000 — 2,250 — (2,028) — 222
		222

Loans receivable bore interest ranging from 6% to 7.125% per annum.

— 148 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

23. AMOUNTS DUE FROM ASSOCIATES

Amounts due from associates Less: Allowance	The Group 2003 2002 HK$’000 HK$’000 88,363 72,776 (88,363) (60,000) — 12,776

The amounts are unsecured, non-interest bearing and repayable on demand.

24. AMOUNTS DUE FROM (TO) MINORITY SHAREHOLDERS

Amounts due from minority shareholders Less: Allowance Amounts due to minority shareholders	The Group 2003 2002 HK$’000 HK$’000 1,664 1,924 (1,664) — — 1,924 (6,599) (5,635)

The amounts are unsecured, non-interest bearing and repayable on demand.

— 149 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

25. AMOUNTS DUE FROM (TO) CUSTOMERS FOR CONTRACT WORK

Contracts in progress at the balance sheet date: Contract costs incurred Recognised profits less recognised losses Progress billings Analysed for reporting purposes as: Due from customers included in current assets Due to customers included in current liabilities	The Group 2003 2002 HK$’000 HK$’000 — 23,092 — 1,161 — 24,253 — (24,569) — (316)	The Group 2003 2002 HK$’000 HK$’000 — 23,092 — 1,161 — 24,253 — (24,569) — (316)
		24,253 (24,569)
		(316)
	— —	246 (562)
	—	(316)

26. TRADE RECEIVABLES

The Group does not have a fixed credit policy.

The following is an aged analysis of trade receivables at the reporting date:

Within 60 days 61 - 90 days Over 90 days	The Group 2003 2002 HK$’000 HK$’000 15,469 23,131 8,179 6,437 25,494 24,727 49,142 54,295	The Group 2003 2002 HK$’000 HK$’000 15,469 23,131 8,179 6,437 25,494 24,727 49,142 54,295
		54,295

— 150 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

27. TRADE PAYABLES

The following is an aged analysis of trade payables at the reporting date:

Within 60 days 61 - 90 days Over 90 days	The Group 2003 2002 HK$’000 HK$’000 4,433 9,096 1,280 1,904 36,041 24,090 41,754 35,090	The Group 2003 2002 HK$’000 HK$’000 4,433 9,096 1,280 1,904 36,041 24,090 41,754 35,090
		35,090

28. AMOUNTS DUE TO RELATED COMPANIES

Details of the amounts due to related companies are as follows:

Notes Hanny Magnetics Limited (i) Hong Kong Wing On Travel Service Limited (ii) Mass Success International Limited (“Mass Success”) (iii) Paul Y. �Building Management Limited (i) Paul Y. �ITC Management Limited (i)	The Group 2003 2002 HK$’000 HK$’000 244 — 36 — 766 — 18 — 1 — 1,065 —	The Group 2003 2002 HK$’000 HK$’000 244 — 36 — 766 — 18 — 1 — 1,065 —
		—

All amounts are unsecured, non-interest bearing and repayable on demand.

Notes:

(i) The companies are wholly-owned subsidiaries of the substantial shareholders of the Company’s substantial shareholder.
(ii) The company is a wholly-owned subsidiary of an associate of the Company’s substantial shareholder.
(iii) Mass Success is a company in which a director of the Company is a director of Mass Success.

— 151 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

29. BANK BORROWINGS

Bank overdraft Bank loans Secured Unsecured Repayable as follows: Within one year Between one to two years Between two to five years Over five years Less: Amount due within one year shown under current liabilities	The Group 2003 2002 HK$’000 HK$’000 9,166 4,334 82,531 72,809 91,697 77,143 74,417 54,331 17,280 22,812 91,697 77,143 91,697 71,073 — 2,996 — 2,964 — 110 91,697 77,143 (91,697) (71,073) — 6,070	The Group 2003 2002 HK$’000 HK$’000 9,166 4,334 82,531 72,809 91,697 77,143 74,417 54,331 17,280 22,812 91,697 77,143 91,697 71,073 — 2,996 — 2,964 — 110 91,697 77,143 (91,697) (71,073) — 6,070
	91,697 — — — 91,697 (91,697)	71,073 2,996 2,964 110
		77,143 (71,073
	—

The Group was in breach of a covenant in respect of certain banking facilities. As event of default had arisen under the loan agreements, certain amount of the loans had become repayable on demand and classified under current liabilities.

— 152 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

30. OTHER BORROWINGS

		The	Group	The	Company
		2003	2002	2003	2002
	Notes	HK$’000	HK$’000	HK$’000	HK$’000
Convertible loan	(i)	92,302	92,302	—	—
— unsecured
Loan from a financial institution in the PRC	(ii)	34,729	40,238	—	—
Loans from employees	(iii)	751	—	—	—
Other short-term loans	(iv)	3,860	63,860	—	60,000
		131,642	196,400	—	60,000
Secured		34,729	100,238	—	60,000
Unsecured		96,913	96,162	—	—
		131,642	196,400	—	60,000

All amounts are repayable within one year or repayable on demand.

Notes:

(i) In 1997, an unsecured convertible loan of US$12,000,000 (“Loan”) which is repayable on demand and carries interest at the rate of 9.8% per annum compounded annually for a term of six years was advanced by Simonson International Development Limited (“Simonson”), a wholly-owned subsidiary of ING Beijing Investment Company Limited (“ING”), an independent third party, to Companion-China Limited, a wholly-owned subsidiary of the Company. The Loan and the accrued interest thereon will, at the option of the convertible noteholder, be convertible into fully paid ordinary shares of the Company at a conversion price calculated at 90% of the average closing price of the shares of the Company quoted on the Stock Exchange for the twenty trading days immediately preceding the date of the notice under the terms and conditions of the convertible loan deed, details of which are set out in the circulars to the shareholders of the Company dated 13 May 1997 and 20 December 2000.

By an assignment executed on 18 February 2002, Simonson assigned to Perfect Master Limited (“PML”), a wholly-owned subsidiary of ING, an independent third party, the Loan and all related rights and interest. On the same date, the entire issued share capital of PML and the Loan were then sold to Galaxy Time Limited, a company held by New World Enterprise Holdings Limited. Details of which are set out in the announcement of Company dated 18 February 2002.

The Group failed to repay certain part of the Loan, resulting in whole outstanding principal sum of US$11.9 million repayable on demand. The conversion option to convert the Loan and the accrued interest into fully paid ordinary share of the Company lapsed on 25 June 2003 but all other rights attaching to the Loan continue to subsist.

(ii) The amounts were secured, interest bearing at 10.8% per annum and repayable on demand.
(iii) The amounts were unsecured, interest bearing at 0.8% per month and repayable on demand.
(iv) The amounts were unsecured, interest bearing at 2% plus prime rate per annum and repayable on demand.

— 153 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

31. SHARE CAPITAL

Number of shares Authorised: Ordinary shares of HK$0.01 each at 1 April 2001 and 1 April 2002 30,000,000,000 Additions (note a) 30,000,000,000 Share consolidation (note e) (58,500,000,000) Ordinary share of HK$0.40 each at 31 March 2003 1,500,000,000 Issued and fully paid: Ordinary shares of HK$0.01 each at 1 April 2001 and 1 April 2002 1,450,612,577 Issue of shares (note b) 45,000,000,000 Exercise of warrants (note c) 3,658 Exercise of share options (note d) 5 Share consolidation (note e) (45,289,350,834) Ordinary shares of HK$0.40 each at 31 March 2003 1,161,265,406	Number of shares Authorised: Ordinary shares of HK$0.01 each at 1 April 2001 and 1 April 2002 30,000,000,000 Additions (note a) 30,000,000,000 Share consolidation (note e) (58,500,000,000) Ordinary share of HK$0.40 each at 31 March 2003 1,500,000,000 Issued and fully paid: Ordinary shares of HK$0.01 each at 1 April 2001 and 1 April 2002 1,450,612,577 Issue of shares (note b) 45,000,000,000 Exercise of warrants (note c) 3,658 Exercise of share options (note d) 5 Share consolidation (note e) (45,289,350,834) Ordinary shares of HK$0.40 each at 31 March 2003 1,161,265,406	Value HK$’000 300,000 300,000 —
		600,000
	1,450,612,577 45,000,000,000 3,658 5 (45,289,350,834)	14,506 450,000 — — —
	1,161,265,406	464,506

During the year ended 31 March 2003, the movement of share capital is as follows:

Notes:

(a) Pursuant to an ordinary resolution passed at a special general meeting of the Company held on 15 August 2002, the authorised share capital of the Company was increased from HK$300,000,000 to HK$600,000,000 by the creation of an additional 30,000,000,000 ordinary shares of HK$0.01 each.
(b) The Company issued and allotted 20,000,000,000 and 25,000,000,000 ordinary shares of HK$0.01 each in the Company for cash at HK$0.01 per share pursuant to a subscription agreement and a placing agreement both dated 4 June 2002 respectively. The shares issued rank pari passu with the then existing shares in issue in all respects. The total net proceeds of approximately HK$441,600,000 will be used for funding suitable investments in natural gas or energy-related products or other appropriate investment projects which may offer growth and development potential to the Group in the long run and additional working capital of the Group.

Details are set out in the announcement of the Company dated 7 June 2002.

(c) Certain registered warrant holders exercised their rights to subscribe for 3,658 ordinary shares of HK$0.01 each in the Company at HK$0.20 per share.
(d) The Company issued and allotted 5 ordinary shares of HK$0.01 each in the Company for cash at HK$0.012 per share as a result of the exercise of share options.
(e) Pursuant to an ordinary resolution passed at a special general meeting of the Company held on 17 March 2003, every forty ordinary shares of HK$0.01 each in the issued and unissued share capital was consolidated into one ordinary share of HK$0.40 each. The nominal value of the issued and unissued shares after the consolidation of shares were increased from HK$0.01 to HK$0.40 each. Details of these were set out in the announcement and circular of the Company dated 22 January 2003 and 21 February 2003 respectively.

— 154 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

32. WARRANTS

On 14 August 2000, the Company issued 2,490,973,075 unit of warrants to the shareholders on the basis of one bonus warrant for every five existing shares held on 14 August 2000 conferring rights to subscribe in cash for new shares of HK$0.01 each at the initial subscription price of HK$0.02 per share at any time from 14 August 2001 up to and including 13 August 2002.

On 25 August 2000, registered holders of the warrants exercised their rights to subscribe for 51,260,400 ordinary shares of HK$0.01 each in the Company at HK$0.02 per share.

As a consequence of the share consolidation on 26 February 2001, the subscription price for new shares of HK$0.01 each under the terms of the warrants was adjusted upwards to HK$0.20 per new share.

During the year, 3,658 warrants were exercised. At 31 March 2003, the Company had no outstanding warrants after the expiry date on 13 August 2002. At 31 March 2002, the Company had outstanding 2,439,712,675 units of warrants carrying rights to subscribe for 243,971,267 ordinary shares.

33. SHARE OPTIONS

1998 Scheme

The Company’s share option scheme (“1998 Scheme”) was adopted pursuant to a resolution passed on 13 October 1998 and became effective on 24 December 1999 for the primary purpose of providing incentives to directors and eligible employees, and will expire on 27 August 2003. The 1998 Scheme was terminated on 17 March 2003. Under the 1998 Scheme, the board of directors of the Company may grant options to eligible employees, including directors of the Company and its subsidiaries, to subscribe for shares in the Company.

The total number of shares of the Company in respect of which options may be granted under the 1998 Scheme is not permitted to exceed 10% in nominal amount of the issued share capital of the Company from time to time less: (i) the aggregate number of shares of the Company which have been duly allotted and issued pursuant to the 1998 Scheme; (ii) the number of shares of the Company which would be issued on the exercise in full of the options granted but not exercised on that date pursuant to the 1998 Scheme; and (iii) the number of shares of Companion Building Material (Holdings) Limited (“CBM”) which have been duly allotted and issued pursuant to the share option scheme of CBM. The shares of CBM were previously listed on Hong Kong Stock Exchange. Pursuant to a scheme of arrangement between CBM and its shareholders, CBM became an indirectly wholly owned subsidiary of the Company and its shares were withdrawn from listing on the Hong Kong Stock Exchange and the shares of the Company are listed on the Hong Kong Stock Exchange with effect from 24 December 1999. The number of shares of the Company in respect of which options may be granted under the 1998 Scheme to any eligible employee (together with (i) the number of shares of the Company issued in respect of options of the Company which have been exercised by that eligible employee; (ii) any shares of the Company which would be issued upon the exercise of outstanding options of the Company granted to that eligible employee; and (iii) the number of shares of CBM issued in respect of options of CBM which have been exercised by that eligible employee), is not permitted to exceed 25% of the maximum aggregate number of shares of the Company subject to the 1998 Scheme at the time it is proposed to grant the relevant option to such eligible employee.

Consideration to be paid on each grant of option is HK$10 and an offer for an option must be accepted by the eligible employee not later than 28 days after the offer date of option. Options granted may be exercised at any time from the date of grant of the share option to the third anniversary of the date of grant. The exercise price is determined by the directors of the Company, and shall not be less than the greater of (i) 80% of the average closing price of the Company’s shares for the five trading days immediately preceding the offer date of the option; and (ii) the nominal value of the Company’s share.

No options were granted under 1998 Scheme to the directors during the year and no options were held by the directors as at 31 March 2003. No options under 1998 Scheme were outstanding as at 31 March 2002.

— 155 —

APPENDIX II

FINANCIAL INFORMATION ON THE DFG GROUP

A summary of movement of share options under 1998 Scheme for the year ended 31 March 2003 is as follows:

			Number of share	Number of share	under option
				Granted	Exercised
Employees	Exercisable	Exercise	Outstanding	during	during	Outstanding
Date of grant	period	price*	at 1.4.2002	the year	the year	at 31.3.2003
		HK$
14.2.2003	14.2.2003-13.8.2003	0.012	—	5	(5)	—

The closing price of the shares of the Company on 13 February 2003 immediately before the date on which the options were granted was HK$0.01. The closing price of the shares of the Company on the date of exercise was HK$0.01.

Total consideration received during the year from employee for taking up the options granted was HK$10. No charge is recognised in the income statement in respect of the value of options granted during the year.

As the options were granted and exercised before the share consolidation of the Company became effective, no adjustments were required to be made on the exercise price.

2003 Scheme

A new share option scheme (“2003 Scheme”) was approved and adopted on 17 March 2003. The 2003 Scheme is valid and effective for a period of 10 years after the date of adoption.

The purpose of the 2003 Scheme is to enable the Company to grant options to any directors (including executive directors, non-executive directors and independent non-executive directors) of the Group and full-time or part-time employees (including executives or officers) of the Group and any advisors and consultants providing advisory, consultancy or other services to the Group, distributors, contractors, suppliers, agents, customers, business partners, joint venture business partners, promoters, service providers of any member of the Group and those staff under secondment to the Group who the Board considers, in its sole discretion, have contributed or will contribute to the Group (“Participant”) as incentives or rewards for their contribution to the Group and to encourage Participants to work towards enhancing the value of the Company and its shares for the benefit of the Company and its shareholders as a whole.

The maximum number of shares of the Company in respect of which options may be granted under the 2003 Scheme and other share option schemes of the Company is not permitted to exceed 30% in nominal amount of the issued share capital of the Company from time to time. The maximum number of shares in respect of which options may be granted to a specifically identified single grantee under the 2003 Scheme shall not (when aggregated with any shares subject to any other share option scheme(s) of the Company) in any 12 month period exceed 1 per cent. of the shares in issue. Where any grant of options to a substantial shareholder or an independent non-executive director of the Company, or any of their respective associates, would result in the shares issued and to be issued upon exercise of all options already granted and to be granted (including options exercised, cancelled or outstanding) to such person in the 12 month period up to and including the date of grant:

(i) representing in aggregate over 0.1 per cent. of the shares in issue; and
(ii) having an aggregate value, based on the closing price of the shares as stated in the daily quotations sheets issued by the Hong Kong Stock Exchange on the date of grant, in excess of HK$5 million.

such grant of options shall be subject to prior approval by resolution of the shareholders who are not connected persons of the Company pursuant to the Rules Governing the Listing of Securities on the Hong Kong Stock Exchange (“Listing Rules”).

— 156 —

APPENDIX II

FINANCIAL INFORMATION ON THE DFG GROUP

Consideration to be paid on each grant of option is HK$1 and an offer remains open for acceptance by Participant concerned for a period of 28 days from date of grant or otherwise stated in the offer letter. The option period is a period to be notified by the board to each grantee at the time of making an offer which shall not expire later than ten years from the date of grant. The exercise price is determined by the directors of the Company, and shall not be less than the greater of (i) the closing price of the shares as stated in the daily quotations sheets issued by the Hong Kong Stock Exchange on the date of grant; (ii) the average closing price of the shares of Company for the five Business Days immediately preceding the date of grant; and (iii) the nominal value of the share of Company.

No options have been granted since the adoption of the 2003 Scheme.

34. RESERVES

THE COMPANY At 1 April 2001 Net loss for the year At 31 March 2002 Net loss for the year At 31 March 2003	Share premium Capital redemption reserve Contributed surplus Accumulated profits (losses) HK$’000 HK$’000 HK$’000 HK$’000 47,140 572 392,912 8,251 — — — (488,943)	Share premium Capital redemption reserve Contributed surplus Accumulated profits (losses) HK$’000 HK$’000 HK$’000 HK$’000 47,140 572 392,912 8,251 — — — (488,943)	Share premium Capital redemption reserve Contributed surplus Accumulated profits (losses) HK$’000 HK$’000 HK$’000 HK$’000 47,140 572 392,912 8,251 — — — (488,943)	Share premium Capital redemption reserve Contributed surplus Accumulated profits (losses) HK$’000 HK$’000 HK$’000 HK$’000 47,140 572 392,912 8,251 — — — (488,943)	Total HK$’000 448,875 (488,943) (40,068) (78,645) (118,713)
	47,140 —	572 —	392,912 —	(480,692) (78,645)	(40,068 (78,645
	47,140	572	392,912	(559,337)

The contributed surplus of the Company represents the difference between the fair value of the share capital of Companion Building Material (Holdings) Limited whose shares were exchanged for the Company’s shares and the nominal amount of the share capital issued by the Company pursuant to the scheme of arrangement on 24 December 1999.

Under the Companies Act 1981 of Bermuda (as amended), the contributed surplus account of the Company is available for distribution. However, the Company cannot declare or pay a dividend, or make a distribution out of contributed surplus if:

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

At the balance sheet date, the Company had no reserves available for distribution to shareholders.

— 157 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

35. DEFERRED TAXATION

At beginning of the year Disposal of subsidiaries Credit for the year At end of the year	The Group 2003 2002 HK$’000 HK$’000 3 2,587 (3) — — (2,584) — 3

At the balance sheet date, the major components of the deferred taxation provided are as follows:

Tax effect of timing differences because of: Excess of tax allowances over depreciation Tax effect of taxation losses	The Group 2003 2002 HK$’000 HK$’000 — 14 — (11) — 3

There were no material unprovided deferred taxation at the balance sheet date for the Group and the Company.

— 158 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

36. DISPOSAL OF SUBSIDIARIES

Net assets disposed of: Property, plant and equipment Inventories Properties under development held for sale Trade receivables, other debtors, deposits and prepayments Amounts due from customers for contract work Bank balances and cash Rental deposits received Trade payables, other creditors and accruals Amounts due to customers for contract work Taxation payable Minority interests Bank borrowings Deferred taxation (Loss) gain on disposal Release of capital reserve on consolidation Satisfied by: Cash Net cash inflow arising on disposal of a subsidiaries: Cash consideration Bank balances and cash disposal of	2003 HK$’000 3,109 — 13,380 22,467 246 256 (580) (2,549) (562) (20) — (740) (3)	2002 HK$’000 — 369 — 1,720 — 156 — (2,158) — — (26) — — 61 189 — 250 250 2002 HK$’000 250 (156) 94
	35,004 (6,554) (10)	61 189 —
	28,440 28,440 2003 HK$’000 28,440 (256) 28,184

The subsidiaries disposed of did not make a significant contribution to the net cash flows or the results of the Group for both years.

— 159 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

37. MAJOR NON-CASH TRANSACTIONS

During the year ended 31 March 2003, property, plant and equipment with net book value of HK$6,500,000 were transferred to properties held for sale.

During the year ended 31 March 2002, interests in associates had been reclassified to investments in securities. These investments in securities had been transferred to a trade creditor to set off an amount of HK$17,327,000 due to such trade creditor based on the estimated fair value of these securities as at 31 March 2002.

38. RELATED PARTY TRANSACTIONS

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

Company	Nature of transactions	Notes	2003	2002
			HK$’000	HK$’000
Yixing United Ceramics Co., Ltd.	Sale of ceramic tiles by the Group	(i)	4,332	127
	Disposal of plant and machinery	(i)	6,552	—
	by the Group
	Purchase of ceramic tiles	(i)	41,582	24,583
	by the Group
Mass Success International Limited	Consultancy fee paid by the Group	(ii)	961	—
(“Mass Success”)
Cycle Company Limited and	Rental deposits paid by the Group	(iii)	247	—
Gunnell Properties Limited	Rental expenses paid by the Group	(iii)	288	—
	Management fee paid by the Group	(iii)	106	—
Paul Y. - ITC General Contractors	Sale of ceramics tiles by the Group	(iii)	259	—
Limited

Notes:

(i) Yixing United Ceramics Co., Ltd. is an associate of the Group.
(ii) Mass Success is a company in which a director of the company is a director of Mass Success.
(iii) Cycle Company Limited and Gunnell Properties Limited and Paul Y. - ITC General Contractors Limited are wholly-owned subsidiaries of the substantial shareholders of the Company’s substantial shareholders.

In the opinion of the directors, the above transactions were undertaken in the ordinary course of business and the terms were mutually agreed between the Group and the related parties with reference to the market price.

Details of balances with related parties at the balance sheet date are set out in notes 23, 24, and 28.

— 160 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

39. CONTINGENT LIABILITIES

At balance sheet date, the contingent liabilities of the Group and the Company not provided for in the financial statements are set out as follows:

	The	Group	The	Company
	2003	2002	2003	2002
	HK$’000	HK$’000	HK$’000	HK$’000
Corporate guarantee given to bankers in respect of
banking facilities utilised by
— an associate	10,268	10,268	—	—
— subsidiaries	—	—	92,302	126,026
Other corporate guarantee (in lieu of utility deposit)	—	540	—	—
Interests on overdue loan unprovided	—	4,237	—	—

40. LEASE COMMITMENTS

The Group as lessee

The Group made approximately HK$2,115,000 (2002: HK$16,082,000) minimum lease payments under operating lease during the year in respect of office premises and warehouse.

At balance sheet date, the Group had commitments for future minimum lease payments under non-cancellable operating leases in respect of rented premises which fall due as follows:

Within one year In the second to fifth year	The Group 2003 2002 HK$’000 HK$’000 1,551 13,281 646 10,048 2,197 23,329	The Group 2003 2002 HK$’000 HK$’000 1,551 13,281 646 10,048 2,197 23,329
		23,329

Operating lease payments represent rentals payable by the Group for its office premises and warehouse. Leases are mainly negotiated for an average term of three years and rentals are fixed for an average term of three years.

— 161 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

The Group as lessor

Property rental income during the year was HK$380,000 (2002: HK$300,000). The properties have no committed tenants.

At balance sheet date, the Group had contracted with tenants for the following future minimum lease payments:

Within one year In the second to fifth year	The Group 2003 2002 HK$’000 HK$’000 — 300 — 875 — 1,175	The Group 2003 2002 HK$’000 HK$’000 — 300 — 875 — 1,175
		1,175

41. PLEDGE OF ASSETS

At the balance sheet date, the Group had pledged the following assets to secure bank and other borrowings facilities granted to the Group:

Notes Bank deposits (i) Properties held for sale (i) Property, plant and equipment (i) Investment in securities (ii) Trade receivables (iii)	2003 HK$’000 26,593 6,500 96,744 16,457 14,292 160,586	2002 HK$’000 — — 110,779 17,327 —
		128,106

Notes:

(i) The assets were pledged to secure the banking facilities and other borrowings of the Group.
(ii) The investment in securities with market value of HK$16,457,000 (2002: HK$17,327,000) were pledged and transferred to margin loan payable included in other payable to set off the amount of margin loan payables of HK$21,482,000 (2002: HK$17,327,000)
(iii) The trade receivables were pledged to a bank to secure the banking facilities granted to the Group.

42. RETIREMENT BENEFITS SCHEMES

(a) The Group has maintained defined contribution provident fund schemes for its Hong Kong employees. The scheme assets of the first scheme are being held under a provident fund operated by The Prudential Assurance Company Limited with BOCI-Prudential Trustee Limited as Trustees (the “Old ORSO Scheme”). The second one is operated by CMG Asia Pensions and Retirement Limited with Butterfield Trust (Hong Kong) Limited as Trustees (the “New ORSO Scheme”).

— 162 —

APPENDIX II

FINANCIAL INFORMATION ON THE DFG GROUP

The Group is required to make contributions to the above schemes calculated at 5% of the employees’ basic salaries and commissions on a monthly basis. The Old ORSO Scheme was granted an exemption from the Mandatory Provident Fund Schemes Authority on 20 July 2000. Under the Old ORSO Scheme, the employees are entitled to 100% of the employers’ contributions and the accrued interest after 12 years of completed service, or at a vesting scale of between 30% and 100% after completion of 5 to 12 years’ service. With effect from 1 October 2000, the Group participates in the New ORSO Scheme, which was granted an exemption from the Mandatory Provident Fund Schemes Authority on 22 June 2001. Under the New ORSO Scheme, the employees are entitled to 100% of the employers’ contributions and the accrued interest after 10 years of completed service, or at a vesting scale of between 30% to 100% after completion of 3 to 10 years’ service. The forfeited contributions and related accrued interest can be used to reduce the employers’ contributions. The principal deed and the rules of the above provident fund schemes were amended accordingly to comply with the rules of the Mandatory Provident Fund Scheme Ordinance.

The employees entitled to the defined contribution provident fund schemes before 1 December 2000 were allowed an option between joining the mandatory provident fund or continuing to making contributions to the New ORSO Scheme. All newly employed employees are required to join the mandatory provident fund scheme or the New ORSO Scheme. The Group is required to make contributions to either of the two schemes according to the employees’ options.

With effect from 1 December 2000, the Group also participates in a mandatory provident fund scheme. The scheme assets are held under a mandatory provident fund operate by CMG Asia Pensions and Retirement Limited. Under the scheme, the Group is required to make contributions to the scheme calculated at 5% of the employees’ relevant income (as defined in the Mandatory Provident Fund Scheme Ordinance) on a monthly basis.

Certain employees in Hong Kong joined another mandatory provident fund scheme, in which the assets of the MPF scheme are held separately from those of the Group, with funds under the control of trustees. The Group contributes 5% of relevant payroll costs to the scheme, which contribution is matched by employees.

At both balance sheet dates, there were no forfeited contributions available to offset future employees’ contributions to the schemes.

(b) Employees in subsidiaries in the PRC are members of the Central Pension Scheme operated by the PRC government. These subsidiaries are required to contribute a certain percentage of their payroll to the Central Pension Scheme to fund the benefits. The only obligation of the Group with respect to the Central Pension Scheme is the required contribution under the Central Pension Scheme.

43. LITIGATION

(a) Companion-China Limited (“Companion-China”), a wholly-owned subsidiary of the Company, entered into a supply contract with a raw tiles manufacturer in Shenzhen on 17 May 1997. The contract was finally terminated due to the sub-standard raw tiles. On 2 June 1999, legal action was instituted by the manufacturers in the High Court of Hong Kong against Companion-China demanding the payment of outstanding contract sum of HK$2,349,000. On 7 August 1999, Companion-China made a counterclaim against the manufacturer for loss and damages as a result of the sub-standard raw tiles.

— 163 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

report, there has been no further progress in respect of such action. As the outstanding contract sum of approximately HK$1,860,000 was provided for in prior year, the Directors are of the opinion that there is unlikely to be any material adverse financial impact on the Group in the event that the final judgement is not in favour of Companion-China.

(b) On 22 January 2002, Companion Finance Limited (“Companion Finance”), a wholly-owned subsidiary of the Company, issued a writ against Pang Siu Chung (“Mr. Pang”) and Kwok Mun Nei, Candy and Leung Wai Hon (as guarantors) claiming payment of a sum of HK$322,097 and further interest on the sum of HK$300,000 at the daily rate of HK$78 from 29 November 2001 to the date of payment, being the unpaid amount due from Mr. Pang to Companion Finance pursuant to a loan agreement dated 16 February 2001 made between Companion Finance and Mr. Pang, plus cost. At the date of this report, there has been no further progress in respect of such action. As the total amount including interest due from Mr. Pang has already been written off, the Directors are of the opinion that there is unlikely to be any material adverse financial impact on the Group in the event that the final judgement is not in favour of Companion Finance.
(c) On 3 June 2002, legal action was instituted against Wenzhou Xishan United Ceramics Company Limited ( ) (“Wenzhou Xishan”) and Chongqing Golden Unity Ceramics Co., Ltd. ( ) (“Chongqing Golden”) as guarantor (both are subsidiaries of the Company) by China Huarong Asset Management Corporation, Hangzhou Office ( ) (“China Huarong”) claiming payment of a sum of RMB12,049,781, being the outstanding principal sum and interest of a loan due from Wenzhou Xishan to Industrial and Commercial Bank of China, Wenzhou Branch, Lucheng Sub-branch ( ), who has assigned the said loan to China Huarong. On 8 August 2002, the Intermediate People’s Court in the Wenzhou Municipality (the “Court”) ruled against Wenzhou Xishan and Chongqing Golden under which a sum of RMB5,000,000 plus interests and costs shall be paid to China Huarong. On 5 December 2002, the Court gave a final judgement against Wenzhou Xishan and Chongqing Golden under which a sum of RMB5,000,000 plus interest and costs of RMB1,581,311 shall be paid to China Huarong. At the date of this report, such amounts have not been paid and no demand for payment has been received by the Group so far. The amount of RMB6,581,311 has been included in the Group’s financial statements in respect of sums claims, the Directors are of the opinion that there will not be any material adverse impact on the Group.

44. POST BALANCE SHEET EVENTS

On 1 June 2003, an indirect wholly owned subsidiary of the Company, Dong Fang Gas (China) Limited, entered into a conditional agreement for the acquisition of 73% interest in Top Power Holdings Limited (“Top Power”) at a consideration of HK$80,000,000.

Top Power is an investment holding company incorporated in the British Virgin Islands and owns 70% equity interest in Beijing Continental Gas Co. Ltd. (“Beijing Gas”). Beijing Gas is a sino-foreign equity joint venture engaged in the business of natural gas supply, storage and related services.

Further details are set out in the Company’s announcement and circular dated 5 June 2003 and 26 June 2003 respectively. As at the date of this report, the acquisition has not completed.”

— 164 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

7. INTERIM REPORT FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2003

Set out below are the unaudited condensed consolidated financial statements of the DFG Group for the six months ended 30 September 2003 together with the comparative figures for the corresponding period in the last financial year extracted from the interim report of DFG for the six months ended 30 September 2003:

CONDENSED CONSOLIDATED INCOME STATEMENT

Period from 1 April 2003 to 30 September 2003

		Six months ended	Six months ended
		30 September
		2003	2002
		(unaudited)	(unaudited)
	Notes	HK$’000	HK$’000
Turnover	3	84,199	79,456
Cost of sales		(66,173)	(74,476)
Gross profit		18,026	4,980
Other operating income		6,745	9,711
Distribution costs		(7,558)	(8,283)
Administrative expenses		(14,329)	(25,463)
Allowance for amount due from a minority
shareholder of a subsidiary		(1,838)	(2,716)
Profit (loss) from operations	4	1,046	(21,771)
Finance costs		(11,761)	(16,599)
Loss on disposal of interests in subsidiaries		—	(5,944)
Impairment loss recognised in respect of interest in an
associate		—	(691)
Share of results of associates		—	(2,129)
Loss before taxation		(10,715)	(47,134)
Taxation	5	(719)	(76)
Loss before minority interests		(11,434)	(47,210)
Minority interests		(858)	3,777
Loss for the period		(12,292)	(43,433)
Loss per share (cents)
Basic	6	(1.06)	(41.81)

Note: There was no extraordinary item, exceptional item and dividend for the two periods ended 30 September 2002 and 2003.

— 165 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

CONDENSED CONSOLIDATED BALANCE SHEET

For the six months ended 30 September 2003

30 September 2003 31 March 2003 (unaudited) (audited) Notes HK$’000 HK$’000 Non-Current Assets Property, plant and equipment 7 126,808 126,447 Goodwill 8 106,731 — Deposit paid for acquisition of an associate 10,000 10,000 Interests in associates — — Investments in securities 467 467 244,006 136,914 Current Assets Inventories 22,198 24,714 Properties held for sale 6,500 6,500 Investments in securities 3 14 Loan receivable 9 31,047 — Trade receivables 10 69,592 49,142 Other debtors, deposits and prepayments 23,099 16,736 Pledged bank deposits 37,337 26,593 Bank balances and cash 271,780 378,364 461,556 502,063	30 September 2003 31 March 2003 (unaudited) (audited) Notes HK$’000 HK$’000 Non-Current Assets Property, plant and equipment 7 126,808 126,447 Goodwill 8 106,731 — Deposit paid for acquisition of an associate 10,000 10,000 Interests in associates — — Investments in securities 467 467 244,006 136,914 Current Assets Inventories 22,198 24,714 Properties held for sale 6,500 6,500 Investments in securities 3 14 Loan receivable 9 31,047 — Trade receivables 10 69,592 49,142 Other debtors, deposits and prepayments 23,099 16,736 Pledged bank deposits 37,337 26,593 Bank balances and cash 271,780 378,364 461,556 502,063	30 September 2003 31 March 2003 (unaudited) (audited) Notes HK$’000 HK$’000 Non-Current Assets Property, plant and equipment 7 126,808 126,447 Goodwill 8 106,731 — Deposit paid for acquisition of an associate 10,000 10,000 Interests in associates — — Investments in securities 467 467 244,006 136,914 Current Assets Inventories 22,198 24,714 Properties held for sale 6,500 6,500 Investments in securities 3 14 Loan receivable 9 31,047 — Trade receivables 10 69,592 49,142 Other debtors, deposits and prepayments 23,099 16,736 Pledged bank deposits 37,337 26,593 Bank balances and cash 271,780 378,364 461,556 502,063
	244,006 22,198 6,500 3 31,047 69,592 23,099 37,337 271,780 461,556	136,914
		24,714 6,500 14 — 49,142 16,736 26,593 378,364
		502,063

— 166 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

		30 September	31 March
		2003	2003
		(unaudited)	(audited)
	Notes	HK$’000	HK$’000
Current Liabilities
Bills payable and import loans		18,180	17,147
Rentals and sales deposits received		10,000	10,000
Trade payables	11	52,586	41,754
Other creditors and accruals		134,082	112,287
Provision	12	23,400	23,400
Taxation payable		814	3,362
Amounts due to minority shareholders		7,170	6,599
Amounts due to related companies	13	13,588	1,065
Amount due to an associate	14	5,303	—
Bank borrowings	15	117,297	91,697
Other borrowings	16	134,705	131,642
		517,125	438,953
Net Current (Liabilities) Assets		(55,569)	63,110
		188,437	200,024
Capital and Reserves
Share capital	17	464,506	464,506
Reserves		(292,152)	(279,863)
		172,354	184,643
Minority Interests		16,083	15,381
		188,437	200,024

— 167 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

CONDENDSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the six months ended 30 September 2003

Share Capital Capital reserve on consolidation HK$’000 HK$’000 14,506 27,382 — — 450,000 — — (10) — —	Share Capital Capital reserve on consolidation HK$’000 HK$’000 14,506 27,382 — — 450,000 — — (10) — —	Share premium HK$’000 47,140 — — — —	Special reserve Capital redemption reserve Enterprises expansion reserve HK$’000 HK$’000 HK$’000 694,583 572 199 — — — — — — — — — — — —	Special reserve Capital redemption reserve Enterprises expansion reserve HK$’000 HK$’000 HK$’000 694,583 572 199 — — — — — — — — — — — —	Special reserve Capital redemption reserve Enterprises expansion reserve HK$’000 HK$’000 HK$’000 694,583 572 199 — — — — — — — — — — — —	Revenue reserve Exchange reserves Contributed surplus Accumulated losses HK$’000 HK$’000 HK$’000 HK$’000 199 (682) 130,555 (1,062,591) — (5,477) — — — — — — — — — — — — — (43,433)	Revenue reserve Exchange reserves Contributed surplus Accumulated losses HK$’000 HK$’000 HK$’000 HK$’000 199 (682) 130,555 (1,062,591) — (5,477) — — — — — — — — — — — — — (43,433)	Revenue reserve Exchange reserves Contributed surplus Accumulated losses HK$’000 HK$’000 HK$’000 HK$’000 199 (682) 130,555 (1,062,591) — (5,477) — — — — — — — — — — — — — (43,433)	Revenue reserve Exchange reserves Contributed surplus Accumulated losses HK$’000 HK$’000 HK$’000 HK$’000 199 (682) 130,555 (1,062,591) — (5,477) — — — — — — — — — — — — — (43,433)	Total HK$’000 (148,137) (5,477) 450,000 (10) (43,433)
464,506 — — 464,506 — —	27,372 — — 27,372 — —	47,140 — — 47,140 — —	694,583 — — 694,583 — —	572 — — 572 — —	199 — — 199 — —	199 — — 199 — —	(6,159) 1,481 — (4,678) 3 —	130,555 — — 130,555 — —	(1,106,024) — (69,781) (1,175,805) — (12,292)	252,943 1,481 (69,781)
										184,643 3 (12,292)
464,506	27,372	47,140	694,583	572	199	199	(4,675)	130,555	(1,188,097)	172,354

Included in capital reserve on consolidation as at 30 September 2003 was negative goodwill of HK$31,587,000 (31 March 2003: HK$31,587,000) arising from acquisition of subsidiaries.

Included in capital reserve on consolidation as at 30 September 2003 was goodwill of HK$4,215,000 (31 March 2003: HK$4,215,000) arising from acquisition of subsidiaries.

The special reserve of the Group represents the difference between share capital, share premium and capital redemption reserve of Companion Building Material (Holdings) Limited, a wholly-owned subsidiary of the Company, and the nominal amount of share capital issued by the Company pursuant to the scheme of arrangement on 24 December 1999.

The contributed surplus of the Group arose from the share consolidation and capital reduction carried out by the Company during the year ended 31 March 2001.

— 168 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

CONDENSED CONSOLIDATED CASH FLOW STATEMENT

For the six months ended 30 September 2003

	Six months ended	Six months ended
	30 September
	2003	2002
	(unaudited)	(unaudited)
	HK$’000	HK$’000
Net cash used in operating activities	(6,887)	(33,449)
Net cash used in investing activities	(115,889)	(17,899)
Net cash from financing activities	6,182	393,711
Net (decrease) increase in cash and cash equivalents	(116,594)	342,363
Cash and cash equivalents at beginning of the period	369,198	15,072
Effect of foreign exchange rate changes	(138)	(695)
Cash and cash equivalents at end of the period	252,466	356,740
Analysis of the balances of cash and cash equivalents
Bank balances and cash	271,780	360,901
Bank overdrafts	(19,314)	(4,161)
	252,466	356,740

— 169 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

For the six months ended 30 September 2003

1. BASIS OF PREPARATION

The condensed financial statements have been prepared in accordance with the applicable disclosure requirements of Appendix 16 to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (“Hong Kong Stock Exchange”) and with Statement of Standard Accounting Practice (“SSAP”) No. 25 “Interim Financial Reporting” issued by the Hong Kong Society of Accountants.

2. PRINCIPAL ACCOUNTING POLICIES

The condensed financial statements have been prepared under the historical cost convention, as modified for the revaluation of investments in securities.

The accounting policies adopted are consistent with those followed in the preparation of the Group’s financial statements for the year ended 31 March 2003, except for the adoption the following new and revised accounting policies. This change in accounting policy has had no material effect on the results for the current or prior accounting periods, accordingly, no prior period adjustment has been required.

Income taxes

The principal effect of the implementation of SSAP No. 12 (Revised) “Income Taxes” is in relation to deferred tax. SSAP No. 12 (Revised) requires the adoption of a balance sheet liability method, whereby deferred tax is recognised in respect of all temporary differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of taxable profit, with limited exceptions.

Revenue recognition

Revenue from household gas connection contract is recognised upon completion of contract.

Sales of gas appliance are recognised when goods are delivered and title has passed.

Service income is recognised at the time when services are rendered.

3. SEGMENT INFORMATION

Business segments

For management purposes, the Group is currently organised into the divisions of manufacturing and trading of building materials, trading of marketable securities and derivatives and business of natural gas supply, storage and related services. These divisions are the basis on which the Group reports its primary segment information.

— 170 —

APPENDIX II

FINANCIAL INFORMATION ON THE DFG GROUP

An analysis of the Group’s turnover and contribution to operating results by business segments is as follows:

For the six months ended 30 September 2003

	Manufacturing	Trading of	Natural
	and trading of	marketable	gas supply,
	building	securities and	storage and
	materials	derivatives	related services	Consolidated
	HK$’000	HK$’000	HK$’000	HK$’000
			(Note)
TURNOVER
External sales	81,423	—	2,776	84,199
RESULT
Segment result	1,297	(44)	(1,258)	(5)
Unallocated corporate expenses				(4,055)
Interest income				5,106
Profit from operations				1,046
Finance costs				(11,761)
Loss before taxation				(10,715)
Taxation charge				(719)
Loss before minority interests				(11,434)
Minority interests				(858)
Loss for the period				(12,292)

— 171 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

For the six months ended 30 September 2002

	Manufacturing	Trading of
	and trading of	marketable
	building	securities and
	materials	derivatives	Consolidated
	HK$’000	HK$’000	HK$’000
TURNOVER
External sales	79,456	—	79,456
RESULT
Segment result	(13,185)	(2)	(13,187)
Unallocated corporate expenses			(8,887)
Interest income			303
Loss from operations			(21,771)
Finance costs			(16,599)
Loss on disposal of interests in subsidiaries			(5,944)
Impairment loss recognised in respect of
interest in an associate			(691)
Share of results of associates			(2,129)
Loss before taxation			(47,134)
Taxation charge			(76)
Loss before minority interests			(47,210)
Minority interests			3,777
Loss for the period			(43,433)

Note: Following the acquisition of certain subsidiaries engaged in the business of natural gas supply, storage and related services during the period ended 30 September 2003, the business of natural gas supply, storage and related services was regarded as a new business segment of the Group. Details of these are set out in the circular issued by the Company dated 26 June 2003.

— 172 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

4. PROFIT (LOSS) FROM OPERATIONS

	Six months ended	Six months ended
	30 September
	2003	2002
	HK$’000	HK$’000
Profit (loss) from operations has been arrived at after charging:
Amortisation of goodwill included in administrative expenses	897	—
Depreciation	5,525	8,435

5. TAXATION

The charge comprises: The Company and subsidiaries - Taxation in other jurisdictions Deferred taxation	Six months ended 30 September 2003 2002 HK$’000 HK$’000 719 59 — 17 719 76	Six months ended 30 September 2003 2002 HK$’000 HK$’000 719 59 — 17 719 76
		76

Taxation in other jurisdictions is calculated at the rates prevailing in the respective jurisdictions.

6. LOSS PER SHARE

The calculation of the basic loss per share is based on the loss for the period of approximately HK$12,292,000 (HK$43,433,000 for the six months ended 30 September 2002) and on 1,161,265,406 (weighted average number of 103,888,318 for the six months ended 30 September 2002 after the adjustment of share consolidation of the Company as described in note 17) ordinary shares in issue during the period.

No diluted loss per share for both periods have been presented as the exercise of the potential ordinary shares under the convertible loan would result in a decrease in loss per share.

7. MOVEMENTS IN PROPERTY, PLANT AND EQUIPMENT

During the period, the Group incurred expenditure of approximately HK$335,000 on property, plant and equipment.

In addition, property, plant and equipment with an aggregate net book value of approximately HK$5,251,000 were acquired as a result of the acquisition of a subsidiary.

The Group disposed of property, plant and equipment with an aggregate net book value of approximately HK$25,000 at nil consideration.

— 173 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

8. GOODWILL

An indirect wholly-owned subsidiary of the Company, Dong Fang Gas (China) Limited, entered into an agreement for the acquisition of a 73% interest in Top Power Holdings Limited (“Top Power”) at a consideration of HK$80,000,000. Top Power is an investment holding company incorporated in the British Virgin Islands and owns a 70% equity interest in Beijing Continental Gas Co. Ltd. (“Beijing Continental Gas”). Beijing Continental Gas is a sino-foreign equity joint venture engaged in the business of natural gas supply, storage and related services. As confirmed by the Company’s legal adviser in the People’s Republic of China (“PRC”), as at the latest practicable date in the circular issued by the Company on 26 June 2003, Beijing Continental Gas’ ongoing operations in (Liquefied Petroleum Gas Supply Station) projects in (Beijing Mentougou Binhe Xiaoqu) and (Beijing Shunyiqu Nanbanbidian Xiaoqu) have been approved by (Beijing City Development Planning Committee) and it is the first and the only sino-foreign joint venture approved by the PRC government authority for incorporation in Beijing, the PRC with a business scope to engage in natural gas business.

The goodwill represents the goodwill arising from acquisition of the above subsidiaries by the Group during the period.

9. LOAN RECEIVABLE

The amounts is unsecured, bears interest at prevailing market rate and is repayable within one year.

10. TRADE RECEIVABLES

The Group does not define a fixed credit policy.

The following is an aged analysis of trade receivables at the reporting date:

30 September 2003 HK$’000 Within 60 days 19,265 61-90 days 20,610 Over 90 days 29,717 69,592	31 March 2003 HK$’000 15,469 8,179 25,494
	49,142

11. TRADE PAYABLES

The following is an aged analysis of trade payables at the reporting date:

30 September 2003 HK$’000 Within 60 days 5,628 61 - 90 days 2,524 Over 90 days 44,434 52,586	31 March 2003 HK$’000 4,433 1,280 36,041
	41,754

— 174 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

12. PROVISION

On 20 April 2000, the Company entered into an agreement with a third party (“Purchaser”) to dispose of certain shares of Skynet Limited (“Shares of Skynet”), a former associate of the Group. According to the terms of the agreement, the Company agreed to grant to the Purchaser a put option to require the Company to acquire the Shares of Skynet within a period of three years from the date of the agreement.

During the year ended 31 March 2002, a provision of HK$23,400,000, representing the full amount of the exercise price, was made for the put option granted to the Purchaser in the prior year to require the Company to purchase the Shares of Skynet.

The put option lapsed during the period ended 30 September 2003. In the opinion of the Company’s directors, no provision should be written back for the six-month period ended 30 September 2003 as further negotiation between the parties in respect thereof is anticipated.

13. AMOUNTS DUE TO RELATED COMPANIES

The amounts are unsecured and repayable on demand. An amount of approximately HK$12,939,000 bears interest at prevailing market rate, and the remaining balance is non-interest bearing.

14. AMOUNT DUE TO AN ASSOCIATE

The amount represents trade payable to Yixing United Ceramics Co., Ltd. (“Yixing United”).

15. MOVEMENTS IN BANK BORROWINGS

During the period, bank loans of approximately HK$25,742,000 arose on the acquisition of subsidiaries. The Group also obtained additional bank loans of approximately HK$10,149,000 and repaid approximately HK$10,291,000 during the period.

16. MOVEMENTS IN OTHER BORROWINGS

Included in other borrowings is an unsecured convertible loan (“Convertible Loan”) of US$12,000,000 (equivalent to approximately HK$92,302,000) (31 March 2003: US$12,000,000, equivalent to approximately HK$92,302,000) issued by a wholly-owned subsidiary of the Company for a term of six years from June 1997. The Convertible Loan bears interest at 9.8% per annum and is repayable on demand. The Convertible Loan and the accrued interest thereon will, at the option of the convertible noteholder, be convertible into fully paid ordinary shares of the Company at a conversion price calculated at 90% of the average closing price of the shares of the Company quoted on the Hong Kong Stock Exchange for the twenty trading days immediately preceding the date of the notice under the terms and conditions of the convertible loan deed. Details of the Convertible Loan and the subsequent assignments are set out in the circulars of the Company dated 13 May 1997 and 20 December 2000 and its announcement dated 18 February 2002 respectively.

The Group failed to repay certain part of the Convertible Loan, resulting in whole outstanding principal sum of approximately US$11,900,000 repayable on demand. The option to convert the Convertible Loan and the accrued interest into fully paid ordinary shares of the Company lapsed on 25 June 2003 but all the other rights attaching to the Convertible Loan continue to subsist.

— 175 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

17. SHARE CAPITAL

Number of shares Value HK$’000 Authorised: Ordinary shares of HK$0.01 each at 1 April 2002 30,000,000,000 300,000 Additions (Note a) 30,000,000,000 300,000 Share consolidation (Note e) (58,500,000,000) — Ordinary share of HK$0.40 each at 31 March 2003 and 30 September 2003 1,500,000,000 600,000 Issued and fully paid: Ordinary shares of HK$0.01 each at 1 April 2002 1,450,612,577 14,506 Issue of shares (Note b) 45,000,000,000 450,000 Exercise of warrants (Note c) 3,658 — Exercise of share options (Note d) 5 — Share consolidation (Note e) (45,289,350,834) — Ordinary shares of HK$0.40 each at 31 March 2003 and 30 September 2003 1,161,265,406 464,506	Number of shares Value HK$’000 Authorised: Ordinary shares of HK$0.01 each at 1 April 2002 30,000,000,000 300,000 Additions (Note a) 30,000,000,000 300,000 Share consolidation (Note e) (58,500,000,000) — Ordinary share of HK$0.40 each at 31 March 2003 and 30 September 2003 1,500,000,000 600,000 Issued and fully paid: Ordinary shares of HK$0.01 each at 1 April 2002 1,450,612,577 14,506 Issue of shares (Note b) 45,000,000,000 450,000 Exercise of warrants (Note c) 3,658 — Exercise of share options (Note d) 5 — Share consolidation (Note e) (45,289,350,834) — Ordinary shares of HK$0.40 each at 31 March 2003 and 30 September 2003 1,161,265,406 464,506	Number of shares Value HK$’000 Authorised: Ordinary shares of HK$0.01 each at 1 April 2002 30,000,000,000 300,000 Additions (Note a) 30,000,000,000 300,000 Share consolidation (Note e) (58,500,000,000) — Ordinary share of HK$0.40 each at 31 March 2003 and 30 September 2003 1,500,000,000 600,000 Issued and fully paid: Ordinary shares of HK$0.01 each at 1 April 2002 1,450,612,577 14,506 Issue of shares (Note b) 45,000,000,000 450,000 Exercise of warrants (Note c) 3,658 — Exercise of share options (Note d) 5 — Share consolidation (Note e) (45,289,350,834) — Ordinary shares of HK$0.40 each at 31 March 2003 and 30 September 2003 1,161,265,406 464,506
		600,000
	1,450,612,577 45,000,000,000 3,658 5 (45,289,350,834)	14,506 450,000 — — —
	1,161,265,406	464,506

During the year ended 31 March 2003, the movements of share capital is as follows:

Notes:

(a) Pursuant to an ordinary resolution passed at a special general meeting of the Company held on 15 August 2002, the authorised share capital of the Company was increased from HK$300,000,000 to HK$600,000,000 by the creation of an additional 30,000,000,000 ordinary shares of HK$0.01 each.
(b) The Company issued and allotted 20,000,000,000 and 25,000,000,000 ordinary shares of HK$0.01 each in the Company for cash at HK$0.01 per share pursuant to a subscription agreement and a placing agreement both dated 4 June 2002. The shares issued rank pari passu with the then existing shares in issue in all respects. Details of these are set out in the announcement of the Company dated 7 June 2002.
(c) Certain registered warrant holders exercised their rights to subscribe for 3,658 ordinary shares of HK$0.01 each in the Company at HK$0.20 per share.
(d) The Company issued and allotted 5 ordinary shares of HK$0.01 each in the Company for cash at HK$0.012 per share as a result of the exercise of share options.
(e) Pursuant to an ordinary resolution passed at a special meeting of the Company held on 17 March 2003, every forty ordinary shares of HK$0.01 each in the issued and unissued share capital was consolidated into one ordinary share of HK$0.40. The nominal value of the issued and unissued shares after the consolidation of shares were increased from HK$0.01 to HK$0.40 each. Details of the these were set out in the announcement and circular of the Company dated 22 January 2003 and 21 February 2003 respectively.

— 176 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

18. PLEDGE OF ASSETS

At the reporting date, the Group had pledged the following assets to secure bank and other borrowings facilities granted to the Group:

		30 September	31 March
		2003	2003
		HK$’000	HK$’000
Bank deposits	(i)	37,337	26,593
Properties held for sale	(i)	6,500	6,500
Property, plant and equipment	(i)	92,086	96,744
Investment in securities	(ii)	10,188	16,457
Trade receivables	(iii)	21,759	14,292
		167,870	160,586

Notes:

(i) The assets were pledged to secure the banking facilities and other borrowings of the Group.
(ii) The investment in securities with market value of HK$10,188,000 (31 March 2003: HK$16,457,000) was pledged and transferred to margin loan payable included in other creditors and accruals to set off the amount of margin loan payable of HK$15,200,000 (31 March 2003: HK$21,482,000).
(iii) The trade receivables were pledged to a bank to secure the banking facilities granted to the Group.

19. RELATED PARTY TRANSACTION

During the period, the Group had the following significant transaction with a related party:

			Six months ended
			30 September
			2003 2002
Name	of company	Nature of transaction	HK$’000 HK$’000
Yixing	United	Purchase of goods	31,594 25,257

The above transaction was carried out in accordance with the terms agreed between the relevant parties.

20. CONTINGENT LIABILITIES

		30 September	31 March
		2003	2003
		HK$’000	HK$’000
Corporate	guarantee given to bankers in respect of banking facilities
utilised	by an associate	—	10,268

— 177 —

FINANCIAL INFORMATION ON THE DFG GROUP

APPENDIX II

21. LITIGATION

(a) Companion-China Limited (“Companion-China”), a wholly-owned subsidiary of the Company, entered into a supply contract with a raw tiles manufacturer in Shenzhen on 17 May 1997. The contract was finally terminated due to the sub-standard raw tiles. On 2 June 1999, legal action was instituted by the manufacturers in the High Court of Hong Kong against Companion-China demanding the payment of outstanding contract sum of HK$2,349,000. On 7 August 1999, Companion-China made a counterclaim against the manufacturer for loss and damages as a result of the substandard raw tiles.

On 20 December 1999, summary judgment was entered against Companion-China for the payment of outstanding contract sum of approximately HK$1,860,000 and interests thereon. Companion-China lodged an appeal against such summary judgment and an unconditional leave was granted to Companion-China on 3 March 2000 to defend the action. If final judgment is entered against Companion-China, Companion-China may be obliged to pay the manufacturer a sum of approximately HK$1,860,000 plus interests and cost. At the date of this report, there has been no further progress in respect of such action. As the outstanding contract sum of approximately HK$1,860,000 was provided for in prior year, the directors are of the opinion that there is unlikely to be any material adverse financial impact on the Group in the event that the final judgement is not in favour of Companion-China.

(b) On 22 January 2002, Companion Finance Limited (“Companion Finance”), a wholly-owned subsidiary of the Company, issued a writ against Pang Siu Chung (“Mr. Pang”) and Kwok Mun Nei, Candy and Leung Wai Hon (as guarantors) claiming payment of a sum of HK$322,097 and further interest on the sum of HK$300,000 at the daily rate of HK$78 from 29 November 2001 to the date of payment, being the unpaid amount due from Mr. Pang to Companion Finance pursuant to a loan agreement dated 16 February 2001 made between Companion Finance and Mr. Pang, plus cost. At the date of this report, there had been no further progress in respect of such action. As the total amount including interest due from Mr. Pang has already been written off, the directors are of the opinion that there is unlikely to be any material adverse financial impact on the Group in the event that the final judgement is not in favour of Companion Finance.
(c) On 3 June 2002, legal action was instituted against Wenzhou Xishan United Ceramics Company Limited ( ) (“Wenzhou Xishan”) and Chongqing Golden Unity Ceramics Co., Ltd. ( ) (“Chongqing Golden”) as guarantor (both are non wholly-owned subsidiaries of the Company) by China Huarong Asset Management Corporation, Hangzhou Office ( ) (“China Huarong”) claiming payment of a sum of RMB12,049,781, being the outstanding principal sum and interest of a loan due from Wenzhou Xishan to Industrial and Commercial Bank of China, Wenzhou Branch, Lucheng Sub-branch ( ), who assigned the said loan to China Huarong. On 8 August 2002, the Intermediate People’s Court in the Wenzhou Municipality (“Court”) ruled against Wenzhou Xishan and Chongqing Golden under which a sum of RMB5,000,000 plus interests and cost should be paid to China Huarong.

On 5 December 2002, the Court gave a final judgement against Wenzhou Xishan and Chongqing Golden under which a sum of RMB5,000,000 plus interests and costs of RMB1,581,311 should be paid to China Huarong. At the date of this report, such amounts had not been paid and no demand for payment had been received by the Group. The amount of RMB6,581,311 (approximately HK$6,234,000) has been charged to the Group’s consolidated income statement in previous year in respect of the sum claimed, the directors are of the opinion that there will not be any additional material adverse impact on the Group.

— 178 —

APPENDIX III PROFORMA FINANCIAL INFORMATION ON THE ENLARGED DFG GROUP

1. UNAUDITED PROFORMA STATEMENT OF ASSETS AND LIABILITIES OF THE ENLARGED DFG GROUP AFTER COMPLETION

The following table is an unaudited proforma statement of assets and liabilities of the Enlarged DFG Group after Completion based on the unaudited consolidated balance sheet of the DFG Group as at 30 September 2003 with certain reclassifications, and the audited combined balance sheet of the Property Group as at 31 December 2003, as extracted from the unaudited interim report of DFG for the six month period ended 30 September 2003 of DFG and the accountants’ report of the Property Group respectively.

Enlarged DFG Group

(In HK$ million) DFG Group as at 30 September 2003 Property Group as at 31 December 2003 Property Group and QRE Proforma Adjustments Notes Property Group and QRE Proforma as at 31 December 2003 Proforma Combination Adjustments (Note 4) Notes C Non-current assets Fixed assets 127 6,294 158 1 6,452 Properties held for/under development — 3,769 3,769 Goodwill 107 — — 36 5 Other non-current assets 10 20 20 Total non-current assets 244 10,083 10,241 Current assets Properties under development — 286 286 Properties held for sale 7 — — Sales proceeds held in stakeholders’ accounts — 2,402 2,402 Restricted cash — 2,701 2,701 Prepayments, deposits and other current assets 54 121 121 Inventories 22 — — Accounts receivable, net 70 22 22 Cash and cash equivalents 272 124 19 2 143 Pledged bank deposits 37 — — Total current assets 462 5,656 5,675 Total assets 706 15,739 15,916 Current liabilities Short-term borrowings (252) (94) 94 2 — Trade and bills payable (71) (372) (372) Accruals and other payables (144) (1,041) (1,041) Provisions (23) (1,759) (1,759) Amounts due to related companies (14) (5) (5) Amounts due to minority shareholders (7) — — Amount due to an associate (5) — — Amount due to ultimate holding company — (2,441) 1,271 2,3 (1,170) 1,170 5 Taxation (1) (2) (2) Total current liabilities (517) (5,714) (4,349) Net current assets (liabilities) (55) (58) 1,326 Total assets less current liabilities 189 10,025 11,567 Non-current liabilities Long-term liabilities — (1,057) 1,057 2 — Convertible notes issued to shareholder — — (61) 1 (61) (3,529) 5 Provisions — (1,941) (1,941) Other long-term liabilities — (31) (31) Amount due to ultimate holding company — (4,503) (4,503) Loan from ultimate holding company — (359) (359) 359 5 Loan from a fellow subsidiary — (2,000) (2,000) 2,000 5 Deferred taxation — (506) (506) Total non current liabilities — (10,397) (9,401) Total liabilities (517) (16,111) (13,750) Net assets (liabilities) 189 (372) 2,166 Shareholder’s equity 173 (372) 2,538 1,3 2,166 36 5 Minority interest 16 — — 189 (372) 2,166	(In HK$ million) DFG Group as at 30 September 2003 Property Group as at 31 December 2003 Property Group and QRE Proforma Adjustments Notes Property Group and QRE Proforma as at 31 December 2003 Proforma Combination Adjustments (Note 4) Notes C Non-current assets Fixed assets 127 6,294 158 1 6,452 Properties held for/under development — 3,769 3,769 Goodwill 107 — — 36 5 Other non-current assets 10 20 20 Total non-current assets 244 10,083 10,241 Current assets Properties under development — 286 286 Properties held for sale 7 — — Sales proceeds held in stakeholders’ accounts — 2,402 2,402 Restricted cash — 2,701 2,701 Prepayments, deposits and other current assets 54 121 121 Inventories 22 — — Accounts receivable, net 70 22 22 Cash and cash equivalents 272 124 19 2 143 Pledged bank deposits 37 — — Total current assets 462 5,656 5,675 Total assets 706 15,739 15,916 Current liabilities Short-term borrowings (252) (94) 94 2 — Trade and bills payable (71) (372) (372) Accruals and other payables (144) (1,041) (1,041) Provisions (23) (1,759) (1,759) Amounts due to related companies (14) (5) (5) Amounts due to minority shareholders (7) — — Amount due to an associate (5) — — Amount due to ultimate holding company — (2,441) 1,271 2,3 (1,170) 1,170 5 Taxation (1) (2) (2) Total current liabilities (517) (5,714) (4,349) Net current assets (liabilities) (55) (58) 1,326 Total assets less current liabilities 189 10,025 11,567 Non-current liabilities Long-term liabilities — (1,057) 1,057 2 — Convertible notes issued to shareholder — — (61) 1 (61) (3,529) 5 Provisions — (1,941) (1,941) Other long-term liabilities — (31) (31) Amount due to ultimate holding company — (4,503) (4,503) Loan from ultimate holding company — (359) (359) 359 5 Loan from a fellow subsidiary — (2,000) (2,000) 2,000 5 Deferred taxation — (506) (506) Total non current liabilities — (10,397) (9,401) Total liabilities (517) (16,111) (13,750) Net assets (liabilities) 189 (372) 2,166 Shareholder’s equity 173 (372) 2,538 1,3 2,166 36 5 Minority interest 16 — — 189 (372) 2,166	(In HK$ million) DFG Group as at 30 September 2003 Property Group as at 31 December 2003 Property Group and QRE Proforma Adjustments Notes Property Group and QRE Proforma as at 31 December 2003 Proforma Combination Adjustments (Note 4) Notes C Non-current assets Fixed assets 127 6,294 158 1 6,452 Properties held for/under development — 3,769 3,769 Goodwill 107 — — 36 5 Other non-current assets 10 20 20 Total non-current assets 244 10,083 10,241 Current assets Properties under development — 286 286 Properties held for sale 7 — — Sales proceeds held in stakeholders’ accounts — 2,402 2,402 Restricted cash — 2,701 2,701 Prepayments, deposits and other current assets 54 121 121 Inventories 22 — — Accounts receivable, net 70 22 22 Cash and cash equivalents 272 124 19 2 143 Pledged bank deposits 37 — — Total current assets 462 5,656 5,675 Total assets 706 15,739 15,916 Current liabilities Short-term borrowings (252) (94) 94 2 — Trade and bills payable (71) (372) (372) Accruals and other payables (144) (1,041) (1,041) Provisions (23) (1,759) (1,759) Amounts due to related companies (14) (5) (5) Amounts due to minority shareholders (7) — — Amount due to an associate (5) — — Amount due to ultimate holding company — (2,441) 1,271 2,3 (1,170) 1,170 5 Taxation (1) (2) (2) Total current liabilities (517) (5,714) (4,349) Net current assets (liabilities) (55) (58) 1,326 Total assets less current liabilities 189 10,025 11,567 Non-current liabilities Long-term liabilities — (1,057) 1,057 2 — Convertible notes issued to shareholder — — (61) 1 (61) (3,529) 5 Provisions — (1,941) (1,941) Other long-term liabilities — (31) (31) Amount due to ultimate holding company — (4,503) (4,503) Loan from ultimate holding company — (359) (359) 359 5 Loan from a fellow subsidiary — (2,000) (2,000) 2,000 5 Deferred taxation — (506) (506) Total non current liabilities — (10,397) (9,401) Total liabilities (517) (16,111) (13,750) Net assets (liabilities) 189 (372) 2,166 Shareholder’s equity 173 (372) 2,538 1,3 2,166 36 5 Minority interest 16 — — 189 (372) 2,166	Proforma ombined Balance sheet 6,579 3,769 143 30
244 — 7 — — 54 22 70 272 37 462 706 (252) (71) (144) (23) (14) (7) (5) — (1) (517) (55) 189 — — — — — — — — — (517)	10,083 286 — 2,402 2,701 121 — 22 124 19 2 — 5,656 15,739 (94) 94 2 (372) (1,041) (1,759) (5) — — (2,441) 1,271 2,3 (2) (5,714) (58) 10,025 (1,057) 1,057 2 — (61) 1 (1,941) (31) (4,503) (359) (2,000) (506) (10,397) (16,111)	10,241 286 — 2,402 2,701 121 — 22 143 — 5,675 15,916 — (372) (1,041) (1,759) (5) — — (1,170) 1,170 5 (2) (4,349) 1,326 11,567 — (61) (3,529) 5 (1,941) (31) (4,503) (359) 359 5 (2,000) 2,000 5 (506) (9,401) (13,750)	10,521
			286 7 2,402 2,701 175 22 92 415 37
			6,137
			16,658
			(252 (443 (1,185 (1,782 (19 (7 (5 — (3
			(3,696
			2,441
			12,962 — (3,590 (1,941 (31 (4,503 — — (506
			(10,571
			(14,267
189	(372)	2,166	2,391
173 16	(372) 2,538 1,3 —	2,166 36 5 —	2,375 16
189	(372)	2,166	2,391

— 179 —

APPENDIX III PROFORMA FINANCIAL INFORMATION ON THE ENLARGED DFG GROUP

Notes:

1) The adjustment reflects the acquisition of the Queen’s Road Exchange from PCCW-HKT Telephone Limited, a subsidiary of PCCW, at its fair value as at 31 December 2003 of HK$158 million subsequent to 31 December 2003 but occurs concurrently with Completion. The consideration will be settled by DFG as to HK$97 million by issue of part of the Consideration Shares and as to the balance of HK$61 million by issue of part of the Convertible Notes.
2) The adjustment reflects the repayment of a bank loan of RMB1,220 million (approximately HK$1,151 million) by the subsidiary holding PCP Beijing using funds advanced by PCCW of HK$1,170 million in March 2004. Excess funds advanced by PCCW of approximately HK$19 million are retained by that subsidiary.
3) The adjustment reflects the capitalisation of shareholder loans owed by the Property Group to PCCW Group prior to Completion.
4) Under generally accepted accounting principles in Hong Kong, the Transaction will be accounted for as a reverse acquisition since the issuance of the Consideration Shares and Consideration Notes in exchange for the Sale Shares and Sale Assets will result in PCCW becoming the controlling shareholder of DFG. For accounting purposes, the Property Group is treated as the acquirer while DFG is deemed to have been acquired by the Property Group.

The Property Group will apply the purchase method to account for the acquisition of the DFG Group. In applying the purchase method, the identifiable assets and liabilities of the DFG Group will be recorded on the balance sheet of the Enlarged DFG Group at their fair values at the date of Completion. Any goodwill or negative goodwill arising on the Transaction will be determined as the excess or deficit of the purchase consideration deemed to be incurred by the Property Group over the fair value of the separable assets and liabilities of the DFG Group at the date of Completion. The purchase consideration deemed to be given by the Property Group is the fair value of the proportion of the Property Group at the date of Completion given up to the existing shareholders of DFG. The assets and liabilities of the Property Group will be recorded in the balance sheet of the Enlarged DFG Group at their historical carrying value on the books of the Property Group.

For purposes of calculating the goodwill arising from the transaction and preparing the unaudited proforma statement of assets and liabilities of the Enlarged DFG Group after Completion, the book value of the assets and liabilities of the DFG Group as stated in its unaudited consolidated financial statements as at 30 September 2003 as extracted from its unaudited interim report for the six months ended 30 September 2003 have been used. A formal valuation of the separable tangible and intangible assets and liabilities of the DFG Group will be undertaken on Completion. As a result of the valuation, the fair value of the assets and liabilities of the DFG Group may be substantially different from the book value of the assets and liabilities of the DFG Group as stated in its unaudited financial statements as at 30 September 2003 which were prepared on the historical cost basis as modified for the revaluation of investments in securities. Accordingly, the actual goodwill of the Enlarged DFG Group may be different from that shown above.

5) The adjustment reflects:
the issuance of the 1,648,333,333 Consideration Shares at HK$1.80 per share and the Convertible Notes to PCCW on Completion;
the elimination of the share capital and reserves due to the reverse acquisition;
goodwill arising from the acquisition of the DFG Group (see Note 4 above); and
the transfer of the Loans.

— 180 —

APPENDIX III PROFORMA FINANCIAL INFORMATION ON THE ENLARGED DFG GROUP

2. UNAUDITED PROFORMA STATEMENT OF ADJUSTED CONSOLIDATED NET TANGIBLE ASSETS OF THE ENLARGED DFG GROUP AFTER COMPLETION

Set out below is an unaudited proforma statement of adjusted consolidated net tangible assets of the Enlarged DFG Group after Completion based on the audited consolidated balance sheet of the DFG Group as at 31 March 2003:

	HK$’million
Audited consolidated net asset value of the DFG Group
as at 31 March 2003	185
Add: Unaudited interim results of the DFG Group for the six-month
ended 30 September 2003	(12)
Unaudited adjusted consolidated net asset value of the DFG Group
as at 30 September 2003	173
Less: Unaudited goodwill of the DFG Group as at 30 September 2003 (note a)	(107)
Unaudited proforma adjusted consolidated net tangible asset value of
the DFG Group as at 30 September 2003	66
Add: Proforma combined net assets of Property Group prior to
Completion as at 31 December 2003	2,166
Estimated goodwill arising from the Transaction	36
Unaudited goodwill of the DFG Group as at 30 September 2003	107
Unaudited proforma adjusted combined net assets of the DFG Group
immediately before Completion	2,375
Less: Estimated goodwill arising from the Transaction	(36)
Unaudited goodwill of the DFG Group as at 30 September 2003	(107)
Unaudited proforma adjusted consolidated net tangible asset value of
the Enlarged DFG Group after Completion but before conversion of
the Convertible Notes	2,232
Unaudited proforma adjusted consolidated net tangible asset value of the
Enlarged DFG Group after Completion and the full conversion of the
Convertible Notes	5,822

— 181 —

APPENDIX III PROFORMA FINANCIAL INFORMATION ON THE ENLARGED DFG GROUP

Unaudited proforma adjusted consolidated net tangible asset value
attributable to each DFG share as at 30 September 2003 (note b)	HK$0.57
Unaudited proforma adjusted consolidated net tangible asset value
per DFG Share after Completion but before conversion of
the Convertible Notes (note b)	HK$1.26
Unaudited proforma adjusted consolidated net tangible asset value
per DFG Share after Completion and the full conversion of
the Convertible Notes (note b)	HK$1.97

Note a: The goodwill represents the goodwill arising from the acquisition of Top Power Holdings Limited and Beijing Continental Gas Co. Ltd. by a subsidiary of DFG as announced by DFG on 5 June 2003, details of which was included in the circular of DFG dated 26 June 2003.

Note b: The unaudited proforma adjusted consolidated net tangible asst value per DFG Share is calculated on the assumption that the 10:1 share consolidation in the Capital Reorganisation has completed.

Goodwill

Under accounting principles generally accepted in Hong Kong, the Transaction will be accounted for as a reverse acquisition since the issuance of the Consideration Shares and the Consideration Notes in exchange for the Sales Shares and Sale Assets will result in PCCW becoming the controlling shareholder of the DFG Group. For accounting purposes, the Property Group is treated as the acquirer while the DFG Group is deemed to have been acquired by the Property Group.

The amount of goodwill arising from the Transaction is estimated to be approximately HK$36 million which is determined as the excess of the purchase consideration deemed to be incurred by the Property Group of approximately HK$209 million over the fair value of the separable assets and liabilities of the DFG Group attributable to the PCCW Group at the date of Completion of approximately HK$173 million. The amount of estimated goodwill disclosed in the unaudited proforma statement of assets and liabilities of the Enlarged DFG Group after Completion as set out in the “Unaudited proforma statement of assets and liabilities of the Enlarged DFG Group after Completion” in this appendix is based on the book value of the assets and liabilities of the DFG Group as stated in its unaudited consolidated financial statements as at 30 September 2003. A formal valuation of the separable tangible and intangible assets and liabilities of the DFG Group will be undertaken by PCCW or a qualified valuer at Completion. As a result of the valuation, the fair value of the net assets of the DFG Group may be substantially different from the book value of the assets and liabilities of the DFG Group as stated in its unaudited financial statements as at 30 September 2003 which were prepared on the historical cost basis as modified for the revaluation of investments in securities. Accordingly, the actual goodwill arising from the Transaction will be determined at Completion and the amount may be different from the amount of goodwill shown in the unaudited proforma statement of assets and liabilities of the Enlarged DFG Group after Completion as set out in the “Unaudited proforma statement of assets and liabilities of the Enlarged DFG Group after Completion” in this appendix.

— 182 —

APPENDIX IV PROPERTY VALUATION ON THE PROPERTY GROUP

The following is the text of the valuation report for the underlying property interests of the Property Group and the Queen’s Road Exchange, as at 31 December 2003, prepared for the purposes of inclusion in this circular. The report was prepared by CBRE, an independent firm of professional surveyors.

As stated in the section headed “Property Development — Cyberport” at page 23 of this circular, the Cyberport Developer does not have title to the site for the Cyberport Project. The valuation report prepared by CBRE does not therefore include any property interest in the Cyberport.

==> picture [125 x 161] intentionally omitted <==

2 April 2004

The Directors

Dong Fang Gas Holdings Limited 9th Floor, Paul Y. Centre 51 Hung To Road, Kwun Tong Kowloon, Hong Kong

Dear Sirs,

Re: Property Valuation for Four Properties Owned by PCCW

We refer to your instructions for us to carry out a valuation of four property interests held by PCCW Limited and its subsidiaries (hereinafter together known as the “Group”) in Hong Kong and the People’s Republic of China (“the PRC”). We confirm that we have carried out inspections, made relevant enquiries and obtained such further information as we consider necessary for the purpose of providing you with our opinions of the open market values of the property interests as at 31 December 2003 (“the date of valuation”).

Unless otherwise stated, our valuation is prepared in accordance with the “Hong Kong Guidance Notes on the Valuation of Property Assets” published by The Hong Kong Institute of Surveyors (“HKIS”). If the Guidance Notes are silent on subjects requiring guidance, we refer to the “Appraisal and Valuation Manual” published by The Royal Institution of Chartered Surveyors (“RICS”) subject to variation to meet local established law, custom, practice and market conditions.

— 183 —

PROPERTY VALUATION ON THE PROPERTY GROUP

APPENDIX IV

Our valuation is made on the basis of Open Market Value, defined by the HKIS as “the best price at which the sale of an interest in the property would have been completed unconditionally for cash consideration on the date of valuation assuming:

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

We have valued the property interests by making reference to comparable sales evidences as available in the markets. Other than a leaseback arrangement for Property No. 4, our valuation has been made on the assumption that the owner sells the properties on the open market without the benefit of a deferred terms contract, leaseback, joint venture, management agreement or any similar arrangement which would serve to affect the values of the properties.

In forming our opinion of value of Property No. 3 in the PRC, we have assumed that the owner has free uninterrupted rights to use and assign the property interest for the whole of the unexpired term of land use right as granted. Unless otherwise stated, we have valued the property interest on the assumption that it is freely disposable and transferable for its existing uses to both local and overseas purchasers whether as a whole or on a strata-title basis without payment of any premium to the relevant authorities.

No allowance has been made in our valuation for any charges, mortgages or amounts owing on the property interests nor for any expenses or taxation that may be incurred in effecting sales. If the properties were to be sold at the amount of the valuation by the owner of the properties, the Hong Kong properties will be subject to stamp duty of 3.75% and may be subject to profits tax of 17.5%, and the PRC property will be subject to stamp duty of 0.05%, business tax of 5% and land value added tax of 30%-60% on progressive rates. However, such potential tax liability would not arise if the off-shore holding companies of such property owners are sold. The likelihood of such potential tax liability crystallising is therefore minimal. Unless otherwise stated, it is assumed that the properties are free from encumbrances, restrictions and outgoings of an onerous nature that could affect their values.

— 184 —

PROPERTY VALUATION ON THE PROPERTY GROUP

APPENDIX IV

We have relied to a considerable extent on the information provided by the instruction party and the legal opinion of the PRC legal adviser employed by the instruction party. We have no reason to doubt the truth and accuracy of the information provided to us by the instruction party and/or its PRC legal adviser, which is material to valuation. We were also advised by the instruction party that no material facts have been omitted from the information supplied. We consider that we have been provided with sufficient information to reach an informed view and have no reason to suspect that material information has been withheld.

We have not seen original planning and/or development schemes and occupation consents for the properties and have assumed that they have been erected and are being occupied and used in accordance with such consents and that there are no outstanding statutory notices.

We have accepted advice given to us on matters such as interests attributable to the Group, tenures, planning approvals, statutory notices, site and floor areas, and all other material information supplied by the instruction party. All documents and leases have been used for reference only and all dimensions, measurements and areas included in the valuation certificate are based on information contained in the documents provided to us and are therefore only approximate. No on-site measurements have been taken.

We have not been provided with copies of the title documents relating to the property interests in Hong Kong, but we have caused searches to be made at the Land Registry. However, we have not examined the original documents to verify ownership or to ascertain the existence of any lease amendments that may not appear on the copies handed to us. All documents have been used for reference only.

In respect of Property No. 3 in the PRC, we have been provided with extracts of documents in relation to the titles to the property interest, However, we have not scrutinised the original documents to verify ownership and encumbrances, or to ascertain any amendment which may or may not appear on the copies handed to us. All documents have been used for reference only.

We have inspected the properties to such extent as for the purpose of this valuation. In the course of our inspection, we did not notice any serious defects. However, we have not carried out any structural survey nor any tests were made on the building services. Therefore, we are not able to report whether the properties are free of rot, infestation or any other structural defects.

We have not carried out land survey to verify the site boundaries of the properties, we have not investigated the site to determine the suitability of soil conditions, the availability of services, etc. for future development. Our report is prepared on the assumption that these aspects are satisfactory. This report does not make any allowance for contamination or pollution of the lands, if any, which may have occurred as a result of past usage.

— 185 —

PROPERTY VALUATION ON THE PROPERTY GROUP

APPENDIX IV

Property No. 3 in the PRC has been valued in Renminbi (“RMB”) and whilst there are any monetary amounts stated in US Dollars (“US$”), we have adopted the exchange rate of RMB8.28 to US$1.0 in our calculation. The valuation has been converted into Hong Kong Dollars in this report at the exchange rate of HK$0.9404 to RMB1.0. There has been no significant fluctuation in that exchange rates between the date of valuation and the date of this letter.

Our report is prepared in accordance with the requirements of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited except for Rule 5.07 that the date of valuation must not be more than three months from the date of the relative listing document is issued. A waiver application has been made to the Stock Exchange in respect of this requirement under Rule 5.07. We are of the opinion that there has been no material change in the values of the property interests during the period from 31 December 2003 to 2 January 2004 (being the date three months before this report).

A summary of valuations and our valuation certificate are attached hereto.

Yours faithfully, For and on behalf of

CB Richard Ellis Limited

Kam Hung Yu

BSc(Hons) MSc(e-Commerce) FHKIS FRICS RPS(GP) Executive Director Valuation & Advisory Services

Note: Mr. Yu is the Chairman for General Practice Division of the Hong Kong Institute of Surveyors. He is a Registered Professional Surveyor (General Practice), a fellow of Royal Institution of Chartered Surveyors, a fellow of the Hong Kong Institute of Surveyors and a fellow of the Hong Kong Institute of Real Estate Administration. He has over 23 years’ valuation experience in both Hong Kong and the PRC.

— 186 —

PROPERTY VALUATION ON THE PROPERTY GROUP

APPENDIX IV

SUMMARY OF VALUATIONS

Property Interest

Capital value as at 31 December 2003

Properties held for Investment

PCCW Tower, Taikoo Place, HK$2,652,000,000 No. 979 King’s Road, Quarry Bay, Hong Kong 2. 18th and 20th Floors HK$20,100,000 (including female disable lavatory, male lavatory, disable lavatory, lift lobby and corridor on each of 18th and 20th Floors), Roof, and Parking Spaces Nos. 5-8 and L3-L5 on 1st Floor, Paramount Building, No. 12 Ka Yip Street, Chai Wan, Hong Kong
Unsold Portions, HK$3,926,070,000 Pacific Century Place, No. 2A Worker’s Stadium Road North, Chaoyang District, Beijing, the PRC Sub-total: HK$6,598,170,000 Property held for Future Development 4. Queen’s Road Telephone Exchange, HK$158,330,000 No. 1 Wo Fung Street, Sheung Wan, Hong Kong Grand Total: HK$6,756,500,000

— 187 —

PROPERTY VALUATION ON THE PROPERTY GROUP

APPENDIX IV

VALUATION CERTIFICATE

Properties held for Investment

Property

Description and tenure

Details of occupancy

Capital value in existing state as at 31 December 2003

PCCW Tower, The property comprises a 43-storey Taikoo Place, Grade A office building plus a No. 979 4-level basement carport King’s Road, accommodating 216 car parking Quarry Bay, spaces. The building was completed Hong Kong in 1994. The property is The gross floor area of the property registered under excluding the carport is the Sub-lease approximately 57,613.60 sq.m. registers of Section (620,147 sq.ft.). S and the Remaining Portion The property is held under a lease of Quarry Bay granted by Taikoo Place Holdings Marine Lot No. 1 Limited for a term of 999 years less the last three days from 2 February 1882 at an annum rent of HK1.00.

As at 31 December 2003, some 29% had been leased to related companies of the Group whereas some 65% of the office spaces had been leased to various third parties. The remaining office spaces were vacant.

The monthly rental income was about HK$10,195,730.6 exclusive of management fees, rates and airconditioning charges. The latest lease expiry date of the leases is 31 March 2008.

48 car parking spaces were licensed at a total monthly fee of HK$141,460.

HK$2,652,000,000

Notes

The registered owner of the property is Taikoo Place Holdings Limited (“the Owner”, formerly known as Parker Valley Estates Limited), who let the property to Monance Limited at a peppercorn rent (“the Sub-lease”). Pursuant to an Assignment of Lease dated 6 September 2002, Monance Limited assigned its leasehold interest to Partner Link Investments Limited.
We were advised that Partner Link Investments Limited is an indirect wholly owned subsidiary of PCCW Limited.
According to the Sub-lease, (i) the lessee is not entitled to assign only parts of its interest, and (ii) in the event that the lessee wishes to assign the whole of the Sub-lease to a person who is not within the Group or in the event that the lessee wishes to underlet the whole (but not part) of the property for a term of more than 12 years to a person who is not within the Group, the lessee shall serve a notice on the Owner of its intention. If the Owner wishes to acquire the lessee’s interest, it must response to the aforesaid notice with 30 days in the event that there is a bonafide offer to purchase the lessee’s entire interest under the Sub-lease or 14 days in the event that the lessee wishes to sell such interest in other circumstances. If no such response is received, the lessee will be entitled to freely assign the Sub-lease or underlet the property. Any underlettings of any part of the property for a term of not more than 12 years to any person not within the Group would also require the Owner’s consent.
The property lies within an area zoned for “Sub-Area (b)” in “Commercial (Group 1)” uses under the relevant outline zoning plan.

— 188 —

PROPERTY VALUATION ON THE PROPERTY GROUP

APPENDIX IV

VALUATION CERTIFICATE

Property

Description and tenure

Details of occupancy

Capital value in existing state as at 31 December 2003

18th and 20th The property comprises two whole Floors (including floors, a top roof, 4 car parking female disable and 3 lorry parking spaces in a 21lavatory, storey industrial building completed male lavatory, in 1990. disable lavatory, lift lobby and The gross floor area of the property corridor on each of is approximately 3,778.37 sq.m. 18th and 20th (40,670 sq.ft.) plus the roof space Floors), Roof, and of 1,168.72 sq.m. (12,580 sq.ft.). Parking Spaces Nos. 5-8 and The property is held under Conditions of Sale No. 11946 for a L3-L5 on 1st Floor, Paramount Building, term from 29 May 1987 expiring on 30 June 2047. The annual No. 12 Ka Yip Street, Chai Wan, government rent is equivalent to 3% of the rateable value of the Hong Kong

The property is held under Conditions of Sale No. 11946 for a term from 29 May 1987 expiring on 30 June 2047. The annual government rent is equivalent to 3% of the rateable value of the property.

The property comprises 522/5625 equal and undivided shares of and in Chai Wan Inland Lot No. 134

As at 31 December 2003, with exception of Unit 1801, Unit 1804, a car parking space and portion of roof space which were vacant, the property had been leased to three related companies of the Group and a third party for media production and placing of satellite dishes.

The total monthly rent and license fee was HK$221,446 of which the workshop units and car parking spaces were leased exclusive of management fees and rates whereas the roof spaces were licensed on inclusive basis.

HK$20,100,000

Notes

The registered owner of 18th Floor, Parking Spaces Nos. 5,6 and L5 is Carmay Investment Limited whilst the registered owner of 20th Floor, Roof, Parking Spaces Nos. 7, 8, L3 and L4 is ACCA Investment Limited.
We were advised that the registered owners are indirect wholly owned subsidiaries of PCCW Limited.
The property is subject to a Deed of Mutual Covenant vide Memorial No. 4452764 dated 24 May 1990 and Management Agreement Memorial No. 8570753 dated 12 December 2001.
The property lies within an area zoned for “Industrial” uses under the relevant outline zoning plan.

— 189 —

PROPERTY VALUATION ON THE PROPERTY GROUP

APPENDIX IV

VALUATION CERTIFICATE

Property

Unsold Portions, Pacific Century Place, No. 2A Worker’s Stadium Road North, Chaoyang District, Beijing, the PRC

Description and tenure

Pacific Century Place comprises a prestigious composite development occupying a site area of 29,350.78 sq.m.. The main building of the development consists of two office blocks (Towers A and B) and two apartment blocks (Towers C and D) all sitting on a common 6-storey commercial podium (of which the upper basement forms part) and a lower basement for car parking purposes. There is an ancillary block with 7 car parking floors. The whole complex extends to some 212,713 sq.m. of gross area.

The four towers and the ancillary car parking block were completed between 1998 and 2000 and the commercial podium was opened for business in 2001.

The gross floor areas of the subject unsold portions are approximately as follows:

asfollows:
Tower A Tower B Tower C Tower D Podium Total	Sq.m. 41,717.23 20,103.93 21,718.24 10,945.80 67,865.51
	162,350.71

A total of 831 car parking spaces are unsold and being part of the subject property.

Land use rights of the property have been granted to Beijing Jing Wei House and Land Estate Development Co., Ltd. (“Jingwei”) for terms until 3 January 2034 (commercial use), 3 January 2044 (office use), 3 January 2064 (residential use) and 15 June 2048 (parking spaces).

Particulars of occupancy

As at 31 December 2003, some 38,995.93 sq.m. in Tower A were leased with a total monthly rental income of USD844,273.30. The lease terms ranged from 9 months to 6 years with the latest expiry date on 31 December 2008.

Some 91% area of Tower B was leased to Nokia and another tenant with a total monthly rental income of USD302,566. The leases of Nokia and another tenant were 5 years from 1 September 2000 and 3 years from 20 December 2003 respectively.

For the apartment towers, total gross areas of 18,113.71 sq.m. in Tower C and 4,256.70 in Tower D were leased out with a total monthly rental income of USD396,880. Most of the lease terms are 1 year.

There were 14 retail tenants including a department store and the PCP Club leasing a total gross area of some 61,731.96 sq.m. in the podium. The latest expiry date of the retail tenants is 25 October 2011. The department store is a related company of the Group and its rent is the higher of a base rent or a turnover rent. The total monthly rental income for the podium was USD597,870.

Office spaces of 1,839.34 sq.m. approximately in Tower A and a management office in the ancillary car parking block were also leased to five related companies of the Group.

Capital value in existing state as at 31 December 2003

HK$3,926,070,000

— 190 —

PROPERTY VALUATION ON THE PROPERTY GROUP

APPENDIX IV

Notes:

According to State-owned Land Use Rights Certificates Nos. Jing Chao 10086, 10131 and 10222 respectively dated 28 January 2002, 24 December 2001 and 5 June 2003, the State Land Resources And Housing Administration Bureau of Beijing (“Beijing Land and Housing Bureau”) has granted the land use rights of the property to Jingwei.
According to Building Ownership Certificates Nos. Jing Chao 10068, 10094 and 10147 respectively dated 21 January 2002 and 2 July 2001 and 5 June 2003, the Beijing Land and Housing Bureau has granted the ownership of the buildings to Jingwei.
We have been advised that the Group has a 100 per cent interest in Jingwei through its wholly owned subsidiary Gain Score Limited.
The opinion of the Group’s PRC legal adviser states that:
i. Jingwei has acquired the aforesaid State-owned Land Use Rights Certificates and Building Ownership Certificates regarding the property.
ii. Jingwei has settled in full the land premium in accordance with the relevant Land Use Rights Grant Contracts.
iii. The unsold portions in Tower A comprise whole of L6, L10-L14, L16-L26, Units 801, 802, 808A, 809, 810, 810A, 811, 812, 815-817A on L8, Units 908, 908A, 909, 910, 910A, 911, 912, 915, 916 and 917 on L9, Units 1510A, 1511, 1512, 1515, 1516, 1517 and 1517A on L15.
iv. Other unsold portions comprise whole of L6-L16 in Tower B, whole of L5-L23 in Tower C, whole of L7-L15 in Tower D, whole of the podium (except Portion of basement and Portions of Levels 1 to 4 having been sold to Agricultural Bank of China, Beijing Branch) and 831 parking spaces.
v. The whole property is subject to five mortgages dated from 22 February 2002 to 20 June 2003 all in favour of the Head Office of ICBC expiring on 20 December 2009.
vi. Subject to a written approval of the mortgagee, which cannot be withheld unreasonably upon the mortgagor’s request, the property is freely transferable to any third parties.

— 191 —

PROPERTY VALUATION ON THE PROPERTY GROUP

APPENDIX IV

VALUATION CERTIFICATE

Property held for Future Development

Property Description and tenure

Queen’s Road The site area of the subject Telephone property is about 1,141.23 sq.m. Exchange, (12,284 sq.ft.) including a right-ofNo. 1 way 85.28 sq.m. (918 sq.ft.). Wo Fung Street, Sheung Wan, Standing on the site is a purposelyHong Kong built 6-storey telephone exchange building with a gross floor area of Sub-Section 1 of approximately 4,992.89 sq.m. Section C, Sub(52,990 sq.ft.) completed in 1968. Sections 2, 3 and 5 of Section F and The property is held under a the Remaining Government Lease for a term of Portion of Section 999 years commencing from 26 F, all of Marine June 1843. Only a peppercorn Lot No. 58 annual rent is payable to the government.

Capital value as at Details of occupancy 31 December 2003 The property is ownerHK$158,330,000 occupied as telephone exchange and ancillary uses with part of the area licensed to a third party.

Notes

The registered owner of the property is PCCW-HKT Telephone Limited (formerly known as The Hong Kong Telephone Company Limited).
We were advised the registered owner is an indirect wholly-owned subsidiary of PCCW Limited.
We were instructed to assess the value of the property subject to a leaseback term commenced on the date of valuation assuming the property has been sold to a new owner and the term shall last until the expiry date of the Government lease (less one day). The details of the arrangement are as follows:
i. Upon sale of the property, whole of the existing structure excluding those parts which are subject to existing licences, tenancies and lettings (if any), will be leased by the new owner to the existing occupant, i.e. the current registered owner, for any lawful purposes in accordance with the occupation permit at a monthly rent of HK$248,050 per month exclusive of government rates, air-conditioning and management charges but inclusive of Government rent, property tax and outgoings of capital nature.
ii. The occupant shall be entitled to terminate the leaseback at any time by giving to the new owner not less than six months’ notice in writing.

— 192 —

PROPERTY VALUATION ON THE PROPERTY GROUP

APPENDIX IV

In event of a redevelopment of the property, the leaseback will be changed as follows:
i. the new owner shall be entitled to terminate the leaseback by giving to the occupant not less than two years’ notice. Under this situation, the occupant shall bear the entire relocation costs incurred.
ii. An area of not less than 3,200 sq.m. (34,444 sq.ft.) of the redeveloped building between the ground and the second floors shall be let to the existing occupant as telephone exchange and related purpose. The occupant shall use its own facilities and management services for its used portion. No air-conditioning nor management charges shall be payable to the new owner.
iii. The new rent shall be exclusive of rates but inclusive of government rent, property tax and capital outgoings and shall be at the open market level. If the parties shall fail to agree on the new rent, the rent shall be determined by a surveyor appointed by The Hong Kong Institute of Surveyors.
Upon redevelopment, the maximum permitted plot ratios on the subject site are 8.0 for domestic building(s) or 15.0 for non-domestic building(s). With the consideration of the conditions under the proposed leaseback arrangement mentioned in Note No. 3 above, the optimal use of the property upon redevelopment should be apartment block(s) erected over a telephone exchange podium.
In our valuation, we have ignored the site area of the right-of-way upon the calculation of the developable gross floor area.
The property lies within an area zoned as “Commercial/ Residential” uses under the relevant outline zoning plan.

— 193 —

GENERAL INFORMATION

APPENDIX V

1. RESPONSIBILITY STATEMENTS

This circular includes particulars given in compliance with the Listing Rules and the Takeovers Code for the purpose of giving information with regard to DFG. The DFG Directors collectively and individually accept full responsibility for the accuracy of the information (other than information relating to the PCCW Group) contained in this circular and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief, opinions (other than those relating to the PCCW Group) expressed in this circular have been arrived at after due and careful consideration and there are no other facts not contained in this circular, the omission of which would make any statement (other than statements relating to the PCCW Group) herein misleading. The directors of PCCW jointly and severally accept full responsibility for the accuracy of the information relating to the PCCW Group contained in this circular and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief, opinions relating to the PCCW Group expressed in this circular have been arrived at after due and careful consideration and there are no other facts relating to the PCCW Group not contained in this circular, the omission of which would make any statement relating to the PCCW Group therein misleading.

The information in this circular has been supplied by the DFG Directors. The issue of this circular has been approved by the DFG Directors who jointly and severally 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, opinions expressed in this circular have been arrived at after due and careful consideration and there are no other facts not contained in this circular, the omission of which would make any statement in this circular misleading.

2. DISCLOSURE OF INTERESTS

(a) Interests in DFG and associated corporations
(i) DFG Directors’ interests and short positions in the securities of DFG and its associated corporations

As at the Latest Practicable Date, the interests and short positions of the DFG Directors in the equity or debt securities of DFG and any associated corporations (within the meaning of Part XV of the SFO) which had been notified to DFG and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests or short positions which they were deemed or taken to have under such provisions of the SFO) or which were required, pursuant to Section 352 of the SFO, to be entered in the register referred to therein, or which were required pursuant to the Model Code for Securities

— 194 —

GENERAL INFORMATION

APPENDIX V

Transactions by Directors of Listed Companies to be notified to DFG and the Stock Exchange were as follows:

(aa) Long positions in DFG Shares

		Number	of Existing		Approximate
		DFG Shares held			% to total
Name of	Personal	Family	Corporate		issued share
DFG Director	interest	interest	interest	Total	capital
Dr. Chan	2,520,900	—	—	2,520,900	0.22

(bb) Long positions in the shares of associated corporations

As at the Latest Practicable Date, none of the DFG Directors had interests or short positions in any equity or debt securities of DFG or any associated corporations (within the meaning of Part XV of the SFO) which were required to be notified to DFG and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests or short positions which they were taken or deemed to have under such provisions of the SFO) or which were required, pursuant to Section 352 of the SFO, to be entered in the register referred to therein or which were required pursuant to the Model Code for Securities Transactions by Directors of Listed Companies to be notified to DFG and the Stock Exchange.

(ii) DFG Directors’ rights to acquire DFG Shares

As at the Latest Practicable Date, there was no outstanding options.

(iii) Substantial Shareholders

As at the Latest Practicable Date, so far as is known to, or can be ascertained after reasonable enquiry by, the DFG Directors or chief executive of DFG, the following persons had an interest or short position in the shares, underlying shares or debentures of DFG and any associated corporations (within the meaning of Part XV of the SFO) which would fall to be disclosed to DFG under the provisions of Divisions 2 and 3 of Part XV of the SFO, or were expected, directly or indirectly, to be interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general

— 195 —

GENERAL INFORMATION

APPENDIX V

meetings of DFG or any other member of the DFG Group or had any options in respect of such capital:

Long positions in the shares, underlying shares or debentures of DFG

		Number of	Approximate
		Existing	% to total
Name of Substantial		DFG Shares	issued share
Shareholder	Capacity	interested in	capital
CSH	Corporate	500,000,000	43.06
China Strategic (B.V.I.) Limited	Corporate	500,000,000	43.06
Great Joint Profits Limited	Corporate	500,000,000	43.06

Note: The 500,000,000 shares are held by Great Joint Profits Limited, a wholly-owned subsidiary of China Strategic (B.V.I.) Limited which is in turn a wholly-owned subsidiary of CSH. Both China Strategic (B.V.I.) Limited and CSH are deemed to be interested in 500,000,000 shares in DFG held by Great Joint Profits Limited.
(iv) Save for Mr. Sin (who is presumed to be acting in concert with PCCW under the Takeovers Code) who held 15 Existing DFG Shares, as at the Latest Practicable Date, none of PCCW, its directors nor any of PCCW’s Concert Parties held any Existing DFG Shares (so far as PCCW is aware).
(v) Others

As at the Latest Practicable Date,

(aa) none of the subsidiaries of DFG, nor any pension funds of the DFG or of any of its subsidiaries, nor Somerley nor Goldbond nor any other advisor to DFG as specified in class (2) of the definition of “Associate” under the Takeovers Code had any interest in any shares, convertible securities, warrants, options or derivatives which carry voting rights of DFG.
(bb) no person had any arrangement of the kind referred to in Note 8 to Rule 22 of the Takeovers Code with DFG or any person who is an associate of DFG by virtue of classes (1), (2), (3) and (4) of the definition of associate under the Takeovers Code, PCCW or with any party acting in concert with PCCW.
(cc) no shareholding in DFG was managed on a discretionary basis by fund managers connected with DFG.

— 196 —

GENERAL INFORMATION

APPENDIX V

(b) Dealings in Existing DFG Shares

(i) Directors

None of the Directors or parties acting in concert with any of them had dealt in any shares, convertible securities, warrants, options or derivatives which carry voting rights of DFG during the period that commenced on 6 September 2003 (being the date six months prior to the date of the Announcement) and ended on the Latest Practicable Date (the “Relevant Period”).

(ii) CSH

None of CSH or parties acting in concert with it had dealt in any shares, convertible securities, warrants, options or derivatives which carry voting rights of DFG during the Relevant Period.

(iii) PCCW and its directors and Concert Parties

During the Relevant Period, other than pursuant to the Transaction, none of PCCW, its directors and (so far as PCCW is aware) its Concert Parties had dealt for value in any Existing DFG Shares and the Existing DFG Shares held by Mr. Sin were acquired about ten years ago.

(iv) Miscellaneous

During the Relevant Period, none of the subsidiaries of DFG, nor any pension funds of DFG or of any of its subsidiaries, nor Goldbond had dealt for value in any Existing DFG Shares.

(c) Interests and dealings in the securities issued by PCCW

Save for Dr. Chan who holds 88 shares in PCCW since 2000, none of the DFG Directors or DFG had any interest in any securities issued by PCCW nor had any of them dealt for value in any such securities during the Relevant Period.

(d) Miscellaneous disclosures of interests

(i) As at the Latest Practicable Date, other than the Acquisition Agreement, there was no agreement, arrangement or understanding between PCCW or its Concert Parties and any other persons for the transfer of the beneficial interests in the Consideration Shares.

— 197 —

GENERAL INFORMATION

APPENDIX V

(ii) As at the Latest Practicable Date, there was no agreement, arrangement or understanding (including any compensation arrangement) in connection with the Transaction between PCCW or its Concert Parties and any of the directors, recent directors, shareholders or recent shareholders of DFG having any connection with or dependence upon the Transaction.
(iii) There is no agreement or arrangement between any DFG Director and any other person which is conditional on or dependent upon the outcome of the Transaction or otherwise connected therewith.
(iv) As at the Latest Practicable Date, DFG has not been informed and was not aware of any person who has committed to vote for or against the Share Whitewash Waiver.

3. MARKET PRICES

(a) The DFG Shares are traded on the Stock Exchange. The table below shows the closing prices of the DFG Shares on the Stock Exchange on (i) the last trading day of each of the six calendar months immediately preceding 5 March 2004, the date of the Announcement; (ii) 23 February 2004, being the day on which the trading of DFG Shares was suspended pending the issue of the Announcement; and (iii) the Latest Practicable Date:

Date	Closing Price
	HK$
29 August 2003	0.31
30 September 2003	0.36
31 October 2003	0.28
28 November 2003	0.31
31 December 2003	0.27
30 January 2004	0.28
23 February 2004	0.48
Latest Practicable Date	0.48

(b) The highest and lowest closing prices for the DFG Shares recorded on the Stock Exchange during the period between 6 September 2003 (being the date six months prior to the date of the Announcement) and the Latest Practicable Date were HK$1.03 on 8 March 2004 and HK$0.25 on 4 December 2003 respectively.

— 198 —

GENERAL INFORMATION

APPENDIX V

4. MATERIAL CONTRACTS

The following contracts (not being contracts entered into in the ordinary course of business carried on or intended to be carried on by the Enlarged DFG Group) have been entered into by the Enlarged DFG Group within the two years prior to 5 March 2004 and between 5 March 2004 and the Latest Practicable Date and are or may be material:

(a) an agreement dated 1 June 2003 between Classic Million Limited as vendor, Dong Fang Gas (China) Limited, an indirect wholly-owned subsidiary of DFG, as purchaser and Chatchawan Sattasakul as guarantor of the vendor, pursuant to which Classic Million Limited agreed to sell and Dong Fang Gas (China) Limited agreed to purchase 73% interest in Top Power Holdings Limited, a limited liability company incorporated in the British Virgin Islands with 70% interest in (Beijing Continental Gas Co. Ltd.) for a consideration of HK$80,000,000;
(b) an agreement dated 8 November 2002 between Great City Associates Limited as vendor, China Crystal Investment Limited, an indirect wholly-owned subsidiary of DFG, as purchaser and Yue Hong as guarantor of the vendor, pursuant to which Great City Associates Limited agreed to sell and China Crystal Investment Limited agreed to purchase 63% interest in WIT International Group Ltd., which on completion of the agreement is to hold 49% interest in (Nanning City Gas Co. Ltd.), for a consideration pf HK$120,000,000;
(c) a placing agreement was entered into dated 4 June 2002 between Companion Building Material International Holdings Limited, a subsidiary of DFG and Tai Fook Securities Company Limited in relation to the placing of 25,000,000,000 shares in Companion Building Material International Holdings Limited; and
(d) the Acquisition Agreement.

5. SERVICE CONTRACTS

None of the DFG Directors had as at the Latest Practicable Date or proposes to have a service agreement with any member of the DFG Group or associated companies of DFG in force which has or will have more than 12 months to run and there are no service contracts for DFG Directors which have been entered into for the replacement of a prior contract or amended, within six months before the date of the Announcement.

None of the directors or proposed directors of the Enlarged DFG Group had as at the Latest Practicable Date any existing or proposed service contracts with any member of the Enlarged DFG Group (excluding contracts expiring or determinable by the employer within one year without payment of compensation (other than statutory compensation)).

— 199 —

GENERAL INFORMATION

APPENDIX V

6. DFG DIRECTORS’ INTEREST IN ASSETS/CONTRACTS AND OTHER INTEREST

None of the DFG Directors has any direct or indirect interest in any assets which have, since 31 March 2003, being the date of the latest published audited accounts of the DFG Group, been acquired or disposed of by or leased to any member of the Enlarged DFG Group or are proposed to be acquired or disposed of by or leased to any member of the Enlarged DFG Group.

None of the DFG Directors was materially interested in any contract which was subsisting as at the Latest Practicable Date and which was significant in relation to the business of the Enlarged DFG Group taken as a whole.

7. LITIGATION

(a) Companion-China Limited (“Companion-China”), a wholly-owned subsidiary of DFG, entered into a supply contract with a raw tiles manufacturer in Shenzhen on 17 May 1997. The contract was finally terminated due to the sub-standard raw tiles. On 2 June 1999, legal action was instituted by the manufacturers in the High Court of Hong Kong against Companion-China demanding the payment of outstanding contract sum of HK$2,349,000. On 7 August 1999, Companion-China made a counterclaim against the manufacturer for loss and damages as a result of the sub-standard raw tiles.

On 20 December 1999, summary judgement was entered against Companion-China for the payment of outstanding contract sum in the sum of approximately HK$1,860,000 and interests thereon. Companion-China lodged an appeal against such summary judgement and an unconditional leave was granted to Companion-China on 3 March 2000 to defend the action. If final judgment is entered against Companion-China, Companion-China may be obliged to pay the manufacturer a sum of approximately HK$1,860,000 plus interests and costs. At the date of this circular, there has been no further progress in respect of such action. As the outstanding contract sum of approximately HK$1,860,000 was provided for in prior year, the DFG Directors are of the opinion that there is unlikely to be any material adverse financial impact on the DFG Group in the event that the final judgement is not in favour of Companion-China.

(b) On 22 January 2002, Companion Finance Limited (“Companion Finance”), a wholly-owned subsidiary of DFG, issued a writ against Pang Siu Chung (“Mr. Pang”) and Kwok Mun Nei, Candy and Leung Wai Hon (as guarantors) claiming payment of a sum of HK$322,097 and further interest on the sum of HK$300,000 at the daily rate of HK$78 from 29 November 2001 to the date of payment, being the unpaid amount due from Mr. Pang to Companion Finance pursuant to a loan agreement dated 16 February 2001 made between Companion Finance and Mr. Pang, plus cost. At the date of this circular, there had been no further progress in respect of such action. As the total amount including interest due from Mr. Pang has already been written off, the DFG Directors are of the opinion that there is unlikely to be any material adverse financial impact on the DFG Group in the event that the final judgement is not in favour of Companion Finance.

— 200 —

GENERAL INFORMATION

APPENDIX V

(c) On 3 June 2002, legal action was instituted against Wenzhou Xishan United Ceramics Company Limited ( ) (“Wenzhou Xishan”) and Chongqing Golden Unity Ceramics Co., Ltd. ( ) (“Chongqing Golden”) as guarantor (both are non wholly-owned subsidiaries of DFG) by China Huarong Asset Management Corporation, Hangzhou Office ( ) (“China Huarong”) claiming payment of a sum of RMB12,049,781, being the outstanding principal sum and interest of a loan due from Wenzhou Xishan to Industrial and Commercial Bank of China, Wenzhou Branch, Lucheng Sub-branch ( ) who assigned the said loan to China Huarong. On 8 August 2002, the Intermediate People’s Court in the Wenzhou Municipality (“Court”) ruled against Wenzhou Xishan and Chongqing Golden under which a sum of RMB5,000,000 plus interests and cost should be paid to China Huarong. On 5 December 2002, the Court gave a final judgement against Wenzhou Xishan and Chongqing Golden under which a sum of RMB5,000,000 plus interests and costs of RMB1,581,311 should be paid to China Huarong. At the date of this circular, such amounts had not been paid and no demand for payment had been received by the Group. The amount of RMB6,581,311 (approximately HK$6,234,000) has been charged to the DFG Group’s consolidated income statement in previous year in respect of the sum claimed, the DFG Directors are of the opinion that there will not be any additional material adverse impact on the DFG Group.
(d) On July 2003, legal action was instituted against Wenzhou Xishan at the (“Zhejiang Court”) by (“Bank”) in relation to a
loan in the sum of US$800,000 made by the Bank against Wenzhou Xishan guaranteed by Chongqing Golden. It has been held at the Zhejiang Court that Wenzhou Xishan is liable to repay the Bank in a sum of US$800,000, together with interest accruing from 27 October 1999 to 27 October 2000 at a rate of 6.5625% per annum and from 28 October 2000 up to the date of judgment, at an interest in accordance with the same fixed rate of interest charged by in respect of similar loans. Chongqing Golden as guarantor is also responsible for the repayment of such sum.

As at the Latest Practicable Date, an aggregate principal amount of approximately HK$12,816,981 of possible claims against the DFG Group arising from cases (a), (c) and (d) above has been fully provided for or accrued as at 30 September 2003 of the Company. Save as disclosed above, as at the Latest Practicable Date, no member of the DFG Group was engaged in any litigation or arbitration of material importance and there is no litigation or claims of material importance known to the DFG Directors to be pending or threatened by or against any member of the DFG Group.

— 201 —

GENERAL INFORMATION

APPENDIX V

8. QUALIFICATIONS OF EXPERTS

The following is the qualifications of the experts who have given opinions or advice which are contained in this circular:

Name Qualification PricewaterhouseCoopers Certified public accountants CB Richard Ellis Limited Professional Surveyors Goldbond A licensed corporation under the SFO

As at the Latest Practicable Date, none of PricewaterhouseCoopers, CB Richard Ellis Limited and Goldbond is beneficially interested in the share capital of any member of the DFG Group, nor has any right to subscribe or to nominate persons to subscribe for securities in any member of the DFG Group, nor did it have any interest, either direct or indirect, in any assets of the DFG Group which have been, since 31 March 2003 (being the date to which the latest published audited consolidated accounts of the DFG Group were made up), acquired or disposed of by or leased to, or are proposed to be acquired or disposed of by or leased to, any member of the DFG Group.

9. CONSENT

Each of PricewaterhouseCoopers, CB Richard Ellis and Goldbond has given and has not withdrawn its written consent to the issue of this circular with the inclusion therein of its letter and/or references to its name, in the form and context in which it appears.

10. MISCELLANEOUS

(a) The secretary of DFG is Ms. Feona Ng (Solicitor, HKSAR).
(b) The registered office of PCCW is at 39th Floor, PCCW Tower, TaiKoo Place, 979 King’s Road, Quarry Bay, Hong Kong.
(c) The ultimate controlling shareholder of PCCW is Mr. Li Tzar Kai, Richard. The executive directors of PCCW are Mr. Li Tzar Kai, Richard, Mr. So Chak Kwong, Jack, Mr. Yuen Tin Fan, Francis, Mr. Michael John Butcher, Mr. Alexander Anthony Arena, Mr. Lee Chi Hong, Robert, Mr. Chung Cho Yee, Mico and Mr. Peter Anthony Allen.
(d) Somerley is the financial adviser to DFG, the registered office of which is situated at Suite 2201, 22nd Floor, Two International Finance Centre, 8 Finance Street, Central, Hong Kong.
(e) Citigroup Global Markets Asia Limited is the financial adviser to PCCW, the registered office of which is situated at 20th Floor, Three Exchange Square, Central, Hong Kong.
(f) In the event of inconsistency, the English text of this circular and the form of proxy shall prevail over the Chinese text.

— 202 —

GENERAL INFORMATION

APPENDIX V

11. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection at the offices of DFG at 9th Floor, Paul Y. Centre, 51 Hung To Road, Kwun Tong, Kowloon, Hong Kong during normal business hours on any Business Day until Wednesday, 28 April 2004:

(a) The memorandum of association and bye-laws of DFG.
(b) The memorandum and articles of association of PCCW.
(c) The accountants’ report of the Property Group for each of the three years ended 31 December 2003, the text of which is set out in appendix I to this circular and audited combined financial statements of the Property Group as of and for the years ended 31 December 2001, 2002 and 2003.
(d) the letters and valuation certificates prepared by CB Richard Ellis Limited in relation to the property interests of the Property Group which are set out in appendix IV to this circular.
(e) The annual reports of the DFG Group for each of the two years ended 31 March 2003 and the unaudited consolidated financial statements for the period from 1 April 2003 to 30 September 2003.
(f) The letter from the Independent Board Committee, the text of which is set out on pages 47 to 48 of this circular.
(g) The letter from Goldbond, the text of which is set out on pages 49 to 80 of this circular.
(h) The letters of consent as referred to in paragraph 9 of this appendix.
(i) The material contracts as referred to in paragraph 4 of this appendix.
(j) Circular of DFG on a discloseable transaction dated 26 June 2003.

— 203 —

NOTICE OF SPECIAL GENERAL MEETING

DONG FANG GAS HOLDINGS LIMITED

(Incorporated in Bermuda with limited liability)

NOTICE IS HEREBY GIVEN that a special general meeting (the “Special General Meeting”) of the shareholders of Dong Fang Gas Holdings Limited (the “Company”) will be held at 10:30 a.m. on Wednesday, 28 April 2004 at 11th Floor, Paul Y. Centre, 51 Hung To Road, Kwun Tong, Kowloon, Hong Kong for the purpose of considering and, if thought fit, passing, with or without modifications, the following resolutions of the Company:

ORDINARY RESOLUTIONS

“ THAT , subject to the passing of the special resolution numbered 3 as set out in the notice convening the special general meeting at which this Resolution is proposed:
(a) the acquisition by the Company from PCCW Limited (“PCCW”) pursuant to an acquisition agreement dated 5 March 2004 (the “Agreement”) entered into between PCCW as vendor and the Company as purchaser (a copy of which has been produced to the meeting and marked “A” and signed for the purpose of identification by the Chairman of the meeting), of:
- (i) the entire issued share capital of Ipswich Holdings Limited (“Property Holdco”);
- (ii) the approximately HK$3,529 million interest-bearing loans owing by certain subsidiaries of Property Holdco to PCCW; and
- (iii) the property situated at Ko Shing Street and Wo Fung Street, Western, Hong Kong, erected on Subsection 3 of Section F of Marine Lot No. 58, Subsection 5 of Section F of Marine Lot No. 58, The Remaining Portion of Section F of Marine Lot No. 58, Subsection 2 of Section F of Marine Lot No. 58 and Subsection 1 of Section C of Marine Lot No. 58,

in consideration for the issue by the Company to PCCW (a) 1,648,333,333 new shares of HK$0.10 each in the Company (each a “DFG Share” and together, the “Consideration Shares”) at HK$1.80 per share; and (b) two convertible notes convertible into new DFG Shares (the “Consideration Notes”), one with a face value of HK$1,170 million and an initial conversion price of HK$2.25 per DFG Share (subject to adjustments) and the other with a face value of HK$2,420 million and an initial conversion price of HK$3.60 per DFG Share (subject to adjustments), and with the benefit of the leases and other commercial arrangements entered into by Property Holdco and its subsidiaries (the “Property Group”)

— 204 —

NOTICE OF SPECIAL GENERAL MEETING

immediately prior to completion of the Agreement (“Completion”) with PCCW or its subsidiaries (other than members of the Property Group) or connected persons of the Company as at the date of the circular of the Company dated 2 April 2004 and subsisting at Completion referred to in the section headed “Information on the Property Group and the Sale Assets” under “Property Development — Cyberport” and “Property Group Investment Portfolio — Key buildings” in the circular of the Company dated 2 April 2004 (a copy of which has been produced to the meeting and marked “B” and signed for the purpose of identification by the Chairman of the meeting), be and is hereby approved;

(b) the terms of the Consideration Notes, a copy of which has been produced and marked “C” and signed by the Chairman of the meeting for the purpose of identification, be and is hereby approved; and
(c) the issue and allotment of the Consideration Shares, the issue of the Consideration Notes upon Completion and the issue of any new DFG Shares which may fall to be issued upon the conversion of the Consideration Notes be and is hereby approved and any one director of the Company be and is hereby authorised to issue the Consideration Shares, the Consideration Notes and any new DFG Shares which may fall to be issued upon the conversion of the Consideration Notes and to sign or execute such other documents or agreements or deeds on behalf of the Company and to do such other things and to take all such actions as he or she considers necessary or desirable for the purposes of giving effect to the Agreement.”
“ THAT the terms of the application for waiver granted or to be granted by the Securities and Futures Commission to PCCW together with parties acting in concert with it, pursuant to Note 1 of the Notes on Dispensations from Rule 26 of the Hong Kong Code on Takeovers and Mergers, waiving any obligation on the part of PCCW and parties acting in concert with it to make a mandatory offer for all the issued DFG Shares other than those already owned or agreed to be acquired by PCCW and parties acting in concert with it, as a result of the issue and allotment of the Consideration Shares, be and is hereby approved.”

SPECIAL RESOLUTIONS

“ THAT , conditional upon: (a) the Listing Committee of The Stock Exchange of Hong Kong Limited granting the listing of and permission to deal in the shares of HK$0.10 each in the Company (the “DFG Shares”) to be created under the “Capital Reorganisation” (as described in the paragraphs below); and (b) compliance with section 46(2) of the Companies Act 1981 of Bermuda with effect from 9:30 a.m. on the earlier of the date of completion of the Agreement (as defined in the resolution numbered 1 as set out in the notice convening the special general meeting of the Company at which this resolution is proposed) or 30 June 2004:
(A) the issued share capital of the Company be reduced from an amount of HK$454,506,162.40 by an amount of HK$452,893,508.34 to an amount of HK$1,612,654.06 by cancelling paid

— 205 —

NOTICE OF SPECIAL GENERAL MEETING

  - up capital of HK$0.39 on each issued share of HK$0.40 each in the capital of the Company (the “Capital Reduction”) so that the nominal value of each issued share of the Company shall be treated as one fully paid up share of HK$0.01 in the capital of the Company (“Adjusted Shares”);

(B) the Company shall apply the credit which shall arise as a result of the Capital Reduction to the contributed surplus account of the Company and the directors of the Company be and are hereby authorised to apply such contributed surplus account to set off the accumulated losses of the Company as at the date on which the Capital Reduction becomes effective;
(C) upon the Capital Reduction becoming effective, every 10 Adjusted Shares be and are hereby consolidated (the “Share Consolidation”) into one share of HK$0.10 each (“DFG Share”) provided that any fractional entitlements to a consolidated DFG Share shall be aggregated and sold, the proceeds of which to be retained for the benefit of the Company;
(D) all of the DFG Shares resulting from the Capital Reduction and the Share Consolidation shall rank pari passu in all respects and have the rights and privileges and be subject to the restrictions contained in the bye-laws of the Company;
(E) upon completion of the Capital Reduction and the Share Consolidation, every share of HK$0.40 each in the unissued share capital of the Company be and is hereby cancelled, and immediately thereafter the authorised share capital of the Company be and is hereby increased by such number of DFG Shares such that the authorised share capital shall be HK$1,000,000,000 divided into 10,000,000,000 DFG Shares;
(F) the entire amount standing to the credit of the share premium account of the Company on the date on which this resolution is passed be and is hereby cancelled; and
(G) any one of the directors of the Company be and is hereby authorised generally to do all things appropriate to effect and implement any of the foregoing.”
“ THAT :

conditional on the passing of special resolution no. 3 as set out in the notice convening the special general meeting at which this resolution is proposed and the Capital Reorganisation (as defined in the said special resolution no. 3) becoming effective, Bye-Law 3(1) of the bye-laws of the Company be amended by deleting the existing Bye-Law in its entirety and replacing it with the following new Bye-Law 3(1):

“3(1) Subject to any resolution of members to the contrary, the share capital of the Company shall be divided into shares of a par value of HK$0.10 each.””

— 206 —

NOTICE OF SPECIAL GENERAL MEETING

“ THAT the bye-laws of the Company be and are hereby amended as follows:
(A) by inserting the following new definition of “associate” in Bye-Law 1:

““associate” the meaning attributed to it in the rules of the Designated Stock Exchange”

(B) By deleting the definition of “clearing house” in its entirety and replacing it with the following definition:

““clearing house”

a clearing house as recognised by the laws of the jurisdiction in which the shares of the Company are listed or quoted on a stock exchange in such jurisdiction (where applicable)”
(C) By adding the following wording in Bye-Law 2(e), after the words “in a visible form”:

“, including in the form of electronic display, provided that both the mode of service of the relevant document or notice and the Members’ election (where applicable) comply with all applicable Statutes, rules and regulations.”

(D) By adding the following Bye-Law 2(k) immediately after Bye-Law 2(j);
“(k) references to a document being executed include references to it being executed under hand or under seal or by electronic signature or by any other legally acceptable method and references to a notice or document include a notice or document recorded or stored in any digital, electronic, electrical, magnetic or other retrievable form or medium and information in visible form whether having physical substance or not.”
(E) By adding the following words in Bye-Law 43(1)(a) immediately after the words “class of shares held by him and” and before the words “the amount paid or agreed to be considered as paid on such shares;”:

“, in respect of any shares that are not fully paid,”

(F) By adding the words “in a form prescribed by the Designated Stock Exchange” in Bye-Law 46, immediately after the words “in the usual common form or” and before the words “in any other form approved by the Board.”
(G) By amending the reference of the existing Bye-Law 76 to Bye-Law 76(1) and adding the following new Bye-Law 76(2) immediately after the Bye-Law 76(1):

“Where any Member is, under the rules of the Designated Stock Exchange, required to abstain from voting on any particular resolution or restricted to voting only for or only against any particular resolution, any votes cast by or on behalf of such Member in contravention of such requirement or restriction shall not be counted.”

— 207 —

NOTICE OF SPECIAL GENERAL MEETING

(H) By deleting the word “special” in the second line in Bye-Law 86(4) and replacing it with the word “ordinary”.
(I) By deleting the existing Bye-Law 88 in its entirety and replacing it with the following new Bye-Law 88:

“No person other than a Director retiring at the meeting shall, unless recommended by the Directors for election, be eligible for election as Director at any general meeting unless a Notice signed by a Member (other than the person to be proposed) duly qualified to attend and vote at the meeting for which such notice is given of his intention to propose such person for election and also a Notice signed by the person to be proposed of his willingness to be elected shall have been lodged at the head office or at the Office provided that the minimum length of the period, during which such Notice(s) are given, shall be at least seven (7) days and that the period for lodgement of such Notice(s) shall commence no earlier than the day after the despatch of the notice of the general meeting appointed for such election and end no later than seven (7) days prior to the date of such general meeting.”

(J) By deleting the words “whereupon the Board resolves to accept such resignation” in Bye-Law 89(1).
(K) By deleting the existing Bye-Law 103 in its entirety and replacing it with the following new Bye-Law 103:
“103.(1) A Director shall not vote (nor be counted in the quorum) on any resolution of the Board approving any contract or arrangement or any other proposal in which he or any of his associate is materially interested, but this prohibition shall not apply to any of the following matters namely:
- (i) any contract or arrangement for the giving to such Director or his associate(s) any security or indemnity in respect of money lent by him or any of his associate(s) or obligations undertaken by him or any of his associate(s) at the request of or for the benefit of the Company or any of its subsidiaries;
- (ii) any contract or arrangement for the giving of any security or indemnity to a third party in respect of a debt or obligation of the Company or any of its subsidiaries for which the Director or his associate(s) has himself/themselves assumed responsibility in whole or in part whether alone or jointly under a guarantee or indemnity or by the giving of security;
- (iii) any contract or arrangement concerning an offer of shares or debentures or other securities of or by the Company or any other company which the Company may promote or be interested in for subscription or purchase, where the Director or his associate(s) is/are or is/are to be interested as a participant in the underwriting or sub-underwriting of the offer;

— 208 —

NOTICE OF SPECIAL GENERAL MEETING

(iv) any contract or arrangement in which the Director or his associate(s) is/are interested in the same manner as other holders of shares or debentures or other securities of the Company or any of its subsidiaries by virtue only of his/their interest in shares or debentures or other securities of the Company;
(v) any contract or arrangement concerning any other company in which the Director or his associate(s) is/are interested only, whether directly or indirectly, as an officer or executive or a shareholder other than a company in which the Director and/or his associate(s) is/are beneficially interested in five (5) per cent or more of the issued shares or of the voting rights of any class of shares of such company (or any third company through which his interest or that of any of his associates is derived); or
(vi) any proposal concerning the adoption, modification or operation of a share option scheme, a pension fund or retirement, death or disability benefits scheme or other arrangement which relates both to Directors or his associates and employees of the Company or of any of its subsidiaries and does not provide in respect of any Director, or his associates(s) as such any privilege or advantage not accorded to the employees to which such scheme or fund relates.
(2) A company shall be deemed to be a company in which a Director and/or his associate(s) owns five (5) per cent. or more if and so long as (but only if and so long as) he and/or his associates (either directly or indirectly) are the holders of the beneficially interested in five (5) per cent. or more of any class of the equity share capital of such company (or of any third company through which his/their interest or that of any of his associates is derived). For the purpose of this paragraph there shall be disregarded any shares held by a Director or his associate(s) as bare or custodian trustee and in which he or any of them has/have no beneficial interest, any shares comprised in a trust in which the interests of the Director or his associate(s) is/are in reversion or remainder if and so long as some other person is entitled to receive the income thereof, and any shares comprised in an authorised unit trust scheme in which the Director or his associate(s) is/are interested only as a unit holder and any shares which carry no voting right at general meetings and very restrictive dividend and return of capital right.
(3) Where a company in which a Director and/or his associate(s) holds five (5) per cent. or more is/are materially interested in a transaction, then that Director and/or his associate(s) shall also be deemed materially interested in such transaction.
(4) If any question shall arise at any meeting of the Board as to the materiality of the interest of a Director (other than the chairman of the meeting) or his associate(s) or as to the entitlement of any Director (other than such chairman)

— 209 —

NOTICE OF SPECIAL GENERAL MEETING

  - to vote and such question is not resolved by his voluntarily agreeing to abstain from voting, such question shall be referred to the chairman of the meeting and his ruling in relation to such other Director shall be final and conclusive except in a case where the nature or extent of the interest of the Director and/or his associate(s) concerned as known to such Director has not been fairly disclosed to the Board. If any question as aforesaid shall arise in respect of the chairman of the meeting such question shall be decided by a resolution of the Board (for which purpose such chairman shall not vote thereon) and such resolution shall be final and conclusive except in a case where the nature or extent of the interest of such chairman as known to such chairman has not been fairly disclosed to the Board.”

(L) By adding the number “(1)” immediately before the words “The Company shall be entitled to destroy the following documents” in Bye-Law 136 and adding the following new Bye-Law 136(2):
“(2) Notwithstanding any provision contained in these Bye-Laws, the Directors may if permitted by applicable law, authorise the destruction of documents set out in sub-paragraphs (a) to (e) of paragraph (1) of this Bye-Law and any other documents in relation to share registration which have been microfilmed or electronically stored by the Company or by the share registrar on its behalf provided always that this Bye-Law shall only apply to the destruction of a document in good faith and without express notice to the Company and its share registrar that the preservation of such document was relevant to a claim.”
(M) By adding the wordings “and Bye-Law 153(A)” into Bye-Law 153 after the words “section 88 of the Act” and before “, a printed copy of the Directors’ report.”
(N) By adding the following new Bye-Laws 153A and 153B immediately after Bye-Law 153:
“153A Subject to due compliance with all applicable Statutes, rules and regulations, including, without limitation, the rules of Designated Stock Exchange, and to obtaining all necessary consents, if any, required thereunder, the requirements of Bye-Law 153 shall be deemed satisfied in relation to any person by sending to the person in any manner not prohibited by the Statutes, a summary financial statement derived from the Company’s annual accounts and the directors’ report which shall be in the form and containing the information required by applicable laws and regulations, provided that any person who is otherwise entitled to the annual financial statements of the Company and the directors’ report thereon may, if he so requires by notice in writing served on the Company, demand that the Company sends to him, in addition to a summary financial statement, a complete printed copy of the Company’s annual financial statement and the directors’ report thereon.
153B The requirement to send to a person referred to in Bye-Law 153 the documents referred to in that Bye-Law or a summary financial report in accordance with Bye-Law 153A shall be deemed satisfied where, in accordance with all applicable

— 210 —

NOTICE OF SPECIAL GENERAL MEETING

Statutes, rules and regulations, including, without limitation, the rules of the Designated Stock Exchange, the Company publishes copies of the documents referred to in Bye-Law 153 and, if applicable, a summary financial report complying with Bye-Law 153A, on the Company’s computer network or in any other permitted manner (including by sending any form of electronic communication), and that person has agreed or is deemed to have agreed to treat the publication or receipt of such documents in such manner as discharging the Company’s obligation to send to him a copy of such documents.”

(O) By deleting the existing Bye-Laws 160, 161 and 162 in their entirety and replacing them with the following new Bye-Laws 160, 161 and 162:
“160. Any Notice or document (including any “corporate communication” within the meaning ascribed thereto under the rules of the Designated Stock Exchange), whether or not, to be given or issued under these Bye-Laws from the Company to a Member shall be in writing or by cable, telex or facsimile transmission message or other form of electronic transmission or communication and any such Notice and document may be served or delivered by the Company on or to any Member either personally or by sending it through the post in a prepaid envelope addressed to such Member at his registered address as appearing in the Register or at any other address supplied by him to the Company for the purpose or, as the case may be, by transmitting it to any such address or transmitting it to any telex or facsimile transmission number or electronic number or address or website supplied by him to the Company for the giving of Notice to him or which the person transmitting the notice reasonably and bona fide believes at the relevant time will result in the Notice being duly received by the Member or may also be served by advertisement in appropriate newspapers in accordance with the requirements of the Designated Stock Exchange or, to the extent permitted by the applicable laws, by placing it on the Company’s website and giving to the member a notice stating that the notice or other document is available there (a “notice of availability”). The notice of availability may be given to the Member by any of the means set out above. In the case of joint holders of a share all notices shall be given to that one of the joint holders whose name stands first in the Register and notice so given shall be deemed a sufficient service on or delivery to all the joint holders.
Any Notice or other document:
- (a) if served or delivered by post, shall where appropriate be sent by airmail and shall be deemed to have been served or delivered on the day following that on which the envelope containing the same, properly prepaid and addressed, is put into the post; in proving such service or delivery it shall be sufficient to prove that the envelope or wrapper containing the notice or document was properly addressed and put into the post and a certificate in writing signed by the Secretary or other officer of the Company or other person appointed by the Board that the envelope or wrapper containing the notice or other document was so addressed and put into the post shall be conclusive evidence thereof;

— 211 —

NOTICE OF SPECIAL GENERAL MEETING

(b) if sent by electronic communication, shall be deemed to be given on the day on which it is transmitted from the server of the Company or its agent. A notice placed on the Company’s website is deemed given by the Company to a Member on the day following that on which a notice of availability is deemed served on the Member;
(c) if served or delivered in any other manner contemplated by these Bye-Laws, shall be deemed to have been served or delivered at the time of personal service or delivery or, as the case may be, at the time of the relevant despatch or transmission; and in proving such service or delivery a certificate in writing signed by the Secretary or other officer of the Company or other person appointed by the Board as to the act and time of such service, delivery, despatch or transmission shall be conclusive evidence thereof; and
(d) may be given to a Member either in the English language or the Chinese language, subject to due compliance with all applicable Statutes, rules and regulations.
(a) Any Notice or other document delivered or sent by post to or left at the registered address of any Member in pursuance of these Bye-Laws shall, notwithstanding that such Member is then dead or bankrupt or that any other event has occurred, and whether or not the Company has notice of the death or bankruptcy or other event, be deemed to have been duly served or delivered in respect of any share registered in the name of such Member as sole or joint holder unless his name shall, at the time of the service or delivery of the notice or document, have been removed from the Register as the holder of the share, and such service or delivery shall for all purposes be deemed a sufficient service or delivery of such Notice or document on all persons interested (whether jointly with or as claiming through or under him) in the share.
(b) A notice may be given by the Company to the person entitled to a share in consequence of the death, mental disorder or bankruptcy of a Member by sending it through the post in a prepaid letter, envelope or wrapper addressed to him by name, or by the title of representative of the deceased, or trustee of the bankrupt, or by any like description, at the address, if any, supplied for the purpose by the person claiming to be so entitled, or (until such an address has been so supplied) by giving the notice in any manner in which the same might have been given if the death, mental disorder or bankruptcy had not occurred.
(c) Any person who by operation of law, transfer or other means whatsoever shall become entitled to any share shall be bound by every notice in respect of such share which prior to his name and address being entered on the Register shall have been duly given to the person from whom he derives his title to such share.”

— 212 —

NOTICE OF SPECIAL GENERAL MEETING

(P) By adding the words “or electronic” in Bye-Law 163, immediately after the words “a cable or telex or facsimile” but before the words “transmission message”
“ THAT subject to and conditional upon the completion of the Agreement (as defined in the resolution numbered 1 as set out in the notice convening the special general meeting of the Company at which this resolution is proposed), the name of the Company be changed to “Pacific Century Premium Developments Limited”.”

By Order of the Board Feona Ng Company Secretary

Hong Kong, 2 April 2004

Notes:

A form of proxy for use at the Special General Meeting is enclosed herewith.
The instrument appointing a proxy shall be in writing under the hand of the appointor or of his/her attorney duly authorised in writing or, if the appointor is a corporation, either under its seal or under the hand of any officer, attorney or other person authorised to sign the same.
Any member entitled to attend and vote at the Special General Meeting is entitled to appoint one or more proxies to attend and vote instead of him/her. A proxy need not be a member of the Company.
In order to be valid, the form of proxy, together with the power of attorney or other authority (if any) under which it is signed, or a notarially certified copy of such power or authority, must be lodged with the branch share registrar of Dong Fang Gas Holdings Limited in Hong Kong, Standard Registrars Limited, at Ground Floor, Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong, not less than 48 hours before the time appointed for holding the Special General Meeting or any adjourned meeting thereof (as the case may be).
Completion and return of the form of proxy will not preclude members from attending and voting in person at the Special General Meeting or at any adjourned meeting thereof (as the case may be) should they so wish, and in such event, the form of proxy shall be deemed to be revoked.
Where there are joint registered holders of any Share, any one of such joint holders may vote, either in person or by proxy, in respect of such Share as if he/she were solely entitled thereto, but if more than one of such joint holders are present at the Special General Meeting, the most senior shall alone be entitled to vote, whether in person or by proxy. For this purpose, seniority shall be determined by the order in which the names stand in the register of members of the Company in respect of the joint holding.
In accordance with the Hong Kong Code on Takeovers and Mergers, Ordinary Resolution No. 2 will be determined by way of a poll.

— 213 —

AI assistant

Digital China Holdings Limited — Proxy Solicitation & Information Statement 2004

49520_rns_2004-04-06_5768c5f0-a276-4465-b688-9a48d48ee6c6.pdf

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

DONG FANG GAS HOLDINGS LIMITED

MAJOR TRANSACTION

Goldbond Capital (Asia) Limited

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

EXPECTED TIMETABLE

DONG FANG GAS HOLDINGS LIMITED

MAJOR TRANSACTION

INTRODUCTION

LETTER FROM THE DFG BOARD

LETTER FROM THE DFG BOARD

THE ACQUISITION AGREEMENT

Date:

Parties:

Subject matter of sale and purchase:

Consideration:

LETTER FROM THE DFG BOARD

Conditions precedent:

Completion:

Additional matters:

Loans and Cyberport Loan

Redevelopment Right

Accrued Profit

SUMMARY OF THE TERMS AND CONDITIONS OF THE CONVERTIBLE NOTES

Issuer:

Coupon:

LETTER FROM THE DFG BOARD

Voting:

Transferability:

Listing:

SHAREHOLDING STRUCTURE PRIOR TO AND AFTER COMPLETION

CONNECTION AMONG THE PARTIES

INFORMATION ON THE PROPERTY GROUP AND THE SALE ASSETS

Business Overview

The Property Group’s property portfolio includes:

— Property Development Cyberport

LETTER FROM THE DFG BOARD

LETTER FROM THE DFG BOARD

Property Group Investment Portfolio — Key buildings

PCP Beijing

PCCW Tower

LETTER FROM THE DFG BOARD

Other investment property

LETTER FROM THE DFG BOARD

Redevelopment Right of Telephone Exchanges

Ongoing business arrangements and leases/licences

LETTER FROM THE DFG BOARD

Property and Facilities Management

Continuing relationship with the PCCW Group

Summary of financial information

LETTER FROM THE DFG BOARD

DFG’s view on the worth of the Sale Shares and Sale Assets

LETTER FROM THE DFG BOARD

LETTER FROM THE DFG BOARD

INFORMATION ON THE DFG GROUP

Business Overview

Summary Financial Information

REASONS FOR AND BENEFITS OF THE TRANSACTION

EFFECT OF THE TRANSACTION ON THE FINANCIAL POSITION OF THE DFG GROUP

(i) Profits

(ii) Net tangible asset value

LETTER FROM THE DFG BOARD

RISKS RELATED TO THE PROPERTY GROUP’S BUSINESS

LETTER FROM THE DFG BOARD

TAKEOVERS CODE IMPLICATIONS OF THE TRANSACTION

LETTER FROM THE DFG BOARD

LETTER FROM THE DFG BOARD

MAINTENANCE OF THE LISTING OF DFG

LETTER FROM THE DFG BOARD

INTENTION REGARDING THE DFG GROUP

APPOINTMENT OF NEW DIRECTORS TO THE DFG BOARD

LETTER FROM THE DFG BOARD

PROPOSED CAPITAL REORGANISATION

Conditions of the Capital Reorganisation

Digital China Holdings Limited Proxy Solicitation & Information Statement 2004