THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

If you have sold or transferred all your securities in Sun Hung Kai & Co. Limited, you should at once hand this circular to the purchaser or transferee, or to the bank, 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 takes no responsibility for the contents of this circular, makes no representation as to its accuracy or completeness and expressly disclaims any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular.

SUNHUNGKAI&CO.LIMITED

(Incorporated in Hong Kong with limited liability)

(Stock Code: 86)

MAJOR TRANSACTION

CONDITIONAL GRANT OF OPTION OVER SHARES AND WARRANTS IN

QUALITY HEALTHCARE ASIA LIMITED

(Incorporated in Bermuda with limited liability)

(Stock Code: 593)

29th June, 2006

CONTENTS

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4
The Conditional Grant of Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5
The Option Agreement (as amended by the Supplemental Letter) . . . . . . . . . . .	5
Information about QHA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	9
Information about the Company, AGL, APL and Wah Cheong . . . . . . . . . . . . . .	10
Information about CLSA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	12
Reasons for and Benefits of the Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	13
Financial Effect of Taking the Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	13
Effect of the Exercise of the Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	13
Listing Rules Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	14
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	14
Appendix I – Financial Information of the Group . . . . . . . . . . . . . . . . . . . . . . . . .	15
Appendix II – Financial Information of the QHA Group . . . . . . . . . . . . . . . . . . .	97
Appendix III – Management Discussion and Analysis
of the QHA Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	149
Appendix IV – Unaudited Pro Forma Statement of Assets and
Liabilities of the Enlarged Group . . . . . . . . . . . . . . . . . . . . . . . . .	170
Appendix V – General Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	175

DEFINITIONS

In this circular, unless the context otherwise requires, the following expressions have the	In this circular, unless the context otherwise requires, the following expressions have the
following meanings:
“AGL”	Allied Group Limited, a company incorporated in
	Hong Kong with limited liability, with its shares listed
	on the Main Board of the Stock Exchange
“APL”	Allied Properties (H.K.) Limited, a company
	incorporated in Hong Kong with limited liability, with
	its securities listed on the Main Board of the Stock
	Exchange
“Board”	board of Directors
“CLSA”	CLSA Capital Limited, a company incorporated in
	Hong Kong with limited liability
“Company”	Sun Hung Kai & Co. Limited, a company incorporated
	in Hong Kong with limited liability, with its securities
	listed on the Main Board of Stock Exchange
“C$”	Canadian dollars, the lawful currency of Canada
“Directors”	directors of the Company
“Enlarged Group”	the Group and the QHA Group
“Group”	the Company and it subsidiaries
“HK$”	Hong Kong dollars, the lawful currency of Hong Kong
“Hong Kong”	Hong Kong Special Administrative Region of the
	People’s Republic of China
“Latest Practicable Date”	26th June, 2006, being the latest practicable date prior
	to the printing of this circular, for the purpose of
	ascertaining certain information contained in this
	circular
“Listing Rules”	Rules Governing the Listing of Securities on The Stock
	Exchange of Hong Kong Limited
“Option”	the option granted by CLSA to Wah Cheong under the
	Option Agreement

– 1 –

DEFINITIONS

“Option Agreement”	the call option agreement dated 3rd April, 2006 made
	between CLSA and Wah Cheong, pursuant to which
	the Option is granted
“Option Shares”	the 34,156,666 QHA Shares held by CLSA, over which
	the Option is granted under the Option Agreement
“Option Warrants”	the number of Warrants held by CLSA, which, if
	exercised, would lead to the subscription of 6,943,333
	QHA Shares at an initial subscription price of HK$2.50
	per QHA Share (subject to adjustments), over which
	the Option is granted under the Option Agreement
	(as at the Latest Practicable Date, the subscription price
	in respect of the Warrants had been adjusted to
	HK$2.46 per QHA Share and the exercise of the Option
	Warrants in full at such adjusted subscription price
	would lead to the subscription of 7,056,232 QHA
	Shares)
“QHA”	Quality HealthCare Asia Limited, a company
	incorporated in Bermuda with limited liability, with
	its securities listed on the Main Board of the Stock
	Exchange
“QHA Group”	QHA and its subsidiaries
“QHA Shares”	ordinary shares of nominal value of HK$0.10 each in
	the share capital of QHA
“RMB”	Reminbi, the lawful currency of the People’s Republic
	of China
“SFC”	Securities and Futures Commission
“SFO”	Securities and Futures Ordinance (Chapter 571 of the
	Laws of Hong Kong)
“Shareholders”	shareholders of the Company
“Shares”	ordinary shares of nominal value of HK$0.20 each in
	the share capital of the Company
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“Supplemental Letter”	the letter dated 18th May, 2006 made between CLSA
	and Wah Cheong supplemental to the Option
	Agreement

– 2 –

DEFINITIONS

“Takeovers Code” Code on Takeovers and Mergers “US$” United States dollars, the lawful currency of the United States of America “Wah Cheong” Wah Cheong Development (B.V.I.) Limited, a company incorporated in the British Virgin Islands with limited liability and a direct wholly-owned subsidiary of the Company “Warrants” listed subscription warrants issued by QHA on 12th January, 2004 at an initial subscription price of HK$2.50 per QHA Share and an existing adjusted subscription price of HK$2.46 per QHA Share (subject to further adjustments) “%” per cent.

– 3 –

LETTER FROM THE BOARD

SUNHUNGKAI&CO.LIMITED

(Incorporated in Hong Kong with limited liability)

(Stock Code: 86)

Executive Directors:

Mr. Patrick Lee Seng Wei Mr. Joseph Tong Tang

Non-executive Director:

Registered Office: Level 12 One Pacific Place 88 Queensway Hong Kong

Mr. Arthur George Dew (Chairman)

Independent non-executive Directors:

Mr. David Craig Bartlett

Mr. Alan Stephen Jones

Mr. Carlisle Caldow Procter

Mr. Peter Wong Man Kong

29th June, 2006

To the Shareholders and, for information only,

the holders of the warrants of the Company

Dear Sir or Madam,

MAJOR TRANSACTION

CONDITIONAL GRANT OF OPTION OVER SHARES AND WARRANTS IN QUALITY HEALTHCARE ASIA LIMITED

(Incorporated in Bermuda with limited liability)

(Stock Code: 593)

INTRODUCTION

On 7th April, 2006, the Directors announced the conditional grant of the Option over the Option Shares and Option Warrants in QHA by CLSA to Wah Cheong. Subsequently, on 18th May, 2006, the Directors announced that there was a change on the major terms of the Option Agreement and the Supplemental Letter was executed to amend the Option Agreement.

The purpose of this circular is to provide the Shareholders with details of the terms of the Option Agreement and the Supplemental Letter and other information in accordance with the requirements of the Listing Rules.

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LETTER FROM THE BOARD

THE CONDITIONAL GRANT OF OPTION

On 3rd April, 2006, Wah Cheong (a direct wholly-owned subsidiary of the Company) entered into the Option Agreement with CLSA, pursuant to which CLSA agreed to grant the Option to Wah Cheong. Subsequently, on 18th May, 2006, Wah Cheong entered into the Supplemental Letter with CLSA in relation to amending the terms contained in the Option Agreement.

To the best of the Directors’ knowledge, information and belief having made all reasonable enquiries, CLSA and its ultimate owners are independent third parties not connected with the Company or its subsidiaries or any of their respective associates, or any of the connected persons of the Company or its subsidiaries or any of their respective associates.

THE OPTION AGREEMENT (AS AMENDED BY THE SUPPLEMENTAL LETTER)

Date of the Option Agreement

3rd April, 2006

Date of the Supplemental Letter

18th May, 2006

Parties

(1) CLSA as grantor
(2) Wah Cheong as grantee

The Option

The Option will entitle Wah Cheong to require CLSA:

(i) to sell all (but not part) of the Option Shares (being 34,156,666 QHA Shares) at an aggregate exercise price of HK$99,908,248.05 (i.e. HK$2.925 per Option Share); and
(ii) to exercise all or part of the Option Warrants (being such number of Warrants held by CLSA as would, if exercised, lead to the subscription of 6,943,333 QHA Shares at an initial subscription price of HK$2.50 per QHA Share (as at the Latest Practicable Date, the subscription price in respect of the Warrants had been adjusted to HK$2.46 per QHA Share and the exercise of the Option Warrants in full at such adjusted subscription price would lead to the subscription of 7,056,232 QHA Shares)) upon Wah Cheong paying the subscription price for such exercise, and following such exercise to transfer to Wah Cheong the resultant QHA Shares issued by QHA to CLSA.

– 5 –

LETTER FROM THE BOARD

The Option is exercisable by Wah Cheong:

(i) with respect to the Option Shares, at any time within a period of one year from the day on which the Option Agreement takes effect, by giving an irrevocable notice to CLSA and paying the aggregate exercise price; and
(ii) with respect to the Option Warrants, on or before 13th January, 2007, by giving irrevocable instructions to CLSA.

There is no right on the part of CLSA under the Option Agreement (as amended by the Supplemental Letter) to require Wah Cheong when or whether to exercise the Option.

According to the Option Agreement (as amended by the Supplemental Letter), the Option over the Option Shares, if not exercised, will lapse after the one year period, upon which the Option consideration will be retained by CLSA. The Option over the Option Warrants will lapse, if not exercised or not exercised in full on or before 13th January, 2007, but the Option consideration will not be affected.

The Option Shares represented approximately 17.43% of the issued share capital of QHA as at the Latest Practicable Date, which, together with the new QHA Shares fall to be issued upon exercise of the Option Warrants in full would represent approximately 20.26% (being an aggregate of 41,099,999 QHA Shares by the addition of 34,156,666 QHA Shares and 6,943,333 new QHA Shares arising from the exercise of the Option Warrants at an initial subscription price of HK$2.50 per QHA Share) and approximately 20.30% (being an aggregate of 41,212,898 QHA Shares by the addition of 34,156,666 QHA Shares and 7,056,232 new QHA Shares arising from the exercise of the Option Warrants at an adjusted subscription price of HK$2.46 per QHA Share) of the issued share capital of QHA as enlarged by issue of the new QHA Shares following exercise of the Option Warrants in full.

The Option Shares and the Option Warrants represented all interests of CLSA in QHA as at the Latest Practicable Date.

Net profits attributable to the Option Shares and the new QHA Shares fall to be issued upon exercise of the Option Warrants in full for the two financial years ended 31st December, 2005 were:

(i) approximately HK$7,848,000 or approximately HK$0.23 per QHA Share (based on the audited consolidated profits of the QHA Group of approximately HK$45,018,000 for the financial year ended 31st December, 2004 and 195,925,168 QHA Shares in issue at the Latest Practicable Date);
(ii) approximately HK$9,787,000 or approximately HK$0.29 per QHA Share (based on the audited consolidated profits of the QHA Group of approximately HK$56,140,000 for the financial year ended 31st December, 2005 and 195,925,168 QHA Shares in issue at the Latest Practicable Date);

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LETTER FROM THE BOARD

(iii) approximately HK$9,120,000 or approximately HK$0.22 per QHA Share (based on the audited consolidated profits of the QHA Group of approximately HK$45,018,000 for the financial year ended 31st December, 2004 and 202,868,501 QHA Shares in issue at the Latest Practicable Date as enlarged by issue of the new QHA Shares upon exercise of the Option Warrants by CLSA in full at an initial subscription price of HK$2.50 per QHA Share);
(iv) approximately HK$11,374,000 or approximately HK$0.28 per QHA Share (based on the audited consolidated profits of the QHA Group of approximately HK$56,140,000 for the financial year ended 31st December, 2005 and 202,868,501 QHA Shares in issue at the Latest Practicable Date as enlarged by issue of the new QHA Shares upon exercise of the Option Warrants by CLSA in full at an initial subscription price of HK$2.50 per QHA Share);
(v) approximately HK$9,140,000 or approximately HK$0.22 per QHA Share (based on the audited consolidated profits of the QHA Group of approximately HK$45,018,000 for the financial year ended 31st December, 2004 and 202,981,400 QHA Shares in issue at the Latest Practicable Date as enlarged by issue of the new QHA Shares upon exercise of the Option Warrants by CLSA in full at an adjusted subscription price of HK$2.46 per QHA Share); and
(vi) approximately HK$11,399,000 or approximately HK$0.28 per QHA Share (based on the audited consolidated profits of the QHA Group of approximately HK$56,140,000 for the financial year ended 31st December, 2005 and 202,981,400 QHA Shares in issue at the Latest Practicable Date as enlarged by issue of the new QHA Shares upon exercise of the Option Warrants by CLSA in full at an adjusted subscription price of HK$2.46 per QHA Share).

Consideration and exercise price

The consideration for the grant of the Option, which is payable by Wah Cheong upon the Option Agreement (as amended by the Supplemental Letter) taking effect, is HK$11,100,916.45. The Option consideration is not refundable if Wah Cheong does not exercise the Option.

The aggregate exercise price for the Option Shares is HK$99,908,248.05 (i.e. HK$2.925 per Option Share), payable upon exercise of the Option over the Option Shares.

If the Option is exercised in respect of the Option Shares, the aggregate payment for the grant of the Option and for the exercise of the Option over the Option Shares would be HK$111,009,164.50 (i.e. HK$3.25 per Option Share).

Both the Option consideration and the exercise price were arrived at after arm’s length negotiations between Wah Cheong and CLSA. Wah Cheong is prepared to pay the Option consideration on the basis that the Option is for a period of one year, and, having

– 7 –

LETTER FROM THE BOARD

regard to the Option Shares and the new QHA Shares fall to be issued upon exercise of the Option Warrants as a substantial block, the prevailing trading prices of the QHA Shares and the present growing trend of the capital market, considered the exercise price reasonable in the circumstances.

According to CLSA, in determining the Option value, it had made reference to the analysis of the discounted anticipated future cash flows and other market comparables in Asia.

The aggregate market value of the Option Shares was approximately HK$105,885,664.60 and the QHA Shares arising from the exercise by CLSA of the Option Warrants in full (i.e. 6,943,333 QHA Shares at an initial subscription price of HK$2.50 per QHA Share) was approximately HK$21,524,332.30, both based on the closing price of HK$3.10 per QHA Share as quoted on the Stock Exchange on 3rd April, 2006, being the last trading day prior to the day on which the Company, AGL and APL jointly announced the conditional grant of Option over the Option Shares and Option Warrants in QHA on 7th April, 2006.

The aggregate market value of the Option Shares was approximately HK$95,638,664.80 and the QHA Shares arising from the exercise by CLSA of the Option Warrants in full (i.e. 7,056,232 QHA Shares at an adjusted subscription price of HK$2.46 per QHA Share) was approximately HK$19,757,449.60, both based on the closing price of HK$2.80 per QHA Share as quoted on the Stock Exchange on 18th May, 2006, being the day on which the Company, AGL and APL jointly announced the update on the conditional grant of Option over the Option Shares and Option Warrants in QHA.

The revised exercise price of HK$2.925 per Option Share represented:

a premium of approximately 4.46%, over the closing price of HK$2.80 per QHA Share as quoted on the Stock Exchange on 18th May, 2006, being the day on which the Company, AGL and APL jointly announced the update on the conditional grant of Option over the Option Shares and Option Warrants in QHA;
a premium of approximately 4.46%, over the average closing price of HK$2.80 per QHA Share, based on the daily closing prices as quoted on the Stock Exchange over the five trading days up to and including 18th May, 2006;
a premium of approximately 3.63%, over the average closing price of HK$2.8225 per QHA Share, based on the daily closing prices as quoted on the Stock Exchange over the ten trading days up to and including 18th May, 2006; and
a premium of approximately 1.83%, over the average closing price of HK$2.8725 per QHA Share, based on the daily closing prices as quoted on the Stock Exchange over the 20 trading days up to and including 18th May, 2006.

Upon exercise of the Option over the Option Shares, stamp duty in respect of the sale and purchase of the Option Shares will be borne and paid by Wah Cheong and CLSA in equal shares.

– 8 –

LETTER FROM THE BOARD

The payment of the Option consideration and payments on exercise of the Option over the Option Shares and over the Option Warrants will be financed from internal resources of Wah Cheong or bank borrowings or both.

Conditions contained in the Option Agreement (as amended by the Supplemental Letter)

The Option Agreement (as amended by the Supplemental Letter) will only take effect upon:

(i) rulings having been received from the SFC that following the granting and taking of the Option, Wah Cheong and CLSA will not be regarded as parties acting in concert for the purposes of the Takeovers Code, and that the taking of the Option by Wah Cheong will not give rise to any obligation to make a mandatory general offer on the part of Wah Cheong under the Takeovers Code in all material substance, without any proviso or requirement being stipulated by the SFC which either CLSA or Wah Cheong (in each case acting reasonably) considers detrimental; and
(ii) the Option Agreement and the transactions contemplated in it having been approved by the respective shareholders of the Company, AGL and APL in accordance with all applicable requirements under the Listing Rules.

If either of the above conditions is not fulfilled on or before 31st July, 2006, the Option Agreement (as amended by the Supplemental Letter) will not take effect.

On 23rd May, 2006, the SFC granted the rulings sought by Wah Cheong in paragraph (i) above which neither CLSA nor Wah Cheong considers detrimental.

Conditions of exercise

In the Option Agreement, CLSA has given warranties and undertakings, amongst other things, in respect of the Option Shares (including the number of QHA Shares to be delivered upon exercise of the Option Shares) and the Option Warrants. Any breach of any of the warranties or undertakings will entitle Wah Cheong to terminate the Option Agreement, upon which CLSA will refund the Option consideration with interest and fully indemnify Wah Cheong for all losses and damages.

If, as a result of any default on the part of CLSA, listing of the Option Shares has been withdrawn (other than for any temporary suspension) from the Main Board of the Stock Exchange, Wah Cheong will be entitled to terminate the Option Agreement, upon which CLSA will refund the Option consideration with interest.

INFORMATION ABOUT QHA

QHA is a company incorporated in Bermuda with limited liability. Its securities are listed on the Main Board of the Stock Exchange.

– 9 –

LETTER FROM THE BOARD

The principal business activities of the QHA Group comprise health administration, medical scheme administration, and the provision of healthcare services. The latest audited net asset value of the QHA Group as at 31st December, 2005 was approximately HK$150,287,000. There will not be any change to the board of directors of QHA as a result of the granting or taking of the Option.

INFORMATION ABOUT THE COMPANY, AGL, APL AND WAH CHEONG

The Company

The Company is a company incorporated in Hong Kong with limited liability. Its securities are listed on the Main Board of the Stock Exchange.

The principal business activity of the Company is investment holding. The principal business activities of its major subsidiaries are securities, leveraged forex, bullion, commodities, futures and options broking, provision of online financial services and online financial information, share margin and structured financing, financial planning and wealth management, asset management, corporate finance, strategic investment, and insurance broking.

As at the Latest Practicable Date, the Company was beneficially owned as to approximately 61.42% by APL.

AGL

AGL is a company incorporated in Hong Kong with limited liability. Its shares are listed on the Main Board of the Stock Exchange.

The principal business activity of AGL is investment holding. The principal business activities of its major subsidiaries are property investment and development, hospitality related activities, and the provision of financial services.

APL

APL is a company incorporated in Hong Kong with limited liability. Its securities are listed on the Main Board of the Stock Exchange.

The principal business activity of APL is investment holding. The principal business activities of its major subsidiaries are property investment and development, hospitality related activities, and the provision of financial services.

As at the Latest Practicable Date, APL was beneficially owned as to approximately 74.93% by AGL.

– 10 –

LETTER FROM THE BOARD

Wah Cheong

Wah Cheong is a direct wholly-owned subsidiary of the Company.

As at the Latest Practicable Date, Wah Cheong was the beneficial owner of 68,298,357 QHA Shares, representing approximately 34.86% of the existing issued share capital of QHA. It also held Warrants, which, if exercised, would lead to the subscription of 12,544,632 QHA Shares. Exercise of such Warrants in full would result in Wah Cheong holding 80,842,989 QHA Shares, representing approximately 38.78% of the issued share capital of QHA as at the Latest Practicable Date as enlarged by issue of the new QHA Shares following exercise of such Warrants in full.

Group chart as at the Latest Practicable Date

An overview of the shareholding structure of AGL, APL, the Company, Wah Cheong and QHA as at the Latest Practicable Date is set out below:

==> picture [154 x 317] intentionally omitted <==

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

AGL
(Stock Code: 373)
74.93% (Note 1)
APL
(Stock Code: 56)
61.42% (Note 1)
The Company
(Stock Code: 86)
100%
Wah Cheong
34.86% (Note 2)
QHA
(Stock Code: 593)
----- End of picture text -----

Notes:

(1) Wholly-owned intermediate holding companies are not shown in the above group chart.
(2) As at the Latest Practicable Date, the Company held 34.86% interest in QHA, which was accounted for as an associated company of the Company using the equity method.

– 11 –

LETTER FROM THE BOARD

Group chart following exercise of the Option

An overview of the shareholding structure of AGL, APL, the Company, Wah Cheong and QHA when the Option in respect of the Option Shares and Option Warrants are exercised in full is set out below:

==> picture [154 x 317] intentionally omitted <==

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

AGL
(Stock Code: 373)
74.93% (Note 1)
APL
(Stock Code: 56)
61.42% (Note 1)
The Company
(Stock Code: 86)
100%
Wah Cheong
50.81% (Note 2)
QHA
(Stock Code: 593)
----- End of picture text -----

Notes:

(1) Wholly-owned intermediate holding companies are not shown in the above group chart.
(2) Assuming that (i) the Option is exercised in respect of the Option Shares, (ii) the Option Warrants have been exercised in full by CLSA at Wah Cheong’s request pursuant to the Option and the resultant QHA Shares have been transferred to Wah Cheong by CLSA, (iii) the Warrants held by Wah Cheong are exercised in full, (iv) the Warrants held by other holders of the Warrants are exercised in full, and (v) the share options granted by QHA to its employees are exercised in full, Wah Cheong will own 122,055,887 QHA Shares, representing approximately 50.81% of the existing issued share capital of QHA as enlarged by the issue of the QHA Shares following exercise in full of the Warrants (at an adjusted subscription price of HK$2.46 per QHA Share) and share options. In such event, QHA, which is now an associated company of the Company, will become a subsidiary of the Company and will be accounted for as a subsidiary using the purchase method.

INFORMATION ABOUT CLSA

The Directors have been advised that CLSA is a member of the CLSA Asia Pacific Markets Group, which is a comprehensive institutional broking, investment banking and asset management group.

– 12 –

LETTER FROM THE BOARD

REASONS FOR AND BENEFITS OF THE OPTION

According to CLSA, the business of QHA is not related to its core business. On 23rd March, 2000, in relation to QHA’s intention to make a general offer for ehealthcareasia Ltd., CLSA entered into a bridge finance facility with QHA. In September 2000, the facility was extended. In April 2001, the facility was re-negotiated to give CLSA an equity conversion right. Subsequently, CLSA exercised its equity conversion right and became the owner of the Option Shares and the Option Warrants. In order to strengthen its future business development and continued growth, CLSA wishes to allocate more resources to its core business. Accordingly, CLSA intends to dispose of the Option Shares and the Option Warrants in the Hong Kong securities market. Insufficient demand for the QHA Shares in the market, however, renders it difficult for the Option Shares to be absorbed by investors. As a result, CLSA approached Wah Cheong for the potential future sale of the Option Shares and the Option Warrants by way of granting the Option.

Upon the request of CLSA, Wah Cheong, after due consideration, had agreed to enter into negotiations with CLSA with a view to taking the Option on the basis that it was fair and just and to the benefit of the Shareholders. The Directors consider the taking of the Option a good opportunity, with sufficient flexibility, for the Company to increase its investments in QHA significantly, as and when the Directors see fit at any time within the coming one year.

Having regard to the financial position and business operation of the QHA Group, the Directors believe that the terms of the Option Agreement (as amended by the Supplemental Letter) are fair and reasonable and in the interests of the Shareholders taken as a whole.

FINANCIAL EFFECT OF TAKING THE OPTION

The consideration of taking the Option is HK$11,100,916.45 and will be classified as current assets under the category of “held for trading investment”. The Board, therefore, believes that the taking of the Option will not give rise to any material effect on the earnings, working capital, gearing ratio and the assets and liabilities of the Group.

EFFECT OF THE EXERCISE OF THE OPTION

As a result of the exercise of the Option by Wah Cheong, the Company is expected to obtain or consolidate control of QHA and is obliged to make a mandatory offer for the QHA Shares in accordance with the Takeovers Code. The maximum additional percentage that may be acquired by the Company (through Wah Cheong) will be approximately 49.19%, assuming that the QHA shareholders will accept the offer price made by Wah

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LETTER FROM THE BOARD

Cheong for the time being and sell all their QHA Shares to Wah Cheong accordingly. QHA, therefore, will become a wholly-owned subsidiary of the Company. Following completion of the mandatory offer, Wah Cheong will place out at least 25% of the issued shares of QHA to other independent investors in the capital market for the purpose of maintaining the public float requirement of 25% under the Listing Rules. Following completion of the placing of 25% of the issued shares of QHA, QHA will become a 75% owned subsidiary of the Company.

In the event that the Company is obliged to make a mandatory offer for the QHA Shares, the acquisition of the additional QHA Shares will constitute a notifiable transaction for the Company under the Listing Rules. The Company will comply with the relevant requirements, including obtaining any Shareholders’ approval (if necessary), under the Listing Rules.

The Company will also comply with all the applicable takeover and disclosure requirements under the Takeovers Code when the Option is exercised.

LISTING RULES IMPLICATIONS

The taking of the Option constitutes a major transaction for the Company under the Listing Rules, on the basis that the calculation of the revenue ratio is within the range of 25% and 100%, and is therefore subject to approval of the Shareholders. The exercise of the Option will also constitute a major transaction for the Company and is also subject to approval of the Shareholders. Pursuant to Rule 14.76(2) of the Listing Rules, the Company is also permitted to seek, at the time of taking the Option, approval of the Shareholders necessary for the exercise of the Option. Such approval would be sufficient for satisfying the shareholders’ approval requirement under Chapter 14 of the Listing Rules in respect of the exercise of the Option.

Under Rule 14.44 of the Listing Rules, as no Shareholder was required to abstain from voting if the Company were to convene a general meeting for approving the Option Agreement (as amended by the Supplemental Letter) and the exercise of the Option, written approval had been obtained from APL (through its indirect wholly-owned subsidiary), as a Shareholder holding approximately 61.42% of the issued share capital of the Company as at the Latest Practicable Date, in lieu of holding a general meeting.

ADDITIONAL INFORMATION

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

Yours faithfully, On behalf of the Board Sun Hung Kai & Co. Limited Joseph Tong Tang Executive Director

– 14 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

1. AUDITED CONSOLIDATED FINANCIAL INFORMATION OF THE GROUP

The following table summarizes the consolidated income statement and consolidated balance sheet of the Group for the last three years ended 31st December, 2005, as extracted from the 2004 and 2005 published annual reports of the Company. Due to the adoption of new Hong Kong Financial Reporting Standards in 2005, the 2004 and 2003 financial information has been restated to conform with the new accounting policies adopted by the Group in 2005.

Consolidated Income Statement

For the three years ended 31st December

Revenue Other income Total income Brokerage and commission expenses Direct cost and operating expenses Administrative expenses Other expenses Finance costs Share of results and amortization of negative goodwill (goodwill) of – Associated companies – Jointly controlled entities Profit before taxation Taxation Profit for the year Attributable to: Equity holders of the Company Minority interests Dividends Special dividends Earnings per share – Basic – Diluted	2005 HK$’000 793,639 131,347 924,986 (141,463) (53,340) (342,648) (59,632) (40,908) 286,995 149,549 2 436,546 (34,186) 402,360 401,497 863 402,360 149,485 – 32.2 cents N/A	2004 HK$’000 (Restated) 807,015 40,363 847,378 (161,553) (54,790) (319,497) (40,398) (19,725) 251,415 165,043 (3,624) 412,834 (33,613) 379,221 378,738 483 379,221 49,828 62,285 30.4 cents N/A	2003 HK$’000 (Restated) 667,461 82,908 750,369 (99,639) (79,779) (285,576) (127,806) (14,423) 143,146 104,445 1 247,592 (12,561) 235,031 235,054 (23) 235,031 49,825 49,828 18.2 cents N/A

– 15 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Consolidated Balance Sheet

At 31st December

Non-current assets Investment properties Leasehold interests in land Property and equipment Intangible assets Goodwill (negative goodwill) Interest in associated companies Interest in jointly controlled entities Available-for-sale investments Statutory deposits Other investments Deferred tax assets Loans and receivables Current assets Trade and other receivables Held for trading investments/ trading securities Taxation recoverable Cash and cash equivalents Current liabilities Bank borrowings due within one year Trade and other payables Trading liabilities, at fair value Provisions Taxation payable Net current assets	2005 HK$’000 93,400 72,487 56,505 20,827 – 2,647,142 935 993,139 32,831 – 4,143 202,306 4,123,715 2,599,864 178,982 3,819 423,384 3,206,049 (342,546) (966,581) (17,756) (33,057) (12,221) (1,372,161) 1,833,888 5,957,603	2004 HK$’000 (Restated) 43,000 65,454 51,237 12,774 (22,396) 2,413,335 1,201 – – 907,710 10,279 3,200 3,485,794 2,290,608 48,263 969 487,249 2,827,089 (63,945) (1,031,182) – (41,739) (22,604) (1,159,470) 1,667,619 5,153,413	2003 HK$’000 (Restated) 36,900 66,896 55,843 10,685 (16,261) 2,149,946 937 – – 699,063 10,230 – 3,014,239 3,009,505 35,563 5,215 566,923 3,617,206 (289,358) (1,535,528) – (33,293) (25,544) (1,883,723) 1,733,483 4,747,722

– 16 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Capital and reserves Share capital Reserves Equity attributable to equity holders of the Company Minority interests Total equity Non-current liabilities Loan notes Bank and other borrowings due after one year Provisions Deferred tax liabilities	2005 HK$’000 249,141 5,591,738 5,840,879 369 5,841,248 64,252 43,720 1,202 7,181 116,355 5,957,603	2004 HK$’000 (Restated) 249,141 4,742,590 4,991,731 (494) 4,991,237 129,637 25,289 1,707 5,543 162,176 5,153,413	2003 HK$’000 (Restated) 249,141 4,226,164
			4,475,305 1,411
			4,476,716
			231,637 30,378 4,979 4,012
			271,006
			4,747,722

– 17 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

2. AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE GROUP FOR THE YEAR ENDED 31ST DECEMBER, 2005

Set out below are the audited consolidated financial statements and notes to the financial statements of the Group for the year ended 31st December, 2005 extracted from the annual report 2005 of the Company.

Consolidated Income Statement

For the year ended 31 December 2005

Notes Revenue 4 Other income 6 Total income Brokerage and commission expenses Direct cost and operating expenses Administrative expenses Other expenses 7 Finance costs 10 Share of results and amortization of negative goodwill (goodwill) of – Associated companies 11 – Jointly controlled entities 12 Profit before taxation 13 Taxation 14 Profit for the year Profit attributable to: Equity holders of the Company Minority interests Dividends 15 Special dividends 15 Earnings per share 16 – Basic – Diluted	2005 HK$’000 793,639 131,347 924,986 (141,463) (53,340) (342,648) (59,632) (40,908) 286,995 149,549 2 436,546 (34,186) 402,360 401,497 863 402,360 149,485 – 32.2 cents N/A	2004 HK$’000 (restated) 807,015 40,363 847,378 (161,553) (54,790) (319,497) (40,398) (19,725) 251,415 165,043 (3,624) 412,834 (33,613) 379,221 378,738 483 379,221 49,828 62,285 30.4 cents N/A

– 18 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Consolidated Balance Sheet

As at 31 December 2005

Notes Non-current Assets Investment properties 17 Leasehold interests in land 18 Property and equipment 19 Intangible assets 20 Goodwill (negative goodwill) 21 Interest in associated companies 23 Interest in jointly controlled entities 24 Available-for-sale investments 25 Statutory deposits Other investments 25 Deferred tax assets 40 Loans and receivables 26 Current Assets Trade and other receivables 27 Held for trading investments/ trading securities 28 Taxation recoverable Cash and cash equivalents 29 Current Liabilities Bank borrowings due within one year 30 Trade and other payables 31 Trading liabilities, at fair value 32 Provisions 39 Taxation payable Net Current Assets	2005 HK$’000 93,400 72,487 56,505 20,827 – 2,647,142 935 993,139 32,831 – 4,143 202,306 4,123,715 2,599,864 178,982 3,819 423,384 3,206,049 (342,546) (966,581) (17,756) (33,057) (12,221) (1,372,161) 1,833,888 5,957,603	2004 HK$’000 (restated) 43,000 65,454 51,237 12,774 (22,396) 2,413,335 1,201 – – 907,710 10,279 3,200 3,485,794 2,290,608 48,263 969 487,249 2,827,089 (63,945) (1,031,182) – (41,739) (22,604) (1,159,470) 1,667,619 5,153,413

– 19 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Notes Capital and Reserves Share capital 34 Reserves 35 Equity attributable to equity holders of the Company Minority interests 36 Total Equity Non-current Liabilities Loan notes 37 Bank and other borrowings due after one year 38 Provisions 39 Deferred tax liabilities 40	2005 HK$’000 249,141 5,591,738 5,840,879 369 5,841,248 64,252 43,720 1,202 7,181 116,355 5,957,603	2004 HK$’000 (restated) 249,141 4,742,590 4,991,731 (494) 4,991,237 129,637 25,289 1,707 5,543 162,176 5,153,413

– 20 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Balance Sheet

As at 31 December 2005

Notes Non-current Assets Intangible assets 20 Interest in subsidiary companies 22 Interest in associated companies 23 Other investments Deferred tax assets 40 Loans and receivables 26 Current Assets Trade and other receivables 33 Taxation recoverable Cash and cash equivalents 33 Current Liabilities Amounts due to subsidiary companies 33 Trade and other payables 33 Taxation payable Net Current (Liabilities) Assets Capital and Reserves Share capital 34 Reserves 35 Equity attributable to equity holders of the Company Non-current Liabilities Loan notes 37	2005 HK$’000 1,580 2,309,465 1,447,531 – 2,158 78,000 3,838,734 3,810 991 4,088 8,889 (272,631) (3,557) – (276,188) (267,299) 3,571,435 249,141 3,258,042 3,507,183 64,252 3,571,435	2004 HK$’000 – 1,818,776 1,525,567 2,090 2,612 – 3,349,045 3,799 – 2,819 6,618 – (4,421) (1,110) (5,531) 1,087 3,350,132 249,141 2,971,354 3,220,495 129,637 3,350,132

– 21 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Consolidated Statement of Recognized Income and Expense

For the year ended 31 December 2005

Notes Deferred tax 40 Exchange differences arising on translation of overseas subsidiaries, associated companies and jointly controlled entities Gains on fair value changes of available-for-sale investments/ other investments (Surplus) deficit reserves released on disposal of an associated company, a jointly controlled entity and available-for-sale investments/ other investments Share of reserves of associated companies and jointly controlled entities Impairment loss of available-for-sale investments/other investments transferred to income statement 7 Net income recognized directly in equity Profit for the year Total recognized income and expense for the year Attributable to: Equity holders of the Company Minority interests Effect of changes in accounting policies Increase (decrease) in retained earnings at the beginning of the year (Decrease) increase in reserves at the beginning of the year Attributable to minority interests	2005 HK$’000 (84) 571 340,928 (38,817) 38,708 14,411 355,717 402,360 758,077 757,214 863 758,077 327,178 (153,254) 173,924 – 173,924	2004 HK$’000 (restated) (222) (45) 208,173 6,154 18,843 16,898 249,801 379,221 629,022 628,539 483 629,022 (41,591) 24,936 (16,655) – (16,655)

– 22 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Consolidated Cash Flow Statement

For the year ended 31 December 2005

Notes OPERATING ACTIVITIES Cash (used in) generated from operations 41 Interest received Interest paid Taxation paid NET CASH (USED IN) FROM OPERATING ACTIVITIES INVESTING ACTIVITIES Proceeds on disposal of an investment property Purchase of property and equipment Proceeds on disposal of property and equipment Purchase of intangible assets Acquisition of subsidiary companies 42 Repayment of net amount due from associated companies Dividends received from associated companies Acquisition of associated companies Repayment of promissory notes of a listed associated company Acquisition of a jointly controlled entity Acquisition of additional shares of a jointly controlled entity Payment received (repayment) of net amount due from investee companies Dividends received from available-for-sale investments/other investments Purchase of available-for-sale investments/ other investments Proceeds on disposal of available-for-sale investments/other investments Net payment of statutory deposits NET CASH FROM INVESTING ACTIVITIES	2005 HK$’000 (391,934) 169,608 (30,626) (39,915) (292,867) 14,661 (16,119) 9 (5,962) (62,416) 13,062 7,412 (5,592) – – – 5,620 38,748 (705) 113,923 (4,472) 98,169	2004 HK$’000 (restated) 78,560 158,944 (17,343) (31,026) 189,135 – (11,215) 55 (6,091) – 12,187 5,582 (102,350) 185,419 (2,294) (1,018) (1,950) 89,408 (32,285) 40,510 – 175,958

– 23 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Notes FINANCING ACTIVITIES Dividends paid Repayment and cancellation of loan notes Net payment to minority interests Net bank borrowings raised (repaid) New long term bank loan raised Repayment of long term bank loans Repayment of finance lease liabilities NET CASH FROM (USED IN) FINANCING ACTIVITIES NET DECREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT 1 JANUARY Effect of foreign exchange rate changes CASH AND CASH EQUIVALENTS AT 31 DECEMBER, represented by Cash and cash equivalents Bank overdrafts	2005 HK$’000 (105,885) (60,000) (48) 255,000 26,000 (5,940) – 109,127 (85,571) 429,344 (314) 343,459 423,384 (79,925) 343,459	2004 HK$’000 (restated) (112,113) (100,426) (33) (177,954) – (5,906) (890) (397,322) (32,229) 461,430 143 429,344 487,249 (57,905) 429,344

– 24 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Notes to the Consolidated Financial Statements

For the year ended 31 December 2005

1. GENERAL

The Company is a public limited company incorporated in Hong Kong and its shares are listed on The Stock Exchange of Hong Kong Limited. Its parent is AP Emerald Limited and its ultimate holding company is Allied Group Limited which is a company incorporated and listed in Hong Kong. The address of the registered office of the Company is disclosed in the Corporate Information of the annual report.

The financial statements are presented in Hong Kong dollars, which are the same as the functional currency of the Company.

The principal activities of the Company and its major subsidiary companies are disclosed in the Directors’ Report of the annual report and in note 47.

2. SIGNIFICANT ACCOUNTING POLICIES

(a) Statement of compliance

The financial statements have been prepared in accordance with Hong Kong Financial Reporting Standards issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”). In addition, the financial statements include applicable disclosures required by the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (“Listing Rules”) and by the Companies Ordinance.

The financial statements have been prepared on the historical cost basis, as modified by the revaluation of available-for-sale investments, financial assets and financial liabilities held for trading purposes, and investment properties, which are measured at fair values, as explained in the accounting policies set out below.

(b) Basis of preparation and consolidation

The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries and the Group’s interest in associates and jointly controlled entities. 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.

All intra-group transactions, balances, income and expenses within the Group are eliminated on consolidation.

The HKICPA has issued a number of new and revised Hong Kong Financial Reporting Standards (“HKFRSs”), Hong Kong Accounting Standards (“HKASs”) and Interpretations, which are effective for accounting periods beginning on or after 1 January 2005 for the purpose of converging by 1 January 2005 all HKFRSs and HKASs with International Financial Reporting Standards issued by the International Accounting Standards Board.

– 25 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

The Group has adopted the following new/revised HKFRSs, HKASs and Interpretations issued up to 31 December 2005 which are pertinent to its operations and have resulted in changes to the Group’s accounting policies. The application of the HKFRSs, HKASs and Interpretations has resulted in a change in the presentation of the income statement, balance sheet and statement of recognized income and expense. In particular, the presentation of minority interests and share of tax of associates/jointly controlled entities have been changed. The changes in presentation have been applied retrospectively. The 2004 comparatives have been restated as required, in accordance with the relevant requirements.

HKAS 1 Presentation of Financial Statements HKAS 7 Cash Flow Statements HKAS 8 Accounting Policies, Changes in Accounting Estimates and Errors HKAS 16 Property, Plant and Equipment HKAS 17 Leases HKAS 23 Borrowing Costs HKAS 24 Related Party Disclosures HKAS 27 Consolidated and Separate Financial Statements HKAS 28 Investments in Associates HKAS 31 Investments in Joint Ventures HKAS 32 Financial Instruments: Disclosures and Presentation HKAS 33 Earnings Per Share HKAS 36 Impairment of Assets HKAS 38 Intangible Assets HKAS 39 Financial Instruments: Recognition and Measurement HKAS 40 Investment Property HKFRS 3 Business Combinations HK-Int 4 Leases – Determination of the Length of Lease Term in respect of Hong Kong Land Leases HKAS-Int 21 Income taxes – Recovery of Revalued Non-Depreciated Assets

The adoption of the above new/revised HKFRSs and HKASs has the following impact on the Group’s accounting policies:

(i) The adoption of new/revised HKASs 1, 7, 8, 23, 24, 27, 28, 31 and 33 did not result in substantial changes to the Group’s accounting polices. In summary:
HKAS 1 has affected the presentation of minority interest, share of net after-tax results of associates and other disclosures;
HKASs 8, 27, 28, 31, and 33 have no material effect on the Group’s policies, but affect certain disclosure of the financial statements;
HKAS 24 affects the identification of related parties and the disclosure of related party transactions.
(ii) The adoption of HKASs 16 and 17 has resulted in a change in the accounting policy for the Group’s leasehold land and buildings (see (iii) below), which are now carried at their costs less accumulated depreciation and impairment losses.
(iii) The adoption of revised HKAS 17 has resulted in a change in the accounting policy relating to the reclassification of leasehold land and land use rights from property and equipment to operating leases. The up-front prepayments made for the leasehold land and land use rights are expensed in the income statement on a straight-line basis over the period of the lease or when there is impairment, the impairment is expensed in the income statement. In prior years, the leasehold land was accounted for at cost or valuation less accumulated depreciation and accumulated impairment.

– 26 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

In accordance with HK-Int 4, the Group changed the estimated useful life of the land and buildings from “over the remaining term of the lease, including the period for which a right of renewal is attached” to “over the remaining term of the lease” on a prospective basis.

(iv) The adoption of HKAS 39 has resulted in a change in the accounting policy for recognition, measurement, derecognition and disclosure of financial instruments on a prospective basis.

Until 31 December 2004, investments of the Group were classified as “trading securities” and “other investments” respectively. They were stated at fair value or estimated fair value at the balance sheet date. Any unrealized gains less losses arising from the valuation of “trading securities” at the balance sheet date were dealt with in the income statement. As to “other investments”, changes in the fair value of individual securities were credited or debited to the investment revaluation reserve until the securities were sold, or were determined to be impaired. Upon disposal, the cumulative gain or loss was dealt with in the income statement.

As from 1 January 2005, in accordance with HKAS 39, financial assets are classified as “held for trading investments”, “available-for-sale investments” and “loans and receivables”. The classification depends on the purpose for which the assets are acquired. “Held for trading investments” and “available-for-sale investments” are carried at fair value with changes in fair values recognized in the income statement and equity respectively. “Loans and receivables” consist of secured margin or term loans and other trade receivables. They are carried at amortized cost using the effective interest method, less impairment losses, if any. Adjustments to the carrying amount on the adoption of HKAS 39 are recognized as an adjustment to the opening retained earnings on 1 January 2005.

(v) The adoption of HKAS 38 results in a change of the useful lives of intangible assets according to the provisions of HKAS 38. Certain exchange participation rights with amortization on a straight line basis over its estimated useful lives of five years before 1 January 2005 were changed to indefinite useful life on that date. Accumulated amortization as at 31 December 2004 has been eliminated with a corresponding decrease in the cost of these intangible assets.
(vi) The adoption of revised HKAS 40 has resulted in a change in the accounting policy of which the changes in fair values of the investment properties are recorded in the income statement as part of other income. In prior years, the increases in fair value were credited to the investment property revaluation reserve. Decreases in fair value were first set off against increases on earlier valuations on a portfolio basis and thereafter expensed in the income statement.
(vii) The adoption of HKFRS 3, HKAS 36 and HKAS 38 results in a change in the accounting policy for goodwill.

Prior to this, goodwill and negative goodwill were amortized in the income statement on a straight line basis over their estimated useful lives of five years.

Following the adoption of HKFRS 3, HKAS 36 and HKAS 38:

The Group ceased amortization of remaining goodwill and remaining negative goodwill from 1 January 2005;
Unamortized negative goodwill was derecognized by way of a corresponding adjustment to the opening retained earnings at 1 January 2005;

– 27 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Accumulated amortized goodwill as at 31 December 2004 was eliminated with a corresponding decrease in the cost of goodwill;
From the year ended 31 December 2005 onwards, goodwill is tested annually at balance sheet date for impairment, as well as when there is indication of impairment.
(viii) The adoption of revised HKAS-Int 21 has resulted in a change in the accounting policy relating to the measurement of deferred taxes arising from the revaluation of investment properties. Such deferred taxes are measured on the basis of tax consequences that would follow from recovery of the carrying amount of the assets through use. In prior years, the carrying amount of that asset was expected to be recovered through sale.

Effect of changes in the accounting policies and estimates on 2005 consolidated income statement:

Decrease in revenue (Decrease) increase in other income (Increase) decrease in direct cost and operating expenses Increase in finance costs (Decrease) increase in share of results of associates (Increase) decrease in taxation (Decrease) increase in profit attributable to equity holders of the Company Increase (decrease) in basic earnings per share (cents)	HKAS 16 & 17 HKAS 38 HK$’000 HK$’000 – – – – (268) 846 – – – – (150) – (418) 846 – 0.1	HKFRS 3, HKAS HKAS 32 & 39 36 & 38 HKAS 40 HK$’000 HK$’000 HK$’000 (1,914 ) – – – (7,995 ) 19,741 – – – (8,692 ) – – – (29,265 ) – 2 – – (10,604 ) (37,260 ) 19,741 (0.9 ) (3.0 ) 1.6	HK-Int 4 HK$’000 – – (418) – – (23) (441) –	HKAS- Share of Int 21 associates HK$’000 HK$’000 – – – – – – – – – 117,210 (2,266) – (2,266) 117,210 (0.2 ) 9.4	Total HK$’000 (1,914) 11,746 160 (8,692) 87,945 (2,437) 86,808 7.0

– 28 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Effect of changes in the accounting policies and estimates on consolidated balance sheet as at 31 December 2005:

Investment properties Leasehold interests in land Property and equipment Intangible assets Goodwill (negative goodwill) Interest in associated companies Available-for-sale investments Statutory deposits Other investments Deferred tax assets Loans and receivables Trade and other receivables Held for trading investments Trading securities Trade and other payables Provisions – current portion Taxation payable Loan notes Provisions Deferred tax liabilities Capital and other reserves Opening retained earnings Profit for the year	HKAS 16 & 17 HKAS 38 HK$’000 HK$’000 – – 64,650 – (67,404) – – 846 – – – – – – – – – – – – – – 1,630 – – – – – – – (242) – – – – – (710) – (391) – (2,467) 846 – – (2,049) – (418) 846 (2,467) 846	HKFRS 3, HKAS HKAS 32 & 39 36 & 38 HKAS 40 HK$’000 HK$’000 HK$’000 – – 19,741 – – – – – – 5,425 – – – 14,401 – (79,147 ) 124,216 – 747,363 – – 26,624 – – (906,620 ) – – – – – 201,240 – – 3,447 – – 50,759 – – (49,312 ) – – (1,900 ) – – – – – 4 – – 5,385 – – – – – – – – 3,268 138,617 19,741 (1,006 ) – – 14,878 175,877 – (10,604 ) (37,260 ) 19,741 3,268 138,617 19,741	HK-Int 4 HK$’000 – (825) 407 – – – – – – – – – – – – – – – – (23) (441) – – (441) (441)	HKAS- Share of Int 21 associates HK$’000 HK$’000 – – – – – – – – – – – 104,415 – – – – – – (2,157) – – – – – – – – – – – – – – – – – – – – – (2,157) 104,415 – (151,158 ) 109 138,363 (2,266) 117,210 (2,157) 104,415	Total HK$’000 19,741 63,825 (66,997 ) 6,271 14,401 149,484 747,363 26,624 (906,620 ) (2,157) 201,240 5,077 50,759 (49,312 ) (1,900) (242 ) 4 5,385 (710 ) (414 ) 261,822 (152,164 ) 327,178 86,808 261,822

– 29 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Effect of changes in the accounting policies on 2004 consolidated income statement:

as Revenue Other income Brokerage and commission expenses Direct cost and operating expenses Administrative expenses Other expenses Finance costs Share of results and amortization of negative goodwill (goodwill) of – Associated companies – Jointly controlled entities Taxation Profit for the year Minority interests Profit attributable to equity holders of the Company Basic earnings per share (cents)	Year 2004 previously reported HK$’000 807,015 40,363 (161,553) (54,578) (319,497) (40,361) (19,725) 265,199 (3,624) (127,961) 385,278 (483) 384,795 30.9	Reclassi- fication HK$’000 – – – – – – – (94,701) – 94,701 – – – –	HKAS 16 & 17 HK$’000 – – – (212) – – – – – (85) (297) – (297) –	HKAS- Int 21 HK$’000 – – – – – – – – – (268) (268) – (268) –	Share of associates HK$’000 – – – – – (37) – (5,455) – – (5,492) – (5,492) (0.5)	Year 2004 as restated HK$’000 807,015 40,363 (161,553) (54,790) (319,497) (40,398) (19,725) 165,043 (3,624) (33,613) 379,221 (483) 378,738 30.4

– 30 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Effect of changes in the accounting policies on consolidated balance sheet as at 31 December 2004:

As reported on 31/12/2004 HK$’000 Investment properties – Leasehold interests in land – Fixed assets/property and equipment 162,149 Intangible assets 12,774 Goodwill (negative goodwill) (22,396) Interest in associated companies 2,433,428 Interest in jointly controlled entities 1,201 Other investments 907,710 Deferred tax assets 10,170 Lending over one year/ loans and receivables 3,200 Trade and other receivables 2,289,166 Trading securities 48,263 Taxation recoverable 969 Cash and cash equivalents 487,249 Bank borrowings due within one year (63,945) Trade and other payables (1,072,960) Provisions – Taxation payable (25,330) 5,171,648 Share capital 249,141 Capital and other reserves 2,543,429 Retained earnings 2,146,452 Proposed dividends 74,742 5,013,764 Minority interests (494) 5,013,270 Loan notes 129,637 Bank and other borrowings due after one year 26,165 Provisions – Deferred tax liabilities 2,576 5,171,648	Reclassi- fication HK$’000 – – – – – – – – – – – – – – – 41,778 (41,739) 2,726 2,765 – – – – – – – – (876) 915 2,726 2,765	HKAS 16 & 17 HK$’000 43,000 65,454 (110,912) – – – – – – – 1,442 – – – – – – – (1,016) – – (2,049) – (2,049) – (2,049) – – 792 241 (1,016)	HKAS- Int 21 HK$’000 – – – – – – – – 109 – – – – – – – – – 109 – – 109 – 109 – 109 – – – – 109	Share of associates HK$’000 – – – – – (20,093) – – – – – – – – – – – – (20,093) – 25,615 (45,708) – (20,093) – (20,093) – – – – (20,093)	As restated on 31/12/2004 HK$’000 43,000 65,454 51,237 12,774 (22,396) 2,413,335 1,201 907,710 10,279 3,200 2,290,608 48,263 969 487,249 (63,945) (1,031,182) (41,739) (22,604) 5,153,413 249,141 2,569,044 2,098,804 74,742 4,991,731 (494) 4,991,237 129,637 25,289 1,707 5,543 5,153,413

– 31 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Effect of changes in the accounting policies on equity as at 1 January 2004:

As reported on 1/1/2004 HK$’000 Share capital 249,141 Capital and other reserves 2,291,480 Retained earnings 1,876,597 Proposed dividends 74,742 4,491,960 Minority interests 1,411 4,493,371	HKAS 16 &17 HK$’000 – – (1,752) – (1,752) – (1,752)	HKAS- Int 21 HK$’000 – – 377 – 377 – 377	Share of associates HK$’000 – 24,936 (40,216) – (15,280) – (15,280)	As restated on 1/1/2004 HK$’000 249,141 2,316,416 1,835,006 74,742
				4,475,305 1,411
				4,476,716

On the adoption of HKAS 39, the Company restated the loan notes issued by the Company to amortized cost on 1 January 2005 with a corresponding adjustment of HK$14,077,000 credited to opening retained earnings. The Company also reclassified the following items on 1 January 2005. There is no material impact to the financial statements of the Company on the adoption of other new/revised HKFRSs.

Club membership of HK$2,090,000 was reclassified from “other investments” to “intangible assets”;
Amounts due to subsidiary companies of HK$273,685,000 were reclassified from “investments in subsidiary companies” to “current liabilities”;
Loan note due from a listed associated company of HK$78,000,000 was reclassified from “interest in associated companies” to “loans and receivables”.

The Group has not early applied the following new standards and interpretations that have been issued but are not yet effective and are pertinent to the operations of the Group. The directors of the Company anticipate that the application of these standards will have no material impact on the financial statements of the Group.

HKAS 1 (amendment) Capital Disclosures[1] HKAS 19 (amendment) Actuarial Gains and Losses, Group Plans and Disclosures[2] HKAS 39 (amendment) The Fair Value Option[2] HKFRS 7 Financial Instruments: Disclosures[1]

1 Effective for annual periods beginning on or after 1 January 2007.

2 Effective for annual periods beginning on or after 1 January 2006.

(c) Intangible assets
(i) Exchange participation rights and club membership

They comprise:

The eligibility right to trade through The Stock Exchange of Hong Kong Limited, Hong Kong Futures Exchange Limited and other Exchanges, and
The eligibility right to use the facilities of various clubs.

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APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

The exchange participation rights are considered by the management of the Group as having an indefinite useful life because they are expected to contribute to net cash flows indefinitely. The management also considers that the club membership does not have a definite useful life. They are carried at cost less any impairment losses and are tested for impairment annually by comparing their recoverable amount with their carrying amount. Useful lives are also examined on an annual basis and adjustments where applicable are made on a prospective basis.

(ii) Computer software

Acquired computer software licenses are capitalized on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortized using the straight-line method over their estimated useful lives (three to five years).

Costs associated with developing or maintaining computer software are recognized as an expense as incurred. Costs that are directly associated with the production of identifiable and unique software controlled by the Group, and that will probably generate economic benefits exceeding costs beyond one year, are recognized as intangible assets. Direct costs include the software development employee costs and an appropriate portion of relevant overheads.

Computer software development costs recognized as assets are amortized from the dates when the software are available for use using the straight-line method over their estimated useful lives (not exceeding ten years).

(d) Investment properties

Investment properties are completed properties which are held for long-term rental yields or for capital appreciation or both. Investment properties are initially measured at cost including all transaction costs. Subsequent to initial recognition they are stated at fair value based on independent professional valuation at the balance sheet date. Any revaluation increase or decrease arising from the revaluation of investment properties is credited or charged to the income statement in the year in which they arise.

(e) Leasehold interests in land

The up-front prepayments made for the leasehold land and land use rights are expensed in the income statement on a straight-line basis over the period of the lease or when there is impairment, the impairment is expensed in the income statement.

(f) Property and equipment

Buildings comprise mainly properties held by the Group for its own use. All property and equipment are stated at cost, less subsequent depreciation and impairment. Cost includes expenditure that is directly attributable to the acquisition of the items.

Depreciation is calculated using the straight-line method to write off the cost of each asset to its residual value over its estimated useful life as follows:

– Buildings over the remaining term of the lease term of land – Furniture and equipment 10% to 33% per annum

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.

Gains and losses on disposals are determined by comparing the disposal proceeds with the carrying amount and are included in the income statement.

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FINANCIAL INFORMATION OF THE GROUP

(g) Investments in subsidiary companies

A subsidiary is an entity over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity.

The acquisition of subsidiaries is accounted for using the purchase method. After 1 January 2005, on acquisition, the assets and liabilities and contingent liabilities of a subsidiary are measured at their fair values at the date of acquisition. Any excess of the cost of acquisition over the fair values of the Group’s share of the identifiable net assets acquired is recognized as goodwill. Any deficiency of the cost of acquisition below the fair value of the Group’s share of the net assets of the subsidiary acquired is credited to income statement in the period of acquisition.

The interest of minority equity holders in the acquiree is initially measured at the minority’s proportion of the net fair value of the assets, liabilities and contingent liabilities recognized.

Investments in subsidiary companies are included in the Company’s balance sheet at cost less impairment. The results of subsidiary companies are accounted for by the Company on the basis of dividend received or receivable.

(h) Interest in associated companies

An associated company is a company not being a subsidiary company or a joint venture, in which the Group has significant influence but not control, generally accompanying a shareholding between 20% and 50% of the voting rights.

Interest in associated companies is accounted for in the consolidated accounts under the equity method and are initially recognized at cost.

The Group’s share of its associated companies’ post-acquisition profits or losses is recognized in the income statement, and its share of post-acquisition movements in reserves is recognized in the reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. In the consolidated balance sheet, interest in associated companies comprises the Group’s share of the net assets and its net advances made to the associated companies (where advances are neither planned nor likely to be settled in the foreseeable future), plus goodwill (net of any accumulated impairment losses) identified on acquisition.

When the Group’s share of losses in an associated company equals or exceeds its interest in the associated company, including its investment cost and other long term interests, the Group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the associated company.

When the Group transacts with an associated company of the Group, profits and losses are eliminated to the extent of the Group’s interest in the relevant associated company.

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APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Effects of redesignation of the warrants of a listed associated company and amounts due from (to) associated companies, which are previously grouped under “interest in associated companies”, together with their reclassification as at 1 January 2005 on the adoption of HKAS 39 are as follows:

Interest in associated companies As reported on 31 December 2004 Share of prior year adjustments of associated companies As restated Adjustments made on 1 January 2005 – Adoption of HKAS 39 # – Adoption of HKFRS 3, HKASs 36 and 38 – Share of associated companies _Less:_reclassification – Warrants reclassified to held for trading investments # – Loan note reclassified to loans and receivables – Amounts due reclassified to trade and other receivables	Carrying Net amounts value due HK$’000 HK$’000 2,335,249 98,389 (20,093) – 2,315,156 98,389 2,469 – 153,481 – 7,298 – 2,478,404 98,389 (2,469) – – (78,000) – (282) 2,475,935 20,107	Total HK$’000 2,433,638 (20,093) 2,413,545 2,469 153,481 7,298 2,576,793 (2,469) (78,000) (282) 2,496,042

# The warrants of a listed associated company which are previously grouped under “investments in associates” are classified under “held for trading investments” and carried at fair value in accordance with the provisions of HKAS 39.

In the Company’s balance sheet, the interest in associated companies is stated at cost less impairment. The results of associated companies are accounted by the Company on the basis of dividend received or receivable.

(i) Interest in joint venture

A joint venture is a contractual arrangement whereby the Group and other parties undertake an economic activity which is subject to joint control and over which none of the participating parties has unilateral control.

A joint venture arrangement which involves the establishment of a separate entity in which each venturer has an interest is referred to as a jointly controlled entity.

The Group’s interest in its jointly controlled entity is accounted for by equity method whereby its interest in the jointly controlled entity is initially recorded at cost and adjusted thereafter for the post-acquisition change in the Group’s share of net assets of the jointly controlled entity. The Group’s share of post-acquisition results of the jointly controlled entity is included in the consolidated income statement.

Where the Group transacts with its jointly controlled entity, unrealized profits and losses are eliminated to the extent of the Group’s interest in the jointly controlled entity.

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APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(j) Investments/financial assets

(i) Classification

From 1 January 2005, investments of the Group are classified under the following categories:

“Financial assets at fair value through profit or loss”

This category has two sub-categories: financial assets held for trading, and those designated at fair value through profit or loss at inception. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term. All derivatives financial assets are also categorized as held for trading unless they are designated as hedges.

“Available-for-sale investments”

This category comprises financial assets, which are non-derivatives, and includes both listed and unlisted investments which are stated at fair value, except for those equity investments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured, when they are measured at cost less any accumulated impairment losses.

“Loans and receivables”

This category includes trade receivables, secured margin loans and secured term loans which are reviewed and approved by either the Credit and Risks Management Committee or the Executive Committee. They arise when the Group provides money, goods or services directly to clients or brokers with no intention of trading the receivables. For those secured margin or term loans, clients are normally required to provide additional margin or securities as collateral whenever there are any shortfalls in their accounts.

Details of the redesignation of investments on 1 January 2005 are shown in (viii) below.

(ii) Recognition and initial measurement

Purchases and sales of investments are recognized on trade-date i.e. the date that the Group commits to purchase or sell the asset. Financial assets at fair value through profit or loss are initially recognized at fair value with transaction costs recognized as expenses in the income statement. Financial assets not designated at fair value through profit or loss are initially recognized at fair value plus transaction costs.

(iii) Derecognition

Investments are derecognized when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership.

(iv) Subsequent measurement

“Financial assets at fair value through profit or loss”

Investments under this category are subsequently re-measured to fair value at balance sheet date until the assets are derecognized. Unrealized gains and losses arising from changes in the fair value are included in the income statement in the period in which they occur. Upon disposal, the difference between the net sale proceeds and the carrying value is included in the income statement.

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APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

“Available-for-sale investments”

Available-for-sale investments are carried at fair value. Unrealized gains and losses arising from changes in the fair value of securities investment classified as available-for-sale are recognized in investment revaluation reserve. When the securities are sold, the difference between the net sale proceeds and the carrying value, and the accumulated fair value adjustments in the investment revaluation reserve are treated as gains or losses on disposal.

“Loans and Receivables”

Loans and receivables consist of secured margin or term loans and trade receivables. They are carried at amortized cost using the effective interest method, less impairment losses, if any.

(v)

Fair value measurement principles

Fair values of quoted investments are based on bid prices. For unlisted securities or financial assets without an active market, the Group establishes the fair value by using valuation techniques including the use of recent arm’s length transaction, reference to other investments that are substantially the same, discounted cash flow analysis, and option pricing models.

(vi) Impairment

The Group assesses at balance sheet date whether there is objective evidence that a financial asset or a group of financial asset is impaired. In case of equity securities classified as available-for-sale, a significant or prolonged decline in the fair value of the securities below their cost is considered in determining whether the securities are impaired. If any such evidence exists for available-for-sale investments, the cumulative loss (i.e. measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in the income statement) is removed from equity and recognized in the income statement. Impairment losses recognized in the income statement on equity investment are not reversed through the income statement.

An estimated impairment allowance is made on loans and receivables based on a review of all outstanding amounts on semi-annual and annual basis when collection of the amount is in doubt. Bad debts are written off when identified.

(vii) Trading securities and other investments (only applicable to accounting periods ended on or before 31 December 2004)

“Trading securities”

Listed and marketable securities held by the Group to facilitate its block trading, arbitrage and underwriting operations are stated at market value. The results from such activities, which include unrealized gains less losses arising from valuation at the balance sheet date of securities on hand, are dealt with in the income statement.

“Other investments”

Investments which are held for non-trading purposes are stated at fair value or estimated fair value at the balance sheet date on an individual investment basis. The estimated fair values of unlisted investments are determined by the Directors having regard to, inter alia, the most recent financial statements or other financial data considered relevant in respect of such investments. Changes in the fair value of individual securities are credited or debited to the investment revaluation reserve until the securities are sold, or are determined to be impaired. Upon

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APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

disposal, the cumulative gain or loss representing the difference between the net sales proceeds and the carrying amount of the relevant securities, together with any surplus/deficit transferred from the investment revaluation reserve, is dealt with in the income statement.

Transfers from the investment revaluation reserve to the income statement as a result of impairments are written back in the income statement when the circumstances and events leading to the impairment cease to exist.

(viii) Effect of redesignation of trading securities and other investments together with their reclassification as at 1 January 2005 on the adoption of HKAS 39:

Effect on As reported adoption As restated on of on 31/12/2004 HKAS 39 1/1/2005 HK$’000 HK$’000 HK$’000 Other investments Equity investments 784,778 (2,096) 782,682 Club memberships and exchange participation rights* 5,425 – 5,425 Statutory deposits and other deposits with Exchange and Clearing companies 26,624 – 26,624 Amounts due from investee companies 92,774 (1,447) 91,327 Amounts due to investee companies (1,891) – (1,891) Trading securities 48,263 (223) 48,040		New	designation and reclassification on 1/1/2005	designation and reclassification on 1/1/2005	Trade and other payables HK$’000 – – – – (1,891) – (1,891)
	Intangible assets HK$’000 – 5,425 – – – – 5,425	Held for trading invest- ments HK$’000 – – – 250 – 48,040 48,290	Available- for-sale invest- ments HK$’000 747,363 – – – – – 747,363	Trade and Statutory Loans and other deposits receivables receivables HK$’000 HK$’000 HK$’000 – 35,319 – – – – 26,624 – – – 87,921 3,156 – – – – – – 26,624 123,240 3,156

* Following the adoption of HKAS 39, the Group has reclassified its exchange participation rights and club memberships which are previously grouped under “other investments” to “intangible assets”.

(k) 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, associated company or jointly controlled entity at the date of acquisition.

For previously capitalized goodwill arising on acquisitions before 1 January 2005, the Group has discontinued amortization from 1 January 2005 onwards, and such goodwill is tested for impairment annually, and whenever there is an indication that the cash generating unit to which the goodwill relates may be impaired (see the accounting policy below).

Goodwill arising on acquisition on or after 1 January 2005, is initially recognized as an asset at cost and is subsequently measured at cost less any accumulated impairment losses.

Goodwill is allocated to cash-generating units for the purpose of impairment testing.

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APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

On disposal of a subsidiary, associated company or jointly controlled entity, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.

(l) Cash and cash equivalents

Cash and cash equivalents are carried in the balance sheet at fair value. They comprise cash on hand, bank balances, short term time deposits and treasury bills. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows.

(m) Financial liabilities

Financial liabilities are generally classified as “financial liabilities at fair value through profit or loss” and “other financial liabilities”. At each balance sheet date, subsequent to initial recognition, financial liabilities at fair value through profit or loss are measured at fair value, with changes in fair value recognized directly in income statement in the period in which they arise. Other financial liabilities including loans, bank overdrafts, trade and other payables are subsequently measured at amortized cost, using the effective interest rate method.

(n) Share capital

Ordinary shares are classified as equity.

When share capital recognized as equity is repurchased, the amount of the consideration paid, including directly attributable costs, is recognized as a change in equity. Repurchased shares that are not subsequently cancelled are classified as treasury shares and presented as a deduction from total equity.

Dividend distribution to the Company’s equity holders is recognized as a liability in the period in which the dividends are properly approved.

(o) Provision and contingent liabilities

Provisions are recognized when the Group has a present legal or constructive obligation as a result of a past event if it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Group expects some or all of a provision to be reimbursed, the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the income statement net of any reimbursement.

A contingent liability is a possible obligation that arises from past events and whose existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Group. It can also be a present obligation arising from past events that is not recognized because it is not probable that outflow of economic resources will be required or the amount of obligation cannot be measured reliably.

A contingent liability is not recognized but is disclosed in the notes to the financial statements. When a change in the probability of an outflow occurs so that the outflow is probable, it will then be recognized as a provision.

(p) Impairment of assets

Goodwill and intangible assets that have indefinite useful lives are not subject to amortization, which are at least tested annually for impairment and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying

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APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

amount may not be recoverable. Assets that are subject to depreciation and amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest level for which there is separately identifiable cash flows (cash-generating units) if an impairment test cannot be performed for an individual asset.

(q)

Taxation

Taxation on the profit and loss comprises current and deferred tax.

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

Deferred taxation is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the accounts. Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary difference can be utilized.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the assets realized. Deferred tax is charged or credited to profit or loss, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

(r)

Foreign currencies

Transactions in currencies other than the functional currency of the respective group entities (foreign currencies) are recorded at the rates of exchange prevailing on the dates of the transactions.

At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date.

Non-monetary assets and liabilities carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Foreign exchange gains and losses arising on the settlement of monetary items, and on the retranslation of monetary items, are included in net profit or loss for the period, except for exchange differences arising on non-monetary assets and liabilities where the changes in fair value are recognized directly in equity.

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

(s) Borrowing costs

Interest expenses 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, are capitalized as part of the cost of the asset.

All other borrowing costs are recognized on a time apportionment basis, taking into account the principal and the effective interest rates. They are charged to the income statement in the year in which they are incurred.

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APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(t) Operating lease

Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases.

“The Group as lessor”

Amounts due from lessees under finance leases are recorded as receivables at the amount of the Group’s net investment in the leases. Finance lease income is allocated to accounting periods so as to reflect a constant periodic rate of return on the Group’s net investment outstanding in respect of the leases.

Rental income from operating leases is recognized on a straight-line basis over the term of the relevant lease. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognized on a straightline basis over the lease term.

“The Group as lessee”

Assets held under finance leases are recognized as assets of the Group at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the balance sheet as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly to profit or loss.

Rentals payable under operating leases are charged to the income statement on a straightline basis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operating lease are also spread on a straight-line basis over the lease term.

(u) Employee benefits

The Group operates defined contribution retirement schemes, the assets of which are held in independent administrated funds. The Group’s contributions to the defined contribution retirement schemes are expensed as incurred and are reduced by contributions forfeited, if applicable, by those employees who leave the schemes prior to vesting fully in the contributions.

Employee entitlements to annual leave are recognized when they accrue to employees. A provision is made for the estimated liability for annual leave as a result of services rendered by employees up to the balance sheet date.

The Group recognizes a liability and an expense for bonuses and profit-sharing, based on approved formulas that take into consideration the profit attributable to the Group after certain adjustments. The Group recognizes a provision where contractually obliged or where there is a past practice that has created a constructive obligation.

(v) Revenue recognition

Income is recognized in the income statement on the following basis:

(i) Commission income is recognized as income on trade date basis.
(ii) Underwriting commission, sub-underwriting income, placing commission and subplacing commission are recognized as income in accordance with the terms and conditions of the relevant agreement or deal mandate when a relevant significant act has been completed.

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APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(iii) Fees for management and advisory of funds are recognized when the related services are rendered.
(iv) Interest income from financial assets is recognized on a time apportionment basis, taking into account the principal amounts outstanding and at the effective interest applicable which is the rate that discounts the estimated future cash receipt through the expected life of the financial asset to that asset’s net carrying amount.
(v) Dividend income from investments is recognized when the equity holders’ right to receive payment has been established.
(vi) Realized profits or losses from held-for-trading investments and derivative contracts are recognized on a trade date basis whilst the unrealized profits or losses are recognized from valuation at the balance sheet date.
(vii) Profits or losses on trading in foreign currencies include both realized and unrealized gains less losses and charges less premium arising from position squaring and valuation at the balance sheet date of foreign currency positions on hand.
(viii) Rental income arising on investment properties is accounted for on a straight-line basis over the lease term regardless of when the cash rental payment will be received.

3. CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY

In preparing these financial statements, management is required to exercise significant judgments in the selection and application of accounting principles, including making estimates and assumptions. The following is a review of the more significant accounting policies that are impacted by judgments and uncertainties and for which different amounts may be reported under a different set of conditions or using different assumptions.

(a) Impairment allowances on loans and receivables

The Group periodically reviews its loan portfolios to assess whether impairment allowances exist. In determining whether impairment allowances should be recorded in the income statement, the Group has individually evaluated each loan account for impairment after taking into account the value of each client account’s underlying collateral and the latest financial position of those borrowers in default of settlement.

(b) Impairment of available-for-sale investments

For listed available-for-sale equity investments, a significant or prolonged decline in fair value below cost is considered to be objective evidence of impairment. Judgment is required when determining whether a decline in fair value has been significant or prolonged. In making this judgment, the historical data on market volatility as well as the price of the specific investment are taken into account.

For those unlisted equity investments, the Group determines their fair values by using appropriate valuation techniques and making assumptions that are based on market conditions existing at each balance sheet date. The Group also takes into account other factors, such as industry and sector performance and financial information regarding the investee.

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APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(c) Estimated impairment of goodwill

The Group conducts tests for impairment of goodwill annually in accordance with the relevant accounting standards. Determining whether the goodwill is impaired requires an estimation of the value in use on basis of data available to the Group. Where the future cash flows are less than expected, an impairments loss may arise.

(d) Deferred tax

Estimating the amount for deferred tax asset arising from tax losses requires a process that involves determining appropriate provisions for taxation, forecasting future years’ taxable income and assessing the Group’s ability to utilize tax benefits through future earnings. In case where the actual future profits generated are less than expected, a reversal of the deferred tax asset may arise, which would be recognized in the income statement for the period in which such a reversal takes place. The Group’s deferred tax asset arising from tax losses is mainly from term loan business. While the current financial models indicate that the tax losses can be utilized in future, any changes in assumptions, estimates and tax regulation can affect the recoverability of this deferred tax asset.

(e) Litigation

Sun Hung Kai Securities Limited (“SHKS”) has obtained leave to appeal the 29 June 2005 judgment of the Court of Appeal (“Court of Appeal Judgment”) to the Court of Final Appeal (the “Final Appeal”) in relation to litigation involving SHKS, New World Development Company Limited (“NWDC”) and Stapleton Development Limited (“SDL”). The litigation relates to a disputed interest in a joint venture between NWDC and/or SDL and IGB Corporation Bhd. to purchase land and to build two hotels at the city centre of Kuala Lumpur. The Company’s understanding of the effect of the Court of Appeal Judgment is that SHKS now effectively owns 25% (“SHKS’s Interest”) of NWDC’s entire interest in the joint venture. The Final Appeal will be heard between 19 June 2006 and 21 June 2006. The Board has considered that it is not possible to decide with any degree of accuracy as to what the final position may be.

As at 31 December 2005, a sum of HK$118.0 million representing SHKS’s interest in the joint venture was recognized, as amounts due from investee companies under Loans and Receivables. In addition, contingent liabilities amounting to HK$37.5 million have been disclosed regarding the payments demanded by NWDC for what it asserts as pro-rata shareholders’ contributions advanced by NWDC on behalf of SHKS. Furthermore, included in the 2004 income statement was a sum of HK$2.9 million representing the interest expense paid by SHKS to NWDC pursuant to the 1 April 2004 judgment of the High Court of Hong Kong (the “Judgment”) on shareholders’ contributions advanced by NWDC on behalf of SHKS. The nature of the interests and the uncertainty of the Final Appeal result in a situation where it is not possible to decide with any degree of accuracy as to what the final position may be. This in turn affects the recovery of the above mentioned receivables or interest payments and the crystallization or discharge of the above mentioned contingent liabilities. The Board has thus decided that it is not presently appropriate to make any impairment allowance for the above mentioned receivables, any provisions in respect of the above mentioned contingencies, or any recoveries of the above mentioned interest expenses. Details of the receivables, contingent liabilities and interest expenses are disclosed in note 26, note 45, and note 7 respectively.

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APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

4. REVENUE

Revenue represents the amounts received and receivables for gross brokerage and commission, interest, dividends, rental and service income; and the following stated net of losses: profit from trading in securities, income from bullion transactions and differences on foreign exchange transactions.

Brokerage, commission and service income Dividends from listed investments Dividends from unlisted investments Gross rental income from investment properties Interest income Net charge on gold and leveraged foreign exchange positions Trading profit from securities, bullion transaction and differences on foreign exchange transactions	2005 HK$’000 522,291 16,853 24,962 2,950 174,565 13,422 38,596 793,639	2004 HK$’000 511,847 36,843 36,793 2,043 160,570 14,931 43,988
		807,015

All interest income for the current year is derived from financial assets that are not carried at fair value through profit and loss.

5. SEGMENT INFORMATION

The operating businesses are organized and managed separately according to the nature of the products and services provided, with each segment representing a strategic business unit that offers different products and serves different markets.

Business segments have been used as a primary reporting format and no geographical segment analysis is presented as most of the Group’s major business activities are conducted in Hong Kong.

The Group has main business segments as follows:

(a) Securities broking and dealing – provision of securities broking, trading in securities including online broking and financial information services.
(b) Forex, bullion, commodities and futures – provision of dealing and broking services in leveraged foreign exchange, bullion and futures.
(c) Margin finance and other financing services – provision of securities margin financing and insurance broking services.
(d) Term loans – provision of term loans financing.
(e) Corporate finance and others – provision of corporate finance and advisory services, financial planning, wealth management services, investments and properties holding.

Intra-segment sales are charged at prevailing market rates.

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APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Forex, Securities bullion, broking and commodities dealing and futures HK$’000 HK$’000 Revenue 263,716 166,874 _Less:_intra-segment revenue (5,254) (5,598) 258,462 161,276 Segment results 47,835 12,552 Share of results – Associated companies – Jointly controlled entities Profit before taxation Segment assets 886,866 448,431 Interest in associated companies Interest in jointly controlled entities Deferred tax assets Taxation recoverable Total assets Segment liabilities (533,801) (321,720) Taxation payable Deferred tax liabilities Total liabilities		2005	2005
		Margin finance and other financing services HK$’000 192,513 (22,387) 170,126 71,876 1,372,253 (316,664)	Term loans HK$’000 44,934 (9,405) 35,529 23,670 380,201 (16,156)	Corporate finance and others HK$’000 443,097 (274,851) 168,246 131,062 1,585,974 (280,773)	Total HK$’000 1,111,134 (317,495) 793,639 286,995 149,549 2 436,546 4,673,725 2,647,142 935 4,143 3,819 7,329,764 (1,469,114) (12,221) (7,181) (1,488,516)

– 45 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Impairment loss of intangible
assets written back
Impairment loss of trade and
other receivables written back
Capital expenditure
Amortization and depreciation
Impairment loss of trade and
other receivables
Impairment loss of
available-for-sale investments
Impairment loss of
property and equipment
Loss on disposal of
property and equipment
Other non-cash expenses

2005
Margin
Forex,
finance
Securities
bullion,
and other
Corporate
broking and commodities
financing
finance
dealing
and futures
services
Term loans
and others
Total
HK$’000
HK$’000
HK$’000
HK$’000
HK$’000
HK$’000
–
–
–
–
180
180
12,532
1
12,667
–
64
25,264
(206)
(1,532)
–
–
(20,343)
(22,081)
(1,219)
(1,606)
(1)
–
(18,342)
(21,168)
(521)
(1,054)
(19,634)
–
(200)
(21,409)
–
–
–
–
(14,411)
(14,411)
(803)
(2,512)
(102)
–
(263)
(3,680)
–
–
–
–
(734)
(734)
(231)
(70)
(19)
–
(20,876)
(21,196)

– 46 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Forex, Securities bullion, broking and commodities dealing and futures HK$’000 HK$’000 Revenue 263,754 159,397 _Less:_intra-segment revenue (1,771) (544) 261,983 158,853 Segment results 50,036 13,140 Share of results and amortization of negative goodwill (goodwill) – Associated companies – Jointly controlled entities Profit before taxation Segment assets 622,864 593,253 Interest in associated companies Interest in jointly controlled entities Deferred tax assets Taxation recoverable Total assets Segment liabilities (237,651) (430,061) Taxation payable Deferred tax liabilities Total liabilities		2004	2004		Total HK$’000 1,076,737 (269,722) 807,015 251,415 165,043 (3,624) 412,834 3,887,099 2,413,335 1,201 10,279 969 6,312,883 (1,293,499) (22,604) (5,543) (1,321,646)
		Margin finance and other financing services HK$’000 165,660 (10,714) 154,946 69,247 1,317,274 (287,727)	Term loans HK$’000 42,580 (5,823) 36,757 33,784 160,218 (17,506)	Corporate finance and others HK$’000 445,346 (250,870) 194,476 85,208 1,193,490 (320,554)

– 47 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

	2004	2004
Forex, Securities bullion, broking and commodities dealing and futures HK$’000 HK$’000 259 – (1,808) (1,696) (1,561) (781) (405) (2,655) – – – – (81) –	Margin finance and other financing services HK$’000 16,356 (661) (312) (13,014) – – –	Term loans HK$’000 – (5) – – – – –	Corporate finance and others HK$’000 – (13,781) (17,103) – (16,898) (559) (3,469)	Total HK$’000 16,615 (17,951 (19,757 (16,074 (16,898 (559 (3,550

Amortization of negative goodwill on acquisition of subsidiary companies Loss arising from default of loan agreement with Millennium Touch Limited written back Discount on acquisition of a subsidiary company Net exchange gains Net realized profit on disposal/deemed disposal of a jointly controlled entity Net realized profit on disposal of an investment property Net realized profit on disposal of available-for-sale investments/other investments Impairment loss of intangible assets written back Impairment loss of trade and other receivables/ provision for doubtful debts written back Repayment of interest in respect of litigation with New World Development Company Limited pursuant to Court of Appeal Judgment * Increase in fair value of investment properties/revaluation deficit written back Miscellaneous income	2005 HK$’000 – – 199 – 1,219 2,061 56,748 180 25,264 14,783 23,638 7,255 131,347	2004 HK$’000 9,565 2,847 – 288 942 – 2,483 – 16,615 – 6,100 1,523
		40,363

* Included in Other Income is HK$14,783,091 representing the partial repayment of interest made pursuant to the Court of Appeal Judgment. That Court ordered a repayment of part of the interest element for the period from 16 December 1998 to 31 March 2004. SHKS had previously paid this interest in connection with the judgment. Note 45 to the financial statements contains additional information regarding the litigation involving SHKS, NWDC and SDL.

– 48 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

7. OTHER EXPENSES

Impairment loss of available-for-sale investments/ other investments transferred from investment revaluation reserve Impairment loss of an associated company Impairment loss of property and equipment Impairment loss of intangible assets Impairment loss of goodwill of a subsidiary company Impairment loss of goodwill of associated companies Impairment loss of trade and other receivables/ provision for doubtful debts Net loss on deemed disposal of an associated company Net exchange losses Provision for interest and legal cost in respect of litigation with New World Development Company Limited *	2005 HK$’000 14,411 4,981 3,680 980 267 13,323 21,409 – 581 – 59,632	2004 HK$’000 16,898 – – – – – 16,074 4,492 – 2,934
		40,398

Included in Other Expenses is HK$2,934,000 representing interest expense paid by SHKS. The expense was incurred pursuant to the Judgment. Note 45 to the financial statements contains additional information regarding the litigation involving SHKS, NWDC and SDL.

8. EMOLUMENTS OF DIRECTORS AND SENIOR EMPLOYEES

(a) Directors

Arthur George Dew Joseph Tong Tang Patrick Lee Seng Wei Sir Gordon Macwhinnie David Craig Bartlett Carlisle Caldow Procter Peter Wong Man Kong	2005	2005
	Salaries, housing and other allowances Director’s Consultancy and benefits fees fees in kind HK$’000 HK$’000 HK$’000 12 – 2,282# 20* – 1,456 10 – – 10 – 619 10 150 – 10 75 – 10 150 – 82 375 4,357	Contribution to retirement benefit Bonus scheme HK$’000 HK$’000 1,000^ 93 900^ 65 – – – – – – – – – – 1,900 158	Total HK$’000 3,387 2,441 10 629 160 85 160
			6,872

Certain directors of the Company received remuneration from the Company’s ultimate holding company. Such company provided management services to the Company and charged the Company a fee, which is included in the management fee as disclosed in note 48, for services provided by those directors as well as other management personnel who are not directors of the Company.

– 49 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Prior to 2005, the management fee could not be apportioned and allocated to any individuals. From 1 January 2005, the management fee is calculated by reference to the time devoted by the management personnel on the affairs of the Group and can be apportioned to the directors mentioned above. The total of such apportioned amounts, which have been included in the above table, is HK$877,000.

# In view of the fact that Mr. Arthur George Dew, the chairman of the Company and an executive director and the chairman of Quality HealthCare Asia Limited (“QHA”) has, since his appointment as an executive director and the chairman of QHA, devoted and will continue to devote part of his time and efforts to the affairs of QHA and its subsidiaries or its associated company in such capacities, the Company and QHA entered into an agreement dated 18 November 2005 (the “Reimbursement Agreement”), pursuant to which QHA agreed to reimburse the Company a portion of the salary of Mr. Dew (which is paid by the Company) for a period commencing from 20 May 2005 and ending on 31 December 2006. The fee payable by QHA to the Company under the Reimbursement Agreement is determined by reference to the percentage of time that Mr. Dew devotes to the affairs of QHA against the amount of time he devotes to the affairs of the Company, which is agreed at HK$50,000 per month and will be payable by QHA on a quarterly basis. The amount paid and payable to the Company under the Reimbursement Agreement for the year ended 31 December 2005 amounted to HK$369,000 (2004: Nil). Further details of the Reimbursement Agreement are also set out in a joint announcement issued by the Company and QHA dated 18 November 2005.
Including director’s fee of HK$10,000 for Sun Hung Kai Securities Limited (2004: HK$5,000).
^ The amount represented the actual bonus for year 2004 paid to the respective directors during 2005. The bonus of year 2005 has yet to be decided.

Arthur George Dew Joseph Tong Tang Patrick Lee Seng Wei Sir Gordon Macwhinnie David Craig Bartlett Carlisle Caldow Procter Peter Wong Man Kong David Hui Yip Wing Dieter Yih	2004	2004
	Salaries, housing and other allowances Director’s Consultancy and benefits fees fees in kind HK$’000 HK$’000 HK$’000 12 – 1,800 10 – 108 10 – – 10 – – 10 150 – 3 13 – 10 150 – – – 80 7 112 – 72 425 1,988	Contribution to retirement benefit Bonus scheme HK$’000 HK$’000 800 90 – 5 – – – – – – – – – – – 4 – – 800 99	Total HK$’000 2,702 123 10 10 160 16 160 84 119
			3,384

– 50 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(b) Senior employees

The five highest paid individuals of the Group included one director (2004: one director) of the Company, whose emoluments have been included above. The emoluments of the remaining four (2004: four) senior employees are analyzed below:

Salaries, housing and other allowances, and benefits in kind Bonuses Contributions to retirement benefit scheme Incentive/commission	2005 HK$’000 4,845 4,292 277 4,376 13,790	2004 HK$’000 9,896 4,420 268 –
		14,584

Emoluments of the senior employees were within the following bands:

	Number of employees	Number of employees
Emoluments band (HK$)	2005	2004
$2,000,001 – $2,500,000	1	2
$2,500,001 – $3,000,000	1	1
$3,000,001 – $3,500,000	1	–
$5,000,001 – $5,500,000	1	–
$7,000,001 – $7,500,000	–	1

9. RETIREMENT BENEFIT SCHEMES

The Group operates defined contribution schemes for the Hong Kong and overseas offices’ qualifying employees and a defined benefit scheme for its subsidiary company’s employees in the Philippines.

The forfeited contributions utilized in the course of the year ended 31 December 2005 were HK$189,000 (2004: HK$761,000). The contributions to the defined benefit scheme in the Philippines were immaterial.

10. FINANCE COSTS

Interest on: Bank loans, overdrafts and loan notes repayable within 5 years Bank loans not wholly repayable within 5 years Finance lease Effective interest expense on loan notes_(note 37)_ Other borrowing costs	2005 HK$’000 30,661 – – 8,692 1,555 40,908	2004 HK$’000 16,784 867 26 – 2,048
		19,725

All interest expense for the year is derived from financial liabilities that are not carried at fair value through profit and loss.

– 51 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

11. SHARE OF RESULTS AND AMORTIZATION OF NEGATIVE GOODWILL (GOODWILL) OF ASSOCIATED COMPANIES

Share of profits of associated companies Amortization – Goodwill on acquisition – Negative goodwill on acquisition – Share of goodwill Share of taxation of associated companies	2005 HK$’000 210,784 – – – 210,784 (61,235) 149,549	2004 HK$’000 220,503 (30,021) 59,281 (740) 249,023 (83,980) 165,043

12. SHARE OF RESULTS AND AMORTIZATION OF GOODWILL OF JOINTLY CONTROLLED ENTITIES

Share of profits (losses) of jointly controlled entities Amortization of goodwill on acquisition	2005 HK$’000 2 – 2	2004 HK$’000 (3,405) (219) (3,624)

– 52 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

13. PROFIT BEFORE TAXATION

	2005	2004
	HK$’000	HK$’000
Profit before taxation for the year has been arrived
at after charging (crediting):
Net realized profit on derivatives	(20,513)	(15,455)
Net unrealized loss on derivatives	744	–
Net profit on dealing in foreign currencies	(6,753)	(18,180)
Net profit on other dealing activities	(7,733)	(8,141)
Net realized profit on trading in equity securities	(3,132)	(4,321)
Net unrealized (profit) loss on trading in equity securities	(1,209)	2,109
Auditors’ remuneration	4,063	3,615
Amortization of intangible assets	3,910	3,906
Amortization of leasehold interests in land	1,645	616
Commission expenses and sales incentives to
account executives and certain staff	135,592	128,783
Contributions to retirement benefit schemes	8,868	7,750
Depreciation
– Leased property and equipment	42	513
– Owned property and equipment	17,216	15,338
Net loss on disposal of property and equipment	734	559
Operating lease rentals
– Premises	15,791	16,010
– Others	50	658
Outgoings in respect of non-rental generating
investment properties	102	27
Outgoings in respect of rental generating
investment properties	707	598
Staff cost (including Directors’ emoluments but
excluding contributions to retirement benefit schemes)	164,239	164,168

– 53 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

14. TAXATION

Current tax Hong Kong Other regions in the PRC Other jurisdictions Under (over) provision in prior years Hong Kong Other regions in the PRC Other jurisdictions Deferred tax_(note 40)_ Current year (Over) under provision in prior years	2005 HK$’000 25,917 309 – 26,226 541 (80) – 26,687 7,851 (352) 7,499 34,186	2004 HK$’000 32,555 264 74 32,893 (588) 2,726 35 35,066 (1,626) 173 (1,453) 33,613

Hong Kong profits tax is calculated at the rate of 17.5% (2004: 17.5%) of the estimated assessable profits for the year. Taxation arising in other jurisdictions is calculated on the estimated assessable profits for the year at the rates of taxation prevailing in the countries in the relevant jurisdictions.

The taxation for the year can be reconciled to the profit before taxation per the income statement as follows:

Profit before taxation Share of taxation of associated companies Tax at the Hong Kong profits tax rate of 17.5% (2004: 17.5%) Tax effect on share of profit and amortization of negative goodwill (goodwill) of associated companies Tax effect on share of profit (loss) and amortization of goodwill of jointly controlled entities Under provision in prior years Tax effect on non-taxable income Tax effect on non-deductible expenses Utilization/recognition of temporary differences not previously recognized Utilization/recognition of tax losses not previously recognized Items/countries subject to different tax rate	2005 HK$’000 436,546 61,235 497,781 87,111 (36,887) – 109 (25,590) 11,996 (302) 798 (3,049) 34,186	2004 HK$’000 412,834 83,980 496,814 86,943 (43,579) 634 2,346 (19,677) 10,149 83 (1,810) (1,476) 33,613

– 54 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

15. DIVIDENDS

Interim dividend paid of HK2.5 cents per share (2004: HK2 cents per share) Proposed final dividend of HK9.5 cents per share (2004: HK2 cents per share) Special dividend paid of nil per share (2004: HK1 cent per share) Proposed special dividend of nil per share (2004: HK4 cents per share)	2005 HK$’000 31,143 118,342 – – 149,485	2004 HK$’000 24,914 24,914 12,457 49,828
		112,113

The final dividend of HK9.5 cents (2004: special and final dividends totaled HK6 cents) per share has been proposed by the Directors and is subject to approval by the equity holders in the forthcoming annual general meeting.

The Board of Directors also recommended a bonus warrant for every five shares held, at an exercise price of HK$6.00 per share with a three years’ term.

16. EARNINGS PER SHARE

The calculation of earnings per share was based on the profit attributable to equity holders of the Company of HK$401,497,000 (2004: HK$378,738,000) and 1,245,703,156 ordinary shares in issue during the year (2004: 1,245,703,156 ordinary shares).

No diluted earnings per share has been presented for both years as there were no potential ordinary shares as at year ended (2004: Nil).

17. INVESTMENT PROPERTIES

Fair value At 1 January Acquired on an acquisition of a subsidiary Disposal Increase in fair value/revaluation surplus recognized in the income statement At 31 December	Group 2005 2004 HK$’000 HK$’000 43,000 36,900 39,362 – (12,600) – 23,638 6,100 93,400 43,000	Group 2005 2004 HK$’000 HK$’000 43,000 36,900 39,362 – (12,600) – 23,638 6,100 93,400 43,000
		43,000

– 55 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(a) The investment properties were valued on 31 December 2005 by Norton Appraisals Limited, an independent qualified professional valuer, not connected with the Group. Norton Appraisals Limited has appropriate qualification and recent experiences in the valuation of similar properties in the relevant locations. The valuation, which conforms to International Valuation Standards, was arrived at by reference to market evidence of transaction prices for similar properties. Particulars of the investment properties at 31 December 2005 were:

Location	Classification	Term of lease	Interest
House C7, Hawaii Garden, No. 18,	Residential	2047	100%
Silver Cape Road,
Sai Kung, New Territories
Rooms 2803-2810, 28/F,	Commercial	2902	100%
Wing On House, No. 71,
Des Voeux Road Central, Hong Kong
11/F, Tian An Centre,	Commercial	2044	100%
No. 338 Nanjing Road West,
Huangpu District, Shanghai, the PRC

(b) At 31 December 2005, the carrying value of investment properties pledged as security for the Group’s long term bank loans amounted to HK$79,400,000 (2004: HK$20,000,000).
(c) The carrying value of investment properties shown above comprises:

Long lease properties in Hong Kong Medium-term lease properties in Hong Kong Medium-term lease properties outside Hong Kong	2005 HK$’000 36,000 14,000 43,400 93,400	2004 HK$’000 20,000 23,000 –
		43,000

– 56 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

18. LEASEHOLD INTERESTS IN LAND

Cost At 1 January Acquired on an acquisition of a subsidiary At 31 December Accumulated amortization At 1 January Amortization charged for the year At 31 December Carrying value at 31 December Less:_current portion(note 27)_ Carrying value of leasehold interests in land comprise: Leasehold land in Hong Kong Long lease Leasehold land outside Hong Kong Medium-term lease Short lease	Group 2005 2004 HK$’000 HK$’000 71,080 71,080 8,900 – 79,980 71,080 4,184 3,568 1,645 616 5,829 4,184 74,151 66,896 (1,664) (1,442) 72,487 65,454 64,728 66,086 8,693 – 730 810 74,151 66,896

At 31 December 2005, the carrying value of leasehold interests in land pledged as security for the Group’s long term bank loans and bank overdrafts amounted to HK$54,968,000 (2004: HK$56,121,000).

– 57 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

19. PROPERTY AND EQUIPMENT

Cost At 1 January 2004 Exchange adjustments Additions Disposals At 31 December 2004 Exchange and other adjustments Additions Acquired on an acquisition of subsidiaries Disposals At 31 December 2005 Accumulated depreciation and impairment At 1 January 2004 Exchange adjustments Depreciation provided for the year Eliminated on disposals At 31 December 2004 Exchange and other adjustments Depreciation provided for the year Impairment loss Eliminated on disposals At 31 December 2005 Carrying value at 31 December 2005 Carrying value at 31 December 2004	Buildings HK$’000 31,268 – – – 31,268 – – 5,228 – 36,496 7,309 – 992 – 8,301 – 707 – – 9,008 27,488 22,967	Group Furniture and equipment HK$’000 95,932 (4) 11,860 (2,499) 105,289 (258) 16,119 5,800 (4,708) 122,242 64,048 (3) 14,859 (1,885) 77,019 (60) 16,551 3,680 (3,965) 93,225 29,017 28,270	Total HK$’000 127,200 (4) 11,860 (2,499) 136,557 (258) 16,119 11,028 (4,708) 158,738 71,357 (3) 15,851 (1,885) 85,320 (60) 17,258 3,680 (3,965) 102,233 56,505 51,237

At 31 December 2005, the carrying value of buildings pledged as security for the Group’s long term bank loans and bank overdrafts amounted to HK$19,250,000 (2004: HK$19,655,000).

At 31 December 2005, no equipment was held under finance lease (2004: carrying value of HK$1,067,000).

– 58 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

20. INTANGIBLE ASSETS

Exchange Club participation membership rights HK$’000 HK$’000 Cost At 1 January 2004 – 4,230 Additions – – Disposals – – At 31 December 2004 – 4,230 Reclassified from other investments at 1 January 2005_(note 2(j)) 3,098 2,507 Elimination of accumulated amortization – (2,079) Exchange and other adjustments – – Additions – – Acquired on acquisitions of subsidiaries – 1,200 Written off (23) – At 31 December 2005 3,075 5,858 Accumulated amortization and impairment At 1 January 2004 – 1,233 Amortization charged for the year – 846 Eliminated on disposals – – At 31 December 2004 – 2,079 Reclassified from other investments at 1 January 2005(note 2(j))_ 180 – Elimination of accumulated amortization – (2,079) Exchange and other adjustments – – Amortization charged for the year – – Impairment loss 730 240 Impairment loss written back (180) – At 31 December 2005 730 240 Carrying amount at 31 December 2005 2,345 5,618 Carrying amount at 31 December 2004 – 2,151	Group Computer software Internally Acquired developed HK$’000 HK$’000 11,430 – 6,091 – (120) – 17,401 – – – – – 284 – 2,352 3,610 – – – – 20,037 3,610 3,742 – 3,060 – (24) – 6,778 – – – – – 85 – 3,910 – 10 – – – 10,783 – 9,254 3,610 10,623 –	Total HK$’000 15,660 6,091 (120) 21,631 5,605 (2,079) 284 5,962 1,200 (23) 32,580 4,975 3,906 (24) 8,857 180 (2,079) 85 3,910 980 (180) 11,753 20,827 12,774
	Acquired HK$’000 11,430 6,091 (120) 17,401 – – 284 2,352 – – 20,037 3,742 3,060 (24) 6,778 – – 85 3,910 10 – 10,783 9,254 10,623

– 59 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Club membership, at cost At 1 January Reclassified from other investments at 1 January 2005 At 31 December Impairment At 1 January Impairment loss At 31 December Carrying value at 31 December	Company 2005 2004 HK$’000 HK$’000 – – 2,090 – 2,090 – – – 510 – 510 – 1,580 –	Company 2005 2004 HK$’000 HK$’000 – – 2,090 – 2,090 – – – 510 – 510 – 1,580 –
		–
		– –
		–
		–

21. GOODWILL (NEGATIVE GOODWILL)

Cost At 1 January 2004 Adjustment to negative goodwill on acquisition of subsidiaries At 31 December 2004 Derecognized upon the application of HKFRS 3 (note 2(b)) Arising on acquisition of subsidiaries At 31 December 2005 Impairment/accumulated amortization At 1 January 2004 Amortization charged for the year At 31 December 2004 Derecognized upon the application of HKFRS 3 (note 2(b)) Impairment loss At 31 December 2005 Carrying amount at 31 December 2005 Carrying amount at 31 December 2004	Goodwill HK$’000 – – – – 267 267 – – – – 267 267 – –	Group Negative goodwill HK$’000 (30,270) (15,700) (45,970) 45,970 – – (14,009) (9,565) (23,574) 23,574 – – – (22,396)	Total HK$’000 (30,270 (15,700 (45,970 45,970 267 267 (14,009 (9,565 (23,574 23,574 267 267 – (22,396

The accounting policy for goodwill has been changed upon the adoption of HKFRS 3. Please refer to note 2(b) for details.

– 60 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

22. INTEREST IN SUBSIDIARY COMPANIES

Unlisted shares, at cost _Add:_amounts due from subsidiary companies _Less:_amounts due to subsidiary companies _Less:_impairment	Company 2005 2004 HK$’000 HK$’000 428,570 428,570 2,197,343 1,663,891 2,625,913 2,092,461 – (273,685) 2,625,913 1,818,776 (316,448) – 2,309,465 1,818,776

The amounts due from subsidiary companies are unsecured, interest free and have no fixed term of repayment except for a sum of HK$134,797,000 bearing interest at market rate. They are considered as quasi-equity loans.

Details of the principal subsidiary companies are shown in note 47.

23. INTEREST IN ASSOCIATED COMPANIES

Carrying value of listed associated companies Carrying value of unlisted associated companies _Less:_impairment Loan note due from a listed associated company Amounts due from associated companies _Less:_impairment _Less:_amounts due to associated companies _Less:_current portion of amounts due from listed associated companies Fair value of listed associated companies	Group 2005 2004 HK$’000 HK$’000 HK$’000 HK$’000 2,560,484 2,231,272 106,486 105,776 2,666,970 2,337,048 (26,873) (21,892) 2,640,097 2,315,156 – 78,000 83,308 83,519 (18,726) (18,726) 64,582 142,793 (57,537) (44,404) 2,647,142 2,413,545 – (210) 2,647,142 2,413,335 1,301,161 1,109,200

– 61 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Listed equity investments in Hong Kong, at cost Unlisted equity investments, at cost Loan note due from a listed associated company Other amounts due from associated companies _Less:_impairment Fair value of listed associated companies	Company 2005 2004 HK$’000 HK$’000 1,388,611 1,388,611 3 3 1,388,614 1,388,614 – 78,000 75,518 75,554 (16,601) (16,601) 1,447,531 1,525,567 880,515 772,879

(a) The goodwill included in the carrying value of associated companies is as follows:

Cost At 1 January 2004 Adjustment Arising on acquisition of associated companies Eliminated on disposal At 31 December 2004 Elimination of accumulated amortization upon the application of HKFRS 3_(note 2(b)) Derecognized upon the application of HKFRS 3(note 2(b))_ Arising on acquisition of associated companies Eliminated on disposal At 31 December 2005	Goodwill HK$’000 246,705 (5,145) 3,469 (433) 244,596 (158,704) – 13,683 (125) 99,450	Group Negative goodwill HK$’000 (342,134) – (11,997) 1,755 (352,376) – 352,376 – – –	Total HK$’000 (95,429) (5,145) (8,528) 1,322 (107,780) (158,704) 352,376 13,683 (125) 99,450

– 62 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Impairment/accumulated amortization At 1 January 2004 Adjustment Amortization charged for the year Eliminated on disposal At 31 December 2004 Elimination of accumulated amortization upon the application of HKFRS 3_(note 2(b)) Derecognized upon the application of HKFRS 3(note 2(b))_ Impairment loss* At 31 December 2005 Carrying amount at 31 December 2005 Carrying amount at 31 December 2004	Goodwill HK$’000 128,360 (343) 31,104 (417) 158,704 (158,704) – 13,323 13,323 86,127 85,892	Group Negative goodwill HK$’000 (140,390) – (59,281) 776 (198,895) – 198,895 – – – (153,481)	Total HK$’000 (12,030) (343) (28,177) 359 (40,191) (158,704) 198,895 13,323 13,323 86,127 (67,589)

The accounting policy for goodwill has been changed upon the adoption of HKFRS 3. Please refer to note 2(b) for details.

The Group tests goodwill annually, or whenever there is an indication that goodwill might be impaired. The impairment loss of HK$13,323,000 arose mainly from the Group’s interest in a listed associated company due to the prolonged decline in the fair value of the Group’s interest in the listed associated company below the Group’s carrying amount.

(b) The summarized financial information of associated companies at 31 December 2005 was as follows:

Total revenue Profit and loss for the year Group’s share of results of associated companies for the year Total assets Total liabilities Group’s share of net assets of associated companies	Group 2005 2004 HK$’000 HK$’000 1,749,519 1,723,201 467,398 336,487 149,549 165,043 12,494,018 10,925,873 (6,681,639) (5,568,262) 2,580,843 2,404,637

(d) The amounts due from (to) associated companies are unsecured, interest free and have no fixed term of repayment. They are considered as quasi-equity loans.

– 63 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

24. INTEREST IN JOINTLY CONTROLLED ENTITIES

Carrying value of unlisted jointly controlled entities Amount due from a jointly controlled entity* Impairment for amount due from a jointly controlled entity	Group 2005 2004 HK$’000 HK$’000 935 1,201 – 1,018 – (1,018) 935 1,201

* The amount due from a jointly controlled entity was unsecured, interest free and had no fixed term of repayment.

Particulars of the jointly controlled entity at 31 December 2005 are as follows:

				Proportion of
		Country of		nominal value
		incorporation and		of issued
	Form of	principal place	Principal	capital and
Name	business structure	of operation	activities	voting right
SHK Corporate Finance	Incorporated	People’s Republic	Corporate finance	1/3
(Shanghai) Limited		of China	advisory

25. AVAILABLE-FOR-SALE INVESTMENTS/OTHER INVESTMENTS

Listed equity investments, at fair value – Listed in Hong Kong – Listed outside Hong Kong Unlisted equity investments, at fair value Club memberships and exchange participation rights Statutory deposits _Add:_amounts due from investee companies _Less:_impairment for amount due from an investee company _Less:_amount due to an investee company	Group Available- for-sale Other investments investments 2005 2004 HK$’000 HK$’000 530,543 476,810 4,444 4,474 534,987 481,284 458,152 303,494 – 5,425 – 26,624 993,139 816,827 – 94,935 – (2,161) 993,139 909,601 – (1,891) 993,139 907,710

– 64 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Available-for-sale investments/other investments are intended to be held for a continuing strategic or long term purpose.

Other investments were redesignated to various line items on 1 January 2005 on the adoption of HKAS 39. Please refer to note 2(j) for details.

Included a sum totalling HK$118,003,000 for the interests in the Kuala Lumpur hotels project in 2004 comparative figures. Please refer to note 26 for details.

26. LOANS AND RECEIVABLES

Loan note of a listed associated company Amounts due from investee companies* Less:_Impairment Long term portion of term loans and other receivables(note 27)_	Group 2005 2004 HK$’000 HK$’000 78,000 – 124,687 – 202,687 – (1,447) – 201,240 – 1,066 3,200 202,306 3,200	Company 2005 2004 HK$’000 HK$’000 78,000 – – – 78,000 – – – 78,000 – – – 78,000 –	Company 2005 2004 HK$’000 HK$’000 78,000 – – – 78,000 – – – 78,000 – – – 78,000 –
			– –
			– –
			–

The fair value of the Group’s loans and receivables at 31 December 2005 was approximate to the corresponding carrying value.

Pending any judgment pursuant to the Final Appeal, the Company’s present understanding of the effect of the Court of Appeal Judgment is that SHKS now effectively owns 25% (“SHKS Interest”) of NWDC’s entire interest (including the shareholder loans advanced by, or on behalf of, NWDC, and/or SDL and/or SHKS to Great Union Properties Sdn. Bhd. (“GUP”) in the Joint Venture (as defined in the Judgment). The Joint Venture is a 50-50 joint venture between NWDC and/or SDL and IGB Corporation Bhd. to purchase land and to build two hotels of 1,000 rooms and a 200 unit service apartment block at the city centre of Kuala Lumpur. SDL holds 12.5% of the shares in GUP on trust for SHKS. A sum totalling HK$118,003,000 (2004: HK$118,003,000) is included in “Amounts due from investee companies” being the amount, (excluding interest which has been expensed in prior years) which represents the carrying value of the SHKS Interest.

The Board has decided that it is not presently appropriate to make any provisions in respect of the litigation or for impairment of the value of its interest in the total Kuala Lumpur hotels project pursuant to the Judgment and the Court of Appeal Judgment (together “the Judgments”). This decision has been taken because it is considered that the current circumstances regarding the nature and value of the interests existing under the Judgments and the uncertainty of the outcome of the Final Appeal, result in a situation where it is not possible to decide with any degree of accuracy as to what the final position may be. On the one hand if SHKS is completely successful in the Final Appeal then it may be entitled to recovery of monies already paid. On the other hand if it is not totally successful or only partially successful then it may be possible that further provision for impairment of the value of its final interests in the Kuala Lumpur hotels project may be required. The extent of such provision is not presently capable of determination as the holding company of the hotel namely GUP has not provided a current valuation of the project and SHKS has not had sufficient access to the detailed books and records of GUP to reach a supportable view as to the value of the project.

– 65 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

27. TRADE AND OTHER RECEIVABLES

		Group
	2005		2004
	HK$’000	HK$’000	HK$’000	HK$’000
Trade receivables
Accounts receivable from exchanges,
brokers and clients	800,873		619,909
_Less:_impairment	(6,184)		(36,618)
		794,689		583,291
Secured term loans	166,967		237,462
Unsecured term loans	–		5,864
Term loans due from a listed
associated company	245,000		–
_Less:_impairment	(35,331)		(58,816)
		376,636		184,510
		1,171,325		767,801
Secured margin loans	1,440,396		1,643,409
_Less:_impairment	(147,111)		(202,353)
		1,293,285		1,441,056
		2,464,610		2,208,857
Amounts due from listed associated
companies		7,357		210
Current portion of leasehold interests
in land		1,664		1,442
Interest receivables		3,730		3,239
Other accounts receivable, deposits
and prepayments		123,569		80,060
		2,600,930		2,293,808
_Less:_long term portion of term loans and
other receivables_(note 26)_		(1,066)		(3,200)
		2,599,864		2,290,608

– 66 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

The aging analysis of the trade receivables excluding margin loans is as follows. No aging analysis on margin clients’ receivables is disclosed as, in the opinion of the Directors, an aging analysis is not meaningful in view of the nature of the business of securities margin financing.

Current 31-60 days 61-90 days Over 90 days _Less:_impairment	2005 HK$’000 1,148,875 10,314 1,320 52,331 1,212,840 (41,515) 1,171,325	2004 HK$’000 752,069 12,560 383 98,223 863,235 (95,434) 767,801

The amount due from associated companies and interest receivable are unsecured, non-interest bearing and are expected to be settled within one year. Further details of the term loans and margin loans are disclosed in note 50.

There were listed securities, unlisted securities and properties of clients held as collateral against secured margin loans and term loans. The fair value of the listed securities as at 31 December 2005 was HK$6,272,527,000 (2004: HK$6,420,945,000).

The fair value of the Group’s trade and other receivables at 31 December 2005 was approximate to the corresponding carrying value.

– 67 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

28. HELD FOR TRADING INVESTMENTS/TRADING SECURITIES

Equity securities listed in Hong Kong, at fair value – Issued by corporate entities – Issued by banks – Issued by public utility entities Equity securities listed outside Hong Kong, at fair value – Issued by corporate entities – Issued by bank Equity securities in unlisted investment funds outside Hong Kong, at fair value – Issued by corporate entities Marketable debt securities outside Hong Kong, at fair value – Issued by central government Warrants and options listed in Hong Kong, at fair value Other held for trading investments, at fair value	Group Held for trading Trading investments securities 2005 2004 HK$’000 HK$’000 32,396 23,152 20,654 13,133 33 32 53,083 36,317 2,534 3,740 87 59 2,621 3,799 119,292 – – 7,741 3,508 – 478 406 178,982 48,263	Group Held for trading Trading investments securities 2005 2004 HK$’000 HK$’000 32,396 23,152 20,654 13,133 33 32 53,083 36,317 2,534 3,740 87 59 2,621 3,799 119,292 – – 7,741 3,508 – 478 406 178,982 48,263
		36,317
		3,740 59
		3,799
		–
		7,741
		–
		406
		48,263

Trading securities were redesignated on 1 January 2005 on the application of HKAS 39. Please refer to note 2(j) for details.

29. CASH AND CASH EQUIVALENTS

Bank balances and cash Fixed deposits with banks Treasury bills	Group 2005 2004 HK$’000 HK$’000 320,492 406,959 95,212 80,290 7,680 – 423,384 487,249	Group 2005 2004 HK$’000 HK$’000 320,492 406,959 95,212 80,290 7,680 – 423,384 487,249
		487,249

The Group maintains trust and segregated accounts with licensed banks to hold clients’ deposits arising from normal business transactions. At 31 December 2005, trust and segregated accounts not otherwise dealt with in these accounts totalled HK$2,130,593,000 (2004: HK$2,178,901,000).

Further details of the fixed deposits with banks and treasury bills are disclosed in note 50.

– 68 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

30. BANK BORROWINGS DUE WITHIN ONE YEAR

Bank loans – Secured_(note 46) – Unsecured Bank overdrafts – Secured(note 46) Current portion of long term bank loans(note 38)_	Group 2005 2004 HK$’000 HK$’000 225,000 – 30,000 – 255,000 – 79,925 57,905 334,925 57,905 7,621 6,040 342,546 63,945	Group 2005 2004 HK$’000 HK$’000 225,000 – 30,000 – 255,000 – 79,925 57,905 334,925 57,905 7,621 6,040 342,546 63,945
		– 57,905
		57,905 6,040
		63,945

All the bank loans and overdrafts are in Hong Kong dollars. Further details are disclosed in note 50.

31. TRADE AND OTHER PAYABLES

Trade payables Accounts payable to exchanges, brokers and clients Other accounts payable and accruals Amounts due to investee companies Current portion of obligation under a finance lease_(note 38)_	Group 2005 2004 HK$’000 HK$’000 787,288 867,135 176,829 163,971 2,464 – – 76 966,581 1,031,182	Group 2005 2004 HK$’000 HK$’000 787,288 867,135 176,829 163,971 2,464 – – 76 966,581 1,031,182
		1,031,182

The fair value of the Group’s trade and other payables at 31 December 2005 was approximate to the corresponding carrying amount.

The aging analysis of the trade payables is as follows:

Current 31-60 days 61-90 days Over 90 days	2005 HK$’000 781,824 1,800 258 3,406 787,288	2004 HK$’000 852,009 3,640 3,037 8,449
		867,135

– 69 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

32. TRADING LIABILITIES, AT FAIR VALUE

Stock borrowings Stock option	Group 2005 2004 HK$’000 HK$’000 17,700 – 56 – 17,756 –	Group 2005 2004 HK$’000 HK$’000 17,700 – 56 – 17,756 –
		–

33. CURRENT ASSETS AND CURRENT LIABILITIES OF THE COMPANY

The fair value of the Company’s trade and other receivables, cash and cash equivalents, trade and other payables and amounts due to subsidiary companies at 31 December 2005 was approximate to the corresponding carrying amount.

34. SHARE CAPITAL

Ordinary shares of HK20 cents each Authorized: Balance as at 1 January and 31 December Issued and fully paid: Balance as at 1 January and 31 December	Number of shares 2005 2004 ’000 ’000 15,000,000 15,000,000 1,245,703 1,245,703	Share capital 2005 2004 HK$’000 HK$’000 3,000,000 3,000,000 249,141 249,141

– 70 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

35. RESERVES

Special capital reserve arising from adjustment of nominal value of shares Balance as at 1 January Transfer to retained earnings Balance as at 31 December Share premium account Balance as at 1 January and 31 December Capital redemption reserve Balance as at 1 January and 31 December Exchange reserve Balance as at 1 January Translation of the accounts of overseas subsidiaries, associated companies and jointly controlled entities Release on disposal of a jointly controlled entity Deferred tax Associated companies Jointly controlled entities Balance as at 31 December Investment property revaluation reserve Balance as at 1 January, as previously reported Share of prior year adjustments of an associated company As restated Share of adjustments to opening of associated companies upon adoption of HKAS 40 Release on disposal of an associated company Associated companies Balance as at 31 December Balance carried forward to next page*	Group 2005 2004 HK$’000 HK$’000 930,026 930,026 (930,026) – – 930,026 1,124,703 1,124,703 51,704 51,704 (26,826) (27,105) 571 (45) (10) – (165) – 26,071 325 – (1) (359) (26,826) 151,158 139,275 25,615 24,936 176,773 164,211 (176,773) – – (533) – 13,095 – 176,773 1,176,048 2,256,380	Company 2005 2004 HK$’000 HK$’000 930,026 930,026 (930,026) – – 930,026 1,123,263 1,123,263 51,704 51,704 – – – – – – – – – – – – – – – – – – – – – – – – – – – – 1,174,967 2,104,993	Company 2005 2004 HK$’000 HK$’000 930,026 930,026 (930,026) – – 930,026 1,123,263 1,123,263 51,704 51,704 – – – – – – – – – – – – – – – – – – – – – – – – – – – – 1,174,967 2,104,993
			930,026
			1,123,263
			51,704
			– – – – – –
			–
			– –
			– – – –
			–
			2,104,993

– 71 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Balance brought forward from previous page Investment revaluation reserve Balance as at 1 January Adjustment to opening on adoption of HKASs 32 and 39 Gains on fair value changes of available- for-sale investments/other investments Impairment loss of available-for-sale investments/other investments transferred to income statement Deferred tax Release on disposal of available-for-sale investments/other investments Release on disposal of an associated company Associated companies Balance as at 31 December Capital reserves Balance as at 1 January Transfer from retained earnings by associated companies Release on disposal of an associated company Associated companies Balance as at 31 December Balance carried forward to next page	Group 2005 2004 HK$’000 HK$’000 1,176,048 2,256,380 308,920 71,956 (2,096) – 340,928 208,173 14,411 16,898 81 (222) (38,807) 6,648 – 43 10,299 5,424 633,736 308,920 3,744 921 352 2,827 – (4) 2,338 – 6,434 3,744 1,816,218 2,569,044	Company 2005 2004 HK$’000 HK$’000 1,174,967 2,104,993 (1) 13,347 – – – – – – – – 1 (13,348) – – – – – (1) – – – – – – – – – – 1,174,967 2,104,992

– 72 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Balance brought forward from previous page Retained earnings Balance as at 1 January, as previously reported Prior year adjustments – Adoption of HKASs 16 and 17 – Adoption of HKAS-Int 21 – Share of associated companies As restated Adjustments to opening retained earnings – Adoption of HKASs 32 and 39 – Adoption of HKFRS 3 – Share of associated companies Profit attributable to equity holders of the Company Dividends Transfer from special capital reserve Unclaimed dividends written back Transfer to capital reserve by associated companies Balance as at 31 December Proposed dividends Balance as at 1 January Dividends proposed Dividends paid Balance as at 31 December Total balance as at 31 December*	Group 2005 2004 HK$’000 HK$’000 1,816,218 2,569,044 2,146,452 1,876,597 (2,049) (1,752) 109 377 (45,708) (40,216) 2,098,804 1,835,006 14,878 – 175,877 – 184,071 – 2,473,630 1,835,006 401,497 378,738 (149,485) (112,113) 930,026 – 1,862 – (352) (2,827) 3,657,178 2,098,804 74,742 74,742 149,485 112,113 (105,885) (112,113) 118,342 74,742 5,591,738 4,742,590	Company 2005 2004 HK$’000 HK$’000 1,174,967 2,104,992 791,620 895,398 – – – – – – 791,620 895,398 14,077 – – – – – 805,697 895,398 376,633 8,335 (149,485) (112,113) 930,026 – 1,862 – – – 1,964,733 791,620 74,742 74,742 149,485 112,113 (105,885) (112,113) 118,342 74,742 3,258,042 2,971,354

The distributable reserves of the Company as at 31 December 2005 amounted to HK$2,397,990,000 (2004: HK$869,704,000), being its net realized profits calculated under Section 79B of the Companies Ordinance.

When sanctioning a reduction in nominal value of the Company’s share in 1998, the High Court of Hong Kong stipulated that the credit arising on the reduction be transferred to a special capital reserve, and that the reserve is not to be distributed until all of the liabilities of the Company as at the date of the order, 14 July 1998, are settled. There were no outstanding liabilities at 31 December 2005 in respect of liabilities in existence at 14 July 1998. Accordingly, the special capital reserve became distributable and was transferred to retained earnings.

– 73 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

36. MINORITY INTERESTS

Balance as at 1 January Profit attributable to minority interests Distribution to minority interests on disposal of subsidiaries Balance as at 31 December	Group 2005 2004 HK$’000 HK$’000 (494) 1,411 863 483 – (2,388) 369 (494)

37. LOAN NOTES

Principal Balance as at 1 January Repayment and cancellation Balance as at 31 December Difference using the effective interest method Balance as at 1 January Adjustments to opening balance on the adoption of HKAS 39 Interest expense Balance as at 31 December Carrying value as at 31 December	Group and the 2005 HK$’000 129,637 (60,000) 69,637 – (14,077) 8,692 (5,385) 64,252	Company 2004 HK$’000 231,637 (102,000) 129,637 – – – – 129,637

The loan notes bear interest at 4% per annum and the principal of the loan notes is due for repayment on 7 March 2008. The effective interest rate is 7.9% per annum.

The fair value of the loan notes at 31 December 2005 was approximate to the corresponding carrying value.

38. BANK AND OTHER BORROWINGS DUE AFTER ONE YEAR

Secured bank loans_(note 46) Obligation under a finance lease Advance from a minority equity holder _Less:_current portion Secured bank loans(note 30)_ Obligation under a finance lease	Group 2005 2004 HK$’000 HK$’000 50,367 30,307 – 76 974 1,022 51,341 31,405 (7,621) (6,040) – (76) 43,720 25,289

– 74 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

At 31 December 2005, the secured bank loans were repayable as follows:

Within one year In the second year In the third to fifth year	Group 2005 2004 HK$’000 HK$’000 7,621 6,040 8,195 6,172 34,551 18,095 50,367 30,307	Group 2005 2004 HK$’000 HK$’000 7,621 6,040 8,195 6,172 34,551 18,095 50,367 30,307
		30,307

The secured bank loans are repayable by instalments up to December 2010. Interest is charged on the outstanding balances at Prime Rate minus 2% per annum and Hong Kong Interbank Offer Rate plus 1% to 1.25% per annum.

The fair value of the Group’s bank and other borrowings due over one year at 31 December 2005 was approximate to the corresponding carrying value.

39. PROVISIONS

At 1 January 2005 Additional provision in the year Written back Amount utilized during the year Amount paid during the year At 31 December 2005 _Less:_current portion	Employee benefit HK$’000 42,654 33,402 (13,009) (11,428) (18,998) 32,621 (32,211) 410	Group Others HK$’000 792 846 – – – 1,638 (846) 792	Total HK$’000 43,446 34,248 (13,009 (11,428 (18,998 34,259 (33,057 1,202

40. DEFERRED TAXATION

Net deferred tax assets as at 1 January Reclassified from taxation payable Exchange adjustments Acquired on an acquisition of a subsidiary Charge to income for the year_(note 14)_ Charge to equity Net deferred tax (liabilities) assets as at 31 December	Group 2005 2004 HK$’000 HK$’000 4,736 6,218 – (2,726 (67) 13 (124) – (7,499) 1,453 (84) (222 (3,038) 4,736	Group 2005 2004 HK$’000 HK$’000 4,736 6,218 – (2,726 (67) 13 (124) – (7,499) 1,453 (84) (222 (3,038) 4,736
		4,736

– 75 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

The deferred tax assets and liabilities recognized in the balance sheet are analyzed as follows:

Deferred tax assets – Decelerated depreciation – Provisions – Revaluation of assets – Unused tax losses Offset against deferred tax liabilities Deferred tax liabilities – Accelerated depreciation – Revaluation of assets – Unrealized profit – Undistributed earnings and others Offset against deferred tax assets	Group 2005 2004 HK$’000 HK$’000 228 286 6,439 7,886 – 601 1,682 4,292 8,349 13,065 (4,206) (2,786) 4,143 10,279 (3,577) (3,268) (3,442) (167) (1,504) (1,274) (2,864) (3,620) (11,387) (8,329) 4,206 2,786 (7,181) (5,543)	Company 2005 2004 HK$’000 HK$’000 – – 2,158 2,612 – – – – 2,158 2,612 – – 2,158 2,612 – – – – – – – – – – – – – –	Company 2005 2004 HK$’000 HK$’000 – – 2,158 2,612 – – – – 2,158 2,612 – – 2,158 2,612 – – – – – – – – – – – – – –
			2,612 –
			2,612

			– – – –
			– –
			–

At the balance sheet date, the Group had unrecognized deductible temporary difference of HK$5,880,000 (2004: HK$6,023,000) and unrecognized tax losses of HK$391,903,000 (2004: HK$353,526,000) available to offset against future profits. The deductible temporary difference and tax losses have not been recognized as it is uncertain that there will be sufficient future taxable profit available against the utilization of these temporary differences. Included in unrecognized tax losses are losses of HK$4,467,000, HK$54,000, and HK$13,349,000 that will be expired on 2006, 2007 and 2008 respectively.

– 76 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

41. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT

Reconciliation of profit before taxation to cash generated from (used in) operations:

Profit before taxation
Share of results and amortization of negative goodwill/
goodwill of
– Associated companies
– Jointly controlled entities
Amortization of negative goodwill on acquisition
of subsidiary companies
Dividend income
Interest income
Discount on acquisition of a subsidiary company
Net realized profit on disposal of a portion of a subsidiary
Net realized profit on disposal/deemed disposal of
a jointly controlled entity
Net realized profit on disposal of an investment property
Net realized profit on disposal of available-for-sale
investments/other investment
Impairment loss for intangible assets written back
Impairment loss for trade and other receivables/provision
for doubtful debts written back
Increase in fair value of investment properties/
revaluation deficit written back
Impairment loss of available-for-sale investments/
other investments
Impairment loss of an associated company
Impairment loss of property and equipment
Impairment loss of intangible assets
Impairment loss of goodwill of a subsidiary company
Impairment loss of goodwill of associated companies
Impairment loss of trade and other receivables/
provision for doubtful debts
Net unrealized (profit) loss on held for trading investments/
trading securities
Amortization of intangible assets
Amortization of leasehold interests in land
Depreciation of property and equipment
Interest expenses
Net loss on deemed disposal of an associated company
Net loss on disposal of property and equipment
Balance carried forward to next page

Group
2005
2004
HK$’000
HK$’000
436,546
412,834
(149,549)
(165,043)
(2)
3,624
–
(9,565)
(40,639)
(73,636)
(174,565)
(160,570)
(199)
–
–
(789)
(1,219)
(942)
(2,061)
–
(56,748)
(2,483)
(180)
–
(25,264)
(16,615)
(23,638)
(6,100)
14,411
16,898
4,981
–
3,680
–
980
–
267
–
13,323
–
21,409
16,074
(465)
2,109
3,910
3,906
1,645
616
17,258
15,851
39,353
17,677
–
4,492
734
559
83,968
58,897

– 77 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Balance brought forward from previous page Net loss on disposal of intangible assets Operating cash flow before movement in working capital Increase in loans and receivables (Increase) decrease in trade and other receivables Increase in held for trading investments/trading securities Decrease in trade and other payables Increase in trading liabilities, at fair value Decrease in provisions Cash (used in) generated from operations	Group 2005 2004 HK$’000 HK$’000 83,968 58,897 – 96 83,968 58,993 – (3,200 (274,849) 523,677 (127,798) (14,634 (81,824) (482,320 17,756 – (9,187) (3,956 (391,934) 78,560	Group 2005 2004 HK$’000 HK$’000 83,968 58,897 – 96 83,968 58,993 – (3,200 (274,849) 523,677 (127,798) (14,634 (81,824) (482,320 17,756 – (9,187) (3,956 (391,934) 78,560
		58,993 (3,200 523,677 (14,634 (482,320 – (3,956
		78,560

42. ACQUISITION OF SUBSIDIARIES

The Group acquired the following subsidiaries during the year:

Principal Date of Percentage Component Name activities acquisition acquired of cost Hing Yip Holdings Property 1/2/2005 100% Cash Limited investment Excalibur Futures Futures dealing 17/3/2005 100% Cash Limited and broking Excalibur Securities Securities broking 17/3/2005 100% Cash Limited Sing Hing Investment Property 18/4/2005 100% Cash Limited investment	Cost including capitalized expenses HK$’000 13,811 16,853 9,033 38,477
	78,174

– 78 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

The aggregate assets and liabilities arising from the acquisition and the goodwill, are as follows:

Cash and cash equivalents Intangible assets Investment property Leasehold interests in land Property and equipment Statutory deposits Trade and other receivables Trade and other payables Deferred tax liabilities Net assets Total purchase consideration satisfied by cash Excess of net fair value over consideration recognized in income statement Goodwill Purchase consideration settled in cash Cash and cash equivalents in subsidiaries acquired Net cash outflow arising on acquisition	Acquiree’s carrying Fair value amount adjustments HK$’000 HK$’000 15,758 – 1,200 – 26,934 12,428 6,408 2,492 9,565 1,463 1,734 – 17,723 (900) (16,575) – (124) – 62,623 15,483	Fair value HK$’000 15,758 1,200 39,362 8,900 11,028 1,734 16,823 (16,575 (124
		78,106 78,174
		68 199
		267

		78,174 (15,758
		62,416

The aggregate revenue and the profit and loss of the acquired subsidiaries are as follows:

Total revenue Profit and loss	For the year 2005 HK$’000 46,695 11,061	Post– acquisition HK$’000 43,743

		10,401

The information for the year 2005 is for illustrative purposes only and is not necessarily an indication of revenue and results of operation of the acquired subsidiaries that are included in the consolidated income statement of the Group, nor is it intended to be a projection of future results.

– 79 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

43. CAPITAL COMMITMENTS

Contracted for but not provided in the financial statements Authorized but not contracted for	Group 2005 2004 HK$’000 HK$’000 29,628 28,688 2,259 2,209 31,887 30,897	Group 2005 2004 HK$’000 HK$’000 29,628 28,688 2,259 2,209 31,887 30,897
		30,897

44. OPERATING LEASES

(a) The Group as lessee

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

Within one year In the second to fifth years inclusive	Group 2005 2004 HK$’000 HK$’000 17,115 20,155 14,802 33,952 31,917 54,107	Group 2005 2004 HK$’000 HK$’000 17,115 20,155 14,802 33,952 31,917 54,107
		54,107

Most of the lease payment represents rentals payable by the Group for its office properties. The lease term and rental are fixed at 2 to 4 years.

(b) The Group as lessor

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 years inclusive	Group 2005 2004 HK$’000 HK$’000 1,269 359 856 – 2,125 359	Group 2005 2004 HK$’000 HK$’000 1,269 359 856 – 2,125 359
		359

The Group has properties leased to tenants for rental. The lease term and rental are fixed at 1 to 3 years.

– 80 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

45. CONTINGENT LIABILITIES

(a) At balance sheet date, the Company and the Group had guarantees as follows:

Guarantee for banking facility granted to – Subsidiary companies – An investee company Indemnities on banking guarantees made available to a clearing house and regulatory body Other guarantees	Group 2005 2004 HK$’000 HK$’000 – – 6,979 7,000 5,540 5,540 7,084 3,184 19,603 15,724	Company 2005 2004 HK$’000 HK$’000 30,000 58,000 6,979 7,000 – – 1,400 1,400 38,379 66,400	Company 2005 2004 HK$’000 HK$’000 30,000 58,000 6,979 7,000 – – 1,400 1,400 38,379 66,400
			66,400

(b) On 4 February 2004, Sun Tai Cheung Credits Limited (“STCC”) and Sun Hung Kai Investment Services Limited (“SHKIS”), both indirect wholly-owned subsidiaries of the Company, were served with a writ including a statement of claim (“200/2004”) by Shanghai Finance Holdings Limited, claiming, inter alia, an order that the sale of the shares in Shun Loong Holdings Limited (“Shun Loong Shares”) by STCC as assignee to SHKIS (at a consideration of HK$36,500,000 subject to additional amounts in a total sum not exceeding HK$15,700,000 which might have been payable one year from the date of completion under certain conditions) pursuant to a sale and purchase agreement dated 25 June 2003 be set aside, or alternatively, as against STCC, damages and an account as to the money obtained by STCC in respect of the Shun Loong Shares. The writ is being vigorously defended. STCC and SHKIS were properly advised at all times during the transaction and believe that the claim is not soundly based. STCC and SHKIS have applied to have the claim struck out. The proceedings have now been stayed until further order of the court.

While a provision has been made for legal costs, at this stage the Directors are of the view that it is not appropriate for any other provision to be made with respect to this action.

(c) By the judgment of Deputy High Court Judge To on 1 April 2004 (the “Judgment”) in HCA 3191/1999 between NWDC and SDL against SHKS, a wholly-owned subsidiary of the Company, SHKS was ordered to pay NWDC the sum of HK$105,534,018.22 together with interest on the principal sum of HK$80,117,652.72 at judgment rate from 16 December 1998 until payment, pursuant to the terms of an oral agreement which His Lordship found (the “Oral Agreement”). As at 17 June 2004, the date when the Judgment sum was paid, the Judgment amounted to HK$150,115,681.54 (being HK$105,534,018.22 plus interest of HK$44,581,663.32). SHKS has paid the Judgment amounts. SHKS filed an appeal against the Judgment both as to liability and quantum (the “Appeal”) to the Court of Appeal. That Court has handed down its judgment (“the Court of Appeal Judgment”) in which the Court ordered a repayment to SHKS of part of the interest element for the period from 16 December 1998 to 31 March 2004 previously ordered against SHKS in the Court of First Instance but otherwise broadly confirmed the Judgment. The sum repayable amounted to HK$14,783,090.86 and has now been repaid.

SHKS has obtained leave to appeal the Court of Appeal Judgment to the Court of Final Appeal (the “Final Appeal”). The Final Appeal will be heard on 19 June 2006.

– 81 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Since the handing down of the Judgment, NWDC has written to SHKS demanding payment of three further amounts for what it asserts as pro-rata equity holders’ contributions advanced by NWDC on behalf of SHKS (the “New Claims”):

(i) on 1 March 2000 in the sum of HK$27,234,753.52;
(ii) on 2 January 2001 in the sum of HK$7,697,418.42
(the Group understands that a further writ was issued by NWDC in April 2004, naming SHKS as defendant, and claiming the aforesaid two amounts as well as interest thereon from March 2000 and January 2001 respectively (“Further Writ”). The Further Writ has not been served on SHKS); and
(iii) on 4 June 2004 in the sum of HK$2,565,839.47 in respect of a bank loan by GUP (a provision has been made with respect to this claim in the accounts of SHKS).

The Group understands that a second further writ including a statement of claim (“HCA 376/2006”) was issued by NWDC and SDL in February 2006, claiming, inter alia, the sum of HK$37,498,011.41 being the aggregate of amounts of the New Claims, together with interest thereon at such rate and for such period as the Court considers appropriate. This second further writ has not been served on SHKS.

The outcome of the Final Appeal as well as other issues will be relevant to the determination of whether SHKS is liable to pay the New Claims which NWDC and SDL asserts are due under the Oral Agreement. Accordingly, the Directors take the view that the New Claims are a contingent liability, and that while a provision has been made for legal costs, it is considered that it is not presently appropriate for any other provision to be made with respect to the Final Appeal or the Further Writ. However, the Directors in Note 26 to the accounts have provided an analysis as to the possible financial implications for the Company depending on the ultimate outcome of the Final Appeal.

46. ASSETS PLEDGED TO THIRD PARTIES

At the balance sheet date, listed investments held by the Group and margin clients with market value of HK$190,654,000 and HK$1,197,005,000 respectively (2004: HK$227,021,000 and HK$847,385,000 respectively) were pledged to banks and financial institutions. Banking facilities of HK$1,493,500,000 (2004: HK$1,735,000,000) were available to the Group of which HK$269,509,000 (2004: HK$20,856,000) was drawn down. The Group also had leasehold properties with a total carrying value of HK$153,618,000 (2004: HK$95,776,000) pledged to banks as security for overdraft facilities of HK$42,300,000 (2004: HK$37,300,000) and instalment loans. The draw down of the overdraft facilities and the outstanding balance of the instalment loans at 31 December 2005 were HK$35,416,000 (2004: HK$37,049,000) and HK$50,367,000 (2004: HK$30,307,000) respectively.

– 82 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

47. PRINCIPAL SUBSIDIARY AND ASSOCIATED COMPANIES

The principal subsidiary and associated companies as at 31 December 2005 were as follows:

	Country of	Issued and
	incorporation	paid up	Group equity
Principal subsidiary companies	and operation	share capital		interest	Principal activities
Bali International Finance Limited	Hong Kong	137,500,000		100%	Financial service and
		HK$1 shares			investment holding
Bali Securities Co. Limited	Hong Kong	7,000,000		100%	Securities dealer
		HK$1 shares
Best Decision Investments Limited	British Virgin Islands	50,000 US$1 share		65%	Investment holding
Best Delta International Limited	British Virgin Islands	1 US$1 share		100%	Investment holding
Boneast Assets Limited	British Virgin Islands	1 US$1 share		100%*	Investment holding
Cheeroll Limited	Hong Kong	2 HK$1 shares		100%	Investment holding,
					securities and
					bullion trading
Constable Development S.A.	Panama	5 US$1 shares		100%	Investment holding
Cowslip Company Limited	Hong Kong	2 HK$1 shares		100%	Investment holding
Excalibur Futures Limited	Hong Kong	20,000,000		100%	Futures dealing and
		HK$1 shares			broking
Excalibur Securities Limited	Hong Kong	20,000,000		100%	Securities broking
		HK$1 shares
Gloria (Nominees) Limited	Hong Kong	2 HK$100 shares		100%	Investment holding
Gloxin Limited	Hong Kong	2 HK$1 shares		100%	Investment holding
Grand Securities Company Limited	Hong Kong	20,000,000		100%	Securities broking
		HK$1 shares
Hing Yip Holdings Limited	British Virgin Islands	1 US$1 share		100%	Property investment
Hilarious (Nominees) Limited	Hong Kong	100 HK$100 shares		100%	Investment holding
I-Market Limited	British Virgin Islands	1 US$1 share		100%*	Investment holding
Itso Limited	Hong Kong	2 HK$1 shares		100%	Securities trading
Lexshan Nominees Limited	Hong Kong	2 HK$1 shares		100%	Nominee service
Macdonnell (Nominees) Limited	Hong Kong	100 HK$100 shares		100%	Investment holding
Oakfame Investment Limited	Hong Kong	2 HK$1 shares		100%	Investment holding
Pioneer Score Development	Hong Kong	2 HK$1 shares		100%	Investment holding
Limited
Plentiwind Limited	Hong Kong	2 HK$1 shares		100%	Futures trading

– 83 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

	Country of	Issued and
	incorporation	paid up	Group equity
Principal subsidiary companies	and operation	share capital		interest	Principal activities
Quick Art Limited	Hong Kong	3,540,000		100%	Property investment
		HK$1 shares
Ranbridge Finance Limited	Hong Kong	20,000,000		100%*	Money lending
		HK$1 shares
Ranbridge, Inc.	The Philippines	5,385,000		100%	Money lending
		Peso 1 shares
Scienter Investments Limited	Hong Kong	2 HK$10 shares		100%	Share trading
Shipshape Investments Limited	British Virgin Islands	1 US$1 share		100%*	Investment holding
SHK Absolute Return Managers	Cayman Islands	10 US$1 shares		100%	Investment holding
Limited
SHK Consultancy Services Limited	Hong Kong	2 HK$1 shares		100%	Provision of
					consultancy service
SHK Financial Data Limited	Hong Kong	100 HK$1 shares		51%	Provision of financial
					information service
SHK Fund Management Limited	Hong Kong	5,000,000		100%	Funds marketing and
		HK$1 shares			management
SHK Global Managers Limited	British Virgin Islands	5,000 US$1 shares		100%	Funds management
SHK Investment Services Limited	Hong Kong	100,000		100%	Asset holding and
		HK$10 shares			leasing
SHK Online (Securities) Limited	Hong Kong	3,000,000		100%	Online securities
		HK$10 shares			broking and margin
					financing
SHK Online Limited	Hong Kong	2,000,000		100%	Online financial
		HK$10 shares			services
SHK Pearl River Delta Investment	Hong Kong	2 HK$1 fully paid		100%	Investment holding
Company Limited		shares 99,999,998
		HK$1 shares paid
		up to HK$0.75	each
SHK Quant Managers Limited	Cayman Islands	10 US$1 shares		100%	Fund management
Sing Hing Investment Limited	British Virgin Islands	1 US$1 share		100%	Property investment
Splendid Gain Limited	Hong Kong	2 HK$1 shares		100%	Investment holding
Shun Loong Bullion Limited	Hong Kong	6,000,000		100%	Bullion dealing and
		HK$1 shares			brokering
Shun Loong Capital Limited	Hong Kong	65,000		100%	Investment holding
		HK$100 shares
Shun Loong Finance Limited	Hong Kong	1,000,000		100%	Money lending
		HK$1 shares

– 84 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

	Country of	Issued and
	incorporation	paid up	Group equity
Principal subsidiary companies	and operation	share capital	interest	Principal activities
Shun Loong Forex Company	Hong Kong	3,200	100%	Leveraged foreign
Limited		HK$10,000 shares		exchange dealing
				and broking
Shun Loong Futures Limited	Hong Kong	150,000	100%	Futures and option
		HK$100 shares		dealing
Shun Loong Holdings Limited	Hong Kong	200,000,000	100%	Investment holding
		HK$1 shares
Shun Loong Nominees Limited	Hong Kong	10,000	100%	Provision of nominee
		HK$10 shares		and secretarial
				services
Shun Loong On-line Investment	Hong Kong	25,000,000	100%	Computer and
Services (H.K.) Limited		HK$1 shares		marketing advisory
				services and
				securities trading
Shun Loong Securities Company	Hong Kong	50,000,000	100%	Securities broking and
Limited		HK$1 shares		share margin
				financing
SL Meridian Holdings Limited	British Virgin Islands	10,000	100%	Investment holding
		HK$100 shares
Sun Hing Bullion Company	Hong Kong	5,000,000	100%	Bullion trading
Limited		HK$1 shares
Sun Hung Kai (Nominees) Limited	Hong Kong	2 HK$100 shares	100%	Nominee service
Sun Hung Kai Bullion Company	Hong Kong	30,000,000	100%	Bullion trading and
Limited		HK$1 shares		investment holding
Sun Hung Kai Commodities	Hong Kong	80,000,600	100%	Commodities broking
Limited		HK$1 shares
Sun Hung Kai Forex Limited	Hong Kong	150,000,000	100%	Foreign exchange
		HK$1 shares		dealing
Sun Hung Kai Insurance	Hong Kong	1,000,000	100%	Insurance broking and
Consultants Limited		HK$1 shares		consultancy services
Sun Hung Kai International Bank	Brunei Darussalam	10,000,000	100%	International banking
Brunei Limited		SGD1 shares		business
Sun Hung Kai International	Hong Kong	100,000	100%	Corporate finance
Limited		HK$100 shares		service
Sun Hung Kai International	Hong Kong	50,000	100%	Securities, futures and
Commodities Limited		HK$100 shares		options trading
Sun Hung Kai International	British Virgin Islands	50,000	100%*	Investment holding
Investment Management		US$1 shares
Limited

– 85 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

	Country of	Issued and
	incorporation	paid up	Group equity
Principal subsidiary companies	and operation	share capital		interest	Principal activities
Sun Hung Kai Investment Services	Macau	Fully paid capital		100%	Property holding
(Macau) Limited		MOP 1,000,000
Sun Hung Kai Investment Services	Hong Kong	2,900,000		100%	Investment holding,
Limited		HK$100 shares			share broking and
					margin financing
Sun Hung Kai Online Limited	British Virgin Islands	1 US$1 share		100%	Online service
Sun Hung Kai Research Limited	Hong Kong	10,000		100%	Securities research
		HK$10 shares			service
Sun Hung Kai Securities (Bermuda)	Bermuda	12,000		100%	Investment holding
Limited		US$1 shares			and management
					service
Sun Hung Kai Securities (Overseas)	Hong Kong	60,000 HK$1 shares		100%	Investment holding
Limited
Sun Hung Kai Securities	The Philippines	273,600,000		100%	Investment holding
(Phil.), Inc.		Peso 1 shares
Sun Hung Kai Securities (Trustees)	Hong Kong	3,000,000		100%	Provision of trustee
Limited		HK$1 shares			service
Sun Hung Kai Securities Capital	Hong Kong	1,000		100%	Investment holding
Markets Limited		HK$1 shares
Sun Hung Kai Securities Limited	Hong Kong	249,797,178		100%*	Investment holding
		HK$0.5 shares
Sun Hung Kai Venture Capital	Hong Kong	2 HK$1 shares		100%	Investment holding
Limited
Sun Hung Kai Wealth Management	Hong Kong	5,000,000		100%	Investment advisory,
Limited		HK$1 shares			financial planning
					and wealth
					management
Sun Tai Cheung Credits Limited	Hong Kong	15,000,000		100%	Share margin
		HK$10 shares			financing
Sun Tai Cheung Finance Company	Hong Kong	25,000,000		100%	Financial service
Limited		HK$1 shares
Swan Islands Limited	British Virgin Islands	1 US$1 share		100%*	Investment holding
Tailwind Consultants Limited	British Virgin Islands	1 US$1 share		100%*	Investment holding
Texgulf Limited	Hong Kong	2 HK$10 shares		100%	Property investment
To Wan Development Company	Hong Kong	1,000		100%	Investment holding
Limited		HK$10 shares
Tung Wo Investment Company,	Hong Kong	100 HK$100 shares		100%	Investment holding
Limited

– 86 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

	Country of	Issued and
	incorporation	paid up	Group equity
Principal subsidiary companies	and operation	share capital	interest	Principal activities
Upper Selection Investments	British Virgin Islands	1 US$1 share	100%*	Investment holding
Limited
Upstand Assets Limited	British Virgin Islands	1 US$1 share	100%*	Investment holding
Wah Cheong Development	Hong Kong	25,100,000	100%*	Investment holding
Company, Limited		HK$1 shares
Wah Cheong Development (B.V.I.)	British Virgin Islands	2,675,400	100%*	Investment holding
Limited		US$1 shares
Wineur Secretaries Limited	Hong Kong	2 HK$1 shares	100%	Secretarial service
Yee Li Ko Investment Limited	Hong Kong	5,833,000	100%	Property investment
		HK$10 shares
Zeal Goal International Limited	British Virgin Islands	1 US$1 share	100%	Investment holding
* These subsidiary companies are directly		held by the Company.

		Equity	interest held by
	Country of incorporation
Principal associated companies	and operation	Group	Company	Principal activities
Chronicle Gain Limited	Hong Kong	45%	–	Property holding
Drinkwater Investment Limited	Hong Kong	22%	–	Property holding
Eurasia Mattress & Furniture	People’s Republic of China	25%	–	Manufacture of
Co. Ltd.				mattresses and
				bedsteads
Omicron International Limited	British Virgin Islands	44%	38%	Investment holding
Quality HealthCare Asia	Bermuda	34%	–	Investment holding
Limited#
Real Estate Investments (N.T.)	Hong Kong	40%	–	Property development
Limited
Silver York Development Limited	Hong Kong	40%	–	Investment holding
Start Hold Limited	Hong Kong	33%	–	Investment holding
Tian An China Investments	Hong Kong	49%	41%	Investment holding
Company Limited#
Tianjin Eurasia Mattress &	People’s Republic of China	25%	–	Manufacture of
Furniture Co. Ltd.				mattresses and
				bedsteads
Yu Ming Investments Limited#	Hong Kong	22%	6%	Investment holding

These associated companies are listed in Hong Kong and further details about these associated companies are available in their published annual reports.

The above tables list the subsidiary and associated companies of the Company which, in the opinion of the Directors, principally affected the results for the year or formed a substantial portion of the net assets of the Group. To give details of other subsidiary and associated companies would, in the opinion of the Directors, result in particulars of excessive length.

– 87 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

48. RELATED PARTY TRANSACTIONS

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

Notes Associated companies Insurance premium received from listed associated companies Interest income from a listed associated company and its subsidiary Proceeds on disposal of an investment to a listed associated company Promissory note received from a listed associated company Purchase of two companies from a subsidiary of a listed associated company Service fee received from listed associated companies Term loans drawdown by a subsidiary of a listed associated company (a) Ultimate holding company and its subsidiary companies Dividend received from a subsidiary of the ultimate holding company Insurance premium received from the ultimate holding company and its subsidiaries Rent and property management fee paid to a subsidiary of the ultimate holding company (b) Management fee paid to the ultimate holding company and its subsidiary company	Group 2005 2004 HK$’000 HK$’000 4,402 4,543 6,754 7,079 – 28,000 – 87,000 52,283 – 2,718 1,137 245,000 – 21,810 7,270 3,238 3,820 2,301 – 2,220 2,200	Group 2005 2004 HK$’000 HK$’000 4,402 4,543 6,754 7,079 – 28,000 – 87,000 52,283 – 2,718 1,137 245,000 – 21,810 7,270 3,238 3,820 2,301 – 2,220 2,200

		7,270 3,820 – 2,200

Compensation of key management personnel

The remuneration of Directors and other members of key management during the year was as follows:

Short-term benefits Post-employment benefits	2005 HK$’000 43,845 1,631 45,476	2004 HK$’000 40,906 1,417
		42,323

Certain key management personnel of the Group received remuneration from the Company’s ultimate holding company or its wholly owned subsidiary. The ultimate holding company provided management services to the Company and charged the Company a fee, which is included in the management fee as disclosed above in this note, for services provided by those personnel as well as others who are not key management personnel of the Group.

– 88 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Prior to 2005, the management fee could not be apportioned and allocated to any individuals. From 1 January 2005, the management fee is calculated by reference to the time devoted by the management personnel on the affairs of the Group and can be apportioned to the relevant key management personnel. The total of such apportioned amounts, which have been included in the key management personnel compensation above for 2005, is HK$1,626,000.

In addition to the above, the Group received brokerage fee of HK$50,000 (2004: HK$31,000) from the key management personnel with year end trade receivable of HK$965,000 (2004: HK$1,896,000) whereas the year end trade payable is HK$2,781,000 (2004: HK$5,346,000).

At the balance sheet date, the Group had the following material balances with related parties:

		Group
		2005	2004
	Notes	HK$’000	HK$’000
Amounts due from (to)
associated companies
Amounts due from
a listed associated company
– Loan note	(c)	78,000	78,000
– Term loans	(a)	245,000	–
– Others	(d)	782	–
Current portion of amounts due from
other associated companies	(d)	6,575	291
Long term portion of amounts due from
other associated companies	(e)	83,308	83,228
Amounts due to other associated
companies	(e)	(57,537)	(44,404)

(a) During the year, a loan facility up to HK$280 million was granted to a subsidiary of a listed associated company for a term of 36 months from 7 November 2005. The interest rate is charged at prime rate plus 1% per annum. The loan was guaranteed by the listed associated company.
(b) The related party transactions are also “connected transactions” or “continuing connected transactions” as defined in the Listing Rules and details of which were contained in the Directors’ Report.
(c) The loan note bears interest at 2.5% per annum and the interest is payable annually. It matures and is due for repayment on 29 August 2008.
(d) These amounts due from associated companies are unsecured, non-interest bearing and are expected to be settled within one year.
(e) These amounts due from (to) associated companies are unsecured, non-interest bearing and have no fixed term of repayment.

– 89 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

49. MATURITY PROFILE OF ASSETS AND LIABILITIES

Within 3 months HK$’000 Assets Term loans due from a listed associated company 245,000 Loan note of a listed associated company in loans and receivables – Fixed deposits with banks 95,212 Treasury bills 7,680 Term loans 66,200 Liabilities Bank loans and overdrafts 334,925 Loan notes – Long term bank loans 1,885 Within 3 months HK$’000 Assets Loan note of a listed associated company – Fixed deposits with banks 80,290 Term loans 61,145 Debts securities in trading securities 7,741 Liabilities Bank loans and overdrafts 57,905 Loan notes – Long term bank loans 1,500 Obligation under a finance lease 76	3 months to 1 year HK$’000 – – – – 3,200 – – 5,736 3 months to 1 year HK$’000 – – 34,600 – – – 4,540 –	As at 31 December 2005 1 year After to 5 years 5 years HK$’000 HK$’000 – – 78,000 – – – – – – – – – 64,252 – 42,746 – As at 31 December 2004 1 year After to 5 years 5 years HK$’000 HK$’000 78,000 – – – 3,200 – – – – – 129,637 – 24,267 – – –	On demand HK$’000 – – – – 97,567 – – – On demand HK$’000 – – 144,381 – – – – –	Total HK$’000 245,000 78,000 95,212 7,680 166,967

				334,925 64,252 50,367

				Total HK$’000 78,000 80,290 243,326 7,741

				57,905 129,637 30,307 76

The above tables only list out the assets and liabilities which have a term of maturity. Overdue assets are reported as on demand.

50. FINANCIAL RISK MANAGEMENT

The Group’s activities expose it to a variety of financial risks: market risk, credit risk, liquidity risk and interest-rate risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance.

The Group has established policies and procedures for risk management which are reviewed regularly by the management and the Credit & Risks Management Committee (the “CRM”), which reports to the Executive Committee of the Board of Directors, to ensure the proper monitoring and control of all major risks arising from the Group’s activities at all times. The Group’s Internal Audit and Compliance department (“IAC”) (which reports independently to the non-executive Chairman and the Audit Committee) also performs regular reviews to supplement the various internal control measures adopted by the management and various divisions within the Group, to ensure compliance with policies and procedures.

– 90 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Market Risk

(i) Trading Risk

Market risk arises from trading activities, including market-making and proprietary trading. Trading activities across the Group are subject to limits approved by management. The Group’s Trading Risk Control Unit (“TRCU”) independently monitors and reports the positions, risks and profit and loss (“P&L”) of its proprietary trading activities involving derivatives, leveraged foreign exchange and bullion. In addition to the TRCU, part of the Group’s proprietary trading exposure is closely monitored by the Credit department. Proprietary trading exposures are measured on both a “mark-to- market” and a “mark-to-fair” basis, and “maximum loss” and “position” limits are used. Value at Risk (VaR) and stress-tests are also used in the assessment of risk. These are approaches that assist in the quantification of risk by combining the size of a position and the extent of a potential market movement into a potential impact on P&L.

The Group’s various proprietary trading positions and P&L are reported daily to senior management for review. The Group’s IAC also performs audits to supplement the above controls to ensure compliance with the established market risk limits and guidelines.

(ii) Foreign Exchange Risk

Foreign exchange risk is the risk to earnings or capital arising from movements of foreign exchange rates.

The Group’s foreign exchange risk primarily arises from currency exposures originating from its leveraged foreign exchange business or purchases of foreign securities on behalf of clients. Foreign exchange risk is managed and monitored by the relevant department under the limits approved by the Group’s Board or Executive Committee. In relation to our leveraged foreign exchange activity, our position is that of a market-maker, and accordingly our risk is our open currency positions which are subject to management approved limits and are monitored and reported daily. The other possible risk is primarily a derivative foreign exchange risk for a client who does not or cannot meet margin calls following any period of substantial currency turbulence. Our principal lending operations are carried out in local currency to obviate foreign exchange risk. Accordingly, the Group has no significant exposure to foreign exchange fluctuations on loan assets.

Credit Risk

Credit risk arises from a number of areas. These include the possibility that a customer or counter-party in a transaction may default during the settlement process. It also arises from lending, settlement, treasury, market-making, derivatives, proprietary trading, and other activities undertaken by the Group.

The Group’s credit manual sets out in detail the credit approval and monitoring procedures, which are established in accordance with sound business practices, the requirements and provisions of the relevant ordinances, and where applicable, the codes or guidelines issued by the Securities and Futures Commission.

Day-to-day credit management is performed by the Credit department with reference to the aforementioned criteria including creditworthiness, collateral pledged, and risk concentration of the counter-parties. Decisions made daily by the Credit department are reported and reviewed by the Executive Directors and senior management of the Group and by the CRM at its regular meetings.

Liquidity Risk

The Group manages its liquidity position to ensure the Group maintains a prudent and adequate liquidity ratio, in strict accordance with statutory requirements. This is achieved by the management, comprising the Executive Directors, the Chief Financial Officer and relevant senior

– 91 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

managers monitoring the liquidity position of the Group on a daily basis to ensure the availability of sufficient liquid funds to meet all obligations and compliance with the statutory requirements such as the Financial Resources Rules applying to various licensed subsidiaries.

Interest Rate Risk

Interest rate risk primarily results from timing differences in the re-pricing of interest bearing assets, liabilities and commitments. The Group’s interest rate risk exposure arises mainly from margin financing and other lending activities undertaken. The Group has the legal capacity to quickly recall such loans or re- price its margin loans to an appropriate level. Its interest- sensitive positions can readily be identified. Interest rates paid by the Group are managed by the Finance department with the aim of maximizing the spread of interest consistent with liquidity and funding obligations.

The exposure of the Group’s material fixed-rate assets and liabilities to fair value interest rate risks and their contractual maturity dates are as follows:

Interest rate At 31 December 2005 Fixed deposits with banks (note 29) 0.28%-7.25% Treasury bills_(note 29) 3.78% Loan note due from a listed associated company(note 26) 2.5% Bank loans(note 30) 4.85%-5.35% Loan notes(note 37) 4% At 31 December 2004 Fixed deposits with banks (note 29) 0.03%-7.50% Loan note due from a listed associated company(note 23) 2.5% Marketable debt securities(note 28) 1.86% Loan notes(note 37)_ 4%	Within 1 year HK$’000 95,212 7,680 – (255,000 ) – 80,290 – 7,741 –	In year 2 HK$’000 – – – – – – – – –	In year 3 HK$’000 – – 78,000 – (64,252 ) – – – –	In year 4 HK$’000 – – – – – – 78,000 – (129,637 )	More than In year 5 5 years HK$’000 HK$’000 – – – – – – – – – – – – – – – – – –	Total HK$’000 95,212 7,680 78,000 (255,000 ) (64,252 ) 80,290 78,000 7,741 (129,637 )

– 92 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

The exposure of the Group’s material floating rate assets and liabilities to cash flow interest rate risks and their contractual maturity dates are as follows:

Interest rate At 31 December 2005 Secured margin loans_(note 27) 7.00%-30.00% Term loans(note 27) 7.00%-26.82% Bank overdrafts(note 30) 4.85%-8.50% Secured long term bank loans(note 38) 5.20%-5.75% At 31 December 2004 Secured margin loans(note 27) 4.00%-30.00% Term loans(note 27) 5.00%-26.82% Bank overdrafts(note 30) 5.5% Secured long term bank loans(note 38)_ 1.15%-3.00%	Within 1 year HK$’000 N/A 376,636 (79,925 ) (7,621) N/A 181,310 (57,905 ) (6,040)	In year 2 HK$’000 N/A – – (8,195) N/A 3,200 – (6,172)	In year 3 HK$’000 N/A – – (8,463) N/A – – (6,307)	In year 4 HK$’000 N/A – – (7,848 ) N/A – – (6,447 )	More than In year 5 5 years HK$’000 HK$’000 N/A N/A – – – – (18,240 ) – N/A N/A – – – – (5,341) –	Total HK$’000 1,293,285 376,636 (79,925 ) (50,367 ) 1,441,056 184,510 (57,905 ) (30,307 )

51. SUBSEQUENT EVENTS

(a) On 3 April 2006, Wah Cheong Development (B.V.I.) Limited (“Wah Cheong”), a whollyowned subsidiary of the Company, entered into a conditional option agreement with CLSA Capital Limited (“CLSA”), pursuant to which Wah Cheong was granted the option to acquire further 34,156,666 shares in Quality HealthCare Asia Limited (“QHA”) from CLSA at an option consideration of HK$27,752,291. The option agreement will only take effect after the approval of the shareholders of the Company, Allied Properties (H.K.) Limited and Allied Group Limited, the ultimate holding company of the Company respectively, and the confirmation from the Securities and Future Commission on terms that are not considered detrimental that Wah Cheong and CLSA will not be regarded as parties acting in concert and that Wah Cheong is not required to make a mandatory offer to all QHA’s shareholders until it exercises the option.

The option will entitle Wah Cheong to:

acquire all (but not part) of the option shares (being 34,156,666 QHA shares held by CLSA) at an aggregate exercise price of HK$83,256,873.375 (i.e. HK$2.4375 per option share), and
exercise all or part of the option warrants (being such number of QHA warrants held by CLSA as would, if exercised, lead to the subscription of 6,943,333 QHA shares at HK$2.5 per share).

The option is exercisable by Wah Cheong, with respect to the option shares, at any time within a period of 4 years and, with respect to option warrants, on or before 13 January 2007.

At 7 April 2006, Wah Cheong has an equity interest of approximately 34.39% in QHA. It also holds such number of warrants as would, if exercised, lead to the subscription of 12,544,632 shares. Exercise of such warrants in full would result in Wah Cheong holding an equity interest of approximately 38.36% in QHA.

Assuming that (i) no new shares are issued by QHA (other than those issued following exercise in full of the option warrants), (ii) the option is exercised in respect of the option shares and the option warrants as mentioned in the option agreement have been exercised, and (iii) Wah Cheong does not exercise any of the warrants held by it, Wah Cheong’s equity interest in QHA will further increase to approximately 53.54% of the enlarged capital.

– 93 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

In case Wah Cheong exercises all the warrants held by it, Wah Cheong’s equity interest in QHA will further increase to approximately 56.25%.

(b) on 6 April 2006, the following agreements were entered into
a placing agreement between the Company as vendor and 3V Capital Limited as a placing agent in respect of the placing of 175,000,000 existing shares in Tian An China Investments Company Limited (“Tian An”), a listed associated company of the Group, to independent investors at a price of HK$5.1 per share, and
a subscription agreement between the Company and Tian An in respect of the Company’s subscription for 175,000,000 new shares in Tian An (“subscription shares”) at the same price on completion of the placing.

The placing agreement is unconditional and completion of the placing is expected to take place on or before 11 April 2006. However, the subscription agreement is conditional upon:

The Stock Exchange of Hong Kong Limited granting listing of and permission to deal in the subscription shares;
granting of a waiver from any obligation to make a general offer under Rule 26 of the Takeover Code arising as a result of the subscription; and
completion of the placing.

The completion of the above will result in the Group’s equity interest in Tian An reducing from approximately 48.60% to approximately 40.51%. The Board does not anticipate any significant gain or loss to the Group arising from this transaction.

– 94 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

3. WORKING CAPITAL

The Directors are of the opinion that in the absence of unforeseen circumstances and after taking into account the Group’s current cash balance and resources as well as its available banking facilities, the Group has sufficient working capital for its present requirements.

4. INDEBTEDNESS

At the close of business on 30th April, 2006, being the latest practicable date for the purpose of this indebtedness statement prior to the printing of this circular, the Group had outstanding borrowings of approximately HK$242.8 million, comprising secured bank loans and overdrafts of approximately HK$116.1 million, unsecured bank overdrafts of approximately HK$0.7 million, 4% unlisted loan notes of approximately HK$65 million, unsecured borrowings of approximately HK$57.5 million from associates, unsecured borrowings of approximately HK$2.5 million from investee companies, and unsecured borrowing of approximately HK$1 million from a minority equity holder. The Group’s banking facilities were secured by charges over its assets, including investment properties, leasehold interests in land and buildings, and listed investments belonging to the Group and margin clients.

In addition, the Group had contingent liabilities in the sum of approximately HK$20.8 million in respect of guarantees for a banking facility granted to an investee company, indemnities on banking guarantees made available to a clearing house and regulatory body and other guarantees. There were also claims arising from the litigations with New World Development Company Limited and Shanghai Finance Holdings Limited, further particulars of which litigations are set out in the section headed “Litigation” in Appendix V to this circular.

Save as aforesaid and apart from intra-group liabilities, the Group did not have any outstanding mortgages, charges, debenture or other loan capital or bank overdrafts, loans or other similar indebtedness or hire purchase commitments, liabilities under acceptances or acceptance credits or any guarantees or other material contingent liabilities at the close of business on 30th April, 2006.

Foreign currency amounts have been translated into Hong Kong dollars at the rates of exchange prevailing at the close of business on 30th April, 2006.

5. MATERIAL ADVERSE CHANGE

As at the Latest Practicable Date, the Directors are not aware of any material adverse change in the financial or trading position of the Group since 31st December, 2005, the date to which the latest published audited financial statements of the Company were made up.

– 95 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

6. FINANCIAL AND TRADING PROSPECTS

Hong Kong economic conditions are presently quite robust, with the unemployment rate continuing to fall and personal income levels continuing to rise. The rate of growth of the P.R.C. economy has remained firm. A significant portion of the equity capital raised through the local stock market is raised by the PRC companies or companies expanding into China, and increasingly, affluent mainland consumers continue to visit Hong Kong. Accordingly the significance of the PRC to the outlook for Hong Kong is expected to continue to increase.

The Company is committed to pursuing growth in its financial services businesses both through organic growth and acquisitions where appropriate. The intention is to not only expand existing services but to create new products and target additional market segments where opportunities are identified.

On 17th May, 2006 and 18th May, 2006, the Company, AGL and APL jointly announced that AP Emerald Limited (“APE”), an indirect wholly-owned subsidiary of APL, as vendor, had entered into placing agreements (as amended) to place 169 million Shares (the “1st Placing”) and 79 million Shares (the “2nd Placing”) to independent investors at a price of HK$7.00 per Share respectively and APE would subscribe for 248 million Shares at the same price of HK$7.00 per Share (the “Subscription”). The 1st Placing was completed on 22nd May, 2006, while the 2nd Placing and the Subscription will be subject to the relevant shareholders’ approvals of the Company, AGL and APL respectively.

In view of the current market conditions, the Directors consider that the 1st Placing and the 2nd Placing, together with the Subscription, represent good opportunities to raise further working capital for the Company while at the same time broadening its shareholder and capital base. The net proceeds of the Subscription of approximately HK$1,685.5 million will be applied by the Group to fund the possible acquisition of the entire interest in UAF Holdings Limited as announced on 19th June, 2006, or if such acquisition does not proceed, to fund new investments and acquisitions in future as and when opportunities arise and require and for general working capital purposes.

The Company maintains a strong balance sheet and a sound management team, and its recent financial performance has been pleasing. With the benefit of favourable economic conditions, the Directors would hope to continue to achieve steady performance and ongoing expansion of the Company’s core businesses.

– 96 –

APPENDIX II FINANCIAL INFORMATION OF THE QHA GROUP

1. AUDITED CONSOLIDATED FINANCIAL INFORMATION OF THE QHA GROUP

The following is a summary of the audited financial results of the QHA Group for each of the three years ended 31 December 2005 as extracted from the annual report of QHA for the relevant years. Due to the adoption of new Hong Kong Financial Reporting Standards in 2005, the 2004 and 2003 financial information has been reclassified to conform with the presentation of 2005.

Consolidated Income Statement

REVENUE
Other income and gains
Changes in inventories of finished goods
and dispensary supplies consumed
Staff costs
Depreciation and amortisation expenses
Other operating expenses, net
Impairment of goodwill
Professional fees in connection
with a takeover offer
Corporate restructuring expenses
Finance costs
Share of profits and losses of:
Jointly-controlled entities
An associate
PROFIT BEFORE TAX
Tax
PROFIT FOR THE YEAR
ATTRIBUTABLE TO EQUITY
HOLDERS OF THE COMPANY
DIVIDENDS
Interim
Proposed final
EARNINGS PER SHARE
ATTRIBUTABLE TO ORDINARY
EQUITY HOLDERS
OF THE COMPANY
Basic
Diluted

Year ended 31 December
2005
2004
2003
HK$’000
HK$’000
HK$’000
822,844
788,348
743,522
9,836
8,692
7,591
(30,548)
(29,985)
(25,858)
(290,529)
(276,051)
(259,978)
(17,731)
(19,398)
(21,639)
(425,109)
(415,413)
(400,738)
(2,200)
(2,176)
–
–
–
(4,759)
–
–
(4,800)
(1)
(101)
(1,440)
43
(7)
1,471
(165)
–
–
66,440
53,909
33,372
(10,300)
(8,891)
(8,933)
56,140
45,018
24,439
4,883
2,167
–
6,348
3,250
4,874
11,231
5,417
4,874
27.9 cents
20.8 cents
11.3 cents
27.9 cents
20.7 cents
11.3 cents

– 97 –

APPENDIX II

FINANCIAL INFORMATION OF THE QHA GROUP

Consolidated Balance Sheet

NON-CURRENT ASSETS Property, plant and equipment Unlisted equity investments Loan to an investee company Goodwill Interests in jointly-controlled entities Interest in an associate Total non-current assets CURRENT ASSETS Convertible note Inventories Accounts receivable Prepayments, deposits and other receivables Cash and bank balances Total current assets CURRENT LIABILITIES Interest-bearing bank borrowing Accounts payable, other payables, accruals and deposits received Deferred revenue Hire purchase contract payable Tax payable Total current liabilities NET CURRENT ASSETS TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Hire purchase contract payable Deferred tax liabilities Total non-current liabilities Net assets EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY Issued capital Reserves Proposed final dividend Total equity	2005 HK$’000 26,169 – – 3,527 819 2,281 32,796 – 7,881 83,270 21,748 116,640 229,539 – 101,773 3,742 5 5,458 110,978 118,561 151,357 13 1,057 1,070 150,287 19,533 124,406 6,348 150,287	31 December 2004 2003 HK$’000 HK$’000 31,612 40,249 78 78 102 342 5,727 8,394 225 – – – 37,744 49,063 – 7,000 7,350 7,413 71,700 71,721 22,151 28,371 115,762 58,991 216,963 173,496 – 8,000 91,869 76,097 7,730 9,446 5 – 8,145 19,458 107,749 113,001 109,214 60,495 146,958 109,558 17 – 1,057 1,728 1,074 1,728 145,884 107,830 21,667 21,662 120,967 81,294 3,250 4,874 145,884 107,830	31 December 2004 2003 HK$’000 HK$’000 31,612 40,249 78 78 102 342 5,727 8,394 225 – – – 37,744 49,063 – 7,000 7,350 7,413 71,700 71,721 22,151 28,371 115,762 58,991 216,963 173,496 – 8,000 91,869 76,097 7,730 9,446 5 – 8,145 19,458 107,749 113,001 109,214 60,495 146,958 109,558 17 – 1,057 1,728 1,074 1,728 145,884 107,830 21,667 21,662 120,967 81,294 3,250 4,874 145,884 107,830
			49,063
			7,000 7,413 71,721 28,371 58,991
			173,496
			8,000 76,097 9,446 – 19,458
			113,001
			60,495
			109,558 – 1,728
			1,728
			107,830

			21,662 81,294 4,874
			107,830

– 98 –

APPENDIX II FINANCIAL INFORMATION OF THE QHA GROUP

2. AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE QHA GROUP FOR THE YEAR ENDED 31ST DECEMBER, 2005

Set out below are the audited consolidated financial statements and notes to the financial statements of the QHA Group for the year ended 31st December, 2005 extracted from the annual report 2005 of QHA.

Consolidated Income Statement

Year ended 31 December 2005

Notes REVENUE 5 Other income and gains Changes in inventories of finished goods and dispensary supplies consumed Staff costs Depreciation and amortisation expenses Other operating expenses, net Impairment of goodwill Finance costs 7 Share of profits and losses of: Jointly-controlled entities An associate PROFIT BEFORE TAX 6 Tax 10 PROFIT FOR THE YEAR ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY 11 DIVIDENDS 12 Interim Proposed final EARNINGS PER SHARE ATTRIBUTABLE TO ORDINARY EQUITY HOLDERS OF THE COMPANY 13 Basic Diluted	2005 HK$’000 822,844 9,836 (30,548) (290,529) (17,731) (425,109) (2,200) (1) 43 (165) 66,440 (10,300) 56,140 4,883 6,348 11,231 27.9 cents 27.9 cents	2004 HK$’000 788,348 8,692 (29,985) (276,051) (19,398) (415,413) (2,176) (101) (7) – 53,909 (8,891) 45,018 2,167 3,250 5,417 20.8 cents 20.7 cents

– 99 –

APPENDIX II

FINANCIAL INFORMATION OF THE QHA GROUP

Consolidated Balance Sheet

31 December 2005

Notes NON-CURRENT ASSETS Property, plant and equipment 14 Unlisted equity investments 15 Loan to an investee company 16 Goodwill 17 Interests in jointly-controlled entities 19 Interest in an associate 20 Total non-current assets CURRENT ASSETS Inventories 21 Accounts receivable 22 Prepayments, deposits and other receivables Cash and bank balances Total current assets CURRENT LIABILITIES Accounts payable, other payables, accruals and deposits received 23 Deferred revenue Hire purchase contract payable 24 Tax payable Total current liabilities NET CURRENT ASSETS TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Hire purchase contract payable 24 Deferred tax liabilities 25 Total non-current liabilities Net assets EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY Issued capital 26 Reserves 28(a) Proposed final dividend 12 Total equity	2005 HK$’000 26,169 – – 3,527 819 2,281 32,796 7,881 83,270 21,748 116,640 229,539 101,773 3,742 5 5,458 110,978 118,561 151,357 13 1,057 1,070 150,287 19,533 124,406 6,348 150,287	2004 HK$’000 31,612 78 102 5,727 225 –
		37,744
		7,350 71,700 22,151 115,762
		216,963
		91,869 7,730 5 8,145
		107,749
		109,214
		146,958 17 1,057
		1,074
		145,884

		21,667 120,967 3,250
		145,884

– 100 –

APPENDIX II

FINANCIAL INFORMATION OF THE QHA GROUP

Consolidated Statement of Changes in Equity

Year ended 31 December 2005

Notes At 1 January 2004 Share options exercised 26(iv) Profit for the year Final 2003 dividend declared Interim 2004 dividend 12 Proposed final 2004 dividend 12 At 31 December 2004 and 1 January 2005 Final 2004 dividend declared Adjustment for final 2004 dividend Share repurchased 26(i) Share repurchase expenses 26(i) Share options exercised 26(ii) Warrants exercised 26(iii) Profit for the year Interim 2005 dividend 12 Proposed final 2005 dividend 12 At 31 December 2005	Issued share capital HK$’000 21,662 5 – – – – 21,667 – – (2,167) – 6 27 – – – 19,533	Share premium account HK$’000 139 72 – – – – 211 – – – – 79 624 – – – 914*	Proposed Retained final profits dividend HK$’000 HK$’000 81,155 4,874 – – 45,018 – – (4,874) (2,167) – (3,250) 3,250 120,756 3,250 – (2,929) 321 (321) (41,168) – (1,326) – – – – – 56,140 – (4,883) – (6,348) 6,348 123,492* 6,348	Total HK$’000 107,830 77 45,018 (4,874) (2,167) – 145,884 (2,929) – (43,335) (1,326) 85 651 56,140 (4,883) – 150,287

These reserve accounts comprised the consolidated reserves of HK$124,406,000 (2004: HK$120,967,000) in the consolidated balance sheet.

– 101 –

APPENDIX II

FINANCIAL INFORMATION OF THE QHA GROUP

Consolidated Cash Flow Statement

Year ended 31 December 2005

Notes CASH FLOWS FROM OPERATING ACTIVITIES Profit before tax Adjustments for: Finance costs 7 Share of results of jointly-controlled entities and an associate Negative goodwill recognised as income 6 Bank interest income 6 Dividend income from an unlisted investment 6 Depreciation 6 Amortisation 6 Impairment of goodwill 6 Provision for/(write-back of) impairment on accounts receivable 6 Loss on disposal/write-off of items of property, plant and equipment 6 Operating profit before working capital changes Decrease/(increase) in inventories Decrease/(increase) in accounts receivable Decrease in prepayments, deposits and other receivables Increase in accounts payable, other payables, accruals and deposits received Decrease in deferred revenue Cash generated from operations Interest paid Hong Kong profits tax paid Net cash inflow from operating activities	2005 HK$’000 66,440 1 122 – (1,455) (485) 17,731 – 2,200 93 458 85,105 (531) (11,663) 403 9,904 (3,988) 79,230 (1) (12,987) 66,242	2004 HK$’000 53,909 101 7 (61) (507) (189) 18,907 491 2,176 (3,294) 968 72,508 63 1,922 5,824 15,772 (1,716) 94,373 (101) (19,783) 74,489

– 102 –

APPENDIX II

FINANCIAL INFORMATION OF THE QHA GROUP

Notes CASH FLOWS FROM INVESTING ACTIVITIES Purchases of items of property, plant and equipment Proceeds from disposal of items of property, plant and equipment Proceeds from disposal of unlisted equity investment Repayment of loan to an investee company Additional capital contribution to a jointly-controlled entity Investment in an associate Advance of loan to an associate Advance to jointly-controlled entities Repayment of convertible notes Dividend received Interest received Net cash outflow from investing activities CASH FLOWS FROM FINANCING ACTIVITIES Exercise of share options 26(ii) Exercise of warrants 26(iii) Repayment of an interest-bearing bank borrowing Capital element of a hire purchase contract payable Repurchase of shares Share repurchase expenses 26(i) Dividends paid Net cash outflow from financing activities NET INCREASE IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at beginning of year CASH AND CASH EQUIVALENTS AT END OF YEAR ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS Cash and bank balances	2005 HK$’000 (13,449) 703 78 102 (390) (2,100) (346) (161) – 485 1,455 (13,623) 85 651 – (4) (43,335) (1,326) (7,812) (51,741) 878 115,762 116,640 116,640	2004 HK$’000 (11,213) – – 240 – – – (171) 7,000 189 1,204 (2,751) 77 – (8,000) (3) – – (7,041) (14,967) 56,771 58,991 115,762 115,762

– 103 –

APPENDIX II

FINANCIAL INFORMATION OF THE QHA GROUP

Balance Sheet

31 December 2005

Notes NON-CURRENT ASSETS Interests in subsidiaries 18 CURRENT ASSETS Prepayments, deposits and other receivables Cash and bank balances Total current assets CURRENT LIABILITIES Other payables and accruals Total current liabilities NET CURRENT ASSETS Net assets EQUITY Issued capital 26 Reserves 28(b) Proposed final dividend 12 Total equity	2005 HK$’000 547,329 796 22,273 23,069 12,184 12,184 10,885 558,214 19,533 532,333 6,348 558,214	2004 HK$’000 580,959 2,133 22,219
		24,352
		10,617
		10,617
		13,735
		594,694

		21,667 569,777 3,250
		594,694

– 104 –

APPENDIX II

FINANCIAL INFORMATION OF THE QHA GROUP

Notes to Financial Statements

31 December 2005

1. CORPORATE INFORMATION

Quality HealthCare Asia Limited is a limited liability company incorporated in Bermuda. The registered office the Company is located at Clarendon House, 2 Church Street, Hamilton HM11, Bermuda. The principal place of business of the Company is located at 6/F, China Merchants Steam Navigation Building, 303–307 Des Voeux Road Central, Sheung Wan, Hong Kong.

During the year, the Group was involved in the following principal activities:

provision of medical services
provision of nursing agency, physiotherapy and dental services
provision of elderly care services

2.1 BASIS OF PREPARATION

These financial statements have been prepared in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”) (which also include Hong Kong Accounting Standards (“HKASs”) and Interpretations) issued by the Hong Kong Institute of Certified Public Accountants, accounting principles generally accepted in Hong Kong and the disclosure requirements of the Hong Kong Companies Ordinance. They have been prepared under the historical cost convention.

Basis of consolidation

The consolidated financial statements include the financial statements of the Company and its subsidiaries for the year ended 31 December 2005. The results of subsidiaries are consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date that such control ceases. All significant intercompany transactions and balances within the Group are eliminated on consolidation.

– 105 –

APPENDIX II

FINANCIAL INFORMATION OF THE QHA GROUP

2.2 IMPACT OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS

The following new and revised HKFRSs affect the Group and are adopted for the first time for the current year’s financial statements:

HKAS 1	Presentation of Financial Statements
HKAS 2	Inventories
HKAS 7	Cash Flow Statements
HKAS 8	Accounting Policies, Changes in Accounting Estimates and Errors
HKAS 10	Events after the Balance Sheet Date
HKAS 12	Income Taxes
HKAS 14	Segment Reporting
HKAS 16	Property, Plant and Equipment
HKAS 17	Leases
HKAS 18	Revenue
HKAS 19	Employee Benefits
HKAS 21	The Effects of Changes in Foreign Exchange Rates
HKAS 23	Borrowing Costs
HKAS 24	Related Party Disclosures
HKAS 27	Consolidated and Separate Financial Statements
HKAS 28	Investments in Associates
HKAS 31	Interests in Joint Ventures
HKAS 32	Financial Instruments: Disclosure and Presentation
HKAS 33	Earnings per Share
HKAS 36	Impairment of Assets
HKAS 37	Provisions, Contingent Liabilities and Contingent Assets
HKAS 38	Intangible Assets
HKAS 39	Financial Instruments: Recognition and Measurement
HKAS 39	Transition and Initial Recognition of Financial Assets and Financial
Amendment	Liabilities
HKFRS 2	Share-based Payment
HKFRS 3	Business Combinations
HKFRS 4	Insurance Contracts

The adoption of HKASs 1, 2, 7, 8, 10, 12, 14, 16, 17, 18, 19, 21, 23, 27, 28, 31, 33, 37 and 38 has had no material impact on the accounting policies of the Group and the Company and the methods of computation in the Group’s and the Company’s financial statements.

HKAS 24 has expanded the definition of related parties and affected the Group’s related party disclosures.

The impact of adopting the other HKFRSs is summarised as follows:

(a) HKAS 32 and HKAS 39

In prior years, the Group classified its unlisted equity investments and a loan to an investee company as long term investments, which were intended to be held for a continuing strategic or long term purpose, and were stated at cost less any impairment losses, on an individual investment basis.

Upon the adoption of HKAS 39, the unlisted equity investments and the loan to an investee company held by the Group at 1 January 2005 in the amounts of HK$78,000 and HK$102,000, respectively, are designated as available-for-sale financial assets and loans and receivables, respectively, under the transitional provisions of HKAS 39. Availablefor-sale financial assets are stated at fair value with gains or losses being recognised as a separate component of equity until subsequent derecognition or impairment. Loans and receivables are carried at amortised cost using the effective interest method, with gains or losses being recognised in the income statement when subsequent derecognised or impaired, as well as through the amortisation process. The adoption of HKAS 39 has not resulted in any material change in the measurement of these instruments at 1 January 2005 or during the current year. Comparative amounts have been reclassified for presentation purposes.

– 106 –

APPENDIX II

FINANCIAL INFORMATION OF THE QHA GROUP

(b) HKFRS 2

In prior years, no recognition and measurement of share- based payment transactions in which employees (including directors) were granted share options over shares in the Company were required until such options were exercised by employees, at which time the share capital and share premium were credited with the proceeds received.

Upon the adoption of HKFRS 2, when employees (including directors) render services as consideration for equity instruments (“equity-settled transactions”), the cost of the equitysettled transactions with employees is measured by reference to the fair value at the date at which the instruments are granted.

The Group has adopted the transitional provisions of HKFRS 2 under which the new measurement policies have not been applied to (i) options granted to employees on or before 7 November 2002; and (ii) options granted to employees after 7 November 2002 but which had vested before 1 January 2005.

As the Group did not have any employee share options which were granted during the period from 7 November 2002 to 31 December 2004 but had not yet vested as at 1 January 2005, or during the current year, the adoption of HKFRS 2 has had no impact on the retained profits as at 31 December 2003 and at 31 December 2004 nor has it had an impact on the current year’s profit.

(c) HKFRS 3 and HKAS 36

In prior years, goodwill arising on acquisitions prior to 1 January 2001 was eliminated against the consolidated reserves in the year of acquisition and was not recognised in the income statement until disposal or impairment of the acquired businesses.

Goodwill arising on acquisitions on or after 1 January 2001 was capitalised and amortised on the straight-line basis over its estimated useful life and was subject to impairment testing when there was any indication of impairment.

The adoption of HKFRS 3 and HKAS 36 has resulted in the Group ceasing annual goodwill amortisation and commencing testing for impairment at the cash-generating unit level annually (or more frequently if events or changes in circumstances indicate that the carrying value may be impaired).

The transitional provisions of HKFRS 3 have required the Group to eliminate at 1 January 2005 the carrying amounts of accumulated amortisation with a corresponding adjustment to the cost of goodwill. Goodwill previously eliminated against consolidated reserves remains eliminated against consolidated reserves and is not recognised in the income statement when all or part of the business to which the goodwill relates is disposed of or when a cash-generating unit to which the goodwill relates becomes impaired.

The effects of the above changes are summarised in note 2.4 to the financial statements. In accordance with the transitional provisions of HKFRS 3, comparative amounts have not been restated.

(d) HKFRS 4

HKFRS 4 prescribes the financial reporting of contracts defined as insurance contracts under HKFRS 4, which include certain fixed-fee contracts in which the level of service depends on an uncertain future event. The Group has certain medical and dental services contracts, in which the Group agrees to provide specific medical/dental services over the terms of the contracts for a fixed-fee (the “Fixed-fee Contracts”). The financial reporting of these Fixed-fee Contracts have been disclosed and accounted for pursuant to certain provisions of HKFRS 4. The Fixed-fee Contracts in general are of short duration. The adoption of HKFRS 4 did not materially impact the measurement and recognition of any asset, liability, income or expense in the financial statements.

– 107 –

APPENDIX II

FINANCIAL INFORMATION OF THE QHA GROUP

2.3 IMPACT OF ISSUED BUT NOT YET EFFECTIVE HONG KONG FINANCIAL REPORTING STANDARDS

The Group has not applied the following new and revised HKFRSs, that have been issued but are not yet effective, in these financial statements. Unless otherwise stated, these HKFRSs are effective for annual periods beginning on or after 1 January 2006:

HKAS 1 Amendment	Capital Disclosures
HKAS 19 Amendment	Actuarial Gains and Losses, Group Plans and Disclosures
HKAS 21 Amendment	Net Investment in a Foreign Operation
HKAS 39 Amendment	Cash Flow Hedge Accounting of Forecast
	Intragroup Transactions
HKAS 39 Amendment	The Fair Value Option
HKAS 39 & HKFRS 4	Financial Guarantee Contracts
Amendments
HKFRSs 1 & 6 Amendments	First-time Adoption of Hong Kong Financial Reporting
	Standards and Exploration for and Evaluation of
	Mineral Resources
HKFRS 6	Exploration for and Evaluation of Mineral Resources
HKFRS 7	Financial Instruments: Disclosures
HK(IFRIC)-Int 4	Determining whether an Arrangement contains a Lease
HK(IFRIC)-Int 5	Rights to Interests arising from Decommissioning,
	Restoration and Environmental Rehabilitation Funds
HK(IFRIC)-Int 6	Liabilities arising from Participating in a Specific Market – Waste
	Electrical and Electronic Equipment
HK(IFRIC)-Int 7	Applying the Restatement Approach under HKAS 29
	Financial Reporting in Hyperinflationary Economies

The HKAS 1 Amendment shall be applied for annual periods beginning on or after 1 January 2007. The revised standard will affect the disclosures about qualitative information about the Group’s objective, policies and processes for managing capital; quantitative data about what the Company regards as capital; and compliance with any capital requirements and the consequences of any non-compliance.

HKFRS 7 will replace HKAS 32 and has modified the disclosure requirements of HKAS 32 relating to financial instruments. This HKFRS shall be applied for annual periods beginning on or after 1 January 2007.

In accordance with the amendments to HKAS 39 regarding financial guarantee contracts, financial guarantee contracts are initially recognised at fair value and are subsequently measured at the higher of (i) the amount determined in accordance with HKAS 37 and (ii) the amount initially recognised, less, when appropriate, cumulative amortisation recognised in accordance with HKAS 18. The adoption of the amendments to HKAS 39 regarding financial guarantee contracts will result in the recognition of a financial liability in the Company’s balance sheet in respect of corporate guarantees given by the Company in connection with banking facilities granted to its subsidiaries and tenancy agreements entered into by its subsidiaries.

The HKAS 19 Amendment, HKAS 39 Amendment regarding cash flow hedge accounting of forecast intragroup transactions, HKAS 21 Amendment, HKFRSs 1 and 6 Amendments, HKFRS 6, HK(IFRIC)-Int 5, HK(IFRIC)-Int 6 and HK(IFRIC)-Int 7 do not apply to the activities to the Group. HK(IFRIC)-Int 6 and HK(IFRIC)-Int 7 shall be applied for annual periods beginning on or after 1 December 2005 and 1 March 2006, respectively.

Except as stated above, the Group expects that the adoption of the other pronouncements listed above will not have any significant impact on the Group’s financial statements in the period of initial application.

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APPENDIX II

FINANCIAL INFORMATION OF THE QHA GROUP

2.4 SUMMARY OF THE IMPACT OF CHANGES IN ACCOUNTING POLICIES

(a) Effect on the consolidated balance sheet

	Effect	of adopting
	HKASs	32# and 39*
At 1 January 2005		Change in
Effect of new policies	classification of
(Increase/(decrease))	investments
		HK$’000
Assets
Available-for-sale equity investments
(accounted for in accordance with HKAS 39)		78
Loan receivable (accounted for in accordance with HKAS 39)		102
Long term investments
(accounted for in accordance with Hong Kong
Statement of Standard Accounting Practice 24
“Accounting for Investments in Securities”)		(180)
		–

At 31 December 2005
Effect of adopting HKFRS 3*

Had the amortisation of goodwill been made for the year ended 31 December 2005 and included in these financial statements, the goodwill and retained profits of the Group at 31 December 2005 would have been reduced by HK$491,000.

Adjustments taken effect prospectively from 1 January 2005
Adjustments/presentation taken effect retrospectively

(b) Effect of adopting HKFRS 3 on the consolidated income statement for the year ended 31 December 2005

	Discontinuation
	of amortisation
	of goodwill
	HK$’000
Effect of new policy
Decrease in amortisation expense and increase in profit	491
Increase in basic earnings per share	0.24 cents
Increase in diluted earnings per share	0.24 cents

– 109 –

APPENDIX II

FINANCIAL INFORMATION OF THE QHA GROUP

2.5 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Subsidiaries

A subsidiary is an entity whose financial and operating policies the Company controls, directly or indirectly, so as to obtain benefits from its activities.

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

Joint ventures

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

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

A joint venture is treated as:

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

Jointly-controlled entities

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

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

Associates

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

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

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APPENDIX II

FINANCIAL INFORMATION OF THE QHA GROUP

Goodwill

Goodwill arising on the acquisition of subsidiaries represents the excess of the cost of the business combination over the Group’s interest in the net fair value of the acquirees’ identifiable assets acquired, and liabilities and contingent liabilities assumed as at the date of acquisition.

Goodwill on acquisitions for which the agreement date is on or after 1 January 2005

Goodwill arising on acquisition is recognised in the consolidated balance sheet as an asset, initially measured at cost and subsequently at cost less any accumulated impairment losses.

The carrying amount of goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.

For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units, or groups of cashgenerating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the Group are assigned to those units or groups of units. Each unit or group of units to which the goodwill is so allocated:

represents the lowest level within the Group at which the goodwill is monitored for internal management purposes; and
is not larger than a segment based on either the Group’s primary or the Group’s secondary reporting format determined in accordance with HKAS 14 “Segment Reporting”.

Impairment is determined by assessing the recoverable amount of the cash-generating unit (group of cash-generating units), to which the goodwill relates. Where the recoverable amount of the cash-generating unit (group of cash-generating units) is less than the carrying amount, an impairment loss is recognised.

Where goodwill forms part of a cash-generating unit (group of cash-generating units) and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained.

An impairment loss recognised for goodwill is not reversed in a subsequent period.

Goodwill previously eliminated against the consolidated reserves

Prior to the adoption of Hong Kong Statement of Standard Accounting Practice (“SSAP”) 30 “Business Combinations” in 2001, goodwill arising on acquisition was eliminated against the consolidated reserves in the year of acquisition. On the adoption of HKFRS 3, such goodwill remains eliminated against the consolidated reserves and is not recognised in profit or loss when all or part of the business to which the goodwill relates is disposed of or when a cash-generating unit to which the goodwill relates becomes impaired.

Impairment of assets

Where an indication of impairment exists, or when annual impairment testing for an asset is required (other than, inter alia, inventories, financial assets and goodwill), the asset’s recoverable amount is estimated. An asset’s recoverable amount is calculated as the higher of the asset’s or cash-generating unit’s value in use and its fair value less costs to sell, and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case, the recoverable amount is determined for the cash- generating unit to which the asset belongs.

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APPENDIX II

FINANCIAL INFORMATION OF THE QHA GROUP

An impairment loss is recognised only if the carrying amount of an asset exceeds its recoverable amount. 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. An impairment loss is charged to the income statement in the period in which it arises.

An assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognised impairment loss of an asset other than goodwill is reversed only if there has been a change in the estimates used to determine the recoverable amount of that asset, however not to an amount higher than the carrying amount that would have been determined (net of any depreciation/amortisation), had no impairment loss been recognised for the asset in prior years. A reversal of such impairment loss is credited to the income statement in the period in which it arises.

Property, plant and equipment and depreciation

Property, plant and equipment are stated at cost less accumulated depreciation and any impairment losses. The cost of an item of property, plant and equipment comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditure incurred after items of property, plant and equipment have been put into operation, such as repairs and maintenance, is normally charged to the income statement in the period in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property, plant and equipment, and where the cost of the item can be measured reliably, the expenditure is capitalised as an additional cost of that asset or as a replacement.

Depreciation is calculated on the straight-line basis to write off the cost of each item of property, plant and equipment to its residual value over its estimated useful life. The principal annual rates used for this purpose are as follows:

Leasehold improvements	15% to 331/3% or over the lease terms,
	whichever is higher
Furniture, fixtures and office equipment	15% to 331/3%
Medical equipment	20%
Computer equipment and software	20% to 331/3%
Motor vehicles	20% to 331/3%

When parts of an item of property, plant and equipment have different useful lives, the cost of that item is allocated on a reasonable basis among the parts and each part is depreciated separately.

Residual values, useful lives and depreciation method are reviewed, and adjusted if appropriate, at each balance sheet date.

An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss on disposal or retirement recognised in the income statement in the year the asset is decognised is the difference between the net sales proceeds and the carrying amount of the relevant asset.

– 112 –

APPENDIX II

FINANCIAL INFORMATION OF THE QHA GROUP

Leased assets

Leases that transfer substantially all the rewards and risks of ownership of assets to the Group, other than legal title, are accounted for as finance leases. At the inception of a finance lease, the cost of the leased asset is capitalised at the present value of the minimum lease payments and recorded together with the obligation, excluding the interest element, to reflect the purchase and financing. Assets held under capitalised finance leases are included in property, plant and equipment, and depreciated over the shorter of the lease terms and the estimated useful lives of the assets. The finance costs of such leases are charged to the income statement so as to provide a constant periodic rate of charge over the lease terms.

Assets acquired through hire purchase contracts of a financing nature are accounted for as finance leases, but are depreciated over their estimated useful lives.

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

Investments and other financial assets

Applicable to the year ended 31 December 2004:

The Group classified its equity and debt investments, other than subsidiaries, associates and jointly-controlled entities, as long term investments. Long term investments in unlisted equity and debt securities, intended to be held for a continuing strategic or long term purpose, are stated at cost less any impairment losses, on an individual investment basis.

When a decline in the fair value of a security below its carrying amount has occurred, unless there is evidence that the decline is temporary, the carrying amount of the security is reduced to its fair value, as estimated by the directors. The amount of the impairment is charged to the income statement for the period in which it arises. When the circumstances and events which led to the impairment in value cease to exist and there is persuasive evidence that the new circumstances and events will persist for the foreseeable future, the amount of the impairment previously charged is credited to the income statement to the extent of the amount previously charged.

Applicable to the year ended 31 December 2005:

Financial assets in the scope of HKAS 39 are classified as either loans and receivables, or availablefor-sale financial assets, as appropriate. When financial assets are recognised initially, they are measured at fair value, plus directly attributable transaction costs. The Group determines the classification of its financial assets after initial recognition and, where allowed and appropriate, re-evaluates this designation at the balance sheet date.

All regular way purchases and sales of financial assets are recognised on the trade date, i.e., the date that the Group commits to purchase the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are carried at amortised cost using the effective interest method. Gains and losses are recognised in the income statement when the loans and receivables are derecognised or impaired, as well as through the amortisation process.

– 113 –

APPENDIX II

FINANCIAL INFORMATION OF THE QHA GROUP

Available-for-sale financial assets

Available-for-sale financial assets are non-derivative financial assets in listed and unlisted equity securities that are designated as available-for-sale or are not classified in any of the other categories. After initial recognition, available-for-sale financial assets are measured at fair value, with gains or losses recognised as a separate component of equity until the investment is derecognised or until the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is included in the income statement.

When the fair value of unlisted equity securities cannot be reliably measured because (a) the variability in the range of reasonable fair value estimates is significant for that investment or (b) the probabilities of the various estimates within the range cannot be reasonably assessed and used in estimating fair value, such securities are stated at cost less any impairment losses.

Fair value

The fair value of investments that are actively traded in organised financial markets is determined by reference to quoted market bid prices at the close of business at the balance sheet date. For investments where there is no active market, fair value is determined using valuation techniques. Such techniques include using recent arm’s length market transactions; reference to the current market value of another instrument which is substantially the same; and a discounted cash flow analysis.

Impairment of financial assets (applicable to the year ended 31 December 2005)

The Group assesses at each balance sheet date whether there is any objective evidence that a financial asset or a group of financial assets is impaired.

Assets carried at amortised cost

If there is objective evidence that an impairment loss on loans and receivables carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (i.e., the effective interest rate computed at initial recognition). The carrying amount of the asset is reduced either directly or through the use of an allowance account. The amount of the impairment loss is recognised in profit or loss.

The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed. Any subsequent reversal of an impairment loss is recognised in the income statement, to the extent that the carrying value of the asset does not exceed its amortised cost at the reversal date.

Available-for-sale financial assets

If an available-for-sale asset is impaired, an amount comprising the difference between its cost (net of any principal payment and amortisation) and its current fair value, less any impairment loss previously recognised in profit or loss, is transferred from equity to the income statement. Impairment losses on equity instruments classified as available for sale are not reversed through profit or loss.

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APPENDIX II

FINANCIAL INFORMATION OF THE QHA GROUP

Impairment losses on debt instruments are reversed through profit or loss, if the increase in fair value of the instrument can be objectively related to an event, occurring after the impairment loss was recognised in profit or loss.

Derecognition of financial assets (applicable to the year ended 31 December 2005)

A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised where:

the rights to receive cash flows from the asset have expired;
the Group retains the rights to receive cash flows from the asset, but has assumed an obligation to pay in full without material delay to a third party under a “pass-through” arrangement; or
the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risk and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

Where the Group has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.

Where continuing involvement takes the form of a written and/or purchased option (including a cash-settled option or similar provision) on the transferred asset, the extent of the Group’s continuing involvement is the amount of the transferred asset that the Group may repurchase, except in the case of a written put option (including a cash-settled option or similar provision) on an asset measured at fair value, where the extent of the Group’s continuing involvement is limited to the lower of the fair value of the transferred asset and the option exercise price.

Derecognition of financial liabilities (applicable to the year ended 31 December 2005)

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.

When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and a recognition of a new liability, and the difference between the respective carrying amounts is recognised in profit or loss.

Inventories

Inventories, including medicine, dispensary supplies and consumables, are stated at the lower of cost and net realisable value, after making due allowance for any obsolete or slow-moving items. Cost is determined on the weighted average basis. Net realisable value is based on estimated selling prices less any estimated costs to be incurred in the process of disposal.

Cash and cash equivalents

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

– 115 –

APPENDIX II

FINANCIAL INFORMATION OF THE QHA GROUP

For the purpose of the balance sheets, cash and bank balances comprise cash on hand and at banks, including term deposits, which are not restricted as to use.

Deferred revenue

Deferred revenue represents services fees received in advance. Deferred revenue is released to and recognised in the income statement when the corresponding services are rendered.

Income tax

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

Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities.

Deferred tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred tax liabilities are recognised for all taxable temporary differences, except:

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

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

where the deferred tax asset relating to the deductible temporary differences arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
in respect of deductible temporary differences associated with interests in subsidiaries, associates and joint ventures, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.

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

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

– 116 –

APPENDIX II

FINANCIAL INFORMATION OF THE QHA GROUP

Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and same taxation authority.

Revenue recognition

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

(a) from the provision of services, including medical services, nursing agency, physiotherapy and dental services and elderly care services, upon the provision of the relevant services or on a time proportion basis over the terms of the service contracts, as further explained in the accounting policy for “Fixed-fee Contracts” below;
(b) from the sale of goods, when the significant risks and rewards of ownership have been transferred to the buyer, provided that the Group maintains neither managerial involvement to the degree usually associated with ownership, nor effective control over the goods sold;
(c) rental income, on a time proportion basis over the lease terms;
(d) interest income, on an accrual basis using the effective interest method by applying the rate that discounts the estimated future cash receipts through the expected life of the financial instrument to the net carrying amount of the financial asset; and
(e) dividend income, when the shareholders’ right to receive payment has been established.

Fixed-fee Contracts

At each balance sheet date, tests are performed to ensure the adequacy of the contract liabilities under the Fixed-fee Contracts. In performing these tests, current best estimates of future contractual cash flows under the Fixed-fee Contracts are used. Any deficiency is immediately charged to profit or loss by establishing a provision for losses.

Fees received or receivable under the Fixed-fee Contracts are recognised on a time proportion basis over the terms of the Fixed- fee Contracts. Expenses incurred in connection with the Fixedfee Contracts are charged to the income statement as incurred.

Employee benefits

Share-based payment transactions (applicable to options granted to employees on or before 7 November 2002)

The Company operates a share incentive plan for the purpose of providing incentives and rewards to eligible participants who contribute to the success of the Group’s operations. Employees (including directors) of the Group receive remuneration in the form of share-based payment transactions, whereby employees render services as consideration for equity instruments (“equitysettled transactions”).

The Group has adopted the transitional provisions of HKFRS 2 under which the new measurement policies have not been applied to options granted to employees on or before 7 November 2002.

The financial impact of share options granted to employees on or before 7 November 2002 under the share incentive plan is not recorded in the Company’s or the Group’s balance sheet until such time as the options are exercised, and no charge is recorded in the income statement or the balance sheet for their cost. Upon the exercise of the share options, the resulting shares issued are recorded by the Company as additional share capital at the nominal value of the shares, and the excess of the exercise price per share over the nominal value of the shares is recorded by the Company in the share premium account. Options which are cancelled prior to their exercise date, or which lapse, are deleted from the register of outstanding options.

– 117 –

APPENDIX II

FINANCIAL INFORMATION OF THE QHA GROUP

Paid leave carried forward

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

Hong Kong Employment Ordinance long service payments

Certain of the Group’s employees have completed the required number of years of service to the Group in order to be eligible for long service payments under the Hong Kong Employment Ordinance (the “Employment Ordinance”) in the event of the termination of their employment. The Group is liable to make such payments in the event that such a termination of employment meets the circumstances specified in the Employment Ordinance.

A contingent liability is disclosed in respect of possible future long service payments to employees, as a number of current employees have achieved the required number of years of service to the Group, to the balance sheet date, in order to be eligible for long service payments under the Employment Ordinance if their employment is terminated in the circumstances specified. A provision has not been recognised in respect of such possible payments, as it is not considered probable that the situation will result in a material future outflow of resources from the Group.

Retirement benefits scheme

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

Dividends

Final dividends proposed by the directors are classified as a separate allocation of retained profits within the equity section of the balance sheet, until they have been approved by the shareholders in a general meeting. When these dividends have been approved by the shareholders and declared, they are recognised as a liability.

Interim dividends are simultaneously proposed and declared, because the Company’s bye-laws grant the directors the authority to declare interim dividends. Consequently, interim dividends are recognised immediately as a liability when they are proposed and declared.

Foreign currency transactions

These financial statements are presented in Hong Kong dollars, which is the Company’s functional and presentation currency. Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Foreign currency transactions are initially recorded using the functional currency rates ruling at the date of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rates of exchange ruling at the balance sheet date. All differences are taken to profit or loss. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.

– 118 –

APPENDIX II

FINANCIAL INFORMATION OF THE QHA GROUP

Related parties

A party is considered to be related to the Group if:

(a) the party, directly or indirectly through one or more intermediaries, (i) controls, is controlled by, or is under common control with, the Group; (ii) has an interest in the Group that gives it significant influence over the Group; or (iii) has joint control over the Group;
(b) the party is an associate;
(c) the party is a jointly-controlled entity;
(d) the party is a member of the key management personnel of the Group or its parent;
(e) the party is a close member of the family of any individual referred to in (a) or (d); or
(f) the party is an entity that is controlled, jointly controlled or significantly influenced by or for which significant voting power in such entity resides with, directly or indirectly, any individual referred to in (d) or (e).

3. SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES

Judgements

In the process of applying the Group’s accounting policies, management has made the following judgements, apart from those involving estimations, which have the most significant effect on the amounts recognised in the financial statements:

Long service payments

The Group and Company had contingent liabilities in respect of possible future long service payments to employees under the Employment Ordinance, as further explained in the accounting policy for “Employee benefits” as set out in note 2.5 to the financial statements. Management has to consider whether it is appropriate to recognise the provision for long service payments.

In making its judgement, the Group considers (i) the number of current employees who have achieved the required number of years of service to the Group and Company, to the balance sheet date, in order to be eligible for long service payment under the Employment Ordinance if their employment is terminated in the circumstances specified; (ii) the average age of the employees; (iii) the turnover rate of its employees; and (iv) the possibility of the termination of employment of its employees that meets circumstances specified in the Employment Ordinance based on relevant economic and other factors. Management considers that no full provision for long service payments is required as it is not considered probable that the situation at the balance sheet date will result in a material future outflow of resources from the Group and the Company.

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APPENDIX II

FINANCIAL INFORMATION OF THE QHA GROUP

Estimation uncertainty

The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

Impairment of goodwill

The Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use of the cash-generating units to which the goodwill is allocated. Estimating the value in use requires the Group to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. The carrying amount of goodwill at 31 December 2005 was HK$3,527,000 (2004: HK$5,727,000). Further details are given in note 17.

4. SEGMENT INFORMATION

Segment information is presented by way of the Group’s primary segment reporting basis, by business segment. In determining the Group’s geographical segments, revenues are attributed to the segments based on the location of the customers, and assets are attributed to the segments based on the location of the assets. No further geographical segment information is presented as over 90% of the Group’s revenue is derived from customers based in Hong Kong, and over 90% of the Group’s assets are located in Hong Kong.

The Group’s operating businesses are structured and managed separately according to the nature of their operations and the products and services they provide. Each of the Group’s business segments represents a strategic business unit that offers products and services which are subject to risks and returns that are different from those of the other business segments. Summary details of the business segments are as follows:

(a) the medical services segment engages in the provision of medical services;
(b) the nursing agency, physiotherapy and dental services (“nursing agency, physio & dental services”) segment engages in the provision of nursing agency, physiotherapy and dental services;
(c) the elderly care services segment engages in the provision of elderly care services; and
(d) the corporate and other segment comprises the Group’s intra-group management service businesses, which principally provides management and other services to group companies, together with other corporate income and expense items.

Intersegment sales and transfers are transacted at mutually agreed terms.

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FINANCIAL INFORMATION OF THE QHA GROUP

Business segments

The following tables present revenue, profit/(loss) and certain asset, liability and expenditure information for the Group’s business segments for the years ended 31 December 2005 and 2004.

Group Segment revenue: Sales to external customers Intersegment sales Other income and gains Total Segment results Unallocated interest income Finance costs Share of profits and losses of: Jointly-controlled entities An associate Profit before tax Tax Profit for the year attributable to equity holders of the Company	Medical services 2005 2004 HK$’000 HK$’000 649,246 623,754 3,196 2,933 6,917 6,744 659,359 633,431 61,691 55,769 43 (7 ) (165 ) –	Nursing agency, physio Elderly care & dental services services 2005 2004 2005 2004 HK$’000 HK$’000 HK$’000 HK$’000 76,040 65,280 97,558 99,314 14,592 10,355 5,759 5,699 405 431 217 141 91,037 76,066 103,534 105,154 7,562 6,077 4,380 (341 ) – – – – – – – –	Corporate and other 2005 2004 HK$’000 HK$’000 – – 68 – 842 869 910 869 (8,525 ) (7,995 ) – – – –	Eliminations 2005 2004 HK$’000 HK$’000 – – (23,615 ) (18,987 ) – – (23,615 ) (18,987 ) – – – – – –	Consolidated 2005 2004 HK$’000 HK$’000 822,844 788,348 – – 8,381 8,185 831,225 796,533 65,108 53,510 1,455 507 (1 ) (101 ) 43 (7 ) (165 ) – 66,440 53,909 (10,300 ) (8,891 ) 56,140 45,018

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APPENDIX II

FINANCIAL INFORMATION OF THE QHA GROUP

Group

Nursing agency, physio Elderly care Corporate and Medical services & dental services services other Eliminations 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 Assets and liabilities Segment assets 183,233 169,459 28,024 21,162 31,435 37,392 16,543 24,817 – – Interests in jointly controlled entities and associates 3,100 225 – – – – – – – – Unallocated assets Total assets Segment liabilities 78,019 68,193 9,137 6,016 11,432 12,406 6,927 13,006 – – Unallocated liabilities Total liabilities Other segment information: Depreciation and amortisation 6,284 7,457 2,525 2,591 8,553 9,065 369 285 – – Goodwill impairment recognised in the income statement – – – – 2,200 2,176 – – – – Provision for/ (write-back of) impairment on accounts receivable – (2,000 ) 36 36 57 (1,330 ) – – – – Loss on disposal/write-off of items of property, plant and equipment 89 580 352 234 17 154 – – – – Capital expenditure 9,317 6,896 3,068 1,770 1,027 1,300 37 1,272 – –	Consolidated 2005 2004 HK$’000 HK$’000 259,235 252,830 3,100 225 – 1,652 262,335 254,707 105,515 99,621 6,533 9,202 112,048 108,823 17,731 19,398 2,200 2,176 93 (3,294 458 968 13,449 11,238	Consolidated 2005 2004 HK$’000 HK$’000 259,235 252,830 3,100 225 – 1,652 262,335 254,707 105,515 99,621 6,533 9,202 112,048 108,823 17,731 19,398 2,200 2,176 93 (3,294 458 968 13,449 11,238
		254,707

		99,621 9,202
		108,823

		19,398 2,176 (3,294 968 11,238

5. REVENUE

Revenue, which is also the Group’s turnover, represents fees earned for the provision of medical services, nursing agency, physiotherapy and dental services, and elderly care services.

An analysis of revenue is as follows:

Revenue Medical services Nursing agency, physiotherapy and dental services Elderly care services	Group 2005 2004 HK$’000 HK$’000 649,246 623,754 76,040 65,280 97,558 99,314 822,844 788,348	Group 2005 2004 HK$’000 HK$’000 649,246 623,754 76,040 65,280 97,558 99,314 822,844 788,348
		788,348

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FINANCIAL INFORMATION OF THE QHA GROUP

6. PROFIT BEFORE TAX

The Group’s profit before tax is arrived at after charging/(crediting):

Notes Cost of inventories sold/dispensary supplies consumed and services provided Depreciation 14 Amortisation of goodwill 17 Impairment of goodwill 17 Negative goodwill recognised as income during the year* Provision for/(write-back of) impairment on accounts receivable Minimum lease payments under operating leases in respect of land and buildings Employee benefits expenses (excluding directors’ remuneration (note 8)): Salaries, wages, allowances and bonuses Retirement benefits scheme contributions (defined contribution scheme) Auditors’ remuneration Foreign exchange differences, net Loss on disposal/write-off of items of property, plant and equipment Revenue attributable to the Fixed-fee Contracts Expenses related to the Fixed-fee Contracts Bank interest income Gross rental income Dividend income from an unlisted investment	2005 HK$’000 663,144 17,731 – 2,200 2,200 – 93 60,154 278,416 6,521 284,937 1,048 12 458 (86,706) 77,201 (1,455) (90) (485)	2004 HK$’000 650,785 18,907 491 2,176 2,667 (61) (3,294) 63,263 264,251 6,198 270,449 920 14 968 (84,224) 80,453 (507) (99) (189)

The amortisation of goodwill in the prior year was included in “Depreciation and amortisation expenses” on the face of the consolidated income statement.

** The negative goodwill in the prior year arose on the acquisition of a jointly-controlled entity during that year and was included in “Other operating expenses, net” on the face of the consolidated income statement. The amount was in respect of negative goodwill in anticipation of identified future losses and expenses.

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FINANCIAL INFORMATION OF THE QHA GROUP

7. FINANCE COSTS

Interest on: Bank loans and overdrafts wholly repayable within five years Hire purchase contract	Group 2005 2004 HK$’000 HK$’000 – 100 1 1 1 101	Group 2005 2004 HK$’000 HK$’000 – 100 1 1 1 101
		101

8. DIRECTORS’ REMUNERATION

Directors’ remuneration for the year, disclosed pursuant to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) and Section 161 of the Hong Kong Companies Ordinance, is as follows:

Fees Other emoluments: Salaries, allowances and benefits in kind Retirement benefits scheme contributions (defined contribution scheme)	Group 2005 2004 HK$’000 HK$’000 160 298 5,408 5,280 24 24 5,432 5,304 5,592 5,602	Group 2005 2004 HK$’000 HK$’000 160 298 5,408 5,280 24 24 5,432 5,304 5,592 5,602
		5,280 24
		5,304
		5,602

(a) Independent non-executive directors

The fees paid to independent non-executive directors during the year were as follows:

Mr. Li Chak Hung Mr. Chang Chu Fai Johnson Francis Mr. Carlisle Caldow Procter Mr. Cheng Mo Chi Moses Mr. Ian Robert Strachan	2005 HK$’000 60 50 50 – – 160	2004 HK$’000 13 9 12 140 124
		298

There were no other emoluments payable to the independent non-executive directors during the year (2004: Nil).

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FINANCIAL INFORMATION OF THE QHA GROUP

(b) Executive directors and non-executive directors

2005 Executive directors: Mr. Arthur George Dew Dr. Chee Wang Jin, Lincoln Mr. Wong Tai Chun, Mark Non-executive directors: Mr. Richard Owen Pyvis Mr. Brian Damian O’Connor	Salaries, allowance Pension and benefits scheme Total Fees in kind contributions remuneration HK$’000 HK$’000 HK$’000 HK$’000 – 369* – 369 – 3,013 12 3,025 – 2,026 12 2,038 – 5,408 24 5,432 – – – – – – – – – 5,408 24 5,432	Salaries, allowance Pension and benefits scheme Total Fees in kind contributions remuneration HK$’000 HK$’000 HK$’000 HK$’000 – 369* – 369 – 3,013 12 3,025 – 2,026 12 2,038 – 5,408 24 5,432 – – – – – – – – – 5,408 24 5,432
		5,432 – –
		5,432

In view of the fact that Mr. Arthur George Dew, an executive director and the chairman of the Company and the chairman of Sun Hung Kai & Co. Limited (“SHK”), has, since his appointment as an executive director and the chairman of the Company, devoted and will continue to devote part of his time and efforts to the affairs of the Company and its subsidiaries or its associated company in such capacities, the Company and SHK entered into an agreement dated 18 November 2005 (the “Reimbursement Agreement”), pursuant to which the Company agreed to reimburse SHK a portion of the salary of Mr. Dew (which is paid by SHK) for a period commencing from 20 May 2005 and ending on 31 December 2006. The fee payable by the Company to SHK under the Reimbursement Agreement is determined by reference to the percentage of time that Mr. Dew devotes to the affairs of the Company against the amount of time he devotes to the affairs of SHK, which is agreed at HK$50,000 per month and will be payable by the Company on a quarterly basis. The amount paid and payable to SHK under the Reimbursement Agreement for the year ended 31 December 2005 amounted to HK$369,000 (2004: Nil). Further details of the Reimbursement Agreement are also set out in a joint announcement issued by the Company and SHK dated 18 November 2005.

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APPENDIX II

FINANCIAL INFORMATION OF THE QHA GROUP

		Salaries,
		allowance	Pension
		and benefits	scheme	Total
	Fees	in kind	contributions	remuneration
	HK$’000	HK$’000	HK$’000	HK$’000
2004
Executive directors:
Mr. Arthur George Dew	–	–	–	–
Dr. Chee Wang Jin, Lincoln	–	3,480	12	3,492
Mr. Wong Tai Chun, Mark	–	1,800	12	1,812
	–	5,280	24	5,304
Non-executive directors:
Mr. Richard Owen Pyvis	–	–	–	–
Mr. Brian Damian O’Connor	–	–	–	–
	–	5,280	24	5,304

There was no arrangement under which a director waived or agreed to waive any remuneration during the year (2004: Nil).

9. FIVE HIGHEST PAID EMPLOYEES

The five highest paid employees during the year did not include any (2004: one) director, details of whose remuneration are set out in note 8 above. Details of the remuneration of these five (2004: four) non-director, highest paid employees for the year are as follows:

Salaries, allowances and benefits in kind Retirement benefits scheme contributions	Group 2005 2004 HK$’000 HK$’000 26,100 22,089 71 60 26,171 22,149	Group 2005 2004 HK$’000 HK$’000 26,100 22,089 71 60 26,171 22,149
		22,149

The number of non-director, highest paid employees or doctors practicing on their own accounts pursuant to an employee typed contract whose remuneration fell within the following bands is as follows:

HK$3,000,001 - HK$3,500,000 HK$4,000,001 - HK$4,500,000 HK$4,500,001 - HK$5,000,000 HK$5,000,001 - HK$5,500,000 HK$7,500,001 - HK$8,000,000 HK$8,500,001 - HK$9,000,000	Number of employees 2005 2004 1 – 1 1 1 2 1 – – 1 1 – 5 4	Number of employees 2005 2004 1 – 1 1 1 2 1 – – 1 1 – 5 4
		4

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FINANCIAL INFORMATION OF THE QHA GROUP

10. TAX

Hong Kong profits tax has been provided at the rate of 17.5% (2004: 17.5%) on the estimated assessable profits arising in Hong Kong during the year.

Group: Current – Hong Kong Charge for the year Overprovision in prior years Deferred_(note 25)_ Total tax charge for the year	2005 HK$’000 10,547 (247) – 10,300	2004 HK$’000 9,562 – (671) 8,891

A reconciliation of the tax expense applicable to profit before tax using the Hong Kong statutory tax rate to the tax expense at the effective tax rate, and a reconciliation of the applicable rate (i.e., the Hong Kong statutory tax rate) to the effective tax rate, are as follows:

Profit before tax Tax at the Hong Kong statutory tax rate Profits and losses attributable to jointly-controlled entities and an associate Adjustments in respect of current tax of previous periods Income not subject to tax Expenses not deductible for tax Tax losses for the year not recognised Tax losses utilised from previous periods Others Tax charge at the Group’s effective rate	Group 2005 2004 HK$’000 % HK$’000 % 66,440 53,909 11,627 17.5 9,434 17.5 21 – – – (247) (0.3) – – (408) (0.6) (5) – 555 0.8 521 1.0 60 0.1 393 0.7 (2,432) (3.7) (1,559) (2.9) 1,124 1.7 107 0.2 10,300 15.5 8,891 16.5

As set out in the financial statements for the year ended 31 December 2004, the Hong Kong Inland Revenue Department was in dispute over certain tax issues related to prior years with certain medical practices in which the Group has business interests and had issued notices of additional assessments to the medical practices (the “Tax Disputes”). The Tax Disputes were settled in 2004 and the corresponding tax liabilities, which were fully provided for in the prior years, were also settled in 2004.

11. PROFIT FOR THE YEAR ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY

The profit for the year attributable to equity holders of the Company for the year ended 31 December 2005 dealt with in the financial statements of the Company, was HK$15,257,000 (2004: HK$16,705,000) (note 28(b)).

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FINANCIAL INFORMATION OF THE QHA GROUP

12. DIVIDENDS

Interim – HK2.5 cents (2004: HK1 cent) per ordinary share Proposed final – HK3.25 cents (2004: HK1.5 cents) per ordinary share	2005 HK$’000 4,883 6,348 11,231	2004 HK$’000 2,167 3,250
		5,417

The proposed final dividend for the year is subject to the approval of the Company’s shareholders at the forthcoming annual general meeting.

The proposed final dividend for 2004 has been adjusted by HK$321,000, details of which are included in note 26(i).

13. EARNINGS PER SHARE ATTRIBUTABLE TO ORDINARY EQUITY HOLDERS OF THE COMPANY

The calculation of basic earnings per share amounts is based on the profit for the year attributable to ordinary equity holders of the Company of HK$56,140,000 (2004: HK$45,018,000), and the weighted average number of 201,144,975 (2004: 216,649,775) ordinary shares in issue during the year.

The calculation of diluted earnings per share amounts is based on the profit for the year attributable to ordinary equity holders of the Company of HK$56,140,000 (2004: HK$45,018,000). The weighted average number of ordinary shares used in the calculation is the 201,144,975 (2004: 216,649,775) ordinary shares in issue during the year, as used in the basic earnings per share calculation and the weighted average number of 371,979 (2004: 334,697) ordinary shares assumed to have been issued at no consideration on the deemed exercise or conversion of all dilutive potential shares into ordinary shares.

The outstanding warrants during the year were not accounted for in the calculation of diluted earnings per share as they did not have a dilutive effect on the basic earnings per share for the year.

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FINANCIAL INFORMATION OF THE QHA GROUP

14. PROPERTY, PLANT AND EQUIPMENT

Group

Leasehold improvements HK$’000 31 December 2005 At 31 December 2004 and 1 January 2005: Cost 72,075 Accumulated depreciation (52,757) Net carrying amount 19,318 At 1 January 2005, net of accumulated depreciation 19,318 Additions 6,668 Disposals/write-off (396) Depreciation provided during the year (10,567) As 31 December 2005, net of accumulated depreciation 15,023 At 31 December 2005: Cost 74,075 Accumulated depreciation (59,052) Net carrying amount 15,023 31 December 2004 At 1 January 2004: Cost 72,087 Accumulated depreciation (47,918) Net carrying amount 24,169 At 1 January 2004, net of accumulated depreciation 24,169 Additions 6,548 Disposals/write-off (764) Depreciation provided during the year (10,635) Reclassification – As 31 December 2004, net of accumulated depreciation 19,318 At 31 December 2004: Cost 72,075 Accumulated depreciation (52,757) Net carrying amount 19,318	Furniture, fixtures and office equipment HK$’000 19,221 (14,733) 4,488 4,488 1,367 (58) (2,139) 3,658 19,174 (15,516) 3,658 19,239 (13,238) 6,001 6,001 968 (73) (2,428) 20 4,488 19,221 (14,733) 4,488	Medical equipment HK$’000 19,978 (15,040 ) 4,938 4,938 4,226 (692 ) (3,503) 4,969 23,073 (18,104 ) 4,969 18,157 (11,230) 6,927 6,927 2,065 (128 ) (3,926) – 4,938 19,978 (15,040 ) 4,938	Computer equipment and software HK$’000 12,556 (10,227 ) 2,329 2,329 1,188 (15) (1,328) 2,174 13,268 (11,094) 2,174 11,722 (8,604) 3,118 3,118 1,058 (3) (1,824) (20) 2,329 12,556 (10,227 ) 2,329	Motor vehicles HK$’000 641 (102) 539 539 – – (194) 345 641 (296) 345 42 (8) 34 34 599 – (94) – 539 641 (102) 539	Total HK$’000 124,471 (92,859 ) 31,612 31,612 13,449 (1,161) (17,731 ) 26,169 130,231 (104,062 ) 26,169 121,247 (80,998 ) 40,249 40,249 11,238 (968 ) (18,907 ) – 31,612 124,471 (92,859 ) 31,612

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APPENDIX II

FINANCIAL INFORMATION OF THE QHA GROUP

The net book value of the Group’s property, plant and equipment held under a hire purchase contract included in the total amount of furniture, fixtures and office equipment at 31 December 2005, amounted to approximately HK$17,000 (2004: HK$22,000).

15. UNLISTED EQUITY INVESTMENTS


	2005	2004
	HK$’000	HK$’000
Unlisted equity investments, at cost	–	78

The above investments were designated as available-for-sale financial assets on 1 January 2005. During the year, the Group disposed of all the above investments for an aggregate consideration of HK$78,000.

16. LOAN TO AN INVESTEE COMPANY


	2005	2004
	HK$’000	HK$’000
Loan to an investee company	–	102

The loan to an investee company was unsecured, interest-free and was fully repaid during the year.

– 130 –

APPENDIX II

FINANCIAL INFORMATION OF THE QHA GROUP

17. GOODWILL

The amount of goodwill capitalised as an asset in the consolidated balance sheet, arising from the acquisition of an elderly care home, is as follows:

Group
31 December 2005
At 1 January 2005:
Cost as previously reported
Effect of adopting HKFRS 3_(note 2.2 (c))
Cost as restated
Accumulated amortisation and impairment as previously reported
Effect of adopting HKFRS 3(note 2.2 (c))_
Accumulated impairment as restated
Net carrying amount
Cost at 1 January 2005, net of accumulated impairment
Impairment during the year
Carrying amount at 31 December 2005
At 31 December 2005:
Cost
Accumulated impairment
Net carrying amount

HK$’000
10,192
(1,924)
8,268
(4,465)
1,924
(2,541)
5,727
5,727
(2,200)
3,527
8,268
(4,741)
3,527

During the year, the Group recognised an impairment of goodwill in the amount of HK$2,200,000 (2004: HK$2,176,000), based on an assessment of the recoverable amount for the elderly care home. The impairment loss is included in the elderly care services segment.

– 131 –

APPENDIX II

FINANCIAL INFORMATION OF THE QHA GROUP

Group

31 December 2004 At 1 January 2004: Cost Accumulated amortisation and impairment Net carrying amount Cost at 1 January 2004, net of accumulated amortisation and impairment Amortisation provided during the year Impairment during the year Cost at 31 December 2004, net of accumulated amortisation and impairment At 31 December 2004: Cost Accumulated amortisation and impairment Net carrying amount	HK$’000 10,192 (1,798) 8,394 8,394 (491) (2,176) 5,727 10,192 (4,465) 5,727

In 2004, goodwill not previously eliminated against the consolidated reserves was amortised on the straight-line basis over its estimated useful of twenty years.

As further detailed in note 2.2 (c) to the financial statements, the Group applied the transitional provisions of HKFRS 3 that permitted goodwill in respect of business combinations which occurred prior to 2001, to remain eliminated against the consolidated reserves.

– 132 –

APPENDIX II

FINANCIAL INFORMATION OF THE QHA GROUP

The amount of goodwill remaining in the consolidated reserves as at 1 January 2005, arising from the acquisition of subsidiaries, businesses and elderly care homes, prior to the adoption of SSAP 30 in 2001, is as follows:

Group
	Goodwill
	eliminated
	against
	consolidated
	reserves
	HK$’000
31 December 2005
At 1 January 2005
Cost as previously reported	541,361
Accumulated impairment as previously reported	(541,361)
Net carrying amount at 1 January 2005 and 31 December 2005	–
31 December 2004
Cost as at 1 January 2004	547,191
Closure of an elderly home	(5,830)
At 31 December 2004	541,361
At 31 December 2004:
Cost	541,361
Accumulated impairment	(541,361)
Net carrying amount	–

Impairment testing of goodwill

Goodwill arising from the acquisition of an elderly care home in a business combination has been allocated to an elderly care home cash-generating unit (the “Cash-generating Unit”) for impairment testing. The recoverable amount of the Cash-generating Unit has been determined based on a value in use calculation using cash flow projections based on financial budgets covering a 5-year period approved by senior management. The discount rate applied to cash flow projections is 11% (2004: 8.5%) and cash flows beyond the five-year period are extrapolated using a zero (2004: zero) percentage growth rate.

The net carrying amount of goodwill allocated to the Cash-generating Unit was approximately HK$3,527,000 at 31 December 2005 (2004: HK$5,727,000).

Key assumptions were used in the value in use calculation of the Cash-generating Unit for 31 December 2005 and 31 December 2004. The following describes each key assumption on which management has based its cash flow projections to undertake impairment testing of goodwill:

Budgeted revenue and results of operation

The budgeted revenue and results of operation have been determined based on the past performance of the Cash-generating Unit and management’s expected market development.

– 133 –

APPENDIX II

FINANCIAL INFORMATION OF THE QHA GROUP

Discount rates

The discount rates used are before tax and reflect specific risks relating to the Cash-generating Unit.

Business environment

No major changes in the existing political, legal and economic conditions in Hong Kong.

18. INTERESTS IN SUBSIDIARIES

Unlisted shares, at cost Due from subsidiaries Due to subsidiaries Impairment	Company 2005 2004 HK$’000 HK$’000 35,443 35,443 1,223,866 1,229,375 (302,638) (274,517 956,671 990,301 (409,342) (409,342 547,329 580,959	Company 2005 2004 HK$’000 HK$’000 35,443 35,443 1,223,866 1,229,375 (302,638) (274,517 956,671 990,301 (409,342) (409,342 547,329 580,959
		990,301 (409,342
		580,959

The balances with subsidiaries are unsecured, interest-free and have no fixed terms of repayment. The carrying amounts of these amounts due from/to subsidiaries approximate to their fair values.

Particulars of the principal subsidiaries are as follows:

			Percentage	Percentage
		Nominal value	of equity
	Place of	of issued	attributable
	incorporation/	ordinary	to the		Principal
Name	operations	share capital	Company		activities
			2005	2004
Medical services
Berkshire Group Limited	British Virgin	US$1	100	100	Provision of healthcare
	Islands/				services
	Hong Kong
Marvellous Way Limited	Hong Kong	HK$10	100	100	Operation of Chinese
					medicine clinics
Quality HealthCare Medical	Hong Kong	HK$1,300	100	100	Medical facilities and
Centre Limited					services provider
Quality HealthCare Medical	Hong Kong	HK$2	100	100	Provision of contract
Services Limited					healthcare services
Quality HealthCare	Hong Kong	HK$2	100	100	Provision of
Professional Services Limited					professional services
Allied Medical Practices	Hong Kong	HK$2	100	100	Provision of contract
Guild Limited					healthcare services

– 134 –

APPENDIX II

FINANCIAL INFORMATION OF THE QHA GROUP

			Percentage	Percentage
		Nominal value	of equity
	Place of	of issued	attributable
	incorporation/	ordinary	to the		Principal
Name	operations	share capital	Company		activities
			2005	2004
Nursing agency, physiotherapy
and dental services
Quality HealthCare Dental	Hong Kong	HK$1,000	100	100	Provision of dental
Services Limited					services
Quality HealthCare Nursing	Hong Kong	HK$10,000	100	100	Provision of nursing
Agency Limited (formerly					agency services
known as Quality HealthCare
Nursing Services Limited)
Quality HealthCare	Hong Kong	HK$1,000	100	100	Provision of
Physiotherapy Services					physiotherapy
Limited					services
Quality HealthCare	Hong Kong	HK$1	100	–	Provision of
Psychological Services Limited					psychological
					services
Dynamic People Group Limited	British Virgin	US$1	100	100	Provision of LASIK and
	Islands/				optical surgical
	Hong Kong				services
Elderly care services
Quality HealthCare Nursing	Hong Kong	HK$1,000	100	100	Provision of elderly
Home Limited (formerly					care services
known as Conifer Elderly
Services Limited)
QHES Limited	British Virgin	US$1	100	100	Provision of elderly
	Islands/				care services
	Hong Kong
Quality HealthCare Man Kee	Hong Kong	HK$1,000	100	100	Provision of elderly
Elderly Limited					care services
Corporate and other
Quality HealthCare Investment	British Virgin	US$1	100	100	Investment holding
Limited	Islands/
	Hong Kong
Sino Success (HK) Limited	Hong Kong	HK$2	100	100	Provision of corporate
					services

Except for Quality HealthCare Man Kee Elderly Limited, all the above subsidiaries are indirectly held by the Company.

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

– 135 –

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FINANCIAL INFORMATION OF THE QHA GROUP

19. INTERESTS IN JOINTLY-CONTROLLED ENTITIES

Share of net assets Due from a jointly-controlled entity	Group 2005 2004 HK$’000 HK$’000 487 54 332 171 819 225	Group 2005 2004 HK$’000 HK$’000 487 54 332 171 819 225
		225

The amount due from a jointly-controlled entity is unsecured, interest-free and has no fixed terms of repayment. The carrying amount of the amount due from a jointly-controlled entity approximates to its fair value.

Particulars of the jointly-controlled entities are as follows:

	Place of		Percentage of
	incorporation	Ownership	Voting	Profit	Principal
Name	and operations	interest	power	sharing	activities
Women’s Health Centres	Hong Kong	50	50	50	Inactive
International Limited
Poltallock Limited*	Hong Kong	50	50	50	Provision of facilities and
					technical services to
					medical and dental
					practitioners

* Not audited by Ernst & Young Hong Kong or other Ernst & Young International member firms.

All of the above investments in jointly-controlled entities are indirectly held by the Company.

20. INTEREST IN AN ASSOCIATE

Share of net assets Loan to an associate	Group 2005 2004 HK$’000 HK$’000 1,935 – 346 – 2,281 –	Group 2005 2004 HK$’000 HK$’000 1,935 – 346 – 2,281 –
		–

The loan to an associate is unsecured, interest-free and has no fixed terms of repayment. The carrying amount of the loan to an associate approximates to its fair value.

– 136 –

APPENDIX II

FINANCIAL INFORMATION OF THE QHA GROUP

Particulars of the associate are as follows:

			Percentage
			of ownership
	Particulars of		interest
	issued	Place of	attributable	Principal
Name	shares held	incorporation	to the Group	activity
SkinCentral Limited	Ordinary shares	Hong Kong	30	Provision of
	of HK$1 each			dermatology,
				aesthetic and
				laser services

The above associate is indirectly held by the Company.

The above associate has been accounted for using the equity method in these financial statements.

The following table illustrates the summarised financial information of the Group’s associate extracted from its management accounts:

	2005	2004
	HK$’000	HK$’000
Assets	8,119	–
Liabilities	(1,669)	–
Revenue	3,297	–
Loss	(549)	–

21. INVENTORIES

Medicine and dispensary supplies Consumables	Group 2005 2004 HK$’000 HK$’000 7,334 6,836 547 514 7,881 7,350	Group 2005 2004 HK$’000 HK$’000 7,334 6,836 547 514 7,881 7,350
		7,350

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FINANCIAL INFORMATION OF THE QHA GROUP

22. ACCOUNTS RECEIVABLE

The Group generally allows an average general credit period of 30 to 90 days to its businessrelated customers, except for certain well established or major customers, where the terms are extended beyond 90 days. The Group seeks to maintain strict control over its outstanding receivables and overdue balances are reviewed regularly by senior management. In view of the aforementioned and the fact that the Group’s accounts receivable relate to a large number of diversified customers, there is no significant concentration of credit risk. Accounts receivable are non-interest-bearing.

An aged analysis of the Group’s accounts receivable as at the balance sheet date, based on the invoice date and net of provisions, is as follows:

Current–90 days 91–180 days Over 180 days	Group 2005 2004 HK$’000 HK$’000 78,747 70,840 3,922 842 601 18 83,270 71,700	Group 2005 2004 HK$’000 HK$’000 78,747 70,840 3,922 842 601 18 83,270 71,700
		71,700

23. ACCOUNTS PAYABLE, OTHER PAYABLES, ACCRUALS AND DEPOSITS RECEIVED

An aged analysis of the accounts payable included in accounts payable, other payables, accruals and deposits received as at the balance sheet date, based on the invoice date, is as follows:

Accounts payable: Current – 90 days 91 – 180 days 181 – 360 days Over 360 days Other payables, accruals and deposits received	Group 2005 2004 HK$’000 HK$’000 24,699 17,330 16 239 10 388 364 439 25,089 18,396 76,684 73,473 101,773 91,869	Group 2005 2004 HK$’000 HK$’000 24,699 17,330 16 239 10 388 364 439 25,089 18,396 76,684 73,473 101,773 91,869
		18,396 73,473
		91,869

The accounts payable are non-interest-bearing and are normally settled on 30-60 days terms.

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APPENDIX II

FINANCIAL INFORMATION OF THE QHA GROUP

24. HIRE PURCHASE CONTRACT PAYABLE

The Group leases certain office equipment for its medical services business under a hire purchase arrangement. The term of the hire purchase is five years.

At 31 December 2005, the total future minimum lease payments under the hire purchase arrangement and its present value were as follows:

Group Amounts payable: Within one year In the second year In the third to fifth years, inclusive Total minimum hire purchase contract payments Future finance charges Total net hire purchase contract payable Portion classified as current liabilities Long term portion	Minimum lease payments 2005 2004 HK$’000 HK$’000 6 6 6 6 11 17 23 29 (5) (7) 18 22 (5) (5) 13 17	Present value of minimum lease payments 2005 2004 HK$’000 HK$’000 6 6 6 4 6 12 18 22

25. DEFERRED TAX

The movement in deferred tax liabilities during the year is as follows:

Group

At 1 January Deferred tax credited to the income statement during the year_(note 10)_ At 31 December	Accelerated tax depreciation 2005 2004 HK$’000 HK$’000 1,057 1,728 – (671 1,057 1,057	Accelerated tax depreciation 2005 2004 HK$’000 HK$’000 1,057 1,728 – (671 1,057 1,057
		1,057

The Group has tax losses arising in Hong Kong of HK$67,706,000 (2004: HK$81,258,000) that are available indefinitely for offsetting against future taxable profits of the companies in which the losses arose. Deferred tax assets have not been recognised in respect of these losses as they have arisen in subsidiaries that have been loss-making for some time or it is not considered probable that taxable profits will be available against which such tax losses can be utilised.

There are no income tax consequences attaching to the payment of dividends by the Company to its shareholders.

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FINANCIAL INFORMATION OF THE QHA GROUP

26. SHARE CAPITAL

Authorised: 3,000,000,000 (2004: 3,000,000,000) ordinary shares of HK$0.10 each Issued and fully paid: 195,327,814 (2004: 216,672,884) ordinary shares of HK$0.10 each	2005 HK$’000 300,000 19,533	2004 HK$’000 300,000

		21,667

The movements in share capital during the current and the prior years were as follows:

Year ended 31 December 2005

(i) The Company repurchased a total of 21,667,288 ordinary shares at a price of HK$2.00 in cash per ordinary share pursuant to a general offer made by Sun Hung Kai International Limited, a wholly-owned subsidiary of SHK, on behalf of the Company to repurchase up to 21,667,288 ordinary shares which was completed in April 2005 (the “Share Repurchase”). The repurchased shares, representing 10% of the then issued share capital of the Company, were subsequently cancelled. The premium paid and the expenses incurred on the Share Repurchase of approximately HK$41,168,000 and HK$1,326,000, respectively, were charged against the retained profits. Further details of the Share Repurchase are set out in a circular of the Company dated 3 March 2005.

Since the shares repurchased (the “Shares”) under the Share Repurchase were subsequently cancelled, they did not rank for the 2004 final dividend, as the record date for the 2004 final dividend was 20 May 2005, which was after the repurchase and cancellation of the Shares.

(ii) The subscription rights attaching to 57,600 share options were exercised at an adjusted subscription price of HK$1.47 per ordinary share (note 27), resulting in the issue of 57,600 ordinary shares of the Company of HK$0.10 each for a total cash consideration, before expenses, of approximately HK$85,000.
(iii) 264,618 shares of HK$0.10 each were issued for cash at an adjusted subscription price of HK$2.46 per ordinary share pursuant to the exercise of the Company’s warrants for a total cash consideration, before expenses, of approximately HK$651,000.

Year ended 31 December 2004

(iv) The subscription rights attaching to 51,000 share options were exercised at the subscription price of HK$1.50 per ordinary share, resulting in the issue of 51,000 ordinary shares of the Company of HK$0.10 each for a total cash consideration, before expenses, of approximately HK$77,000.

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FINANCIAL INFORMATION OF THE QHA GROUP

A summary of the transactions during the current year and the prior year with reference to the above movements in the Company’s issued ordinary share capital is as follows:

Notes At 1 January 2004 Share options exercised iv) At 31 December 2004 and 1 January 2005 Shares repurchased i) Share options exercised ii) Warrants exercised iii) At 31 December 2005	Number of shares in issue 216,621,884 51,000 216,672,884 (21,667,288) 57,600 264,618 195,327,814	Issued share capital HK$’000 21,662 5 21,667 (2,167) 6 27 19,533	Share premium account HK$’000 139 72 211 – 79 624 914	Total HK$’000 21,801 77 21,878 (2,167) 85 651 20,447

Share options

Details of the Company’s share incentive plan and the share options issued under the share incentive plan are included in note 27 to the financial statements.

Warrants

As at 1 January 2005, the aggregate amount of the outstanding warrants of the Company was HK$108,310,940, entitling the warrantholders to subscribe up to 43,324,376 ordinary shares of the Company of HK$0.10 each at a subscription price of HK$2.50 per ordinary share, payable in cash and subject to adjustment, for the period from 14 January 2004 to 13 January 2007. On 10 May 2005, as a result of the Share Repurchase (note 26(i)), the subscription price of the outstanding warrants of the Company was adjusted from HK$2.50 per ordinary share to HK$2.46 per ordinary share and thereby conferring rights to warrantholders to subscribe up to a total of 44,028,837 ordinary shares of the Company of HK$0.10 each. During the year, warrants in the amount of approximately HK$651,000 were exercise at an adjusted subscription price of HK$2.46 per ordinary share to subscribe for 264,618 ordinary shares of the Company of HK$0.10 each.

At the balance sheet date, the aggregate amount of the outstanding warrants of the Company was approximately HK$107,659,977. The exercise in full of such outstanding warrants would, under the present capital structure of the Company, result in the issue of 43,764,218 additional ordinary shares of the Company of HK$0.10 each and additional share capital of approximately HK$4,376,422 and share premium of approximately HK$103,283,555 (before issue expenses).

27. SHARE OPTION PLAN

The Company operates a share incentive plan (the “Share Incentive Plan”) for the purpose of providing incentives and rewards to eligible participants who contribute to the success of the Group’s operations.

Pursuant to the Share Incentive Plan, the board of directors of the Company may, at its discretion, invite any employees, executive or non-executive directors (including independent non-executive directors), officers, advisers, consultants or such other persons from time to time to be an eligible person to whom share options will be granted as an incentive to attract and retain them for their contributions to the business development of the Group. The Share Incentive Plan was approved and adopted by the Company on 7 June 2002 (the “Adoption Date”) and, unless otherwise cancelled or amended, will remain in force for 10 years from that date.

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APPENDIX II

FINANCIAL INFORMATION OF THE QHA GROUP

The total number of ordinary shares in respect of which options may be granted under the Share Incentive Plan (excluding options lapsed) is not permitted to exceed 10% of the shares of the Company in issue as at the Adoption Date, without a prior approval from the Company’s ordinary shareholders. The maximum entitlement of each eligible participant under the Share Incentive Plan of the Group in any 12-month period up to the date of grant must not exceed 1% of the ordinary shares of the Company in issue at the date of grant, unless shareholders’ approval has been obtained in a general meeting.

The offer of a grant of share options may be accepted within 14 business days from the date of the offer, upon payment of a nominal consideration of HK$1 in total by the grantee. The exercise period of the share options granted is determinable by the directors, but in any event such period may not go beyond 10 years from the Adoption Date.

The exercise price of the share options is determinable by the directors, but may not be less than the highest of (i) the nominal value of the Company’s ordinary shares; (ii) the average Stock Exchange closing price of the Company’s ordinary shares on the five consecutive trading days immediately preceding the date of the offer of the share option; and (iii) the closing price of the Company’s ordinary shares on the Stock Exchange on the date of the offer of the share option (which must be a business day). Further details of the Share Incentive Plan are also set out in a circular of the Company dated 22 May 2002.

There were no share options granted under the Share Incentive Plan during the year (2004: Nil).

The following share options were outstanding under the Share Incentive Plan during the year:

Name or category of participant Directors Mr. Brian Damian O’Connor**** Mr. Wong Tai Chun, Mark Other employees In aggregate		Number of share options Exercise Exercise price Adjustment period of of share arising Date of share options Exercised Forfeited* from At 31 grant of options (as adjusted during during the Share December share (both dates for the Share the year the year Repurchase 2005 options* inclusive) Repurchase)* HK$ – (180,000 ) (20,000 ) – 16-10-2002 16-10-2003 1.47 to 15-10-2007 – – (15,000 ) 135,000 16-10-2002 16-10-2003 1.47 to 15-10-2007 – (180,000 ) (35,000 ) 135,000 (57,600 ) (96,800 ) (122,750 ) 1,000,350 16-10-2002 16-10-2003 1.47 to 15-10-2007 (57,600 ) (276,800 ) (157,750 ) 1,135,350	Price of the Company’s shares**
			Immedi- ately At before exercise the date of exercise share date options HK$ HK$ N/A N/A N/A N/A 1.96 1.96
	At 1 January 2005 200,000 150,000 350,000 1,277,500 1,627,500	Exercised during the year – – – (57,600 ) (57,600 )

The vesting period of the share options under the Share Incentive Plan is from the date of the grant until the commencement of the exercise period.
** The price of the Company’s shares disclosed immediately before and at the exercise date of the share options are the weighted average of the Stock Exchange closing price immediately before and at the dates on which the share options were exercised.

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FINANCIAL INFORMATION OF THE QHA GROUP

*** On 10 May 2005, the exercise price for ordinary shares under each outstanding share option was adjusted from HK$1.50 per ordinary share to HK$1.47 per ordinary share and the aggregate number of ordinary shares which can be subscribed for under the outstanding share options has been adjusted from 1,577,500 to 1,419,750 as a result of the repurchase and cancellation of 21,667,288 ordinary shares of the Company under a voluntary conditional cash offer announced by the Company on 24 January 2005. The exercise price of the share options is subject to adjustment in the case of rights or bonus issues, or other similar changes in the Company’s share capital.
**** Mr. Brian Damian O’Connor retired as a director of the Company on 20 May 2005 and his share options under the Share Incentive Plan were lapsed on 20 August 2005.

The share options granted are exercisable in accordance with the terms and restrictions contained in the respective offer letters.

At 31 December 2005, the Company had 1,135,350 share options outstanding under the Share Incentive Plan, which represented approximately 0.58% of the Company’s ordinary shares in issue as at that date. The exercise in full of the outstanding share options would, under the present capital structure of the Company, result in the issue of 1,135,350 additional ordinary shares of the Company of HK$0.10 each, additional share capital of HK$113,535 and share premium of HK$1,555,430 (before issue expenses).

Subsequent to the balance sheet date, a total of 15,750 share options granted to certain employees were lapsed.

At the date of approval of these financial statements, the Company had 1,119,600 share options outstanding under the Share Incentive Plan, which represented approximately 0.57% of the Company’s ordinary shares in issue as at that date.

28. RESERVES

(a) Group

The amounts of the Group’s reserves and the movements therein for the current and prior years are presented in the consolidated statement of changes in equity on page 101 to the financial statements.

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FINANCIAL INFORMATION OF THE QHA GROUP

(b) Company

Notes At 1 January 2004 Share options exercised 26(iv) Profit for the year Interim 2004 dividend 12 Proposed final 2004 dividend 12 At 31 December 2004 and 1 January 2005 Share repurchased 26(i) Share repurchased expenses 26(i) Adjustment for final 2004 dividend Share options exercised 26(ii) Warrants exercised 26(iii) Profit for the year Interim 2005 dividend 12 Proposed final 2005 dividend 12 At 31 December 2005	Share premium account HK$’000 139 72 – – – 211 – – – 79 624 – – – 914	Retained profits HK$’000 558,278 – 16,705 (2,167) (3,250) 569,566 (41,168) (1,326) 321 – – 15,257 (4,883) (6,348) 531,419	Total HK$’000 558,417 72 16,705 (2,167) (3,250) 569,777 (41,168) (1,326) 321 79 624 15,257 (4,883) (6,348) 532,333

29. CONTINGENT LIABILITIES

(a) At the balance sheet date, contingent liabilities not provided for in the financial statements were as follows:
(i) Corporate guarantees given by the Company to certain third parties in connection with tenancy agreements entered into by its subsidiaries with an aggregate amount of approximately HK$42,403,000 at 31 December 2005 (2004: HK$63,654,000).
(ii) Corporate guarantees given by the Company to banks in connection with banking facilities granted to its subsidiaries with an aggregate amount of HK$60,000,000 at 31 December 2005 (2004: HK$60,000,000).

As at 31 December 2005, the banking facilities granted to the subsidiaries subject to guarantees given to the banks by the Company were utilised to the extent of approximately HK$4,108,000 (2004: HK$3,526,000) for the issuance of bank guarantee letters.

(b) In the prior year, Quality HealthCare Medical Services Limited (“QHMS”) and Quality HealthCare Medical Centre Limited (“QHMC”), indirect subsidiaries of the Company, were served with a writ attaching a statement of claim by Asia Pacific Lasik Centre Limited claiming, inter alia, damages of HK$900,000 for breaches of contract on the parts of QHMS and QHMC. The case is being defended and a cross action mounted. At this stage, based on the development to date and having taken legal advice, the directors take the view that no contingency arises for which a provision is required to be made.

As at 31 December 2005, the Group was engaged in other litigation and claims which have not been disclosed in detail, as the possibility of an outflow of resources embodying economic benefits is remote.

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FINANCIAL INFORMATION OF THE QHA GROUP

(c) The Group and the Company had a contingent liability in respect of possible future long service payments to employees under the Employment Ordinance, with a maximum possible amount of approximately HK$7,648,000 (2004: HK$6,543,000) and HK$292,000 (2004: HK$250,000), respectively, as at 31 December 2005, as further explained under the heading “Employee benefits” in note 2.5 to the financial statements. The contingent liability has arisen because, at the balance sheet date, a number of current employees have achieved the required number of years of service to the Group and the Company in order to be eligible for long service payments under the Employment Ordinance if their employment is terminated under certain circumstances. A provision has not been recognised in respect of such possible payments, as it is not considered probable that the situation will result in a material future outflow of resources from the Group and the Company.

30. OPERATING LEASE ARRANGEMENTS

(a) As lessor

The Group subleases certain of its premises under operating lease arrangements with non-cancellable leases negotiated for terms ranging from twenty to twenty two months. The terms of the leases generally also require the tenants to pay security deposits.

At 31 December 2005, the Group had total future minimum lease receivables under noncancellable operating leases with its tenants falling due within one year of HK$80,000 (2004: Nil).

(b) As lessee

The Group leases certain of its medical centres, office premises and elderly care homes under operating lease arrangements. Leases for properties are negotiated for terms ranging from one to six years.

At 31 December 2005, the Group had total future minimum lease payments under noncancellable operating leases falling due as follows:

Within one year In the second to fifth years, inclusive After five years	Group 2005 2004 HK$’000 HK$’000 52,081 54,474 48,568 84,210 – 341 100,649 139,025	Group 2005 2004 HK$’000 HK$’000 52,081 54,474 48,568 84,210 – 341 100,649 139,025
		139,025

31. CAPITAL COMMITMENTS

In addition to the operating lease commitments detailed in note 30(b) above, the Group had the following capital commitments at the balance sheet date:


		2005	2004
		HK$’000	HK$’000
Contracted,	but not provided for:
Leasehold	improvements	600	–

At the balance sheet date, the Company did not have any significant capital commitments (2004: Nil).

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APPENDIX II

FINANCIAL INFORMATION OF THE QHA GROUP

32. RELATED PARTY TRANSACTIONS

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

(a) The Group had certain transactions with various indirect wholly-owned subsidiaries of Sun Hung Kai & Co. Limited (“SHK”), a substantial shareholder of the Company during the years ended 31 December 2005 and 2004, based on mutually agreed terms, pursuant to relevant agreements dated 7 February 2005 and 2 February 2004, respectively, for a term of one year as summarised below.
(i) The Group paid insurance premiums of approximately HK$3,707,000 (2004: HK$3,400,000) to Sun Hung Kai Insurance Consultants Limited in accordance with the relevant insurance brokerage services agreements;
(ii) The Group paid corporate secretarial services fees of approximately HK$1,140,000 (2004: HK$1,083,000) to Wineur Secretaries Limited in accordance with the relevant corporate secretarial services agreements; and
(iii) The Group paid internal audit and compliance consultancy services fees of approximately HK$12,000 (2004: HK$54,000) to SHK Consultancy Services Limited in accordance with the relevant internal audit and compliance consultancy services agreements.

Further details of these transactions are also set out in the announcements of the Company dated 7 February 2005 and 2 February 2004. Subsequent to the balance sheet date, on 27 January 2006, the Group entered into a new set of agreements with the relevant parties to continue the above- mentioned services for a term of one year commencing from 1 February 2006, further details of which are also set out in an announcement of the Company dated 27 January 2006.

The above transactions also constitute continuing connected transactions as defined in Chapter 14A of the Listing Rules.

(b) The Group paid a financial advisory fee of approximately HK$325,000 (2004: Nil) to Sun Hung Kai International Ltd. The fee was charged based on terms agreed between both parties.
(c) The Group paid service fees for the provision of facilities and services to a jointlycontrolled entity of HK$3,275,000 (2004: Nil) for its medical practices. The fee was charged based on terms agreed between both parties.
(d) The Group sold certain items of medical equipment at their carrying amounts totalling HK$701,000 (2004: Nil) to an associate.
(e) Outstanding balances with related parties:
(i) Included in the Group’s accounts payable, other payables, accruals and deposits received are outstanding balances with SHK and its wholly-owned subsidiaries totalling HK$771,000 (2004: Nil).
(ii) Details of the Group’s loan to its associate are included in note 20 to the financial statements, and details of the Group’s loan to its jointly-controlled entity are included in note 19 to the financial statements.

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FINANCIAL INFORMATION OF THE QHA GROUP

(f) Compensation of key management personnel of the Group:

Short term employee benefits Post-employment benefits Total compensation paid to key management personnel	2005 HK$’000 5,568 24 5,592	2004 HK$’000 5,578 24
		5,602

Further details of directors’ emoluments are included in note 8 to the financial statements.

33. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES AND FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES

The Group’s principal financial instruments comprise cash and bank balances and hire purchase contract payable. The main purpose of these financial instruments is to finance the Group operations. The Group has various other financial assets and liabilities such as accounts and other receivable, accounts and other payables, and deferred revenue, which arise directly from its operations. The Group does not hold or issue any derivative financial instruments.

The main risks arising from the Group’s financial instruments and the policies for managing each of these risks are summarised below.

Cash flow interest rate risk

Except for the Group’s short term bank deposits, the Group has no significant interest-bearing assets or liabilities. Cash at banks earns interest at floating rates based on daily bank deposit rates. Short term time deposits are made for varying periods of between one day and three months depending on the immediate cash requirements of the Group, and earns interest at the respective short term time deposit rates.

Liquidity risk

The Group’s objective is to maintain sufficient cash and bank balances with the availability of flexible bank credit facilities for its operations and development.

Credit risk

The Group in general provides services on credit to customers with good credit history or of low risk profile and accordingly, there is no requirement for collateral. The major exposure to credit risk of the Group’s financial assets, which comprise trade and other receivables, and cash and bank balances, arises from the default of the counterparty, with a maximum exposure equal to the carrying amount of these financial assets in the consolidated balance sheet.

At the balance sheet date, the Group had certain concentration of credit risk as 12% (2004: 8.4%) and 26.8% (2004: 23.3%) of the total accounts receivable were due from the Group’s largest customer and the five largest customers, respectively.

Foreign currency risk

The Group’s exposure to the risks of foreign currency is minimal, as the Group’s revenue is derived from customers based in Hong Kong and it primarily purchases from suppliers based in Hong Kong. As at the balance sheet date, all cash and bank deposits of the Group were denominated in Hong Kong dollars.

Fair values

As at 31 December 2005, the carrying amounts of the Group’s financial assets and liabilities approximate to their fair values.

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FINANCIAL INFORMATION OF THE QHA GROUP

34. MANAGEMENT OF THE FIXED-FEE CONTRACTS

The Group enters into the Fixed-fee Contracts, in which the Group uses its own centres, medical staff and other resources to provide medical/dental services covered by the contracts. The level of services to be rendered under the Fixed-fee Contracts is uncertain and depends on uncertain future events. The Group has to consider whether the cost of meeting its contractual obligations to provide the services under the Fixed-fee Contracts may exceed the revenue it will receive and the probability of such risk (the “Risk”), when assessing the pricing and provisioning for such contracts.

The frequency and severity of the Risk are affected by many factors, including, inter alia, the health status and awareness of the persons covered by the Fixed-fee Contracts and that of the general public in Hong Kong, the outbreak/potential outbreak of any epidemic, climatic changes, the duration of those contracts (which in general are of short duration), as well as a diversity of social, industrial and economic factors. The risk associated with such factors (including any undue concentration thereof and the probability of the occurrence of certain events affected by them) on the actual recovery rate for individual contracts is the key source of uncertainty that needs to be estimated.

The Group manages the Risk through periodic review of the estimated and actual recovery rate of individual contracts and includes such assessment in establishing its pricing and contract continuance policies.

As the related assets and liabilities of the Fixed-fee Contracts are non-interest-bearing and as the provisions of services on credit are in general only made to customers with good credit history or of low risk profile, the Group’s exposure to interest rate risk and credit risk in respect of such contracts is considered to be minimal.

As at 31 December 2005, accounts receivable and deferred revenue of the Group attributable to its Fixed-fee Contracts amounted to approximately HK$8,752,000 (2004: HK$10,595,000) and HK$2,732,000 (2004: HK$6,447,000), respectively.

35. COMPARATIVE AMOUNTS

As further explained in notes 2.2 and 2.4 to the financial statements, due to the adoption of new HKFRSs during the current year, the accounting treatment and presentation of certain items and balances in the financial statements have been revised/ reclassified to comply with the new requirements. Accordingly, certain comparative amounts have been reclassified to conform with the current year’s presentation.

36. APPROVAL OF THE FINANCIAL STATEMENTS

The financial statements were approved and authorised for issue by the board of directors on 28 March 2006.

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APPENDIX III MANAGEMENT DISCUSSION AND ANALYSIS OF THE QHA GROUP

MANAGEMENT DISCUSSION AND ANALYSIS OF THE QHA GROUP

(I) FOR THE YEAR ENDED 31ST DECEMBER, 2003

The following is the management discussion and analysis principally extracted from the annual report of the QHA Group for the year ended 31st December, 2003. Terms and definitions used below shall bear the respective meanings as defined in such annual report.

OPERATIONAL REVIEW

Quality HealthCare Medical Services (“QHMS”)

Consolidation

Following the successful reorganization in 2002, QHMS continued to restructure and consolidate its business in 2003, leveraging on the increased efficiency of its network and infrastructure. Divisional profit of QHMS in 2003 was HK$50.0 million, showing a growth of 20% compared to HK$41.7 million in 2002. Revenue for 2003 showed a slight increase of 1% to HK$586.7 million, compared to HK$579.8 million in 2002. This is directly resulting from the reduction in service fees due to economic circumstances and SARS despite an increase in the number of contracts achieved in 2003. Earnings Before Interest, Tax, Depreciation and Amortization (“EBITDA”) for 2003 was HK$59.7 million (2002: HK$50.1 million).

Dedicated Infrastructure

The current network of 35 core medical centres together with an extensive affiliated doctor network provides a sound base for QHMS in Hong Kong, enabling QHMS clients to enjoy healthcare services that are efficient and professional. To support the network, QHMS has devoted significant resources to building dedicated teams of experts to maintain practice standards and quality assurance, transaction platforms, medical affairs, and customer servicing. This infrastructure has enabled QHMS to service sizeable contracts with widely differing requirements. It has also provided corporate clients with the option of outsourcing medical scheme management utilizing its experience and medical knowledge, and thereby reducing internal manpower costs.

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MANAGEMENT DISCUSSION AND ANALYSIS OF THE QHA GROUP

Competence

QHMS has accepted the challenge of an extremely competitive market and is devoting additional resources to maintain its ability to deliver services of international standard and to satisfy the needs of its corporate clients and the community of Hong Kong. Initiatives to enhance service delivery include medical centre and practice audits, service training, appraisals for paramedical staff, and ongoing renovation projects for medical centres to upgrade its facilities. These initiatives are planned to distinguish QHMS from its competitors and assist it in further development of specialist care.

Platform for Growth

QHMS is planning diversification of its range of life enhancement services including establishment of a reproductive medicine centre and the provision of chronic disease management programs.

QHMS will maintain its focus on delivering services to corporate clients, but will also look to extend its reach into the consumer market, in an effort to capture opportunities offered by medical tourism and retail services.

Medical Scheme Management

The QHMS medical affairs team, comprising physicians, pharmacists, nurses, and other healthcare professionals is further developing its specialization in scheme management. The knowledge and experience accumulated by this team will assist QHMS to participate in the Government’s public private partnership and service any outsourcing program in the future.

Proactive Care

Throughout the year and particularly during the SARS period, QHMS has supported Government programs as a private sector healthcare provider and has also provided clients with updated and timely information, services, and community programs in a flexible manner. Preventive healthcare services and programs such as comprehensive physical checkups, vaccination programs, and public education, will continue as top priorities for QHMS in the coming year.

Contributions to The Community

QHMS is aware of its social responsibility to contribute to the community in which it operates. In 2003, QHMS actively participated in the Operation Santa Claus program, and through support from staff, clients, and associates, has raised substantial funding for the beneficiaries of Children’s Heart Foundation.

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APPENDIX III

MANAGEMENT DISCUSSION AND ANALYSIS OF THE QHA GROUP

Quality HealthCare Chinese Medicine (“QHCM”)

Care of Choice

QHCM now maintains a network of seven core centres and is seeking growth opportunities. It is working closely with QHMS to achieve greater appreciation of integrated holistic care and continues to benchmark against the academic bodies for quality assurance and accreditation. In 2003, QHCM has actively participated in various public exhibitions and health seminars with significant positive response.

Corporate Care

QHCM has worked closely with QHMS to incorporate traditional Chinese Medicine into corporate health plans and insurance plans to meet the growing demands of corporate clients. In 2003, QHCM signed its first prepaid contract with an insurance company.

Quality HealthCare Services (“QHS”)

Dental, Physiotherapy and Nursing continued to deliver growth and achieved an increase in revenue of 4% in 2003. Divisional profit increased by 108% over the prior year, as a result of the successful re-engineering of manpower and contract management. EBITDA for 2003 was HK$5.6 million (2002: HK$3.7 million).

Quality HealthCare Nursing (“QHN”)

The demand for private nursing services for patients in the hospitals decreased due to SARS. However the revenue for the Nursing division was supported by the growth of other existing and new lines of business. In 2003, QHN successfully launched its paramedical services for insurance companies. It also won tenders from non government organizations for the provision of nursing services. QHN also worked in conjunction with a number of public hospitals to provide relief nurses to cover staff shortages and voluntary leave. Cost effective home help and home care programs have been offered to corporate clients and insurance companies to suit the changing market needs.

Quality HealthCare Dental (“QHD”)

QHD has remained profitable in 2003 despite the impact of SARS. The Division experienced growing demand in the New Territories. Second consultation rooms for two clinics were opened in 2003 and both have shown steady growth in utilization.

The range of cosmetic dentistry services provided by QHD was well received by clients, with the number of consultations increasing almost threefold in 2003. The annual client satisfaction survey for 2003 demonstrated that over 2,000 patients rated the services 97% excellent to good in all categories. Meanwhile, QHD has also established a committee of Standards & Compliance led by 5 senior dentists.

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APPENDIX III

MANAGEMENT DISCUSSION AND ANALYSIS OF THE QHA GROUP

Quality HealthCare Physiotherapy (“QHP”)

Utilization continued to improve for QHP in 2003 with an 11% growth in the number of visits. In addition to its core program for corporate clients, QHP has developed a number of consumer oriented products such as spinal and golf screening, onsite ergonomics evaluation, and exercise programs in order to provide holistic care for clients. QHP’s physiotherapists have also been providing regular screening and consultative services for various organizations in the community to maximize the mobility and well being of their elderly members, with a view to minimising excessive hospitalization and premature health deterioration.

Quality HealthCare Elderly Services (“QHES”)

SARS has unfortunately resulted in a longer term adverse impact on the elderly care industry, with average occupancy falling for many homes. The triple impact of economic circumstances, reduction in Comprehensive Social Security Assistance and the fear of institutional risk for SARS, has adversely affected the QHES occupancy rate.

An unfortunate result of the lower occupancy rate has been that the revenue of QHES decreased by 4% in 2003 and its divisional loss increased by 85%. EBITDA for 2003 was HK$7.1 million (2002: HK$8.6 million).

Throughout the SARS period, stringent infection control was enforced at all the elderly homes, successfully protecting all its staff and residents. In recognition of the contribution from private elderly homes during the SARS period, five outstanding homes were selected and representatives were invited by Social Welfare Department to join a post-SARS celebration attended by China’s Premier Wen Jiabao. QHES’s Man Kee home was one of the homes selected.

In compliance with the Social Welfare Department’s guidelines, an infection control officer has now been appointed at each home and in 2004, an isolation room will be added to each home.

Initiatives to rebuild the division’s performance are in progress, including intensive and focused marketing, liaison with landlords on rental reduction, and continuation of the delivery of quality and specialized nursing care for the residents of the homes.

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FINANCIAL REVIEW

1. Capital Structure Treasury Policy

(a) Equity and debt structure

QHA issued 2,790,000 shares during the year as a result of the exercise of employee share options. Apart from the aforesaid, QHA has not issued any shares or made any share repurchase during the year.

A capital reorganization of QHA was implemented and became effective on 30th December, 2003 which involved, among others, the following:

(i) a reduction of the nominal value of each issued ordinary share of QHA from HK$0.10 to HK$0.01 each by the cancellation of HK$0.09 of the paid-up capital for each issued share and the credit arising from such reduction of approximately HK$194,960,000 was applied as a set off against the accumulated losses of QHA.
(ii) a share consolidation of every ten reduced shares of HK$0.01 each as set out in (i) above into one consolidated share of HK$0.10 each.
(iii) The cancellation of the entire amount standing to the credit of the share premium account of QHA as at 30th June, 2003 and the credit arising therefrom of approximately HK$293,094,000 was applied as a set off against the accumulated losses of QHA.

On 12th January, 2004, a bonus issue of warrants was made in the proportion of one warrant for every five ordinary shares (after the share consolidation) held by members on the register of members on 29th December, 2003. Each warrant entitles the holder to subscribe for one ordinary share of QHA at a subscription price of HK$2.50 per share (subject to adjustment), in cash, from 14th January, 2004 to 13th January, 2007.

The QHA Group’s shareholders’ funds increased from HK$93.8 million to HK$107.8 million mainly as a result of the profit retained for the year.

The QHA Group’s financial position was strengthened in 2003. The QHA Group’s bank borrowings reduced from approximately HK$67.1 million as at 31st December, 2002 to HK$8.0 million as at 31st December, 2003 because of the scheduled and early repayments of bank loans. By repaying old bank loans, the QHA Group was able to negotiate with various bankers for new facilities on more favourable terms.

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(b) Debt maturity profile

		31st December	31st December	31st December
		2003		2002
		HK$’000		HK$’000
	Repayable:
	Within one year and on demand	8,000		52,347
	In the second year	–		14,754
		8,000		67,101

(c)	Net cash position
		31st December	31st December
		2003		2002
		HK$’000		HK$’000
	Shareholders’ funds	107,830		93,790

	Net Cash:
	Cash and bank balances	58,991		89,821
	Bank borrowings	(8,000)		(67,101)
		50,991		22,720

The QHA Group was in a net cash position at 31st December, 2003. Gearing ratio comparing net debt (bank borrowings net of cash and bank balances available) to equity was not applicable at 31st December, 2003 and 2002.

(d) Currency and financial risk management

The QHA Group’s main operating subsidiaries are located in Hong Kong and over 90% of the QHA Group’s sales and purchases during the year were denominated in Hong Kong dollars.

All bank borrowings are denominated in Hong Kong dollars. During the year, interest was charged on a floating rate basis with reference to Hong Kong Best Lending Rate and HIBOR.

Most cash and bank balances are denominated in Hong Kong dollars. Any surplus cash was placed in savings and short-term bank deposits to earn interest income.

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The QHA Group’s foreign currency assets are immaterial. The QHA Group’s exposure to foreign exchange risk is minimal and as such the QHA Group did not have any requirement to use financial instruments for hedging purposes.

2. Pledge of Assets

The QHA Group’s designated receivables and rights under certain medical services contracts at 31st December, 2002 were pledged to banks for certain loans and overdrafts under banking facilities granted to the QHA Group. During the year, the relevant loans under the banking facilities were repaid and the pledge of the designated receivables and rights under certain medical services was no longer required.

3. Contingent Liabilities

At 31st December, 2003, QHA had given guarantees in connection with the tenancy agreements entered into by its subsidiaries of approximately HK$55.3 million and guarantees given to a bank in connection with banking facilities granted to its subsidiaries of HK$100 million. The banking facilities, subject to guarantees given to the bank by QHA were utilized to the extent of approximately HK$2,645,000 at 31st December, 2003.

The QHA Group and QHA had a contingent liability in respect of possible future long service payments to employees under the Hong Kong Employment Ordinance, with a maximum possible amount of HK$7,113,000 (2002: HK$8,882,000) and HK$164,000 (2002: HK$521,000), respectively, as at 31st December, 2003. The contingent liability has arisen because, at the balance sheet date, a number of current employees have achieved the required number of years of service to the QHA Group and QHA in order to be eligible for long service payments under the Hong Kong Employment Ordinance if their employment is terminated under certain circumstances. A provision has not been recognized in respect of such possible payments, as it is not considered probable that the situation will result in a material future outflow of resources from the QHA Group and QHA.

4. Material Acquisition and Disposal of Subsidiaries and Associated Companies

During the year, there has been no material acquisition or disposal of subsidiaries and associated companies by the QHA Group.

5. Management and Staff

At 31st December, 2003, the total number of employees was 950 (2002: 960). Total staff costs amounted to approximately HK$260.0 million (2002: HK$287.6 million). The staffing structure is under constant review as the shape of the QHA Group develops. Remuneration packages are calculated at market rates, with share

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options offered at the discretion of the board of directors. All executive directors’ remuneration and option packages must first be recommended by QHA’s Remuneration Committee which is composed of all the independent non-executive directors, namely, Messrs. Moses Cheng Mo Chi and Ian Robert Strachan.

(II) FOR THE YEAR ENDED 31ST DECEMBER, 2004

The following is the management discussion and analysis principally extracted from the annual report of the QHA Group for the year ended 31st December, 2004. Terms and definitions used below shall bear the respective meanings as defined in such annual report.

OPERATIONAL REVIEW

Quality HealthCare Medical Services (“QHMS”)

Healthy Future

Divisional profit of QHMS in 2004 was HK$55.8 million, showing a growth of 11% compared to HK$50.0 million in 2003. Revenue for 2004 showed an increase of 8% to HK$633.4 million, compared to HK$586.7 million in 2003. Earnings Before Interest, Tax, Depreciation and Amortization (“EBITDA”) for 2004 was HK$63.2 million (2003: HK$59.7 million).

Listening to Clients

QHMS has emphasized a policy of actively seeking feedback from clients on their requirements. The information once collected is then analysed, and where appropriate, steps are taken to implement changes to improve any deficiencies. QHMS has, in conjunction with this initiative, completely upgraded its complaint monitoring and reporting system in order to more effectively identify and rectify any service deficiencies and enhance client and patient satisfaction.

Staff Training

QHMS is continuing to enhance its training programs in order to better equip staff to service its clients. Approximately 300 staff have attended a total of 58 training sessions in various areas including service protocols, first aid, occupational health and safety issues and regular continuous professional education. Professional consultants have been utilized and a full time training officer has been appointed. These initiatives will be enhanced in the coming year.

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Medical Centre Refurbishments

A number of core medical centres have been refurbished and expanded to provide better patient comfort and service. Additional weekend operating sessions have also been utilized to reduce waiting times.

Preferred Health Partner

QHMS has been active in promoting its services as a preferred health partner for corporations and insurance companies. QHMS has undertaken promotions through public healthcare days and health seminars as well as health information on its website.

In addition QHMS has continued to develop its third party administrative skills and QHMS has a designated team to assist its clients in servicing their requirements for analysis and management of medical data and costings.

Information Technology

QHMS has continued the development of its information technology systems in order to improve the efficiency and reduce the costs of claim processing. QHMS’s objective is also to improve its data management and analysis so as to improve its third party administrative capacity. QHMS has commenced a complete review of its information technology requirements and the various options to secure improved operational capacity in the future and enhanced ability to provide cashless and paperless transactions.

Expanded Services

QHMS is aware of the need to expand, where appropriate, its range of products to service all its client needs. Complementary services such as the Employees Assistance Program and Occupational Health and Safety Program have been developed to assist corporations manage their staff requirements. QHMS will continue to pursue these objectives.

Growth Initiatives

QHMS opened three new core medical centres in 2004 at Sheung Wan, Cyberport and Stanley Plaza. In addition, QHMS opened the Quality Women’s Health and Reproductive Medicine Centre. QHMS will continue to seek expansion opportunities for new medical centres, to expand its specialist network and for the delivery of new systems. In addition, QHMS will actively pursue any potential suitable acquisitions or joint ventures.

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Quality HealthCare Chinese Medicine (“QHCM”)

Customizing Needs

In response to increasing demands for holistic and alternative medicine, QHCM is able to offer its range of services to corporates and insurers. It has introduced a range of herbal packaged products to provide patients who have time constraints with an alternative choice of prescription.

Quality HealthCare Services (“QHS”)

QHS continued to deliver growth and achieved an increase in revenue of 14% in 2004. Divisional profit increased by 58% over the prior year. EBITDA for 2004 was HK$8.7 million (2003: HK$5.6 million).

Quality HealthCare Nursing (“QHN”)

QHN achieved significant growth in profit in 2004 compared to 2003. Demand for private nursing services in both the private hospitals and public hospitals significantly increased in 2004. Demand for relief nurses in the hospitals and nursing homes also improved.

QHN has focused on enhancing its relationship with its pool of nurses and carers in order that it is perceived as their preferred nursing agency. At the same time, QHN is committed to identifying and meeting the needs and demands of its clients and seeks to build client loyalty through improved client servicing. QHN continues to explore new cross border opportunities and possible areas for servicing the needs of corporations.

Quality HealthCare Dental (“QHD”)

QHD enjoyed a profitable year for 2004, with increased utilization of both general dental services and specialty dental services within its network. Despite a competitive market environment, QHD continues to perceive opportunities to expand its services at different locations.

Training has been a priority in 2004 and regular bi-monthly continuous dental education sessions have been arranged. Frontline staff, including dental nurses and receptionists, have been provided with courtesy training to improve telephone and interpersonal skills. Additional training will be undertaken to improve staff language skills in the coming year.

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Quality HealthCare Physiotherapy (“QHP”)

2004 has been a rewarding year for QHP with significant growth in profit. To service the growing demands for physiotherapy services, QHP opened one new centre and expanded two existing centres in 2004. Corporations are taking more interest in occupational health and safety issues and QHP’s physiotherapists have been invited to deliver a series of workshops and onsite evaluation for their staff members.

QHP plans to continue expansion of the scope of services in occupational health and safety issues. In addition, QHP will continue to upgrade its facilities to enhance the delivery of lifestyle enhancement programs.

Quality HealthCare Elderly Services (“QHES”)

QHES experienced a slight decrease in revenue in 2004 compared to 2003 whilst its net loss was reduced through continuous efforts in cost control, restructuring, and consolidation resulting in the closure of one redundant facility. EBITDA for 2004 was HK$8.7 million (2003: HK$7.1 million).

Core Competency

2004 continued to be a challenging year for the elderly care industry. QHES concentrated its efforts on cost reduction as well as improvement in its capacity to deliver quality care to the residents. The staff were provided with training in occupational safety and health and first aid courses to facilitate their daily work. Key staff at the homes were provided with client servicing training to improve their communications with the elders and their families. An influenza vaccination program was undertaken to improve protection for staff and residents.

Facilities Enhancement

QHES has added isolation rooms in all its homes with independent ventilation for better infection control. Its maintenance programs were reviewed and improved to maintain quality. QHES will continue to devote resources to maintenance of standards in the homes as well as to explore the feasibility of enhancement where appropriate.

Growth Opportunities

QHES will adopt a more targeted and structured marketing program to ensure that its homes are more likely to become the home of choice for elders. Training of staff in this regard has been commenced and results will be carefully monitored. QHES will continue to examine other areas where it may be possible to provide complementary products and services. QHES will also closely monitor any opportunities for public private co-operation that may be achievable.

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FINANCIAL REVIEW

1. Capital Structure and Equity

QHA issued 51,000 ordinary shares during the year as a result of the exercise of staff share options. Apart from the aforesaid, QHA has not issued any shares or made any share repurchases during the year under review.

On 12th January, 2004, a bonus issue of warrants was made in the proportion of one warrant for every five ordinary shares held by members on the register of members on 29th December, 2003 resulting in 43,324,376 warrants being issued. Each warrant entitles the holder to subscribe for one ordinary share of QHA at a subscription price of HK$2.50 per share in cash, from 14th January, 2004 to 13th January, 2007. No ordinary shares of QHA have been issued pursuant to the exercise of warrants.

On 24th January, 2005, QHA announced a voluntary conditional cash offer made by Sun Hung Kai International Limited on behalf of QHA to repurchase up to 21,667,288 ordinary shares of QHA for HK$2.00 in cash per share (the “Share Repurchase”). If accepted in full, the total estimated costs of the Share Repurchase including total estimated expenses would be approximately HK$44.7 million which will be financed by internal resources of the QHA Group. The Share Repurchase is conditional upon, among other things, the approval of the independent shareholders at the special general meeting to be held on 23rd March, 2005. Details of the Share Repurchase are set out in a circular of QHA dated 3rd March, 2005.

The QHA Group’s shareholders’ funds increased from HK$107.8 million as at 31st December, 2003 to HK$145.9 million at 31st December, 2004 mainly as a result of profits retained for the year.

2. Financial Resources and Liquidity

During the year, the QHA Group’s financial position was further strengthened. Short term bank borrowing amounted to HK$8.0 million at 31st December, 2003 was repaid during the year. As at 31st December, 2004, the QHA Group had outstanding borrowing comprising an obligation under a hire purchase contract of approximately HK$22,000.

The QHA Group’s cash and bank balances increased to approximately HK$115.8 million as at 31st December, 2004 from about HK$59.0 million at 31st December, 2003. Net cash inflow from operating activities for the year 2004 amounted to approximately HK$74.5 million. During the year, the convertible note issued by Wanji Pharmaceutical Holdings Limited to a subsidiary of QHA together with the accrued interest were fully repaid in cash.

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As at 31st December, 2004, the QHA Group was in a positive net cash position (cash and bank balances available was in excess of the total borrowing). Gearing ratio comparing net debt (bank borrowings net of cash and bank balances available) to equity was not applicable.

3. Currency and Financial Risk Management

The QHA Group’s main operating subsidiaries are located in Hong Kong and over 90% of the QHA Group’s sales and purchases during the year were denominated in Hong Kong dollars.

All bank borrowings are denominated in Hong Kong dollars. During the year, interest was charged on a floating rate basis with reference to Hong Kong dollar prime rate and HIBOR.

Most cash and bank balances are denominated in Hong Kong dollars. Any surplus cash is placed in savings and short-term bank deposits to earn interest income.

The QHA Group’s foreign currency assets are immaterial. The QHA Group’s exposure to foreign exchange risk is minimal and as such did not have any requirement to use financial instruments for hedging purpose.

4. Pledge of Assets

At 31st December, 2004, the QHA Group had not pledged any of its assets.

5. Contingent Liabilities

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

Guarantees given in connection with tenancy agreements entered into by subsidiaries Guarantees given to banks in connection with banking facilities granted to subsidiaries	QHA 2004 2003 HK$’000 HK$’000 63,654 55,326 60,000 100,000 123,654 155,326	QHA 2004 2003 HK$’000 HK$’000 63,654 55,326 60,000 100,000 123,654 155,326
		155,326

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As at 31st December, 2004, the banking facilities granted to the subsidiaries subject to guarantees given to the banks by QHA were utilized to the extent of approximately HK$3,526,000 for the issuance of bank guarantee letters (2003: HK$2,645,000).

(b) On 10th August, 2004, Quality HealthCare Medical Services Limited (“QHMS”) and Quality HealthCare Medical Centre Limited (“QHMC”), indirect subsidiaries of QHA, were served with a writ attaching a statement of claim by Asia Pacific Lasik Centre Limited claiming, inter alia, damages of HK$900,000 for breaches of contract on the parts of QHMS and QHMC. The case is being defended and a cross action mounted. At this early stage, having taken legal advice, the directors take the view that no contingency arises for which a provision is required to be made.

As at 31st December, 2004, the QHA Group was engaged in other litigation and claims which have not been disclosed in detail, as the possibility of an outflow of resources embodying economic benefits is remote.

(c) The QHA Group and QHA had a contingent liability in respect of possible future long service payments to employees under the Employment Ordinance, with a maximum possible amount of HK$6,543,000 (2003: HK$7,113,000) and HK$250,000 (2003: HK$164,000), respectively, as at 31st December, 2004. The contingent liability has arisen because, at the balance sheet date, a number of current employees have achieved the required number of years of service to the QHA Group and QHA in order to be eligible for long service payments under the Employment Ordinance if their employment is terminated under certain circumstances. A provision has not been recognized in respect of such possible payments, as it is not considered probable that the situation will result in a material future outflow of resources from the QHA Group and QHA.

6. Material Acquisition and Disposal of Subsidiaries and Associated Companies

During the year, there has been no material acquisition or disposal of subsidiaries and associated companies by the QHA Group.

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7. Management and Staff

At 31st December, 2004, the total number of employees was around 990 (at 31st December, 2003: around 950). Total staff costs amounted to approximately HK$276.1 million (2003: HK$260.0 million). The staffing structure is under constant review as the shape of the QHA Group develops. Remuneration packages are calculated at market rates, with share options offered at the discretion of the board of directors. All executive directors’ remuneration and option packages must first be recommended by the Remuneration Committee which is composed of all the independent non-executive directors, namely, Messrs. Li Chak Hung, Chang Chu Fai Johnson Francis and Carlisle Caldow Procter.

(III) FOR THE YEAR ENDED 31ST DECEMBER, 2005

The following is the management discussion and analysis principally extracted from the annual report of the QHA Group for the year ended 31st December, 2005. Terms and definitions used below shall bear the respective meanings as defined in such annual report.

REVIEW OF OPERATIONS

Quality HealthCare Medical Services (“QHMS”)

Stable Growth

Divisional profit of QHMS in 2005 was HK$61.7 million, demonstrating a growth of 11% compared to HK$55.8 million in 2004. Revenue for 2005 demonstrating an increase of 4% to HK$659.4 million, compared to HK$633.4 million in 2004. Earnings Before Interest, Tax, Depreciation and Amortisation (“EBITDA”) for 2005 was HK$68.0 million (2004: HK$63.2 million).

Customer Experience

Major renovation projects were undertaken in 2005 of a number of key medical centres of QHMS, including the flagship centre at Prince’s Building. The objectives of the renovation were to upgrade the facilities, improve operational efficiency, and create the improved ambience for the centres. The key focus was on delivering the right customer experience, with the underlying philosophy being the cultivation of a life long relationship with loyal and satisfied customers. In spite of an increase in the number of patients visits in both contract and cash patients, the average number of complaints per month declined 30%. QHMS continues to be challenged by the requirement to be cost effective, with high patients volumes whilst maintaining a personal caring service.

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Understanding Customer Needs

QHMS is sensitive to clients’ need to be cost conscious. However QHMS will continue to seek to maintain an international standard of care while enhancing efficiencies and savings in other aspects of the delivery system. QHMS continues to expand its services and its geographic coverage in tandem with clients needs. Preventive health, travel and wellness, employee assistance, and vision care will be strengthened and structured in a direction that strives to meet the rising expectations of clients.

In 2005, QHMS was able to proactively respond to the demand for arrangement of on and off site vaccinations, health talks and contingency planning and advice for its corporate clients and insurance partners in response to the growing awareness and concerns over possible avian flu pandemic. These initiatives were rewarded by positive feedback and encouragement.

QHMS invested in its 24-hour Medical Call Centre in response to increased patient expectations with the objective of improving the capacity to handle more than 30,000 calls per month with a quality service. External consultants were engaged to benchmark the quality of handling such services as enquires, appointment bookings, emergency assistance, counseling and the like. Over 90% of the call centre staff received Call Centre Professional Certification, and the centre was awarded the “People Site Certification Award” from the Asia Pacific Customer Service Consortium, a leading customer service advocate.

QHMS client list and capability continues to grow in third party administration. Administrative skill and IT are vital as the delivery of employee plans increase. QHMS has now increased its capability to include pan-Asian advisory, work injury and disability case management and critical illness.

Training and Productivity

As a people-focused industry, QHMS believes in empowering staff through training and the cultivation of a learning culture to enhance knowledge, expertise and productivity at all levels. Consultants were employed in 2005 and will continue in 2006 to provide service training to its frontline supervisory staff and management training was arranged for its senior executives to enhance effective teamwork and communications. Over 90 classes were arranged in 2005 for continuous clinical training on occupational health and safety and first aid to the frontline staff.

QHMS will continue to strive for enhanced productivity at all levels through training, process reengineering and the setting of clear strategies and performance indicators for the staff. IT solutions and technology will continue to be employed to facilitate and support the process changes when driving for operational efficiency. Focused communication will be directed to customers, staff and partners to facilitate and sustain its growth initiatives. Employee services will be promoted to retain a base of loyal and experienced staff with their career and personal development in mind. A balanced scorecard approach will be adopted in 2006 as a basis for team and individual appraisal.

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Quality HealthCare Chinese Medicine (“QHCM”)

QHCM continued to gain popularity in the market, and the total number of visits for QHCM in 2005 increased by 26% as compared to 2004. The provision of Chinese medicine granules was launched in June 2005 as an alternative choice for clients, bringing to them a convenient and efficient way of using Chinese medicine. QHCM will continue to expand its network in conjunction with the growth of QHMS’s Western medical centre network.

Quality HealthCare Services (“QHS”)

QHS continued to deliver growth and achieved an increase in revenue of 20% in 2005. Divisional profit increased by 24% over the prior year. EBITDA for 2005 was HK$10.1 million (2004: HK$8.7 million).

Quality HealthCare Nursing Agency (“QHNA”)

QHNA continued to deliver significant growth in profit in 2005 compared to 2004. There was a strong demand for nursing service from private patients in the private hospitals. In addition, staff relief for private hospitals and elderly homes was buoyant, bringing in a steady flow of revenue. QHNA also successfully filled the need for baby-sitting services in hotels and was able to generate regular orders from this new business area.

QHNA will continue to provide streamlined, strategic staffing solutions that result in cost-efficient care delivery to NGO homes and hospitals by delivering accountability for quality and proper credentialing of the nurses and the carers. Marketing activities will be focused on strengthening the brand name of the agency as the “HomeCare Services Provider” to the general public, hospital patients, ward nurses, insurance companies and doctors. QHNA will explore opportunities to work with statutory bodies and other corporations in providing training programs for care workers of elders at home and for sourcing of nurses in China as overseas recruitment.

Quality HealthCare Dental (“QHD”)

QHD continued to enjoy growth in private and corporate revenue in 2005 and achieved increased revenue generated by the general practitioners and the specialists. The orthodontic and paedodontic services were expanded into the Kowloon and New Territories areas, and the dental centre at Prince’s Building was expanded. New educational programs were broadcast at the Prince’s Building centre to enhance client awareness of the different procedures available and to thereby enable clients to enjoy a more informed choice.

QHD plans to expand its network further with new centres while continuing to increase the capacities of the existing centres. Specialist services will continue to be the focus for growth, and internal processes will be reviewed including IT solutions in order to gain more efficiency.

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Quality HealthCare Physiotherapy (“QHP”)

QHP continued to achieve an increase in revenue and profit in 2005. The physiotherapy network was expanded with the addition of a new centre in New Territories North and a staff physiotherapy centre in Chek Lap Kok. One of the centres on the Kowloon side was also relocated and expanded, allowing easier access and more efficient administration.

QHP’s physiotherapists continued to be active in providing health talks and ergonomic workshops to its corporate clients and insurance companies, and its wellness workshops by combining the training from the physiotherapists, dietitians, podiatrists, and psychologists were designed to deliver a holistic approach towards a healthy lifestyle and proper work posture.

Quality HealthCare Elderly Services (“QHES”)

QHES achieved significant growth in 2005, with a divisional profit of HK$4.4 million, a significant turnaround despite a slight drop of 2% in revenue to HK$103.5 million. EBITDA for 2005 was HK$12.9 million (2004: HK$8.7 million).

Matching Market Needs

The successful growth in 2005 resulted from focused marketing, staff training and stringent quality control, and most importantly the introduction of changes in the facilities to match the needs of the market. One of the initiatives was to convert an open ward into a number of private rooms, which was welcomed by the clients with the rooms being taken up very quickly. These encouraging results reflect improved utilisation and client satisfaction. Similar projects will continue to be undertaken.

Focused Branding

More focused branding has been introduced with the alignment of the naming of its elderly homes. The operations manager and home managers pursued active communication with the medical doctors and nurses at the Hospital Authority to gather feedback on the performance of its homes and invited suggestions for improvement.

FINANCIAL REVIEW

1. Capital Structure and Equity

QHA repurchased 21,667,288 ordinary shares in April 2005 for a cash consideration of HK$2.00 per ordinary share through a voluntary conditional cash offer (the “Share Repurchase”). The shares repurchased represented 10% of the then issued share capital of QHA. Total consideration (before expenses) of approximately HK$43.3 million was paid from the QHA Group’s internal resources. Details of the Share Repurchase are set out in a circular of QHA dated 3rd March, 2005.

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As a result of the Share Repurchase, the subscription price of the outstanding warrants of QHA was adjusted from HK$2.50 per ordinary share to HK$2.46 per ordinary share on 10th May, 2005. The exercise price of the outstanding share options was also adjusted from HK$1.50 per ordinary share to HK$1.47 per ordinary share and the aggregate number of ordinary shares which can be subscribed for under the outstanding share options have been adjusted from 1,577,500 to 1,419,750.

Subsequent to the Share Repurchase, 264,618 ordinary shares of HK$0.10 each were issued as a result of the exercise of warrants and 57,600 ordinary shares of HK$0.10 each were issued as a result of the exercise of share options.

The QHA Group’s shareholders’ funds increased from HK$145.9 million as at 31st December, 2004 to HK$150.3 million as at 31st December, 2005 mainly as the result of the net profit retained for the year and the Share Repurchase.

2. Financial Resources and Liquidity

As at 31st December, 2005, cash and bank balances of the QHA Group amounted to approximately HK$116.6 million (31st December, 2004: HK$115.8 million). It is the QHA Group’s objective to maintain sufficient cash with the availability of flexible bank credit facilities for its operations and development.

The QHA Group had outstanding borrowings as at 31st December, 2005 comprising an obligation under a hire purchase contract of approximately HK$18,000 (31st December, 2004: HK$22,000).

Since the QHA Group was in a positive net cash position (cash and bank balances available were in excess of borrowings), gearing ratio comparing net debt (bank borrowings net of cash and bank balances available) to equity was not applicable at 31st December, 2005 and 31st December, 2004.

3. Currency and Financial Risk Management

The QHA Group’s main operating subsidiaries are located in Hong Kong and over 90% of the QHA Group’s sales and purchases during the year were denominated in Hong Kong dollars.

All bank facilities are denominated in Hong Kong dollars. Interest is chargeable on a floating rate basis with reference to Hong Kong Best Lending Rate and HIBOR.

Most cash and bank balances are denominated in Hong Kong dollars. Any surplus cash is placed in savings and short term bank deposits to earn interest income. The QHA Group’s foreign currency assets are immaterial.

The QHA Group’s exposure to foreign exchange risk is minimal, and accordingly, it did not have any requirement to use financial instruments for hedging purposes.

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MANAGEMENT DISCUSSION AND ANALYSIS OF THE QHA GROUP

4. Pledge of Assets

At 31st December, 2005, the QHA Group had fixed assets of net book value of HK$17,000 (31st December, 2004: HK$22,000) held under a hire purchase contract.

5. Contingent Liabilities

(a) At the balance sheet date, contingent liabilities not provided for in the financial statements were as follows:
(i) Corporate guarantees given by QHA to certain third parties in connection with tenancy agreements entered into by its subsidiaries with an aggregate amount of approximately HK$42,403,000 at 31st December, 2005 (2004: HK$63,654,000).
(ii) Corporate guarantees given by QHA to banks in connection with banking facilities granted to its subsidiaries with an aggregate amount of HK$60,000,000 at 31st December, 2005 (2004: HK$60,000,000). As at 31st December 2005, the banking facilities granted to the subsidiaries subject to guarantees given to the banks by QHA were utilized to the extent of approximately HK$4,108,000 (2004: HK$3,526,000) for the issuance of bank guarantee letters.
(b) In the prior year, Quality HealthCare Medical Services Limited (“QHMS”) and Quality HealthCare Medical Centre Limited (“QHMC”), indirect subsidiaries of QHA, were served with a writ attaching a statement of claim by Asia Pacific Lasik Centre Limited claiming, inter alia, damages of HK$900,000 for breaches of contract on the parts of QHMS and QHMC. The case is being defended and a cross action mounted. At this stage, based on the development to date and having taken legal advice, the Directors take the view that no contingency arises for which a provision is required to be made.

As at 31st December, 2005, the QHA Group was engaged in other litigation and claims which have not been disclosed in detail, as the possibility of an outflow of resources embodying economic benefits is remote.

(c) The QHA Group and QHA had a contingent liability in respect of possible future long services payments to employees under the Employment Ordinance, with a maximum possible amount of approximately HK$7,648,000 (31st December, 2004: HK$6,543,000) and HK$292,000 (2004: HK$250,000) respectively, as at 31st December, 2005. The contingent liability has arisen because, at the balance sheet date, a number of current employees have achieved the required number of

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APPENDIX III

MANAGEMENT DISCUSSION AND ANALYSIS OF THE QHA GROUP

years of services to the QHA Group and QHA in order to be eligible for long service payments under the Employment Ordinance if their employment is terminated under certain circumstances. A provision has not been recognized in respect of such possible payments, as it is not considered probable that the situation will result in a material future outflow of resources from the QHA Group and QHA.

6. Material Acquisition and Disposal of Subsidiaries and Associated Companies

During the year, the QHA Group invested HK$2.1 million for a 30% stake in a newly formed company, SkinCentral Limited. The principal activities of which consisted, primarily, of the provision of dermatology, aesthetic and laser services.

Other than the aforesaid acquisition, there has been no material acquisition or disposal of subsidiaries and associated companies by the QHA Group during the year.

7. Management and Staff

At 31st December, 2005, the total number of employees was around 980. Total staff costs amounted to approximately HK$290.5 million (2004: HK$276.1 million). The staffing structure is under constant review as the shape of the QHA Group develops. Remuneration packages are calculated at market rates, with share options offered at the discretion of the Board of Directors. All Executive Directors’ remuneration and option packages must first be recommended by the Remuneration Committee which is composed of all the Independent Non-Executive Directors, namely, Messrs. Li Chak Hung, Francis J. Chang Chu Fai and Carlisle Caldow Procter.

– 169 –

APPENDIX IV

UNAUDITED PRO FORMA STATEMENT OF ASSETS AND LIABILITIES OF THE ENLARGED GROUP

1. UNAUDITED PRO FORMA STATEMENT OF ASSETS AND LIABILITIES OF THE ENLARGED GROUP

The unaudited pro forma statement of assets and liabilities (“Unaudited Pro Forma Financial Information”) of the Enlarged Group has been prepared to illustrate the effect of the purchase (the “Purchase”) and the exercise (the “Exercise”) of the Option over the Option Shares and the Option Warrants of Quality HealthCare Asia Limited (“QHA”).

The Unaudited Pro Forma Financial Information of the Enlarged Group has been prepared in accordance with Rule 4.29 of the Listing Rules for the purpose of illustrating the effect of the Purchase and the Exercise as if they took place on 31 December 2005.

The Unaudited Pro Forma Financial Information of the Enlarged Group is based on the audited consolidated balance sheet of the Group and QHA and its subsidiaries (the “QHA Group”) as at 31 December 2005 after making pro forma adjustments relating to the Purchase and the Exercise that are (i) directly attributable to the transactions; and (ii) factually supportable.

The Unaudited Pro Forma Financial Information is based on a number of assumptions. Accordingly, the accompanying Unaudited Pro Forma Financial Information of the Enlarged Group does not purport to describe the actual financial position of the Group that would have been attained had the Purchase and the Exercise been completed on 31 December 2005. The Unaudited Pro Forma Financial Information of the Enlarged Group does not purport to predict the future position of the Enlarged Group.

The Unaudited Pro Forma Financial Information has been prepared by the Directors for illustrative purposes only and because of its nature, it may not give a true picture of financial information of the Enlarged Group following completion of the Purchase and the Exercise.

Non-current assets Investment properties Leasehold interests in land Property and equipment Intangible assets Goodwill Interest in associated companies Interest in jointly controlled entities Available-for-sale investments Statutory deposits Deferred tax assets Loans and receivables	The Group HK$’000 93,400 72,487 56,505 20,827 – 2,647,142 935 993,139 32,831 4,143 202,306 4,123,715	Pro forma adjustments relating to the Purchase of the Option Notes HK$’000 – – – – – – – – – – – –	The Group after the Purchase of the Option HK$’000 93,400 72,487 56,505 20,827 – 2,647,142 935 993,139 32,831 4,143 202,306 4,123,715	The QHA Group HK$’000 – – 26,169 – 3,527 2,281 819 – – – – 32,796	Pro forma adjustments relating to the Exercise of the Option *Notes* HK$’000 – – – – 173,550 (g) (136,612) (e) – – – – – 36,938	Pro forma Enlarged Group HK$’000 93,400 72,487 82,674 20,827 177,077 2,512,811 1,754 993,139 32,831 4,143 202,306
						4,193,449

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APPENDIX IV

UNAUDITED PRO FORMA STATEMENT OF ASSETS AND LIABILITIES OF THE ENLARGED GROUP

Current assets Inventories Trade and other receivables Held for trading investments Taxation recoverable Cash and cash equivalents Current liabilities Bank borrowings due within one year Trade and other payables Trading liabilities, at fair value Provisions Taxation payable Net current assets Non-current liabilities Loan notes Bank and other borrowings due after one year Provisions Deferred tax liabilities Net Assets	The Group HK$’000 – 2,599,864 178,982 3,819 423,384 3,206,049 (342,546) (966,581) (17,756 ) (33,057 ) (12,221 ) (1,372,161 ) 1,833,888 5,957,603 (64,252 ) (43,720 ) (1,202 ) (7,181 ) (116,355 ) 5,841,248	Pro forma adjustments relating to the Purchase of the Option Notes HK$’000 – – 11,101 (b) – – 11,101 (11,101 ) (b) – – – – (11,101 ) – – – – – – – –	The Group after the Purchase of the Option HK$’000 – 2,599,864 190,083 3,819 423,384 3,217,150 (353,647) (966,581) (17,756 ) (33,057 ) (12,221 ) (1,383,262 ) 1,833,888 5,957,603 (64,252 ) (43,720 ) (1,202 ) (7,181 ) (116,355 ) 5,841,248	The QHA Group HK$’000 7,881 105,018 – – 116,640 229,539 – (105,520) – – (5,458) (110,978 ) 118,561 151,357 – (13) – (1,057) (1,070) 150,287	Pro forma adjustments relating to the Exercise of the Option *Notes* HK$’000 – (1,992) (h) (11,101) (c) – 17,358 (f) 4,265 (117,266 ) (d) 1,992 (h) – – – (115,274 ) (111,009) (74,071 ) – – – – – (74,071 )	Pro forma Enlarged Group HK$’000 7,881 2,702,890 178,982 3,819 557,382 3,450,954 (470,913) (1,070,109) (17,756) (33,057) (17,679) (1,609,514) 1,841,440 6,034,889 (64,252) (43,733) (1,202) (8,238) (117,425 ) 5,917,464

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APPENDIX IV

UNAUDITED PRO FORMA STATEMENT OF ASSETS AND LIABILITIES OF THE ENLARGED GROUP

Notes

The Unaudited Pro Forma Financial Information has been prepared in accordance with the Group’s accounting policies as at 31 December 2005 and on the basis of the assumptions and adjustments set out below. Upon the Purchase and the Exercise, the Group will acquire an additional ownership interest of 19.2% resulting in an increase in ownership interest from 34.4%, held through Wah Cheong, to 53.6%. The effect of the Purchase and the Exercise resulting in an ownership interest of 53.6% excludes the effect of warrants and options not exercised by the Group and other holders, which if exercised will reduce the Group’s effective interest to 50.4%. As the Group will have the ability to control the QHA Group on completion of the Purchase and the Exercise, it has been accounted for as a subsidiary using the purchase method.

(a) The following assumptions have been made in determining the Group’s interest of 53.6% of QHA:
(i) The Option is taken by the Group as at 31 December 2005;
(ii) The Option Shares are exercised on 31 December 2005, resulting in an additional 34,156,666 QHA Shares being held by the Group;
(iii) The Option Warrants are exercised in full by CLSA on 31 December 2005 as requested by Wah Cheong pursuant to the Option and an additional 7,056,232 QHA Shares acquired by the Group;
(iv) 12,544,632 QHA warrants that are presently held by Wah Cheong would not be exercised;
(v) All other outstanding 24,163,354 warrants and 1,135,350 share options of QHA as at 31 December 2005 would not be exercised.

The adjustments reflect the following:

(b) Consideration of HK$11,101,000 paid for the Purchase of the Option. It is assumed that the consideration would be financed through borrowings.
(c) Reversal of the carrying amount of the Option recorded as held for trading investment by the Group amounting to HK$11,101,000.
(d) Being the consideration of HK$99,908,000 and HK$17,358,000 paid on the Exercise of the Option Shares and Option Warrants respectively. It has been assumed that the consideration would be financed through borrowings.
(e) Reversal of the carrying amount of interest in QHA held as an associate by the Group.
(f) Being cash received by QHA following the Exercise of the Option Warrants.
(g) Goodwill is determined based on the total cost of HK$264,979,000. Goodwill includes HK$86,127,000 which was recorded on acquisition of QHA as an associate.
(h) Elimination of current account balances between the Group and QHA at 31 December 2005.

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APPENDIX IV UNAUDITED PRO FORMA STATEMENT OF ASSETS AND LIABILITIES OF THE ENLARGED GROUP

2. ACCOUNTANTS’ REPORT ON UNAUDITED PRO FORMA FINANCIAL INFORMATION TO THE DIRECTORS OF SUN HUNG KAI & CO. LIMITED

SUN HUNG KAI & CO. LIMITED (THE “COMPANY”) AND ITS SUBSIDIARIES (HEREINAFTER COLLECTIVELY REFERRED TO AS THE “GROUP”), QUALITY HEALTHCARE ASIA LIMITED AND ITS SUBSIDIARIES (TOGETHER WITH THE GROUP HEREINAFTER REFERRED TO AS THE “ENLARGED GROUP”)

We report on the unaudited pro forma financial information of the Enlarged Group set out in Appendix IV on pages 170 to 172 of the circular dated 29 June 2006 (“Circular’) under the heading of “Unaudited Pro Forma Statement of Assets and Liabilities of the Enlarged Group” (the “Unaudited Pro Forma Financial Information”) in connection with the conditional grant of option over shares and warrants in Quality HealthCare Asia Limited (the “Acquisition”). The Unaudited Pro Forma Financial Information has been prepared by the Directors for illustrative purposes only, to provide information about how the Acquisition might have affected the financial information presented. The basis of preparation of the Unaudited Pro Forma Financial Information is set out on pages 170 to 172 of the Circular.

Respective Responsibilities of Directors of the Company and Reporting Accountants

It is the responsibility solely of the Directors of the Company to prepare the Unaudited Pro Forma Financial Information in accordance with paragraph 29 of Chapter 4 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) and with reference to Accounting Guideline 7 “Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars” issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”).

It is our responsibility to form an opinion, as required by paragraph 29(7) of Chapter 4 of the Listing Rules, on the Unaudited Pro Forma Financial Information and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the Unaudited Pro Forma Financial Information beyond that owed to those to whom those reports were addressed by us at the dates of their issue.

Basis of Opinion

We conducted our engagement in accordance with Hong Kong Standard on Investment Circular Reporting Engagements 300 “Accountants’ Reports on Pro Forma Financial Information in Investment Circulars” issued by the HKICPA. Our work consisted primarily of comparing the unadjusted financial information with source documents, considering the evidence supporting the adjustments and discussing the Unaudited Pro Forma Financial Information with the Directors of the Company. This engagement did not involve independent examination of any of the underlying financial information.

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APPENDIX IV

UNAUDITED PRO FORMA STATEMENT OF ASSETS AND LIABILITIES OF THE ENLARGED GROUP

We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Unaudited Pro Forma Financial Information has been properly compiled by the Directors of the Company on the basis stated, that such basis is consistent with the accounting policies of the Group and that the adjustments are appropriate for the purpose of the Unaudited Pro Forma Financial Information as disclosed pursuant to paragraph 29(1) of Chapter 4 of the Listing Rules.

The Unaudited Pro Forma Financial Information is for illustrative purposes only, based on the judgments and assumptions of the Directors of the Company, and, because of its hypothetical nature, does not provide any assurance or indication that any event will take place in the future and may not be indicative of the financial position of the Enlarged Group as at 31 December 2005 or any future date.

Opinion

In our opinion:

a) the Unaudited Pro Forma Financial Information has been properly compiled by the Directors of the Company on the basis stated;
b) such basis is consistent with the accounting policies of the Group; and
c) the adjustments are appropriate for the purposes of the Unaudited Pro Forma Financial Information as disclosed pursuant to paragraph 29(1) of Chapter 4 of the Listing Rules.

Deloitte Touche Tohmatsu

Certified Public Accountants Hong Kong 29 June 2006

– 174 –

APPENDIX V

GENERAL INFORMATION

1. RESPONSIBILITY STATEMENT

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

2. DISCLOSURE OF INTERESTS

(a) Directors’ interests

Save as disclosed below, as at the Latest Practicable Date, none of the Directors and the chief executive of the Company had any interest or short position in the shares, underlying shares or debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO), which (i) were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions, if any, which they were taken or deemed to have under such provisions of the SFO); or (ii) were required, pursuant to Section 352 of the SFO, to be entered in the register referred to in such provisions of the SFO; or (iii) were required, pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers as set out in Appendix 10 of the Listing Rules to be notified to the Company and the Stock Exchange:

Beneficial interest in number of Approximate % Name of shares and of the relevant Name of associated underlying issued share Director corporations shares capital Nature of interest Patrick Lee APL 324,000 0.06% Personal interest Seng Wei (Note 1) (held as beneficial owner) AGL 550,000 0.21% Personal interest (Note 2) (held as beneficial owner)

Notes:

(1) This represented an interest in 270,000 shares of APL and an interest in 54,000 units of warrants of APL giving rise to an interest in 54,000 underlying shares of APL. The said warrants of APL entitle the holders thereof to subscribe at any time during the period from 7th June, 2006 to 6th June, 2009 (both days inclusive) for fully paid shares of APL at an initial subscription price of HK$10 per share (subject to adjustments).
(2) This represented an interest in 550,000 shares of AGL.
(3) All interests stated above represented long positions.

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APPENDIX V

GENERAL INFORMATION

(b) Substantial Shareholders’ interests

Save as disclosed below, the Directors and chief executive of the Company were not aware that there was any person who, as at the Latest Practicable Date, had an interest or short position in the shares, underlying shares or debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) which would fall to be disclosed under provisions of Divisions 2 and 3 of Part XV of the SFO, or who, as at the Latest Practicable Date, was directly and indirectly interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of the Group.

(i) Interests in the Shares and underlying Shares

	Number of Shares	Approximate
Name of	and underlying	% of the issued
Shareholders	Shares	share capital	Notes
APL	952,038,670	76.42%	1,4,5
AGL	952,038,670	76.42%	2,4,5
Lee and Lee Trust	952,038,670	76.42%	3,4,5
(the “LL Trust”)
Penta Investment	153,506,200	12.32%	6
Advisers Limited
(“Penta”)
John Zwaanstra	153,506,200	12.32%	7

Notes:

This represented an interest in 765,198,892 Shares and an interest in 186,839,778 units of warrants of the Company, giving rise to an interest in 186,839,778 underlying Shares, which were held by AP Emerald Limited (“APE”), a whollyowned subsidiary of AP Jade Limited (“AP Jade”). The said warrants of the Company (the “2009 Warrants”) entitle the holders thereof to subscribe at any time during the period from 1st June, 2006 to 31st May, 2009 (both days inclusive) for the fully paid Shares at an initial subscription price of HK$6 per Share (subject to adjustments). AP Jade was a wholly-owned subsidiary of APL which was therefore deemed to have an interest in the Shares and the underlying Shares.
AGL owned approximately 74.93% interest in the issued share capital of APL and was therefore deemed to have an interest in the Shares and the underlying Shares in which APL was interested.
Mr. Lee Seng Hui, Ms. Lee Su Hwei and Mr. Lee Seng Huang are the trustees of the LL Trust, being a discretionary trust. They together owned approximately 40.66% interest in the issued share capital of AGL and were therefore deemed to have an interest in the Shares and the underlying Shares in which AGL was interested.

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APPENDIX V

GENERAL INFORMATION

A subscription agreement dated 12th May, 2006 (as supplemented on 17th May, 2006) was entered into between APE as subscriber and the Company for the subscription of 169,000,000 new Shares on completion of the placing of 169,000,000 Shares by APE to 3V Capital Limited (“3V Capital”) as placing agent pursuant to a placing agreement entered into between the two parties on 12th May, 2006 (as supplemented on 17th May, 2006) and an additional of 79,000,000 new Shares if the potential placing of 79,000,000 Shares proceeds, at a price of HK$7.00 per Share. Completion of the subscription agreement is conditional upon the fulfillment of the conditions as set out in the agreement. Further details were disclosed in the joint announcements of the Company, AGL and APL dated 17th May, 2006 and 18th May, 2006 and the respective circulars of AGL and APL dated 8th June, 2006.
A placing agreement dated 18th May, 2006 was entered into between APE as vendor and Sun Hung Kai Investment Services Limited (“SHKIS”), an indirect wholly-owned subsidiary of the Company, as placing agent in relation to the underwriting of the placing of 79,000,000 Shares by SHKIS at a price of HK$7.00 per Share. Completion of the placing agreement is conditional upon the fulfillment of the conditions as set out in the agreement. Further details were disclosed in a joint announcement of the Company, AGL and APL dated 18th May, 2006 and the respective circulars of AGL and APL dated 8th June, 2006.
This represented an interest (held as investment manager) in 149,698,000 Shares and an interest in 3,808,200 units of the 2009 Warrants of the Company giving rise to an interest in 3,808,200 underlying Shares.
Mr. John Zwaanstra was deemed to have an interest in the Shares and the underlying Shares through his 100% interest in Penta.
All interests stated above represented long positions. As at the Latest Practicable Date, no short positions were recorded in the register required to be kept under Section 336 of the SFO.
(ii) Interests in the shares of other members of the Group

Name of non wholly-			Approximate
owned subsidiaries	Name of	Number	% of the relevant
of the Company	shareholders	of shares	issued share capital
Best Decision	Christophe	17,500	35%
Investments Limited	Lee Kin Ping
SHK Financial Data	Unison Information	49	49%
Limited	Limited

3. DIRECTORS’ SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors had any existing or proposed service contract with any member of the Group which does not expire or is not terminable by such member of the Group within one year without payment of compensation (other than statutory compensation).

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APPENDIX V

GENERAL INFORMATION

4. DIRECTORS’ INTERESTS IN COMPETING BUSINESSES

As at the Latest Practicable Data, the following Directors (not being the independent non-executive Directors) were considered to have interests in the businesses which compete or are likely to compete with the businesses of the Group pursuant to the Listing Rules as set out below:

(a) Mr. Arthur George Dew is a director of AGL which, through certain of its subsidiaries, is partly engaged in the businesses of money lending, provision of financial services and property investment.
(b) Mr. Patrick Lee Seng Wei is a director of APL and Tian An China Investments Company Limited (“Tian An”). APL, through certain of its subsidiaries, is partly engaged in the businesses of money lending and property investment; and Tian An, through a subsidiary, is partly engaged in the business of money lending.

As the Board is independent from the boards of the abovementioned companies and none of the above Directors can control the Board, the Group is capable of carrying on its businesses independently of, and at arm’s length from, the businesses of such companies.

5. LITIGATION

Save as disclosed below, as at the Latest Practicable Date, no member of the Group was engaged in any litigation or claims of material importance and no litigation or claim of material importance was known to the Directors to be pending or threatened against any member of the Group:

(a) By the Judgment of Deputy High Court Judge To on 1st April, 2004 (the “Judgment”) in HCA 3191/1999 between New World Development Company Limited (“NWDC”) and Stapleton Development Limited against Sun Hung Kai Securities Limited (“SHKS”), a direct wholly-owned subsidiary of the Company, SHKS was ordered to pay NWDC the sum of HK$105,534,018.22 together with interest on the principal sum of HK$80,117,652.72 at judgment rate from 16th December 1998 until payment, pursuant to the terms of an oral agreement which His Lordship found (the “Oral Agreement”). As at 17th June, 2004, the date when the Judgment sum was paid, the Judgment amounted to HK$150,115,681.54 (being HK$105,534,018.22 plus interest of HK$44,581,663.32). SHKS has paid the Judgment amounts. SHKS filed an appeal against the Judgment both as to liability and quantum (the “Appeal”) to the Court of Appeal. That Court has now handed down its Judgment (the “Court of Appeal Judgment”) in which the Court ordered a repayment to SHKS of part of the interest element for the period from 16th December, 1998 to 31st March, 2004 previously ordered against SHKS in the Court of First Instance but otherwise broadly confirmed the Judgment. The sum repayable amounted to HK$14,783,090.86 and has now been repaid. SHKS obtained leave to appeal the Court of Appeal Judgment to the Court of Final Appeal (the “Final Appeal”). The Final Appeal was heard on 19th, 20th and 21st June, 2006. The Court of Final Appeal reserved its decision.

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APPENDIX V

GENERAL INFORMATION

(b) On 4th February, 2004, Sun Tai Cheung Credits Limited (“STCC”) and SHKIS, both indirect wholly-owned subsidiaries of the Company, were served with a writ including a statement of claim (“200/2004”) by Shanghai Finance Holdings Limited (“Shanghai Finance”), claiming, inter alia, an order that the sale of the shares in Shun Loong Holdings Limited (the “Shun Loong Shares”) by STCC as assignee to SHKIS (at a consideration of HK$36,500,000 subject to additional amounts in a total sum not exceeding HK$15,700,000 which might have been payable one year from the date of completion under certain conditions) pursuant to a sale and purchase agreement dated 25th June, 2003 be set aside, or alternatively, as against STCC, damages and an account as to the money obtained by STCC in respect of the Shun Loong Shares. The writ is being vigorously defended. STCC and SHKIS were properly advised at all times during the transaction and believe that the claim is not soundly based. STCC and SHKIS have applied to have the claim struck out. The proceedings have now been stayed until further order of the court.
(c) Shun Loong Finance Limited and Shun Loong Holdings Limited (together the “Petitioners”), both indirect wholly-owned subsidiaries of the Company, filed a winding-up petition on 19th February, 2004 in the British Virgin Islands (“B.V.I.”) seeking an order that Shanghai Finance be wound up by reason of its failure to pay debts owing to the Petitioners. The B.V.I. proceedings were stayed by order of the B.V.I. court. The Petitioners have appealed that decision but have agreed not to pursue the appeal during the stay of 200/2004.
(d) The Company, STCC and SHKIS filed a writ on 7th February, 2004 (230/2004) naming as defendants Shanghai Land Holdings Limited, Stephen Liu Yiu Keung, Yeo Boon Ann, The Standard Newspapers Publishing Limited and Hong Kong Economic Times Limited and claiming damages for libel, injunctive relief, interest and costs. The case remains at an early stage.
(e) SHKIS filed a notice of action on 8th June, 2004 in Canada naming as defendants Sung Chun (“Sung”), Song Lei (“Song”) and the Bank of Montreal claiming from Sung and Song reimbursement for funds totalling US$1,300,000 transferred by them in addition to costs, and against the Bank of Montreal for an injunction freezing the subject funds or alternatively for payment of the funds into court. SHKIS discontinued the action in respect of the Bank of Montreal, and agreed to a dismissal of the action against Song. On 31st March, 2005, Madam Justice Herman granted summary judgment to SHKIS (the “Summary Judgment”) in the amount of Canadian currency sufficient to purchase HK$10,533,000 plus prejudgment and postjudgment interest thereon. On 24th January, 2006, SHKIS received in partial satisfaction of the Summary Judgment order C$14,070.99 and US$1,288,555.31 (i.e. together approximately HK$10,008,867.89) that had been held in the custody of the Superior Court of Justice.

– 179 –

APPENDIX V

GENERAL INFORMATION

(f) SHKIS filed a writ on 23rd July, 2004 in Hong Kong naming as defendants Sellon Enterprises Limited (“Sellon”), Sung and Song and seeking a declaration that Sellon holds property wholly or in part on trust for SHKIS. The case remains at an early stage.

6. MATERIAL CONTRACTS

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

(a) A sale and purchase agreement dated 30th December, 2004 was entered into between (i) Shine Star Properties Limited (“Shine Star”) as vendor; (ii) Sun Hung Kai International Investment Management Limited (“SHKIIM”), a direct wholly-owned subsidiary of the Company, as purchaser; and (iii) Hing Yip Holdings Limited (“Hing Yip”), pursuant to which (a) Shine Star agreed to sell and SHKIIM agreed to purchase one share of US$1.00 being the entire issued share capital of Hing Yip, which owns certain office premises in the Tian An Centre in Shanghai; and (b) Shine Star agreed to assign and SHKIIM agreed to take as an assignment of the benefits of a shareholder’s loan in the sum of HK$10,172,709 due from Hing Yip to Shine Star as at 23rd December, 2004, at the aggregate consideration of RMB14,634,180 (equivalent to approximately HK$13,805,830).
(b) A sale and purchase agreement dated 19th January, 2005 was entered into between (i) Shine Star as vendor; (ii) SHKIIM as purchaser; and (iii) Sing Hing Investment Limited (“Sing Hing”), pursuant to which (a) Shine Star agreed to sell and SHKIIM agreed to purchase one share of US$1.00 being the entire issued share capital of Sing Hing, which owns certain office premises in the Tian An Centre in Shanghai; and (b) Shine Star agreed to assign and SHKIIM agreed to take as an assignment of the benefits of a shareholder’s loan in the sum of HK$26,934,275 due from Sing Hing to Shine Star as at 18th January, 2005, at the aggregate consideration of RMB40,786,200 (equivalent to approximately HK$38,477,547).
(c) A deed dated 5th February, 2005 in relation to the sale and purchase of all the issued shares of Excalibur Securities Limited (“ESL”) and Excalibur Futures Limited (“EFL”) was entered into between (i) Smart Day International Limited (“Smart Day”) as vendor; (ii) SHKSL, a direct wholly-owned subsidiary of the Company, as purchaser; and (iii) Messrs. Poon Kwok Wah, Allan and Chan Ying Leung as warrantors pursuant to which Smart Day agreed to sell and SHKSL agreed to purchase all the issued 10,000,000 shares of each of ESL and EFL at a consideration of:
(i) in relation to the shares of ESL, the aggregate value of the total net current assets as shown in the completion accounts of ESL less its actual and contingent liabilities (including provisions which it is proper or

– 180 –

APPENDIX V

GENERAL INFORMATION

appropriate to make in respect of any potential or contingency liability or the doubtful recoverability or realization of any assets) plus HK$2,000,000.00 and the deposits with the Stock Exchange, deposit to replenish compensation fund, statutory deposit with the Commission for Securities, admission fee paid to a clearing house and contribution in cash to a guarantee fund; and

(ii) in relation to the shares of EFL, the aggregate value of the total net current assets as shown in the completion accounts of EFL less its actual and contingent liabilities (including provisions which it is proper or appropriate to make in respect of any potential or contingency liability or the doubtful recoverability or realization of any assets) plus HK$5,000,000.00 and the deposits, reserve fund(s) and compensation fund paid to Hong Kong Futures Exchange Limited and Hong Kong Futures Exchange Clearing Corporation Limited.
(d) A loan agreement dated 2nd March, 2005 was entered into between (i) Ranbridge Finance Limited (“Ranbridge”), a direct wholly-owned subsidiary of the Company, as lender; (ii) Join View Development Limited (“Join View”) as borrower; and (iii) Tian An as guarantor in relation to the granting of a revolving loan facility up to an amount of HK$100,000,000.00 for a period of 36 months at the interest rate of prime rate plus 1% per annum. Further details were disclosed in a joint announcement of the Company, AGL and APL dated 8th November, 2005 and their respective circulars dated 25th November, 2005.
(e) A supplemental loan agreement dated 7th November, 2005 was entered into between (i) Ranbridge as lender; (ii) Join View as borrower; and (iii) Tian An, Sky Full Enterprises Limited and Tian An Real Estate Agency (China) Limited as guarantors in relation to amending the loan agreement dated 2nd March, 2005 and increasing the amount of the loan facility to HK$280,000,000.00. Further details were disclosed in a joint announcement of the Company, AGL and APL dated 8th November, 2005 and their respective circulars dated 25th November, 2005.
(f) The Option Agreement and the Supplemental Letter.
(g) A placing agreement dated 6th April, 2006 was entered into between the Company as vendor and 3V Capital as placing agent, pursuant to which the Company agreed to place 175,000,000 ordinary shares in Tian An to independent investors at the price of HK$5.10 per share. Further details were disclosed in an announcement of Tian An dated 7th April, 2006.
(h) A top-up subscription agreement dated 6th April, 2006 was entered into between Tian An and the Company as subscriber, pursuant to which the Company agreed to subscribe 175,000,000 ordinary shares in Tian An at the price of HK$5.10 per share. Further details were disclosed in an announcement of Tian An dated 7th April, 2006.

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APPENDIX V

GENERAL INFORMATION

(i) A subscription agreement dated 12th May, 2006 (as supplemented on 17th May, 2006) was entered into between APE as subscriber and the Company for the subscription of 169,000,000 new Shares on completion of the placing of 169,000,000 Shares by APE to 3V Capital as placing agent pursuant to a placing agreement entered into between the two parties on 12th May, 2006 (as supplemented on 17th May, 2006) and an additional of 79,000,000 new Shares if the potential placing of 79,000,000 Shares proceeds, at a price of HK$7.00 per Share. Completion of the subscription agreement is conditional upon the fulfillment of the conditions as set out in the agreement. Further details were disclosed in the joint announcements of the Company, AGL and APL dated 17th May, 2006 and 18th May, 2006 and the respective circulars of AGL and APL dated 8th June, 2006.
(j) A placing agreement dated 18th May, 2006 was entered into between APE as vendor and SHKIS as placing agent in relation to the underwriting of the placing of 79,000,000 Shares by SHKIS at a price of HK$7.00 per Share. Completion of the placing agreement is conditional upon the fulfillment of the conditions as set out in the agreement. Further details were disclosed in a joint announcement of the Company, AGL and APL dated 18th May, 2006 and the respective circulars of AGL and APL dated 8th June, 2006.
(k) A sale and purchase agreement dated 13th June, 2006 was entered into between (i) AG Capital Holding Limited (“AG Capital”) as vendor; (ii) AGL as warrantor; (iii) Swan Islands Limited, a direct wholly-owned subsidiary of the Company, as purchaser; and (iv) the Company as guarantor in relation to the conditional sale and purchase of the entire issued share capital of UAF Holdings Limited (“UAF Holdings”) and assignment of the shareholder’s loan advanced by AG Capital to UAF Holdings at an aggregate consideration of HK$4,328,000,000. Further details were disclosed in a joint announcement of the Company, AGL and APL dated 19th June, 2006.

7. EXPERT AND CONSENT

Deloitte Touche Tohmatsu (“Deloitte”), certified public accountants in Hong Kong, has given an opinion or advice which is contained in this circular.

As at the Latest Practicable Date, Deloitte:

(a) had no direct or indirect interest in any assets which have since 31st December, 2005 (being the date to which the latest published audited financial statements of the Company were made up) been acquired or disposed of by or leased to any member of the Group, or are proposed to be acquired or disposed of by or leased to any member of the Group; and
(b) had no shareholding in any member of the Group or the right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group.

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APPENDIX V

GENERAL INFORMATION

Deloitte has given and has not withdrawn its written consent to the issue of this circular with the inclusion herein of its reports or letters, as the case may be, and reference to its name in the form and context in which they respectively appear.

8. DIRECTORS’ INTERESTS IN CONTRACT

As at the Latest Practicable Date, there was no contract or arrangement subsisting in which any Director was materially interested and which was significant in relation to the business of the Group.

9. GENERAL

(a) The registered office of the Company is Level 12, One Pacific Place, 88 Queensway, Hong Kong.
(b) The company secretary of the Company is Ms. Hester Wong Lam Chun. She is a fellow member of the Institute of Chartered Secretaries and Administrators.
(c) The qualified accountant of the Company is Mr. Poon Mo Yiu. He is a fellow member of the Chartered Association of Certified Accountants and the Hong Kong Institute of Certified Public Accountants.
(d) The share registrars of the Company are Secretaries Limited of 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong.
(e) This circular is prepared in both English and Chinese. In the event of inconsistency, the English text shall prevail.

10. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection at the office of P. C. Woo & Co. at 12th Floor, Prince’s Building, 10 Chater Road, Central, Hong Kong during normal business hours on any business day from the date of this circular up to and including 14th July, 2006:

(a) the memorandum and articles of association of the Company;
(b) the material contracts referred to under the paragraph headed “Material Contracts” in this Appendix;
(c) the report from Deloitte on the unaudited pro forma statement of assets and liabilities of the Enlarged Group dated 29th June, 2006, the text of which is set out in Appendix IV;
(d) the written consent referred to in the paragraph headed “Expert and Consent” in this Appendix;

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APPENDIX V

GENERAL INFORMATION

(e) the annual reports of the Company for the two financial years ended 31st December, 2004 and 31st December, 2005; and
(f) this circular.

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AI assistant

First Pacific Company Limited — Proxy Solicitation & Information Statement 2006

48980_rns_2006-06-29_44b55064-0ece-403b-881d-fabef31b1d24.pdf

SUNHUNGKAI&CO.LIMITED

MAJOR TRANSACTION

CONDITIONAL GRANT OF OPTION OVER SHARES AND WARRANTS IN

QUALITY HEALTHCARE ASIA LIMITED

DEFINITIONS

DEFINITIONS

SUNHUNGKAI&CO.LIMITED

MAJOR TRANSACTION

CONDITIONAL GRANT OF OPTION OVER SHARES AND WARRANTS IN QUALITY HEALTHCARE ASIA LIMITED

INTRODUCTION

THE CONDITIONAL GRANT OF OPTION

THE OPTION AGREEMENT (AS AMENDED BY THE SUPPLEMENTAL LETTER)

Date of the Option Agreement

Date of the Supplemental Letter

Parties

The Option

Consideration and exercise price

Conditions contained in the Option Agreement (as amended by the Supplemental Letter)

Conditions of exercise

INFORMATION ABOUT QHA

INFORMATION ABOUT THE COMPANY, AGL, APL AND WAH CHEONG

The Company

AGL

APL

Wah Cheong

Group chart as at the Latest Practicable Date

Group chart following exercise of the Option

INFORMATION ABOUT CLSA

REASONS FOR AND BENEFITS OF THE OPTION

FINANCIAL EFFECT OF TAKING THE OPTION

EFFECT OF THE EXERCISE OF THE OPTION

LISTING RULES IMPLICATIONS

ADDITIONAL INFORMATION

1. AUDITED CONSOLIDATED FINANCIAL INFORMATION OF THE GROUP

Consolidated Income Statement

Consolidated Balance Sheet

2. AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE GROUP FOR THE YEAR ENDED 31ST DECEMBER, 2005

Consolidated Income Statement

Consolidated Balance Sheet

Balance Sheet

Consolidated Statement of Recognized Income and Expense

Consolidated Cash Flow Statement

Notes to the Consolidated Financial Statements

1. GENERAL

2. SIGNIFICANT ACCOUNTING POLICIES

(a) Statement of compliance

(b) Basis of preparation and consolidation

(ii) Computer software

(d) Investment properties

(e) Leasehold interests in land

(f) Property and equipment

(g) Investments in subsidiary companies

(h) Interest in associated companies

(i) Interest in joint venture

(j) Investments/financial assets

“Financial assets at fair value through profit or loss”

“Available-for-sale investments”

“Loans and receivables”

(iii) Derecognition

“Financial assets at fair value through profit or loss”

“Available-for-sale investments”

“Loans and Receivables”

Fair value measurement principles

(vi) Impairment

“Trading securities”

“Other investments”

(k) Goodwill

(l) Cash and cash equivalents

(m) Financial liabilities

(n) Share capital

(o) Provision and contingent liabilities

(p) Impairment of assets

(q)

Taxation

(r)

Foreign currencies

(s) Borrowing costs

First Pacific Company Limited Proxy Solicitation & Information Statement 2006