First Tractor Company Limited - Proxy Solicitation & Information Statement 2006

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

If you have sold or transferred all your shares in First Tractor Company Limited, you should at once hand this circular with the enclosed form of proxy to the purchaser or the transferee or to the bank, stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser or the transferee.

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

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(a joint stock limited company incorporated in the People’s Republic of China with limited liability)

(Stock Code: 0038)

EXCHANGE OF THE CASTING FACTORIES INTERESTS FOR THE EQUITY INTERESTS IN YITUO DIESEL AND YITUO FUEL JET MAJOR AND CONNECTED TRANSACTION FINANCIAL ASSISTANCES TO CHINA YITUO

Financial Adviser

Oriental Patron Asia Limited

Independent financial adviser to the Independent Board Committee and the Independent Shareholders of First Tractor Company Limited

South China Capital Limited

A letter from the Board is set out on pages 1 to 14 of this circular.

A letter from the Independent Board Committee is set out on page 15 of this circular.

A letter from South China containing its recommendations to the Independent Board Committee and the Independent Shareholders is set out on pages 16 to 26 of this circular.

A notice convening an extraordinary general meeting (“EGM”) of First Tractor Company Limited to be held at 9:00 a.m. on Friday, 28 July 2006 at No. 154 Jianshe Road, Luoyang, Henan Province, the People’s Republic of China is set out on pages 195 to 196 of this circular.

A form of proxy for use at the EGM is enclosed. Whether or not you are able to attend the meeting in person, you are requested to complete and return the accompanying form of proxy in accordance with the instructions contained therein and deposit the same with the Company’s H Share registrar, Hong Kong Registrars Limited, at 46/F, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong as soon as possible and in any event not less than 24 hours before the time scheduled for holding of the EGM (or any adjourned meeting thereof). Completion and delivery of the form of proxy will not preclude you from attending and voting in person at the EGM or any adjournment if you so desire.

For identification purpose only

9 June 2006

	Pages
Definitions ..................................................................................................................................................	ii
Letter from the Board ...............................................................................................................................	1
Letter from the Independent Board Committee .....................................................................................	15
Letter from South China ...........................................................................................................................	16
Appendix I – Financial information on Yituo Diesel............................................................................	27
Appendix II – Financial information on Yituo Fuel Jet .......................................................................	68
Appendix III – Financial information of the Group..............................................................................	108
Appendix IV – Unaudited Pro forma financial information of the Enlarged Group ........................	181
Appendix V – General information .........................................................................................................	188
Notice of EGM ..........................................................................................................................................	195

— i —

DEFINITIONS

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

“Assets Swap” the exchange of the Casting Factories Interests for the equity interests in Yituo Diesel and Yituo Fuel Jet as contemplated under the Assets Swap Agreement

“Assets Swap Agreement” the conditional assets restructuring agreement dated 8 May 2006 entered into between the Company and China Yituo pursuant to which the Company agreed with China Yituo to exchange the Casting Factories Interests at an aggregate consideration of RMB158.24 million for the 58.80% equity interest in Yituo Diesel and 70% equity interest in Yituo Fuel Jet at a consideration of RMB154.75 million and RMB43.27 million respectively “associate(s)” has the meaning ascribed to it under the Listing Rules

“Board” the board of Director(s)
“Brilliance China” Brilliance China Machinery Holdings Limited (華晨中國機械控股有限公司), a company incorporated in Bermuda with limited liability and is owned as to approximately 90.1% by the Company, approximately 9.9% by Brilliance China Holdings Ltd and one share is owned by Mr. Yang Rong, both of which are not connected persons (as defined under the Listing Rules) of the Company
“Casting Factories” including Precision Casting Factory, No.1 Iron Casting Factory, Steel Casting Factory and Nodular (Graphite) Cast Iron and Aluminum Factory
“Casting Factories Interests” the assets and liabilities of the Casting Factories stipulated in the Assets Swap Agreement
“China Yituo” or “Holding” China Yituo Group Corporation Limited (中國一拖集團有限公司), a PRC company with limited liability, the controlling Shareholder of the Company, holding approximately 57.32% of the equity interests in the Company
“China Yituo Group” China Yituo and its controlled companies or entities (for the purpose of this circular excluding the Group)
“Company” First Tractor Company Limited (第一拖拉機股份有限公司), a joint stock limited company established under the Company Law

— ii —

DEFINITIONS

“Company Law”	the Company Law of the PRC (中華人民共和國公司法), as enacted by the
	Standing Committee of the Eighth National People’s Congress (全國人民
	代表大會) on 29 December 1993 and came into force on 1 July 1994, as
	amended, supplemented or otherwise modified from time to time
“Completion”	Completion of the Assets Swap in accordance with the terms and conditions
	of the Assets Swap Agreement
“Diesel Repayment	the conditional repayment agreement date 8 May 2006 entered
Agreement”	into between Yituo Diesel and China Yituo in connection with the repayment
	of approximately RMB81 million by China Yituo to Yituo Diesel
“Director(s)”	the director(s) of the Company
“Effective Date”	the day on which all the conditions of the Assets Swap Agreement are
	fulfilled
“EGM”	the extraordinary general meeting of the Company to be convened on 28
	July 2006 to approve the Assets Swap Agreement, Diesel Repayment
	Agreement, Fuel Jet Repayment Agreement and all transactions contemplated
	thereunder or any adjournment thereof
“Enlarged Group”	the Group as enlarged by the Assets Swap Agreement upon Completion
“Fuel Jet Repayment	the conditional repayment agreement date 8 May 2006 entered
Agreement”	into between Yituo Fuel Jet and China Yituo in connection with the repayment
	of approximately RMB26 million by China Yituo to Yituo Fuel Jet
“Group”	the Company and its subsidiaries
“HK$”	Hong Kong dollars, the lawful currency of Hong Kong
“Hong Kong”	the Hong Kong Special Administrative Region of the PRC
“HK GAAP”	Accounting Principles Generally Accepted in Hong Kong
“Independent Board	the independent board committee of the Company comprising
Committee”	independent non-executive Directors to advice the Independent Shareholders
	in relation to the Assets Swap Agreement, Diesel Repayment Agreement,
	Fuel Jet Repayment Agreement and the transactions contemplated thereunder
“Independent Shareholders”	The Shareholders other than China Yituo and its associates

— iii —

DEFINITIONS

“Latest Practicable Date”	5 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”	the Rules Governing the Listing of Securities on the Stock Exchange (as
	amended from time to time)
“PRC”	the People’s Republic of China
“RMB”	Renminbi, the lawful currency of the PRC
“SFO”	Securities and Futures Ordinance (Chapter 571, Laws of Hong Kong)
“Shareholder(s)”	the holder(s) of the shares of the Company
“Shares”	shares of the Company
“South China”	South China Capital Limited, the independent financial adviser to the
	Independent Board Committee and the Independent Shareholders and a
	deemed licensed corporation to carry on Type 6 (advising on corporate
	finance) regulated activity under the Securities and Future Ordinance (Chapter
	571), Laws of Hong Kong
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“US$”	United States dollars, the lawful currency of the United States
“Yituo Diesel” or “YLDC”	Yituo (Luoyang) Diesel Co., Ltd. (一拖(洛陽)柴油機有限公司), a limited
	liability company established in the PRC
“Yituo Engine Machinery”	Yituo (Luoyang) Engine Machinery Company Limited (一拖(洛陽)動力機
or “YEMC”	械有限公司), a limited liability company established in the PRC
“Yituo Fuel Jet” or “YLFJ”	Yituo (Luoyang) Fuel Jet Company Limited (一拖(洛陽)燃油噴射有限公
	司), a limited liability company established in the PRC
“%”	per cent.

— iv —

LETTER FROM THE BOARD

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(a joint stock limited company incorporated in the People’s Republic of China with limited liability)

(Stock Code: 0038)

Board of Directors: LIU Dagong (Chairman) LIU Wenying ZHAO Yanshui YAN Linjiao LI Tengjiao SHAO Haichen ZHANG Jing LI Youji LIU Shuangcheng ZHAO Fei LU Zhongmin CHAN Sau Shan, Gary CHEN Zhi*

Registered and principal office: No. 154 Jianshe Road Luoyang Henan Province The PRC

* Independent non-executive Director

9 June 2006

To the Shareholders

Dear Sir or Madam,

EXCHANGE OF THE CASTING FACTORIES INTERESTS FOR THE EQUITY INTERESTS IN YITUO DIESEL AND YITUO FUEL JET MAJOR AND CONNECTED TRANSACTION FINANCIAL ASSISTANCES TO CHINA YITUO

INTRODUCTION

On 11 May 2006 the Company announced, among other matters, the following agreements were entered into:

(i) an Assets Swap Agreement, pursuant to which the Company agreed with China Yituo to exchange the Casting Factories Interests at an aggregate consideration of RMB158.24 million for the 58.80% equity interest in Yituo Diesel and 70% equity interest in Yituo Fuel Jet at a consideration of RMB154.75 million and RMB43.27 million respectively. At Completion, the net consideration payable by the Company to China Yituo pursuant to the Assets Swap Agreement is approximately RMB39.78 million;

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LETTER FROM THE BOARD

(ii) the Diesel Repayment Agreement and Fuel Jet Repayment Agreement pursuant to which each of the Yituo Diesel and Yituo Fuel Jet has agreed the repayment terms for China Yituo to repay the existing financial assistances provided from Yituo Diesel and Yituo Fuel Jet of approximately RMB81 million and RMB26 million respectively following the completion of the Assets Swap.

As China Yituo is the controlling Shareholder of the Company, holding approximately 57.32% of the equity interests in the Company, China Yituo is regarded as a connected person of the Company under Chapter 14A of the Listing Rules. The transactions contemplated under the Assets Swap Agreement, Diesel Repayment Agreement and the Fuel Jet Repayment Agreement constitute connected transactions and are subject to reporting, announcement and independent Shareholders’ approval requirements under Chapter 14A of the Listing Rules. The transactions contemplated under the Assets Swap Agreement also constitute a major transaction under Rule 14.08 of the Listing Rules. China Yituo and its associates are required to abstain from voting in respect of the Assets Swap Agreement, Diesel Repayment Agreement and the Fuel Jet Repayment Agreement at the EGM and the voting shall be taken by poll.

An Independent Board Committee comprising Messrs. LU Zhongmin, CHAN Sau Shan, Gary and CHEN Zhi has been appointed to advise the Independent Shareholders in relation to the Assets Swap Agreement, Diesel Repayment Agreement and the Fuel Jet Repayment Agreement and the transactions contemplated thereunder. South China has been appointed as independent financial adviser to advise the Independent Board Committee and Independent Shareholders.

The purpose of this circular is (i) to provide you with information relating to details of the Assets Swap Agreement, Diesel Repayment Agreement, Fuel Jet Repayment Agreement and the transactions contemplated thereunder; (ii) to set out recommendation of the Independent Board Committee and South China regarding the Assets Swap Agreement, Diesel Repayment Agreement and Fuel Jet Repayment Agreement; and (iii) to give you notice of the EGM to be convened for the Independent Shareholders for approval of the Assets Swap Agreement, Diesel Repayment Agreement and Fuel Jet Repayment Agreement.

THE ASSETS SWAP AGREEMENT

Date

8 May 2006

Parties

(1) The Company; and
(2) China Yituo

— 2 —

LETTER FROM THE BOARD

Consideration

(1) Assets being exchanged to the Company
(a) 58.80% equity interest in Yituo Diesel (together with 18% equity interests in Yituo Fuel Jet and 50% equity interest in Yituo Engine Machinery held by Yituo Diesel); and
(b) 70% equity interest in Yituo Fuel Jet.
(2) Assets being exchanged out of the Company
(a) the Casting Factories Interests

The Casting Factories Interests are conditionally exchanged out of the Company to China Yituo free from all liens, charges and encumbrances.

(3) Net consideration

Net consideration of approximately RMB39.78 million, calculation of which are as follows:

	Transfer in/(out)
	Consideration
	RMB’ million
Assets being exchanged to the Company
58.80% equity interest in Yituo Diesel (together with 18%
equity interests in Yituo Fuel Jet and 50%
equity interests in Yituo Engine Machinery held by Yituo Diesel)	154.75
70% equity interest in Yituo Fuel Jet	43.27
Assets being exchanged out of the Company
The Casting Factories Interests	(158.24)
Net consideration payable	39.78

Payment of the net consideration

The net consideration of approximately RMB39.78 million payable by the Company to China Yituo shall be satisfied in cash and payable within 30 business days from the Effective Date. The consideration for each of the assets to be exchanged to the Company and to be exchanged out of the Company under Assets Swap Agreement has been determined after arm’s length negotiations between the Company and China Yituo.

— 3 —

LETTER FROM THE BOARD

Conditions Precedent

The Assets Swap Agreement shall be subject to, among other things, the following conditions being satisfied:

(1) the granting of the necessary approvals by relevant governmental and regulatory authorities in relation to the implementation of the Assets Swap Agreement and all transactions contemplated thereunder; and
(2) the passing by the Independent Shareholders of all necessary resolutions at the EGM approving the Assets Swap Agreement, Diesel Repayment Agreement, Fuel Jet Repayment Agreement and all the transactions contemplated thereunder.

If any of the above conditions are not fulfilled by 31 December 2006 (or such later date as the parties to the Assets Swap Agreement may agree in writing) the Assets Swap Agreement will be terminated and have no effect.

SHAREHOLDING STRUCTURE IMMEDIATELY BEFORE AND AFTER COMPLETION OF THE ASSETS SWAP AGREEMENT

The following charts show the shareholding structure of the Group immediately before and after completion of the Assets Swap Agreement:

Before completion of the Assets Swap Agreement

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

China Yituo
57.32%
The Company
90.1%
Brilliance China
Casting Others
Factories 75% 25%
75%
Yituo Diesel
7% 18% 50% 42% 8%
Yituo Fuel Jet Yituo Engine Machinery
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LETTER FROM THE BOARD

After completion of the Assets Swap Agreement

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

China Yituo
57.32%
The Company
90.1%
Brilliance China
Casting Others
Factories
58.8% 16.2% 25%
5%
Yituo Diesel
77% 18% 50% 42% 8%
Yituo Fuel Jet Yituo Engine Machinery
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Management of Yituo Engine Machinery

INFORMATION OF THE COMPANY AND CHINA YITUO

The Company

The Company is principally engaged in the production and sale of agricultural machineries and construction machineries.

China Yituo

China Yituo is principally engaged in the production of motive power machinery, vehicles products, spare parts and components etc., and is a controlling shareholder of the Company holding approximately 57.32% of the equity interests in the Company.

INFORMATION OF ASSETS TO BE EXCHANGED UNDER THE ASSET SWAP AGREEMENT

Yituo Diesel

Yituo Diesel is private company principally engaged in the manufacture and sale of diesel engines. Yituo Diesel in turn holds 18% equity interest in Yituo Fuel Jet and 50% equity interest in Yituo Engine Machinery.

Before completion of the Assets Swap Agreement, Yituo Diesel is owned as to 75% by China Yituo and 25% by Brilliance China. The investment cost for the 75% equity interest in Yituo Diesel by China Yituo is approximately US$4.50 million.

— 5 —

LETTER FROM THE BOARD

Pursuant to an employee stock option incentive plan initially adopted by Yituo Diesel in 2002 and as amended in 2003, certain members of senior management of Yituo Diesel were granted stock options for the four years ended 31 December 2002 to 2005 to acquire equity interest in Yituo Diesel from China Yituo in accordance with the terms and conditions of the employee stock option incentive plan. It is expected that all stock options granted will be fully exercised by the option holders before Completion and an aggregate 16.20% equity interest in Yituo Diesel will be transferred from China Yituo to those relevant option holders upon approval from relevant authorities. Upon Completion, it is expected that the existing employee stock option incentive plan will be terminated and China Yituo will cease to have any equity interest in Yituo Diesel upon the exercise of the stock options in full by the option holders and the duly transfer of its 16.20% equity interest in Yituo Diesel to the option holders.

Yituo Diesel’s production facilities consist of factory and ancillary premises and are located on Huashan Road, Jianxi District, Luoyang on a site leased from China Yituo with an area of approximately 71,542 sq.m and an aggregated factory floor area of approximately 45,000 sq.m. Out of the aggregated factory floor area of approximately 45,000 sq.m, approximately 10,300 sq.m are leased from China Yituo. The production facilities are principally responsible for production of diesel engines for wheeled tractors and other wheeled agricultural and construction machineries. Yituo Diesel produced approximately 70,000 units of diesel engines in 2005 and employed approximately 1,271 employees as at 31 December 2005.

The audited net asset value (as adjusted to HK GAAP) of Yituo Diesel as at 31 December 2005 was approximately RMB208.37 million. The audited results (as adjusted to HK GAAP) of Yituo Diesel for the two years ended 31 December 2005 were as follows:

	2005	2004
	RMB’ million	RMB’ million
Net profit before taxation and extraordinary items	37.45	27.70
Net profit after taxation and extraordinary items	31.98	20.91

On 17 April 2006, Yituo Diesel entered into an agreement with China Yituo pursuant to which Yituo Diesel agreed to dispose of its 7.27% equity interest in a commercial bank in Luoyang, PRC to China Yituo at the consideration of approximately RMB30 million which represented the carrying value of such investment. Therefore such disposal will not have any profit or loss on the results of Yituo Diesel for the year ending 31 December 2006.

As at 31 December 2005, Yituo Diesel has an outstanding receivable of approximately RMB81 million due from China Yituo. As it is expected that the receivable of approximately RMB81 million due from China Yituo will remain outstanding after the Completion, this advance will constitute a connected transaction under Chapter 14A of the Listing Rules. Further details regarding this connected transaction are set out in the paragraph headed “Financial Assistances” below in this circular.

On 28 April 2006, Yituo Diesel declared a dividend of approximately RMB73.41 million to its shareholders out of its retained profits. Pursuant to the terms of the Assets Swap Agreement, the 58.80% equity interest in Yituo Diesel conditionally to be exchanged to the Company will not be entitled for such dividend.

Upon Completion, Yituo Diesel will become a non-wholly owned subsidiary of the Company with a direct interest of 58.80% and an indirect interest of 22.53% in Yituo Diesel.

— 6 —

LETTER FROM THE BOARD

Yituo Fuel Jet

Yituo Fuel Jet is a private company principally engaged in the manufacture and sale of fuel injection pump and fuel jet.

Yituo Fuel Jet is owned as to 75% by China Yituo, 18% by Yituo Diesel and 7% by the Company. The investment cost for the 75% equity interest in Yituo Fuel Jet by China Yituo is approximately RMB39 million.

Pursuant to an employee stock option incentive plan adopted by Yituo Fuel Jet in 2003, certain members of senior management of Yituo Fuel Jet were granted stock options for the three years ended 31 December 2003 to 2005 to acquire its equity interest in Yituo Fuel Jet from China Yituo in accordance with the terms and condition of the employee stock option incentive plan. It is expected that all share options granted will be fully exercised by the option holders before Completion and an aggregate 5% equity interest in Yituo Fuel Jet will be transferred from China Yituo to those relevant option holders upon approval from relevant authorities. Upon Completion, it is expected that the existing employee stock option incentive plan will be terminated and China Yituo will cease to have any equity interest in Yituo Fuel Jet upon the exercise of the share options in full by the option holders and the duly transfer of its 5.0% equity interest in Yituo Fuel Jet to the option holders.

Yituo Fuel Jet production facilities consist of factory and ancillary premises and are located on Zhengzhou Road, Jianxi District, Luoyang on a site leased from China Yituo with an area of approximately 30,236 sq.m and a factory floor area of approximately 40,000 sq.m. The production facilities are principally responsible for production of fuel injection and fuel jets for diesel engines. Yituo Fuel Jet produced approximately 100,000 sets of fuel injection pump and approximately 350,000 sets of fuel jets in 2005 and employed approximately 1,214 employees as at 31 December 2005.

The audited net asset value (as adjusted to HK GAAP) of Yituo Fuel Jet as at 31 December 2005 was approximately RMB52.91 million. The audited results (as adjusted to HK GAAP) of Yituo Fuel Jet for the two years ended 31 December 2005 were as follows:

	2005	2004
	RMB’ million	RMB’ million
Net profit before taxation and extraordinary items	6.39	0.13
Net profit /(loss) after taxation and extraordinary items	4.12	(0.39)

As at 31 December 2005, Yituo Fuel Jet has an outstanding receivable of approximately RMB26 million due from China Yituo. As it is expected that the receivable of approximately RMB26 million due from China Yituo will remain outstanding after the Completion , this advance will constitute a connected transaction under Chapter 14A of the Listing Rules. Further details regarding this connected transaction are set out in paragraph headed “Financial Assistances” below in this circular.

On 28 April 2006, Yituo Fuel Jet declared a dividend to its shareholders of approximately RMB6.64 million to its shareholders out of its retained profits. Pursuant to the terms of the Assets Swap Agreement, the 70% equity interest in Yituo Fuel Jet conditionally exchanged to the Company will not be entitled for such dividend.

Upon Completion, Yituo Fuel Jet will become a non-wholly owned subsidiary of the Company with a direct interest of 77% and an indirect interest of 14.64% in Yituo Fuel Jet.

— 7 —

LETTER FROM THE BOARD

Yituo Engine Machinery

Yituo Engine Machinery is principally engaged in the manufacture and sales of diesel engines. The Company currently owned approximately 42% equity interests in Yituo Engine Machinery. Upon Completion, Yituo Engine Machinery will become a non-wholly owned subsidiary of the Company with a direct interest of 42% and an indirect interest of 40.66% in Yituo Engine Machinery.

The Casting Factories

The Casting Factories include Precision Casting Factory, No.1 Iron Casting Factory, Steel Casting Factory and Nodular (Graphite) Cast Iron and Aluminum Factory. Particulars of the Casting Factories are set out below.

Precision Casting Factory

The Precision Casting Factory is located on a site leased from China Yituo with an area of approximately 19,100 sq.m and has a factory floor area of approximately 15,975 sq.m. The factory is principally responsible for manufacturing crawler tractor parts which require precision casting. For the year ended 31 December 2005, the Precision Casting Factory produced approximately 3,000 tonnes of precision castings and employed approximately 255 employees as at 31 December 2005.

No. 1 Iron Casting Factory

The No. 1 Iron Casting Factory is located on a site leased from China Yituo with an area of approximately 61,529 sq.m and has a factory floor area of approximately 48,565 sq.m. The factory is principally responsible for casting of engine cylinder blocks and cylinder heads, and rear axle housings for crawler tractors. For the year ended 31 December 2005, the No. 1 Iron Casting Factory produced approximately 25,000 tonnes of cast iron parts and employed approximately 787 employees as at 31 December 2005.

Steel Casting Factory

The Steel Casting Factory is located on a site leased from China Yituo with an area of approximately 67,297 sq.m and has a factory floor area of approximately 66,667 sq.m. The factory is principally responsible for the casting of crawler tractors shoes, track driving sprockets, idlers and rollers. For the year ended 31 December 2005, the Steel Casting Factory produced approximately 25,000 tonnes of cast steel parts and employed approximately 650 employees as at 31 December 2005.

Nodular (Graphite) Cast Iron and Aluminium Factory

The Nodular (Graphite) Cast Iron and Aluminium Factory is located on a site leased from China Yituo with an area of approximately 53,904 sq.m and has a factory floor area of approximately 37,939 sq.m. The factory is principally responsible for casting of nodular (graphite) cast iron and aluminium parts. For the year ended 31 December 2005, the Nodular (Graphite) Cast Iron and Aluminium Factory produced approximately 10,000 tonnes of nodular (graphite) cast iron and aluminium parts and employed approximately 387 employees as at 31 December 2005.

— 8 —

LETTER FROM THE BOARD

Along with its Casting Factories Interests, the relevant employees of the Casting Factories will also be transferred to China Yituo upon Completion.

The unaudited net asset value (as adjusted to HK GAAP) of the Casting Factories Interests as at 31 December 2005 was approximately RMB156.21 million.

Under the Assets Swap Agreement, the factory and related premises for each of the Casting Factories will not be disposed of and will continue to be owned by the Group following the Completion for its own use.

REASONS FOR AND BENEFITS OF THE ASSETS SWAP

Due to a gradual shift of the Group’s product mix from mainly crawler tractors to wheeled tractors and other agricultural and construction machineries over the years, the purchases of diesel engines and related parts and components from Yituo Diesel and Yituo Fuel Jet by the Group increased accordingly. On the other hand, the output of the Casting Factories, which are designed mainly for crawler tractors, has decreased substantially and the continuation of maintaining the operation of the Casting Factories becomes increasingly costly. The Directors believe the Assets Swap will allow the Group to improve its operational and financial performance.

The Assets Swap is expected to bring about the following benefits to the Group:

the production of diesel engines and fuel injection pumps which are one of the key components of Group’s products such as wheeled agricultural tractors and other agricultural and construction machineries can be vertically integrated into the operations of the Group;
reduction of the volume of connected transactions between the Group and China Yituo Group; and
disposing of costly Casting Factories Interests thereby improving financial performance of the Group.

The Directors consider that the Assets Swap Agreement was entered into on normal commercial terms and are in the ordinary and usual course of business of the Company, the terms of the Asset Swap Agreement are fair and reasonable and in the interests of the Shareholders and the Company as a whole.

FINANCIAL ASSISTANCES

Upon Completion the following new financial assistances provided from the Group to China Yituo Group are anticipated.

Diesel Repayment Agreement

Date

8 May 2006

Parties

(1) Yituo Diesel, as creditor
(2) China Yituo, as debtor

— 9 —

LETTER FROM THE BOARD

Principal

The outstanding balance of the advance made by Yituo Diesel to China Yituo as at the Effective Date. Such balance as at 31 December 2005 was approximately RMB81 million.

Repayment terms

(1) China Yituo shall repay the principal in full on or before 31 December 2009; and
(2) China Yituo has the option to repay the principal in part or in full with assets pledged under the Diesel Repayment Agreement based on a valuation to be determined by an independent valuer.

Security

(1) China Yituo shall pledge certain of its machineries and facilities which functions are designed to enhance the technology, quality and capacity in the production of diesel engines in favour of Yituo Diesel as security;
(2) Yituo Diesel has the right to use the assets pledged under the Diesel Repayment Agreement at any time prior to its termination at nil consideration; and
(3) If the principal is not repaid by China Yituo in full on 31 December 2009, Yituo Diesel shall have the rights to dispose of the assets pledged under the Diesel Repayment Agreement.

Interest

No interest shall be payable by China Yituo.

Other terms

Upon the full repayment of the principal in cash by China Yituo in accordance with the terms of the Diesel Repayment Agreement, Yituo Diesel has the first right of refusal to lease the asset pledged under the Diesel Repayment Agreement for a maximum term of two years.

Conditions

The passing by the Independent Shareholders of all necessary resolutions at the EGM approving the Assets Swap Agreement, Diesel Repayment Agreement, Fuel Jet Repayment Agreement and all the transactions contemplated thereunder.

— 10 —

LETTER FROM THE BOARD

Fuel Jet Repayment Agreement

Date

8 May 2006

Parties

(1) Yituo Fuel Jet, as creditor
(2) China Yituo, as debtor

Principal

The outstanding balance of the advance made by Yituo Fuel Jet to China Yituo as at the Effective Date. Such balance as at 31 December 2005 was approximately RMB26 million.

Repayment terms

(1) China Yituo shall repay the principal in full on or before 31 December 2009; and
(2) China Yituo has the option to repay the principal in part or in full with assets pledged under the Fuel Jet Repayment Agreement based on a valuation to be determined by an independent valuer.

Security

(1) China Yituo shall pledge certain of its machineries and facilities which functions are designed to enhance the technology, quality and capacity in the production of fuel injection pumps and fuel jets, in favour of Yituo Fuel Jet as security;
(2) Yituo Fuel Jet has the right to use the assets pledged under the Fuel Jet Repayment Agreement any time prior to its termination at nil consideration; and
(3) If the principal is not repaid by China Yituo in full on 31 December 2009, Yituo Fuel Jet shall have the rights to dispose of the assets pledged under the Fuel Jet Repayment Agreement.

Interest

No interest shall be payable by China Yituo.

Other terms

Upon the full repayment of the principal in cash by China Yituo in accordance with the terms of the Fuel Jet Repayment Agreement, Yituo Fuel Jet has the first right of refusal to lease the asset pledged under the Fuel Jet Repayment Agreement for a maximum term of two years.

— 11 —

LETTER FROM THE BOARD

Conditions

The Directors consider that the Diesel Repayment Agreement and the Fuel Jet Repayment Agreement were entered into on normal commercial terms and are in the ordinary and usual course of business of the Company, the terms of which are fair and reasonable and in the interests of the Shareholders and the Company as a whole.

Pursuant to Rule14A.63 of the Listing Rules, the transactions contemplated under the Diesel Repayment Agreement and Fuel Jet Repayment Agreement will constitute non-exempted connected transactions of the Company and are subject to reporting, announcement and Independent Shareholders’ approval requirement under Chapter 14A of the Listing Rules.

FINANCIAL EFFECTS OF THE ACQUISITION ON THE GROUP

Earnings

Based on the unaudited net asset value of the Casting Factories Interests as at 31 December 2005 of approximately RMB156.21 million and the consideration of approximately RMB158.24 million, upon Completion an estimated gain of approximately RMB2.03 million will be accounted for by the Company in its consolidated financial statements in 2006 in the Company as a result of the Casting Factory Interests being exchanged out of the Company.

Net tangible asset

Based on the unaudited pro forma statement of assets and liabilities of the Enlarged Group as set out in Appendix IV to this circular, the Group has audited consolidated net tangible assets of approximately RMB2,031 million before the Completion and unaudited pro forma net tangible assets of approximately RMB2,028 million after the Completion. Based on 785,000,000 Shares in issue upon Completion, the unaudited pro forma consolidated net tangible assets per Share immediate after Completion will be approximately RMB2.58.

The gearing ratio of the Group at 31 December 2005 was 0.045 which is calculated by dividing the total interest-bearing bank borrowings by the total assets. Based on the unudited pro forma statement of assets and liabilites of the Enlarged Group as at 31 December 2005, the gearing ratio of the Enlarged Group is 0.097 which is calculated by dividing the total interest-bearing bank borrowings by the total assets.

Upon Completion, (1) Yituo Diesel, Yituo Fuel Jet and Yituo Engine Machinery will become non-wholly owned subsidiaries of the Company and therefore leading to their financial statements to be consolidated into the financial statements of the Company; and (2) the Company will cease to have any interests in any of the Casting Factories Interests and their assets and liabilities will no longer be included into the financial statements of the Company.

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LETTER FROM THE BOARD

FINANCIAL AND TRADING PROSPECTS

Upon Completion, the Group will continue to achieve its long term strategic aim “to become an excellent manufacturer of agricultural machinery and construction machinery in the PRC” by making itself as a domestically advanced and internationally well-known manufacturing base for agricultural machinery and construction machinery.

As one of the largest enterprise for manufacturing agricultural and construction machinery in the PRC, it is an important mission for the company to provide agricultural machinery with good-quality for the new countryside establishment in China. As a result, the Group has set and activated “China Yituo New Countryside Construction Action Plan”, in order to provide suitable, advanced, affordable, usable technology and agricultural and construction products that is cater to the agricultural and scientific development for the general users, and to support the upgrade of the agricultural industry. By implementation the idea of independence and innovation, reinforcement of technical upgrade and technical correction, upgrading the level and ability of manufacturing, enhancement of innovative operation, improving brands operation, and by transforming economic growth mode and improving its business operations, the Group aims to promote its comprehensive business capacity and operating results to accomplish the following business targets in 2006:

Grasping opportunities to sustain the fast growth of agricultural machinery business;
Taking measures to improve operating results of construction machinery business;
Strengthening the international market exploration with a more reasonable export structure for more international communication;
In line with the principle of “advancement, assets optimization and emphasis identification” and the business needs and strategic targets, the Group will continue to reorganise and integrate its resources and businesses and strengthen the capital operation and strategic alliance to improve its operations and increase the return on investment; and
Promoting transformation of economic growth mode by improving economic operations.

EGM

The EGM will be held on at 9:00 a.m. on Friday, 28 July 2006 at No. 154 Jianshe Road Luoyang, Henan Province, the People’s Republic of China for the purpose of considering, and if thought fit, approving the Assets Swap Agreement, Diesel Repayment Agreement and Fuel Jet Repayment Agreement. As each of the Assets Swap Agreement, Diesel Repayment Agreement and Fuel Jet Repayment Agreement constituted a connected transaction, only the Independent Shareholders will be entitled to vote on the resolution at the EGM and such votes will be taken by way of poll pursuant to the requirements of the Listing Rules. A notice of the EGM is set out on pages 195 to 196 of this circular.

A form of proxy for use at the EGM is enclosed. Whether or not you are able to attend the meeting in person, you are requested to complete and return the accompanying form of proxy in accordance with the instructions contained therein and deliver the same with the Company’s H Share registrar in Hong Kong, Hong Kong Registrars Limited, at 46/F., Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong as soon as possible and in any event not less than 24 hours before the time scheduled for holding of the EGM (or any adjourned meeting thereof). Completion and delivery of the form of proxy will not preclude you from attending and voting in person at the EGM or any adjournment if you so desire.

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LETTER FROM THE BOARD

RECOMMENDATIONS

South China has been appointed to advise the Independent Board Committee and the Independent Shareholders with regard to the Assets Swap Agreement, Diesel Repayment Agreement and Fuel Jet Repayment Agreement. The text of the letter of from South China to the Independent Board Committee and the Independent Shareholders in set out on pages 16 to 26 of this circular.

The letter from the Independent Board Committee, which contains its recommendation to the Independent Shareholders in respect of the Assets Swap Agreement, Diesel Repayment Agreement and Fuel Jet Repayment Agreement, is also set out on page 15 of this circular.

The Board considers that the Assets Swap Agreement, Diesel Repayment Agreement and Fuel Jet Repayment Agreement are in the interests of the Company and the Shareholders and the terms of which are fair and reasonable so far as the Company and the Shareholders as a whole are concerned. Accordingly, the Board recommends the Independent Shareholders to vote in favour of the relevant ordinary resolutions to be proposed at the EGM for approving the Assets Swap Agreement, Diesel Repayment Agreement and Fuel Jet Repayment Agreement as set out in the notice of the EGM.

ADDITIONAL INFORMATION

Your attention is drawn to the general information set out in Appendix V to this circular.

Yours faithfully, For and on behalf of First Tractor Company Limited Liu Dagong Chairman

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

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(a joint stock limited company incorporated in the People’s Republic of China with limited liability)

(Stock Code: 0038)

9 June 2006

To the Independent Shareholders

Dear Sir or Madam,

EXCHANGE OF THE CASTING FACTORIES INTERESTS FOR THE EQUITY INTERESTS IN YITUO DIESEL AND YITUO FUEL JET MAJOR AND CONNECTED TRANSACTION FINANCIAL ASSISTANCES TO CHINA YITUO

We have been appointed as members of the Independent Board Committee to give our advice on the Assets Swap Agreement, Diesel Repayment Agreement and Fuel Jet Repayment Agreement, details of which are set out in the letter from the Board included in the circular to the Shareholders dated 9 June 2006 (the “Circular”), of which this letter forms a part. Terms defined in the Circular shall have the same meanings when used herein unless the context otherwise requires.

South China has been appointed as the independent financial adviser to advise us regarding the Assets swap Agreement, Diesel Repayment Agreement and Fuel Jet Repayment Agreement. The letter from South China is set out on pages 16 to 26 of the Circular.

Having considered the terms and conditions of the Assets Swap Agreement, Diesel Repayment Agreement and Fuel Jet Repayment Agreement, the advice given by South China and the principal factors and reasons taken into consideration by them in arriving at their advice, we are of the view that the terms of the Assets Swap Agreement, Diesel Repayment Agreement and Fuel Jet Repayment Agreement are fair and reasonable so far as the Independent Shareholders as a whole are concerned. Accordingly, we recommend the Independent Shareholders to vote in favour of the ordinary resolutions to be proposed at the EGM for approving the Assets swap Agreement, Diesel Repayment Agreement and Fuel Jet Repayment Agreement.

Yours faithfully, Independent Board Committee

Mr. Lu Zhongmin Independent non-executive

Director

Mr. Chan Sau Shan, Gary Mr. Chen Zhi Independent non-executive Independent non-executive Director Director

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LETTER FROM SOUTH CHINA

South China Capital Limited

28th Floor, Bank of China Tower No. 1 Garden Raod Central Hong Kong

9 June 2006

To the Independent Board Committee and the Independent Shareholders

EXCHANGE OF THE CASTING FACTORIES INTERESTS FOR THE EQUITY INTERESTS IN YITUO DIESEL AND YITUO FUEL JET MAJOR AND CONNECTED TRANSACTION FINANCIAL ASSISTANCES TO CHINA YITUO

Dear Sirs,

INTRODUCTION

We refer to our appointment by First Tractor Company Limited (the “Company”) to advise the Independent Board Committee and the Independent Shareholders in respect of the terms and conditions of the Assets Swap Agreement, Diesel Repayment Agreement and Fuel Jet Repayment Agreement, details of which are set out in the “Letter from the Board” contained in the circular of the Company dated 9 June 2006 (the “Circular”), of which this letter forms part. Terms defined in the Circular shall have the same meanings in this letter unless the context otherwise requires.

The Board announced on 11 May 2006, the Company has entered into a conditional Assets Swap Agreement with China Yituo to exchange the Casting Factories interests at an aggregate consideration of RMB158.24 million for the 58.8% equity interest in Yituo Diesel and 70% equity interest in Yituo Fuel Jet at a consideration of RMB154.75 million and RMB43.27 million respectively on 8 May 2006. At Completion, the net consideration payable by the Company to China Yituo pursuant to the Assets Swap Agreement is approximately RMB39.78 million. On 8 May 2006, Yituo Diesel and Yituo Fuel Jet entered into the Diesel Repayment Agreement and Fuel Jet Repayment Agreement respectively with China Yituo, pursuant to which, each of the Yituo Diesel and Yituo Fuel Jet has agreed the repayment terms for China Yituo to repay the existing financial assistances provided from Yituo Diesel and Yituo Fuel Jet of approximately RMB81 million and RMB26 million respectively following the completion of the Assets Swap.

The transactions contemplated under the Assets Swap Agreement, Diesel Repayment Agreement and Fuel Jet Repayment Agreement constitute a major transaction under Rule 14.08 of the Listing Rules. In addition, China Yituo is the controlling Shareholder of the Company, holding approximately 57.32% of the equity interests in the Company, China Yituo is regarded as a connected person of the Company pursuant to the Listing Rules. The transactions contemplated under the Assets Swap Agreement, Diesel Repayment Agreement and Fuel Jet Repayment Agreement constitute connected transactions and are subject to, among other things, the approval of the Independent Shareholders by poll at the EGM. China Yituo and its associates will abstain from voting on the relevant resolution at the EGM.

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LETTER FROM SOUTH CHINA

Pursuant to the requirement of Rule 13.39(6) of the Listing Rules, the Independent Board Committee comprising all the independent non-executive Directors, namely Mr. LU Zhongmin, Mr. CHAN Sau Shan, Gary and Mr. CHEN Zhi have been formed to advise the Independent Shareholders in respect of the Assets Swap Agreement, Diesel Repayment Agreement and Fuel Jet Repayment Agreement. We have been appointed to advise the Independent Board Committee in connection with the terms and conditions of the Assets Swap Agreement, Diesel Repayment Agreement and Fuel Jet Repayment Agreement.

BASIS OF OUR OPINION

In arriving at our opinion and recommendation, we have relied on the information supplied and the representations given by the Directors and the management of the Company. We have assumed that the information contained and representations made to us or referred to in the Circular are true, accurate and complete at the time they were made and continue to be so at the date of the Circular.

We consider that we have been provided with sufficient information on which to form a reasonable basis for our opinion. We have no reason to suspect that any relevant information has been withheld, the information provided and representations made to us untrue, inaccurate or misleading, nor are we aware of any fact or circumstance which would render the information provided and representations and opinions made to us untrue, inaccurate or misleading. Having made all reasonable enquiries by us, the Director have collectively and individually accepted full responsibility for the accuracy of the information contained in the Circular and further confirmed that, to the best of their knowledge, they believe there are no other facts or representations the omission of which would make any statement in the Circular, including this letter, misleading.

We have not, however, carried out any independent verification of the information provided by the Directors and the management of the Company, nor have we conducted an independent investigation into the business affairs, financial position or future prospects of the Company, Yituo Diesel, Yituo Fuel Jet and Casting Factories, nor have we consider the taxation implication on the Company or the Shareholders as a result of the Assets Swap.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In arriving at our opinion and recommendation to the Independent Board Committee and the Independent Shareholders in respect of the Assets Swap, we have taken the following principal factors and reasons into consideration:

1. Background of the Company

As stated in the “Letter from the Board” of the Circular, the Company is principally engaged in the production and sales of agricultural machineries and construction machineries.

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LETTER FROM SOUTH CHINA

2. Reasons for and benefits of the Assets Swap

(a) Vertical Integration

According to the “Letter from the Board” of the Circular, due to a gradual shift of the Group’s product mix from mainly crawler tractors to wheeled tractors and other agricultural and construction machineries over the years, the purchase of diesel engines and related parts and components from Yituo Diesel and Yituo Fuel Jet by the Group increased accordingly.

Based on the information given to us by the management of the Company, we summarized below the Company’s historical sales volume of (i) crawler tractors, (ii) medium and large wheeled tractors and (iii) small wheeled tractors for each of the three years ended 31 December 2003, 2004 and 2005.

	Year	ended 31 December	ended 31 December
	2003	2004	2005
	Units	Units	Units
Crawler Tractors	4,564	3,434	3,418
Medium and Large Wheeled Tractors	5,864	12,207	24,970
Small Wheeled Tractors	120,754	144,764	131,200
Total sales volume of tractors	131,182	160,405	159,588

Based on the above table, we noted that the sales of crawler tractors reduced gradually in the last three years and it accounts for only 2.14% of the total sales volume of tractors of the Company at the year of 2005. On the other hand, the sales volume and percentage of wheeled tractors as the main products of the Company increased in the last three years, in particular, the medium and large wheeled tractors increased significantly from 5,864 units in 2003 to 24,970 units in 2005. According to the management of the Company, the production of the diesel engines and fuel injection pumps are one of the key components of the Group’s products such as the wheeled agricultural tractors and other agricultural and construction machineries. According to the management of the Company, the purchase of diesel engines, fuel jets and related parts from Yituo Diesel, Yituo Fuel Jet and Yituo Engine Machinery by the Company has increased from approximately RMB132.67 million in 2003 to approximately RMB332.47 million in 2005. Additional investment in the equity interests of Yituo Diesel and Yituo Fuel Jet will vertically integrate the diesel engines and fuel jet operation in the supply chain of the wheeled tractors production, which will enhance the profitability of the Company as a whole.

Having considered the above information and reasons, we are of the opinion that the additional investment in the equity interests of Yituo Diesel and Yituo Fuel Jet is consistent with the Company’s principal business and strategy as to vertically integrate the production of diesel engines and fuel jet into the production of the Group’s products such as the wheeled agricultural tractors and other agricultural and construction machineries.

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LETTER FROM SOUTH CHINA

(b) Reduction of the volume of connected transactions

Upon completion of the Assets Swap, Yituo Diesel and Yituo Fuel Jet will become non-wholly owned subsidiaries of the company. According to the “Letter from the Board” of the Circular, it is expected that China Yituo will cease to have any equity interest in Yituo Diesel upon the exercise of the share options in full by the option holders and the duly transfer of its 16.20% equity interest in Yituo Diesel to the option holders of Yituo Diesel. It is also expected that China Yituo will cease to have any equity interest in Yituo Fuel Jet upon the exercise of the share options in full by the option holders and the duly transfer of its 5.0% equity interest in Yituo Fuel Jet to the option holders of Yituo Fuel Jet. Accordingly, transactions between the Company and Yituo Fuel Jet such as the provision of the products and services would cease to be continuing connected transactions to the Company and transactions between the Company and Yituo Diesel would also cease to be continuing connected transactions to the Company as well. We are of the view that the reduction of the volume of connected transaction would save administrative costs and burdens to the Company and accordingly is in the interest of the Company and the Shareholders as a whole.

(c) Improving financial performance

According to the “Letter from the Board” of the Circular, the audited net profit after taxation and extraordinary items of Yituo Diesel and Yituo Fuel Jet for the year ended 31 December 2005 were RMB31.98 million and RMB4.12 million respectively. According to the financial information on Yituo Diesel as set out in Appendix I to the Circular, Yituo Diesel has a track record of profits for the last three years, with the profit of RMB32.66 million in 2003, RMB20.91 million in 2004 and RMB31.98 million in 2005. According to the financial of Yituo Fuel Jet as set out in the Appendix II to the Circular, Yituo Fuel Jet has a substantial financial improvement from the loss position of RMB4.36 million in 2003 to a net profit of RMB4.12 million in 2005. Upon the completion of the Asset Swap, the performance of Yituo Diesel and Yituo Fuel Jet will be consolidated in the Company’s financial statement.

On the other hand, according to the “Letter from the Board” of the Circular, under the Assets Swap Agreement, the Casting Factories Interests excluded the factory and related premises for each of the Casting Factories will be disposed of by the Company. According to the management of the Company, the output of the Casting Factories, which are designed mainly for crawler tractors, has decreased substantially and the continuation of maintaining the operation of the Casting Factories Interests becomes increasingly costly. Upon Completion, the Company will cease to have any equity interests in any of the Casting Factories Interests and their assets and liabilities will no longer be included into the financial statement of the Company.

In addition, according to the “Letter from the Board” of the Circular, the unaudited net asset value (as adjusted to HK GAAP) of the Casting Factories Interests as at 31 December 2005 was approximately RMB156.21 million and the consideration of the Casting Factories Interests is approximately RMB158.24 million. According to the “Letter from the Board” of the Circular, upon Completion, there shall be an estimated gain of approximately RMB2.03 million (excluding transaction costs of the Asset Swap) to the Company in its consolidated financial statements in 2006 as a result of the Casting Factories Interests being exchanged out of the Company. Please refer to our discussion on the financial effect of the Assets Swap under the section headed “Financial Effects of the Assets Swap” below.

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LETTER FROM SOUTH CHINA

Taken into account that possible improvement of the financials of the Company by the disposal of the costly Casting Factories Interests and the acquisition of Yituo Diesel and Yituo Fuel Jet in the future, we are of the view that the Assets Swap is in the interest of the Company and the Shareholders as a whole.

3. Basis of consideration and valuation

(a) Consideration

According to the “Letter from the Board” of the Circular, pursuant to the Assets Swap Agreement, the Company and China Yituo will exchange the Casting Factories Interests at an aggregate consideration of RMB158.24 million for the 58.80% equity interest in Yituo Diesel and 70% equity interest in Yituo Fuel Jet at a consideration of RMB154.75 million and RMB43.27 million respectively. At Completion, the net consideration payable by the Company to China Yituo pursuant to the Assets Swap Agreement is approximately RMB39.78 million. The Directors confirmed that the consideration for each of the assets to be exchanged to the Company and to be exchanged out of the Company under the Assets Swap Agreement has been determined after arm’s length negotiation between the Company and China Yituo.

Consideration of the Casting Factories Interests

According to the management of the Company, the continuation of maintaining the operation of the Casting Factories Interests becomes increasingly costly since the output of the Casting Factories, which are designed mainly for crawler tractors, has decreased substantially. Pursuant to the Assets Swap Agreement, the factory and related premises for each of the Casting Factories will not be disposed of and will continue to be owned by the Group following the Completion for its own use. Therefore, we are of the view that it is difficult to segregate the proportion of revenues and profits out of the Casting Factories Interests, which comprise of only part of the assets and liabilities of the Casting Factories. Accordingly, valuation methodology such as price-earning ratio is not applicable for valuing the Casting Factories Interests and we consider that net asset value (NAV) is appropriate to be used as the basis of the consideration of Casting Factories Interests. According to the “Letter from the Board” of the Circular, the unaudited net asset value (as adjusted to HK GAAP) of Casting Factories Interests as at 31 December 2005 was approximately RMB156.21 million. According to the Assets Swap Agreement, the consideration of Casting Factories Interests is approximately RMB158.24 million which is approximately in line with the unaudited net asset value of the Casting Factories Interests as at 31 December 2005. Accordingly, we are of the view that the consideration of the Casting Factories Interests being exchanged out of the Company is fair and in the interest of the Company and the Shareholders as a whole.

Consideration of Yituo Diesel and Yituo Fuel Jet

According to the “Letter from the Board” of the Circular, the audited net profit after taxation and extraordinary items of Yituo Diesel and Yituo Fuel Jet for the year ended 31 December 2005 were RMB31.98 million and RMB4.12 million, respectively. The audited net asset value (as adjusted to HK GAAP) of Yituo Diesel and Yituo Fuel Jet as at 31 December 2005 were approximately RMB208.37 million and RMB52.91 million, respectively. According to the “Letter from the Board” of the Circular, the consideration for each of the assets to be exchanged to the Company and to be exchanged out of the Company under Assets Swap Agreement has been determined after arm’s length negotiations between the Company and China Yituo.

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LETTER FROM SOUTH CHINA

Taking into account that Yituo Diesel and Yituo Fuel Jet are profit making and the provision of the key components of the wheeled tractors which are main products of the Company, we are of the view that price-to-earning ratio and price-to-book value ratio are appropriate to be used as the basis of the consideration of Yituo Diesel and Yituo Fuel Jet in the Assets Swap. In formulating our opinion on evaluating the fairness of the consideration of Yituo Diesel and Yituo Fuel Jet, we consider that it is reasonable to analyze the current market multiples of various comparable listed companies principally engaged in the supply of diesel engine and fuel jet based in the PRC. The comparable companies were selected based on their nature and location of the business and the availability of their financial information to the public (but not necessarily comprise of all companies that match the above-mentioned criteria).

Based on the above criteria, we set out in the following table for the relevant multiples of the selected eight comparable listed companies (the “Comparables”) in Hong Kong, Shanghai and Shenzhen. Based on their respective closing price of the shares quoted on the Stock Exchanges on 10 May 2006 (the date preceding the date of the announcement of the Company in relation to the Assets Swap) and their latest published annual reports, we have computed the price-toearnings ratio (“P/E”) and the price-to-book value ratio (“P/BV”) of the Comparables.

Company Name	Principal Business Activities	P/E	P/BV
(Stock Code)		(times)	(times)
Shanghai
Anhui Quanchai Engine	Manufacture and sale of diesel engines	67.22	0.83
Co., Ltd, (600218.SH)
Shanghai Diesel Engine	Machine electron product, diesel engine	650	2.10
Co., Ltd, (600841.SH)*	and the material, metal material
Shenzhen
Jiangsu Jianghuai Engine	Manufacture and sale of singular cylinder	36.00	1.15
Co., Ltd. (000816.SZ)	and multicylinder diesel engines
Changchai Co., Ltd.	Manufacture and sale of agriculture	25.77	1.39
(000570.SZ)**	diesel engine, combine harvester and
	agriculture transportation vehicle
Kunming Yunnei Power	Diesel engine and the machine set, diesel	17.88	1.00
Co., Ltd. (000903.SZ)	generator set; diesel engine series and
	its deformation machine set and part units,
	the automobile accessories, the agriculture
	machine accessories, research assisting material,
	electronics product, kit equipments,
	control equipments, examination equipments,
	instrument, appearance, tool, molding tool
	and related technique, special kind oil

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LETTER FROM SOUTH CHINA

Company Name	Principal Business Activities	P/E	P/BV
(Stock Code)
Jinan Diesel Engine	Manufacture, sell, repair and mechanic	38.39	10.21
Co., Ltd. (000617.SZ)	reproduct of diesel engine, air motor,
	diesel and air generators,
WeiFu High-Technology	Manufacture of diesel fuel system product and	19.59	1.52
Co., Ltd. (000581.SZ)	fuel system testing apparatus and equipment
Hong Kong
Weichai Power Co., Ltd.	Manufacture and sale of diesel engines	20.54	2.70
(02338.HK)
Average***		34.59	1.64
Maximum		650	10.21
Minimum		17.88	0.83

Sources: Latest annual and interim report of the respective comparable companies available, the websites of the Shanghai Stock Exchange, Shenzhen Stock Exchange and the Hong Kong Stock Exchange
Shanghai Diesel Engine Co., Ltd, (600841.SH) has suspended for trading from 30 March 2006 to 14 May 2006. Accordingly, the closing price on 29 March 2006 was used to compute the P/E and P/BV.
** Changchai Co., Ltd. (000570.SZ) has suspended for trading from 24 April 2006 to 24 May 2006. Accordingly, the closing price on 21 April 2006 was used to compute the P/E and P/BV.
*** The highest and lowest values were excluded in the calculation of the averages.

Notes:

(1) Price refers to the closing price of the respective listed comparable companies with main operations in mainland China as quoted on their respective stock exchanges on 10 May 2006 (the date preceding the date of the announcement of the Company in relation to the Assets Swap) and the total number of shares in issue according to the relevant company’s latest published annual or interim report or announcement as the case may require.
(2) Earnings refer to the net profit as per the latest published audited full year financial statements of the relevant company available.
(3) NAV refers to the net asset value as per the latest published financial statements of the relevant company available.

As can be seen from the above table, the P/E of the Comparables ranged from approximately 17.88 times to 650 times, with an overall average of 34.59 times by ignoring the highest and lowest values for minimizing the impact of outliers. In respect of the P/BV, it ranges from approximately 0.83 times to 10.21 times, with an overall average of 1.64 times also by ignoring the highest and lowest values.

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LETTER FROM SOUTH CHINA

According to the “Letter from the Board” of the Circular, the consideration of Yituo Diesel and Yituo Fuel Jet for the Assets Swap represent approximately 8.23 times and 15.0 times of the respective net profit after taxation and extraordinary items of Yituo Diesel and Yituo Fuel Jet. Both P/Es are below the range and lower than the average P/E of the Comparables. The consideration of Yituo Diesel and Yituo Fuel Jet for the Assets Swap represent approximately 1.26 times and 1.17 times respectively of the book value of NAV. Both P/BVs are within the range and lower than the average P/BV of the Comparables.

As both of the P/E of Yituo Diesel and Yituo Fuel Jet for the Assets Swap are lower than the average P/E of the Comparables, and both of the P/BV of Yituo Diesel and Yituo Fuel Jet for the Assets Swap are lower than the average P/BV of the Comparables, we are of the view that the consideration of Yituo Diesel and Yituo Fuel Jet exchanged to the Company are fair and reasonable. Taking into account of the above, we are of the view that the basis of the consideration of each of the Casting Factories Interests, Yituo Diesel and Yituo Fuel Jet are fair and reasonable, and are in the interest of the Company and the Shareholders as a whole.

(b) Settlement terms of the consideration

According to the “Letter from the Board” of the Circular, the consideration of the 58.80% equity interest in Yituo Diesel and 70% equity interest in Yituo Fuel Jet which will be exchanged to the Company is RMB154.75 million and RMB43.27 million, respectively; the consideration of the interest of Casting Factories which will be exchanged out of the Company shall be RMB158.24 million. The net Consideration of approximately RMB39.78 million payable by the Company to China Yituo shall be satisfied in cash and payable within 30 business days from the Effective day.

According to the audited financial statement of the Company as for the year ended 2005, the cash and cash equivalent of the Company was RMB542.43 million. When compared to the net consideration of RMB39.78 million payable by the Company to China Yituo in cash pursuant to the Assets Swap Agreement, we considered that the Company has sufficient financial resources to satisfy the cash consideration. We consider that by settling the majority of the Consideration with the proceeds of the disposal of Casting Factories Interests, the Company can maintain sufficient liquidity and working capital for its day-to-day operation and future development. Please also refer to the discussion of the Assets Swap’s financial effect on the Company in the section headed “Financial effects of the Assets Swap” below.

Having considered the above reasons and factors, we are of the view that the terms of payment under the Assets Swap Agreement is favorable to the Company and is in the interest to the Company and the Shareholders as a whole.

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LETTER FROM SOUTH CHINA

DIESEL REPAYMENT AGREEMENT AND FUEL JET REPAYMENT AGREEMENT

According to the “Letter from the Board” of the Circular, there is an outstanding advance of approximately RMB81 million made by Yituo Diesel to China Yituo and approximately RMB26 million made by Yituo Fuel Jet to China Yituo as at 31 December 2005. As it is expected that these advances due from China Yituo will remain outstanding after the Completion, these advances will constitute financial assistances under Chapter 14A of the Listing Rules. Accordingly, Yituo Diesel and Yituo Fuel Jet entered into the Diesel Repayment Agreement and the Fuel Jet Repayment Agreement respectively on 8 May 2006 with China Yituo in the amount of RMB81 million and RMB26 million respectively. China Yituo shall repay the outstanding advances in full to Yituo Diesel and Yituo Fuel Jet on or before 31 December 2009.

Based on the “Letter from the Board” of the Circular, China Yituo would pledge certain of its machineries and facilities in favor of Yituo Diesel and Yituo Fuel Jet as security to Yituo Diesel and Yituo Fuel Jet under the Diesel Repayment Agreement and Fuel Jet Repayment Agreement respectively. According to the Diesel Repayment Agreement and the Fuel Jet Repayment Agreement, Yituo Diesel and Yituo Fuel Jet have the rights to dispose of the assets pledged to Yituo Diesel and Yituo Fuel Jet respectively on the condition that China Yituo could not repay the principal in full on or before 31 December 2009. Based on the information given to us by the management of the Company, the aggregate values of the assets pledged for Diesel Repayment Agreement and Fuel Jet Repayment Agreement are approximately RMB73.29 million and RMB26.08 million respectively. According to the management of the Company, there are certain additional installation cost to be incurred and subsequently will be settled by China Yituo of these pledged assets which would increase the value of the pledged assets to Yituo Diesel to over RMB81 million. Having considering the terms and the value of the assets pledged of the Diesel Repayment Agreement and Fuel Jet Repayment Agreement, we are of the view that the assets pledged by the Diesel Repayment Agreement and Fuel Jet Repayment Agreement would minimize the credit risk of Yituo Diesel and Yituo Fuel Jet to a large extent.

According to the “Letter from the Board” of the Circular, no interest will be payable by China Yituo to Yituo Diesel and Yituo Fuel Jet pursuant to the Diesel Repayment Agreement and the Fuel Jet Repayment Agreement. However, during the period of the financial assistances, Yituo Diesel and Yituo Fuel Jet have the rights to use the pledged assets comprising of machineries and facilities which functions are designed to enhance the technology, quality and capacity in the production of diesel engines, fuel injection pumps and fuel jets respectively. In assessing the fairness of the terms, we have contrasted the benefits provided by using the pledged assets at no charge with the loss of the interest. According to the People’s Bank of China, given the current saving interest rate for one year as of 2.25% per year before tax which was most updated on 29 October 2004, the interest losses (defined as principal times interest rate) for Yituo Diesel and Yituo Fuel Jet per year are approximately RMB1.82 million and RMB0.59 million respectively. According to the management of the Company, Yituo Diesel and Yituo Fuel Jet are expected to derive benefits from the pledged machineries and facilities by the increased production efficiency and the decreased production costs. The Management considered that the benefits of the utilization of the pledged assets at no charge would offset the impact of the interest loss for Yituo Diesel and Yituo Fuel Jet per year of approximately RMB1.82 million and RMB0.59 million respectively.

Taken into account of the above factors and reasons, we are of the view that (i) the credit risks of Diesel Repayment Agreement and Fuel Jet Repayment Agreement are minimized to a large extent and (ii) the benefits provided by using the pledged assets at no charge could compensate for the interest loss. Accordingly, we consider that the Diesel Repayment Agreement and Fuel Jet Repayment Agreement are fair and reasonable.

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LETTER FROM SOUTH CHINA

FINANCIAL EFFECTS OF THE ASSETS SWAP

1. Effect on net tangible asset

According to the unaudited pro forma statement of assets and liabilities of the enlarged Group as disclosed in Appendix IV to the Circular, the consolidated net tangible assets (excluding minority interests) of the Group as at 31 December 2005 was approximately RMB2,031 million before completion of the Assets Swap. On a per Share basis, the consolidated net tangible asset value (excluding minority interests) per Share was approximately RMB2.59, based on the total number of issued Shares of 785,000,000. According to Appendix IV to the Circular, assuming the Assets Swap had been completed on 31 December 2005, the consolidated net tangible assets (excluding minority interests) of the enlarged Group would be approximately RMB2,028 million, which is approximately in line with the consolidated net tangible assets (excluding minority interests) of the Group as at 31 December 2005. The consolidated net tangible asset value (excluding minority interests) per Share would be RMB2.58, which is also approximately in line with the consolidated net tangible asset value (excluding minority interests) per Share before completion of the Assets Swap.

In addition, according to the “Letter from the Board” of the Circular, the unaudited net asset value (as adjusted to HK GAAP) of the Casting Factories Interests as at 31 December 2005 was approximately RMB156.21 million and the consideration of the Casting Factories Interests to be exchanged out of the Company is approximately RMB158.24 million. Upon Completion, the management of the Company estimated that there would be an estimated gain of approximately RMB2.03 million (excluding transaction costs of the Assets Swap) to the Company in its consolidated financial statements in 2006 in the Company as a result of the Casting Factories Interests being exchanged out of the Company.

2. Effect on gearing ratio

Based on the unaudited pro forma statement of assets and liabilities of the enlarged Group as set out in Appendix IV to the Circular, the gearing ratio (defined as total interest-bearing bank borrowings divided by total assets) of the Group was approximately 0.045 before completion of the Assets Swap (given by total interest-bearing bank borrowings of RMB173.25 million divided by total assets of RMB3,821.63 million) as at 31 December 2005. Assuming the Assets Swap had been completed on 31 December 2005, based on the unaudited pro forma statement of assets and liabilities of the enlarged Group in Appendix IV to the Circular, the gearing ratio would be increased to 0.097 (given by total interest-bearing bank borrowing of RMB418.00 million divided by total assets of RMB4,305.20 million). We are of the view that such increase in the gearing ratio is acceptable to the Group given the benefits of the Assets Swap to the Group as we discussed in the section headed “Reasons for and benefits of the Assets Swap” above.

3. Effect on the liquidity of the Group

Based on the audited consolidated financial statements of the Group as at 31 December 2005, total current assets and total current liabilities of the Group were approximately RMB2,476.50 million and RMB1,625.73 million respectively. The current ratio (as defined as total current assets divided by the total current liabilities) of the Group as 31 December 2005 was approximately 1.52. Based on the pro forma statement of the assets and liabilities of the enlarged Group as disclosed in Appendix IV of the Circular, the current ratio of the Enlarged Group would be approximately 1.35 (given by the total current assets of RMB2,740.68 million divided by the total current liabilities of RMB2,034.45 million) assuming the Assets Swap had been completed on 31 December 2005. Although there would be a minor decrease in the current ratio of the Group upon completion of the Assets Swap, we consider that such change in the liquidity position of the Group would be acceptable to the Group having considered the benefits of the Assets Swap to the Group.

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LETTER FROM SOUTH CHINA

4. Effect on the revenue and net income of the Company

Based on the financial information on Yituo Diesel and Yituo Fuel Jet set out in the Appendix I and II to the Circular, the audited net profit for the year ended 31 December 2005 of Yituo Diesel and Yituo Fuel Jet were approximately RMB31.98 million and approximately RMB4.12 million respectively. Upon Completion, Yituo Diesel and Yituo Fuel Jet will become the subsidiaries of the Company and the financial results of Yituo Diesel and Yituo Fuel jet will be consolidated to the Group. As discussed with the section headed “Reasons for and benefits of the Assets Swap” above, given the historical financial information of Yituo Diesel and Yituo Fuel Jet for the financial years ended 31 December 2005, we believe the Assets Swap could broaden the Group’ revenue and income base by integrating future revenues and profits and the growth potential from Yituo Diesel and Yituo Fuel Jet.

According to the management of the Company, the output of the Casting Factories has decreased substantially and the continuation of maintaining the operation of the Casting Factories Interests becomes increasingly costly. Upon Completion, the financials of the Casting Factories Interests will be excluded from the Group’s financial results. We consider that there is a positive impact on the Group’s financial results by disposing the costly Casting Factories Interests.

Conclusively, we are of the view that the Assets Swap represents an opportunity for the Group to enhance its financials by consolidating businesses with growth potentials and broadening its revenue and earnings base.

Having considered the above factors, we are of the view that, upon the completion of the Assets Swap, there would be no material change in the consolidated net tangible assets of the Company, and the minor changes of the gearing and liquidity ratio would be compensated by the benefits of the Assets Swap to the Group as we discussed in the section headed “Reasons for and benefits of the Assets Swap” above. Furthermore, the Assets Swap represents an opportunity for the Group to enhance its financials by consolidating future possible revenues and profits of Yituo Diesel and Yituo Fuel Jet to the Group. Accordingly, we consider that the Assets Swap is in the interest of the Company and the Shareholders as a whole.

CONCLUSION AND RECOMMENDATION

Having considered the above principal factors and reasons, we are of the opinion that the terms and conditions of the Assets Swap Agreement, Diesel Repayment Agreement and Fuel Jet Repayment Agreement are on normal commercial terms, fair and reasonable and are in the interest in the Group and the Shareholders of the Company as a whole. We would therefore advise the Independent Board Committee to recommend the Independent Shareholders to vote in favor of the relevant resolutions to approve the Assets Swap Agreement, and the financial assistance to China Yituo under the Diesel Repayment Agreement and Fuel Jet Repayment Agreement.

Yours faithfully, For and on behalf of

SOUTH CHINA CAPITAL LIMITED

Tony Wu

Director

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FINANCIAL INFORMATION ON YITUO DIESEL

APPENDIX I

1. ACCOUNTANTS’ REPORT ON YITUO DIESEL

The following is the text of a report in relation to Yituo Diesel, prepared for the sole purpose of inclusion in this circular, received from Ernst & Young, Certified Public Accountants, Hong Kong.

18th Floor Two International Finance Centre 安永會計師事務所 8 Finance Street, Central Hong Kong

9 June 2006

The Directors First Tractor Company Limited

Dear Sirs,

We set out below our report on the financial information regarding Yituo (Luoyang) Diesel Co., Ltd. (“Yituo Diesel”) for the three years ended 31 December 2005 (the “Relevant Periods”), prepared on the basis set out in Section 1 below, for inclusion in the circular of First Tractor Company Limited (the “Company”) dated 9 June 2006 (the “Circular”) in connection with the proposed acquisition of the 58.8% equity interest in Yituo Diesel by the Company, which is pursuant to an assets swap agreement dated 8 May 2006 entered into between the Company and China Yituo Group Corporation Limited (“China Yituo”), the ultimate holding company of the Company.

Yituo Diesel was established as a limited liability company in the People’s Republic of China (the “PRC”) on 28 December 1993. As at the date of this report, China Yituo and Brilliance China Machinery Holdings Limited (a 90.1%-owned subsidiary of the Company) own equity interests of 75% and 25% respectively in Yituo Diesel. Yituo Diesel was engaged in the manufacture and sale of diesel engines during the Relevant Periods.

Yituo Diesel has adopted 31 December as its financial year end date. The management accounts of Yituo Diesel were prepared in accordance with PRC accounting principles and financial regulations. Accordingly, no Hong Kong Financial Reporting Standards (“HKFRSs”) audited accounts are available. For the purpose of this report, the directors of Yituo Diesel have prepared the management accounts of Yituo Diesel under HKFRSs for the Relevant Periods.

The results, statements of changes in equity and the cash flow statements of Yituo Diesel for the Relevant Periods and the balance sheets of Yituo Diesel as at 31 December 2003, 2004 and 2005, together with the notes thereto set out in this report (collectively the “Financial Information”) have been prepared from the unaudited HKFRSs management accounts of Yituo Diesel for the years ended 31 December 2003, 2004 and 2005.

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APPENDIX I

FINANCIAL INFORMATION ON YITUO DIESEL

The directors of Yituo Diesel are responsible for the preparation of the Financial Information which gives, for the purpose of this report, a true and fair view. The directors of Yituo Diesel are also responsible for the preparation of the HKFRSs management accounts which give a true and fair view. In preparing the Financial Information and the HKFRSs management accounts which give a true and fair view, it is fundamental that appropriate accounting policies are selected and applied consistently, that judgements and estimates made are prudent and reasonable, and that the reasons for any significant departure from applicable accounting standards are stated. The directors of the Company are responsible for the contents of the Circular in which this report is included. It is our responsibility to form an independent opinion on such Financial Information in respect of the Relevant Periods and to report our opinion solely to you.

For the purpose of this report, we have undertaken an independent audit on the Financial Information in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”), and have carried out such additional procedures as we considered necessary in accordance with Auditing Guideline 3.340 “Prospectuses and the reporting accountant” issued by the HKICPA.

In our opinion, the Financial Information gives, for the purpose of this report, a true and fair view of the results and cash flows of Yituo Diesel for each of the three years ended 31 December 2005, and of the state of affairs of Yituo Diesel as at 31 December 2003, 2004 and 2005.

1. BASIS OF PREPARATION

The Financial Information has been prepared in accordance with HKFRSs (which also include Hong Kong Accounting Standards (“HKASs”) and Interpretations) issued by the HKICPA, 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. The Financial Information is presented in Renminbi (“RMB”) and all values are rounded to the nearest thousand except when otherwise indicated.

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FINANCIAL INFORMATION ON YITUO DIESEL

APPENDIX I

The HKICPA has issued a number of new and revised HKFRSs, which are generally effective for accounting periods beginning on or after 1 January 2005. For the purposes of preparing and presenting the Financial Information of the Relevant Periods, Yituo Diesel has early adopted the following new and revised HKFRSs:

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 23 Borrowing Costs HKAS 24 Related Party Disclosures HKAS 27 Consolidated and Separate Financial Statements HKAS 28 Investments in Associates HKAS 32 Financial Instruments: Disclosure and Presentation HKAS 36 Impairment of Assets HKAS 37 Provisions, Contingent Liabilities and Contingent Assets HKAS 39 Financial Instruments: Recognition and Measurement HKAS 39 Amendment Transition and Initial Recognition of Financial Assets and Financial Liabilities HKFRS 2 Share-based Payment

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FINANCIAL INFORMATION ON YITUO DIESEL

APPENDIX I

Impact of issued but not yet effective HKFRSs

Yituo Diesel has not applied the following new and revised HKFRSs, that have been issued but are not yet effective for the Financial Information. 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 Yituo Diesel’s objective, policies and processes for managing capital; quantitative data about what Yituo Diesel regards as capital; and compliance with any capital requirements and the consequences of any non-compliance.

HKFRS 7 incorporates 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.

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FINANCIAL INFORMATION ON YITUO DIESEL

APPENDIX I

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

The directors of the Company and Yituo Diesel expect that the adoption of other pronouncements listed above will not have any significant impact on the Financial Information of Yituo Diesel in the period of initial application.

2. PRINCIPAL ACCOUNTING POLICIES

Associate

An associate is an entity, not being a subsidiary or a jointly-controlled entity, in which Yituo Diesel 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.

Yituo Diesel’s share of the post-acquisition results and reserves of an associate is included in the income statement and reserves, respectively. Yituo Diesel’s interest in an associate is stated in the balance sheet at Yituo Diesel’s share of net assets under the equity method of accounting, less any impairment losses.

Impairment of assets

Where an indication of impairment exists, or when annual impairment testing for an asset is required (other than inventories, deferred tax assets and financial assets), 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.

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.

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FINANCIAL INFORMATION ON YITUO DIESEL

APPENDIX I

Related parties

A party is considered to be related to Yituo Diesel if:

(a) the party, directly or indirectly through one or more intermediaries, (i) controls, is controlled by, or is under common control with, Yituo Diesel; (ii) has an interest in Yituo Diesel that gives it significant influence over Yituo Diesel; or (iii) has joint control over Yituo Diesel;
(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 Yituo Diesel 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).

Property, plant and equipment and depreciation

Property, plant and equipment, other than construction in progress, 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 over its estimated useful life, after taking into account its estimated residual value. The estimated useful lives of property, plant and equipment are as follows:

Buildings	20 years
Plant, machinery and equipment	5 - 10 years
Transportation vehicles and equipment	5 years

Where 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.

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FINANCIAL INFORMATION ON YITUO DIESEL

APPENDIX I

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 derecognised is the difference between the net sales proceeds and the carrying amount of the relevant asset.

Construction in progress

Construction in progress represents factory buildings and other property, plant and equipment under construction, which is stated at cost less any impairment losses, and is not depreciated. Cost comprises the direct costs of construction during the period of construction. Construction in progress is reclassified to the appropriate category of property, plant and equipment when completed and ready for use.

Research and development costs

All research costs are charged to the income statement as incurred.

Expenditure incurred on projects to develop new products is capitalised and deferred only when Yituo Diesel can demonstrate the technical feasibility of completing the intangible asset so that it will be available for use or sale, its intention to complete and its ability to use or sell the asset, how the asset will generate future economic benefits, the availability of resources to complete the project and the ability to measure reliably the expenditure during the development. Product development expenditure which does not meet these criteria is expensed when incurred.

Operating leases

Leases where substantially all the rewards and risks of ownership of assets remain with the lessor are accounted for as operating leases. Where Yituo Diesel 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

Yituo Diesel’s financial assets in the scope of HKAS 39 are classified as financial assets at fair value through profit or loss, loans and receivables and available-for-sale financial assets, as appropriate. When financial assets are recognised initially, they are measured at fair value, plus, in the case of investments not at fair value through profit or loss, directly attributable transaction costs. Yituo Diesel 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 Yituo Diesel 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.

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FINANCIAL INFORMATION ON YITUO DIESEL

APPENDIX I

Financial assets at fair value through profit or loss

Financial assets classified as held for trading are included in the category “financial assets at fair value through profit or loss”. Financial assets are classified as held for trading if they are acquired for the purpose of sale in the near term. Gains or losses on investments held for trading are recognised in the income statement.

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.

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 two 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; a discounted cash flow analysis; and option pricing models.

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FINANCIAL INFORMATION ON YITUO DIESEL

APPENDIX I

Impairment of financial assets

Yituo Diesel 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.

Yituo Diesel 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.

Assets carried at cost

If there is objective evidence that an impairment loss on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured 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 discounted at the current market rate of return for a similar financial asset. Impairment losses on these assets are not reversed.

Available-for-sale financial assets

If an available-for-sale financial 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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FINANCIAL INFORMATION ON YITUO DIESEL

APPENDIX I

Derecognition of financial assets

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;
Yituo Diesel 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
Yituo Diesel has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks 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 Yituo Diesel 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 Yituo Diesel’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 Yituo Diesel 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 Yituo Diesel’s continuing involvement is the amount of the transferred asset that Yituo Diesel 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 Yituo Diesel’s continuing involvement is limited to the lower of the fair value of the transferred asset and the option exercise price.

Interest-bearing loans and borrowings

All loans and borrowings are initially recognised at the fair value of the consideration received less directly attributable transaction costs.

After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method.

Gains and losses are recognised in net profit or loss when the liabilities are derecognised as well as through the amortisation process.

Derecognition of financial liabilities

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.

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FINANCIAL INFORMATION ON YITUO DIESEL

APPENDIX I

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined on the weighted average basis and, in the case of work in progress and finished goods, comprises direct materials, direct labour and an appropriate proportion of overheads. Net realisable value is based on estimated selling prices less any estimated costs to be incurred to completion and disposal.

Cash and cash equivalents

For the purpose of the 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 Yituo Diesel’s cash management.

For the purpose of the balance sheet, cash and cash equivalents comprise cash on hand and at banks, which are not restricted as to use.

Provisions

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

When the effect of discounting is material, the amount recognised for a provision is the present value at the balance sheet date of the future expenditures expected to be required to settle the obligation. The increase in the discounted present value amount arising from the passage of time is included in finance costs in the income statement.

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 the initial recognition of an asset or liability 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 investment in an associate, 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.

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APPENDIX I

FINANCIAL INFORMATION ON YITUO DIESEL

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 investment in an associate, 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.

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 the same taxation authority.

Revenue recognition

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

(a) from the sale of goods, when the significant risks and rewards of ownership have been transferred to the buyer, provided that Yituo Diesel maintains neither managerial involvement to the degree usually associated with ownership, nor effective control over the goods sold;
(b) 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
(c) dividend income, when the shareholders’ right to receive payment has been established.

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FINANCIAL INFORMATION ON YITUO DIESEL

APPENDIX I

Employee benefits

Retirement benefits scheme

Contributions to the defined contribution retirement benefits scheme are charged to the income statement as incurred.

Share-based payment transactions

Yituo Diesel operates a share-based compensation scheme for the purpose of providing incentives and rewards to eligible participants who achieve certain performance targets set by Yituo Diesel. Pursuant to such scheme, certain employees (including directors) of Yituo Diesel receive additional remuneration in the form of share-based payment transactions as reward for their performance, whereby employees render services as consideration for equity instruments (“equitysettled transactions”).

The cost of equity-settled transactions with employees is measured by reference to the fair value at the date at which the equity instruments are granted. The fair value is determined by an external valuer using certain valuation techniques, further details of which are given in note 4(o).

The cost of equity-settled transactions is recognised over the period in which the performance and/or service conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (the “vesting date”). The cumulative expense recognised for equity-settled transactions at each balance sheet date until the vesting date reflects the extent to which the vesting period has expired and Yituo Diesel’s best estimate of the number of equity instruments that will ultimately vest. The charge or credit to the income statement for a period represents the movement in the cumulative expense recognised as at the beginning and end of that period.

Yituo Diesel has adopted the transitional provisions of HKFRS 2 in respect of equity-settled awards and has applied HKFRS 2 only to equity-settled awards granted after 7 November 2002 that had not vested on 1 January 2005 and to those granted on or after 1 January 2005.

Foreign currency transactions

The Financial Information is presented in RMB, which is Yituo Diesel’s functional and presentation 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.

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.

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APPENDIX I

FINANCIAL INFORMATION ON YITUO DIESEL

Useful lives and impairment of property, plant and equipment

Yituo Diesel’s management determines the estimated useful lives of its items of property, plant and equipment. This estimate is based on the historical experience of the actual useful lives of property, plant and equipment of similar nature and functions. Management will increase the depreciation charge where the useful lives are less than the previously estimated lives. The impairment loss for an item of property, plant and equipment is recognised for the amount by which the carrying amount exceeds its recoverable amount. The recoverable amounts have been determined based on fair values less costs to sell , which are based on the best information available to reflect the amounts that are obtainable at each balance sheet date, from the disposal of the asset in an arm’s length transaction between knowledgeable, willing parties, after deducting the costs to disposal.

Impairment of receivables

The policy for impairment of receivables of Yituo Diesel is based on the evaluation of collectability and aged analysis of trade receivables and on the judgement of the management. A considerable amount of judgement is required when assessing the ultimate realisation of these receivables, including the current creditworthiness and the past collection history of the customers. The management reassesses the estimation at each balance sheet date.

Provision for obsolete inventories

The management reviews the condition of inventories of Yituo Diesel and makes provision for obsolete and slow-moving inventory items identified that are no longer suitable for sale. The management estimates the net realisable value for such inventories based primarily on the latest invoice prices and current market conditions. Yituo Diesel carries out an inventory review at each balance sheet date and makes provision for obsolete items. The management reassesses the estimation at each balance sheet date.

Provision for product warranties

Provision for product warranties is estimated based on sales volume and past experience of the level of repairs and returns, discounted to their present values as appropriate. Factors considered in the estimation included the unit rate charged by repair centres, number of units of products and components already sold which may require repairs and maintenance, and the miscellaneous expenditures which may be incurred, etc.

Income tax

As a result of the fact that certain matters relating to the income tax have not been confirmed by the local tax bureau, objective estimates and judgement based on currently enacted tax laws, regulations and other related policies are required when determining the provision of income tax to be made. Where the final tax outcome of these matters are different from the amounts originally recorded, the differences will impact the income tax and tax provisions in the period in which the differences realise.

Segment reporting

During the Relevant Periods, all revenue recognised by Yituo Diesel was derived from the sale of diesel engines in the PRC. Accordingly, no segment analysis is required to be prepared.

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FINANCIAL INFORMATION ON YITUO DIESEL

APPENDIX I

3. INCOME STATEMENTS

The following is a summary of the income statements of Yituo Diesel for the Relevant Periods prepared on the basis set out in Section 1 above:

Notes REVENUE (a) Cost of sales Gross profit Other income (a) Selling and distribution costs Administrative expenses Other expenses, net Finance costs (c) Share of losses of an associate PROFIT BEFORE TAX (b) Tax (f) PROFIT FOR THE YEAR DIVIDEND (g)	Year ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 658,203 819,884 760,617 (552,436) (719,743) (628,831) 105,767 100,141 131,786 5,045 12,210 9,239 (26,450) (29,568) (33,911) (32,073) (33,439) (29,243) (6,027) (11,237) (24,695) (8,317) (7,419) (11,508) — (2,989) (4,220) 37,945 27,699 37,448 (5,282) (6,794) (5,468) 32,663 20,905 31,980 — — 73,412	Year ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 658,203 819,884 760,617 (552,436) (719,743) (628,831) 105,767 100,141 131,786 5,045 12,210 9,239 (26,450) (29,568) (33,911) (32,073) (33,439) (29,243) (6,027) (11,237) (24,695) (8,317) (7,419) (11,508) — (2,989) (4,220) 37,945 27,699 37,448 (5,282) (6,794) (5,468) 32,663 20,905 31,980 — — 73,412
		131,786 9,239 (33,911) (29,243) (24,695) (11,508) (4,220)
		37,448 (5,468)
		31,980

		73,412

Notes:

(a) Revenue and other income

Revenue, which is also Yituo Diesel’s turnover, represents the invoiced value of goods sold, net of trade discounts and returns, and excludes sales taxes.

An analysis of revenue and other income is as follows:

Revenue Sale of goods Other income	Year ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 658,203 819,884 760,617	Year ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 658,203 819,884 760,617	Year ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 658,203 819,884 760,617


Profits from sundry sales Interest income Dividend income Others	1,985 654 — 2,406 5,045	8,810 250 420 2,730 12,210	6,247 178 735 2,079
			9,239

— 41 —

APPENDIX I

FINANCIAL INFORMATION ON YITUO DIESEL

(b) Profit before tax

Yituo Diesel’s profit before tax is arrived at after charging/(crediting):

Notes Cost of inventories sold Depreciation 4(a) Auditors’ remuneration Employee benefits expenses (including directors’ remuneration - note 3(d)): Wages and salaries Performance-related bonuses Allowances and benefits Share-based compensation expense Pension scheme contributions Provision/(reversal of provision) against obsolete inventories Product warranty provision 4(k) Research and development costs Minimum lease payments under operating leases: Land and buildings Plant and machinery Provision for bad and doubtful debts, net Loss/(gain) on disposal of items of property, plant and equipment, net Reversal of impairment of items of property, plant and equipment Write-off of construction in progress Reversal of impairment of construction in progress* Exchange losses/(gains), net Interest income Dividend income from unlisted investments	Year ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 552,436 719,743 628,831 9,406 12,601 13,650 26 30 35 39,322 25,167 29,270 4,570 1,786 2,859 6,898 4,970 6,009 — 8,137 20,993 3,911 4,828 5,361 54,701 44,888 64,492 2,921 (2,530) 4,711 8,862 11,003 12,074 3,739 4,460 3,366 1,990 1,945 2,756 4,133 — 233 2,852 5,773 7,572 (4) 15 (23) (176) — — 57 19 24 — (1,714) — — (9) 15 (654) (250) (178) — (420) (735)	Year ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 552,436 719,743 628,831 9,406 12,601 13,650 26 30 35 39,322 25,167 29,270 4,570 1,786 2,859 6,898 4,970 6,009 — 8,137 20,993 3,911 4,828 5,361 54,701 44,888 64,492 2,921 (2,530) 4,711 8,862 11,003 12,074 3,739 4,460 3,366 1,990 1,945 2,756 4,133 — 233 2,852 5,773 7,572 (4) 15 (23) (176) — — 57 19 24 — (1,714) — — (9) 15 (654) (250) (178) — (420) (735)
		64,492
		4,711 12,074 3,366 2,756 233 7,572 (23) — 24 — 15 (178) (735)

At each of the balance sheet dates, Yituo Diesel had no forfeited contributions available to reduce its contributions to the pension scheme in future years.

** The write-off/(reversal of impairment) of construction in progress is included in “Other expenses, net” on the face of the income statement.

(c) Finance costs

		Year ended 31 December
	2003	2004	2005
	RMB’000	RMB’000	RMB’000
Interest on bank and other loans wholly
repayable within five years	8,317	7,419	11,508

No interest was capitalised during the Relevant Periods.

— 42 —

APPENDIX I

FINANCIAL INFORMATION ON YITUO DIESEL

(d) Directors’ remuneration

Directors’ remuneration for the Relevant Periods, 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 Performance-related bonuses Employee share-based compensation benefits Pension scheme contributions	Year ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 — — — 21 25 26 627 255 471 — 1,126 3,280 2 2 3 650 1,408 3,780 650 1,408 3,780	Year ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 — — — 21 25 26 627 255 471 — 1,126 3,280 2 2 3 650 1,408 3,780 650 1,408 3,780
		26 471 3,280 3
		3,780
		3,780

One of the directors of Yituo Diesel is entitled to bonus payments and share-based compensation benefits which are determined as a percentage of the profit after tax of Yituo Diesel.

During the Relevant Periods, a director was granted equity instruments for his services to Yituo Diesel, under the share-based compensation scheme of Yituo Diesel, further details of which are set out in note 4(o) to the Financial Information. The fair value of such equity instruments, which has been charged to the income statement, was determined as at the date of grant and was included in the above directors’ remuneration disclosures.

2003 Mr. Shao Haichen Mr. Zhang Jing Mr. Li Xibin 2004 Mr. Shao Haichen Mr. Zhang Jing Mr. Li Xibin 2005 Mr. Shao Haichen Mr. Zhang Jing Mr. Li Xibin	Salaries, Employee allowances Performance- share-based Pension and benefits related compensation scheme Total in kind bonuses benefits contributions remuneration RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 — — — — — — — — — — 21 627 — 2 650 21 627 — 2 650 — — — — — — — — — — 25 255 1,126 2 1,408 25 255 1,126 2 1,408 — — — — — — — — — — 26 471 3,280 3 3,780 26 471 3,280 3 3,780	Salaries, Employee allowances Performance- share-based Pension and benefits related compensation scheme Total in kind bonuses benefits contributions remuneration RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 — — — — — — — — — — 21 627 — 2 650 21 627 — 2 650 — — — — — — — — — — 25 255 1,126 2 1,408 25 255 1,126 2 1,408 — — — — — — — — — — 26 471 3,280 3 3,780 26 471 3,280 3 3,780
		650

		— — 1,408
		1,408

		— — 3,780
		3,780

There was no arrangement under which a director waived or agreed to waive any remuneration during the Relevant Periods.

— 43 —

APPENDIX I

FINANCIAL INFORMATION ON YITUO DIESEL

(e) Five highest paid employees

The five highest paid employees of Yituo Diesel during the Relevant Periods included one director, whose emoluments are included in note 3(d) above. Details of the remuneration of the remaining four non-director, highest paid employees during the Relevant Periods are as follows:

Salaries, allowances and benefits in kind Performance-related bonuses Employee share-based compensation benefits Pension scheme contributions	Year ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 76 89 92 2,078 801 1,418 — 3,643 10,431 6 8 11 2,160 4,541 11,952	Year ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 76 89 92 2,078 801 1,418 — 3,643 10,431 6 8 11 2,160 4,541 11,952
		11,952

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

Nil to HK$1,000,000 HK$1,000,001 to HK$1,500,000 HK$1,500,001 to HK$2,000,000 HK$2,000,001 to HK$2,500,000 HK$2,500,001 to HK$3,000,000	2003 4 — — — — 4	Number of employees 2004 2005 — — 4 — — — — — — 4 4 4	Number of employees 2004 2005 — — 4 — — — — — — 4 4 4
			4

During the Relevant Periods, certain equity instruments were granted to the four non-director, highest paid employees in respect of their services to Yituo Diesel, further details of which are included in the disclosures in note 4(o) to the Financial Information. The fair value of such instruments, which has been charged to the income statement, was determined as at the date of grant and was included in the above non-director, highest paid employees’ remuneration disclosures.

— 44 —

FINANCIAL INFORMATION ON YITUO DIESEL

APPENDIX I

(f) Tax

Under the relevant PRC Income Tax Law and respective regulations, being a foreign investment enterprise, Yituo Diesel is entitled to (i) a preferential corporate income tax (“CIT”) rate of 30%; (ii) an exemption from CIT for its first two profitable years commenced in the year ended 31 December 1999 and a 50% reduction in the CIT rate to 15% for the third to fifth years pursuant to the Income Tax Law of the PRC for Enterprises with Foreign Investment and Foreign Enterprises and the relevant local tax regulations; and (iii) 50% reduction in the CIT rate to 15% for another three years after the fifth year, subject to the annual approval from the tax bureau, as it is also qualified as a high technology enterprise.

Current - PRC CIT Charge for the year Deferred (note 4(m)) Total tax charge for the year	Year ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 5,591 7,268 6,849 (309) (474) (1,381) 5,282 6,794 5,468

There was no share of tax attributable to the associate during each of the Relevant Periods.

A reconciliation of the tax expense applicable to profit before tax at the statutory rate of 33% in the PRC to the tax expense at the effective tax rate for each of the Relevant Periods is as follows:

Profit before tax Tax at PRC statutory tax rate of 33% Tax relief granted Loss attributable to an associate Tax concessions Income not subject to tax Expenses not deductible for tax Tax charge for the year Yituo Diesel’s effective income tax rate	Year ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 37,945 27,699 37,448 12,521 9,141 12,358 (6,830) (4,986) (6,741) — 448 633 (357) (335) (5,647) (544) (63) (110) 492 2,589 4,975 5,282 6,794 5,468 14% 25% 15%

(g) Dividend

No dividends were paid or declared by Yituo Diesel during the Relevant Periods.

On 28 April 2006, the directors declared a special dividend of approximately RMB73,412,000 to its shareholders. As the dividend was declared after the last balance sheet date of 31 December 2005, it has not been recognised as a liability as at 31 December 2005.

(h) Earnings per share

Information of earnings per share is not presented as such information is not meaningful given the purpose of this report.

— 45 —

FINANCIAL INFORMATION ON YITUO DIESEL

APPENDIX I

4. BALANCE SHEETS

The following is a summary of the balance sheets of Yituo Diesel as at the end of each of the Relevant Periods prepared on the basis set out in Section 1 above:

Notes NON-CURRENT ASSETS Property, plant and equipment (a) Construction in progress (b) Interest in an associate (c) Available-for-sale equity investments (d) Deferred tax assets (m) Total non-current assets CURRENT ASSETS Inventories (e) Trade and bills receivables (f) Prepayments and other receivables (g) Due from the ultimate holding company (h) Tax recoverable Pledged deposits (i) Cash and cash equivalents (i) Total current assets CURRENT LIABILITIES Trade and bills payables (j) Other payables and accruals (k) Interest-bearing bank and other borrowings (l) Tax payable Total current liabilities NET CURRENT ASSETS	2003 RMB’000 66,492 127 19,000 30,360 1,083 117,062 137,895 117,616 32,663 — — — 25,549 313,723 128,718 51,625 115,000 1,395 296,738 16,985	As at 31 December 2004 2005 RMB’000 RMB’000 106,399 130,175 749 20,609 16,011 11,791 30,360 60,360 1,557 2,938 155,076 225,873 110,875 95,919 120,008 147,894 31,523 9,671 29,599 81,010 2,148 — — 10,017 12,540 33,242 306,693 377,753 149,979 173,583 28,945 47,369 78,000 151,750 — 2,552 256,924 375,254 49,769 2,499	As at 31 December 2004 2005 RMB’000 RMB’000 106,399 130,175 749 20,609 16,011 11,791 30,360 60,360 1,557 2,938 155,076 225,873 110,875 95,919 120,008 147,894 31,523 9,671 29,599 81,010 2,148 — — 10,017 12,540 33,242 306,693 377,753 149,979 173,583 28,945 47,369 78,000 151,750 — 2,552 256,924 375,254 49,769 2,499
			225,873
			95,919 147,894 9,671 81,010 — 10,017 33,242
			377,753
			173,583 47,369 151,750 2,552
			375,254
			2,499

— 46 —

APPENDIX I

FINANCIAL INFORMATION ON YITUO DIESEL

Notes TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Interest-bearing bank and other borrowings (l) EQUITY Paid-up capital (n) Reserves (p) Total equity Notes: (a) Property, plant and equipment At 1 January 2003, net of accumulated depreication and impairment Additions Disposals Reversal of impairment Depreciation provided during the year At 31 December 2003, net of accumulated depreciation and impairment At 1 January 2004, net of accumulated depreciation and impairment Additions Disposals Depreciation provided during the year Transfer from construction in progress (note 4(b)) At 31 December 2004, net of accumulated depreciation and impairment	Notes TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Interest-bearing bank and other borrowings (l) EQUITY Paid-up capital (n) Reserves (p) Total equity Notes: (a) Property, plant and equipment At 1 January 2003, net of accumulated depreication and impairment Additions Disposals Reversal of impairment Depreciation provided during the year At 31 December 2003, net of accumulated depreciation and impairment At 1 January 2004, net of accumulated depreciation and impairment Additions Disposals Depreciation provided during the year Transfer from construction in progress (note 4(b)) At 31 December 2004, net of accumulated depreciation and impairment	As at 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 134,047 204,845 228,372 — 45,000 20,000 134,047 159,845 208,372 51,718 51,718 51,718 82,329 108,127 156,654 134,047 159,845 208,372 Plant, Transportation machinery and vehicles and Buildings equipment equipment Total RMB’000 RMB’000 RMB’000 RMB’000 13,861 59,292 712 73,865 — 2,611 431 3,042 (99) (1,086) — (1,185) — 176 — 176 (1,890) (7,098) (418) (9,406) 11,872 53,895 725 66,492 11,872 53,895 725 66,492 20,691 30,307 524 51,522 — (61) (26) (87) (2,735) (9,627) (239) (12,601) — 437 636 1,073 29,828 74,951 1,620 106,399

		Buildings RMB’000 13,861 — (99) — (1,890) 11,872 11,872 20,691 — (2,735) — 29,828

— 47 —

APPENDIX I

FINANCIAL INFORMATION ON YITUO DIESEL

At 1 January 2005, net of accumulated depreciation and impairment Additions Disposals Depreciation provided during the year Transfer from construction in progress (note 4(b)) At 31 December 2005, net of accumulated depreciation and impairment At 31 December 2003: Cost Accumulated depreciation and impairment Net carrying amount At 31 December 2004: Cost Accumulated depreciation and impairment Net carrying amount At 31 December 2005: Cost Accumulated depreciation and impairment Net carrying amount (b) Construction in progress At beginning of year, net of accumulated impairment Additions Written off during the year Transfer to items of property, plant and equipment (note 4(a)) Reversal of impairment during the year recognised in the income statement At end of year, net of accumulated impairment At 31 December: Cost Accumulated impairment Net carrying amount	Plant, machinery and Buildings equipment RMB’000 RMB’000 29,828 74,951 4,801 17,781 — (462) (2,687) (10,638) 387 14,407 32,329 96,039 39,332 122,687 (27,460) (68,792) 11,872 53,895 60,023 153,370 (30,195) (78,419) 29,828 74,951 65,211 184,169 (32,882) (88,130) 32,329 96,039 Year 2003 RMB’000 36 148 (57) — — 127 1,841 (1,714) 127	Plant, machinery and Buildings equipment RMB’000 RMB’000 29,828 74,951 4,801 17,781 — (462) (2,687) (10,638) 387 14,407 32,329 96,039 39,332 122,687 (27,460) (68,792) 11,872 53,895 60,023 153,370 (30,195) (78,419) 29,828 74,951 65,211 184,169 (32,882) (88,130) 32,329 96,039 Year 2003 RMB’000 36 148 (57) — — 127 1,841 (1,714) 127	Transportation vehicles and equipment Total RMB’000 RMB’000 1,620 106,399 266 22,848 (116) (578) (325) (13,650) 362 15,156 1,807 130,175 3,104 165,123 (2,379) (98,631) 725 66,492 3,842 217,235 (2,222) (110,836) 1,620 106,399 4,030 253,410 (2,223) (123,235) 1,807 130,175 ended 31 December 2004 2005 RMB’000 RMB’000 127 749 — 35,040 (19) (24) (1,073) (15,156) 1,714 — 749 20,609 749 20,609 — — 749 20,609

During the year ended 31 December 2004, additional capital expenditure was incurred on certain suspended items of construction in progress to restore their intended use. The relevant impairment provision was reversed accordingly.

— 48 —

FINANCIAL INFORMATION ON YITUO DIESEL

APPENDIX I

(c) Interest in an associate

Share of net assets	2003 RMB’000 19,000	As at 31 December 2004 2005 RMB’000 RMB’000 16,011 11,791

Yituo Diesel’s trade receivable, other receivable and trade payable balances with the associate are disclosed in notes 4(f), 4(g) and 4(j), respectively.

Particulars of the associate are as follows:

		Percentage of
		ownership
	Place of	interest directly
	registration	attributable	Principal
Name	and operations	to Yituo Diesel	activities
Yituo (Luoyang)	PRC	50	Manufacture
Engine Machinery			and sale of
Company Limited			engines and
(“Yituo Engine Machinery”)			generators

On 28 November 2003, Yituo Diesel entered into an agreement with the Company and certain individuals to establish Yituo Engine Machinery.

The following table illustrates the summarised financial information of Yituo Diesel’s associate extracted from its financial statements:

Assets Liabilities Revenues Loss	2003 RMB’000 38,000 — — —	2004 RMB’000 76,358 44,336 91,664 (5,978)	2005 RMB’000 83,206 59,624 144,892 (8,440)

(d) Available-for-sale equity investments

		As at 31 December	As at 31 December
	2003	2004	2005
	RMB’000	RMB’000	RMB’000
Unlisted equity investments, at cost	30,360	30,360	60,360

No gain on the available-for-sale equity investments was recognised during the Relevant Periods.

The unlisted equity investments of Yituo Diesel are not stated at fair value but at cost less any accumulated impairment losses, because they do not have a quoted market price in an active market, the range of reasonable fair value estimates is significant and the probabilities of the various estimates cannot be reasonably assessed.

— 49 —

FINANCIAL INFORMATION ON YITUO DIESEL

APPENDIX I

(e) Inventories

Raw materials Work in progress Finished goods	2003 RMB’000 66,092 10,042 61,761 137,895	As at 31 December 2004 2005 RMB’000 RMB’000 65,007 63,203 6,635 6,228 39,233 26,488 110,875 95,919	As at 31 December 2004 2005 RMB’000 RMB’000 65,007 63,203 6,635 6,228 39,233 26,488 110,875 95,919
			95,919

(f) Trade and bills receivables

Yituo Diesel’s trading terms with its customers are mainly on credit, where payment in advance is normally required. The credit periods to its customers are 30 to 90 days. Yituo Diesel seeks to maintain strict control over its outstanding receivables. In view of the aforementioned and the fact that Yituo Diesel’s trade receivables relate to a large number of diversified customers, there is no significant concentration of credit risk. Trade receivables are non-interest-bearing.

An aged analysis of the trade and bills receivables as at the balance sheet dates, based on the invoice date, and net of provisions, is as follows:

Within 90 days 91 days to 180 days 181 days to 365 days 1 to 2 years Over 2 years	2003 RMB’000 108,048 7,234 1,960 374 — 117,616	As at 31 December 2004 2005 RMB’000 RMB’000 76,263 119,260 20,773 14,451 20,857 10,361 2,115 3,162 — 660 120,008 147,894	As at 31 December 2004 2005 RMB’000 RMB’000 76,263 119,260 20,773 14,451 20,857 10,361 2,115 3,162 — 660 120,008 147,894
			147,894

Yituo Diesel’s trade and bills receivables included the following amounts due from related parties:

		As at 31 December
	2003	2004	2005
	RMB’000	RMB’000	RMB’000
Due from China Yituo	560	1,018	97
Due from fellow subsidiaries	51,426	10,308	4,635
Due from an associate	—	—	405

— 50 —

APPENDIX I

FINANCIAL INFORMATION ON YITUO DIESEL

(g) Prepayments and other receivables

Prepayments Other receivables	2003 RMB’000 16,606 16,057 32,663	As at 31 December 2004 2005 RMB’000 RMB’000 19,271 6,051 12,252 3,620 31,523 9,671	As at 31 December 2004 2005 RMB’000 RMB’000 19,271 6,051 12,252 3,620 31,523 9,671
			9,671

Prepayments and other receivables included the following amounts due from related parties:

		As at 31 December
	2003	2004	2005
	RMB’000	RMB’000	RMB’000
Due from China Yituo	559	3,333	—
Due from fellow subsidiaries	5,305	4,991	3,891
Due from an associate	—	—	600

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

(h) Due from the ultimate holding company

It represents the amount due from China Yituo, which is unsecured, interest-free and has no fixed terms of repayments. Pursuant to a conditional repayment agreement (the “Diesel Repayment Agreement”) entered into between Yituo Diesel and China Yituo on 8 May 2006, China Yituo will repay the outstanding balance of approximately RMB81 million as at 31 December 2005 to Yituo Diesel on or before 31 December 2009 and pledge certain of its machinery to Yituo Diesel as security for the outstanding balance. Further details of the Diesel Repayment Agreement are disclosed in note 9(d).

The carrying amount of the balance due from the ultimate holding company approximates to its fair value.

(i) Cash and cash equivalents and pledged deposits

Cash and deposits at banks and a non-bank financial institution Less: Pledged for banking facilities Cash and cash equivalents	2003 RMB’000 25,549 — 25,549	As at 31 December 2004 2005 RMB’000 RMB’000 12,540 43,259 — (10,017) 12,540 33,242	As at 31 December 2004 2005 RMB’000 RMB’000 12,540 43,259 — (10,017) 12,540 33,242
			33,242

As at 31 December 2003, 2004 and 2005, Yituo Diesel’s deposits included amounts of approximately RMB1,958,000, RMB8,880,000 and RMB3,401,000 respectively, which were placed with China First Tractor Group Finance Company Limited (“FTGF”), a fellow subsidiary of Yituo Diesel which is a non-bank financial institution.

The carrying amounts of the cash and cash equivalents and the pledged deposits approximate to their fair values.

— 51 —

FINANCIAL INFORMATION ON YITUO DIESEL

APPENDIX I

(j) Trade and bills payables

An aged analysis of the trade and bills payables as at the balance sheet dates, based on the invoice date, is as follows:

Within 90 days 91 days to 180 days 181 days to 365 days 1 to 2 years Over 2 years	2003 RMB’000 58,533 19,799 28,455 14,991 6,940 128,718	As at 31 December 2004 2005 RMB’000 RMB’000 40,917 92,503 31,608 40,546 25,596 7,807 44,778 20,699 7,080 12,028 149,979 173,583	As at 31 December 2004 2005 RMB’000 RMB’000 40,917 92,503 31,608 40,546 25,596 7,807 44,778 20,699 7,080 12,028 149,979 173,583
			173,583

Yituo Diesel’s trade and bills payables included the following amounts due to related parties:

		As at 31 December
	2003	2004	2005
	RMB’000	RMB’000	RMB’000
Due to China Yituo	36,203	37,477	3,000
Due to fellow subsidiaries	4,125	1,863	8,866
Due to an associate	—	—	143

The trade payables are non-interest-bearing and are normally settled on 60-day terms.

(k) Other payables and accruals

Accruals and other liabilities Advance on sales Provision for product warranty claims	2003 RMB’000 8,223 40,752 2,650 51,625	As at 31 December 2004 2005 RMB’000 RMB’000 16,804 41,741 9,291 2,348 2,850 3,280 28,945 47,369	As at 31 December 2004 2005 RMB’000 RMB’000 16,804 41,741 9,291 2,348 2,850 3,280 28,945 47,369
			47,369

The movement of provision for product warranty claims during the Relevant Periods was as follows:

At beginning of year Provision during the year Amount utilised during the year At end of year	Year ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 2,000 2,650 2,850 8,862 11,003 12,074 (8,212) (10,803) (11,644) 2,650 2,850 3,280	Year ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 2,000 2,650 2,850 8,862 11,003 12,074 (8,212) (10,803) (11,644) 2,650 2,850 3,280
		3,280

— 52 —

APPENDIX I

FINANCIAL INFORMATION ON YITUO DIESEL

Yituo Diesel’s other liabilities included the following amounts due to related parties:

Due to China Yituo Due to fellow subsidiaries	2003 RMB’000 879 2,724	As at 31 December 2004 2005 RMB’000 RMB’000 — 1,636 — —

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

(l) Interest-bearing bank and other borrowings

Effective interest rate (%) Notes Current Bank loans: Unsecured (i) 5.31 - 7.01 Loans from a financial institution: Unsecured (ii) 5.49 - 6.14 Other loans: Unsecured (iii) 6.42 Non-current Bank loans: Unsecured (i) 5.49 - 6.51 Analysed into: Bank loans repayable: Within one year In the second year Loans from a financial institution repayable: Within one year Other loans repayable: Within one year	2003 RMB’000 95,000 20,000 — 115,000 — 95,000 — 95,000 20,000 —	As at 31 December 2004 2005 RMB’000 RMB’000 75,000 105,000 3,000 — — 46,750 78,000 151,750 45,000 20,000 75,000 105,000 45,000 20,000 120,000 125,000 3,000 — — 46,750	As at 31 December 2004 2005 RMB’000 RMB’000 75,000 105,000 3,000 — — 46,750 78,000 151,750 45,000 20,000 75,000 105,000 45,000 20,000 120,000 125,000 3,000 — — 46,750
			151,750

			20,000

			105,000 20,000
			125,000

			—

			46,750

Notes:

(i) Yituo Diesel’s unsecured bank loans were guaranteed by China Yituo.
(ii) Yituo Diesel’s unsecured loans from a financial institution were borrowed from FTGF, and were guaranteed by China Yituo.
(iii) Yituo Diesel’s unsecured other loans of RMB46,750,000 as at 31 December 2005 were borrowed from China Yituo.

All bank and other loans of Yituo Diesel as at the balance sheet dates were denominated in RMB and bore interest at fixed rates. The carrying amounts of Yituo Diesel’s bank and other borrowings approximate to their fair values.

— 53 —

APPENDIX I

FINANCIAL INFORMATION ON YITUO DIESEL

(m) Deferred tax

The movements in deferred tax assets during the Relevant Periods are as follows:

At 1 January 2003 Deferred tax credited to the income statement during the year At 31 December 2003 and 1 January 2004 Deferred tax credited to the income statement during the year At 31 December 2004 and 1 January 2005 Deferred tax credited to the income statement during the year At 31 December 2005	Product warranty claims RMB’000 300 97 397 30 427 65 492	Wages and bonuses payable RMB’000 474 212 686 444 1,130 1,316 2,446	Total RMB’000 774 309
			1,083 474
			1,557 1,381
			2,938

There was no significant unrecognised deferred tax liability as at the end of each the three years ended 31 December 2005.

There were no income tax consequences attaching to the payment of dividends by Yituo Diesel to its shareholders.

(n) Paid-up capital

Registered capital Registered and paid-up capital	2003 USD 6,000,000 RMB 51,718,205	As at 31 December 2004 2005 USD USD 6,000,000 6,000,000 RMB RMB 51,718,205 51,718,205	As at 31 December 2004 2005 USD USD 6,000,000 6,000,000 RMB RMB 51,718,205 51,718,205

			RMB 51,718,205

The registered capital of Yituo Diesel was fully paid-up. There was no movement in the paid-up capital during the Relevant Periods.

— 54 —

FINANCIAL INFORMATION ON YITUO DIESEL

APPENDIX I

(o) Share-based compensation scheme

Yituo Diesel operates a share-based compensation scheme (the “Scheme”) for the purpose of providing incentives and rewards to eligible participants who achieve certain performance targets set by Yituo Diesel. Eligible participants of the Scheme include certain directors and employees of Yituo Diesel. The Scheme became effective on 5 July 2002 and ended on 31 December 2005. The eligible participants are granted bonuses to acquire from China Yituo certain equity interests of Yituo Diesel held by China Yituo at a predetermined exercise price (the “Exercise Price”) after the expiry of the Scheme.

Under the Scheme, the board of directors of Yituo Diesel, based on the performance of Yituo Diesel, approves a certain amount of bonus (the “Bonus”) annually to reward the eligible participants. 15% of the Bonus is distributed immediately in the form of cash to the eligible participants, while the remaining 85% of the Bonus is set aside, on behalf of the eligible participants, for the consideration to be paid to China Yituo upon the purchase of the equity interests from China Yituo after the expiry of the Scheme. For the purpose of the Scheme, the paid-up capital of Yituo Diesel of RMB51,718,205 is divided into 51,718,205 units of shares (“Shares”). The Exercise Price per Share was determined to be approximately RMB1.39 per Share. In the opinion of the directors, such an arrangement is in substance a grant of equity interests of Yituo Diesel to the eligible participants.

The maximum number of Shares permitted to be acquired under the Scheme is 30% of the registered capital of Yituo Diesel. However, there is no limitation on the maximum entitlement of each participant under the Scheme. The Shares granted under the Scheme vest on the grant date, which is the respective date of approval of the Bonus by the board of directors of Yituo Diesel.

The share-based compensation arrangement does not confer rights on the participants to dividends or to vote at shareholders’ meetings before they purchased the Shares from China Yituo.

Details of the Shares granted under the Scheme affecting the Relevant Periods are as follows:

2003 Director Mr. Li Xibin Other employees In aggregate 2004 Director Mr. Li Xibin Other employees In aggregate		Number of Shares Granted during At end Date of the year of year grant* 287,799 380,835 15/3/2004 1,849,086 2,445,098 15/3/2004 2,136,885 2,825,933 316,345 697,180 26/4/2005 2,015,169 4,460,267 26/4/2005 2,331,514 5,157,447
	At beginning of year 93,036 596,012 689,048 380,835 2,445,098 2,825,933	Granted during the year 287,799 1,849,086 2,136,885 316,345 2,015,169 2,331,514

— 55 —

APPENDIX I

FINANCIAL INFORMATION ON YITUO DIESEL

2005 Director Mr. Li Xibin Other employees In aggregate		Number of Shares Granted during At end Date of the year of year grant* 480,991 1,178,171 28/4/2006 2,714,333 7,174,600 28/4/2006 3,195,324 8,352,771
	At beginning of year 697,180 4,460,267 5,157,447	Granted during the year 480,991 2,714,333 3,195,324

The date of grant refers to the date when the board of directors of Yituo Diesel approved the amount of entitlement of the participants.

The fair values of the Shares granted on 26 April 2005 and 28 April 2006 amounted to RMB8.1 million and RMB21.0 million respectively. The fair values of the Shares over the aggregate Exercise Price of the Shares, which amounted to RMB4.9 million and RMB16.5 million, have been charged to the income statements for the years ended 31 December 2004 and 2005, respectively, and at the same time credited to the “share-based compensation reserve” for the years ended 31 December 2004 and 2005 respectively. No expense was recognised for the excess of the fair value of the Shares over the aggregate Exercise Price in the income statement for the year ended 31 December 2003 under the application of the transitional provisions of HKFRS 2, as further explained under the heading “Share-based payment transactions” in section 2.

The fair values of the Shares granted were estimated as at the date of grant, using valuation techniques including comparison of price/earnings ratios with those of similar listed securities, taking into account of the expected dividend and the allowance made for the lower liquidity of the unlisted nature of the Shares.

The execution of the Scheme is subject to the approvals of the relevant government authorities in the PRC. Subsequent to 31 December 2005, the participants have applied for the purchase of all the 8,352,771 Shares from China Yituo in accordance with the Scheme. The approval from the relevant government authority was subsequently obtained on 2 June 2006.

(p) Reserves

In accordance with the Company Law of the PRC and Yituo Diesel’s articles of association, Yituo Diesel is required to appropriate 10% and 5% to 10% of its annual statutory profit after tax, as determined in accordance with PRC accounting standards and regulations, to the statutory surplus reserve (the “SSR”) and the statutory public welfare fund (the “PWF”), respectively. No allocation to the SSR is required after the balance of Yituo Diesel’s SSR reaches 50% of its registered capital.

The SSR may only be used to offset accumulated losses, to expand the production operations of Yituo Diesel, or to increase its paid-up capital.

The PWF is used for the collective welfare of the staff and workers of Yituo Diesel, such as the construction of dormitories, canteens, and other staff welfare facilities. The fund forms a part of equity because individual staff and workers can only use these facilities, while the title of such facilities is held by Yituo Diesel.

During the Relevant Periods, Yituo Diesel did not utilise any of the SSR or PWF.

— 56 —

FINANCIAL INFORMATION ON YITUO DIESEL

APPENDIX I

(q) Guarantees and contingent liabilities

At the balance sheet dates, guarantees not provided for in the Financial Information were as follows:

Guarantees given to banks and a financial institution in connection with facilities granted to: China Yituo The Company Yituo Engine Machinery	2003 RMB’000 191,000 — — 191,000	As at 31 December 2004 2005 RMB’000 RMB’000 268,000 177,300 20,000 20,000 20,500 6,000 308,500 203,300	As at 31 December 2004 2005 RMB’000 RMB’000 268,000 177,300 20,000 20,000 20,500 6,000 308,500 203,300
			203,300

Amongst the guarantee amounts as at 31 December 2003, 2004 and 2005, approximately RMB69,000,000, RMB131,500,000 and RMB148,800,000 respectively were granted to FTGF. Subsequent to 31 December 2005 and up to the date of this report, approximately RMB95,800,000 and RMB66,500,000 of the guarantees given for facilities granted to China Yituo were released and matured, respectively.

Yituo Diesel did not have any significant contingent liabilities at the above balance sheet dates.

(r) Retirement benefits

Yituo Diesel participates in the central pension scheme operated by the local municipal government and is required to contribute certain percentage of the payroll costs to the central pension scheme, out of which the pensions of Yituo Diesel’s retired employees are paid.

(s) Commitments

(i) Capital commitments

Yituo Diesel had the following capital commitments at the below respective balance sheet dates:

		As at 31 December	As at 31 December
	2003	2004	2005
	RMB’000	RMB’000	RMB’000
Contracted, but not provided for:
Purchase of plant and machinery	2,525	64,080	26,377

(ii) Commitment under operating leases

At the below respective balance sheet dates, Yituo Diesel had total future minimum lease payments under non-cancellable operating leases which fall due as follows:

Within one year In the second to fifth years, inclusive	2003 RMB’000 686 1,344 2,030	As at 31 December 2004 2005 RMB’000 RMB’000 530 525 842 628 1,372 1,153	As at 31 December 2004 2005 RMB’000 RMB’000 530 525 842 628 1,372 1,153
			1,153

— 57 —

FINANCIAL INFORMATION ON YITUO DIESEL

APPENDIX I

5. STATEMENTS OF CHANGES IN EQUITY

The changes in the shareholders’ equity of Yituo Diesel for the Relevant Periods are as follows:

At 1 January 2003 Net profit for the year Transfer from/(to) reserves At 31 December 2003 and 1 January 2004 Net profit for the year Equity-settled share-based compensation arrangements Transfer from/(to) reserves At 31 December 2004 and 1 January 2005 Net profit for the year Equity-settled share-based compensation arrangements Transfer from/(to) reserves Special dividend At 31 December 2005	Share-based Paid-up compensation capital reserve RMB’000 RMB’000 51,718 — — — — — 51,718 — — — — 4,893 — — 51,718 4,893 — — — 16,547 — — — — 51,718 21,440	Statutory surplus reserve RMB’000 — — 3,344 3,344 — — 3,489 6,833 — — 4,648 — 11,481	Statutory public welfare fund RMB’000 — — 1,672 1,672 — — 1,744 3,416 — — 2,324 — 5,740	Special dividend RMB’000 — — — — — — — — — — — 73,412 73,412	Retained profits RMB’000 49,666 32,663 (5,016) 77,313 20,905 — (5,233) 92,985 31,980 — (6,972) (73,412) 44,581	Total RMB’000 101,384 32,663 —
						134,047 20,905 4,893 —
						159,845 31,980 16,547 — —
						208,372

— 58 —

FINANCIAL INFORMATION ON YITUO DIESEL

APPENDIX I

6. CASH FLOW STATEMENTS

The following is a summary of cash flow statements of Yituo Diesel for the Relevant Periods:

Notes
CASH FLOWS FROM
OPERATING ACTIVITIES
Profit before tax
Adjustments for:
Finance costs
3(c)
Share of losses of an associate
Interest income
3(b)
Dividend income
3(b)
Depreciation
3(b), 4(a)
Loss/(gain) on disposal
of items of property, plant
and equipments, net
3(b)
Reversal of impairment
of items of property, plant
and equipment
3(b)
Write-off of construction
in progress
3(b)
Reversal of impairment
of construction in progress
3(b)
Share-based
compensation expense
Operating profit before
working capital changes
(Increase)/decrease in inventories
Increase in trade and
bills receivables
(Increase)/decrease in prepayments
and other receivables
Increase in an amount due from
the ultimate holding company
Increase/(decrease) in trade and
bills payables
Increase/(decrease) in other payables
and accruals

Year ended 31 December
2003
2004
2005
RMB’000
RMB’000
RMB’000
37,945
27,699
37,448
8,317
7,419
11,508
—
2,989
4,220
(654)
(250)
(178)
—
(420)
(735)
9,406
12,601
13,650
(4)
15
(23)
(176)
—
—
57
19
24
—
(1,714)
—
—
4,893
16,547
54,891
53,251
82,461
(36,175)
27,020
14,956
(25,582)
(2,392)
(27,886)
(10,860)
1,140
21,852
—
(29,599)
(51,411)
(3,076)
21,261
23,604
33,464
(22,680)
18,424

— 59 —

APPENDIX I

FINANCIAL INFORMATION ON YITUO DIESEL

Cash generated from operations
Interest received
Interest paid
Corporate income tax paid
Net cash inflow from operating
activities
CASH FLOWS FROM
INVESTING ACTIVITIES
Dividends received
Purchase of property, plant
and equipment and additions to
construction in progress
Proceeds from disposal of items
of property, plant and equipment
Capital contribution to an associate
Purchases of available-for-sale
equity investments
Increase in pledged deposits
Net cash outflow from
investing activities
CASH FLOWS FROM
FINANCING ACTIVITIES
New bank loans
New other loans
Repayment of bank loans
Repayment of other loans
Net cash inflow/(outflow) from
financing activities

Year ended 31 December
2003
2004
2005
RMB’000
RMB’000
RMB’000
12,662
48,001
82,000
654
250
178
(8,317)
(7,419)
(11,508)
(4,216)
(10,811)
(2,149)
783
30,021
68,521
—
420
735
(3,190)
(51,522)
(57,888)
1,189
72
601
(19,000)
—
—
(9,360)
—
(30,000)
—
—
(10,017)
(30,361)
(51,030)
(96,569)
95,000
125,000
90,000
20,000
22,500
119,290
(130,000)
(100,000)
(85,000)
(15,400)
(39,500)
(75,540)
(30,400)
8,000
48,750

— 60 —

FINANCIAL INFORMATION ON YITUO DIESEL

APPENDIX I

NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at beginning of year CASH AND CASH EQUIVALENTS AT END OF YEAR ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS Cash and deposits at banks and a non-bank financial institution	Year ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 (59,978) (13,009) 20,702 85,527 25,549 12,540 25,549 12,540 33,242 25,549 12,540 33,242

— 61 —

FINANCIAL INFORMATION ON YITUO DIESEL

APPENDIX I

7. RELATED PARTY TRANSACTIONS

(a) In addition to the transactions and balances detailed elsewhere in the Financial Information, Yituo Diesel had the following material transactions with related parties during the Relevant Periods:

Notes
China Yituo:
Purchases of raw materials
and components
(i)
Purchases of tools
(i)
Purchases of plant
and equipment
(i)
Sales of raw materials
(i)
Sales of product diesels
and components
(i)
Fee paid for the use
of trademark
(ii)
Fees paid for transportation
costs
(i)
Rentals paid for land and
buildings, and plant
and machinery
(i)
Purchase of utilities
(i)
Interest paid for borrowings
(i)
Fellow subsidiaries:
Purchases of raw materials
and components
(i)
Purchases of tools
(i)
Sales of raw materials
(i)
Sales of product diesels
and components
(i)
Interest paid for borrowings
(i)
Associate:
Purchases of raw materials
and components
(i)
Purchases of product diesels
(i)
Sales of product diesels
and components
(i)
Fees paid for sub-contracting
services
(i)

Year ended 31 December
2003
2004
2005
RMB’000
RMB’000
RMB’000
14,243
12,743
83,634
3,720
3,038
2,387
—
45,479
16,301
1,317
5,884
5,310
1,921
1,273
6,494
6,580
8,431
1,636
2,657
3,651
2,459
5,169
1,371
2,094
7,232
7,672
8,778
—
—
262
214,529
225,520
138,192
398
970
1,353
50
13
316
135,318
167,611
41,843
1,169
1,884
3,612
—
5,794
4,634
—
—
2,761
—
4,166
5,091
—
2,232
75

— 62 —

FINANCIAL INFORMATION ON YITUO DIESEL

APPENDIX I

Notes:

(i) The transactions are conducted based on mutually agreed terms.
(ii) The fee for the use of the trademark is charged at rates of 1% of Yituo Diesel’s net annual turnover for years 2003 and 2004, and 0.3% of Yituo Diesel’s net annual turnover to external customers for year 2005.
(b) Compensation of key management personnel of Yituo Diesel

Short term employee benefits Post-employment benefits Share-based compensation Total compensation paid to key management personnel	Year ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 648 280 497 2 2 3 — 1,126 3,280 650 1,408 3,780	Year ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 648 280 497 2 2 3 — 1,126 3,280 650 1,408 3,780
		3,780

Further details of directors’ emoluments are included in note 3(d).

8. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

Yituo Diesel’s principal financial instruments mainly comprise bank loans, other interestbearing borrowings, pledged deposits and cash and cash equivalents. The main purpose of these financial instruments is to raise finance for Yituo Diesel’s operations. Yituo Diesel has various other financial assets and liabilities such as trade and bills receivables and trade and bills payables, which arise directly from its operations.

The main risks arising from Yituo Diesel’s financial instruments are credit risk, foreign currency risk, cash flow interest rate risk and liquidity risk. The board of directors meets periodically to analyse and formulate measures to manage Yituo Diesel’s exposure to these risks. Generally, Yituo Diesel introduces conservative strategies on its risk management. As Yituo Diesel’s exposure to these risks is kept to a minimum, Yituo Diesel has not used any derivatives and other instruments for hedging purposes. Yituo Diesel does not hold or issue derivative financial instruments for trading purposes. The board of directors reviews and agrees policies for managing each of these risks and they are summarised below.

— 63 —

FINANCIAL INFORMATION ON YITUO DIESEL

APPENDIX I

Credit risk

Credit risk is the risk associated with a customer or counterparty being unable to meet a commitment when it falls due. It mainly arises from the trade receivables of Yituo Diesel.

It is Yituo Diesel’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an ongoing basis and the board of directors believes that adequate provision for uncollectible receivables has been made in the Financial Information. In this respect, the board of directors considers that the credit risk is significantly reduced.

Yituo Diesel’s trade receivables relate to a large number of diversified customers, there is no significant concentration of credit risk on trade receivables.

The carrying amount of Yituo Diesel’s financial assets which comprise cash and cash equivalents, available-for-sale financial assets and other receivables included in the balance sheets, represents Yituo Diesel’s maximum exposure to credit risk in relation to its financial assets, without taking into account the fair value of any collateral.

Foreign currency risk

The business of Yituo Diesel is principally located in the PRC. While most of the transactions are conducted in RMB, Yituo Diesel does not have significant exposures to foreign currency risk. Yituo Diesel does not use derivative financial instruments to hedge its foreign currency risk.

Cash flow interest rate risk

At the balance sheet dates, all of Yituo Diesel’s interest-bearing borrowings bore interest at fixed rates, therefore, Yituo Diesel’s exposure to the risk of changes in market interest rates is kept to minimum.

Liquidity risk

Yituo Diesel’s objective is to maintain a balance between continuity of funding and flexibility through the use of interest-bearing bank and other borrowings and other available sources of financing loans.

— 64 —

FINANCIAL INFORMATION ON YITUO DIESEL

APPENDIX I

9. SUBSEQUENT EVENTS

(a) On 17 April 2006, Yituo Diesel entered into an agreement with China Yituo pursuant to which Yituo Diesel agreed to dispose of its 7.27% equity interest in a commercial bank in Luoyang, the PRC, to China Yituo at a consideration of approximately RMB30 million, which represented the carrying value of such investment. No gain or loss has been recognised in such transaction.
(b) On 28 April 2006, Yituo Diesel declared a special dividend of approximately RMB73,412,000 to its shareholders out of its retained profits.
(c) On 28 April 2006, the board of directors approved to grant 3,195,324 Shares to a director and certain employees of Yituo Diesel, as further detailed in note 4(o).
(d) On 8 May 2006, Yituo Diesel entered into the Diesel Repayment Agreement with China Yituo, whereby (1) China Yituo shall repay the principal of RMB81 million due to Yituo Diesel in full on or before 31 December 2009; and (2) China Yituo has the option to repay the principal in part or in full with assets pledged under the Diesel Repayment Agreement based on a valuation to be determined by an independent valuer. Pursuant to the Diesel Repayment Agreement, certain machinery of China Yituo was pledged to Yituo Diesel and Yituo Diesel has the right to use the assets pledged under the Diesel Repayment Agreement at any time prior to its termination at nil consideration. If the principal is not repaid by China Yituo in full on 31 December 2009, Yituo Diesel shall have the rights to dispose of the assets pledged under the Diesel Repayment Agreement. No interest will be charged by Yituo Diesel on the outstanding balance.

10. SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements have been prepared by Yituo Diesel in respect of any period subsequent to 31 December 2005.

Yours faithfully, Ernst & Young Certified Public Accountants Hong Kong

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FINANCIAL INFORMATION ON YITUO DIESEL

APPENDIX I

2. MANAGEMENT DISSCUSION AND ANALYSIS OF RESULTS OF YITUO DIESEL

Liquidity and capital structure

The total borrowings of Yituo Diesel as at 31 December 2005 amounted to approximately RMB171.75 million, of which approximately RMB151.75 million are repayable within one year from 31 December 2005 and the balance of approximately of RMB20 million are repayable in the second year from 31 December 2005.

The gearing ratio of Yituo Diesel at 31 December 2005 was 0.28 which is calculated by dividing the total interest-bearing bank and other borrowings by the total assets.

For the three years ended 31 December 2005, Yituo Diesel has met its working capital and other capital requirements principally from cash provided by operations, while raising the remainder of its requirements primarily through long term and short term debt.

Significant investment held

In August 2005, Yituo Diesel acquired a 7.27% equity interest in a commercial bank in Luoyang at consideration of approximately RMB30 million. Such investment was disposed of to China Yituo on 17 April 2006 at a consideration of RMB30 million. No gain or loss is recognised by Yituo Diesel in such transaction.

Acquisition and disposal

There was no acquisition or disposal of any subsidiaries or associated companies of Yituo Diesel during 2005.

Guarantees

As at 31 December 2005, Yituo Diesel has provided guarantees to banks and a financial institution amounted to approximately RMB203.30 million in connection with facilities granted to China Yituo, the Company and Yituo Engine Machinery amounted to approximately RMB177.30 million, RMB20.00 million and RMB6.0 million respectively. Subsequent to 31 December 2005 and up to the date of this Circular, approximately RMB95,800,000 and RMB66,500,000 of the guarantees given for facilities granted to China Yituo were released and matured, respectively.

Charges on Assets

As at 31 December 2005, Yituo Diesel has pledged deposits in banks and a non-bank financial institution a total of approximately RMB10.02 million for bank bills facilities granted.

Exposure to fluctuation in exchange rates

Since Yituo Diesel‘s business is carried on in the PRC, its exposure to fluctuations in exchange rates and currencies is minimal.

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FINANCIAL INFORMATION ON YITUO DIESEL

APPENDIX I

Number and remuneration of employees

As at 31 December 2005, Yituo Diesel employed approximately 1,271 employees who were all based in the PRC. In addition to salaries, employees of Yituo Diesel are entitled to a range of benefit including working and other allowances, performance bonus, employee stock option incentive plan, central retirement and pension fund scheme organized by Luoyang Municipal Government.

Pursuant to an employee stock option incentive plan initially adopted by Yituo Diesel in 2002 and as amended in 2003, certain members of senior management of Yituo Diesel were granted stock options for the four years ended 31 December 2002 to 2005 to acquire equity interest in Yituo Diesel from China Yituo in accordance with the terms and conditions of the employee stock option incentive plan. It is expected that all share options granted will be fully exercised by the option holders before Completion and an aggregate 16.20% equity interest in Yituo Diesel will be transferred from China Yituo to those relevant option holders upon approval from relevant authorities. Upon Completion, it is expected that the existing employee stock incentive plan will be terminated.

— 67 —

FINANCIAL INFORMATION ON YITUO FUEL JET

APPENDIX II

1. ACCOUNTANTS’ REPORT ON YITUO FUEL JET

The following is the text of a report in relation to Yituo Fuel Jet, prepared for the sole purpose of inclusion in this circular, received from Ernst & Young, Certified Public Accountants, Hong Kong.

18th Floor Two International Finance Centre 安永會計師事務所 8 Finance Street, Central Hong Kong

9 June 2006

The Directors First Tractor Company Limited

Dear Sirs,

We set out below our report on the financial information regarding Yituo (Luoyang) Fuel Jet Co., Ltd. (“Yituo Fuel Jet”) for the period from 15 January 2003 (date of establishment) to 31 December 2003 and the two years ended 31 December 2005 (the “Relevant Periods”), prepared on the basis set out in Section 1 below, for inclusion in the circular of First Tractor Company Limited (the “Company”) dated 9 June 2006 (the “Circular”) in connection with the proposed acquisition of the 70% equity interest in Yituo Fuel Jet by the Company, which is pursuant to an assets swap agreement dated 8 May 2006 entered into between the Company and China Yituo Group Corporation Limited (“China Yituo”), the ultimate holding company of the Company.

Yituo Fuel Jet was established as a limited liability company in the People’s Republic of China (the “PRC”) on 15 January 2003. As at the date of this report, China Yituo, Yituo (Luoyang) Diesel Co., Ltd. (an associate of the Company) and the Company own 75%, 18% and 7% equity interests respectively in Yituo Fuel Jet. Yituo Fuel Jet was engaged in the manufacture and sale of fuel injection pumps and fuel jets during the Relevant Periods.

Yituo Fuel Jet has adopted 31 December as its financial year end date. The management accounts of Yituo Fuel Jet were prepared in accordance with PRC accounting principles and financial regulations. Accordingly, no Hong Kong Financial Reporting Standards (“HKFRSs”) audited accounts are available. For the purpose of this report, the directors of Yituo Fuel Jet have prepared the management accounts of Yituo Fuel Jet under HKFRSs for the Relevant Periods.

The results, statements of changes in equity and cash flows statements of Yituo Fuel Jet for the Relevant Periods and the balance sheets of Yituo Fuel Jet as at 31 December 2003, 2004 and 2005, together with the notes thereto set out in this report (collectively the “Financial Information”) have been prepared from the unaudited HKFRSs management accounts of Yituo Fuel Jet for the period/years ended 31 December 2003, 2004 and 2005.

— 68 —

APPENDIX II

FINANCIAL INFORMATION ON YITUO FUEL JET

The directors of Yituo Fuel Jet are responsible for the preparation of the Financial Information which gives, for the purpose of this report, a true and fair view. The directors of Yituo Fuel Jet are also responsible for the preparation of the HKFRSs management accounts which give a true and fair view. In preparing the Financial Information and the HKFRSs management accounts which give a true and fair view, it is fundamental that appropriate accounting policies are selected and applied consistently, that judgements and estimates made are prudent and reasonable, and that the reasons for any significant departure from applicable accounting standards are stated. The directors of the Company are responsible for the contents of the Circular in which this report is included. It is our responsibility to form an independent opinion on such Financial Information in respect of the Relevant Periods and to report our opinion solely to you.

In our opinion, the Financial Information gives, for the purpose of this report, a true and fair view of the results and cash flows of Yituo Fuel Jet for each of the Relevant Periods, and of the state of affairs of Yituo Fuel Jet as at 31 December 2003, 2004 and 2005.

1. BASIS OF PREPARATION

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FINANCIAL INFORMATION ON YITUO FUEL JET

APPENDIX II

The HKICPA has issued a number of new and revised HKFRSs, which are generally effective for accounting periods beginning on or after 1 January 2005. For the purposes of preparing and presenting the Financial Information of the Relevant Periods, Yituo Fuel Jet has early adopted the following new and revised HKFRSs:

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 23 Borrowing Costs HKAS 24 Related Party Disclosures HKAS 27 Consolidated and Separate Financial Statements HKAS 32 Financial Instruments: Disclosure and Presentation HKAS 36 Impairment of Assets HKAS 37 Provisions, Contingent Liabilities and Contingent Assets HKAS 39 Financial Instruments: Recognition and Measurement HKAS 39 Amendment Transition and Initial Recognition of Financial Assets and Financial Liabilities HKFRS 2 Share-based Payment

— 70 —

FINANCIAL INFORMATION ON YITUO FUEL JET

APPENDIX II

Impact of issued but not yet effective HKFRSs

Yituo Fuel Jet has not applied the following new and revised HKFRSs, that have been issued but are not yet effective for the Financial Information. 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 First-time Adoption of Hong Kong Financial Reporting Amendments 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 Yituo Fuel Jet’s objective, policies and processes for managing capital; quantitative data about what Yituo Fuel Jet regards as capital; and compliance with any capital requirements and the consequences of any non-compliance.

HKFRS 7 incorporates 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.

— 71 —

FINANCIAL INFORMATION ON YITUO FUEL JET

APPENDIX II

The directors of the Company and Yituo Fuel Jet expect that the adoption of other pronouncements listed above will not have any significant impact on the Financial Information of Yituo Fuel Jet in the period of initial application.

2. PRINCIPAL ACCOUNTING POLICIES

Impairment of assets

Related parties

A party is considered to be related to Yituo Fuel Jet if:

(a) the party, directly or indirectly through one or more intermediaries, (i) controls, is controlled by, or is under common control with, Yituo Fuel Jet; (ii) has an interest in Yituo Fuel Jet that gives it significant influence over Yituo Fuel Jet; or (iii) has joint control over Yituo Fuel Jet;
(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 Yituo Fuel Jet or its parent;

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FINANCIAL INFORMATION ON YITUO FUEL JET

APPENDIX II

(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).

Property, plant and equipment and depreciation

Buildings	10 - 30 years
Plant, machinery and equipment	5 - 15 years
Transportation vehicles and equipment	6 - 12 years

Where 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.

Construction in progress

Construction in progress represents factory buildings and other property, plant and equipment under construction, which is stated at cost less any impairment losses, and is not depreciated. Cost comprises the direct costs of construction during the period of construction. Construction in progress is reclassified to the appropriate category of property, plant and equipment when completed and ready for use.

— 73 —

FINANCIAL INFORMATION ON YITUO FUEL JET

APPENDIX II

Research and development costs

All research costs are charged to the income statement as incurred.

Expenditure incurred on projects to develop new products is capitalised and deferred only when Yituo Fuel Jet can demonstrate the technical feasibility of completing the intangible asset so that it will be available for use or sale, its intention to complete and its ability to use or sell the asset, how the asset will generate future economic benefits, the availability of resources to complete the project and the ability to measure reliably the expenditure during the development. Product development expenditure which does not meet these criteria is expensed when incurred.

Operating leases

Leases where substantially all the rewards and risks of ownership of assets remain with the lessor are accounted for as operating leases. Where Yituo Fuel Jet is the lessee, rentals payable under the operating leases are charged to the income statement on the straight-line basis over the lease terms.

Financial assets

Yituo Fuel Jet’s financial assets in the scope of HKAS 39 are classified as financial assets at fair value through profit or loss, loans and receivables and available-for-sale financial assets, as appropriate. When financial assets are recognised initially, they are measured at fair value, plus, in the case of investments not at fair value through profit or loss, directly attributable transaction costs. Yituo Fuel Jet 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 Yituo Fuel Jet 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.

Financial assets at fair value through profit or loss

Loans and receivables

— 74 —

APPENDIX II

FINANCIAL INFORMATION ON YITUO FUEL JET

Available-for-sale financial assets

Fair value

Impairment of financial assets

Yituo Fuel Jet 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

Yituo Fuel Jet 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.

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FINANCIAL INFORMATION ON YITUO FUEL JET

APPENDIX II

Assets carried at cost

Available-for-sale financial assets

Derecognition of financial assets

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;
Yituo Fuel Jet 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
Yituo Fuel Jet has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks 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 Yituo Fuel Jet 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 Yituo Fuel Jet’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 Yituo Fuel Jet could be required to repay.

— 76 —

APPENDIX II

FINANCIAL INFORMATION ON YITUO FUEL JET

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 Yituo Fuel Jet’s continuing involvement is the amount of the transferred asset that Yituo Fuel Jet 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 Yituo Fuel Jet’s continuing involvement is limited to the lower of the fair value of the transferred asset and the option exercise price.

Interest-bearing loans and borrowings

All loans and borrowings are initially recognised at the fair value of the consideration received less directly attributable transaction costs.

After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method.

Gains and losses are recognised in net profit or loss when the liabilities are derecognised as well as through the amortisation process.

Derecognition of financial liabilities

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

Inventories

Spare parts and consumables are stated at cost less any provision for obsolescence.

Cash and cash equivalents

For the purpose of the balance sheet, cash and cash equivalents comprise cash on hand and at banks, which are not restricted as to use.

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FINANCIAL INFORMATION ON YITUO FUEL JET

APPENDIX II

Provisions

Income tax

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 liabilities are recognised for all taxable temporary differences, except where the deferred tax liability arises from the initial recognition of an asset or liability that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss.

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.

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FINANCIAL INFORMATION ON YITUO FUEL JET

APPENDIX II

Revenue recognition

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

(a) from the sale of goods, when the significant risks and rewards of ownership have been transferred to the buyer, provided that Yituo Fuel Jet maintains neither managerial involvement to the degree usually associated with ownership, nor effective control over the goods sold; and
(b) 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.

Employee benefits

Retirement benefits scheme

Contributions to the defined contribution retirement benefits scheme are charged to the income statement as incurred.

Share-based payment transactions

Yituo Fuel Jet operates a share option scheme for the purpose of providing incentives and rewards to eligible participants who achieve certain performance targets set by Yituo Fuel Jet. Pursuant to such scheme, certain employees (including directors) of Yituo Fuel Jet receive remuneration in the form of share-based payment transactions, whereby employees render services as consideration for equity instruments (“equity-settled transactions”).

The cost of equity-settled transactions with employees is measured by reference to the fair value at the date at which they are granted. The fair value is determined by an external valuer using certain valuation techniques, further details of which are given in note 4(n).

The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (the “vesting date”). The cumulative expense recognised for equity-settled transactions at each balance sheet date until the vesting date reflects the extent to which the vesting period has expired and Yituo Fuel Jet’s best estimate of the number of equity instruments that will ultimately vest. The charge or credit to the income statement for a period represents the movement in the cumulative expense recognised as at the beginning and end of that period.

Where the terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms had not been modified. In addition, an expense is recognised for any modification, which increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee as measured at the date of modification.

— 79 —

APPENDIX II

FINANCIAL INFORMATION ON YITUO FUEL JET

Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award, and is designated as a replacement award on the date that it is granted, the cancelled and new awards are treated as if they were a modification of the original award, as described in the previous paragraph.

Yituo Fuel Jet has adopted the transitional provisions of HKFRS 2 in respect of equity-settled awards and has applied HKFRS 2 only to equity-settled awards granted after 7 November 2002 that had not vested on 1 January 2005 and to those granted on or after 1 January 2005.

Early retirement benefits

Termination benefits are payable whenever an employee’s employment is terminated involuntarily before the normal retirement date or whenever an employee accepts voluntary redundancy in exchange for the benefits. Yituo Fuel Jet recognises termination benefits when it is demonstrably committed to terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal or to providing termination benefits as a result of an offer made to encourage voluntary redundancy.

Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, i.e., assets that necessarily take a substantial period of time to get ready for their intended use or sale, are capitalised as part of the cost of those assets. The capitalisation of such borrowing costs ceases when the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs capitalised.

Foreign currency transactions

The Financial Information is presented in RMB, which is Yituo Fuel Jet’s functional and presentation 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.

Estimation uncertainty

— 80 —

APPENDIX II

FINANCIAL INFORMATION ON YITUO FUEL JET

Useful lives and impairment of property, plant and equipment

Yituo Fuel Jet’s management determines the estimated useful lives of its items of property, plant and equipment. This estimate is based on the historical experience of the actual useful lives of property, plant and equipment of similar nature and functions. Management will increase the depreciation charge where the useful lives are less than the previously estimated lives. The impairment loss for an item of property, plant and equipment is recognised for the amount by which the carrying amount exceeds its recoverable amount. The recoverable amounts have been determined based on fair values less costs to sell, which are based on the best information available to reflect the amounts that are obtainable at each balance sheet date, from the disposal of the asset in an arm’s length transaction between knowledgeable, willing parties, after deducting the costs to disposal.

Impairment of receivables

The policy for impairment of receivables of Yituo Fuel Jet is based on the evaluation of collectability and aging analysis of trade receivables and on the judgement of the management. A considerable amount of judgement is required when assessing the ultimate realisation of these receivables, including the current creditworthiness and the past collection history of the customers. The management reassesses the estimation at each balance sheet date.

Provision for obsolete inventories

The management reviews the condition of inventories of Yituo Fuel Jet and makes provision for obsolete and slow-moving inventory items identified that are no longer suitable for sale. The management estimates the net realisable value for such inventories based primarily on the latest invoice prices and current market conditions. Yituo Fuel Jet carries out an inventory review at each balance sheet date and makes provision for obsolete items. The management reassesses the estimation at each balance sheet date.

Provision for product warranties

Provision for early retirement benefits

The benefits of the early retirement plans are estimated based on factors including the remaining number of years of service from the date of early retirement to the normal retirement date and the salary on the date of early retirement of an employee, discounted to their present values as appropriate.

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FINANCIAL INFORMATION ON YITUO FUEL JET

APPENDIX II

Income tax

Segment reporting

During the Relevant Periods, all revenue recognised by Yituo Fuel Jet was derived from the sale of fuel injection pumps and fuel jets in the PRC. Both fuel injection pumps and fuel jets are components of diesel engines and hence they are subject to similar risks and returns. Accordingly, no segment analysis is required to be prepared.

3. INCOME STATEMENTS

The following is a summary of the income statements of Yituo Fuel Jet for the Relevant Periods prepared on the basis set out in Section 1 above:

Period from
15 January
2003 (date of
establishment)
to 31 December
2003
Notes
RMB’000
REVENUE
(a)
103,993
Cost of sales
(85,596)
Gross profit
18,397
Other income
(a)
1,035
Selling and distribution costs
(8,018)
Administrative expenses
(15,564)
Other expenses, net
(708)
Finance costs
(c)
(646)
PROFIT/(LOSS) BEFORE TAX
(b)
(5,504)
Tax
(f)
1,149
PROFIT/(LOSS) FOR THE
YEAR/PERIOD
(4,355)
DIVIDEND
(g)
—

Year ended 31 December
2004
2005
RMB’000
RMB’000
95,816
124,377
(76,182)
(95,350)
19,634
29,027
1,677
1,760
(7,363)
(9,056)
(11,671)
(12,693)
(1,659)
(854)
(484)
(1,796)
134
6,388
(521)
(2,264)
(387)
4,124
—
6,640

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FINANCIAL INFORMATION ON YITUO FUEL JET

APPENDIX II

Notes:

(a) Revenue and other income

Revenue, which is also Yituo Fuel Jet’s turnover, represents the invoiced value of goods sold, net of trade discounts and returns, and excludes sales taxes.

An analysis of revenue and other income is as follows:

Period from 15 January 2003 (date of establishment) to 31 December 2003 RMB’000 Revenue Sale of goods 103,993 Other income Profits from sundry sales 878 Interest income 150 Others 7 1,035	Year ended 2004 RMB’000 95,816 1,298 54 325 1,677	31 December 2005 RMB’000 124,377

		1,604 30 126
		1,760

(b) Profit/(loss) before tax

Yituo Fuel Jet’s profit/(loss) before tax is arrived at after charging/(crediting):

Period from 15 January 2003 (date of establishment) to 31 December 2003 Notes RMB’000 Cost of inventories sold 85,596 Depreciation 4(a) 6,924 Auditors’ remuneration — Employee benefits expenses (including directors’ and supervisors’ remuneration - note 3(d)): Wages and salaries 19,811 Allowances and benefits 5,057 Early retirement benefits 4(k) 1,260 Performance-related bonuses 1,149 Share-based compensation expenses 510 Pension scheme contributions* 2,383 30,170	Year ended 31 December 2004 2005 RMB’000 RMB’000 76,182 95,350 5,410 4,056 20 22 14,942 21,050 5,899 5,440 623 349 491 950 510 510 3,419 3,599 25,884 31,898	Year ended 31 December 2004 2005 RMB’000 RMB’000 76,182 95,350 5,410 4,056 20 22 14,942 21,050 5,899 5,440 623 349 491 950 510 510 3,419 3,599 25,884 31,898
		31,898

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APPENDIX II

FINANCIAL INFORMATION ON YITUO FUEL JET

		Period from
		15 January
		2003 (date of
		establishment)
		to 31 December	Year ended 31 December
		2003	2004	2005
	Note	RMB’000	RMB’000	RMB’000
Provision against obsolete
inventories		938	505	530
Product warranty provision	4(k)	3,599	3,305	4,322
Research and development costs		1,019	300	380
Minimum lease payments under
operating leases:
Land and buildings		1,128	208	245
Plant and machinery		910	1,604	113
Provision/(reversal of provision)
for bad and doubtful debts		190	(54)	99
Net loss on disposal of items of
property, plant and equipment		—	1,172	244
Interest income		(150)	(54)	(30)

At each of the balance sheet dates, Yituo Fuel Jet had no forfeited contributions available to reduce its contributions to the pension scheme in future years.

(c) Finance costs

Period from 15 January 2003 (date of establishment) to 31 December 2003 RMB’000 Interest on bank and other loans wholly repayable within five years 646 Less: Interest capitalised — 646	Year ended 2004 RMB’000 1,895 (1,411) 484	31 December 2005 RMB’000 4,372 (2,576) 1,796

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FINANCIAL INFORMATION ON YITUO FUEL JET

APPENDIX II

(d) Directors’ and supervisors’ remuneration

Directors’ and supervisors’ remuneration for the Relevant Periods, 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:

Period from 15 January 2003 (date of establishment) to 31 December 2003 RMB’000 Salaries, allowances and benefits in kind 75 Performance-related bonuses* 305 Employee share-based compensation benefits 131 Pension scheme contributions 10 521	Year ended 2004 RMB’000 75 123 137 14 349	31 December 2005 RMB’000 71 192 129 15
		407

Certain directors of Yituo Fuel Jet are entitled to bonus payments which are determined with reference to the profit after tax of Yituo Fuel Jet.

During the Relevant Periods, certain directors were granted share options, in respect of their services to Yituo Fuel Jet, under the share-based compensation scheme of Yituo Fuel Jet, further details of which are set out in note 4(n) to the Financial Information. The fair value of such options, which has been charged to the income statement, was determined as at the date of grant and was included in the above directors’ and supervisors’ remuneration disclosures.

Salaries, allowances and benefits in kind RMB’000 Period from 15 January 2003 (date of establishment) to 31 December 2003 Directors: Mr. Yan Linjiao — Mr. Guo Zhiqiang — Mr. Chang Jinxing — Mr. Meng Wei 30 Mr. Li Xinzhou 24 54 Supervisors: Mr. Xu Weilin — Ms. Liang Yiping 21 21 75	Performance- related bonuses RMB’000 — — — 175 130 305 — — — 305	Employee share-based compensation benefits RMB’000 — — — 73 58 131 — — — 131	Pension scheme contributions RMB’000 — — — 5 4 9 — 1 1 10	Total remuneration RMB’000 — — — 283 216
				499
				— 22
				22
				521

— 85 —

APPENDIX II

FINANCIAL INFORMATION ON YITUO FUEL JET

2004 Directors: Mr. Yan Linjiao (i) Mr. Shao Haichen (ii) Mr. Guo Zhiqiang Mr. Chang Jinxing Mr. Meng Wei Mr. Li Xinzhou Supervisors: Mr. Xu Weilin Ms. Liang Yiping 2005 Directors: Mr. Shao Haichen Mr. Guo Zhiqiang Mr. Chang Jinxing Mr. Meng Wei Mr. Li Xinzhou Supervisors: Mr. Xu Weilin Ms. Liang Yiping	Salaries, allowances and benefits in kind RMB’000 — — — — 32 26 58 — 17 17 75 — — — 26 26 52 — 19 19 71	Performance- related bonuses RMB’000 — — — — 70 53 123 — — — 123 — — — 108 84 192 — — — 192	Employee share-based compensation benefits RMB’000 — — — — 75 62 137 — — — 137 — — — 73 56 129 — — — 129	Pension scheme contributions RMB’000 — — — — 7 6 13 — 1 1 14 — — — 7 7 14 — 1 1 15	Total remuneration RMB’000 — — — — 184 147
					331
					— 18
					18
					349

					— — — 214 173
					387
					— 20
					20
					407

(i) Mr. Yan Linjiao resigned as Yituo Fuel Jet’s director on 18 April 2004.

(ii) Mr. Shao Haichen was appointed as Yituo Fuel Jet’s director on 18 April 2004.

There was no arrangement under which a director or supervisor waived or agreed to waive any remuneration during the Relevant Periods.

— 86 —

FINANCIAL INFORMATION ON YITUO FUEL JET

APPENDIX II

(e) Five highest paid employees

The five highest paid employees of Yituo Fuel Jet during the Relevant Periods included two directors, whose emoluments are included in note 3(d) above. Details of the remuneration of the remaining three non-director and non-supervisor, highest paid employees during the Relevant Periods are as follows:

Period from 15 January 2003 (date of establishment) to 31 December 2003 RMB’000 Salaries, allowances and benefits in kind 74 Performance-related bonuses 417 Employee share-based compensation benefits 182 Pension scheme contributions 17 690	Year ended 2004 RMB’000 76 170 192 18 456	31 December 2005 RMB’000 72 240 168 18 498

The aggregate emoluments of the remaining three non-director and non-supervisor, highest paid employees during the Relevant Periods were within the band of “Nil to HK$1,000,000”.

During the Relevant Periods, share options were granted to the three non-director and non-supervisor, highest paid employees in respect of their services to Yituo Fuel Jet, further details of which are included in the disclosures in note 4(n) to the Financial Information. The fair value of such options, which has been charged to the income statement, was determined as at the date of grant and was included in the above non-director and non-supervisor, highest paid employees’ remuneration disclosures.

(f) Tax

Under the relevant PRC Income Tax Law and respective regulations, Yituo Fuel Jet is subject to corporate income tax at the rate of 33%.

Period from 15 January 2003 (date of establishment) to 31 December 2003 RMB’000 Current: Charge for the year/period 1,153 Deferred (note 4(l)) (2,302) Total tax charge/(credit) for the year/period (1,149)	Year ended 2004 RMB’000 236 285 521	31 December 2005 RMB’000 2,838 (574) 2,264

A reconciliation of the tax expense applicable to profit/(loss) before tax at the statutory rate of 33% in the PRC to the tax expense at the effective tax rate for each of the Relevant Periods is as follows:

— 87 —

FINANCIAL INFORMATION ON YITUO FUEL JET

APPENDIX II

Period from 15 January 2003 (date of establishment) to 31 December 2003 RMB’000 Profit/(loss) before tax (5,504) Tax at PRC statutory tax rate of 33% (1,816) Income not subject to tax — Expenses not deductible for tax 667 Tax charge/(credit) for the year/period (1,149) Yituo Fuel Jet’s effective income tax rate 21%	Year ended 2004 RMB’000 134 44 (18) 495 521 389%	31 December 2005 RMB’000 6,388 2,108 (315) 471 2,264 35%

(g) Dividend

No dividends were paid or declared by Yituo Fuel Jet during the Relevant Periods.

On 28 April 2006, the directors proposed to declare a special dividend of approximately RMB6,640,000 to its shareholders. This was approved in the shareholders’ meeting on the same day. As the dividend was declared after the last balance sheet date of 31 December 2005, it was not been recognised as a liability as at 31 December 2005.

(h) Earnings/(loss) per share

Information of earnings/(loss) per share is not presented as such information is not meaningful given the purpose of this report.

— 88 —

FINANCIAL INFORMATION ON YITUO FUEL JET

APPENDIX II

4. BALANCE SHEETS

The following is a summary of the balance sheets of Yituo Fuel Jet as at the end of each of the Relevant Periods:

Notes NON-CURRENT ASSETS Property, plant and equipment (a) Construction in progress (b) Deferred tax assets (l) Total non-current assets CURRENT ASSETS Inventories (c) Trade and bills receivables (d) Prepayments and other receivables (e) Due from the ultimate holding company (f) Tax recoverable Cash and cash equivalents (g) Total current assets CURRENT LIABILITIES Trade payables (h) Other payables and accruals (i) Interest-bearing bank and other borrowings (j) Tax payable Provisions (k) Total current liabilities NET CURRENT ASSETS TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Interest-bearing bank and other borrowings (j) Provisions (k) Total non-current liabilities EQUITY Paid-up capital (m) Reserves Total equity	2003 RMB’000 27,625 1,689 2,302 31,616 21,779 22,093 1,626 — — 6,138 51,636 5,658 4,467 20,000 485 3,748 34,358 17,278 48,894 — 739 739 48,155 52,000 (3,845) 48,155	As at 31 December 2004 2005 RMB’000 RMB’000 23,860 51,357 26,905 25,867 2,017 2,591 52,782 79,815 19,722 18,445 7,735 14,617 696 959 25,696 56,446 34 — 10,276 5,160 64,159 95,627 5,074 8,196 7,309 14,749 — 40,000 — 2,237 3,438 4,653 15,821 69,835 48,338 25,792 101,120 105,607 52,000 52,000 842 695 52,842 52,695 48,278 52,912 52,000 52,000 (3,722) 912 48,278 52,912	As at 31 December 2004 2005 RMB’000 RMB’000 23,860 51,357 26,905 25,867 2,017 2,591 52,782 79,815 19,722 18,445 7,735 14,617 696 959 25,696 56,446 34 — 10,276 5,160 64,159 95,627 5,074 8,196 7,309 14,749 — 40,000 — 2,237 3,438 4,653 15,821 69,835 48,338 25,792 101,120 105,607 52,000 52,000 842 695 52,842 52,695 48,278 52,912 52,000 52,000 (3,722) 912 48,278 52,912
			79,815
			18,445 14,617 959 56,446 — 5,160
			95,627
			8,196 14,749 40,000 2,237 4,653
			69,835
			25,792
			105,607
			52,000 695
			52,695
			52,912

			52,000 912
			52,912

— 89 —

FINANCIAL INFORMATION ON YITUO FUEL JET

APPENDIX II

Notes:

(a) Property, plant and equipment

Contributed by China Yituo upon the establishment of Yituo Fuel Jet Additions Depreciation provided during the period Transfer from construction in progress (note 4(b)) At 31 December 2003, net of accumulated depreciation At 1 January 2004, net of accumulated depreciation Additions Disposals Depreciation provided during the year Transfer from construction in progress (note 4(b)) At 31 December 2004, net of accumulated depreciation At 1 January 2005, net of accumulated depreciation Additions Disposals Depreciation provided during the year Transfer from construction in progress (note 4(b)) At 31 December 2005, net of accumulated depreciation At 31 December 2003: Cost Accumulated depreciation Net carrying amount At 31 December 2004: Cost Accumulated depreciation Net carrying amount	Plant, Transportation machinery and vehicles and Buildings equipment equipment RMB’000 RMB’000 RMB’000 11,374 15,893 133 — 6,794 — (707) (6,193) (24) — 355 — 10,667 16,849 109 10,667 16,849 109 — 1,519 — (1,061) (117) — (765) (4,624) (21) — 1,304 — 8,841 14,931 88 8,841 14,931 88 447 11,565 495 (231) (131) — (708) (3,314) (34) — 19,408 — 8,349 42,459 549 23,701 74,953 312 (13,034) (58,104) (203) 10,667 16,849 109 21,855 77,610 312 (13,014) (62,679) (224) 8,841 14,931 88	Total RMB’000 27,400 6,794 (6,924) 355 27,625 27,625 1,519 (1,178) (5,410) 1,304 23,860 23,860 12,507 (362) (4,056) 19,408 51,357 98,966 (71,341) 27,625 99,777 (75,917) 23,860

— 90 —

APPENDIX II

FINANCIAL INFORMATION ON YITUO FUEL JET

At 31 December 2005: Cost Accumulated depreciation Net carrying amount (b) Construction in progress At beginning of year/period Additions Transfer to items of property, plant and equipment (note 4(a)) At end of year/period (c) Inventories Raw materials Work in progress Finished goods Spare parts and consumables	Plant, Transportation machinery and vehicles and Buildings equipment equipment RMB’000 RMB’000 RMB’000 21,728 109,921 807 (13,379) (67,462) (258) 8,349 42,459 549 As at 31 December 2003 2004 RMB’000 RMB’000 — 1,689 2,044 26,520 (355) (1,304) 1,689 26,905 As at 31 December 2003 2004 RMB’000 RMB’000 3,347 2,100 9,153 11,268 6,054 2,952 3,225 3,402 21,779 19,722	Plant, Transportation machinery and vehicles and Buildings equipment equipment RMB’000 RMB’000 RMB’000 21,728 109,921 807 (13,379) (67,462) (258) 8,349 42,459 549 As at 31 December 2003 2004 RMB’000 RMB’000 — 1,689 2,044 26,520 (355) (1,304) 1,689 26,905 As at 31 December 2003 2004 RMB’000 RMB’000 3,347 2,100 9,153 11,268 6,054 2,952 3,225 3,402 21,779 19,722	Total RMB’000 132,456 (81,099) 51,357 2005 RMB’000 26,905 18,370 (19,408) 25,867 2005 RMB’000 1,152 8,166 6,480 2,647 18,445

(d) Trade and bills receivables

Yituo Fuel Jet’s trading terms with its customers are mainly on credit, where payment in advance is normally required. The credit periods to its customers are 30 to 90 days. Yituo Fuel Jet seeks to maintain strict control over its outstanding receivables. In view of the aforementioned and the fact that Yituo Fuel Jet’s trade receivables relate to a large number of diversified customers, there is no significant concentration of credit risk. Trade receivables are non-interest-bearing.

An aged analysis of the trade and bills receivables as at the balance sheet dates, based on the invoice date, and net of provisions, is as follows:

Within 90 days 91 days to 180 days 181 days to 365 days 1 to 2 years	2003 RMB’000 21,589 349 155 — 22,093	As at 31 December 2004 2005 RMB’000 RMB’000 7,195 14,300 473 275 34 1 33 41 7,735 14,617

— 91 —

APPENDIX II

FINANCIAL INFORMATION ON YITUO FUEL JET

Yituo Fuel Jet’s trade and bills receivables included the following amounts due from related parties:

Due from China Yituo Due from fellow subsidiaries (e) Prepayments and other receivables Prepayments Other receivables Prepaid taxes and surcharges	2003 RMB’000 12,687 1,053 2003 RMB’000 1,262 364 — 1,626	As at 31 December 2004 2005 RMB’000 RMB’000 — — — 5,203 As at 31 December 2004 2005 RMB’000 RMB’000 181 558 408 401 107 — 696 959	As at 31 December 2004 2005 RMB’000 RMB’000 — — — 5,203 As at 31 December 2004 2005 RMB’000 RMB’000 181 558 408 401 107 — 696 959
			959

Yituo Fuel Jet’s prepayments included amounts due from China Yituo of approximately RMB228,000 and RMB5,000 as at 31 December 2003 and 2005 respectively (2004: Nil). Such balances are unsecured, interestfree and have no fixed terms of repayment.

(f) Due from the ultimate holding company

It represents the amount due from China Yituo, which is unsecured, interest-free and has no fixed terms of repayment. Pursuant to a conditional repayment agreement (the “Fuel Jet Repayment Agreement”) entered into between Yituo Fuel Jet and China Yituo on 8 May 2006, China Yituo will repay part of the outstanding balance of approximately RMB26 million as at 31 December 2005 to Yituo Fuel Jet on or before 31 December 2009 and pledge certain of its machinery to Yituo Fuel Jet as security for the outstanding balance. Further details of the Fuel Jet Repayment Agreement are disclosed in note 9(b).

The carrying amount of the balance due from the ultimate holding company approximates to its fair value.

(g) Cash and cash equivalents

Cash and deposits at banks and a non-bank financial institution	2003 RMB’000 6,138	As at 31 December 2004 2005 RMB’000 RMB’000 10,276 5,160

As at 31 December 2003, 2004 and 2005, Yituo Fuel Jet’s deposits included amounts of approximately RMB2,655,000, RMB9,242,000 and RMB4,900,000 respectively, which were placed with China First Tractor Group Finance Company Limited (“FTGF”), a fellow subsidiary of Yituo Fuel Jet which is a non-bank financial institution.

The carrying amounts of the cash and cash equivalents approximate to their fair values.

— 92 —

APPENDIX II

FINANCIAL INFORMATION ON YITUO FUEL JET

(h) Trade payables

An aged analysis of the trade payables as at the balance sheet dates, based on the invoice date, is as follows:

Within 90 days 91 days to 180 days 181 days to 365 days 1 to 2 years Over 2 years	2003 RMB’000 4,120 1,125 413 — — 5,658	As at 31 December 2004 2005 RMB’000 RMB’000 3,588 6,043 91 523 834 941 561 381 — 308 5,074 8,196	As at 31 December 2004 2005 RMB’000 RMB’000 3,588 6,043 91 523 834 941 561 381 — 308 5,074 8,196
			8,196

Yituo Fuel Jet’s trade payables at 31 December 2005 included an amount due to a fellow subsidiary of RMB62,000.

The trade payables are non-interest-bearing and are normally settled on 90-day terms.

(i) Other payables and accruals

Accruals and other liabilities Advance on sales	2003 RMB’000 4,176 291 4,467	As at 31 December 2004 2005 RMB’000 RMB’000 6,915 13,232 394 1,517 7,309 14,749	As at 31 December 2004 2005 RMB’000 RMB’000 6,915 13,232 394 1,517 7,309 14,749
			14,749

Yituo Fuel Jet’s other liabilities included the following amounts due to related parties:

		As at 31 December
	2003	2004	2005
	RMB’000	RMB’000	RMB’000
Due to China Yituo	120	3,540	3,831
Due to a fellow subsidiary	—	350	350

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

— 93 —

FINANCIAL INFORMATION ON YITUO FUEL JET

APPENDIX II

(j) Interest-bearing bank and other borrowings

Effective interest Notes rate (%) Current Bank loans: Unsecured (i) 5.31 - 6.14 Loan from a financial institution: Unsecured (ii) 5.22 Non-current Other loan: Unsecured (iii) 5.27 - 5.59 Analysed into: Bank loans repayable: Within one year Loan from a financial institution repayable: Within one year Other loan repayable: Within one year In the second year In the third to fifth years, inclusive	2003 RMB’000 20,000 — 20,000 — 20,000 — — — — —	As at 31 December 2004 2005 RMB’000 RMB’000 — 10,000 — 30,000 — 40,000 52,000 52,000 — 10,000 — 30,000 — — — 52,000 52,000 — 52,000 52,000	As at 31 December 2004 2005 RMB’000 RMB’000 — 10,000 — 30,000 — 40,000 52,000 52,000 — 10,000 — 30,000 — — — 52,000 52,000 — 52,000 52,000
			40,000

			52,000

			10,000

			30,000

			— 52,000 —
			52,000

Notes:

(i) Yituo Fuel Jet’s unsecured bank loans were guaranteed by China Yituo.
(ii) Yituo Fuel Jet’s unsecured loan from a financial institution was borrowed from FTGF, and was guaranteed by China Yituo.
(iii) Yituo Fuel Jet’s unsecured other loan of RMB52,000,000 as at 31 December 2004 and 2005 respectively was jointly guaranteed by China Yituo and FTGF.

All bank and other loans of Yituo Fuel Jet as at the balance sheet dates were denominated in RMB and bore interest at fixed rates. The carrying amounts of Yituo Fuel Jet’s bank and other borrowings approximate to their fair values.

— 94 —

APPENDIX II

FINANCIAL INFORMATION ON YITUO FUEL JET

(k) Provisions

2003 Provision during the period Amount utilised during the period At 31 December 2003 Portion classified as current liabilities Non-current portion 2004 At 1 January 2004 Provision during the year Amount utilised during the year At 31 December 2004 Portion classified as current liabilities Non-current portion 2005 At 1 January 2005 Provision during the year Amount utilised during the year At 31 December 2005 Portion classified as current liabilities Non-current portion	Early retirement benefits RMB’000 1,260 (254) 1,006 (267) 739 1,006 623 (288) 1,341 (499) 842 1,341 349 (555) 1,135 (440) 695	Product warranty claims RMB’000 3,599 (118) 3,481 (3,481) — 3,481 3,305 (3,847) 2,939 (2,939) — 2,939 4,322 (3,048) 4,213 (4,213) —	Total RMB’000 4,859 (372) 4,487 (3,748) 739 4,487 3,928 (4,135) 4,280 (3,438) 842 4,280 4,671 (3,603) 5,348 (4,653) 695

A provision for early retirement benefits was recorded during the Relevant Periods in connection with the early retirement plans for Yituo Fuel Jet’s employees. Further details of the early retirement plans are included in note 4(p).

Yituo Fuel Jet provides warranties to its customers on certain of its products sold, under which faulty products are repaired or replaced. The estimation basis is reviewed on an ongoing basis and is revised where appropriate.

— 95 —

FINANCIAL INFORMATION ON YITUO FUEL JET

APPENDIX II

(l) Deferred tax

The movements in deferred tax assets during the Relevant Periods are as follows:

Deferred tax credited to the income statement during the period At 31 December 2003 and 1 January 2004 Deferred tax credited/(charged) to the income statement during the year At 31 December 2004 and 1 January 2005 Deferred tax credited/(charged) to the income statement during the year At 31 December 2005	Product warranty claims RMB’000 1,149 1,149 (179) 970 420 1,390	Early retirement benefits RMB’000 332 332 110 442 (67) 375	Others RMB’000 821 821 (216) 605 221 826	Total RMB’000 2,302 2,302 (285) 2,017 574 2,591

There was no significant unrecognised deferred tax liability as at the end of each of the Relevant Periods.

There were no income tax consequences attaching to the payment of dividends by Yituo Fuel Jet to its shareholders.

(m) Paid-up capital

Registered and paid-up capital	2003 RMB’000 52,000	As at 31 December 2004 2005 RMB’000 RMB’000 52,000 52,000

Yituo Fuel Jet was established on 15 January 2003 with a registered capital of RMB52,000,000. The share capital was fully paid up by the shareholders through injection of cash and other assets aggregating to RMB52,000,000.

Other than the capital injection by the shareholders on establishment of Yituo Fuel Jet, there was no movement in the paid-up capital during the Relevant Periods.

— 96 —

FINANCIAL INFORMATION ON YITUO FUEL JET

APPENDIX II

(n) Share-based compensation scheme

Yituo Fuel Jet operates a share-based compensation scheme (the “Scheme”) for the purpose of providing incentives and rewards to eligible participants who achieve certain performance targets set by Yituo Fuel Jet. Eligible participants of the Scheme include certain directors and employees of Yituo Fuel Jet. The Scheme became effective on 18 July 2003 and ended on 31 December 2005. The eligible participants are granted the options (the “Options”) to acquire from China Yituo, certain equity interests of Yituo Fuel Jet held by China Yituo, at a predetermined exercise price (the “Exercise Price”). For the purpose of the Scheme, the paid-up capital of Yituo Fuel Jet of RMB52,000,000 is divided into 52,000,000 units of shares (“Shares”). The Exercise Price of the Option is RMB1 per Share, which is the nominal value of each Share should the paid-up capital of Yituo Fuel Jet be represented by 52,000,000 Shares.

The number of Options permitted to be granted under the Scheme is 5% of the registered capital of Yituo Fuel Jet. However, there is no limitation on the maximum entitlement of each participant under the Scheme.

Participants are required to pay 30% of the total purchase consideration as deposits on the grant date of the Options, and the remaining 70% of the consideration by two equal instalments no later than 30 April of 2004 and 2005, respectively.

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

Details of the Options granted and outstanding under the Scheme affecting the Relevant Periods are as follows:

Period from 15 January 2003 (date of establishment) to31 December 2003 Directors Mr. Meng Wei Mr. Li Xinzhou Other employees In aggregate 2004 Directors Mr. Meng Wei Mr. Li Xinzhou Other employees In aggregate		Number of Options	Number of Options	At end Date of of year/ grant period 371,440 18/07/2003 297,140 18/07/2003 1,931,420 18/07/2003 2,600,000 360,705 18/07/2003 278,570 18/07/2003 1,791,724 18/07/2003 169,001 24/11/2004 1,960,725 2,600,000
	At beginning of year/ period — — — — 371,440 297,140 1,931,420 — 1,931,420 2,600,000	Granted Cancelled during during the year/ the year/ period period 371,440 — 297,140 — 1,931,420* — 2,600,000 — — (10,735) — (18,570) — (47,875) 169,001^ — 169,001 (47,875) 169,001 (77,180)	Forfeited during the year/ period — — — — — — (91,821) — (91,821) (91,821)

— 97 —

FINANCIAL INFORMATION ON YITUO FUEL JET

APPENDIX II

2005 Directors Mr. Meng Wei Mr. Li Xinzhou Other employees In aggregate		Number of Options	Number of Options	At end Date of of year/ grant period 360,705 18/07/2003 15,099 28/10/2005 375,804 278,570 18/07/2003 12,079 28/10/2005 290,649 1,716,230 18/07/2003 169,001 24/11/2004 48,316 28/10/2005 1,933,547 2,600,000
	At beginning of year/ period 360,705 — 360,705 278,570 — 278,570 1,791,724 169,001 — 1,960,725 2,600,000	Granted Cancelled during during the year/ the year/ period period — — 15,099+ — 15,099 — — — 12,079+ — 12,079 — — — — — 48,316+ — 48,316 — 75,494 —	Forfeited during the year/ period — — — — — — (75,494) — — (75,494) (75,494)

The fair value of the Options granted was approximately RMB1,531,000. The vesting period of the Options was from 15 January 2003 (date of establishment) to 31 December 2005.
^ The fair value of the Options granted was approximately RMB39,000. The vesting period of the Options was from the date of grant to 31 December 2005.
- The fair value of the Options granted was approximately RMB9,000. The vesting period of the Options was from the date of the grant to 31 December 2005.

The fair values of the Options granted during the Relevant Periods were estimated as at the date of grant, using the Black-Scholes-Merton model, taking into account the terms and conditions upon which the Options were granted. The following table lists the inputs to the model used:

		2003	2004	2005
Dividend	yield (%)	0.00	0.00	0.00
Expected	volatility (%)	21.34	27.69	32.43
Risk-free	interest rate (%)	3.72	4.21	2.15
Expected	life of equity instruments (years)	3.00	2.00	1.00
Estimated	share price (RMB)	1.58	1.11	1.00

The expected volatility reflects the assumption that the historical volatility is indicative of future trends, which may not necessarily be the actual outcome.

The execution of the Scheme is subject to the approvals of the relevant government authorities in the PRC. Subsequent to 31 December 2005, the participants have applied for the exercise of all the 2,600,000 Options outstanding as at 31 December 2005 in accordance with the Scheme. The approval from the relevant government authority was subsequently obtained on 2 June 2006.

— 98 —

FINANCIAL INFORMATION ON YITUO FUEL JET

APPENDIX II

(o) Reserves

In accordance with the Company Law of the PRC and Yituo Fuel Jet’s articles of association, Yituo Fuel Jet is required to appropriate 10% and 7% of its annual statutory profit after tax, as determined in accordance with PRC accounting standards and regulations, to the statutory surplus reserve (the “SSR”) and the statutory public welfare fund (the “PWF”), respectively. No allocation to the SSR is required after the balance of Yituo Fuel Jet’s SSR reaches 50% of its registered capital.

The SSR may only be used to offset accumulated losses, to expand the production operations of Yituo Fuel Jet, or to increase its paid-up capital.

The PWF is used for the collective welfare of the staff and workers of Yituo Fuel Jet, such as the construction of dormitories, canteens, and other staff welfare facilities. The fund forms a part of equity because individual staff and workers can only use these facilities, while the title of such facilities is held by Yituo Fuel Jet.

No transfers to the SSR and the PWF of Yituo Fuel Jet were proposed by the directors during the period ended 31 December 2003 and the year ended 31 December 2004 as Yituo Fuel Jet has accumulated losses under PRC accounting standards.

During the Relevant Periods, Yituo Fuel Jet did not utilise any of the SSR or PWF.

(p) Retirement benefits

(i) Yituo Fuel Jet participates in the central pension scheme operated by the local municipal government and is required to contribute certain percentages of the payroll costs to the central pension scheme, out of which the pensions of Yituo Fuel Jet’s retired employees are paid.
(ii) Yituo Fuel Jet also operates an early retirement plan for certain employees in addition to the benefits under the government-regulated defined contribution scheme as disclosed in (i) above. The benefits of the early retirement plans are estimated based on factors including the remaining number of years of service from the date of early retirement to the normal retirement date and with reference to certain historical salaries of such early retirees. The costs of early retirement benefits are recognised in the period when employees opted for early retirement.

(q) Contingent liabilities

At the balance sheet dates, Yituo Fuel Jet did not have any significant contingent liabilities.

(r) Commitments

Yituo Fuel Jet had the following capital commitments at the balance sheet dates:

Contracted, but not provided for: Purchase of plant and machinery	2003 RMB’000 417	As at 31 December 2004 2005 RMB’000 RMB’000 13,537 316

— 99 —

FINANCIAL INFORMATION ON YITUO FUEL JET

APPENDIX II

5. STATEMENTS OF CHANGES IN EQUITY

The changes in the shareholders’ equity of Yituo Fuel Jet for the Relevant Periods are as follows:

Capital contribution at inception of Yituo Fuel Jet Net loss for the period Equity-settled share-based compensation arrangements At 31 December 2003 and 1 January 2004 Net loss for the year Equity-settled share-based compensation arrangements At 31 December 2004 and 1 January 2005 Net profit for the year Equity-settled share-based compensation arrangements Transfer from/(to) reserves Special dividend At 31 December 2005	Share-based Paid-up compensation capital reserve RMB’000 RMB’000 52,000 — — — — 510 52,000 510 — — — 510 52,000 1,020 — — — 510 — — — — 52,000 1,530	Statutory surplus reserve RMB’000 — — — — — — — — — 815 — 815	Statutory public welfare fund RMB’000 — — — — — — — — 570 — 570	Retained profits/ Special (accumulated dividend losses) RMB’000 RMB’000 — — — (4,355) — — — (4,355) — (387) — — — (4,742) — 4,124 — — — (1,385) 6,640 (6,640) 6,640 (8,643)	Total RMB’000 52,000 (4,355) 510 48,155 (387) 510 48,278 4,124 510 — — 52,912

— 100 —

FINANCIAL INFORMATION ON YITUO FUEL JET

APPENDIX II

6. CASH FLOW STATEMENTS

The following is a summary of cash flow statements of Yituo Fuel Jet for the Relevant Periods:

Period from
15 January
2003 (date of
establishment)
to 31 December
2003
Notes
RMB’000
CASH FLOWS FROM
OPERATING ACTIVITIES
Profit/(loss) before tax
(5,504)
Adjustments for:
Finance costs
3(c)
646
Interest income
3(b)
(150)
Net loss on disposal of items of
property, plant and equipment
3(b)
—
Depreciation
3(b), 4(a)
6,924
Share-based
compensation expense
510
Operating profit before
working capital changes
2,426
(Increase)/decrease in inventories
(11,965)
(Increase)/decrease in trade and
bills receivables
(22,093)
(Increase)/decrease in prepayments
and other receivables
(1,626)
Increase in an amount due from
the ultimate holding company
—
Increase/(decrease) in trade payables
5,658
Increase in other payables and accruals
4,467
Increase/(decrease) in provisions
4,487
Cash generated from/(used in) operations
(18,646)
Interest received
150
Interest paid
(646)
Corporate income tax paid
(668)
Net cash outflow from operating activities
(19,810)

Year ended 31 December
2004
2005
RMB’000
RMB’000
134
6,388
484
1,796
(54)
(30)
1,172
244
5,410
4,056
510
510
7,656
12,964
2,057
1,277
14,358
(6,882)
930
(263)
(25,696)
(30,750)
(584)
3,122
2,842
7,440
(207)
1,068
1,356
(12,024)
54
30
(1,895)
(4,372)
(755)
(567)
(1,240)
(16,933)

— 101 —

FINANCIAL INFORMATION ON YITUO FUEL JET

APPENDIX II

Period from
15 January
2003 (date of
establishment)
to 31 December
2003
RMB’000
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of items of property,
plant and equipment and additions
to construction in progress
(8,838)
Proceeds from disposal of items of
property, plant and equipment
—
Net cash outflow from investing activities
(8,838)
CASH FLOWS FROM FINANCING
ACTIVITIES
Capital contribution by shareholders
14,786
New bank loans
20,000
New other loan
—
Repayment of bank loans
—
Net cash inflow from financing activities
34,786
NET INCREASE/(DECREASE) IN
CASH AND CASH EQUIVALENTS
6,138
Cash and cash equivalents at beginning
of year/period
—
CASH AND CASH EQUIVALENTS
AT END OF YEAR/PERIOD
6,138
ANALYSIS OF BALANCES OF
CASH AND CASH EQUIVALENTS
Cash and deposits at banks
and a non-bank financial institution
6,138

Year ended 31 December
2004
2005
RMB’000
RMB’000
(26,628)
(28,301)
6
118
(26,622)
(28,183)
—
—
—
10,000
52,000
30,000
(20,000)
—
32,000
40,000
4,138
(5,116)
6,138
10,276
10,276
5,160
10,276
5,160

— 102 —

FINANCIAL INFORMATION ON YITUO FUEL JET

APPENDIX II

Note:

(a) Major non-cash transaction

The non-cash capital contribution made by the shareholders of Yituo Fuel Jet on its establishment on 15 January 2003 was in the form of non-current assets valued at approximately RMB27,400,000 and non-cash current assets valued at approximately RMB9,814,000.

7. RELATED PARTY TRANSACTIONS

(a) In addition to the transactions and balances detailed elsewhere in the Financial Information, Yituo Fuel Jet had the following material transactions with related parties during the Relevant Periods:

Period from 15 January 2003 (date of establishment) to 31 December 2003 Notes RMB’000 China Yituo: Purchases of raw materials and components (i) 3,960 Purchases of plant and equipment (i) 6,794 Sales of raw materials and components (i) — Rentals paid for land and buildings, and plant and machinery (i) 1,900 Fee paid for the use of trademark (ii) 2,080 Fees paid for services received (i) 1,580 Fellow subsidiaries: Purchases of raw materials and components (i) 20,755 Sales of raw materials and components (i) 924 Sales of products (i) 76,188 Fees paid for services received (i) 2,200 Interest paid for borrowings (i) —	Year ended 31 December 2004 2005 RMB’000 RMB’000 2,766 10,230 — 12,013 — 1,346 1,504 201 1,916 90 — — 12,309 17,503 60 985 65,700 72,475 910 610 — 840	Year ended 31 December 2004 2005 RMB’000 RMB’000 2,766 10,230 — 12,013 — 1,346 1,504 201 1,916 90 — — 12,309 17,503 60 985 65,700 72,475 910 610 — 840

		17,503 985 72,475 610 840

Notes:

(i) The transactions are conducted based on mutually agreed terms.
(ii) The fee for the use of the trademark is charged at rates of 2% of Yituo Fuel Jet’s net annual turnover for period ended 31 December 2003 and year ended 31 December 2004, and 0.2% of Yituo Fuel Jet’s net annual turnover to external customers for year ended 31 December 2005.

— 103 —

APPENDIX II

FINANCIAL INFORMATION ON YITUO FUEL JET

(b) Compenation of key management personnel of Yituo Fuel Jet

Period from 15 January 2003 (date of establishment) to 31 December 2003 RMB’000 Short term employee benefits 380 Post-employment benefits 10 Share-based compensation 131 Total compensation paid to key management personnel 521	Year ended 31 December 2004 2005 RMB’000 RMB’000 198 263 14 15 137 129 349 407	Year ended 31 December 2004 2005 RMB’000 RMB’000 198 263 14 15 137 129 349 407
		407

Further details of directors’ and supervisors’ emoluments are included in note 3(d).

8. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

Yituo Fuel Jet’s principal financial instruments mainly comprise bank loans, other interestbearing borrowings, and cash and cash equivalents. The main purpose of these financial instruments is to raise finance for Yituo Fuel Jet’s operations. Yituo Fuel Jet has various other financial assets and liabilities such as trade and bills receivables and trade payables, which arise directly from its operations.

The main risks arising from Yituo Fuel Jet’s financial instruments are credit risk, foreign currency risk, cash flow interest rate risk and liquidity risk. The board of directors meets periodically to analyse and formulate measures to manage Yituo Fuel Jet’s exposure to these risks. Generally, Yituo Fuel Jet introduces conservative strategies on its risk management. As Yituo Fuel Jet’s exposure to these risks is kept to a minimum, Yituo Fuel Jet has not used any derivatives and other instruments for hedging purposes. Yituo Fuel Jet does not hold or issue derivative financial instruments for trading purposes. The board of directors reviews and agrees policies for managing each of these risks and they are summarised below.

— 104 —

FINANCIAL INFORMATION ON YITUO FUEL JET

APPENDIX II

Credit risk

Credit risk is the risk associated with a customer or counterparty being unable to meet a commitment when it falls due. It mainly arises from the trade receivables of Yituo Fuel Jet.

It is Yituo Fuel Jet’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an ongoing basis and the board of directors believes that adequate provision for uncollectible receivables has been made in the Financial Information. In this respect, the board of directors considers that the credit risk is significantly reduced.

Yituo Fuel Jet’s trade receivables relate to a large number of diversified customers, there is no significant concentration of credit risk on trade receivables.

The carrying amount of Yituo Fuel Jet’s financial assets which comprise cash and cash equivalents and other receivables included in the balance sheets, represents Yituo Fuel Jet’s maximum exposure to credit risk in relation to its financial assets, without taking into account the fair value of any collateral.

Foreign currency risk

The business of Yituo Fuel Jet is principally located in the PRC. While most of the transactions are conducted in RMB, Yituo Fuel Jet does not have significant exposures to foreign currency risk. Yituo Fuel Jet does not use derivative financial instruments to hedge its foreign currency risk.

Cash flow interest rate risk

At the balance sheet dates, all of Yituo Fuel Jet’s interest-bearing borrowings bore interest at fixed rates, therefore, Yituo Fuel Jet’s exposure to the risk of changes in market interest rates is kept to minimum.

Liquidity risk

Yituo Fuel Jet’s objective is to maintain a balance between continuity of funding and flexibility through the use of interest-bearing bank and other borrowings and other available sources of financing loans.

— 105 —

FINANCIAL INFORMATION ON YITUO FUEL JET

APPENDIX II

9. SUBSEQUENT EVENTS

(a) On 28 April 2006, Yituo Fuel Jet declared a special dividend of approximately RMB6,640,000 to its shareholders.
(b) On 8 May 2006, Yituo Fuel Jet entered into the Fuel Jet Repayment Agreement with China Yituo, whereby (1) China Yituo shall repay the principal of RMB26 million due to Yituo Fuel Jet in full on or before 31 December 2009; and (2) China Yituo has the option to repay the principal in part or in full with assets pledged under the Fuel Jet Repayment Agreement based on a valuation to be determined by an independent valuer. Pursuant to the Fuel Jet Repayment Agreement, certain machinery of China Yituo was pledged to Yituo Fuel Jet and Yituo Fuel Jet has the right to use the assets pledged under the Fuel Jet Repayment Agreement at any time prior to its termination at nil consideration. If the principal is not repaid by China Yituo in full on 31 December 2009, Yituo Fuel Jet shall have the rights to dispose of the assets pledged under the Fuel Jet Repayment Agreement. No interest will be charged by Yituo Fuel Jet on the outstanding balance.

10. SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements have been prepared by Yituo Fuel Jet in respect of any period subsequent to 31 December 2005.

Yours faithfully, Ernst & Young Certified Public Accountants Hong Kong

— 106 —

FINANCIAL INFORMATION ON YITUO FUEL JET

APPENDIX II

2. MANAGEMENT DISSCUSION AND ANALYSIS OF RESULTS OF YITUO FUEL JET

Liquidity and capital structure

The total borrowings of Yituo Fuel Jet as at 31 December 2005 amounted to approximately RMB92 million of which approximatley RMB40 million are repayable within one year from 31 December 2005 and the balance of approximately RMB52 million are repayable in the second year from 31 December 2005.

The gearing ratio of Yituo Fuel Jet at 31 December 2005 was 0.52 which is calculated by dividing the total interest-bearing bank and other borrowings by the total assets.

For the period from 15 January to 31 December 2003 and the two years ended 31 December 2005, Yituo Fuel Jet has met its working capital and other capital requirements principally from cash provided by operations, while raising the remainder of its requirements primarily through long term and short term debt.

Acquisition and disposal

There was no acquisition or disposal of any subsidiaries or associated companies of Yituo Fuel Jet during 2005.

Contingent liabilities

As at 31 December 2005, Yituo Fuel Jet did not have any significant contingent liabilities.

Exposure to fluctuation in exchange rates

Since Yituo Fuel Jet’s business is carried on in the PRC, its exposure to fluctuations in exchange rates and currencies is minimal.

Number and remuneration of employees

As at 31 December 2005, Yituo Fuel Jet employed approximately 1,214 employees who were all based in the PRC. In addition to salaries, employees of Yituo Fuel Jet are entitled to a range of benefit including working and other allowances, performance bonus, employee stock option incentive plan, central retirement and pension fund scheme organized by Luoyang Municipal Government.

— 107 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

1. SUMMARY OF AUDITED FINANCIAL STATEMENTS

Set out below is a summary of the audited consolidated income statements of the Group for each of the three years ended 31 December 2005 and the audited consolidated balance sheets of the Group as at 31 December 2005, 31 December 2004 and 31 December 2003 as extracted from the annual reports of the Company for the relevant years, and restated/reclassified as appropriate.

CONSOLIDATED INCOME STATEMENT

REVENUE
Cost of sales
Gross profit
Other income and gains
Selling and distribution costs
Administrative expenses
Other operating expenses, net
Finance costs
Share of profits and losses of associates
Negative goodwill on acquisition of an associate
recognised as income during the year
PROFIT/(LOSS) BEFORE TAX
Tax
PROFIT/(LOSS) FOR THE YEAR
Attributable to:
Equity holders of the parent
Minority interests
DIVIDENDS
EARNINGS/(LOSS) PER SHARE
ATTRIBUTABLE TO ORDINARY
EQUITY HOLDERS OF THE PARENT
Basic
Diluted

For the year ended 31 December
2005
2004
2003
RMB’000
RMB’000
RMB’000
4,765,828
4,246,554
3,277,297
(4,408,063)
(3,905,535)
(2,912,313)
357,765
341,019
364,984
103,523
114,027
109,814
(172,021)
(154,561)
(126,616)
(262,482)
(241,439)
(237,211)
(86,126)
(30,829)
(55,885)
(11,186)
(9,719)
(9,770)
(6,955)
4,709
8,744
—
606
606
(77,482)
23,813
54,666
17,183
(13,953)
(21,641)
(60,299)
9,860
33,025
(50,436)
11,961
16,328
(9,863)
(2,101)
16,697
(60,299)
9,860
33,025
—
—
—
(6.42)cents
1.52 cents
2.08 cents
N/A
N/A
N/A

— 108 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

CONSOLIDATED BALANCE SHEET

NON-CURRENT ASSETS Property, plant and equipment Construction in progress Prepaid land premiums Negative goodwill Interests in associates Available-for-sale equity investments/ long term investments Loans receivable Deferred tax assets Total non-current assets CURRENT ASSETS Inventories Trade and bills receivables Loans receivable Bills discounted receivable Other receivables Equity investments at fair value through profit or loss/short term investments Pledged deposits Cash and cash equivalents Total current assets	2005 RMB’000 785,143 151,620 13,761 — 98,726 71,984 195,664 28,235 1,345,133 755,227 448,641 193,685 167,437 244,378 3,576 121,124 542,429 2,476,497	As at 31 December 2004 2003 RMB’000 RMB’000 781,073 768,418 106,338 68,730 7,747 7,608 (1,758) (1,992) 137,645 135,275 67,794 65,105 205,750 40,915 — — 1,304,589 1,084,059 865,110 773,847 490,690 410,611 96,926 189,699 131,985 155,390 274,061 238,927 19,661 6,955 69,206 120,157 397,437 680,427 2,345,076 2,576,013

— 109 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

CURRENT LIABILITIES Trade and bills payables Tax payable Other payables and accruals Customer deposits Interest-bearing bank borrowings Provisions Total current liabilities NET CURRENT ASSETS TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Interest-bearing bank borrowings Provisions Total non-current liabilities Net assets EQUITY Equity attributable to equity holders of the parent Issued capital Reserves Minority interests Total equity	2005 RMB’000 843,988 5,459 388,223 199,028 172,250 16,785 1,625,733 850,764 2,195,897 1,000 17,442 18,442 2,177,455 785,000 1,245,919 2,030,919 146,536 2,177,455	As at 31 December 2004 2003 RMB’000 RMB’000 731,891 683,964 2,913 3,308 353,804 347,695 219,707 357,387 96,660 65,297 7,914 7,502 1,412,889 1,465,153 932,187 1,110,860 2,236,776 2,194,919 — — — — — — 2,236,776 2,194,919 785,000 785,000 1,292,131 1,280,170 2,077,131 2,065,170 159,645 129,749 2,236,776 2,194,919

— 110 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

2. AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2005

Set out below is the audited consolidated financial statements of the Company for the year ended 31 December 2005, which is extracted from the annual report of the Company for the year ended 31 December 2005.

CONSOLIDATED INCOME STATEMENT

Year ended 31 December 2005

Notes REVENUE 5 Cost of sales Gross profit Other income and gains 5 Selling and distribution costs Administrative expenses Other operating expenses, net Finance costs 7 Share of profits and losses of associates Negative goodwill on acquisition of an associate recognised as income during the year 18 PROFIT/(LOSS) BEFORE TAX 6 Tax 10 PROFIT/(LOSS) FOR THE YEAR Attributable to: Equity holders of the parent 11 Minority interests DIVIDENDS EARNINGS/(LOSS) PER SHARE ATTRIBUTABLE TO ORDINARY EQUITY HOLDERS OF THE PARENT 12 Basic Diluted	2005 RMB’000 4,765,828 (4,408,063) 357,765 103,523 (172,021) (262,482) (86,126) (11,186) (6,955) — (77,482) 17,183 (60,299) (50,436) (9,863) (60,299) — (6.42)cents N/A	2004 RMB’000 (Restated) 4,246,554 (3,905,535) 341,019 114,027 (154,561) (241,439) (30,829) (9,719) 4,709 606 23,813 (13,953) 9,860 11,961 (2,101) 9,860 — 1.52 cents N/A

— 111 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

CONSOLIDATED BALANCE SHEET

31 December 2005

Notes NON-CURRENT ASSETS Property, plant and equipment 13 Construction in progress 14 Prepaid land premiums 15 Negative goodwill 16 Interests in associates 18 Available-for-sale equity investments/long term investments 19 Loans receivable 20 Deferred tax assets 33 Total non-current assets CURRENT ASSETS Inventories 21 Trade and bills receivables 22 Loans receivable 20 Bills discounted receivable 23 Other receivables 24 Equity investments at fair value through profit or loss/short term investments 26 Pledged deposits 27 Cash and cash equivalents 27 Total current assets	2005 RMB’000 785,143 151,620 13,761 — 98,726 71,984 195,664 28,235 1,345,133 755,227 448,641 193,685 167,437 244,378 3,576 121,124 542,429 2,476,497	2004 RMB’000 (Restated) 781,073 106,338 7,747 (1,758) 137,645 67,794 205,750 — 1,304,589 865,110 490,690 96,926 131,985 274,061 19,661 69,206 397,437 2,345,076

— 112 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

Notes CURRENT LIABILITIES Trade and bills payables 28 Tax payable Other payables and accruals 29 Customer deposits 31 Interest-bearing bank borrowings 32 Provisions 30 Total current liabilities NET CURRENT ASSETS TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Interest-bearing bank borrowings 32 Provisions 30 Total non-current liabilities Net assets EQUITY Equity attributable to equity holders of the parent Issued capital 34 Reserves 35(a) Minority interests Total equity	2005 RMB’000 843,988 5,459 388,223 199,028 172,250 16,785 1,625,733 850,764 2,195,897 1,000 17,442 18,442 2,177,455 785,000 1,245,919 2,030,919 146,536 2,177,455	2004 RMB’000 (Restated) 731,891 2,913 353,804 219,707 96,660 7,914
		1,412,889
		932,187
		2,236,776
		— —
		—
		2,236,776

		785,000 1,292,131
		2,077,131
		159,645
		2,236,776

— 113 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Year ended 31 December 2005

Note At 1 January 2005 As previously reported Opening adjustments 2.4 As restated Exchange realignment Total income and expense recognised directly in equity Net loss for the year Total income and expense for the year Contributions from minority interests Dividends paid to minority shareholders Disposal of a subsidiary Disposal of an associate Transfer from/(to) reserves At 31 December 2005 At 1 January 2004 Net profit for the year Total income and expense for the year Contributions from minority interests Dividends paid to minority shareholders Transfer from/(to) reserves At 31 December 2004				Attributa	ble to equity h	olders of the parent	olders of the parent			Total RMB’000 2,077,131 5,581 2,082,712 (1,357) (1,357) (50,436) (51,793) — — — — — 2,030,919 2,065,170 11,961 11,961 — — — 2,077,131	Minority interests RMB’000 159,645 420 160,065 — — (9,863) (9,863) 2,700 (3,721) (2,645) — — 146,536 129,749 (2,101) (2,101) 40,620 (8,623) — 159,645	Total equity RMB’000 2,236,776 6,001 2,242,777 (1,357) (1,357) (60,299) (61,656) 2,700 (3,721) (2,645) — — 2,177,455 2,194,919 9,860 9,860 40,620 (8,623) — 2,236,776
	Issued share capital RMB’000 785,000 — 785,000 — — — — — — — — — 785,000 785,000 — — — — — 785,000	Share premium account RMB’000 1,378,840 — 1,378,840 — — — — — — — — — 1,378,840* 1,378,840 — — — — — 1,378,840	Statutory surplus reserve RMB’000 65,597 — 65,597 — — — — — — (49) — 3,269 68,817* 61,699 — — — — 3,898 65,597	Statutory public welfare fund RMB’000 63,171 — 63,171 — — — — — — (24) — 1,597 64,744* 62,749 — — — — 422 63,171	Reserve fund RMB’000 2,398 — 2,398 — — — — — — — — 127 2,525* 1,759 — — — — 639 2,398	Enterprise expansion fund RMB’000 2,974 — 2,974 — — — — — — — (821) — 2,153* 1,515 — — — — 1,459 2,974	General and statutory reserve RMB’000 — — — — — — — — — — — 2,217 2,217* — — — — — — —	Exchange fluctuation A reserve RMB’000 — — — (1,357) (1,357) — (1,357) — — — — — (1,357)* — — — — — — —	ccumulated losses RMB’000 (220,849) 5,581 (215,268) — — (50,436) (50,436) — — 73 821 (7,210) (272,020)* (226,392) 11,961 11,961 — — (6,418) (220,849)

These reserve accounts comprise the consolidated reserves of RMB1,245,919,000 (2004: RMB1,292,131,000) in the consolidated balance sheet.

— 114 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

CONSOLIDATED CASH FLOW STATEMENT

Year ended 31 December 2005

		2005	2004
	Notes	RMB’000	RMB’000
			(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES
Profit/(loss) before tax		(77,482)	23,813
Adjustments for:
Finance costs	7	11,186	9,719
Share of profits and losses of associates		6,955	(4,709)
Interest income	5	(34,442)	(44,117)
Gain on disposal of items of property,
plant and equipment, net	5	(167)	(320)
Gain on disposal of a subsidiary	5, 6	(735)	—
Gain on disposal of an associate	5, 6	(11,000)	—
Depreciation	6	84,938	89,664
Amortisation of prepaid land premiums	6	188	203
Impairment/(reversal of impairment) of
construction in progress, net	6	6,990	(7,802)
Impairment/(reversal of impairment) of items
of property, plant and equipment, net	6	12,661	(15,252)
Negative goodwill on acquisition of a subsidiary
recognised as income during the year	5, 6	—	(234)
Negative goodwill on acquisition of an associate
recognised as income during the year	18	—	(606)
Dividend income from unlisted available-for-sale
equity investments/long term investments	5, 6	(156)	(501)
Gain on disposal of unlisted available-for-sale
equity investments/long term investments	5, 6	—	(14,529)
Provision for and write-off of bad and
doubtful debts, net	6	23,098	45,506
Provision/(reversal of provision) for other receivable	6	9,220	(17,720)
Net charge for impairment losses and
allowances/provision for loans receivable	6	(2,038)	648
Net charge for impairment losses and
allowances/provision for bills discounted receivable	6	358	(237)
Provision against obsolete inventories, net	6	6,237	7,448
Fair value loss on equity investments at fair value
through profit or loss/short term investments, net	6	1,444	1,837

— 115 —

APPENDIX III

FINANCIAL INFORMATION OF THE GROUP

Operating profit before working capital changes (Increase)/decrease in inventories Increase in loans receivable (Increase)/decrease in trade and bills receivables (Increase)/decrease in bills discounted receivable (Increase)/decrease in other receivables (Increase)/decrease in an amount due from the ultimate holding company (Increase)/decrease in equity investments at fair value through profit or loss/short term investments Increase in trade and bills payables Decrease in customer deposits Increase/(decrease) in accruals and other liabilities Increase/(decrease) in an amount due to the ultimate holding company Increase in provisions Cash generated from/(used in) operations Interest received Interest paid Income tax paid Net cash inflow/(outflow) from operating activities	2005 RMB’000 37,255 89,535 (84,635) 14,551 (35,810) 40,804 (23,760) 14,641 130,968 (20,679) 77,764 (42,345) 26,313 224,602 34,442 (11,186) (6,390) 241,468	2004 RMB’000 (Restated) 72,811 (84,525) (72,710) (125,165) 23,642 (6,233) 13,908 (14,543) 44,109 (137,680) (59,203) 48,111 412 (297,066) 44,117 (9,719) (19,450) (282,118)

— 116 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

Notes CASH FLOWS FROM INVESTING ACTIVITIES Dividend income from unlisted available-for-sale equity investments/long term investments Dividend income received from an associate Purchases of items of property, plant and equipment and additions to construction in progress Proceeds from disposal of items of property, plant and equipment Purchases of unlisted available-for-sale equity investments/long term investments Proceeds from disposal of long term investments Investment in an associate Disposal of an associate Disposal of a subsidiary 36 (Increase)/decrease in mandatory reserve deposits in the People’s Bank of China (Increase)/decrease in time deposits (Increase)/decrease in pledged deposits Net cash inflow/(outflow) from investing activities CASH FLOWS FROM FINANCING ACTIVITIES New bank loans Repayment of bank loans Dividends paid to minority shareholders Contributions from minority shareholders Net cash inflow from financing activities NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at beginning of year Effect of foreign exchange rate changes, net CASH AND CASH EQUIVALENTS AT END OF YEAR ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS Cash and bank balances 27 Non-pledged time deposits with original maturity of less than three months when acquired 27	2005 RMB’000 156 7,207 (183,548) 17,455 (4,190) — — 40,000 3,550 (8,832) (62,718) (51,918) (242,838) 232,230 (153,040) (3,721) 700 76,169 74,799 361,625 (1,357) 435,067 416,883 18,184 435,067	2004 RMB’000 (Restated) 501 3,745 (129,896) 27,740 (4,689) 16,529 (800) — — 15,076 244,545 50,951 223,702 218,270 (186,907) (8,623) 12,307 35,047 (23,369) 384,994 — 361,625 340,043 21,582 361,625

— 117 —

APPENDIX III

FINANCIAL INFORMATION OF THE GROUP

BALANCE SHEET

31 December 2005

Notes NON-CURRENT ASSETS Property, plant and equipment 13 Construction in progress 14 Prepaid land premiums 15 Investments in subsidiaries 17 Investments in associates 18 Available-for-sale equity investments/long term investments 19 Deferred tax assets 33 Total non-current assets CURRENT ASSETS Inventories 21 Trade and bills receivables 22 Other receivables 24 Due from subsidiaries 17 Loans to subsidiaries 17 Deposits placed in a subsidiary 17 Pledged deposits 27 Cash and cash equivalents 27 Total current assets	2005 RMB’000 522,807 138,625 2,092 645,152 80,760 70,420 28,235 1,488,091 378,736 315,039 140,725 129,530 52,000 240,980 58,391 224,154 1,539,555	2004 RMB’000 (Restated) 522,870 77,226 — 643,052 105,760 65,780 —
		1,414,688
		369,376 238,536 158,041 130,570 62,000 123,273 3,000 63,121
		1,147,917

— 118 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

Notes CURRENT LIABILITIES Trade and bills payables 28 Tax payable Other payables and accruals 29 Due to subsidiaries 17 Interest-bearing bank borrowings 32 Provisions 30 Total current liabilities NET CURRENT ASSETS TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Provisions 30 Total non-current liabilities Net assets EQUITY Issued capital 34 Reserves 35(b) Total equity	2005 RMB’000 526,451 769 288,583 5,101 93,590 5,529 920,023 619,532 2,107,623 14,541 14,541 2,093,082 785,000 1,308,082 2,093,082	2004 RMB’000 (Restated) 287,277 769 221,242 29,214 20,000 2,202
		560,704
		587,213
		2,001,901
		—
		—
		2,001,901

		785,000 1,216,901
		2,001,901

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

NOTES TO FINANCIAL STATEMENTS

31 December 2005

1. CORPORATE INFORMATION

First Tractor Company Limited is a limited liability company incorporated in the People’s Republic of China (the “PRC”). The registered office of the Company is located at 154 Jian She Road, Luoyang, Henan Province, the PRC.

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

manufacture and sale of agricultural machinery
manufacture and sale of construction machinery
manufacture and sale of biochemical products

In the opinion of the directors, the parent and the ultimate holding company of the Group is China Yituo Group Corporation Limited (the “Holding”), which is established in the PRC.

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, except for certain equity investments, which have been measured at fair value. These financial statements are presented in Renminbi (“RMB”) and all values are rounded to the nearest thousand except when otherwise indicated.

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.

Minority interests represent the interests of outside shareholders in the results and net assets of the Company’s subsidiaries.

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APPENDIX III

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 20	Accounting for Government Grants and Disclosure of Government Assistance
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 30	Disclosure in the Financial Statements of Banks and Similar Financial Institutions
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 Amendment	Transition and Initial Recognition of Financial Assets and Financial Liabilities
HKFRS 3	Business Combinations
HKFRS 5	Non-current Assets Held for Sale and Discontinued Operations

The adoption of HKASs 2, 7, 8, 10, 12, 14, 16, 18, 19, 20, 23, 27, 28, 30, 33, 37, 38 and HKFRS 5 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 1 has affected the presentation of minority interests on the face of the consolidated balance sheet, consolidated income statement, consolidated statement of changes in equity and other disclosures. In addition, in prior periods, the Group’s share of tax attributable to associates was presented as a component of the Group’s total tax charge/(credit) in the consolidated income statement. Upon the adoption of HKAS 1, the Group’s share of the post-acquisition results of associates is presented net of the Group’s share of tax attributable to associates.

HKAS 21 had no material impact on the Group. As permitted by the transitional provisions of HKAS 21, goodwill arising in a business combination prior to 1 January 2005 and fair value adjustments arising on that acquisition are deemed to be in the currency of the Company. In respect of acquisitions subsequent to 1 January 2005, any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of the assets and liabilities are treated as assets and liabilities of the foreign operation and are translated at the closing rate in accordance with HKAS 21.

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

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APPENDIX III

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

(a) HKAS 17 - Leases

In prior years, leasehold land and buildings held for own use were stated at cost less accumulated depreciation and any impairment losses.

Upon the adoption of HKAS 17, the Group’s leasehold interest in land and buildings is separated into leasehold land and buildings. The Group’s leasehold land is classified as an operating lease, because the title of the land is not expected to pass to the Group by the end of the lease term, and is reclassified from property, plant and equipment to prepaid land premiums, while buildings continue to be classified as part of property, plant and equipment. Prepaid land premiums for land lease payments under operating leases are initially stated at cost and subsequently amortised on the straight-line basis over the lease term. When the lease payments cannot be allocated reliably between the land and buildings elements, the entire lease payments are included in the cost of the land and buildings as a finance lease in property, plant and equipment.

This change in accounting policy has had no effect on the consolidated income statement and accumulated losses. The comparative amounts for the year ended 31 December 2004 in the consolidated balance sheet have been restated to reflect the reclassification of the leasehold land.

(b) HKAS 32 and HKAS 39 - Financial Instruments

(i) Equity securities

In prior years, the Group classified its investments in equity securities as long term investments, which were held for non-trading purposes and were stated at their fair values on an individual basis with gains and losses recognised as movements in the investment revaluation reserve. Upon the adoption of HKAS 39, these securities held by the Group at 1 January 2005 are designated as available-for-sale investments under the transitional provisions of HKAS 39 and accordingly are stated at fair value with gains or losses being recognised as a separate component of equity until subsequent derecognition or impairment.

In prior years, the Group classified its investments in equity securities for trading purposes as short term investments, and were stated at their fair values on an individual basis with gains and losses recognised in the income statement. Upon the adoption of HKAS 39, these securities held by the Group at 1 January 2005 are designated as financial assets at fair value through profit or loss under the transitional provisions of HKAS 39 and accordingly are stated at fair value with gains or losses being recognised in the income statement.

The adoption of HKAS 39 has not resulted in any change in the measurement of these equity securities. Comparative amounts have been reclassified for presentation purposes.

(ii) Loans receivables

In prior years, loans receivable arising from financial operations of the Group were reported in the balance sheet at the principal amount outstanding net of provision for loans receivable. Specific provisions and general provisions were made for loans receivable by applying various percentages to the loans receivable balance classified as pass, special mention, substandard, doubtful and loss.

Upon the adoption of HKAS 39, loans receivables are measured at amortised cost where the carrying amount of the asset is computed by discounting the future cash flows to the present value using the original effective interest rate. The previous approach of maintaining specific and general provisions is replaced with individual and collective impairment allowances after the adoption of HKAS 39. Where objective evidence of impairment exists, the recoverable amount of an asset is calculated by discounting the future cash flows to the present value using the original effective interest rate taking into account the value of collateral, if any. The difference between the carrying amount and the recoverable amount of the asset is recognised as impairment. Where there is no objective evidence of impairment, impairment is assessed collectively based on expected cash flows and historical loss experience.

This change in accounting policy has had no material effect on the consolidated income statement and consolidated balance sheet.

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APPENDIX III

(c) HKFRS 3 - Business Combinations and HKAS 36 - Impairment of Assets

In prior years, goodwill and negative goodwill arising on acquisitions prior to 1 January 2001 were eliminated against the consolidated retained profits and credited to the consolidated capital reserve, respectively, in the year of acquisition and were 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 straightline basis over its estimated useful life and was subject to impairment testing when there was any indication of impairment. Negative goodwill to the extent of the fair value of the acquired non-monetary assets was carried in the balance sheet and was recognised in the consolidated income statement on a systematic basis over the remaining average useful life of the acquired depreciable/amortisable assets. The amount of any negative goodwill in excess of the fair values of the acquired non-monetary assets is recognised as income immediately.

In the case of associates, any negative goodwill not yet recognised in the consolidated income statement was included in the carrying amount thereof, rather than as a separately identified item on the consolidated balance sheet.

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).

Any excess of the Group’s interest in the net fair value of the acquirees’ identifiable assets, liabilities and contingent liabilities over the cost of acquisition of subsidiaries (previously referred to as negative goodwill), after reassessment, is recognised immediately in the income statement.

The transitional provisions of HKFRS 3 have required the Group to derecognise at 1 January 2005 the carrying amount of negative goodwill (including that remaining in the consolidated capital reserve) against retained profits. Goodwill previously eliminated against the retained earnings remains eliminated against the retained earnings 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.

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 Amendments Financial Guarantee Contracts 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

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

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 incorporates 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.

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

2.4 SUMMARY OF THE IMPACT OF CHANGES IN ACCOUNTING POLICIES

(a) Effect on the consolidated balance sheet

Effect of adopting HKFRS 32# At 1 January 2005 HKAS 17# and 39 HKFRS 3 Change in classification Derecognition Effect of new policies Prepaid land of equity of negative (Increase/(decrease)) premiums investments goodwill** RMB’000 RMB’000 RMB’000 Assets Property, plant and equipment (7,747) — — Prepaid land premiums 7,747 — — Negative goodwill — — 1,758 Interests in associates — — 4,243 Available-for-sale equity investments — 67,794 — Long term investments — (67,794) — Equity investments at fair value through profit or loss — 19,661 — Short term investments — (19,661) — Liabilities/equity	Effect of adopting HKFRS 32# At 1 January 2005 HKAS 17# and 39 HKFRS 3 Change in classification Derecognition Effect of new policies Prepaid land of equity of negative (Increase/(decrease)) premiums investments goodwill** RMB’000 RMB’000 RMB’000 Assets Property, plant and equipment (7,747) — — Prepaid land premiums 7,747 — — Negative goodwill — — 1,758 Interests in associates — — 4,243 Available-for-sale equity investments — 67,794 — Long term investments — (67,794) — Equity investments at fair value through profit or loss — 19,661 — Short term investments — (19,661) — Liabilities/equity	Total RMB’000 (7,747) 7,747 1,758 4,243 67,794 (67,794) 19,661 (19,661) 6,001 5,581 420 6,001

Retained profits/(accumulated losses) — — 5,581 Minority interests — — 420

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FINANCIAL INFORMATION OF THE GROUP

Effect of adopting HKFRS 32# At 31 December 2005 HKAS 17# and 39 HKFRS 3 Change in classification Derecognition Effect of new policies Prepaid land of equity of negative (Increase/(decrease)) premiums investments goodwill** RMB’000 RMB’000 RMB’000 Assets Property, plant and equipment (13,761) — — Prepaid land premiums 13,761 — — Negative goodwill — — 1,524 Interests in associates — — 3,637 Available-for-sale equity investments — 71,984 — Long term investments — (71,984) — Equity investments at fair value through profit or loss — 3,576 — Short term investments — (3,576) — Liabilities/equity	Effect of adopting HKFRS 32# At 31 December 2005 HKAS 17# and 39 HKFRS 3 Change in classification Derecognition Effect of new policies Prepaid land of equity of negative (Increase/(decrease)) premiums investments goodwill** RMB’000 RMB’000 RMB’000 Assets Property, plant and equipment (13,761) — — Prepaid land premiums 13,761 — — Negative goodwill — — 1,524 Interests in associates — — 3,637 Available-for-sale equity investments — 71,984 — Long term investments — (71,984) — Equity investments at fair value through profit or loss — 3,576 — Short term investments — (3,576) — Liabilities/equity	Total RMB’000 (13,761) 13,761 1,524 3,637 71,984 (71,984) 3,576 (3,576) 5,161 4,801 360 5,161

Retained profits/(accumulated losses) — — 4,801 Minority interests — — 360

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

(b) Effect on the balances of equity at 1 January 2004 and at 1 January 2005

The adoption of HKFRS 3 has reduced the accumulated losses of the Group as at 1 January 2005 by RMB5,581,000 and increased the minority interests by RMB420,000.

In accordance with the relevant transitional provisions of the HKFRSs, the adoption of the HKFRSs did not result in retrospective adjustments being made to the opening balances of equity at 1 January 2004.

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FINANCIAL INFORMATION OF THE GROUP

(c) Effect on the consolidated income statement for the years ended 31 December 2005 and 2004

Effect of HKAS 1 Share of post-tax profits and losses Effect of new policies of associates RMB’000 Year ended 31 December 2005 Decrease in other income and gains — Decrease in negative goodwill on acquisition of an associate recognised as income during the year — Decrease in share of profits and losses of associates (5,173) Decrease in tax 5,173 Total decrease in profit — Decrease in basic earnings per share — Year ended 31 December 2004 Decrease in share of profits and losses of associates (4,710) Decrease in tax 4,710 Total increase/(decrease) in profit — Increase/(decrease) in basic earnings per share —	Effect of	adopting HKFRS 3 Discontinuation of recognition of negative goodwill as income RMB’000 (234) (606) — — (840) (0.11)cents — — — —	Total RMB’000 (234) (606) (5,173) 5,173 (840) (0.11)cents (4,710) 4,710 — —

Change in segment identification

During the year, the Group changed its identification of reportable business segments. The Group consolidated its previous six business segments, namely, “Tractors”, “Road machinery”, “Construction machinery”, “Harvesting machinery”, “Financial operations” and “Others” into four new business segments, namely, “Agricultural machinery”, “Construction machinery”, “Financial operations”and “Others”. Further information of the four new business segments is detailed in note 4 to the financial statements. In the opinion of the directors, the new basis of segment identification provides a more appropriate presentation of the segment information. Prior year segment information is restated for comparative purposes.

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APPENDIX III

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/Company has unilateral control, directly or indirectly, over the joint venture;
(b) a jointly-controlled entity, if the Group/Company does not have unilateral control, but has joint control, directly or indirectly, over the joint venture;
(c) an associate, if the Group/Company 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 accounted for in accordance with HKAS 39, if the Group/Company 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.

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. Goodwill or negative goodwill arising from the acquisition of associates, which was not previously eliminated or recognised in the consolidated reserves, is included as part of the Group’s interests in associates.

The results of associates are included in the Company’s income statement to the extent of dividends received and receivable. The Company’s investments in associates are treated as non-current assets and are stated at cost less any impairment losses.

Goodwill

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

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APPENDIX III

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. In the case of associates, goodwill is included in the carrying amount thereof, rather than as a separately identified asset on the consolidated balance sheet.

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 cash-generating 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 cashgenerating 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 cashgenerating 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 SSAP 30 “Business Combinations” in 2001, goodwill arising on acquisition was eliminated against the consolidated retained profits in the year of acquisition. On the adoption of HKFRS 3, such goodwill remains eliminated against the consolidated retained profits 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.

Excess over the cost of business combinations (applicable to business combinations for which the agreement date is on or after 1 January 2005)

Any excess of the Group’s interest in the net fair value of the acquirees’ identifiable assets, liabilities and contingent liabilities over the cost of acquisition of subsidiaries and associates (previously referred to as negative goodwill), after reassessment, is recognised immediately in the income statement.

The excess for associates is included in the Group’s share of the associates’ profit or loss in the period in which the investments are acquired.

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APPENDIX III

Impairment of assets

Where an indication of impairment exists, or when annual impairment testing for an asset is required (other than inventories, deferred tax assets, 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.

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).

Property, plant and equipment and depreciation

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APPENDIX III

FINANCIAL INFORMATION OF THE GROUP

Buildings 8 - 30 years Plant, machinery and equipment 6 - 16 years Transportation vehicles and equipment 6 - 12 years

Where 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.

Construction in progress

Construction in progress represents factory buildings and other property, plant and equipment under construction, which is stated at cost less any impairment losses, and is not depreciated. Cost comprises the direct costs of construction and capitalised borrowing costs on related borrowed funds during the period of construction, installation and testing. Capitalisation of interest charges and exchange difference ceases when the fixed assets are substantially ready for their intended use. Construction in progress is reclassified to the appropriate category of property, plant and equipment when completed and ready for use.

Research and development costs

All research costs are charged to the income statement as incurred.

Expenditure incurred on projects to develop new products is capitalised and deferred only when the Group can demonstrate the technical feasibility of completing the intangible asset so that it will be available for use or sale, its intention to complete and its ability to use or sell the asset, how the asset will generate future economic benefits, the availability of resources to complete the project and the ability to measure reliably the expenditure during the development. Product development expenditure which does not meet these criteria is expensed when incurred.

Deferred development costs are stated at cost less any impairment losses and are amortised using the straight-line basis over the commercial lives of the underlying products not exceeding five years, commencing from the date when the products are put into commercial production.

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.

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

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APPENDIX III

Operating leases

Leases where substantially all the rewards and risks of ownership of assets remain with the lessor are accounted for as operating leases. Where the Group is the lessor, assets leased by the Group under operating leases are included in non-current assets, and rentals receivable under the operating leases are credited to the 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.

Prepaid land premiums under operating leases are initially stated at cost and subsequently recognised on the straightline basis over the lease terms. When the lease payments cannot be allocated reliably between the land and buildings elements, the entire lease payments are included in the cost of the land and buildings as a finance lease in property, plant and equipment.

Investments and other financial assets

Applicable to the year ended 31 December 2004:

The Group classified its equity investments, other than subsidiaries and associates, as long term investments and short term investments.

Long term investments

Long term investments are non-trading investments in unlisted equity securities intended to be held on a long term basis.

Unlisted securities are stated at their estimated fair values, on an individual basis. The estimated fair values of unlisted investments are determined by the directors having regard to, inter alia, the prices of the most recent reported sales or purchases of the securities, or comparison of price/earnings ratios and dividend yields of the securities with those of similar listed securities, with allowance made for the lower liquidity of the unlisted securities.

The gains or losses arising from changes in the fair value of a security are dealt with as movements in the investment revaluation reserve, until the security is sold, collected, or otherwise disposed of, or until the security is determined to be impaired, when the cumulative gain or loss derived from the security recognised in the investment revaluation reserve, together with the amount of any further impairment, is charged to the income statement in the period in which the impairment arises. Where the circumstances and events which led to an impairment 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 and any appreciation in fair value is credited to the income statement to the extent of the amount previously charged.

Short term investments

Short term investments are investments in debt and equity securities held for trading purposes and are stated at their fair values on the basis of their quoted market prices at the balance sheet date, on an individual investment basis. The gains or losses arising from changes in the fair value of a security are credited or charged to the income statement in the period in which they arise.

Applicable to the year ended 31 December 2005:

The Group’s financial assets in the scope of HKAS 39 are classified as financial assets at fair value through profit or loss, loans and receivables or available-for-sale financial assets, as appropriate. When financial assets are recognised initially, they are measured at fair value, plus, in the case of investments not at fair value through profit or loss, 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.

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APPENDIX III

Financial assets at fair value through profit or loss

Loans and receivables

Available-for-sale financial assets

Fair value

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

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.

Where there is no reasonable prospect of recovery, the loan is written off.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

Assets carried at cost

Available-for-sale financial assets

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 risks 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.

Interest-bearing loans and borrowings

All loans and borrowings are initially recognised at the fair value of the consideration received less directly attributable transaction costs.

After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method.

Gains and losses are recognised in net profit or loss when the liabilities are derecognised as well as through the amortisation process.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

Customer deposits

Customer deposits arising from the Group’s financial operations are carried at amortised cost using the original effective interest method taking into account the unamortised portion of relevant fees and expenses.

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.

Inventories

Spare parts and consumables are stated at cost less any provision for obsolescence.

Provisions

Income tax

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 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 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 investments in subsidiaries and associates, 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.

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FINANCIAL INFORMATION OF THE GROUP

where the deferred tax asset relating to the deductible temporary differences arises from negative 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 deductible temporary differences associated with investments in subsidiaries and associates, 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.

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 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;
(b) rental income and income from trademark licence fee, on a time proportion basis over the lease terms;
(c) 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
(d) dividend income, when the shareholders’ right to receive payment has been established.

Employee benefits

Pension obligations

The Group contributes on a monthly basis to various defined contribution retirement benefit plans organised by relevant municipal governments in the PRC. The municipal governments undertake to assume the retirement benefit obligations payable to all existing and future retired employees under these plans and the Group has no further obligation for post-retirement benefits beyond the contributions made. Contributions to these plans are expensed as incurred.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

Early retirement benefits

Termination benefits are payable whenever an employee’s employment is terminated involuntarily before the normal retirement date or whenever an employee accepts voluntary redundancy in exchange for the benefits. The Group recognises termination benefits when it is demonstrably committed to terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal or to providing termination benefits as a result of an offer made to encourage voluntary redundancy.

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.

Foreign currencies

These financial statements are presented in RMB, 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.

The functional currency of an overseas subsidiary is currency other than the RMB. As at the balance sheet date, the assets and liabilities of this entity are translated into the presentation currency of the Company at the exchange rate ruling at the balance sheet date and its income statement is translated into RMB at the weighted average exchange rate for the year. The resulting exchange differences are included in the exchange fluctuation reserve. On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in the income statement.

For the purpose of the consolidated cash flow statement, the cash flows of the overseas subsidiary are translated into RMB at the exchange rate ruling at the date of the cash flows. Frequently recurring cash flows of the overseas subsidiary which arise throughout the year are translated into RMB at the weighted average exchange rate for the year.

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:

Operating lease commitments - Group as lessor

The Group has entered into property leases on its property, plant and equipment. The Group has determined that it retains all the significant risks and rewards of ownership of these properties which are leased out on operating leases.

Estimation uncertainty

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

Useful lives and impairment of property, plant and equipment

The Group’s management determines the estimated useful lives of its property, plant and equipment based on the historical experience of the actual useful lives of property, plant and equipment of similar nature and functions. Management will increase the depreciation charge where useful lives are less than previously estimated lives. The impairment loss for property, plant and equipment is recognised for the amount by which the carrying amount exceeds its recoverable amount.

Impairment of receivables

The policy for impairment of receivables of the Group is based on the evaluation of collectability and aging analysis of trade receivables and on the judgement of the management. A considerable amount of judgement is required in assessing the ultimate realisation of these receivables, including the current creditworthiness and the past collection history of the customers. Management reassesses the estimation on each of the balance sheet date.

Provision against obsolete inventories

Management reviews the condition of inventories of the Group and makes provision against obsolete and slow-moving inventory items identified that are no longer suitable for sale. Management estimates the net realisable value for such inventories based primarily on the latest invoice prices and current market conditions. The Group carries out an inventory review at each balance sheet date and makes provision against obsolete items. Management reassesses the estimation on each of the balance sheet date.

Provision for product warranties

Provision for early retirement benefits

The benefits of the early retirement plans are estimated based on factors including the remaining number of years of service from the date of early retirement to the normal retirement date and with reference to historical salaries of such early retirees, discounted to their present values as appropriate.

Income tax

The Group is subject to income taxes in various regions within the PRC. As a result of the fact that certain matters relating to the income taxes have not been confirmed by the local tax bureau, objective estimate and judgement based on currently enacted tax laws, regulations and other related policies are required in determining the provision of income taxes to be made. Where the final tax outcome of these matters are different from the amounts originally recorded, the differences will impact on the income tax and tax provisions in the period in which the differences realise.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

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 Mainland China, and over 90% of the Group’s assets are located in Mainland China.

The Group’s operating businesses are structured and managed separately according to the nature of their operations and the products they provide. Each of the Group’s business segments represents a strategic business unit that offers products which are subject to risks and returns that are different from those of the other business segments. As detailed in note 2.4 to the financial statements, the Group adopted a new segment reporting basis and consolidated its businesses into four new business segments during the year. Summary details of the four new business segments are as follows:

(a) the “Agricultural machinery” segment engages in the manufacture and sale of agricultural machinery, including tractors, harvesters, relevant parts and components;
(b) the “Construction machinery” segment engages in the manufacture and sale of construction and road machinery;
(c) the “Financial operations” segment engages in the provision of loan lending, bills discounting and deposittaking services; and
(d) the “Others” segment comprises, principally, the manufacture and sale of biochemical products.

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APPENDIX III

FINANCIAL INFORMATION OF THE GROUP

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 revenue Other income and gains Total Segment results Interest, dividend and investment income and negative goodwill on acquisition of a subsidiary recognised as income Gain on disposal of a subsidiary Gain on disposal of an associate (Provision)/reversal of provision for other receivable Unallocated expenses Finance costs Share of profits and losses of associates Negative goodwill on acquisition of an associate recognised as income during the year Profit/(loss) before tax Tax Profit/(loss) for the year	Agricultural machinery 2005 2004 RMB’000 RMB’000 (Restated) 3,751,521 3,064,060 285,549 223,071 — — 4,037,070 3,287,131 23,254 (8,194) 7,589 6,897	Construction machinery 2005 2004 RMB’000 RMB’000 (Restated) 1,013,898 1,182,482 46,692 11,326 — — 1,060,590 1,193,808 (122,768) (27,379) — —	Financial operations 2005 2004 RMB’000 RMB’000 (Restated) — — 15,373 13,187 33,480 40,260 48,853 53,447 33,477 31,723 — —	Ot 2005 RMB’000 409 — — 409 (3,015) (14,544)	hers 2004 RMB’000 (Restated) 12 — — 12 (5,909) (2,188)	Elimi 2005 RMB’000 — (347,614) — (347,614) — —	nations 2004 RMB’000 (Restated) — (247,584) — (247,584) — —	Consolidated 2005 2004 RMB’000 RMB’000 (Restated) 4,765,828 4,246,554 — — 33,480 40,260 4,799,308 4,286,814 (69,052) (9,759) 8,640 22,773 735 — 11,000 — (9,220 ) 17,720 (1,444 ) (2,517) (11,186) (9,719) (6,955) 4,709 — 606 (77,482) 23,813 17,183 (13,953) (60,299) 9,860

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APPENDIX III

FINANCIAL INFORMATION OF THE GROUP

Agricultural Construction Financial machinery machinery operations Others Eliminations 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 Group RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Restated) (Restated) (Restated) (Restated) (Restated) Segment assets 2,363,035 1,896,969 929,758 1,143,748 1,052,074 920,176 77,667 78,306 (826,411) (660,698) Interest in associates — 28,618 — — — — 98,726 109,027 — — Unallocated assets Total assets Segment liabilities 1,009,779 712,678 644,593 734,236 512,670 402,644 124,835 124,456 (826,411) (660,698) Unallocated liabilities Total liabilities Other segment information: Capital expenditure 147,658 96,973 35,426 32,465 125 458 339 — — — Depreciation 65,053 72,816 18,641 16,160 567 511 677 177 — — Impairment/(reversal of impairment) of items of property, plant and equipment and construction in progress, net 7,637 (23,054) 9,353 — — — 2,661 — — — Provision and write-off of bad and doubtful debts, net 2,448 4,938 20,650 38,568 — — — 2,000 — — Provision/(reversal of provision) against obsolete inventories, net (215) (8,380) 6,452 15,328 — — — 500 — — Provision/(reversal of provision) for loans receivable, net — — — — (2,038) 648 — — — —	Co 2005 RMB’000 3,596,123 98,726 126,781 3,821,630 1,465,466 178,709 1,644,175 183,548 84,938 19,651 23,098 6,237 (2,038)	nsolidated 2004 RMB’000 (Restated) 3,378,501 137,645 133,519 3,649,665 1,313,316 99,573 1,412,889 129,896 89,664 (23,054) 45,506 7,448 648

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

5. REVENUE, OTHER INCOME AND GAINS

Revenue, which is also the Group’s turnover, represents the invoiced value of goods sold, net of trade discounts and returns, and excludes sales taxes and intra-group transactions.

An analysis of revenue, other income and gains is as follows:

Notes Revenue Sale of goods Other income	2005 RMB’000 4,765,828	2004 RMB’000 4,246,554


Bank interest income Interest income from financial operations Profit from sundry sales Rental income Trademark licence fee Investment income from short term listed investments Dividend income from short term listed investments Dividend income from unlisted available-for-sale equity investments/long term investments Others Gains	7,460 26,982 29,046 5,614 — — — 156 21,339 90,597	5,048 39,069 22,757 6,985 2,110 1,400 1,061 501 20,013
		98,944

Gain on disposal of items of property, plant and equipment, net Gain on disposal of a subsidiary 36 Gain on disposal of an associate Gain on disposal of unlisted available-for-sale equity investments/long term investments Gain on disposal of listed equity investments through profit or loss/short term investments, net Negative goodwill on acquisition of a subsidiary recognised as income during the year 16	167 735 11,000 — 1,024 — 12,926 103,523	320 — — 14,529 — 234
		15,083
		114,027

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

6. PROFIT/(LOSS) BEFORE TAX

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

Notes Cost of inventories sold Depreciation 13 Amortisation of prepaid land premiums 15 Impairment/(reversal of impairment) of construction in progress, net 14 Impairment/(reversal of impairment) of items of property, plant and equipment, net 13 Employee benefits expense (excluding directors’ and supervisors’ remuneration - note 8): Wages and salaries Pension scheme contributions*** Provision for early retirement benefits 30 Minimum lease payments under operating leases: Land and buildings Plant and machinery Research and development costs Auditors’ remuneration Provision for and write-off of bad and doubtful debts, net Provision/(reversal of provision) for other receivable 24(i) Net charge for impairment losses and allowances/ provision for loans receivable 20	2005 RMB’000 4,408,063 84,938 188 6,990 12,661 307,911 65,333 23,896 397,140 11,906 3,803 15,709 27,640 4,264 23,098 9,220 (2,038)	2004 RMB’000 (Restated) 3,905,535 89,664 203 (7,802) (15,252) 285,586 58,380 — 343,966 14,641 2,539 17,180 24,186 3,500 45,506 (17,720) 648

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APPENDIX III

FINANCIAL INFORMATION OF THE GROUP

Notes Net charge for impairment losses and allowances/ provision for bills discounted receivable 23 Interest expense on financial operations Provision against obsolete inventories, net Gain on disposal of items of property, plant and equipment, net Fair value loss on equity investments at fair value through profit or loss/short term investments, net Gain on disposal of a subsidiary 36 Gain on disposal of an associate Foreign exchange differences, net Investment income from short term listed investments Dividend income from short term listed investments (Gain)/loss on disposal of listed equity investments through profit or loss/short term investments, net Dividend income from unlisted available-for-sale equity investments/long term investments Gain on disposal of unlisted available-for-sale equity investments/long term investments Bank interest income Interest income from financial operations Negative goodwill on acquisition of a subsidiary recognised as income during the year* 16 Gross rental income	2005 RMB’000 358 6,868 6,237 (167) 1,444 (735) (11,000) 600 — — (1,024) (156) — (7,460) (26,982) — (5,614)	2004 RMB’000 (Restated) (237) 11,244 7,448 (320) 1,837 — — 1,330 (1,400) (1,061) 680 (501) (14,529) (5,048) (39,069) (234) (6,985)

The gains on disposal of a subsidiary and an associate, and the movements in negative goodwill on acquisition of a subsidiary recognised in the income statement for the year are included in “Other income and gains” on the face of the consolidated income statement.

** The impairment/(reversal of impairment) of construction in progress and items of property, plant and equipment are included in “Other operating expenses, net” on the face of the consolidated income statement.

*** At 31 December 2005, the Group had no forfeited contributions available to reduce its contributions to the pension schemes in future years (2004: Nil).

7. FINANCE COSTS

Interest on bank and other loans wholly repayable within five years Less: Interest capitalised	Group 2005 2004 RMB’000 RMB’000 11,186 9,719 — — 11,186 9,719

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

8. REMUNERATION OF DIRECTORS AND SUPERVISORS

The directors’ and supervisors’ 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 Performance related bonuses Pension scheme contributions	Group 2005 2004 RMB’000 RMB’000 — — 600 530 300 265 220 199 1,120 994 1,120 994	Group 2005 2004 RMB’000 RMB’000 — — 600 530 300 265 220 199 1,120 994 1,120 994
		530 265 199
		994
		994

(a) Independent non-executive directors

There was no remuneration paid and payable to the independent non-executive directors for their services rendered to the Company during the year (2004: Nil).

(b) Executive directors and supervisors

Fees 2005 RMB’000 Executive directors: Mr. Liu Dagong — Mr. Liu Wenying — Mr. Zhao Yanshui — Mr. Yan Linjiao — Mr. Li Tengjiao — Mr. Shao Haichen — Mr. Zhang Jing — Mr. Li Youji — Mr. Liu Shuangcheng — Mr. Zhao Fei — — Supervisors: Mr. Liu A Nan — Mr. Zhao Zhonghai — Mr. Xu Weilin — Ms. Wang Aiying — Mr. Shao Jiangxin — — —	Salaries, allowances and benefits in kind RMB’000 46 46 46 46 46 46 46 46 46 46 460 28 28 28 28 28 140 600	Performance related bonuses RMB’000 23 23 23 23 23 23 23 23 23 23 230 14 14 14 14 14 70 300	Pension scheme contributions RMB’000 17 17 17 17 17 17 17 17 17 17 170 10 10 10 10 10 50 220	Total remuneration RMB’000 86 86 86 86 86 86 86 86 86 86
				860
				52 52 52 52 52
				260
				1,120

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APPENDIX III

FINANCIAL INFORMATION OF THE GROUP

Fees 2004 RMB’000 Executive directors: Mr. Liu Dagong — Mr. Dong Yongan — Mr. Liu Wenying — Mr. Zhao Yanshui — Mr. Yan Linjiao — Mr. Li Tengjiao — Mr. Shao Haichen — Mr. Zhang Jing — Mr. Li Youji — Mr. Liu Shuangcheng — Mr. Zhao Fei — Mr. Huang Yanzhao — — Supervisors: Mr. Liu A Nan — Mr. Zhao Zhonghai — Mr. Xu Weilin — Ms. Wang Aiying — Mr. Shao Jiangxin — — —	Salaries, allowances and benefits in kind RMB’000 42 34 42 42 26 42 42 42 8 42 8 35 405 25 25 25 25 25 125 530	Performance related bonuses RMB’000 21 16 21 21 13 21 21 21 4 21 4 16 200 13 13 13 13 13 65 265	Pension scheme contributions RMB’000 16 13 16 16 10 16 16 16 3 16 3 13 154 9 9 9 9 9 45 199	Total remuneration RMB’000 79 63 79 79 49 79 79 79 15 79 15 64
				759
				47 47 47 47 47
				235
				994

There was no arrangement under which a director or supervisor waived or agreed to waive any remuneration during the year.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

9. FIVE HIGHEST PAID EMPLOYEES

The five highest paid employees during the year included two (2004: one) non-director employees, details of whose remuneration are as follows:

Salaries, allowances and benefits in kind Performance related bonuses Pension scheme contributions	Group 2005 2004 RMB’000 RMB’000 200 35 105 45 15 6 320 86

All of the remaining three (2004: four) highest paid employees for the year are directors of the Company, details of whose remuneration are set out in note 8 above.

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

10.

Nil to HK$1,000,000 TAX Group: Current - PRC corporate income tax Charge for the year Under/(over) provision in prior years Deferred tax (note 33) Total tax charge/(credit) for the year	Number of employees 2005 2004 2 1 2005 2004 RMB’000 RMB’000 (Restated) 10,811 15,185 241 (1,232) (28,235) — (17,183) 13,953

No provision for Hong Kong profits tax has been made as the Group had no assessable profits arising in Hong Kong during the two years ended 31 December 2005 and 2004.

The PRC corporate income tax for the Company and its subsidiaries is calculated at rates ranging from 10% to 33% (2004: 10% to 33%) on their estimated assessable profits for the year based on existing legislation, interpretations and practices in respect thereof.

Profits tax of the subsidiary operating outside the PRC is subject to the rates applicable in its jurisdiction. No provision for overseas profits tax has been made for the Group as there were no assessable profits for the year (2004: Nil).

The share of tax attributable to associates amounting to RMB5,173,000 (2004: RMB4,710,000), is included in “Share of profits and losses of associates” on the face of the consolidated income statement. The PRC corporate income tax of the associates is calculated at rates ranging from 15% to 33% (2004: 15% to 33%) on the respective company’s assessable profits determined in accordance with the relevant PRC laws and regulations.

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APPENDIX III

FINANCIAL INFORMATION OF THE GROUP

A reconciliation of the tax expense applicable to profit/(loss) before tax using the statutory rate for the locations in which the Company and the majority of its subsidiaries are domiciled to the tax expense at the effective tax rate, and a reconciliation of the applicable rate (i.e., the statutory tax rate) to the effective tax rate, are as follows:

Profit/(loss) before tax Tax at PRC statutory tax rate Lower tax rate for specific provinces or local authority Adjustments in respect of current tax of previous periods Profits and losses attributable to associates Income not subject to tax Expenses not deductible for tax Tax losses utilised from previous periods Tax losses not recognised Tax charge/(credit) at the Group’s effective rate	RMB’000 (77,482) (25,569) (2,139) 241 2,295 (395) 34,445 (57,664) 31,603 (17,183)	Group 2005 % RMB’000 (Restated) 23,813 33 7,858 3 (5,817) — (1,232) (3) (1,754) 1 (13,696) (45) 11,413 74 (7,047) (41) 24,228 22 13,953	2004 % 33 (24) (5) (7) (58) 48 (30) 102
			59

11. NET PROFIT FROM ORDINARY ACTIVITIES ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT

The net profit from ordinary activities attributable to equity holders of the parent for the year ended 31 December 2005 dealt with in the financial statements of the Company was RMB91,181,000 (2004: RMB29,435,000) (note 35(b)).

12. EARNINGS/(LOSS) PER SHARE ATTRIBUTABLE TO ORDINARY EQUITY HOLDERS OF THE PARENT

The calculation of basic earnings/(loss) per share amounts is based on the net loss for the year attributable to ordinary equity holders of the parent of RMB50,436,000 (2004: net profit of RMB11,961,000), and the weighted average number of 785,000,000 (2004: 785,000,000) ordinary shares in issue during the year.

No diluted earnings/(loss) per share amounts are presented as the Company does not have any dilutive potential ordinary shares in both years presented.

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APPENDIX III

FINANCIAL INFORMATION OF THE GROUP

13. PROPERTY, PLANT AND EQUIPMENT

Group

31 December 2005 At 31 December 2004 and at 1 January 2005: Cost Accumulated depreciation and impairment Net carrying amount At 1 January 2005, net of accumulated depreciation and impairment Additions Disposals Disposal of a subsidiary (note 36) Contributions by minority interests as capital of a subsidiary Impairment Depreciation provided during the year Transfer from construction in progress (note 14) At 31 December 2005, net of accumulated depreciation and impairment At 31 December 2005: Cost Accumulated depreciation and impairment Net carrying amount	Plant, Transportation machinery and vehicles and Buildings equipment equipment RMB’000 RMB’000 RMB’000 788,703 1,229,634 52,297 (444,318) (825,727) (19,516) 344,385 403,907 32,781 344,385 403,907 32,781 2,572 4,625 7,561 (7,075) (6,133) (4,080) (1,374) (5,471) (242) — 1,807 193 (5,017) (6,294) (1,350) (26,675) (53,953) (4,310) 53,275 52,007 4,004 360,091 390,495 34,557 833,481 1,232,133 56,029 (473,390) (841,638) (21,472) 360,091 390,495 34,557	Total RMB’000 2,070,634 (1,289,561) 781,073 781,073 14,758 (17,288) (7,087) 2,000 (12,661) (84,938) 109,286 785,143 2,121,643 (1,336,500) 785,143

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APPENDIX III

FINANCIAL INFORMATION OF THE GROUP

Group

31 December 2004 At 1 January 2004: Cost Accumulated depreciation and impairment Net carrying amount At 1 January 2004, net of accumulated depreciation and impairment Additions Disposals Reclassifications Contributions by minority interests as capital of subsidiaries Reversal of impairment recognised in the income statement during the year Depreciation provided during the year Transfer from construction in progress (note 14) At 31 December 2004, net of accumulated depreciation and impairment At 31 December 2004: Cost Accumulated depreciation and impairment Net carrying amount	Plant, Transportation machinery and vehicles and Buildings equipment equipment RMB’000 RMB’000 RMB’000 762,831 1,230,017 76,650 (423,695) (838,784) (38,601) 339,136 391,233 38,049 339,136 391,233 38,049 5,078 11,377 8,599 (3,498) (20,402) (3,520) (326) 13,112 (12,786) 5,101 7,271 2,367 — 15,252 — (24,240) (61,657) (3,767) 23,134 47,721 3,839 344,385 403,907 32,781 788,703 1,229,634 52,297 (444,318) (825,727) (19,516) 344,385 403,907 32,781	Total RMB’000 2,069,498 (1,301,080) 768,418 768,418 25,054 (27,420) — 14,739 15,252 (89,664) 74,694 781,073 2,070,634 (1,289,561) 781,073

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APPENDIX III

FINANCIAL INFORMATION OF THE GROUP

Company

31 December 2005 At 31 December 2004 and at 1 January 2005: Cost Accumulated depreciation and impairment Net carrying amount At 1 January 2005, net of accumulated depreciation and impairment Additions Disposals Depreciation provided during the year Transfer from construction in progress (note 14) At 31 December 2005, net of accumulated depreciation and impairment At 31 December 2005: Cost Accumulated depreciation and impairment Net carrying amount	Plant, Transportation machinery and vehicles and Buildings equipment equipment RMB’000 RMB’000 RMB’000 577,756 1,042,399 19,659 (367,566) (738,440) (10,938) 210,190 303,959 8,721 210,190 303,959 8,721 1,510 — 189 (2,938) (604) (854) (19,006) (42,305) (1,688) 24,897 37,506 3,230 214,653 298,556 9,598 599,384 1,037,585 19,465 (384,731) (739,029) (9,867) 214,653 298,556 9,598	Total RMB’000 1,639,814 (1,116,944) 522,870 522,870 1,699 (4,396) (62,999) 65,633 522,807 1,656,434 (1,133,627) 522,807

— 150 —

APPENDIX III

FINANCIAL INFORMATION OF THE GROUP

Company

31 December 2004 At 1 January 2004: Cost Accumulated depreciation and impairment Net carrying amount At 1 January 2004, net of accumulated depreciation and impairment Additions Disposals Reversal of impairment during the year recognised in the income statement during the year Depreciation provided during the year Transfer from construction in progress (note 14) At 31 December 2004, net of accumulated depreciation and impairment At 31 December 2004: Cost Accumulated depreciation and impairment Net carrying amount	Plant, Transportation machinery and vehicles and Buildings equipment equipment RMB’000 RMB’000 RMB’000 583,665 1,114,478 19,921 (365,616) (788,560) (11,737) 218,049 325,918 8,184 218,049 325,918 8,184 1,083 4,490 1,051 (4,990) (19,155) (1,059) — 15,252 — (18,007) (51,627) (1,652) 14,055 29,081 2,197 210,190 303,959 8,721 577,756 1,042,399 19,659 (367,566) (738,440) (10,938) 210,190 303,959 8,721	Total RMB’000 1,718,064 (1,165,913) 552,151 552,151 6,624 (25,204) 15,252 (71,286) 45,333 522,870 1,639,814 (1,116,944) 522,870

At 31 December 2005, certain of the Group’s buildings and machinery with an aggregate net carrying value of approximately RMB18,806,000 (2004: RMB27,417,000) were pledged to secure certain short term bank loans granted to the Group (note 32).

Impairment loss recognised in the income statement during the year is summarised as follows:

Construction machinery segment - note Others	RMB’000 10,000 2,661 12,661

Note: Due to the downturn in construction machinery market, certain items of property, plant and equipment in the construction machinery segment were written down to the recoverable amount. The recoverable amount was based on value in use and was determined at the cash-generating unit level. The cash-generating unit consists of the property, plant and equipment of Yituo (Luoyang) Building Machinery Co., Ltd. (“YBMC”), a subsidiary. In determining value in use for the cash-generating unit, the cash flows were discounted at a rate of 6% on a pre-tax basis.

During the year ended 31 December 2004, certain impaired fixed assets previously under long term idle condition had been modified and restored to their normal economic performance, and the relevant impairment provision was reversed accordingly.

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14. CONSTRUCTION IN PROGRESS

31 December 2005 At 31 December 2004 and at 1 January 2005: Cost Impairment Net carrying amount At 1 January 2005, net of impairment Additions Transfer to items of property, plant and equipment (note 13) Disposal of a subsidiary (note 36) Impairment recognised in the income statement during the year Reversal of impairment recognised in the income statement during the year At 31 December 2005, net of impairment At 31 December 2005: Cost Impairment Net carrying amount 31 December 2004 At 1 January 2004: Cost Impairment Net carrying amount At 1 January 2004, net of impairment Additions Transfer to items of property, plant and equipment (note 13) Reversal of impairment recognised in the income statement during the year At 31 December 2004, net of impairment At 31 December 2004: Cost Impairment Net carrying amount	Group RMB’000 113,500 (7,162) 106,338 106,338 162,588 (109,286) (1,030) (8,063) 1,073 151,620 165,622 (14,002) 151,620 Group RMB’000 83,694 (14,964) 68,730 68,730 104,500 (74,694) 7,802 106,338 113,500 (7,162) 106,338	Company RMB’000 83,198 (5,972) 77,226 77,226 134,668 (65,633) — (8,063) 427 138,625 152,233 (13,608) 138,625 Company RMB’000 61,927 (13,774) 48,153 48,153 66,604 (45,333) 7,802 77,226 83,198 (5,972) 77,226

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FINANCIAL INFORMATION OF THE GROUP

An impairment loss of RMB8,063,000 was recognised in the income statement during the year to write down certain construction in progress items of the agricultural machinery segment to their recoverable amounts. The recoverable amount estimation was determined at fair value less cost to sell at the individual assets level, which was based on the best information available to reflect the amount that was obtainable at each of the balance sheet date, from the disposal of the asset in an arm’s length transaction between knowledgeable, willing parties, after deducting the costs to disposal.

During the year, additional capital expenditure was incurred on certain suspended items of construction in progress to restore their intended use. The relevant impairment provision was reversed accordingly.

15. PREPAID LAND PREMIUMS

Carrying amount at 1 January As previously reported Effect of adopting HKAS 17 (note 2.2(a)) As restated Additions Amortisation recognised during the year Carrying amount at 31 December	2005 RMB’000 — 7,747 7,747 6,202 (188) 13,761	Group 2004 RMB’000 (Restated) — 7,608 7,608 342 (203) 7,747	Company 2005 2004 RMB’000 RMB’000 — — — — — — 2,160 — (68) — 2,092 —

The leasehold land is held under medium term leases and is situated in the PRC.

16. GOODWILL AND NEGATIVE GOODWILL

The amount of the negative goodwill recognised in the consolidated balance sheet, arising from the acquisition of a subsidiary, 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 recognition as income as previously reported Effect of adopting HKFRS 3 (note 2.2(c)) Accumulated recognition as income as stated Net carrying amount Cost and carrying amount at 1 January 2005 and 31 December 2005	Negative goodwill RMB’000 2,344 (2,344) — 586 (586) — — —

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FINANCIAL INFORMATION OF THE GROUP

Group 31 December 2004 At 1 January 2004: Cost Accumulated recognition as income Net carrying amount Cost at 1 January 2004, net of accumulated recognition as income Recognised as income during the year At 31 December 2004 At 31 December 2004: Cost Accumulated recognition as income Net carrying amount	Negative goodwill RMB’000 2,344 (352) 1,992 1,992 (234) 1,758 2,344 (586) 1,758

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

The amount of goodwill remaining in consolidated reserves, arising from the acquisition of subsidiaries prior to the adoption of the SSAP 30 in 2001, was RMB39,844,000 as at 31 December 2004 and 31 December 2005. The amount of goodwill is stated at its cost.

17. INVESTMENTS IN SUBSIDIARIES

Unlisted investments, at cost Impairment	Company 2005 2004 RMB’000 RMB’000 698,847 696,747 (53,695) (53,695) 645,152 643,052

The loans to subsidiaries included in the Company’s current assets of RMB52,000,000 (2004: RMB62,000,000), which are granted in the form of designated deposits through a financial institution subsidiary of the Company, are unsecured, bear interest at ranging from 5.31% to 6.70% (2004: 5.22% to 5.58%) per annum and are repayable within one year.

The amounts due from and due to subsidiaries included in the Company’s current assets and current liabilities of RMB129,530,000 (2004: RMB130,570,000) and RMB5,101,000 (2004: RMB29,214,000), respectively, are unsecured, interest-free and have no fixed terms of repayment.

Deposits in a subsidiary are deposits placed by the Company in a financial institution subsidiary, except for a sixmonth time deposits of RMB10 million placed therein which bears interest at 1.88% per annum, all other deposits placed therein bear interest at a rate of 0.72% per annum and are repayable on demand.

The trading balances with subsidiaries are included in notes 22 and 29 to the financial statements.

The carrying amounts of these balances with subsidiaries approximate to their fair values.

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FINANCIAL INFORMATION OF THE GROUP

Particulars of the principal subsidiaries are as follows:

		Nominal value	Percentage	Percentage
	Place of	of issued	of equity
	incorporation/	ordinary/	attributable to
	registration	registered	the Company		Principal
Name	and operations	share capital	Direct	Indirect	activities
Brilliance China Machinery	Bermuda	US$12,000	90.1	—	Investment
Holdings Limited					holding
華晨中國機械控股有限公司
Yituo (Luoyang) Construction	PRC	US$9,980,000	49	46	Manufacture
Machinery Co., Ltd.+					and sale of
一拖(洛陽)工程機械有限公司					construction
					machinery
Yituo (Luoyang) Building	PRC	US$9,980,000	49	46	Manufacture
Machinery Co., Ltd. (“YBMC”)+					and sale of
一拖(洛陽)建築機械有限公司					road rollers
					and road
					construction
					machinery
Luoyang Changlun Agricultural	PRC	RMB500,000	99	—	Trading of
Machinery Company Limited* #					tractors
洛陽長侖農業機械有限公司
Yituo Shenyang Tractor	PRC	RMB27,000,000	60	—	Manufacture
Company Limited* #					and sale of
一拖瀋陽拖拉機有限公司					tractors
Zhenjiang Huatong Aran	PRC	US$1,000,000	—	53.2	Manufacture
Machinery Company Limited					and sale
(“ZHAM”)+					of road
鎮江華通阿倫機械有限公司					construction
					machinery
Zhenjiang Huachen Huatong Road	PRC	US$7,154,300	—	53.2	Manufacture
Machinery Company Limited					and sale
(“ZHHRM”)+					of road
鎮江華晨華通路面機械有限公司					construction
					machinery
Yituo (Luoyang) Harvester	PRC	RMB49,295,000	93.9	—	Manufacture
Co., Ltd.* #					and sale of
一拖(洛陽)收穫機械有限公司					agricultural
					harvesting
					machinery
Guizhou Zhenning Biological	PRC	RMB16,000,000	70	—	Manufacture
Industrial Co., Ltd.* #					and sale of
貴州鎮寧生物工業有限公司					biochemical
					products

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APPENDIX III

FINANCIAL INFORMATION OF THE GROUP

		Nominal value	Percentage	Percentage
	Place of	of issued	of equity
	incorporation/	ordinary/	attributable to
	registration	registered	the Company		Principal
Name	and operations	share capital	Direct	Indirect	activities
Luoyang Changhong High	PRC	RMB3,000,000	91.7	8.2	Trading of
Technology Trading					tractors
Company Limited* #
洛陽高新長宏工貿有限公司
China First Tractor Group Finance	PRC	RMB500,000,000	87.8	6.6	Provision of
Company Limited					financial
(“FTGF”)* #					services
中國一拖集團財務有限責任公司
Yituo (Luoyang) Building	PRC	RMB18,303,000	35	—	Manufacture
Construction Machinery Company					and sale of
Limited (“YLBC”)* #					road rollers
- note (i)
一拖(洛陽)建工機械有限公司
Yituo (Luoyang) Standard	PRC	RMB8,000,000	65	—	Manufacture
Components Company					and sale of
Limited (“YLSC”)* # ~					metallic
一拖(洛陽)標準零件有限公司					components
Yituo (Luoyang) Shentong	PRC	RMB13,000,000	50	—	Manufacture
Construction Machinery Company					and sale of
Limited (“YLST”)* # - note (ii)					construction
一拖(洛陽)神通工程機械有限公司					machinery
Yituo (Luoyang) Lutong	PRC	RMB58,000,000	—	43.7	Manufacture
Construction Machinery Company					and sale of
Limited (“YLLT”)* # - note (iii)					construction
一拖(洛陽)路通工程機械有限公司					machinery
Yituo (Luoyang) Construction	PRC	RMB8,000,000	40	46.3	Trading of
Machinery Trading Co.,					road rollers and
Ltd.* #					construction
一拖(洛陽)工程機械銷售有限公司					machinery
Luoyang Changxing	PRC	RMB3,000,000	70	30	Trading of
Agricultural Machinery					tractors
Company Limited* #
洛陽長興農業機械有限公司
Yituo (Luoyang) Agricultural	PRC	RMB10,000,000	73	—	Manufacture and
Machinery and Tools					sale of agricultural
Co., Ltd.* #◊					machinery and
一拖(洛陽)機具有限公司					tools
Notes:

(i) In accordance with YLBC’s articles of association and the joint venture agreement entered into between the Company and the other two shareholders, which held 33% and 32% equity interests of YLBC, respectively, each of such two shareholders has conferred 8% voting rights in the shareholders’ meeting of YLBC to the Company. Therefore, the Company can exercise control over the financial and operating policies of YLBC.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

(ii) The percentages of equity interests in YLST held by the Company and the Holding are 50% and 24%, respectively. The Holding conferred all of its voting rights in the shareholders’ meeting of YLST to the Company, such that the Company can exercise control over the financial and operating policies of YLST.
(iii) Certain individual shareholders in aggregate holding a 5% equity interest of YLLT conferred all their voting rights in the shareholders’ meeting of YLLT to YBMC (a 95% - owned subsidiary of the Group which in turn owned a 46% equity interest in YLLT), such that YBMC can have 51% voting rights in the shareholdings’ meeting of YLLT. Thus, the Group can exercise control over the financial and operating policies of YLLT.
The names of the PRC subsidiaries in English are direct translations of their respective registered names in Chinese.
Limited liability companies established in the PRC.
- Sino-foreign joint ventures established in the PRC.
A subsidiary newly incorporated during the year.
~ A subsidiary disposed of during the year.

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.

During the year, the Company disposed of its entire equity interest of 65% in YLSC. Further details of the disposal are included in note 36 to the financial statements.

18. INTERESTS/INVESTMENTS IN ASSOCIATES

Unlisted shares, at cost Share of net assets Negative goodwill on acquisition Provision for impairment	2005 RMB’000 — 98,726 — 98,726 — 98,726	Group 2004 RMB’000 — 141,888 (4,243) 137,645 — 137,645	2005 RMB’000 122,760 — — 122,760 (42,000) 80,760	Company 2004 RMB’000 147,760 — — 147,760 (42,000) 105,760

The Group’s loan to and deposits from associates are disclosed in notes 20 and 31 to the financial statements, respectively.

The Group’s other receivable and trade balances with associates are disclosed in notes 22, 24, 28 and 29 to the financial statements.

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FINANCIAL INFORMATION OF THE GROUP

Particulars of the principal associates are as follows:

		Percentage	Percentage
		of	ownership
	Place of		interest
	registration	attributable
	and	to	the Group	Principal
Name	operations	Direct	Indirect	activities
Yituo (Luoyang) Diesel Co., Ltd.
(“YLDC”) - note (i)	PRC	—	22.53	Manufacture and
一拖(洛陽)柴油機有限公司				sale of diesel
				engines
Luoyang First Motors	PRC	29.5	—	Design,
Company Limited (“LFMC”)				manufacture
洛陽福賽特汽車股份有限公司				and sale of
				vehicles and related
				accessories
Yituo (Luoyang) Engine Machinery	PRC	42	—	Manufacture and
Company Limited (“YEMC”)*				sale of engines and
- note (ii)				generators
一拖(洛陽)動力機械有限公司
Yituo (Luoyang) Casting & Forging	PRC	25	—	Manufacture and
Company Limited (“YLCF”)*				sale of casting and
- note (iii)				forging products
一拖(洛陽)鑄鍛有限公司

Notes:

(i) The Holding holds a 75% equity interest in YLDC and the remaining 25% equity interest is held by a nonwholly-owned subsidiary of the Company.
(ii) YLDC held a 50% equity interest in YEMC, while the remaining 42% and 8% equity interests in YEMC are held by the Company and certain third parties, respectively.
(iii) The Holding holds a 50% equity interest in YLCF.
The names of the above PRC associates in English are direct translations of their respective registered names in Chinese.

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

During the year, the Company disposed of its entire equity interest of 40% in First Tractor Ningbo C.S.I. Tractor & Automobile Corp., Ltd. (“NCSIT”). Goodwill remaining in the consolidated reserves arising from the acquisition of the associate, NCSIT, amounted to RMB4,901,000 at both 1 January 2004 and 31 December 2004. The amount of goodwill is stated at cost at 31 December 2004.

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FINANCIAL INFORMATION OF THE GROUP

The amount of negative goodwill from the acquisition of an associate, YLDC, 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 recognition as income as previously reported
Effect of adopting HKFRS 3 (note 2.2(c))
Accumulated recognition as income as restated
Net carrying amount
Cost and carrying amount at 1 January 2005 and
31 December 2005
31 December 2004
At 1 January 2004:
Cost
Accumulated recognition as income
Net carrying amount
Cost at 1 January 2004, net of accumulated recognition as income
Recognised as income during the year
At 31 December 2004
At 1 31 December 2004:
Cost
Accumulated recognition as income
Net carrying amount

Negative
goodwill
RMB’000
6,061
(6,061)
—
1,818
(1,818)
—
—
—
6,061
(1,212)
4,849
4,849
(606)
4,243
6,061
(1,818)
4,243

The Group has discontinued the recognition of its share of losses of Shanghai Qiangnong (Group) Company Limited (an associate) because the share of losses of such an associate exceeded the Group’s interest in the associate. The Group’s unrecognised share of losses of this associate for the current year and cumulatively were RMB2,441,000 (2004:RMB16,582,000) and RMB35,147,000 (2004: RMB32,706,000) respectively.

All the above associates have been accounted for using the equity method in the Group’s financial statements.

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APPENDIX III

FINANCIAL INFORMATION OF THE GROUP

The following table illustrates the summarised financial information of the Group’s associates extracted from their financial statements:

Assets Liabilities Revenues Loss	2005 RMB’000 1,239,813 952,846 1,247,737 (43,394)	2004 RMB’000 1,129,617 749,975 1,401,231 (23,758)

19. AVAILABLE-FOR-SALE EQUITY INVESTMENTS/LONG TERM INVESTMENTS

Unlisted equity investments, at fair value Unlisted equity investments, at cost Provision for impairment	2005 RMB’000 52,600 21,507 (2,123) 71,984	Group 2004 RMB’000 69,917 — (2,123) 67,794	2005 RMB’000 52,600 19,943 (2,123) 70,420	Company 2004 RMB’000 67,903 — (2,123) 65,780

No gain on the Group’s available-for-sale equity investments was recognised during the year (2004: Nil).

The fair values of unlisted available-for-sale equity investments have been estimated by the directors having regard to, inter alia, the prices of the most recently reported sales or purchases of the securities or comparison of price/earnings ratios and dividend yields of the securities with those of similar listed securities, with allowance made for the lower liquidity of the unlisted securities.

Certain unlisted equity investments of the Group and the Company are not stated at fair value but at cost less any accumulated impairment losses, because they do not have a quoted market price in an active market, the range of reasonable fair value estimates is significant and the probabilities of the various estimates cannot be reasonably assessed.

20. LOANS RECEIVABLE

Group - 2005 Notes Loan to the Holding (i) Loan to associates (ii) Loans to related companies (iii) Loans to customers (iv) Portion classified as current assets Long term portion	Gross amount RMB’000 252,800 86,900 41,710 16,765 398,175 (200,534) 197,641	Impairment allowances RMB’000 2,528 3,368 1,582 1,348 8,826 (6,849) 1,977	Net RMB’000 250,272 83,532 40,128 15,417 389,349 (193,685) 195,664

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

Group - 2004 Notes Loan to the Holding (i) Loans to associates (ii) Loans to related companies (iii) Loans to customers (iv) Portion classified as current assets Long term portion	Gross amount RMB’000 196,000 22,900 15,750 78,890 313,540 (101,337) 212,203	Provisions RMB’000 5,880 927 2,443 1,614 10,864 (4,411) 6,453	Net RMB’000 190,120 21,973 13,307 77,276
			302,676 (96,926)
			205,750

Notes:

(i) The loan to the Holding is granted by FTGF and is unsecured, interest-bearing at 5.76% (2004: 5.49% to 5.76%) per annum and repayable within one to two (2004: one to three) years.
(ii) The loans to associates are granted by FTGF. These loans are unsecured and bear interest at rates ranging from 5.74% to 6.14% (2004: 5.84% to 6.14%) per annum. Except for the loan granted to LFMC (an associate) of RMB67 million which is repayable in 2007, all loans to associates are repayable within one year.
(iii) The loans to related companies represent the loans granted by FTGF to the companies which the Holding has significant influence therein. These loans are unsecured, interest-bearing at rates ranging from 5.58% to 6.34% (2004: 5.49% to 6.26%) per annum and repayable within one year.
(iv) The loans to customers represent the loans granted to the specific customers as permitted by the People’s Bank of China (“PBOC”).

The movements of impairment allowances/provisions for loans receivable during the year are as follows:

Balance at 1 January New provisions charged to the income statement, net Balance at 31 December	Group 2005 2004 Impairment Provisions for allowances loans receivable RMB’000 RMB’000 10,864 10,216 (2,038) 648 8,826 10,864	Group 2005 2004 Impairment Provisions for allowances loans receivable RMB’000 RMB’000 10,864 10,216 (2,038) 648 8,826 10,864
		10,864

The maturity profile of the Group’s loans receivable at the balance sheet date is analysed by the remaining periods to their contractual maturity dates as follows:

Repayable: Within three months Within one year but over three months Within five years but over one year Over five years	Group 2005 2004 RMB’000 RMB’000 68,024 24,200 132,510 77,137 194,066 206,643 3,575 5,560 398,175 313,540	Group 2005 2004 RMB’000 RMB’000 68,024 24,200 132,510 77,137 194,066 206,643 3,575 5,560 398,175 313,540
		313,540

The carrying amounts of the Group’s loans receivable approximate to their fair values.

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FINANCIAL INFORMATION OF THE GROUP

21. INVENTORIES

Raw materials Work in progress Finished goods Spare parts and consumables	2005 RMB’000 113,392 238,842 365,336 37,657 755,227	Group 2004 RMB’000 148,682 257,934 423,850 34,644 865,110	2005 RMB’000 47,567 138,534 158,295 34,340 378,736	Company 2004 RMB’000 61,962 168,012 109,482 29,920
				369,376

22. TRADE AND BILLS RECEIVABLES

The Group’s trading terms with its customers are mainly on credit, where payment in advance for customers is normally required. The credit periods to its customers are 30 to 90 days. The Group seeks to maintain strict control over its outstanding receivables. Trade receivables are non-interest bearing.

An aged analysis of the trade and bills receivables as at the balance sheet date, based on the invoice date, and net of provisions, is as follows:

Within 90 days 91 days to 180 days 181 days to 365 days 1 to 2 years Over 2 years	2005 RMB’000 220,839 107,639 85,303 30,123 4,737 448,641	Group 2004 RMB’000 314,146 89,393 59,185 27,151 815 490,690	2005 RMB’000 221,292 55,189 34,290 4,268 — 315,039	Company 2004 RMB’000 (Restated) 203,173 28,574 4,818 1,971 —
				238,536

At 31 December 2005, certain of the Group’s and the Company’s bills receivable of RMB7,400,000 (2004: Nil) were pledged for the issuance of bills payable.

Included in the trade and bills receivables of the Group and the Company are trade receivables from the Holding of approximately RMB8,136,000 (2004: Nil) and RMB8,100,000 (2004: Nil), respectively.

Included in the trade and bills receivables of the Group and the Company are trade receivables from associates aggregating approximately RMB12,135,000 (2004: RMB1,901,000) and RMB10,687,000 (2004: RMB1,901,000), respectively.

Included in the trade and bills receivables of the Company are trade receivables from the subsidiaries of approximately RMB129,864,000 (2004: RMB44,927,000).

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

23. BILLS DISCOUNTED RECEIVABLE

The bills discounted receivable arose from the Group’s financial operation. Included in the bills discounted receivable (net of impairment) of the Group are approximately RMB56,103,000 (2004: RMB53,064,000) related to the Holding; approximately RMB97,238,000 (2004: RMB26,265,000) related to an associate; and approximately RMB9,267,000 (2004: RMB3,425,000) related to related companies.

The maturity profile of the Group’s bills discounted receivable at the balance sheet date is analysed by the remaining periods to their contractual maturity dates as follows:

Maturing within: Within three months Within six months but over three months Less: Impairment allowance for bills discounted receivable	Group 2005 2004 RMB’000 RMB’000 105,697 41,714 63,431 91,604 169,128 133,318 (1,691) (1,333) 167,437 131,985

The movements of impairment allowance/provision for discounted bills receivable during the year are as follows:

Balance at 1 January New provisions charged to the income statement, net Balance at 31 December	Group 2005 2004 Provision for Impairment bills discounted allowance receivable RMB’000 RMB’000 1,333 1,570 358 (237) 1,691 1,333

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FINANCIAL INFORMATION OF THE GROUP

24. OTHER RECEIVABLES

Prepayments, deposits and other debtors Due from the Holding (note 25) Prepaid income tax	2005 RMB’000 217,632 23,760 2,986 244,378	Group 2004 RMB’000 268,959 — 5,102 274,061	2005 RMB’000 117,073 23,652 — 140,725	Company 2004 RMB’000 158,041 — —
				158,041

Notes:

(i) Included in other debtors is an amount of RMB20 million (2004: RMB42.72 million) (net of provision) due from the branch of a securities company which represents the overdue balance of a government bond investment to be repaid to the Company. Pursuant to a court judgement in September 2004, the securities company is required to repay the overdue balance of RMB42.72 million to the Company and a repayment schedule has been agreed between the Company and the securities company such that the securities company should repay the overdue balance to the Company by unequal instalments over 2 years commencing from 15 January 2005. The Company received the first settlement of RMB13,500,000 before the date of the approval of the financial statements for the year ended 31 December 2004, and no provision has been made for the remaining balance of RMB29.22 million in the financial statements for the year ended 31 December 2004. Thereafter, the securities company commenced its restructuring and since July 2005, it is under court order protection against the execution of any claim on it until January 2007. As a result the agreed repayment schedule for the remaining balance of RMB29.22 million was deferred. The directors are of the view that the Company should have valid legal claim on the outstanding balance and is able to recover such balance subsequent to the expiry of the court order. However, the directors consider it prudent to make an impairment allowance of RMB9,220,000 to cover for the overdue instalment at 31 December 2005.
(ii) Included in other debtors of the Group and the Company are other receivables due from associates totalling approximately RMB5,076,000 (2004: RMB12,905,000). Such balances are unsecured, interest-free and have no fixed term of repayments.
(iii) Included in other debtors of the Group are other receivables due from minority shareholders of subsidiaries of the Group of approximately RMB 22,703,000 (2004: RMB19,293,000). Such balances are unsecured, interest-free and have no fixed terms of repayment.

25. DUE FROM/TO THE HOLDING

The balances due from/to the Holding are interest-free, unsecured and have no fixed terms of repayment.

26. EQUITY INVESTMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS/SHORT TERM INVESTMENTS

Listed equity securities, at market value: Hong Kong Elsewhere	Group 2005 2004 RMB’000 RMB’000 3,576 7,203 — 12,458 3,576 19,661	Group 2005 2004 RMB’000 RMB’000 3,576 7,203 — 12,458 3,576 19,661
		19,661

The above equity investments at 31 December 2005 were classified as held for trading.

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FINANCIAL INFORMATION OF THE GROUP

27. CASH AND CASH EQUIVALENTS AND PLEDGED DEPOSITS

Note Cash and bank balances — note (i) Mandatory reserve deposits in the PBOC - note (ii) Time deposits Less: Pledged time deposits: Pledged for bills payable 28 Pledged for other banking facilities Cash and cash equivalents	2005 RMB’000 416,883 38,362 208,308 663,553 (105,570) (15,554) 542,429	Group 2004 RMB’000 340,043 29,530 97,070 466,643 (54,382) (14,824) 397,437	2005 RMB’000 205,154 — 77,391 282,545 (58,391) — 224,154	Company 2004 RMB’000 60,049 — 6,072 66,121 — (3,000) 63,121

Notes:

(i) The balance included FTGF’s placements with the PBOC and other banks of approximately RMB52,674,000 (2004: RMB71,285,000) and RMB136,689,000 (2004: RMB101,077,000), respectively.
(ii) The balance represents mandatory reserve deposits placed in the PBOC. In accordance with the regulations of the PBOC, such balance should be no less than a specific percentage of the amounts of the customer deposits placed with FTGF. Such mandatory reserve deposits are not available for use in the Group’s day-to-day operations.

The maturity profile of the Group’s time deposits at the balance sheet date is analysed by the remaining periods to their contractual maturity dates as follows:

Maturing within: Within three months Within one year but over three months	Group 2005 2004 RMB’000 RMB’000 139,308 90,788 69,000 6,282 208,308 97,070

— 165 —

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FINANCIAL INFORMATION OF THE GROUP

28. TRADE AND BILLS PAYABLES

An aged analysis of the trade and bills payables as at the balance sheet date, based on the invoice date, is as follows:

Within 90 days 91 days to 180 days 181 days to 365 days 1 to 2 years Over 2 years	2005 RMB’000 531,402 225,677 40,617 29,446 16,846 843,988	Group 2004 RMB’000 432,112 189,767 77,545 19,636 12,831 731,891	2005 RMB’000 346,495 148,743 14,734 7,787 8,692 526,451	Company 2004 RMB’000 224,947 27,812 19,191 7,829 7,498
				287,277

The Group’s bills payables amounting to approximately RMB211,375,000 (2004: RMB197,400,000) are secured by the pledge of certain of the Group’s deposits amounting to approximately RMB105,570,000 (2004: RMB54,382,000).

Included in the trade and bills payables of the Group are trade payables to the Holding of approximately RMB2,865,000 (2004: RMB2,639,000).

Included in the trade and bills payables of the Group and the Company are trade payables to associates totalling RMB8,113,000 (2004: RMB13,817,000) and RMB1,840,000 (2004: RMB10,913,000), respectively.

29. OTHER PAYABLES AND ACCRUALS

Note Accruals and other liabilities Due to the Holding 25	2005 RMB’000 365,400 22,823 388,223	Group 2004 RMB’000 288,636 65,168 353,804	2005 RMB’000 288,583 — 288,583	Company 2004 RMB’000 177,550 43,692
				221,242

Included in other liabilities of the Group are amounts due to the minority shareholders of subsidiaries of the Group of approximately RMB6,541,000 (2004: RMB2,679,000). Such balances are unsecured, interest-free and have no fixed terms of repayment.

Included in other liabilities of the Group and the Company is receipt in advance from an associate of approximately RMB3,772,000 (2004: Nil).

Included in other liabilities of the Company are receipts in advance from subsidiaries totalling RMB156,657,000 (2004: RMB48,416,000).

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APPENDIX III

FINANCIAL INFORMATION OF THE GROUP

30. PROVISIONS

Group At beginning of year Additional provision Amounts utilised during the year At 31 December 2005 Portion classified as current liabilities Non-current portion Company At beginning of year Additional provision Amounts utilised during the year At 31 December 2005 Portion classified as current liabilities Non-current portion	Early retirement benefits RMB’000 — 23,896 (2,450) 21,446 (4,004) 17,442 Early retirement benefits RMB’000 — 20,067 (2,199) 17,868 (3,327) 14,541	Product warranties RMB’000 7,914 37,544 (32,677) 12,781 (12,781) — Product warranties RMB’000 2,202 2,442 (2,442) 2,202 (2,202) —	Total RMB’000 7,914 61,440 (35,127) 34,227 (16,785) 17,442 Total RMB’000 2,202 22,509 (4,641) 20,070 (5,529) 14,541

A provision for early retirement benefits was recorded during the year in connection with the early retirement plans for the Group’s employees. Further details of the early retirement plans are included in note 38 to the financial statements.

The Group provides warranties for certain of its products sold, under which faulty products are repaired or replaced. The estimation basis is reviewed on an ongoing basis and is revised where appropriate.

31. CUSTOMER DEPOSITS

Deposits from the Holding Deposits from associates Deposits from related companies Deposits from customers	Group 2005 2004 RMB’000 RMB’000 69,525 32,407 75,859 77,323 28,184 18,557 25,460 91,420 199,028 219,707

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FINANCIAL INFORMATION OF THE GROUP

The maturity profile of the Group’s customer deposits at the balance sheet date is analysed by the remaining periods to their contractual maturity as follows:

Repayable: On demand Within three months Within one year but over three months	Group 2005 2004 RMB’000 RMB’000 195,128 176,907 — — 3,900 42,800 199,028 219,707	Group 2005 2004 RMB’000 RMB’000 195,128 176,907 — — 3,900 42,800 199,028 219,707
		219,707

32. INTEREST-BEARING BANK BORROWINGS

Effective interest rate (%) Maturity Current Bank loans: Secured 6.42 – 6.98 2006 Unsecured 4.80 – 6.70 2006 Non-current Bank loans: Unsecured 4.80 2007 Analysed into: Bank loans repayable: Within one year or on demand In the second year	2005 RMB’000 5,500 166,750 172,250 1,000 173,250 172,250 1,000 173,250	Group 2004 RMB’000 24,000 72,660 96,660 — 96,660 96,660 — 96,660	2005 RMB’000 — 93,590 93,590 — 93,590 93,590 — 93,590	Company 2004 RMB’000 — 20,000
				20,000
				—
				20,000

				20,000 —
				20,000

All of the above bank loans of the Group and the Company as at 31 December 2005 and 31 December 2004 are under fixed rate and in RMB.

Certain of the Group’s bank loans are secured by:

(i) the Group’s certain buildings and machinery with an aggregate net carrying value of approximately RMB18,806,000 (2004: RMB27,417,000) (note 13);
(ii) corporate guarantees provided by the Company and certain subsidiaries of the Group, including FTGF;
(iii) guarantees provided by the Holding and YLDC; and
(iv) guarantees provided by the holding company of the minority shareholder of ZHHRM.

The carrying amounts of the Group’s and the Company’s bank loans approximate to their fair values, which are calculated by discounting the expected future cash flows at prevailing interest rates.

— 168 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

33. DEFERRED TAX

Deferred tax liabilities

No deferred tax liabilities of the Group and the Company were recognised for the years ended 31 December 2005 and 2004. No deferred tax liabilities have been recognised in respect of the temporary differences associated with undistributed profits of subsidiaries because the Group is in a position to control the timing of the reversal of the temporary differences and it is probable that such differences will not reverse in the foreseeable future.

Deferred tax assets

2005 Losses available Early for offset against retirement Group and Company future taxable profit benefits RMB’000 RMB’000 At 1 January 2005 — — Deferred tax credited to the income statement during the year (note 10) 22,339 5,896 Deferred tax assets at 31 December 2005 22,339 5,896	Total RMB’000 — 28,235
	28,235

No deferred tax assets of the Group and the Company were recognised for the year ended 31 December 2004.

The principal components of the Group’s deductible temporary differences and unused tax losses for which no deferred tax assets were recognised in the financial statements are as follows:

Group Tax losses Assets provision Other deductible temporary differences	2005 RMB’000 133,177 40,691 45,764 219,632	2004 RMB’000 226,885 21,191 76,421
		324,497

Deferred tax assets have not been recognised in respect of these unused tax losses and other deductible temporary differences as they have arisen in companies that have been loss-making for some time and the recoverability of the deferred tax assets is uncertain. The unused tax losses will be available within five years in offsetting against future taxable profits of the companies in which the losses arose.

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

— 169 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

34. SHARE CAPITAL

Registered, issued and fully paid: State-owned legal person shares of RMB1.00 each H shares of RMB1.00 each	Company 2005 2004 RMB’000 RMB’000 450,000 450,000 335,000 335,000 785,000 785,000	Company 2005 2004 RMB’000 RMB’000 450,000 450,000 335,000 335,000 785,000 785,000
		785,000

There was no movement in the share capital during the years ended 31 December 2005 and 2004.

35. RESERVES

(a) Group

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

In accordance with the Company Law of the PRC and the Company’s articles of association, the Company is required to appropriate 10% and 5% to 10% of its annual statutory profit after tax, as determined in accordance with PRC accounting standards and regulations, to a statutory surplus reserve (the “SSR”) and a statutory public welfare fund (the “PWF”), respectively. No allocation to the SSR is required after the balance of the Company’s SSR reaches 50% of its registered capital.

The SSR may only be used to offset accumulated losses, to expand the production operations of the Company, or to increase its paid-up capital.

The PWF is used for the collective welfare of the staff and workers of the Company.

Pursuant to the relevant laws and regulations for Sino-foreign joint venture enterprises, a portion of the profits of the Group’s certain subsidiaries, which are registered in the PRC, have been transferred to the reserve fund and enterprise expansion fund, which are restricted as to use.

During the year, the subsidiaries’ aggregate appropriations to the SSR, the PWF and the reserve fund, as dealt with in the Group’s financial statements, were RMB2,222,000 (2004: RMB3,112,000), RMB1,073,000 (2004: RMB29,000) and RMB127,000 (2004: RMB639,000), respectively.

The associates’ appropriations to each of the SSR and the PWF during the year, as dealt with in the Group’s financial statements were RMB1,047,000 and RMB524,000, respectively. For the year ended 31 December 2004, the associates’ appropriations to each of the SSR, the PWF and the enterprise expansion fund during the year, as dealt with in the Group’s financial statements were RMB786,000, RMB393,000, and RMB820,000, respectively.

Pursuant to the relevant PRC regulations, FTGF, being a non-bank financial institution subsidiary of the Group, is required to transfer a certain amount of its net profit, as determined based on the degree of overall unidentified loss exposure (normally not lower than 1% of the ending balance of risk assets by the end of 2009), to the general and statutory reserve through its profit appropriation.

Certain amounts of goodwill arising on the acquisition of subsidiaries in prior years remain eliminated against the consolidated retained profits, as explained in note 16 to the financial statements.

— 170 —

APPENDIX III

FINANCIAL INFORMATION OF THE GROUP

(b) Company

At 1 January 2004 Net profit for the year At 31 December 2004 and at 1 January 2005 Net profit for the year At 31 December 2005	Share premium account RMB’000 1,378,840 — 1,378,840 — 1,378,840	Statutory surplus reserve RMB’000 48,388 — 48,388 — 48,388	Statutory public welfare fund RMB’000 48,388 — 48,388 — 48,388	Accumulated losses RMB’000 (288,150) 29,435 (258,715) 91,181 (167,534)	Total RMB’000 1,187,466 29,435
					1,216,901 91,181
					1,308,082

No transfer to the SSR and the PWF of the Company has been proposed by the directors during the year.

At the balance sheet date, the Company did not utilise any of the SSR or PWF.

As at 31 December 2005, the Company had no retained profits (2004: Nil) available for distribution by way of cash or in kind.

As at 31 December 2005, in accordance with the Company Law of the PRC, an amount of approximately RMB1.38 billion (2004: RMB1.38 billion) standing to the credit of the Company’s share premium account was available for distribution by way of future capitalisation issues.

36. DISPOSAL OF A SUBSIDIARY

Notes Net assets disposed of: Property, plant and equipment Construction in progress Cash and bank balances Trade and bills receivables Prepayments, deposits and other debtors Inventories Interest-bearing bank borrowings Trade and bills payables Accruals and other liabilities Minority interests Gain on disposal of a subsidiary 5, 6 Satisfied by: Cash	2005 RMB’000 7,087 1,030 2,097 4,400 1,303 14,111 (2,600) (18,871) (1,000) (2,645) 4,912 735 5,647 5,647	2004 RMB’000 — — — — — — — — — —
		— —
		—

		—

— 171 —

APPENDIX III

FINANCIAL INFORMATION OF THE GROUP

An analysis of the net inflow of cash and cash equivalents in respect of the disposal of a subsidiary is as follows:

Cash consideration Cash and bank balances disposed of Net inflow of cash and cash equivalents in respect of the disposal of a subsidiary	2005 RMB’000 5,647 (2,097) 3,550	2004 RMB’000 — —
		—

The results of the subsidiary disposed of during the year have no significant impact on the Group’s consolidated revenue or loss after tax for the year.

37. NOTE TO THE CONSOLIDATED CASH FLOW STATEMENT

Major non-cash transactions

The non-cash capital contribution made by a minority shareholder of a subsidiary of the Group during the year ended 31 December 2005 was in the form of non-current assets valued at RMB2,000,000.

The non-cash capital contributions made by the minority shareholders of the subsidiaries of the Group during the year ended 31 December 2004 were in the form of non-current assets valued at RMB14,739,000, non-cash current assets valued at RMB34,593,000, and current liabilities of RMB21,019,000.

38. RETIREMENT BENEFITS

(a) The Group participates in various defined contribution retirement benefits schemes operated by the local municipal governments and is required to contribute 20% to 24% (2004: 20% to 25%) of the payroll costs to the schemes, out of which the pensions of the Group’s retired employees are paid.
(b) During the year, the Group implemented early retirement plans for certain employees in addition to the benefits under the government-regulated defined contribution schemes as disclosed in (a) above. The benefits of the early retirement plans are estimated based on factors including the remaining number of years of service from the date of early retirement to the normal retirement date and with reference to certain historical salaries of such early retirees. The costs of early retirement benefits are recognised in the period when employees opted for early retirement.

39. CONTINGENT LIABILITIES

(a) As at 31 December 2005, FTGF, a subsidiary, had given guarantees to the extent of RMB100 million (2004: Nil) and RMB20 million (2004: Nil) to certain financial institutions for securing the loans granted to the Holding and YLDC, respectively. As at 31 December 2005, the aforesaid loans of the Holding and YLDC were drawn down to RMB100 million and RMB20 million, respectively.
(b) As at 31 December 2005, the Holding and FTGF, a subsidiary, had jointly given guarantee to the extent of RMB52 million (2004: RMB52 million) to a financial institution for securing the loans granted to Yituo (Luoyang) Fuel Jet Co. Ltd. (“YLFJ”), a subsidiary of the Holding. The aforesaid loans were drawn down to RMB52 million (2004: RMB52 million) as at 31 December 2005.
(c) As at 31 December 2005, ZHHRM, a subsidiary of the Group, had provided a guarantee to the extent of RMB20 million to a bank for securing the loan granted to a customer of the Group.
(d) As at 31 December 2005, the Company had given corporate guarantees of approximately RMB319.2 million (2004: RMB248.7 million) and RMB122.9 million (2004: RMB201.4 million) to FTGF and certain banks, respectively, for securing credit facilities granted by FTGF and such banks to certain subsidiaries. The facilities were utilised to the extent of approximately RMB442.1 million (2004: RMB450.1 million).

The above contingent liabilities were not provided for in the Group’s and the Company’s financial statements. Save as aforesaid, neither the Group, nor the Company had any significant contingent liabilities.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

40. PLEDGE OF ASSETS

Details of the Group’s bills payable and bank loans, which are secured by assets of the Group, are included in notes 28 and 32 to the financial statements, respectively.

41. OPERATING LEASE ARRANGEMENTS

(a) As lessor

The Company leases out certain of its buildings and machinery under operating lease arrangements. Leases for buildings and machinery are negotiated for terms ranging from one to five years. The terms of the leases generally also require the tenants to pay security deposits and provide for periodic rent adjustments according to the prevailing market conditions.

At 31 December 2005, the Group and the Company had total future minimum lease receivables under noncancellable operating leases with its tenants falling due as follows:

Within one year In the second to fifth years, inclusive	Group and Company 2005 2004 RMB’000 RMB’000 5,390 1,633 13,707 4,817 19,097 6,450	Group and Company 2005 2004 RMB’000 RMB’000 5,390 1,633 13,707 4,817 19,097 6,450
		6,450

(b) As lessee

The Group leases certain land, buildings, plant and machinery under operating lease arrangements. Leases for land and buildings are negotiated for terms ranging from one to fifty years, and those for plant and machinery are for terms of one year with renewal options.

At 31 December 2005, the Group and the Company 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	2005 RMB’000 6,453 23,760 195,508 225,721	Group 2004 RMB’000 8,013 27,985 200,858 236,856	Company 2005 2004 RMB’000 RMB’000 6,000 6,000 22,000 23,000 181,795 186,795 209,795 215,795	Company 2005 2004 RMB’000 RMB’000 6,000 6,000 22,000 23,000 181,795 186,795 209,795 215,795
				215,795

— 173 —

APPENDIX III

FINANCIAL INFORMATION OF THE GROUP

42. COMMITMENTS

In addition to the operating lease commitments detailed in note 41(b) above, the Group and the Company had the following capital commitments at the balance sheet date:

Contracted, but not provided for: Purchase of plant and machinery Investment in joint venture Authorised, but not contracted for: Purchase of plant and machinery Additional capital contribution into a subsidiary Investments in joint ventures	2005 RMB’000 92,129 50,880 143,009 170,186 — 9,360 179,546 322,555	Group 2004 RMB’000 102,386 — 102,386 174,871 — 7,550 182,421 284,807	Company 2005 2004 RMB’000 RMB’000 91,071 95,822 50,880 — 141,951 95,822 170,186 173,041 159,075 159,075 9,360 7,300 338,621 339,416 480,572 435,238	Company 2005 2004 RMB’000 RMB’000 91,071 95,822 50,880 — 141,951 95,822 170,186 173,041 159,075 159,075 9,360 7,300 338,621 339,416 480,572 435,238
				95,822
				173,041 159,075 7,300
				339,416
				435,238

43. RELATED PARTY TRANSACTIONS

(a) 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:

The significant transactions carried out between the Group and the Holding group, inclusive of subsidiaries and associates of the Holding, during the year are summarised as follows:

		2005	2004
	Notes	RMB’000	RMB’000
Sales of raw materials, finished
goods and components	(i)	362,079	314,533
Purchases of raw materials and components	(i)	464,774	502,539
Purchases of utilities	(ii)	107,722	127,059
Fees paid for welfare and support services	(iii)	34,994	20,542
Purchases of transportation services	(iii)	19,537	10,343
Research and development expenses paid	(iv)	8,300	6,149
Fees paid for the use of land	(v)	5,000	5,000
Fees paid for the use of trademark	(vi)	8,300	6,743
Rentals paid in respect of:
Buildings	(vii)	1,628	1,263
Plant and machinery	(vii)	4,371	2,339
Rental income received in respect of:
Buildings	(viii)	1,380	—
Plant and machinery	(viii)	1,400	4,274
Sales of plant and machinery	(ix)	4,800	13,062
Purchases of plant and machinery	(x)	6,226	2,911
Interest income, inclusive
of discounted bill charges	(xi)	27,257	22,446
Interest paid for customer deposits	(xii)	585	707
Service charge for guarantee	(xiii)	260	—

The above transactions included the significant transactions carried out between the Group and its associates, YLDC (which is also a subsidiary of the Holding), YLCF (where the Holding holds a 50% equity interest) and YEMC (where YLDC holds a 50% interest).

— 174 —

APPENDIX III

FINANCIAL INFORMATION OF THE GROUP

Particulars of the significant transactions carried out between the Group and YLDC , YLCF and YEMC, during the year are summarised as follows:

Notes Sales of raw materials and components (i) Purchases of raw materials and components (i) Rental income received in respect of: Buildings (viii) Plant and machinery (viii) Sales of plant and machinery (ix) Interest income, inclusive of discounted bill charges (xi) Interest paid for customer deposits (xii)	2005 RMB’000 173,010 190,812 1,380 1,400 — 4,973 66	2004 RMB’000 182,179 254,044 — 4,274 11,397 3,932 109

(a) Particulars of the significant transactions carried out between the Group and LFMC, an associate, are summarised as follows:

Notes Sales of raw materials and components (i) Purchases of raw material and components (ii) Interest paid for customer deposits (xii)	2005 RMB’000 8,772 1,651 794	2004 RMB’000 5,321 — 1,925

During the year, ZHHRM and ZHAM carried out various transactions with Jiangsu Huatong Machinery Co., Ltd. (“Jiangsu Huatong”) (a minority shareholder of ZHHRM and ZHAM) and the holding company of Jiangsu Huatong. Particulars of these transactions are summarised as follows:

		2005	2004
	Notes	RMB’000	RMB’000
Sales of finished goods and components	(xiv)	9,704	800
Purchases of raw materials
and components	(xiv)	1,145	1,651
Fees paid for the use of trademark	(xv)	400	400
Rentals paid in respect of:
Plant and machinery	(xiv)	—	200
Land	(xiv)	920	920
Buildings	(xiv)	125	500
Fees paid for support services	(xiv)	100	100
Management fees paid	(xiv)	200	350

The significant transactions carried out between YLSC and its minority shareholder up to date of the Group’s disposal of YLSC in 2005 are summarised as follows:

		2005	2004
	Notes	RMB’000	RMB’000
Sales of standard parts and components	(xiv)	2,773	5,260

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

Notes:

(i) Pursuant to relevant agreements, the pricing in respect of raw materials and components is determined by reference to the state price (i.e., the mandatory price set in accordance with relevant PRC regulations, where applicable), or if there is no applicable state price for any such raw materials or components, the market price or the agreed price which is not exceeding the price charged in the immediate preceding year increased by a percentage equal to certain PRC consumer price indexes, whichever is lower.
(ii) Pursuant to relevant agreements, the pricing in respect of utilities is determined by reference to the state price (i.e., the mandatory price set in accordance with relevant PRC regulations, where applicable), or if there is no applicable state price for any such services, the market price or the agreed price which is not exceeding the price charged in the immediate preceding year increased by a percentage equal to certain PRC consumer price indexes, whichever is lower.
(iii) Pursuant to relevant agreements, the pricing in respect of each of the welfare and support services and transportation services is determined by reference to the state price (i.e., the mandatory price set in accordance with relevant PRC regulations, where applicable), or if there is no applicable state price for any such services, the market price or the agreed price which is not exceeding the price charged in the immediate preceding year increased by a percentage equal to certain PRC consumer price indexes, whichever is lower. Included in the welfare and supporting services fee during the year was an one-off staff children education expense of RMB36 million imposed by the local municipal government against the Holding, RMB18 million of which was recharged to the Company under the basis that such one-off expense is equally borne by the Company and the Holding.
(iv) Pursuant to relevant agreements, the pricing in respect of routine research and development services is calculated at a rate of 0.2% (2004: 0.2%) of the Company’s net annual turnover.
(v) Pursuant to relevant agreements, the annual rental for the use of land is RMB5 million (2004: RMB5 million) subject to a further land rental adjustment announced by the relevant state land administration authorities.
(vi) Pursuant to relevant agreements, the pricing for the use of the trademark is charged at a rate of 0.2% (2004: 0.2%) of the Company’s net annual turnover.
(vii) Pursuant to relevant agreements, the rental of buildings and plant and machinery is charged with reference to the depreciation of the relevant assets.
(viii) Pursuant to relevant agreements, the rental of plant and machinery is received mutually agreed with the related parties.
(ix) The sales of plant and machinery in 2005 were conducted under mutually agreed terms. The pricing of the sales of plant and machinery in 2004 was determined with reference to the net book value of the relevant assets.
(x) The purchases of plant and machinery are conducted under mutually agreed terms.
(xi) The interest income related to the bills discounting service and loans granted by FTGF to the Holding and its subsidiaries and associates. Pursuant to relevant agreements, the transactions are conducted with reference to the terms and rates stipulated by the PBOC.
(xii) The interest paid for customer deposits relates to the customer deposits placed in FTGF by the Holding and its subsidiaries and associates. Pursuant to the relevant agreements, the transactions are conducted with reference to the terms and rates stipulated by the PBOC.
(xiii) The service charge for guarantee relates to the service charge paid by a subsidiary of the Holding for the guarantee provided by FTGF. Pursuant to the relevant agreement, the pricing of the service charge is approximately 0.5% to 1% of the guarantee amount with reference to the relevant service fee charged by other licensed financial institutions in the PRC. Details of the guarantee are set out in note 43(b)(ii) to the financial statements.

— 176 —

APPENDIX III

FINANCIAL INFORMATION OF THE GROUP

(xiv) These transactions were conducted according to the prices and conditions, mutually agreed between the Group and its minority shareholder.
(xv) Pursuant to the relevant agreement, the annual fee paid for the use of trademark was RMB400,000 for the years from 2000 to 2005.
(b) Other transactions with related parties
(i) Designated deposits and designated loans

As at 31 December 2005, the Holding placed a designated deposit of RMB3.8 million (2004: RMB1 million) in FTGF for lending to YLCF.

As at 31 December 2005, Yituo International Commerce Company Limited, a subsidiary of the Holding, placed a designated deposit of RMB2 million (2004: Nil) in FTGF for lending to a third party.

Since the credit risk is borne by the depositors, the related assets and liabilities of such transactions are not included in the Group’s consolidated financial statements.

(ii) Guarantees provided by the Group to related parties

As at 31 December 2005, FTGF provided guarantees to the extent of RMB100 million (2004: Nil) and RMB20 million (2004: Nil) to certain financial institutions for securing loans granted to the Holding and YLDC, respectively.

As at 31 December 2005, the Holding and FTGF jointly provided a guarantee to the extent of RMB52 million (2004: RMB52 million) to a financial institution for securing loans granted to YLFJ.

(iii) Guarantees provided by related parties to the Group

During the year, the Holding provided a guarantee to the extent of RMB100 million (2004: Nil) to a bank for securing the banking facilities granted to the Company. As at 31 December 2005, the aforesaid banking facilities were utilised to the extent of RMB30 million.

During the year, YLDC provided guarantee to the extent of RMB20 million (2004: RMB20 million) to a bank for securing a loan granted to the Company. As at 31 December 2005, the aforesaid loan was utilised to the extent of RMB20 million (2004: RMB20 million).

As at 31 December 2004, Jiangsu Huatong provided guarantees up to RMB26 million to banks for securing loans granted to ZHHRM.

(iv) During the year, ZHHRM, Jiangsu Huatong and its holding company entered into a debt assignment arrangement, whereby Jiangsu Huatong took up the obligation payable to ZHHRM of approximately RMB20 million from its holding company.
(v) During the year, the Company disposed of its entire equity interest in YLSC to the Holding at a consideration of approximately RMB5.65 million. Further details of the disposal are included in note 36 to the financial statements.
(vi) On 3 March 2004, the Company entered into a promoter agreement with the Holding to establish Yituo (Luoyang) Dongfanghong Tyre Company Limited (“YLDT”). The registered capital of YLDT is RMB2 million, of which the percentages of equity interests in YLDT held by the Company and the Holding are 40% and 60%, respectively.
(vii) On 9 April 2004, the Company entered into a promoter agreement with the Holding and 46 other individuals to establish YLST. The registered capital of YLST is RMB13 million, of which the percentages of equity interests in YLST held by the Company, the Holding and 46 other individuals are 50%, 24% and 26%, respectively. The Holding conferred its 24% voting rights in the shareholders’ meeting of YLST to the Company. Therefore, the Company can exercise control over the financial and operating policies of YLST.

— 177 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

(c) Outstanding balances with related parties
(i) Details of the Group’s amount due from/to the Holding, its loans and deposits balances with the Holding as at the balance sheet date are disclosed in notes 25, 20, and 31 to the financial statements, respectively.
(ii) Details of the Group’s loans to and deposits received from its associates as at the balance sheet date are included in note 20 and 31 to the financial statements, respectively.
(iii) Details of the Group’s trade balances with its related parties as at the balance sheet date are disclosed in notes 22 and 28 to the financial statements.
(iv) Details of the Group’s amounts due from/to the minority shareholders as at the balance sheet date are disclosed in notes 24 and 29 to the financial statements.
(d) Compensation of key management personnel of the Group

Short term employee benefits Post-employment benefits Total compensation paid to key management personnel	2005 RMB’000 957 230 1,187	2004 RMB’000 903 204
		1,107

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

44. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

The Group’s principal financial instruments mainly comprise bank loans, pledged deposits and cash and cash equivalents. The main purpose of these financial instruments is to raise finance for the Group’s operations. The Group has various other financial assets and liabilities such as trade and bills receivables, loans receivables, bills discounted receivables, trade and bills payables and customer deposits, which arise directly from its operations, including the financial operation carried out by FTGF, a subsidiary of the Group.

The main risks arising from the Group’s financial instruments are credit risk, foreign currency risk, cash flow interest rate risk and liquidity risk. The board of directors meets periodically to analyse and formulate measures to manage the Group’s exposure to these risks. Generally, the Group introduces conservative strategies on its risk management. As the Group’s exposure to these risks is kept to a minimum, the Group has not used any derivatives and other instruments for hedging purposes. The Group does not hold or issue derivative financial instruments for trading purposes. The board of directors reviews and agrees policies for managing each of these risks and they are summarised below.

Credit risk

Credit risk is the risk associated with a customer or counterparty being unable to meet a commitment when it falls due. It mainly arose from the trade receivables of the Group and the lending activities of FTGF.

It is the Group’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an ongoing basis and the board of directors believes that adequate provision for uncollectible receivables have been made in the financial statements. In this respect, the board of directors considered that the credit risk is significantly reduced.

The Group’s trade receivables relate to a large number of diversified customers, there is no significant concentration of credit risk on the trade receivables.

— 178 —

APPENDIX III

FINANCIAL INFORMATION OF THE GROUP

For the Group’s lending activities, FTGF has established a set of strict credit granting criteria and approving systems to control and manage credit risk. The loan approval committee is responsible to formulate credit policies and determine the cap of facilities, and each credit transaction was subject to a collective consideration and approval under conservative and prudent policies. The auditing department of FTGF is responsible for supervision over the implementation of the credit approving system and post-credit inspection system.

For the significant concentration of credit risk relates to the Group’s loans receivable, please refer to note 20 to the financial statements.

The carrying amount of the Group’s financial assets which comprise pledged deposits, cash and cash equivalents, available-for-sale financial assets, and other receivables included in the balance sheet, represents the Group’s maximum exposure to credit risk in relation to its financial assets, without taking into account of the fair value of any collateral.

Foreign currency risk

The business of the Group is principally located in the PRC. While most of the transactions are conducted in RMB, the Group does not have significant exposure on foreign currency risk. As at 31 December 2005, the Group has short term deposits denominated in United States dollars and Hong Kong Dollars of approximately RMB21,647,000 (2004: RMB17,536,000) and RMB47,456,000 (2004: RMB52,442,000), respectively. All the bank loans of the Group are denominated in RMB. The Group does not use derivative financial instruments to hedge its foreign currency risk.

Cash flow interest rate risk

The Group’s exposure to the risk of changes in market interest rates primarily relates to the Group’s loans receivable, customer deposits and debt obligations.

FTGF monitored the interest rate risk on a regular basis and made appropriate arrangements to minimise the exposure. The Group does not use derivative financial instruments to hedge its interest rate risk.

The table below summaries the effective interest rates at 31 December for monetary financial instruments:

	2005	2004
	Rate	Rate
	per annum	per annum
Assets
Cash and cash equivalents	0.72% – 2.48%	0.72% – 1.98%
Loans receivable	4.95% – 6.91%	4.77% – 6.59%
Liabilities
Customer deposits	0.72% – 2.70%	0.72% – 2.70%
Interest-bearing bank borrowings	4.80% – 6.98%	4.43% – 6.32%

Liquidity risk

The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of interestbearing bank borrowings, bills payable and other available sources of financing.

To monitor the liquidity risk arising from the Group’s financial operations, FTGF has established policies and procedures to monitor and control its liquidity position. The Asset and Liability Management Committee of FTGF is responsible for properly managing the liquidity structure of its assets, liabilities and commitments so as to achieve balanced cash flows and to meet all funding obligations.

— 179 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

45. POST BALANCE SHEET EVENT

In December 2005, the Company entered into a joint venture agreement whereby the Company injects capital of RMB50,880,000 in the form of cash and other assets into Yituo (Luoyang) Transportation Machinery Co., Ltd. (“YLTM”). After the aforesaid capital injection, the registered capital of YLTM will be increased to RMB55,880,000, of which RMB50,880,000 (constituting 91.05% thereof) will be attributed to the Company and RMB5,000,000 (constituting 8.95% thereof) will be attributable to the Holding and certain third parties. YLTM engages in the manufacture and sale of transportation machinery. Subsequent to the balance sheet date, the Company injected capital of RMB19.2 million in the form of cash into YLTM.

46. COMPARATIVE AMOUNTS

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

47. APPROVAL OF THE FINANCIAL STATEMENTS

The financial statements were approved and authorised for issue by the board of directors on 21 April 2006.

— 180 —

APPENDIX IV UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

1. ACCOUNTANTS’ REPORT ON UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

18th Floor Two International Finance Centre 安永會計師事務所 8 Finance Street, Central Hong Kong

9 June 2006

The Directors

First Tractor Company Limited

UNAUDITED PRO FORMA STATEMENT OF ASSETS AND LIABILITIES OF FIRST TRACTOR COMPANY LIMITED

We report on the unaudited pro forma statement of assets and liabilities (“Pro Forma Assets and Liabilities Statement”) of First Tractor Company Limited (the “Company”) and its subsidiaries (hereinafter collectively referred to as the “Group”), which has been prepared by the directors for illustrative purposes only, to provide information about how the proposed exchange of the Casting Factories Interests (as defined in the circular of the Company dated 9 June 2006 (the “Circular”)) for the equity interests in Yituo (Luoyang) Diesel Co., Ltd. and Yituo (Luoyang) Fuel Jet Company Limited might have affected the financial information presented, for inclusion in section 2 of Appendix IV of the Circular. The basis of preparation of the unaudited Pro Forma Assets and Liabilities Statement is set out on page 183 to 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 Assets and Liabilities Statement 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 Assets and Liabilities Statement 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 Assets and Liabilities Statement beyond that owed to those to whom those reports were addressed by us at the dates of their issue.

— 181 —

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX IV

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 Assets and Liabilities Statement with the directors of the Company. This engagement did not involve independent examination of any of the underlying financial information.

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 Assets and Liabilities Statement 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 purposes of the unaudited Pro Forma Assets and Liabilities Statement as disclosed pursuant to paragraph 29(1) of Chapter 4 of the Listing Rules.

The unaudited Pro Forma Assets and Liabilities Statement is for illustrative purposes only, based on the judgements 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 Group as at 31 December 2005 or any future date.

Opinion

In our opinion:

a) the unaudited Pro Forma Assets and Liabilities Statement 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 Assets and Liabilities Statement as disclosed pursuant to paragraph 29(1) of Chapter 4 of the Listing Rules.

Yours faithfully, Ernst & Young

Certified Public Accountants Hong Kong

— 182 —

APPENDIX IV UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

2. UNAUDITED PRO FORMA STATEMENT OF ASSETS AND LIABILITIES OF THE ENLARGED GROUP IMMEDIATELY AFTER COMPLETION OF THE EXCHANGE OF THE CASTING FACTORIES INTERESTS FOR THE EQUITY INTERESTS IN YITUO DIESEL AND YITUO FUEL JET

Purpose and basis of preparation of the unaudited pro forma statement of assets and liabilities

The accompanying unaudited pro forma statement of assets and liabilities (“Pro Forma Assets and Liabilities Statement”) of First Tractor Company Limited (the “Company”) and its subsidiaries (hereinafter collectively referred to as the “Group”) has been prepared to illustrate the effect of the Group’s proposed exchange (“Assets Swap”) of the Casting Factories Interests (as defined in the circular of the Company dated 9 June 2006 (the “Circular”)), for the equity interests in Yituo (Luoyang) Diesel Co., Ltd. (“Yituo Diesel”) and Yituo (Luoyang) Fuel Jet Company Limited (“Yituo Fuel Jet”).

The unaudited Pro Forma Assets and Liabilities Statement of the Group has been prepared 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”) for the purpose of illustrating the Assets Swap as if the Assets Swap had taken place on 31 December 2005.

The unaudited Pro Forma Assets and Liabilities Statement of the Group is prepared based upon the audited consolidated balance sheet of the Group as at 31 December 2005, which has been extracted from the annual report of the Company for the year ended 31 December 2005, the audited balance sheets of Yituo Diesel and Yituo Fuel Jet as at 31 December 2005, which have been extracted from the accountants’ reports as set out in Appendices I and II to this Circular, respectively, after giving effect to the pro forma adjustments of the Assets Swap that are (i) directly attributable to the transactions; and (ii) factually supportable, as summarised in the accompanying notes.

The unaudited Pro Forma Assets and Liabilities Statement of the Group is based on a number of assumptions, estimates and uncertainties. Accordingly, the accompanying unaudited Pro Forma Assets and Liabilities Statement of the Group does not purport to describe the actual financial position of the Group that would have been attained had the Assets Swap been completed on 31 December 2005. The unaudited Pro Forma Assets and Liabilities Statement of the Group does not purport to predict the future financial position of the Group.

The unaudited Pro Forma Assets and Liabilities Statement of the Group should be read in conjunction with the historical financial information of the Company as set out in the annual report of the Company for the year ended 31 December 2005 and other financial information included elsewhere in this circular.

— 183 —

APPENDIX IV UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

This statement has been prepared by the directors of the Company for illustrative purposes only and because of its nature, it may not give a true picture of the financial position of the Enlarged Group (as defined in the Circular) following completion of the Assets Swap.

The Group As at 31 December 2005 RMB’000 (Audited) 785,143 151,620 13,761 — — 98,726 71,984 195,664 28,235	Yituo Diesel As at 31 December 2005 RMB’000 (Audited) 130,175 20,609 — — — 11,791 60,360 — 2,938	Pro forma adjustments	The Enlarged Group Pro forma balances after the Assets Swap RMB’000 (Unaudited) 926,075 197,316 13,761 91,740 — 37,850 68,344 195,664 33,764
		Dividends Consideration Disposal of Disposal of paid by paid and Assets and Casting investment in Yituo Diesel direct costs Reclassifications liabilities of Factories a commerical and Yituo incurred on to interests in Yituo Engine Interests bank Fuel Jet acquisitions subsidiaries Machinery Eliminations RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) Note (1) Note (2) Note (3) Note (4) Note (5) Note (6) Note (7) (76,175) 35,575 (9,712) 8,932 91,740 204,395 84,971 (289,366) (50,971) (21,696) (30,000) (34,000) (53,076) 26,004 (49,068) 6,699 (10,084) (30,000) (9,469) 1,559 (4,696) 151,862(a) 30,000 (60,039) (204,395) 4,438 (8,928)
1,345,133	225,873		1,564,514
755,227 448,641 193,685 167,437 244,378 3,576 121,124 542,429 —	95,919 147,894 — — 9,671 — 10,017 33,242 81,010		842,519 558,699 163,685 167,437 242,402 3,576 131,141 493,769 137,456
2,476,497	377,753		2,740,684

— 184 —

APPENDIX IV

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

The Group As at 31 December 2005 RMB’000 (Audited) 843,988 5,459 388,223 199,028 172,250 16,785	Yituo Diesel As at 31 December 2005 RMB’000 (Audited) 173,583 2,552 47,369 — 151,750 —	Pro forma adjustments	The Enlarged Group Pro forma balances after the Assets Swap RMB’000 (Unaudited) 1,019,047 10,248 447,316 192,397 344,000 21,438
		Dividends Consideration Disposal of Disposal of paid by paid and Assets and Casting investment in Yituo Diesel direct costs Reclassifications liabilities of Factories a commerical and Yituo incurred on to interests in Yituo Engine Interests bank Fuel Jet acquisitions subsidiaries Machinery Eliminations RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) Note (1) Note (2) Note (3) Note (4) Note (5) Note (6) Note (7) (34,945) 38,309 (10,084) (8,644) 10,315 (4,696) 2,297(b) (8,928) 10,000 (30,000) 1,000 (103,718) (4,346) (60,039) (96,105) 1,887 2,197
1,625,733	375,254		2,034,446
850,764 2,195,897 1,000 17,442	2,499 228,372 20,000 —		706,238 2,270,752 74,000 18,137
18,442	20,000		92,137
2,177,455	208,372		2,178,615

785,000 1,245,919	51,718 156,654		785,000 1,242,995
2,030,919	208,372		2,027,995
146,536	—		150,620
2,177,455	208,372		2,178,615

— 185 —

APPENDIX IV

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

Notes:

(1) The pro forma adjustment reflects the disposal of the Casting Factories Interests.
(a) The pro forma adjustment for the cash and cash equivalents represents the consideration received from the disposal of the Casting Factories Interests of RMB158,240,000 less (i) cash balances of approximately RMB3,000 included in the Casting Factories Interests disposed of; and (ii) the direct costs of the disposal of Casting Factories Interests of approximately RMB6,375,000.
(b) The Casting Factories Interests included deposits of approximately RMB2,297,000 placed with China First Tractor Group Finance Company Limited (“FTGF”), a non-bank financial institution subsidiary of the Group, which is eliminated against FTGF’s customer deposits account in preparation of the consolidated balance sheet of the Group as at 31 December 2005. The pro forma adjustment reflects the increase in customer deposits balance of the Enlarged Group upon disposal of the Casting Factories Interests.
(2) The pro forma adjustment reflects the disposal of an available-for-sale equity investment of Yituo Diesel in a commercial bank in Luoyang, the PRC, with a carrying amount of RMB30 million, to China Yituo at the consideration of RMB30 million, pursuant to an agreement dated 17 April 2006 entered into between Yituo Diesel and China Yituo.
(3) The pro forma adjustment represents the amount of dividends declared and paid by Yituo Diesel and Yituo Fuel Jet to their shareholders other than the Enlarged Group. On 28 April 2006, Yituo Diesel and Yituo Fuel Jet declared dividends of approximately RMB73,412,000 and RMB6,640,000, respectively. Brilliance China Machinery Holdings Limited (“Brilliance China”), a subsidiary of the Group, is a shareholder of Yituo Diesel with 25% equity interest, and is entitled to approximately RMB18,353,000 of the dividend declared by Yituo Diesel. The Company and Yituo Diesel are shareholders of Yituo Fuel Jet with equity interests of 7% and 18%, respectively, and are entitled to approximately RMB465,000 and RMB1,195,000 of the dividend declared by Yituo Fuel Jet, respectively. Therefore, for the purpose of the Pro Forma Assets and Liabilities Statement, a deduction of cash and cash equivalents of approximately RMB60,039,000 is reflected in relation to the dividends declared by Yituo Diesel and Yituo Fuel Jet.
(4) The pro forma adjustment reflects the total consideration of approximately RMB198,020,000 paid for the acquisitions of 58.8% equity interest in Yituo Diesel and 70% equity interest in Yituo Fuel Jet, plus estimated direct costs incurred for the acquisitions of approximately RMB6,375,000.
(5) Before the completion of the Assets Swap, the Group’s interests in Yituo Diesel and Yituo Fuel Jet were classified under “Interests in associates” and “Available-for-sale equity investments”, respectively. In addition, Yituo Diesel’s 18% equity interest in Yituo Fuel Jet and 4.2% equity interest in FTGF were classified under “Available-for-sale equity investments” in Yituo Diesel’s accounts. The pro forma adjustment reflects the reclassification of the aforementioned “Interests in associates” and “Available-for-sale equity investments” balances to “Interests in subsidiaries” account, as both Yituo Diesel and Yituo Fuel Jet will become subsidiaries of the Enlarged Group upon completion of the Assets Swap.
(6) Yituo (Luoyang) Engine Machinery Company Limited (“Yituo Engine Machinery”) is an associate of both Yituo Diesel and the Company. Yituo Diesel and the Company hold 50% and 42% equity interests in Yituo Engine Machinery as at 31 December 2005, respectively. After the completion of the Assets Swap, the Group will have a total effective equity interest of 82.66% in Yituo Engine Machinery, and Yituo Engine Machinery will become a subsidiary of the Company. The pro forma adjustment reflects the consolidation of the assets and liabilities of Yituo Engine Machinery into the Enlarged Group and the elimination of the interests in Yituo Engine Machinery that are included in the balance sheets of the Group and Yituo Diesel as at 31 December 2005.
(7) The pro forma adjustment reflects the elimination of intra-group balances and the interests in Yituo Diesel, Yituo Fuel Jet and Yituo Engine Machinery.

Goodwill of approximately RMB91.74 million arises on the acquisitions of Yituo Diesel and Yituo Fuel Jet, which reflects the recognition of excess of the purchase considerations, which amounted to RMB154.75 million and RMB43.27 million in respect of Yituo Diesel and Yituo Fuel Jet, respectively, together with the estimated direct costs of approximately RMB6,375,000 incurred on the acquisitions, over 58.8% and 70% interest in the identifiable assets, liabilities and contingent liabilities of Yituo Diesel and Yituo Fuel Jet, respectively, determined with reference to the audited net asset values of Yituo Diesel of approximately RMB208.37 million and Yituo Fuel Jet of approximately RMB52.91 million as at 31 December 2005, and after the deduction of dividends declared by Yituo Diesel of approximately RMB73,412,000 and Yituo Fuel Jet of approximately RMB6,640,000 on 28 April 2006.

— 186 —

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX IV

3. STATEMENT OF INDEBTEDNESS

As at the close of business on 31 March 2006, being the latest practicable date for the purpose of this indebtedness statement, the Enlarged Group has outstanding bank loans and other loans of approximately RMB320.47 million and RMB95.85 million, respectively. The outstanding bank and other loans comprise secured bank loans of approximately RMB30.50 million, guaranteed bank loans of approximately RMB289.97 million, guaranteed other loan of RMB52.00 million and unsecured other loans of RMB43.85 million.

As at 31 March 2006, the bank loans of the Enlarged Group of RMB320.47 million are secured or guaranteed by the following:

(i) pledges of certain of the Enlarged Group’s land use rights, buildings and machinery;
(ii) guarantees provided by China Yituo;
(iii) guarantees provided by the Company and certain subsidiaries of the Company, including FTGF;
(iv) guarantees provided by the holding company of the minority shareholder of Zhenjiang Huachen Huatong Road Machinery Company Limited, a subsidiary of the Company; and
(v) guarantees provided by certain third parties.

As at 31 March 2006, the guaranteed other loan of RMB52.00 million is jointly guaranteed by China Yituo and FTGF.

As at 31 March 2006, the Enlarged Group has outstanding guarantees given to banks to the extent of RMB115.00 million and RMB20.00 million for securing loans granted to China Yituo and a customer of the Group respectively. The amount of bank loans drawn down by China Yituo and the customer as at 31 March 2006 are RMB115.00 million and RMB20.00 million, respectively.

Save as aforesaid or as otherwise disclosed therein, and apart from intra-group liabilities, the Enlarged Group did not have, at the close of business on 31 March 2006, any other outstanding mortgages, charges, debentures, or other loan capital or bank overdrafts, loans or other similar indebtedness, or any hire purchase contracts or finance leases or any guarantees or other material contingent liabilities.

4. WORKING CAPITAL

The Directors are of the opinion that taking into account the existing cash and bank balances, the Enlarged Group has sufficient working capital for its present requirements for the next 12 months from date of this circular.

5. MATERIAL ADVERSE CHANGES

The Directors confirm that there has been no material adverse change in the financial or trading position of the Group since 31 December 2005, the date to which the latest published audited financial statements of the Group were made up.

— 187 —

GENERAL INFORMATION

APPENDIX V

RESPONSIBILITY STATEMENT

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

EXPERT

(a) The following are the qualification of the experts who has given its opinion or advice which are contained in this circular:

Qualification

Name Qualification South China a deemed licensed corporation to carry on Type 6 (advising on corporate finance) regulated activity under the SFO Ernst & Young Certified Public Accountants

(b) As at the Latest Practicable Date, none of South China and Ernst & Young had any shareholding in any member of the Group, nor the right or option (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group.
(c) South China and Ernst & Young have given and have not withdrawn their written consent to the issue of this circular with the inclusion of their letter and references to their name and letter in the form and context in which they appear.
(d) The letter and recommendation given by South China and the letter given by Ernst & Young are given as of the date of this circular for incorporation herein.
(e) As at the Latest Practicable Date, none of South China and Ernst & Young had any direct or indirect interest in any assets which have 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 since 31 December 2005, the date to which the latest published audited financial statement of the Group was made up.

— 188 —

GENERAL INFORMATION

APPENDIX V

DISCLOSURE OF INTERESTS

Directors’ Interests

As at the Latest Practicable Date, save as disclosed below, none of the Directors, supervisors, chief executives of the Company and their associates had any interests or short positions in the shares, underlying shares and debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) which were required to be notified to the Company and Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they were taken or deemed to have under such provisions of the SFO), or which were required, pursuant to section 352 of the SFO, to be entered in the register referred to therein or which were required pursuant to the Model Code for Securities Transactions by Directors of Listed Companies contained in the Listing Rules, to be notified to the Company and the Stock Exchange:-

				Approximate
				percentage
				in the entire
	Name of			registered capital
	associated		Registered capital	of the associated
Name	corporation	Capacity	held (Note 2)	corporation
Yan Linjiao (Director)	Yituo (Luoyang)	Beneficial owner	RMB290,000 (L)	0.5%
	Lutong Construction
	Machinery Co., Ltd.
	(“Lutong Company”)
	(Note 1)

Notes:

1. Lutong Company is a limited company established in the PRC. Its total registered capital is RMB58,000,000. Mr. Yan Linjiao contributed RMB290,000 to the total registered capital of Lutong Company and therefore holding 0.5% of the total registered capital of Lutong Company.

2. The letter “L” represents the person’s long position in the registered capital of the associated corporation.

As at the Latest Practicable Date, none of the Directors, supervisors or chief executives of the Company or their spouses or children under 18 years of age were granted or had exercised any right to subscribe for any equity or debt securities of the Company or any of its associated corporations (within the meaning of Part XV of the SFO).

None of the Directors has any direct or indirect interest in any assets which have 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 since 31 December 2005, the date to which the latest published audited financial statement of the Group was made up.

— 189 —

APPENDIX V

GENERAL INFORMATION

None of the Directors, South China and Ernst & Young is materially interested in any contract or arrangement entered into by the Company or any of its subsidiaries which contract or arrangement is subsisting at the Latest Practicable Date and which is significant in relation to the business of the Group taken as a whole.

As at the Latest Practicable Date, none of the Directors or supervisors of the Company and their respective associates have interests in a business, apart from the business of the Group, which competes or is likely to compete, either directly or indirectly, with the business of the Group.

Substantial Shareholders’ Interests

(a) As at the Latest Practicable Date, so far as is known to, or can be ascertained after reasonable enquiries by, the Directors, supervisors or chief executives of the Company, the following entities (other than a Director, supervisor or chief executive of the Company) had an interest or short position in the shares or underlying shares (including options) of the Company which would fall to be disclosed to the Company under Divisions 2 and 3 of Part XV of the SFO:

Domestic Shares

Domestic Shares
			Approximate
			percentage of
			the total issued
Name of	Nature of	Number and class	share capital of
Shareholder	Interest	of securities	the Company
		(Note 1)
China Yituo	Beneficial	450,000,000	57.32%
	owner	domestic shares (L)
H Shares
			Approximate
			percentage of
Name of	Nature of	Number and class	the total
Shareholder	Interest	of securities	issued H Shares
		(Note 1)	of the Comapny
Fidelity International	Investment	24,216,600	7.23%
Limited	Manager	H Shares (L)
DnB NOR	Investment	16,716,000	4.99%
Asset Management	Manager	H Shares (L)
(Asia) Limited		(Note 2)

Note 1: The letter “L” represents the entities’ long position in the Shares.

Note 2: The detail of the substantial Shareholder was based on information set out in the website of the Stock Exchange. The Company has not been notified by the relevant Shareholder and has not received any Corporate Substantial Shareholder Notice from the relevant Shareholder.
Note 3: According to the Corporate Substantial Shareholder Notice submitted by State Street Corporation to the Company dated 23 September 2005, State Street Corporation is the holding company of an approved lending agent and 15,639,756 H Shares are held in a lending pool.

— 190 —

APPENDIX V

GENERAL INFORMATION

(b) As at the Latest Practicable Date, so far as is known to, or can be ascertained after reasonable enquiries by the Directors, supervisors or chief executives of the Company, the following entities were, directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any members of the Group:

		Approximate	percentage
Name of entity	Name of member of the Group	of equity interest
		Direct	Indirect
Luoyang Changhong	Luoyang Changxing Agricultural Machinery Co., Ltd.	30%	—
Trading Co., Ltd
Guizhou Hongyue Food	Guizhou Zhenning Biological Industrial Co., Ltd.	30%	—
(Group) Co., Ltd.
Shenyang Agricultural	Yituo Shenyang Tractor Company Limited	40%	—
Machinery Industrial Co.
Brilliance China Machinery	Yituo (Luoyang) Construction Machinery Co., Ltd.	51%	—
Holdings Ltd
(“Brilliance China”)
Brilliance China	Yituo (Luoyang) Building Machinery Co., Ltd.	51%	—
China Yituo	Yituo (Luoyang) Shentong Construction Machinery	24%	28.7%
	Co., Ltd. (“Yituo Shentong”)		(Note 1)
Brilliance China	Zhenjiang Huachen Huatong Road Machinery Co., Ltd.	59%	—
Jiangsu Huatong Machinery	Zhenjiang Huachen Huatong Road Machinery Co., Ltd.	41%	—
Group Co., Ltd.
First Branch Factory Trade	Yituo (Luoyang) Building Construction Machinery	32%	—
Union Committee of	Company Limited
Luoyang Building
Machinery Factory
Brilliance China	Zhenjiang Huatong Aran Machinery Co., Ltd.	59%	—
Jiangsu Huatong Machinery	Zhenjiang Huatong Aran Machinery Co., Ltd.	38%	—
Group Co., Ltd.
Luoyang Yituo Oriental	Yituo (Luoyang) Agricultural Machinery	20%	—
Enterprise Co., Ltd	and Tools Co., Ltd
(Labour Union)
Yituo (Luoyang) Construction	Yituo (Luoyang) Construction Machinery	20%	—
Machinery Co., Ltd	Trading Co., Ltd
Yituo (Luoyang) Building	Yituo (Luoyang) Construction Machinery	20%	—
Machinery Co., Ltd	Trading Co., Ltd
Yituo (Luoyang) Lutong	Yituo (Luoyang) Construction Machinery	15%	—
Construction Machinery	Trading Co., Ltd
Co., Ltd
China Yituo	Yituo Diesel	75%	12.9%
			(Note 2)
Brilliance China	Yituo Diesel	25%	—
Shanghai Material (Group)	Shanghai Qiangnong (Group) Co., Ltd	35.8%	—
Company
Yituo (Luoyang) Building	Yituo (Luoyang) Lutong Construction	46%	—
Machinery Co., Ltd	Machinery Co., Ltd
Li Jianye	Yituo (Luoyang) Lutong Construction	20%	—
	Machinery Co., Ltd

— 191 —

GENERAL INFORMATION

APPENDIX V

		Approximate	percentage
Name of entity	Name of member of the Group	of equity interest
		Direct	Indirect
Chen Jianzhen	Yituo (Luoyang)Lutong Construction	13%	—
	Machinery Co., Ltd
Li Junpeng	Yituo (Luoyang) Lutong Construction	11%	—
	Machinery Co., Ltd
Henan Province Construction	Luoyang First Motors Co., Ltd	60%	—
Investment Company
China Yituo	Yituo (Luoyang) Casting & Forging	50%	—
	Co., Ltd
Luoyang Yituo Chunzhen	Yituo (Luoyang) Casting & Forging	25%	—
Spare Parts Manufacturing	Co., Ltd
Co., Ltd
Yituo Diesel	Yituo Engine Machinery	50%	—

Note:

As China Yituo directly holds 57.32% of the equity interests of the Company and the Company directly holds 50% of the equity interests of Yituo Shentong, therefore, China Yituo indirectly holds 28.7% of the equity interests of Yituo Shentong.
As China Yituo directly holds 57.32% of the equity interests of the Company and the Company directly holds 90.1% of the equity interests of Brilliance China (who directly holds 25% of the equity interests of Yituo Diesel), therefore, China Yituo indirectly holds 12.9% of the equity interests of Yituo Diesel.
(c) Save as disclosed above, there is no other person so far as is known to the Directors, supervisors or chief executives of the Company who, as at the Latest Practicable Date, had an interest or short position in the shares or underlying shares (including options) of the Company which would fall to be disclosed to the Company under Divisions 2 and 3 of Part XV of the SFO, or, had, directly or indirectly, interested in 10% or more of nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any members of the Group.
(d) As at the Latest Practicable Date, so far as known to the Directors, supervisors or chief executives of the Company, Mr. Liu Dagong, Mr. Liu Wenying, Mr. Zhao Yanshui, Mr. Yan Linjiao and Mr. Shao Haichen, executive Directors, are also the directors of China Yituo, Mr. Zhao Yanshui, executive Director is also the general manager of China Yituo, Mr. Li Tengjiao and Mr. Zhang Jing, executive Directors are also the deputy general manager of China Yituo, whereas Mr. Li Youji, executive Director is also the assistant to the general manager of China Yituo. China Yituo is the controlling shareholder and holding company of the Company which had an interest of 57.32% in the Shares which would fall to be disclosed to the Company under Divisions 2 and 3 of Part XV of the SFO. Save as disclosed above, none of the Directors or proposed Directors is a director or employee of a company which had any interests or short positions in any shares and underlying shares (including options) of the Company which would fall to be disclosed to the Company under Divisions 2 and 3 of Part XV of the SFO.

— 192 —

GENERAL INFORMATION

APPENDIX V

SHARE CAPITAL

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

Authorised:	Number of Shares	RMB
ordinary shares of RMB1 each	785,000,000	785,000,000
Issued and fully paid:
domestic shares of RMB1 each	450,000,000	450,000,000
H Shares of RMB1 each	335,000,000	335,000,000

SERVICE CONTRACTS OF THE DIRECTORS AND THE SUPERVISORS

As at the Latest Practicable Date, none of the Directors or supervisors of the Company had entered into or was proposing to enter into a service contract with the Company or any of its subsidiaries (excluding contracts expiring or determinable by the Company within one year without payment of compensation other than statutory compensation).

LITIGATION

As at the Latest Practicable Date, neither the Company nor any of its subsidiaries is engaged in any litigation or arbitration or claim of material importance and no litigation or arbitration or claim of material importance is known to the Directors to be pending or threatened by or against any member of the Group.

PROCEDURES TO DEMAND A POLL AT GENERAL MEETING

Pursuant to article 77 of the articles of association of the Company, at any general meeting, a resolution put to the vote of the meeting shall be decided on a show of hands unless a poll is (before or after any vote by show of hands) demanded :

(i) by the chairman of the meeting;
(ii) by at least two Shareholders present in person or by proxy for the time being entitled to vote at the meeting; or
(iii) by any Shareholder or Shareholders (including proxy) holding individually or holding in aggregate of 10% or more of the Shares carrying the right to vote at the meeting.

As each of the Assets Swap Agreement, Diesel Repayment Agreement and Fuel Jet Repayment Agreement constituted a connected transaction, votes at the EGM will be taken by way of poll pursuant to the requirements of the Listing Rules.

— 193 —

GENERAL INFORMATION

APPENDIX V

GENERAL

(a) The secretary of the Company is Mr. Zhang Guo Long who is not a qualified accountant. As at the Latest Practicable Date, the Company has not appointed a qualified accountant pursuant to Rule 3.24 of the Listing Rules. The Company will use its best endeavors to continue seeking a suitable qualified accountant for appointment as soon as practicable.
(b) The registered and head office of the Company is at No.154 Jianshe Road, Luoyang, Henan Province, the PRC.
(c) The H Share transfer office of the Company in Hong Kong is Hong Kong Registrars Limited at 46th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong.
(d) In the event of inconsistency, the English text of this circular shall prevail over the Chinese text.

MATERIAL CONTRACTS

As at the Latest Practicable Date, no member of the Group has entered into any contracts, not being contracts entered into in the ordinary course of business, which are or may be material within the two years immediately preceding the Latest Practicable Date.

DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection during normal business hours up to and including 26 June 2006 at the offices of Li & Partners, at 22nd Floor, World Wide House, Central, Hong Kong and at the EGM:

(a) the articles of association of the Company;
(b) Assets Swap Agreement, the Diesel Repayment Agreement and the Fuel Jet Repayment Agreement;
(c) the letter of opinion from the Independent Board Committee dated 9 June 2006, the text of which is set out on page 15 of this circular;
(d) the letter of opinion from South China dated 9 June 2006, the text of which is set out on pages 16 to 26 of this circular; and
(e) the accountant’s report from Ernst &Young on Yituo Diesel dated 9 June 2006, the text of which is set out on pages 27 to 67 of this circular;
(f) the accountant’s report from Ernst &Young on Yituo Fuel Jet dated 9 June 2006, the text of which is set out on pages 68 to 107 of this circular;
(g) the letter from Ernst &Young dated 9 June 2006 regarding unaudited pro forma financial information of the Enlarged Group, the text of which is set out on pages 181 to 187 of this circular;
(h) the annual reports of the Company for each of the two financial years ended 31 December 2005;
(i) the written consents referred to in the section headed “Expert” above; and
(j) this circular.

— 194 —

NOTICE OF EGM

==> picture [233 x 77] intentionally omitted <==

(a joint stock limited company incorporated in the People’s Republic of China with limited liability)

(Stock Code: 0038)

NOTICE IS HEREBY GIVEN that an extraordinary general meeting (the “EGM”) of the shareholders of First Tractor Company Limited (the “Company”) will be held at No. 154 Jianshe Road, Luoyang, Henan Province, the People’s Republic of China on Friday, 28 July 2006 at 9:00 a.m. for the purpose of considering and, if thought fit, passing the following resolutions as ordinary resolutions:

ORDINARY RESOLUTIONS

“ THAT :

(A) the Diesel Repayment Agreement (as defined in the circular of the Company dated 9 June 2006 (the “Circular”), a copy of which has been produced to the EGM marked “A” and signed by the chairman of the EGM for the purpose of identification) and the terms of and the transactions contemplated thereunder and the implementation thereof be and are hereby approved, ratified and confirmed; and
(B) the Fuel Jet Repayment Agreement (as defined in the Circular, a copy of which has been produced to the EGM marked “B” and signed by the chairman of the EGM for the purpose of identification) and the terms of and the transactions contemplated thereunder and the implementation thereof be and are hereby approved, ratified and confirmed; and
(C) the Assets Swap Agreement (as defined in the Circular, a copy of which has been produced to the EGM marked “C” and signed by the chairman of the EGM for the purpose of identification) and the terms of and the transactions contemplated thereunder and the implementation thereof be and are hereby approved, ratified and confirmed; and
(D) any one of the directors of the Company be authorised for and on behalf of the Company, among other matters, to sign, execute, perfect, deliver or to authorise signing, executing, perfecting and delivering all such documents and deeds be hereby approved, ratified and confirmed, and be and are hereby authorised to do or authorise doing all such acts, matters and things as they may in their discretion consider necessary, expedient or desirable to give effect to and implement the Assets Swap Agreement, Diesel Repayment Agreement and Fuel Jet Repayment Agreement, and to waive compliance from or make and agree such variations of a non-material nature to any of the terms of any of the Diesel Repayment Agreement, the Fuel Jet Repayment Agreement and the Assets Swap Agreement as they may in their discretion consider to be desirable and in the interest of the Company.”

By Order of the Board Liu Dagong Chairman

Luoyang, the PRC, 9 June 2006

— 195 —

NOTICE OF EGM

Notes:

The register of members of the Company will be temporarily closed from 28 June 2006 to 28 July 2006 (both days inclusive) during which no transfer of shares of the Company (the “Shares”) will be registered in order to determine the list of shareholders of the Company (the ‘Shareholders”) for attending the EGM. The last lodgment for Share transfer should be made on 27 June 2006 at Hong Kong Registrars Limited by or before 4:00p.m.. The Shareholders or their proxies being registered before the close of business on 27 June 2006 are entitled to attend the EGM by presenting their identity documents. The address of H Share registrar of the Company, Hong Kong Registrars Limited is 46/F., Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong.
Each Shareholder having the rights to attend and vote at the EGM is entitled to appoint one or more proxies (whether a Shareholder or not) to attend and vote on his behalf. Should more than one proxy be appointed by one Shareholder, such proxy shall only exercise his voting rights on a poll.
Shareholders can appoint a proxy by an instrument in writing (i.e. by using the Proxy Form enclosed). The Proxy Form shall be signed by the person appointing the proxy or an attorney authorised by such person in writing. If the Proxy Form is signed by an attorney, the power of attorney or other documents of authorization shall be notarially certified. To be valid, the Proxy Form and the notarially certified power of attorney or other documents of authorization must be delivered to the Company’s H Share registrar. Hong Kong Registrars Limited, at 46/F., Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong as soon as possible and in any event not less than 24 hours before the time scheduled for the holding of the EGM or any adjournment thereof.
Shareholders or proxies who intend to attend the EGM are requested to deliver the duly completed and signed reply slip for attendance to the Company’s registered address in person, by post or by facsimile on or before 4:00p.m. 7 July 2006.
Shareholders or their proxies shall present proofs of their identities upon attending the EGM. Should a proxy be appointed, the proxy shall also present the Proxy Form.
The EGM is expected to last for less than one day. The Shareholders and proxies attending the EGM shall be responsible for their own traveling and accommodation expenses.
The Company’s registered address:

No. 154, Jianshe Road, Luoyang, Henan Province, the PRC Postal code : 471004 Telephone : 86-379-64967038 Facsimile : 86-379-64967438 Email : [email protected]

As at the date hereof, the Board comprises ten executive Directors: Mr. Liu Dagong (Chairman), Mr. Liu Wenying, Mr. Zhao Yanshui, Mr. Yan Linjiao, Mr. Li Tengjiao, Mr. Shao Haichen, Mr. Zhang Jing, Mr. Li Youji, Mr. Liu Shuangcheng and Mr. Zhao Fei, and three independent non-executive Directors: Mr. Lu Zhongmin, Mr. Chen Zhi and Mr. Chan Sau Shan, Gary.

For identification purpose only

— 196 —

AI assistant

First Tractor Company Limited — Proxy Solicitation & Information Statement 2006

48894_rns_2006-06-09_002b4848-0172-4138-9488-2146b00417bd.pdf

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

EXCHANGE OF THE CASTING FACTORIES INTERESTS FOR THE EQUITY INTERESTS IN YITUO DIESEL AND YITUO FUEL JET MAJOR AND CONNECTED TRANSACTION FINANCIAL ASSISTANCES TO CHINA YITUO

Financial Adviser

Oriental Patron Asia Limited

South China Capital Limited

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

LETTER FROM THE BOARD

EXCHANGE OF THE CASTING FACTORIES INTERESTS FOR THE EQUITY INTERESTS IN YITUO DIESEL AND YITUO FUEL JET MAJOR AND CONNECTED TRANSACTION FINANCIAL ASSISTANCES TO CHINA YITUO

INTRODUCTION

LETTER FROM THE BOARD

THE ASSETS SWAP AGREEMENT

Date

Parties

LETTER FROM THE BOARD

Consideration

Payment of the net consideration

LETTER FROM THE BOARD

Conditions Precedent

SHAREHOLDING STRUCTURE IMMEDIATELY BEFORE AND AFTER COMPLETION OF THE ASSETS SWAP AGREEMENT

Before completion of the Assets Swap Agreement

LETTER FROM THE BOARD

After completion of the Assets Swap Agreement

INFORMATION OF THE COMPANY AND CHINA YITUO

The Company

China Yituo

INFORMATION OF ASSETS TO BE EXCHANGED UNDER THE ASSET SWAP AGREEMENT

Yituo Diesel

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Yituo Fuel Jet

LETTER FROM THE BOARD

Yituo Engine Machinery

The Casting Factories

Precision Casting Factory

No. 1 Iron Casting Factory

Steel Casting Factory

Nodular (Graphite) Cast Iron and Aluminium Factory

LETTER FROM THE BOARD

REASONS FOR AND BENEFITS OF THE ASSETS SWAP

FINANCIAL ASSISTANCES

LETTER FROM THE BOARD

Principal

Repayment terms

Security

Interest

Other terms

Conditions

LETTER FROM THE BOARD

Date

Parties

Principal

Repayment terms

Security

Interest

Other terms

LETTER FROM THE BOARD

Conditions

FINANCIAL EFFECTS OF THE ACQUISITION ON THE GROUP

Earnings

Net tangible asset

LETTER FROM THE BOARD

FINANCIAL AND TRADING PROSPECTS

EGM

LETTER FROM THE BOARD

RECOMMENDATIONS

ADDITIONAL INFORMATION

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

EXCHANGE OF THE CASTING FACTORIES INTERESTS FOR THE EQUITY INTERESTS IN YITUO DIESEL AND YITUO FUEL JET MAJOR AND CONNECTED TRANSACTION FINANCIAL ASSISTANCES TO CHINA YITUO

LETTER FROM SOUTH CHINA

South China Capital Limited

EXCHANGE OF THE CASTING FACTORIES INTERESTS FOR THE EQUITY INTERESTS IN YITUO DIESEL AND YITUO FUEL JET MAJOR AND CONNECTED TRANSACTION FINANCIAL ASSISTANCES TO CHINA YITUO

INTRODUCTION

LETTER FROM SOUTH CHINA

BASIS OF OUR OPINION

First Tractor Company Limited Proxy Solicitation & Information Statement 2006