FIYTA Precision Technology Co., Ltd. — Annual Report 2004

Apr 15, 2005

SHENZHEN FIYTA HOLDINGS LIMITED (Joint stock limited company incorporated in the People’s Republic of China)

INDEPENDENT AUDITOR’S REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004

SHENZHEN FIYTA HOLDINGS LIMITED

(Joint stock limited company incorporated in the People’s Republic of China)

INDEPENDENT AUDITOR’S REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004

Contents	Pages
Independent report of the auditors	1
Consolidated income statement	2
Consolidated balance sheet	3
Consolidated statement of changes in shareholders’ equity	4
Consolidated cash flow statement	5
Notes to the consolidated financial statements	6 – 28
Supplementary information

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PricewaterhouseCoopers Zhong Tian CPAs Co., Ltd.

INDEPENDENT REPORT OF THE AUDITORS

TO THE SHAREHOLDERS OF SHENZHEN FIYTA HOLDINGS LIMITED (Joint stock limited company incorporated in the People’s Republic of China)

11/F PricewaterhouseCoopers Center 202 Hu Bin Road Shanghai 200021 People's Republic of China Telephone +86 (21) 6123 8888 Facsimile +86 (21) 6123 8800

We have audited the accompanying consolidated balance sheet of Shenzhen Fiyta Holdings Limited (the “Company”) and its subsidiaries (collectively the “Group”) as of 31 December 2004 and the related consolidated income and consolidated cash flow statements for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as of 31 December 2004 and of the consolidated results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

PricewaterhouseCoopers Zhong Tian CPAs Co., Ltd.

13 April 2005

SHENZHEN FIYTA HOLDINGS LIMITED (Joint stock limited company incorporated in the People’s Republic of China)

CONSOLIDATED INCOME STATEMENT

FOR THE YEAR ENDED 31 DECEMBER 2004

Notes Turnover 4 Cost of sales Gross profit Other operating (expense) / income 7 Selling expenses Administrative expenses Gain on sale of discontinuing operation 30 Loss on disposal of a subsidiary Profit from operations 5 Finance (costs) / income - net 8 Profit before taxation Taxation charge 9 Profit after taxation Minority interests Net profit for the year Dividends 25 Earnings per share 10	2004 RMB’000 278,247 (177,105) 101,142 (7,116) (55,225) (35,617) - - 3,184 (98) 3,086 (2,818) 268 (63) 205 - RMB0.001	2003 RMB’000 228,133 (139,435)
		88,698 16,272 (57,173) (42,578) 777 (403)
		5,593 553
		6,146 (859)
		5,287 845
		6,132
		-
		RMB0.02

The accompanying notes form an integral part of these consolidated financial statements.

• 2 -

SHENZHEN FIYTA HOLDINGS LIMITED

(Joint stock limited company incorporated in the People’s Republic of China)

CONSOLIDATED BALANCE SHEET AS AT 31 DECEMBER 2004

Notes ASSETS NON-CURRENT ASSETS Fixed assets 11 Investment properties 12 Construction in progress 13 Leasehold land payments 14 Available-for-sale investments 15 Deferred tax assets 16 Other non-current assets Total non-current assets CURRENT ASSETS Inventories 17 Trade receivables 18 Due from a related company 29 Prepayments and other receivables 19 Trading investments 20 Designated deposits 21 Cash and cash equivalents Total current assets TOTAL ASSETS EQUITY AND LIABILITIES CAPITAL AND RESERVES Share capital 22 Reserves 23 Accumulated losses Total shareholders’ equity MINORITY INTERESTS NON-CURRENT LIABAILITIES Deferred income CURRENT LIABILITIES Trade payables Staff welfare payable Tax payable Accruals and other current liabilities Short-term loans 24 Total current liabilities TOTAL EQUITY AND LIABILITIES	2004 RMB’000 70,291 187,600 1,290 16,003 4,885 15,466 1,947 297,482 203,983 18,730 1,500 36,213 11,819 - 84,792 357,037 654,519 249,318 305,627 (36,770) 518,175 7,336 3,000 65,264 18,713 449 21,582 20,000 126,008 654,519	2003 RMB’000 40,142 16,492 125,227 16,464 4,885 16,731 2,507
		222,448
		152,649 19,549 1,500 33,984 4,314 51,004 117,527
		380,527
		602,975
		249,318 305,627 (36,975)
		517,970
		7,273
		3,000
		34,505 18,677 311 21,139 100
		74,732
		602,975

On 13 April 2005, Shenzhen Fiyta Holdings Limited’s Board of Directors approved these financial statements for issue.

The accompanying notes form an integral part of these consolidated financial statements.

• 3 -

SHENZHEN FIYTA HOLDINGS LIMITED (Joint stock limited company incorporated in the People’s Republic of China)

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEAR ENDED 31 DECEMBER 2004

At 1 January 2003 Net profit for the year At 31 December 2003 Net profit for the year At 31 December 2004	Share capital RMB’000 249,318 - 249,318 - 249,318		Reserves	Sub-total RMB’000 305,627 - 305,627 - 305,627	Accumulated losses RMB’000 (43,107) 6,132 (36,975) 205 (36,770)	Total
		Capital reserve RMB’000 191,108 - 191,108 - - 191,108	Statutory reserves RMB’000 114,519 - 114,519 - 114,519
						RMB’000 511,838 6,132
						517,970 205
						518,175

The accompanying notes form an integral part of these consolidated financial statements.

• 4 -

SHENZHEN FIYTA HOLDINGS LIMITED

(Joint stock limited company incorporated in the People’s Republic of China)

CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2004

Notes Cash flows from operating activities Cash used in operations 26 Interest paid Tax paid Net cash flows used in operating activities Cash flows from investing activities Purchases of fixed assets Additions to construction in progress Sales proceeds from disposals of fixed assets Proceeds from sale of discontinuing operation 30 Disposal of a subsidiary, net of cash disposed Dividends received from available-for-sale investments Investment income from designated deposit Decrease in designated deposits Subsidiary in voluntary liquidation and not consolidated Interest received Government grants received Net cash flows (used in) / generated from investing activities Cash flows from financing activities Proceeds from borrowings Repayments of borrowings Net cash flows generated from / (used in) financing activities (Decrease) / increase in cash and cash equivalents At start of year At end of year	2004 RMB’000 (40,630) (323) (1,415) (42,368) (39,053) (24,221) 1,002 - - - 351 51,004 - 650 - (10,267) 20,000 (100) 19,900 (32,735) 117,527 84,792	2003 RMB’000 (8,320) - (795)
		(9,115)
		(8,048) (63,955) 1,327 2,800 22 138 10,000 73,996 (842) 802 3,000
		19,240
		100 (4,000)
		(3,900)
		6,225 111,302
		117,527

The accompanying notes form an integral part of these consolidated financial statements.

• 5 -

SHENZHEN FIYTA HOLDINGS LIMITED (Joint stock limited company incorporated in the People’s Republic of China)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. CORPORATE INFORMATION

Shenzhen Fiyta Holdings Limited (the “Company”) was established in the People’s Republic of China (the “PRC”) as a joint stock limited company following a reorganisation of its predecessor company, Shenzhen Fiyta Timing Industry Company, in December 1992. The Company’s Renminbi Ordinary Shares (“A Shares”) and Domestically Listed Foreign Shares (“B Shares”) were listed on the Shenzhen Stock Exchange in March 1993.

The Company’s holding company is CATIC Shenzhen Holdings Limited (“CATIC”) which holds 52.24% of its equity interest. CATIC’s H Shares were listed on The Stock Exchange of Hong Kong in September 1997.

The Company and its subsidiaries (the “Group”) are principally engaged in the design, manufacture, assembly and sale of quartz analog watches, clocks, watch straps and watch casings, catering and entertainment businesses and property management.

At 31 December 2004, the Company had the following major subsidiaries (all incorporated in the PRC):

Name ofthe subsidiaries Shenzhen Fiyta Precision Timing Manufacture Co., Ltd. Shenzhen Feijing Precision Optical Device Manufacture Co., Ltd. Shenzhen Feiyu Art Clock Co., Ltd. Shenzhen Feitu New Technology Development Company Shenzhen Harmony World Watch Centre Co., Ltd.	Registered capital RMB10,000,000 RMB7,000,000 HKD3,000,000 RMB3,080,000 RMB15,000,000	Attributable equity interest Direct Indirect 90% 9% 90% 9% 75% - 60% - 90% -	Principalactivities
		Direct 90% 90% 75% 60% 90%	Design, manufacture and assembly of quartz watches and watch components Manufacture of precision optical device and watch surfaces Design, manufacture and distribution of clocks Electroplating of watch straps, casing and jewellery Distribution of watches and watch components and provision of repair services

• 6 -

SHENZHEN FIYTA HOLDINGS LIMITED

(Joint stock limited company incorporated in the People’s Republic of China)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. CORPORATE INFORMATION (Cont’d)

Name ofthe subsidiaries	Registered capital	Attributable equity interest Direct Indirect 62% - 50% -	Principalactivities
Xian Haomen Food & Recreation City Co., Ltd. (note a) Shenzhen World Famous Watch Centre Co., Ltd. (note b)	HKD16,000,000 RMB 2,800,000	Direct 62% 50%	Catering and entertainment Retailing of advanced watch, glasses and jewellery

• Note: (a) This subsidiary has sold out all its assets related to catering and entertainment business and ceased its operations since 2003.

• (b) The Company has obtained substantial control over the joint venture’s operation since 2003. As a result, its results and assets have been consolidated in the Group’s financial statements.

2. BASIS OF PREPARATION

The consolidated financial statements are prepared in conformity with International Financial Reporting Standards (“IFRS”) and under the historical cost convention as modified by the revaluation of certain fixed assets, non-current investments and trading investments. This basis of accounting differs from that used in the statutory accounts of the PRC Group companies which are prepared in accordance with the accounting principles and the relevant financial regulations applicable to enterprises in the PRC. The differences arising from the restatement of the results of operations for compliance with IFRS are reflected in these consolidated financial statements.

The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management’s best knowledge of current event and actions, actual results ultimately may differ from those estimates.

During the year ended 31 December 2004, certain changes were introduced to IAS 36 - “Impairment of Assets” and IAS 38 - “Intangible Assets”, and a new standard, IFRS 3 - “Business Combinations”, became effective. There were no material effects of these revised standards to the financial statements of the Group.

• 7 -

SHENZHEN FIYTA HOLDINGS LIMITED

(Joint stock limited company incorporated in the People’s Republic of China)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3. PRINCIPAL ACCOUNTING POLICIES

The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below.

(a) Consolidation

Subsidiary undertakings, which are those companies in which the Group, directly or indirectly, has an interest of more than one half of the voting rights or otherwise has power to govern the financial and operating policies are consolidated. The existence and effect of potential voting rights that are presently exercisable are considered when assessing whether the Group controls another entity.

Subsidiaries are consolidated from the date on which control is transferred to the Group and are no longer consolidated from the date that control ceases. Intercompany transactions, balances and unrealised gains and losses on transactions between Group companies are eliminated. Minority interests represent the interests of outside members in the operating results and net assets of subsidiaries.

(b) Related party

Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party, or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence.

(c) Foreign currency translation

(1) Measurement currency

Items included in the financial statements of each entity in the Group are measured using the currency that best reflects the economic substance of the underlying events and circumstances relevant to that entity (“the measurement currency”). The consolidated financial statements are presented in Renminbi (“RMB”), which is the measurement currency of the Company.

• (2) Transactions and balances

Foreign currency transactions are translated into the measurement currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement.

Translation differences on debt securities and other monetary financial assets measured at fair value are included in foreign exchange gains and losses. Translation differences on non-monetary items are reported as part of the fair value gain or loss.

• (d) Financial assets and financial liabilities

Financial assets and financial liabilities carried on the balance sheet include cash and bank balances, investments, trade receivables, prepayments and other receivables, amounts due from related companies, trade payables, accruals and other current liabilities and borrowings. Investments and trade receivables are stated at carrying amounts determined in accordance with note 3(e) and note 3(m) respectively. Other financial assets and financial liabilities are stated at cost.

Disclosures about financial assets and financial liabilities of the Group are provided in note 27.

1. PRINCIPAL ACCOUNTING POLICIES (Cont’d)

2. 8 -

SHENZHEN FIYTA HOLDINGS LIMITED (Joint stock limited company incorporated in the People’s Republic of China)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(e) Investments

The Group classified its investments into the following categories: trading, held-to-maturity and available-for sale. The classification is dependent on the purpose for which the investment were acquired. Management determines the classification of its investments at the time of the purchase and re-evaluates such designation on a regular basis.

Investments that are acquired principally for the purpose of generating a profit from short-term fluctuations in price are classified as trading investments and included in current assets; for the purpose of these financial statements, short-term is defined as three months. Investments with a fixed maturity that management has the intent and ability to hold to maturity are classified as held-to-maturity and are included in non-current assets, except for maturities within 12 months from the balance sheet date which are classified as current assets.

Investments intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, are regarded as available-for-sale and are classified as non-current investments unless management has the express intention of holding the investment for less than twelve months from the balance sheet date or unless they will need to be sold to raise operating capital, in which case they are included in current assets.

Purchases and sales of investments are recognised on the trade date, which is the date that the Group commits to purchase or sell the asset. Cost of purchase includes transaction costs. Trading and non-current investments are subsequently carried at fair value. Held-to-maturity investments are carried at amortised cost using the effective yield method. Realised and unrealised gains and losses arising from changes in the fair value of trading investments and noncurrent investments are included in the income statement in the period in which they arise. For the held-to-maturity investments, the gain or loss shall be amortised to income statement over the remaining life of the held-to-maturity investment using the effective interest method. Unrealised gains and losses arising from changes in the fair value of available for sale are recognized in equity.

The fair value of investments is based on quoted market prices or amounts derived from cash flow models. Fair values for unlisted equity securities are estimated using applicable price/earnings or price/cash flow ratios refined to reflect the specific circumstances of the issuer. Equity securities for which fair values cannot be measured reliably are recognised at cost less impairment.

(f) Investment properties

Investment properties, principally comprising office buildings, are held for long-term rental yields and are not occupied by the Group. Investment properties are treated as long-term investments and are carried at cost less accumulated depreciation and accumulated impairment losses, if any.

Depreciation is provided using the straight-line method to write off the cost of the investment properties over their estimated useful lives which are between 20 and 35 years, after deducting the estimated residual value. Where the carrying amount of an investment property is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount.

The cost of maintenance, repairs and minor equipment is charged to the income statement as incurred; the cost of major renovations and improvements is capitalised when it is probable that future economic benefits in excess of the originally assessed standard of performance of the existing asset will flow to the Group. The gain or loss on disposal of an investment property is recognised with reference to its carrying value.

3. PRINCIPAL ACCOUNTING POLICIES (Cont’d)

(g) Fixed assets and depreciation

• 9 -

SHENZHEN FIYTA HOLDINGS LIMITED (Joint stock limited company incorporated in the People’s Republic of China)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Fixed assets are stated at cost or valuation less accumulated depreciation and accumulated impairment losses. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use.

Independent valuations are performed periodically. In the intervening period, the directors review the carrying value of the fixed assets and adjustment is made where in the director’s opinion there has been a material change in value. Increases in valuation are credited to revaluation reserve. Decreases in valuation are first offset against increases on earlier valuations in respect of the same fixed asset and are thereafter debited to operating profit. Any subsequent increases are credited to operating profit up to the amount previously debited.

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

Buildings	20	-	35	years
Equipment and machinery	5	-	10	years

Leasehold improvements are depreciated over the remaining period of the lease or beneficial period.

Where the carrying amount of a fixed asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount.

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

Repairs and maintenance are charged to the income statement during the financial period in which they are incurred. The cost of major renovations is included in the carrying amount of the asset when it is probable that the future economic benefits in excess of the originally assessed standard of performance of the existing asset will flow to the Group. Major renovations are depreciated over the remaining useful life of the related asset.

(h) Leasehold land payments

Leasehold land payments are up-front payments to acquire a long term interest in land. These payments are stated at cost and amortised over the period of lease on a straight-line basis.

(i) Construction in progress

Construction in progress represents properties under construction and plant and equipment under installation or testing, is stated at cost, which includes the costs of construction, the costs of buildings, machinery and equipment and interest charges arising from borrowings used to finance these assets during the period of construction or installation and testing. When the assets concerned are brought into use, the costs are transferred to fixed assets and depreciated in accordance with the policy as stated above.

• 10 -

SHENZHEN FIYTA HOLDINGS LIMITED

(Joint stock limited company incorporated in the People’s Republic of China)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. PRINCIPAL ACCOUNTING POLICIES (Cont’d)

(j) Impairment of long lived assets

Fixed assets and other non-current assets are reviewed for impairment losses whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the carrying amount of the asset exceeds its recoverable amount which is the higher of an asset’s net selling price and value in use. For the purpose of assessing impairment, assets are grouped at the lowest level for which there are separately identifiable cash flows.

(k) Operating leases

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

• (1) Where the Group is the lessee

Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease.

• (2) Where the Group is the lessor

Assets leased out under operating bases are included in fixed assets or investment properties in the balance sheet. They are depreciated over their expected useful lives on a basis consistent with similar fixed assets or investment properties. Rental income (net of any incentives given to lessees) is recognised on a straight-line basis over the lease term.

The Group has no finance leases.

(l) Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined using the weighted average basis. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity) but excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less the costs of completion and selling expenses.

(m) Trade receivables

Trade receivables are carried at original invoiced amount less provision made for impairment of these receivables.

A provision for impairments of trade receivables is established when there is an objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the carrying amount and the recoverable amount, being the present value of expected cash flows, discounted at the market rate of interest for similar borrowers.

(n) Cash and cash equivalents

Cash and cash equivalents are carried in the balance sheet at cost. For the purpose of the cash flow statement, cash and cash equivalents comprise cash on hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less. PRINCIPAL ACCOUNTING POLICIES (Cont’d)

2. 11 -

SHENZHEN FIYTA HOLDINGS LIMITED (Joint stock limited company incorporated in the People’s Republic of China)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(o) Borrowings

Borrowings are recognised initially at the proceeds received, net of transaction costs incurred.

Borrowings are subsequently stated at amortised cost using the effective yield method; any difference between proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings.

(p) Revenue recognition

Revenue comprises substantially sales of goods which are recognised when the significant risks and rewards of ownership of the goods have been transferred to customers. Sales amounts are shown at invoiced amounts net of discounts and value-added tax.

Service revenue is recognised when the service has been rendered and the entitlement to the service consideration has been established.

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

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

Rental income is recognised on an accrual basis.

(q) Employee social insurance schemes

The Group participates in certain employee social insurance schemes in respect of pension, and medical and other insurance managed by governmental organisations. According to the relevant provisions, the Group and its employees are required to make contributions to Social Security Administration Bureau at specified amounts. The proportion of insurance expenses borne by the Group is included in the consolidated operating results when incurred.

The Group has no further liabilities other than the above defined contribution. The Group’s contributions to the defined contribution schemes are charged to income statement as when incurred.

(r) Government grants relating to purchase of property, plant and equipment

Grants from the government are recognised at their fair value where there is a reasonable assurance that the grants will be received and the Group will comply with all attached conditions.

Government grants relating to the purchase of property, plant and equipment are included in noncurrent liabilities as other liabilities and are credited to the income statement on a straight line basis over the expected lives of the related assets.

• 12 -

SHENZHEN FIYTA HOLDINGS LIMITED

(Joint stock limited company incorporated in the People’s Republic of China)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3. PRINCIPAL ACCOUNTING POLICIES (Cont’d)

(s) Taxation

PRC income taxes are provided for based on the estimated assessable profit and tax rates applicable to the Company and its subsidiaries. Deferred income tax is provided, using the liability method, for all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Currently enacted tax rates are used to determine deferred income tax.

Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which temporary differences can be utilised.

(t) Dividends

Dividends are recorded in the Group’s financial statements in the period in which they are approved by the Group’s shareholders.

(u) Segment reporting

Business segments provide products or services that are subject to risks and returns that are different from those of other business segments. Geographical segments provide products or services within a particular economic environment that is subject to risks and returns that are different from those of components operating in other economic environments.

(v) Comparatives

Where necessary, comparative figures have been reclassified to conform to changes in presentation in the current year.

• 13 -

SHENZHEN FIYTA HOLDINGS LIMITED

(Joint stock limited company incorporated in the People’s Republic of China)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

4. BUSINESS SEGMENTS INFORMATION OF THE GROUP

For the year ended 31 December 2004 Turnover Segment results Other expense Operating profits Finance costs - net Profit before taxation Taxation Profit after taxation Minority interests Net profit Segment assets Unallocated assets Segment liabilities Unallocated liabilities Capital expenditure Depreciation and amortisation - fixed assets - investment properties Amortisation of leasehold land Provision for doubtful debts Reversal of inventory obsolescence	Clocks and watches RMB’000 250,902 (7,313) 418,746 108,559 39,053 7,358 - - 443 (3,386)	Property rental RMB’000 27,345 20,096 203,603 - 50,921 - 4,367 461 - -	Catering, entertainment and others RMB’000 - - - - - - - - - -	Total RMB’000 278,247
				12,783 (9,599)
				3,184 (98)
				3,086 (2,818)
				268 (63)
				205
				622,349 32,170
				654,519
				108,559 20,449
				129,008
				89,974
				7,358
				4,367
				461
				443
				(3,386)

• 14 -

SHENZHEN FIYTA HOLDINGS LIMITED

(Joint stock limited company incorporated in the People’s Republic of China)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS SEGMENTS INFORMATION OF THE GROUP (Cont’d)

For the year ended 31 December 2003 Turnover Segment results Other revenue Gain on sale of discontinuing operation Loss on disposal of a subsidiary Profit before taxation Finance income – net Profit before taxation Taxation Profit after taxation Minority interests Net profit Segment assets Unallocated assets Segment liabilities Unallocated liabilities Capital expenditure Depreciation and amortisation - fixed assets - investment properties Amortisation of leasehold land payments Provision for doubtful debts Reversal of inventory obsolescence	Clocks and watches RMB’000 208,302 (7,905) 497,471 77,051 72,047 6,478 - 151 7,910 (423)	Property rental RMB’000 14,768 12,925 28,570 270 - - 1,042 310 - -	Catering, entertainment and others RMB’000 5,063 (684) - - - 2,469 - - - -	Total RMB’000 228,133
				4,336 883 777 (403)
				5,593 553
				6,146 (859)
				5,287 845
				6,132
				526,041 76,934
				602,975
				77,321 411
				77,732
				72,047
				8,947
				1,042
				461
				7,910
				(423)

There are no sales or other transactions between the business segments. Segment assets comprise operating assets and mainly exclude deferred tax assets, designated deposits and investments. Segment

• 15 -

SHENZHEN FIYTA HOLDINGS LIMITED

(Joint stock limited company incorporated in the People’s Republic of China)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

liabilities comprise operating liabilities and mainly exclude minority interests, certain borrowings and tax payable. All assets and operations of the Group are located in the PRC.

• 16 -

SHENZHEN FIYTA HOLDINGS LIMITED

(Joint stock limited company incorporated in the People’s Republic of China)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

5. PROFIT FROM OPERATIONS

The following items have been included in arriving at operating profit:

2004 RMB’000 Fair value losses / (gain) on trading investments 9,857 (Gain) / loss on disposal of trading investments (258) Gain on sale of discontinuing operation - (Gain) / loss on disposals of fixed assets (73) Provision for doubtful debts 443 Reversal of inventory obsolescence (3,386) Depreciation on fixed assets 7,358 Depreciation on investment properties 4,367 Amortisation of leasehold land payments 461 Amortisation of other non-current assets 560 Operating lease rental expense 6,205 Cost of inventories recognised as an expense 169,487 Repairs and maintenance expenditure on fixed assets 133 Staff costs (note 6) 38,987 Advertising expenses 11,046 Loss on disposal of a subsidiary - Directors’ emoluments 2,296 6. STAFF COSTS 2004 RMB’000 Staff salaries 33,641 Staff welfare 2,348 Social insurance expenses 2,998 38,987 The number of employees at 31 December 2004 was 1,195 (2003: 1,068).	2003 RMB’000 (1,089) 206 (777) 536 7,910 (423) 8,947 1,042 461 397 5,147 132,741 193 33,887 13,522 403 352
	2003 RMB’000 28,519 2,605 2,763
	33,887

1. OTHER OPERATING (EXPENSES) / INCOME

Investment income from designated deposits Repair and maintenance income Government subsidies (Loss) / gain from trading investments - profit / (loss) on sales - Fair value (loss) / gain Others	2004 RMB’000 351 671 - 258 (9,857) 1,461 (7,116)	2003 RMB’000 10,000 513 3,800 (206) 1,089 1,076
		16,272

• 17 -

SHENZHEN FIYTA HOLDINGS LIMITED

(Joint stock limited company incorporated in the People’s Republic of China)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

8. FINANCE (COSTS) / INCOME - NET

Interest income - bank deposits Interest expenses - bank loans Net exchange (losses) / gain Others	2004 RMB’000 650 (323) (13) (412) (98)	2003 RMB’000 802 - 32 (281)
		553

9. TAXATION CHARGE

Taxation charge for the year are as follows:

Current taxation Deferred taxation (note 16)	2004 RMB’000 1,553 1,265 2,818	2003 RMB’000 1,465 (606)
		859

The tax on the Group’s profit before tax differs from the theoretical amount that could arise using the basic tax rates applicable to the Company and its subsidiaries as follows:

Profit before taxation Tax calculated at the tax rates applicable to the Company and its subsidiaries ranging from 15% to 33% Tax effect of a subsidiary which was exempted from income tax Tax effect in tax losses of subsidiaries Expenses not deductible for tax purpose Income not subject to tax Tax charge	2004 RMB’000 3,086 463 (936) 1,289 2,043 (41) 2,818	2003 RMB’000 6,146
		1,046 (1,445) 866 478 (86)
		859

Pursuant to the relevant income tax laws of the PRC, group companies established in the Shenzhen Special Economic Zone are subject to income tax at a rate of 15% while those established in other areas are subject to income tax at a rate of 33%. In addition, as approved by the local Tax Bureau, a subsidiary is entitled to full exemption from PRC income tax for two years starting from the first profit making year and a 50% reduction in the next three years.

10. EARNINGS PER SHARE

The calculation of earnings per share is based on the consolidated profit for the year of RMB205,000 (2003: RMB6,132,000) and 249,318,000 shares (2003: 249,318,000 shares) on issue.

• 18 -

SHENZHEN FIYTA HOLDINGS LIMITED

(Joint stock limited company incorporated in the People’s Republic of China)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

11. FIXED ASSETS

Cost / valuation At beginning of year Reclassification to investment properties (Note 12) Additions Disposals Disposal of a subsidiary Voluntary liquidation of a subsidiary At end of year Representing At cost At valuation Accumulated depreciation and impairment At beginning of year Reclassification to investment properties (Note 12) Charge for the year Disposals Disposal of a subsidiary Voluntary liquidation of a subsidiary At end of year Net book value At end of year At beginning of year		2004	2004	Total	2003
	Buildings	Equipment and machinery	Leasehold improvements		Total
	RMB’000 34,600 (918) 26,699 - - - 60,381 26,699 33,682 60,381 12,250 (301) 1,075 - - - 13,024 47,357 22,350	RMB’000 32,674 - 8,124 (6,016) - - 34,782 12,532 22,250 34,782 20,108 - 3,250 (5,087) - - 18,271 16,511 12,566	RMB’000 23,681 - 4,230 (12,732) - - 15,179 15,179 - 15,179 18,455 - 3,033 (12,732) - - 8,756 6,423 5,226	RMB’000 90,955 (918) 39,053 (18,748) - - 110,342 54,410 55,932 110,342 50,813 (301) 7,358 (17,819) - - 40,051 70,291 40,142	RMB’000 107,808 - 8,048 (11,378) (9,972) (3,551)
					90,955
					28,089 62,866
					90,955
					62,083 - 8,947 (9,515) (7,718) (2,984)
					50,813
					40,142
					45,725

• 19 -

SHENZHEN FIYTA HOLDINGS LIMITED

(Joint stock limited company incorporated in the People’s Republic of China)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

11. FIXED ASSETS (Cont’d)

Had the fixed assets been carried at cost less accumulated depreciation, the carrying amounts of each category of fixed assets would have been as follows:

Cost Accumulated depreciation		2004	2004	Total RMB’000 104,307 (38,169) 66,138	2003
	Buildings RMB’000 54,346 (11,142) 43,204	Equipment andmachinery RMB’000 34,782 (18,271) 16,511	Leasehold improvements RMB’000 15,179 (8,756) 6,423		Total
					RMB’000 84,920 (48,931)
					35,989

The Group is in the process of applying for property certificates in respect of buildings with a net book value amounting to RMB26,343,000 at 31 December 2004 (2003: RMB 9,227,209).

The buildings and equipment and machinery were valued on an open market value and a replacement basis respectively at 31 December 2002 by Shenzhen Peng Xing Real Estate Valuation Co., Ltd. (“Shenzhen Peng Xing”), an independent valuer registered in the PRC. The revalued amounts are not materially different from the carrying values of buildings and equipment and machinery.

12. INVESTMENT PROPERTIES

Net book value at beginning of year Transfer from construction in process (note 13) Transfer from fixed assets (note 11) Depreciation for the year Net book value at end of year Directors’ valuation -Including leasehold land payments	2004 RMB’000 16,492 174,858 617 (4,367) 187,600 346,019	2003 RMB’000 17,534 - - (1,042) 16,492 100,000

The investment properties of the Group are situated in the PRC and the related leasehold land was granted by Town Planning and Land Administration Bureau of Shenzhen for a period of 50 years. The valuation for the investment properties at 31st December 2004 and 2003 were determined by the directors on an open market value basis. While the valuation for 2002 was performed by an independent valuer, Shenzhen Peng Xing, on an open market value basis.

The Group is in the process of applying for property certificates in respect of buildings with a net book value amounting to RMB171,789,000 at 31 December 2004 (2003: nil).

13. CONSTRUCTION IN PROGRESS

At beginning of year Additions Transfer to investment properties (note 12) Effect of subsidiary in voluntary liquidation and not consolidated At end of year	2004 RMB’000 125,227 50,921 (174,858) - 1,290	2003 RMB’000 61,318 63,955 - (46)
		125,227

• 20 -

SHENZHEN FIYTA HOLDINGS LIMITED

(Joint stock limited company incorporated in the People’s Republic of China)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

14. LEASEHOLD LAND PAYMENTS

Cost Balance at beginning and end of year Accumulated amortisation Balance at beginning of year Amortisation for the year Balance at end of year Net book value Balance at end of year Balance at beginning of year All the Group’s leasehold land payments were granted by Town of Shenzhen for a period of 50 years. By nature - Investment properties - Other properties	2004 2003 RMB’000 RMB’000 20,037 20,037 3,573 3,112 461 461 4,034 3,573 16,003 16,464 16,464 16,925 Planning and Land Administration Bureau 2004 2003 RMB’000 RMB’000 16,003 12,078 - 4,386 16,003 16,464	2003 RMB’000 20,037
		3,112 461
		3,573
		16,464
		16,925
		16,464

• 21 -

SHENZHEN FIYTA HOLDINGS LIMITED

(Joint stock limited company incorporated in the People’s Republic of China)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

15. AVAILABLE-FOR-SALE INVESTMENTS

Investment in promoters’ shares of a listed company, at cost Investment in shares of unlisted companies, at cost	2004 RMB’000 3,000 1,885 4,885	2003 RMB’000 3,000 1,885
		4,885

Promoters’ shares of a listed company are transferable subject to approvals from relevant local authorities. There are no quoted market prices for shares in unlisted companies. Both types of shares have neither an active market nor a fixed maturity and are therefore carried at cost less accumulated impairment losses, if any. The directors of the Company are of the opinion that the carrying value of the long-term investments approximated their recoverable amounts at the year end.

16. DEFERRED TAXATION

Balance at beginning of year Transfer (to) / from income statement (note 9) Balance at end of year Deferred taxation assets arose from temporary differences in respect of the following: Provision for doubtful debts, provision for inventory obsolescence, provision for diminution in value of trading investment and other expenses INVENTORIES Raw materials (at cost) Raw materials (at net realisable value) Work-in-progress (at cost) Finished goods (at cost) Finished goods (at net realisable value)	2004 RMB’000 16,731 (1,265) 15,466 2004 RMB’000 15,466 2004 RMB’000 14,836 7,429 1,730 166,299 13,689 203,983	2003 RMB’000 16,125 606
		16,731
		2003 RMB’000 16,731
		2003 RMB’000 17,270 4,000 4,162 111,616 15,601
		152,649

17. INVENTORIES

• 22 -

SHENZHEN FIYTA HOLDINGS LIMITED

(Joint stock limited company incorporated in the People’s Republic of China)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

18. TRADE RECEIVABLES

Trade receivables Less: provision for doubtful debts 19. PREPAYMENTS AND OTHER RECEIVABLES Prepayments Other receivables Less: provision for doubtful debts 20. TRADING INVESTMENTS Market value of listed investments - Equity shares	2004 RMB’000 59,849 (41,119) 18,730 2004 RMB’000 2,772 47,175 (13,734) 36,213 2004 RMB’000 11,819	2003 RMB’000 62,314 (42,765)
		19,549
		2003 RMB’000 1,023 46,355 (13,394)
		33,984
		2003 RMB’000 4,314

The trading investments are traded in active markets and are valued at market prices at the close of business on 31 December by reference to Stock Exchange quoted prices.

21. DESIGNATED DEPOSITS

Deposits in a bank (Note) Note:	2004 RMB’000 -	2003 RMB’000 51,004

The deposits were placed with Bank of China for the purpose of investment in government bonds. The deposits have been uplifted in February 2004.

• 23 -

SHENZHEN FIYTA HOLDINGS LIMITED

(Joint stock limited company incorporated in the People’s Republic of China)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

22. SHARE CAPITAL

Registered capital (Par value of RMB1 each) Shares in issue (Par value of RMB1 each) Promoters’ shares A Shares B Shares	2004 Thousand RMB’000 shares 249,318 249,318 130,248 130,248 60,750 60,750 58,320 58,320 249,318 249,318	2003	2003
	Thousand shares 249,318 130,248 60,750 58,320 249,318	Thousand shares 249,318 130,248 60,750 58,320 249,318	RMB’000 249,318
			130,248 60,750 58,320
			249,318

23. RESERVES

According to the Company Laws of the PRC and the Company’s Articles of Association, the Company is required to provide certain statutory reserves, which are appropriated from the net profit as reported in the statutory accounts. The Company shall set aside 10% of its net profit for statutory common reserve fund (until it has reached 50% of the Company’s registered capital) and 5% to 10% for the statutory public welfare fund. Further appropriations from the net profit may be made to the discretionary common reserve fund upon approval by shareholders. The common reserve funds cannot be used for purposes other than those for which they are created without the prior approval by shareholders under certain conditions and are not distributed as cash dividends. The statutory public welfare fund is designated for collective welfare of the employees.

The statutory common reserve fund, discretionary common reserve fund and capital reserve fund as approved by shareholders can be converted into share capital provided that the balance of the statutory common reserve fund does not fall below 25% of the registered share capital after conversion.

No appropriations to the statutory common reserve fund and statutory public welfare fund were proposed for the year ended 31 December 2004 as there is no distributable profit in the statutory accounts of the Company.

24. SHORT-TERM LOANS

	2004	2003
	RMB’000	RMB’000
Bank loans – unsecured	20,000	100

The bank loan was guaranteed by the holding company, CATIC.

• 24 -

SHENZHEN FIYTA HOLDINGS LIMITED (Joint stock limited company incorporated in the People’s Republic of China)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

25. DIVIDENDS

Pursuant to a resolution of the Board of Directors, the Company did not declare any cash dividend for 2003 in 2004 (2003: nil).

26. CASH GENERATED FROM OPERATIONS

Reconciliation of profit before taxation to cash generated from operations

Profit before taxation Adjustments for: Depreciation - fixed assets - investment properties Amortisation of leasehold land payments Amortisation of non-current assets (Gain) / Loss on disposals of fixed assets Gain of sale of discontinuing operating (Gain) / loss on disposal of trading investments Fair value losses on trading investments Provision for doubtful debts Reversal of inventory obsolescence Loss on disposal of a subsidiary Investment income from designated deposits Interest expense Interest income Others Decrease / (increase) in accounts receivable Decrease in amounts due from related companies Increase in inventories Increase in prepayments and other receivables (Increase) / decrease in trading investments Increase in accounts payable Increase in staff welfare payable (Decrease) / increase in accruals and other current liabilities Cash used in operations	2004 RMB’000 3,086 7,358 4,367 461 560 (73) - (258) 9,857 443 (3,386) - (351) 323 (650) - 716 - (47,948) (2,569) (17,104) 4,059 36 443 (40,630)	2003 RMB’000 6,146 8,947 1,042 461 397 536 (777) 206 (1,089) 7,910 (423) 403 (10,000) - (802) (138) (4,137) 2,549 (27,939) (282) 2,690 6,864 145 (1,029)
		(8,320)

• 25 -

SHENZHEN FIYTA HOLDINGS LIMITED (Joint stock limited company incorporated in the People’s Republic of China)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

27. FINANCIAL RISK MANAGEMENT

(a) Interest rate risk

In the opinion of the directors, financial assets and financial liabilities, other than the bank borrowings disclosed in note 24, do not have material interest rate risk.

(b) Credit risk

The carrying amount of cash and cash equivalents and receivables represented the Group’s maximum exposure to credit risk in relation to financial assets. Cash is deposited with registered banks in the PRC. Majority of the Group’s receivables relate to sales of goods to third parties in the PRC. The Group performs ongoing credit evaluations of its customers’ financial condition and generally does not require collateral on receivables. The Group maintains a provision for doubtful debts.

No other financial assets carry a significant exposure to credit risk.

(c) Foreign currency risk

Most of the transactions of the Group were settled in Renminbi. In the opinion of the Directors, the Group would not have significant foreign currency risk exposure.

(d) Fair value

The carrying amounts of the following financial assets and the financial liabilities approximate their fair values: cash and bank balances, investments, trade receivables, amounts due from related parties, prepayments and other receivables, trade payables, other payables, accruals and other current liabilities and borrowings.

28. COMMITMENTS

(a) Operating lease commitments

• where the Group is the lessee

The future minimum lease payments under non- cancellable operating leases are as follows: Not later than 1 year Later than 1 year and not later than 5 years Later than 5 years	2004 RMB’000 3,720 10,077 - 13,797	2003 RMB’000 2,100 3,063 450
		5,613

• 26 -

SHENZHEN FIYTA HOLDINGS LIMITED (Joint stock limited company incorporated in the People’s Republic of China)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

28.	COMMITMENTS (Cont’d)	COMMITMENTS (Cont’d)
	(a)	Operating lease commitments (cont’d)
		- where the Group is the lessor
			2004	2003
			RMB’000	RMB’000
		The future minimum lease payments receivable under
		non-cancellable operating leases are as follows:
		Not later than 1 year	28,686	15,261
		Later than 1 year and not later than 5 years	51,854	28,389
			80,540	43,650
	(b)	Capital commitments
			2004	2003
			RMB’000	RMB’000
		Contracted but not provided for
		Buildings	357	63,961
29.	SIGNIFICANT RELATED PARTY TRANSACTIONS
	(a)	Property management fee
			2004	2003
			RMB’000	RMB’000
		Shenzhen CATIC Property Management Co.,Ltd	3,087	662
	(b)	Amount due from a related company
		The amount due from a related company is non-interest bearing and repayable on demand.
			2004	2003
			RMB’000	RMB’000
		CATIC Shenzhen Company	1,500	1,500
	(c)	Loan guaranteed by holding company
			2004	2003
			RMB’000	RMB’000
		CATIC	20,000	100

• 27 -

SHENZHEN FIYTA HOLDINGS LIMITED

(Joint stock limited company incorporated in the People’s Republic of China)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

30. DISCONTINUING OPERATION

On 15 March 2003, the Group publicly announced its intention to sell the catering and entertainment segment. The subsidiaries comprising this segment are Xian Haomen Food & Recreation City Co. Ltd., Shenzhen Pengmen Restaurant Co. Ltd. and Shanghai Tian Lin Xianmen Restaurant Co. Ltd. were sold on 30 April 2003 and 26 August 2003, respectively. Xian Haomen Food & Recreation City Co., Ltd. has suspended its operation in 2003. The above two subsidiaries sold were reported in the last year’s financial statements as a discontinuing operation. The sales, results, cash flow and not assets were as follows:

Turnover Operating costs Operating loss Finance costs Loss before taxation Taxation Net loss Net operating cash inflow Net investing cash outflow Total net cash inflow Fixed assets Current assets Total assets Total liabilities Net assets The gain on disposal was determined as follows: Proceed from sales Net assets sold Gain on disposal	2004 RMB’000 - - - - - - - - - - RMB’000 - - - - - RMB’000 - - -	2003 RMB’000 5,063 (5,747)
		(684) (1)
		(685) -
		(685)
		(1,848) -
		(1,848)
		At disposal dates RMB’000 2,023 -
		2,023 -
		2,023
		RMB’000 2,800 (2,023)
		777

1. DISCONTINUING OPERATION (Cont’d)

2. 28 -

SHENZHEN FIYTA HOLDINGS LIMITED

(Joint stock limited company incorporated in the People’s Republic of China)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The net cash inflow on sale was determined as follows:

Proceed from sale Less: Cash and cash equivalents in subsidiaries sold Net cash inflow on sale	2004 RMB’000 - - -	2003 RMB’000 2,800 -
		2,800

31. ULTIMATE HOLDING COMPANY

The directors regard CATIC Shenzhen Company, a company established in the PRC, as the ultimate holding company.

• 29 -

SHENZHEN FIYTA HOLDINGS LIMITED

(Joint stock company incorporated in the People’s Republic of China)

SUPPLEMENTARY INFORMATION

IMPACT OF IFRS AND OTHER ADJUSTMENTS ON NET PROFIT AND SHAREHOLDERS’ EQUITY

As reported in the statutory accounts Impact of major IFRS and other adjustments: - adjustment on deferred tax assets - reclassification of prior year profit appropriation to staff welfare payable - adjustment on fair value for trading investment - others As restated for IFRS	Net profit for the year 2004 2003 RMB’000 RMB’000 1,908 5,088 (1,265) 606 - - (438) 438 - - 205 6,132	Shareholders’ equity 2004 2003 RMB’000 RMB’000 517,364 515,456 15,466 16,731 (15,949) (15,949) - 438 1,294 1,294 518,175 517,970	Shareholders’ equity 2004 2003 RMB’000 RMB’000 517,364 515,456 15,466 16,731 (15,949) (15,949) - 438 1,294 1,294 518,175 517,970
			517,970

11899/FZE