FIYTA Precision Technology Co., Ltd. — Annual Report 2005

Apr 20, 2006

SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飛亞達(集團)股份有限公司

Report and Financial Statements For the year ended December 31, 2005

SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飛亞達(集團)股份有限公司

REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005

CONTENTS INTERNATIONAL AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET CONSOLIDATED STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION	PAGE(S)
	1 2 3 – 4 5 6 – 7 8 – 30 31

INTERNATIONAL AUDITORS’ REPORT TO THE SHAREHOLDERS OF

SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飛亞達(集團)股份有限公司

(Incorporated in the People’s Republic of China with limited liability)

We have audited the accompanying consolidated balance sheet of Shenzhen Fiyta Holdings Limited (the “Company”) and its subsidiaries (the “Group’) as at December 31, 2005 and the related consolidated statements of income, cash flows and changes in shareholders’ equity for the year then ended. These consolidated financial statements set out on pages 2 to 30 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.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to whether the financial statements are free from material misstatement. In forming our opinion, we also evaluated the overall adequacy of the presentation of information in the financial statements. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements give a true and fair view of the financial position of the Group as of December 31, 2005, and the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

Morison Heng Chartered Accountants Certified Public Accountants

Hong Kong:

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SHENZHEN FIYTA HOLDINGS LIMITED

深圳巿飛亞達(集團)股份有限公司

CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2005

Turnover Cost of sales Gross profit Other revenue Selling expenses Administrative expenses Other operating expenses Profit from operations Finance costs Profit before taxation Income tax Profit for the year Attributable to: Equity holders of the parent Minority interests Earnings per share Basic	Notes 6 6 7 9 11 12	2005 RMB’000 341,505 (212,332) 129,173 4,266 (59,041) (50,512) (4,720) 19,166 (1,056) 18,110 (2,712) 15,398 15,553 (155) 15,398 RMB0.062	2004 RMB’000 278,247 (177,105) 101,142 3,391 (55,225) (35,617) (10,282) 3,409 (323) 3,086 (2,818) 268 205 63 268 RMB0.001

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SHENZHEN FIYTA HOLDINGS LIMITED

深圳巿飛亞達(集團)股份有限公司

CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 2005

ASSETS Non-currents assets Property, plant and equipment Investment properties Construction in progress Prepaid lease payments Available-for-sale investments Deferred tax assets Other non-current assets Current assets Inventories Trade receivables Bills receivable Other receivables and prepayments Amount due from an ultimate company Tax recoverable Financial assets at fair value through profit or loss Bank balances and cash Total assets	Notes 13 14 15 16 17 18 19 20 21 22 23	2005 RMB’000 77,182 181,174 135 15,081 10,386 15,466 1,554 300,978 233,861 27,205 550 32,551 - 1,403 4,949 47,711 348,230 649,208	2004 RMB’000 70,291 187,600 1,290 15,542 4,885 15,466 1,947 297,021 203,983 18,730 - 36,674 1,500 - 11,819 84,792 357,498 654,519

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SHENZHEN FIYTA HOLDINGS LIMITED

深圳巿飛亞達(集團)股份有限公司

CONSOLIDATED BALANCE SHEET – (continued) AT DECEMBER 31, 2005

EQUITY AND LIABILITIES CAPITAL AND RESERVES Registered capital Reserves Equity attributable to equity holders of the parent Minority interests Total equity Non-current liabilities Deferred income Current liabilities Trade payables Staff welfare payable Other payables and accruals Amount due to a related company Amount due to an invested company Tax payable Bank loan - secured Total liabilities Total assets less current liabilities	Notes 26 27 24 24 25	2005 RMB’000 249,318 284,410 533,728 7,503 541,231 3,000 28,992 18,820 24,641 215 12,309 - 20,000 104,977 107,977 649,208	2004 RMB’000 249,318 268,857 518,175 7,336 525,511 3,000 65,264 18,713 21,582 - - 449 20,000 126,008 129,008 654,519
Approved by the Board of Directors on

DIRECTOR

DIRECTOR

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SHENZHEN FIYTA HOLDINGS LIMITED

深圳巿飛亞達(集團)股份有限公司

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED DECEMBER 31, 2005

Share capital RMB’000 Balance at December 31, 2003 249,318 Net profit for the year - Balance at December 31, 2004 249,318 Net profit for the year - Transfer from statutory reserve to accumulated losses - Balance at December 31, 2005 249,318	Capital reserves RMB’000 191,108 - 191,108 - 191,108	(Accumulated Statutory losses)/ reserves Retained profits RMB’000 RMB’000 114,519 (36,975) - 205 114,519 (36,770) - 15,553 (31,813 ) 31,813 82,706 10,596	(Accumulated losses)/ Retained profits	(Accumulated losses)/ Retained profits	Total RMB’000 517,970 205
				RMB’000 (36,975) 205 (36,770) 15,553 31,813 10,596
					518,175 15,553 -
					533,728

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SHENZHEN FIYTA HOLDINGS LIMITED

深圳巿飛亞達(集團)股份有限公司

CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2005

Cash flows from operating activities Profit before taxation Adjustment for: Amortisation of prepaid lease payments Amortisation of non-current assets Depreciation of investment properties Depreciation of property, plant and equipment Dividend income Gain on disposal of property, plant and equipment Gain on disposal of financial assets at fair value through profit or loss Fair value loss on financial assets at fair value through profit or loss Reversal of inventory obsolescence Investment income from designated deposits Interest paid Interest income Provision for impairment loss on available-for-sale investments Provision for obsolescent inventory Provision for doubtful debts Operating profit before working capital changes Increase in inventories (Increase)/Decrease in trade receivables Increase in bill receivable Decrease/(Increase) in other receivables and prepayments Decrease in amount due from a related company Increase in amount due to a related company (Decrease)/Increase in trade payables Increase in staff welfare payable Increase in other payables and accruals Increase in amount due to an invested company Decrease/(Increase) in financial assets at fair value through profit or loss Cash used in operations Interest paid Tax paid Net cash used in operating activities	2005 RMB’000 18,110 461 393 6,426 9,319 (110) (296) (1,104 ) 2,058 - - 1,056 (600) 5,539 1,538 420 43,210 (31,416) (9,663) (550) 4,891 1,500 215 (36,272) 107 3,059 12,309 5,916 (6,694) (1,056) (4,564) (12,314)	2004 RMB’000 3,086 461 560 4,367 7,358 - (73) (258) 9,857 (3,386) (351) 323 (650) - - 443 21,737 (47,948) 716 - (2,569) - - 4,059 36 443 - (17,104) (40,630) (323) (1,415) (42,368)

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SHENZHEN FIYTA HOLDINGS LIMITED

深圳巿飛亞達(集團)股份有限公司

CONSOLIDATED CASH FLOW STATEMENT – (continued) FOR THE YEAR ENDED DECEMBER 31, 2005

Cash flows from investing activities Interest received Proceeds on disposal of property, plant and equipment Purchase of property, plant and equipment Acquisition of available-for-sale investments Dividend income from available-for-sale investments Investment income from designed deposit Payments for construction in progress Decrease in designated deposits Decrease in minority interests Net cash used in investing activities Cash flows from financing activities Proceeds from borrowings Repayments of borrowings Net cash from financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year Analysis of cash and cash equivalents at the end of the year Bank balances and cash	2005 RMB’000 600 1,546 (15,342) (11,040) 110 - (963) - 322 (24,767) 20,000 (20,000) - (37,081) 84,792 47,711 47,711	2004 RMB’000 650 1,002 (39,053) - - 351 (24,221) 51,004 - (10,267) 20,000 (100) 19,900 (32,735) 117,527 84,792 84,792

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SHENZHEN FIYTA HOLDINGS LIMITED

NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2005

深圳巿飛亞達(集團)股份有限公司

1. GENERAL INFORMATION

Shenzhen Fiyta Holdings Limited (the “Company”) was established in the People’s Republic of China (the “PRC”) as a joint stock limited company 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 casings, and property management.

2. SIGNIFICANT ACCOUNTING POLICIES

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

Basis of preparation

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) including International Accounting Standards and Interpretations issued by the International Accounting Standards Board. The basis of accounting differs from that used in the preparation of the Company’s statutory financial statements (“PRC statutory financial statements”). The PRC statutory financial statements of the Company and its subsidiaries comprising the Group have been prepared in accordance with relevant accounting principles and regulations applicable to them, as appropriate in the PRC. Appropriate adjustments have been made to the PRC statutory financial statements to conform to IFRS. Differences arising from the restatement have not been incorporated in the statutory accounting records of the Group.

The consolidated financial statements are prepared under the historical cost convention as modified by the revaluation of available-for-sale investments, non-current investments and financial assets at fair value through profit or loss. The preparation of financial statements 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 events and actions, actual results ultimately may differ from those estimates.

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SHENZHEN FIYTA HOLDINGS LIMITED

深圳巿飛亞達(集團)股份有限公司

2. SIGNIFICANT ACCOUNTING POLICIES – (continued)

In 2005, the Group adopted the following revised and newly released IFRSs which are generally effectively for accounting periods beginning on or after 1 January 2005 that are relevant to its operations. The comparatives of prior years have been amended as required, in accordance with the relevant requirements.

IAS 1 Presentation of Financial Statements IAS 2 Inventories IAS 7 Cash Flow Statements IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors IAS 10 Events after the Balance Sheet Date IAS 11 Construction Contracts IAS 12 Incomes Taxes IAS 14 Segment Reporting IAS 16 Property, Plant and Equipment IAS 17 Leases IAS 18 Revenue IAS 19 Employee Benefits IAS 20 Accounting for Government Grants and Disclosure of Government Assistance IAS 21 The Effects of Changes in Foreign Exchange Rates IAS 23 Borrowing Costs IAS 24 Related Party Disclosures IAS 27 Consolidated and Separate Financial Statements IAS 32 Financial Instruments: Disclosure and Presentation IAS 33 Earnings per Share IAS 36 Impairment of Assets IAS 37 Provisions, Contingent Liabilities and Contingent Assets IAS 39 Financial Instruments: Recognition and Measurement IAS 40 Investment Property IFRS 3 Business Combinations

The adoption of new/revised IASs 1, 2, 7, 8, 10, 11, 12, 14, 16, 17, 18, 19, 20, 21, 23, 24, 27, 32, 33, 36, 37, 39 and 40 did not result in substantial changes to the Group’s accounting policies. In summary:

• IAS 1 has affected the presentation of minority interests and other disclosures.

• IASs 2, 7, 8, 10, 11, 12, 14, 16, 17, 18, 19, 20, 23, 27, 32, 33, 37, 39 and 40 had no material effect on the Group’s policies.

• IAS 21 has no material effect on the Group’s policy. All the Group entities have the same functional currency as their measurement currency.

• IAS 24 has affected the identification of related parties and certain related party disclosures.

All changes in the accounting policies have been retrospectively made in accordance with the respective transitional provisions, wherever required or allowed. The accounting policies set out below have been consistently applied throughout the relevant years, other than:

IAS 39 – generally does not permit to recognise, derecognise and measure financial assets and liabilities in accordance with this standard on a retrospective basis.

IFRS 3 – prospectively after January 1, 2005.

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SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飛亞達(集團)股份有限公司

2. SIGNIFICANT ACCOUNTING POLICIES – (continued)

Basis of consolidation

The consolidation financial statements incorporate the financial statements of the Company and its subsidiaries made up to December 31 each year. The results of the subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. All significant inter-company transactions and balances within the Group are eliminated on consolidation.

Minority interests in the net assets of consolidated subsidiaries are presented separately from the Group’s equity therein. Minority interests in the net assets consist of the amount of those interests at the date of the original business combination and the minority’s share of changes in equity since the date of the combination. Losses applicable to the minority in excess of the minority’s interest in the subsidiary’s equity are allocated against the interests of the Group except to the extent that the minority has a binding obligation and is able to make an additional investment to cover the losses.

Revenue recognition

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

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

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

Rental income is recognised on a straight-line basis over the terms of the relevant lease.

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

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

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SHENZHEN FIYTA HOLDINGS LIMITED

深圳巿飛亞達(集團)股份有限公司

2. SIGNIFICANT ACCOUNTING POLICIES – (continued)

Property, plant and equipment

Property, plant and equipment 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 property, plant and equipment 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 property, plant and equipment 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 property, plant and equipment is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount.

Prepaid lease payments

Prepaid lease 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.

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 property, plant and equipment and depreciated in accordance with the policy as stated above.

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SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飛亞達(集團)股份有限公司

2. SIGNIFICANT ACCOUNTING POLICIES – (continued)

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.

Subsidiaries

A subsidiary is a company in which the Company, directly or indirectly, holds more than half of the issued share capital, or controls more than half of the voting power, or where the Company controls the composition of its board of directors or equivalent governing body.

Investments in subsidiaries are stated at cost less any identified impairment loss. Results of the subsidiaries are accounted for by the Company on the basis of dividends received and receivable during the year.

Financial assets at fair value through profit or loss

A financial asset is classified as financial assets at fair value through profit or loss if acquired principally for the purpose of selling in the short term. Financial asset includes derivatives which are not qualified for hedge accounting.

Unrealised gains and losses arising from changes in the fair value are included in the profit and loss account in the period in which they arise. Upon disposal, the difference between the sale proceeds and the carrying value is included in the profit and loss account.

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SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飛亞達(集團)股份有限公司

2. SIGNIFICANT ACCOUNTING POLICIES – (continued)

Available-for-sale financial assets

Available-for-sale financial assets are non-derivatives that are either designated or not classified as any of the other categories. At each balance sheet date subsequent to initial recognition, available-for-sale financial assets are measured at fair value. Changes in fair value are recognised in equity, until the financial asset is disposed of or is determined to be impaired, at which time, the cumulative gain or loss previously recognised in equity is removed from equity and recognised in profit or loss. Any impairment losses on available-forsale financial assets are recognised in profit or loss. Impairment losses on available-for-sale equity investments will not reverse in subsequent periods.

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost which comprises direct materials and, where applicable, direct labor costs and those overheads that have been incurred in bringing the inventories and work in progress to their present locations and condition, is calculated using the weighted average basis method. Net realisable value is based on estimated selling prices less estimated selling expenses.

Trade receivables

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

Impairment of assets

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

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

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SHENZHEN FIYTA HOLDINGS LIMITED

深圳巿飛亞達(集團)股份有限公司

2. SIGNIFICANT ACCOUNTING POLICIES – (continued)

Taxation

PRC income taxes are provided for based on the estimated assessable profits and the applicable tax rates for the Company and other companies comprising the Group.

Deferred taxation is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the accounts. Taxation rates enacted or substantively enacted by the balance sheet date are used to determine deferred taxation.

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

Deferred taxation is provided on temporary differences arising on investments in subsidiaries, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future.

Leased assets

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 property, plant and equipment or investment properties in the balance sheet. They are depreciated over their expected useful lives on a basis consistent with similar property, plant and equipment 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.

Foreign currencies

Transactions in foreign currencies are recorded at rates of exchange ruling on the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated into Renminbi (“RMB”) at the rates of exchange ruling on the balance sheet date. Profits and losses arising on foreign currency translation are dealt with in the income statement.

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SHENZHEN FIYTA HOLDINGS LIMITED

深圳巿飛亞達(集團)股份有限公司

2. SIGNIFICANT ACCOUNTING POLICIES – (continued)

Related parties

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.

Employee benefits

The Group participates in employee social security plans, including pension, medical, housing and other welfare benefits, organized by the government authorities in accordance with relevant regulations. Except for the above social security benefits, the Group has no additional commitment to other employee welfare benefits.

According to the relevant regulations, premium and welfare benefit contributions are remitted to the social welfare authorities and are calculated based on percentages of the total salary of employees, subject to a certain ceiling. Contributions to the plans are charged to the income statement as incurred.

Borrowings

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

Deferred income

Deferred income represents 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.

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

Segment reporting

Business segments provide products or services that are subject to risks and returns that are different from those of other business segments.

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, cash investments with a maturity of three months or less from the date of investment and bank overdraft.

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SHENZHEN FIYTA HOLDINGS LIMITED

深圳巿飛亞達(集團)股份有限公司

3. FINANCE RISK MANAGEMENTS

Interest rate risk

The interest rates and repayment terms of bank borrowings are disclosed in note 25. Other financial assets and financial liabilities do not have material interest rate risk.

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 to credit risk.

Foreign currency risk

Transactions of the Group are mainly settled in RMB. In the opinion of the Directors of the Company, the Group does not have significant foreign currency risk exposure.

Fair value

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

4. CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS

Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

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

• (a) Estimated impairment of property, plant and equipment and available-for-sale investments

Property, plant and equipment and available-for-sale investments are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The recoverable amounts of property, plant and equipment and available-for-sale investments have been determined based on value-inuse calculations. These calculation and valuations require the use of judgment and estimates.

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SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飛亞達(集團)股份有限公司

4. CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS - (continued)

(b) Current taxation and deferred taxation

The Group is subject to taxation in the PRC. Significant judgment is required in determining the amount of the provision for taxation and the timing of payment of the related taxations. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such difference will impact the income tax and deferred tax provisions in the periods in which such determination are made.

5. BUSINESS SEGMENTS INFORMATION OF THE GROUP

For the year ended December 31, 2005

Turnover Segment results Unallocated expense Operating profits Finance costs Profit before taxation Taxation Profit after taxation Minority interest Net profit Segment assets Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities Capital expenditure Depreciation and amortisation - property, plant and equipment - investment properties Amortisation of prepaid leasehold land Provision for doubtful debts Provision for obsolescent inventories	Clocks and watches RMB’000 300,373 100,171 421,691 87,977 15,342 9,319 - - 420 1,538	Property rental RMB’000 41,132 32,212 196,716 - 963 - 6,426 461 - -	Total RMB’000 341,505 132,383 (113,217) 19,166 (1,056) 18,110 (2,712) 15,398 155 15,553 618,407 30,801 649,208 87,977 20,000 107,977 16,305 9,319 6,426 461 420 1,538

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SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飛亞達(集團)股份有限公司

5. BUSINESS SEGMENTS INFORMATION OF THE GROUP – (continued)

For the year ended December 31, 2004

Turnover Segment results Unallocated expense Operating profits Finance costs Profit before taxation Taxation Profit after taxation Minority interests Net profit Segment assets Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities Capital expenditure Depreciation and amortisation - property, plant and equipment - investment properties Amortisation of prepaid 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 - -	Total RMB’000 278,247 12,783 (9,374) 3,409 (323) 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)

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 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.

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SHENZHEN FIYTA HOLDINGS LIMITED

深圳巿飛亞達(集團)股份有限公司

6.

TURNOVER AND REVENUE

The Group in engaged in the design, manufacture, assembly and sale of quartz analog watches, clocks, watch straps and watch casings, and property management. Revenue recognised during the year is as follows:

Turnover Rental income Sales of goods Other revenue Bank interest income Dividend income Investment income from designated deposits Repair and maintenance income Gain on disposal of financial assets at fair value through profit or loss Gain on disposal of property, plant and equipment Others Total revenue 7. PROFIT FROM OPERATIONS Profit from operations is arrived at: After charging: Amortisation of prepaid leasehold land Amortisation of other non-current assets Exchange loss Depreciation of property, plant and equipment Depreciation of investment properties Fair value loss on financial assets at fair value through profit or loss Loss on disposal of property, plant and equipment Cost of inventories sold Provision for doubtful debts Rent paid under operating leases Staff costs (including directors’ remuneration – note 10) Provision for obsolescent inventory (note 19) Impairment loss for available-for-sale investment	2005 RMB’000 41,132 300,373 341,505 600 110 - 1,253 1,104 426 773 4,266 345,771 2005 RMB’000 461 393 150 9,319 6,426 2,058 130 187,730 420 2,868 46,473 1,538 5,539	2004 RMB’000 27,345 250,902	2004 RMB’000 27,345 250,902
			278,247
			650 - 351 671 258 - 1,461
			3,391
			281,638
		2004 RMB’000 461 560 13 7,358 4,367 9,857 73 169,487 443 6,205 41,283 - -

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SHENZHEN FIYTA HOLDINGS LIMITED

深圳巿飛亞達(集團)股份有限公司

8. STAFF COSTS Wages and salaries Staff welfare Social insurance expenses 9. FINANCE COSTS Interest on bank borrowings 10. DIRECTORS’ REMUNERATION	2005 RMB’000 38,101 2,644 3,165 43,910 2005 RMB’000 1,056	2004 RMB’000 33,641 2,348 2,998	2004 RMB’000 33,641 2,348 2,998
			38,987
		2004 RMB’000 323

Particulars of the emoluments of the directors for the year were as follows:

	2005	2004
	RMB’000	RMB’000
Fees	-	-
Other emoluments	2,563	2,296
	2,563	2,296

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SHENZHEN FIYTA HOLDINGS LIMITED

深圳巿飛亞達(集團)股份有限公司

11. INCOME TAX

Current tax Deferred tax (note 18)	2005 RMB’000 2,712 - 2,712	2004 RMB’000 1,553 1,265 2,818

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

Profit before taxation Tax at the applicable income tax rate Tax effect of expenses not deductible for tax purposes Tax effect of income not taxable for tax purposes Tax effect of a subsidiary which was exempted from income tax Tax effect of a subsidiary which has 50% reduction from income tax Tax effect in tax losses of subsidiaries Taxation charge	2005 RMB’000 18,110 2,716 2,383 (2,734) - (735 ) 1,082 2,712	2004 RMB’000 3,086 463 2,043 (41) (936) - 1,289 2,818

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.

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SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飛亞達(集團)股份有限公司

12. EARNINGS PER SHARE

The calculation of earnings per share is based on the consolidated profit after tax and after minority interests for the year of RMB15,553,000 (2004: RMB205,000) and 249,318,000 shares (2004: 249,318,000 shares) on issue.

13. PROPERTY, PLANT AND EQUIPMENT

COST OR VALUATION At January 1, 2004 Additions Reclassification to investment properties (note 14) Disposals At January 1, 2005 Additions Transferred from construction in progress (note 15) Disposals At December 31, 2005	Buildings RMB’000 34,600 26,699 (918 ) - 60,381 39 1,413 - 61,833	Equipment and machinery RMB’000 32,674 8,124 - (6,016) 34,782 4,732 - (4,295) 35,219	Leasehold improvements RMB’000 23,681 4,230 - (12,732) 15,179 10,571 705 (1,152) 25,303	Total RMB’000 90,955 39,053 (918) (18,748) 110,342 15,342 2,118 (5,447) 122,355

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SHENZHEN FIYTA HOLDINGS LIMITED

深圳巿飛亞達(集團)股份有限公司

13. PROPERTY, PLANT AND EQUIPMENT – (continued)

ACCUMULATED DEPRECIATION AND IMPAIRMENT At January 1, 2004 Charge for the year Reclassification to investment properties (note 14) Eliminated on disposals At January 1, 2005 Charge for the year Eliminated on disposals At December 31, 2005 Carrying amount At December 31, 2005 At December 31, 2004	Buildings RMB’000 12,250 1,075 (301 ) - 13,024 764 - 13,788 48,045 47,357	Equipment and machinery RMB’000 20,108 3,250 - (5,087) 18,271 3,997 (3,046) 19,222 15,997 16,511	Leasehold improvements RMB’000 18,455 3,033 - (12,732) 8,756 4,558 (1,151) 12,163 13,140 6,423	Total RMB’000 50,813 7,358 (301) (17,819) 40,051 9,319 (4,197) 45,173 77,182 70,291

The Group is in the process of applying for property certificates in respect of buildings with a net book value amounting to RMB7,618,000 at December 31, 2005 (2004: RMB 26,343,000).

At the balance sheet date, the Company’s future aggregate minimum lease rental receivables under non-cancellable leases are as follows:

Within one year	2005 RMB’000 5,886	2004 RMB’000 4,489

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SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飛亞達(集團)股份有限公司

14. INVESTMENT PROPERTIES

Carrying amount at January 1 Transfer from property, plant and equipment (note 13) Transfer from construction in progress (note 15) Charge for the year Carrying amount at December 31 Directors’ valuation - including prepaid lease payments	2005 RMB’000 187,600 - - (6,426) 181,174 330,932	2004 RMB’000 16,492 617 174,858 (4,367) 187,600 346,019

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 December 31, 2005 and 2004 were determined by the directors on an open market value basis.

15. CONSTRUCTION IN PROGRESS

Opening net book value Additions Transfer to property, plant and equipment (note 13) Transfer to investment properties (note 14) Closing net book value	2005 RMB’000 1,290 963 (2,118) - 135	2004 RMB’000 125,227 50,921 - (174,858) 1,290

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SHENZHEN FIYTA HOLDINGS LIMITED

深圳巿飛亞達(集團)股份有限公司

16. PREPAID LEASE PAYMENTS

COST At January 1and at December 31 ACCUMULATED AMORTISATION At January 1 Charge for the year At December 31 NET BOOK VALUE At December 31 Current portion included in other receivables and prepayments Non-current portion	2005 2004 RMB’000 RMB’000 20,037 20,037 4,034 3,573 461 461 4,495 4,034 15,542 16,003 (461 ) (461) 15,081 15,542

The leasehold land is held under long term lease and is situated in People’s Republic of China.

All the Group’s prepaid lease payments were granted by Town Planning and Land Administration Bureau of Shenzhen for a period of 50 years.

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SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飛亞達(集團)股份有限公司

17. AVAILABLE-FOR-SALE INVESTMENTS

Listed investment, at cost Unlisted investment, at cost Less: impairment loss	2005 RMB’000 3,000 12,925 15,925 (5,539) 10,386	2004 RMB’000 3,000 1,885
		4,885 -
		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 available-for-sale investments approximated their recoverable amounts at the year end.

18. DEFERRED TAX ASSETS

Balance at January 1, 2004 Charge to income statement Balance at January 1, 2005 Credit to income statement Balance at December 31, 2005	RMB’000 16,731 (1,265) 15,466 - 15,466

19. INVENTORIES

Raw materials Work in progress Finished goods Less :provision for obsolescent inventories (note 7)	2005 RMB’000 47,291 5,323 242,407 295,021 (61,160) 233,861	2004 RMB’000 45,076 1,730 216,799
		263,605 (59,622)
		203,983

Included above are raw materials of RMB1,228,000 (2004: RMB7,429,000) and finished goods RMB50,047,000 (2004: RMB13,689,000) carried at net realisable value.

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SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飛亞達(集團)股份有限公司

20. 21.	TRADE RECEIVABLES Trade receivables Less :provision for doubtful debts Trade receivables, net OTHER RECEIVABLES AND PREPAYMENTS Prepayments Other receivables Less :provision for doubtful debts	2005 RMB’000 69,512 (42,307) 27,205 2005 RMB’000 1,677 43,840 (12,966) 32,551	2004 RMB’000 59,849 (41,119) 18,730 2004 RMB’000 2,772 47,636 (13,734) 36,674

22. AMOUNT DUE FROM AN ULTIMATE COMPANY

Name of company CATIC Shenzhen Company	Balance at 31.12.2005 RMB’000 -	Balance Maximum amount at outstanding 31.12.2004 during the year RMB’000 RMB’000 1,500 1,500

The amount due is unsecured, interest-free and repayable on demand.

23. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS

Market value of listed investments - equity shares	2005 RMB’000 4,949	2004 RMB’000 11,819

The financial assets at fair value through profit or loss are traded in active markets and are valued at market prices at the close of business on December 31 by reference to Stock Exchange quoted prices.

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SHENZHEN FIYTA HOLDINGS LIMITED

深圳巿飛亞達(集團)股份有限公司

24. AMOUNT DUE TO A RELATED COMPANY AND AMOUNT DUE TO AN INVESTED COMPANY

The amounts due are unsecured, interest-free and with no fixed terms of repayment.

25. BANK LOAN - SECURED

Repayable within one year	2005 RMB’000 20,000	2004 RMB’000 20,000

The bank loan was interest bearing at 5.58% per annum (2004: 5.31%) and guaranteed by the holding company, CATIC Shenzhen Holdings Limited.

26. SHARE CAPITAL

Registered, issued and fully paid ordinary shares of RMB1 each:

Promoters’ shares A shares B shares	2005 RMB’000 130,248 60,750 58,320 249,318	2004 RMB’000 130,248 60,750 58,320
		249,318

27. 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 capital reserve 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.

According to the Company’s and the subsidiaries’ Articles of Association, the Board of Directors, after obtaining approval from the shareholders, has the discretion to make up accumulated losses against the discretionary statutory reserve. Upon approval from the authorities, the discretionary statutory reserve can be used to setoff accumulated losses incurred or to increase the par value of the shares currently held by them. The Company appropriated RMB31,813,490 to the accumulated losses in 2005 (2004: Nil).

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SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飛亞達(集團)股份有限公司

27. RESERVES – (continued)

No appropriations to the statutory common reserve fund and capital reserve fund were proposed for the year ended 31 December 2005 as there is no distributable profit in the statutory accounts of the Company before the conversion from statutory reserve to accumulated losses.

28. CAPITAL COMMITMENTS

Contracted but not provided for: - acquisition of property, plant and equipment	2005 RMB’000 2,259	2004 RMB’000 357

29. OPERATING LEASE COMMITMENTS

At December 31, 2005, the Company had total future minimum lease payments under an noncancellable operating lease in respect of land and buildings as follows:

Within one year In the second to fifth years inclusive	2005 RMB’000 3,730 7,875 11,605	2004 RMB’000 3,720 10,077
		13,797

30. RELATED PARTY TRANSACTIONS

During the year, the Group had the following material transactions with related parties in normal course of its business:

Property management fee paid to: Shenzhen CATIC Property Management Co., Ltd Construction fee paid to: Shenzhen CATIC Property Management Co., Ltd Commission paid to: Shenzhen Rainbow Department Store Co., Ltd	2005 RMB’000 2,752 2,208 970	2004 RMB’000 3,087
		-
		403

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SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飛亞達(集團)股份有限公司

31. SUBSIDIARIES

At December 31, 2005, the Company had the following major subsidiaries (all incorporated in the PRC):

Name of 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. Xian Haomen Food & Recreation City Co., Ltd. (note a) Shenzhen World Famous Watch Centre Co., Ltd. (note b)

Registered capital Principal activities Attributable equity interest held Direct Indirect RMB10,000,000 Design, manufacture and assembly of quartz watches and watch components 90% 9.879% RMB7,000,000 Manufacture of precision optical device and watch surfaces 90% 9.879% HKD3,000,000 Design, manufacture and distribution of clocks 75% - RMB3,080,000 Electroplating of watch straps, casing and jewellery 60% - RMB123,800,000 Distribution of watches and watch components and provision of repair services 98.79% - HKD16,000,000 Catering and entertainment 62% - RMB2,800,000 Retailing of advanced watch, glasses and jewellery 50% -

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.

32. REPORTING CURRENCY

The Company’s financial statements are expressed in Renminbi.

33. ULTIMATE HOLDING COMPANY

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

34. COMPARATIVE FIGURES

Certain comparative figures have been reclassified to conform with the current year’s presentation.

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SHENZHEN FIYTA HOLDINGS LIMITED

深圳巿飛亞達(集團)股份有限公司

SUPPLEMENTARY INFORMATION FOR THE YEAR ENDED DECEMBER 31, 2005

The impact of IFRS adjustments on the PRC statutory financial statements is as follows:

Net profit for the year 2005 2004 RMB’000 RMB’000 As report under PRC statutory financial statements 16,007 1,908 IFRS adjustments: - Adjustment on deferred tax assets - (1,265) - Reclassification of prior year profit appropriation to staff welfare payable - - - Adjustment on fair value for financial assets at fair value through profit or loss - (438 ) - Adjustment on provision for bad debt (454) - - Others - - As restated after IFRS adjustments 15,553 205

Shareholders’equity 2005 2004 RMB’ 000 RMB’000 533,371 517,364 15,466 15,466 (15,949 ) (15,949) - - (454) - 1,294 1,294 533,728 518,175

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