GC Construction Holdings Limited — Proxy Solicitation & Information Statement 2005

Aug 30, 2005

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

If you have sold or transferred all your shares in Fushan International Energy Group Limited, you should at once hand this circular to the purchaser or transferee, or to the bank, stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser or transferee.

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

� � � � � � � � � � � FUSHAN INTERNATIONAL ENERGY GROUP LIMITED (Incorporated in Hong Kong with limited liability)

(Stock Code: 639)

MAJOR TRANSACTION

ACQUISITION OF 13% INTEREST IN SHANXI YAO ZIN COAL AND COKING COMPANY LIMITED

Financial adviser to the Company

Partners Capital International Limited

23 August 2005

CONTENTS

		Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		1
Letter from the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		3
Appendix I –	Accountants’ report on the JV Company. . . . . . . . . . . . . . . . . . . . . . .	12
Appendix II –	Financial Information on the Group . . . . . . . . . . . . . . . . . . . . . . . . . .	24
Appendix III –	Unaudited Pro Forma Financial Information
	of the enlarged Group. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	52
Appendix IV –	General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	56

DEFINITIONS

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

“Acquisition”	the acquisition of the JV Interest by New Honest
	pursuant to the Acquisition Agreement
“Acquisition Agreement”	a conditional agreement dated 29 June 2005 entered
	into among Party A, New Honest and Party C in
	respect of the Acquisition
“associates”	have the meaning as defined under the Listing Rules
“Board”	the board of Directors
“Company”	Fushan International Energy Group Limited, a
	company incorporated in Hong Kong with limited
	liability and the shares of which are listed on the Stock
	Exchange
“Completion”	Completion of the Acquisition Agreement
“Consideration”	the consideration for the Acquisition
“Director(s)”	the director(s) of the Company
“Group”	the Company and its subsidiaries
“Hong Kong”	the Hong Kong Special Administrative Region of the
	PRC
“JV Agreement”	the joint venture agreement dated 10 December 2004
	entered into amongst Party A, New Honest and Party
	C for the formation of the JV Company
“JV Company”	山西曜鑫煤焦有限公司(Shanxi Yao Zin Coal and
	Coking Company Limited), a sino-foreign equity joint
	venture established under the laws of the PRC in
	accordance with the terms of the JV Agreement and
	the articles of association of the JV Company dated
	10 December 2004
“JV Interest”	13% of the equity interest of Party A in the JV
	Company, which is to be sold to New Honest pursuant
	to the Acquisition Agreement
“Latest Practicable Date”	19 August 2005, being the latest practicable date prior
	to the printing of this circular for ascertaining certain
	information in this circular

– 1 –

DEFINITIONS

“Listing Rules”	the Rules Governing the Listing of Securities on the
	Stock Exchange
“Major Shareholder”	Mr. Wong Lik Ping, the Chairman and the controlling
	Shareholder holding approximately 59.59% of the
	existing issued share capital of the Company
“New Honest”	New Honest Limited新誠有限公司, a company
	incorporated in the British Virgin Islands with limited
	liability and wholly owned by the Company
“Party A”	孝義市曜鑫煤焦有限責任公司(Ziao Yi Shi Yao Zin Coal
	and Coking Company Limited), a company established
	in the PRC with limited liability
“Party C”	山西焦煤集團國際發展有限公司(Shanxi Coal and
	Coking Group International Development Company
	Limited), a company established in the PRC with
	limited liability
“PRC”	the People’s Republic of China
“SFO”	The Securities and Futures Ordinance (Chapter 571 of
	the laws of Hong Kong)
“Share(s)”	share(s) of HK$0.10 each in the share capital of the
	Company
“Shareholder(s)”	registered holder(s) for the time being of Shares issued
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“HK$”	Hong Kong dollars, the lawful currency of Hong Kong
“RMB”	Renminbi, the lawful currency of the PRC
“US Dollars”	United States dollars, the lawful currency of the United
	States of America
“%”	per cent.

For the purpose of this circular, all amounts in RMB are translated into HK$ at an exchange rate of RMB1.04: HK$1.00 unless otherwise specified in this circular.

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LETTER FROM THE BOARD

� � � � � � � � � � � FUSHAN INTERNATIONAL ENERGY GROUP LIMITED

(Incorporated in Hong Kong with limited liability)

(Stock Code: 639)

Executive Directors:

Mr. Wong Lik Ping Mr. So Kwok Hoo Mr. Li King Luk

Registered Office:

12th Floor, Kwan Chart Tower No. 6 Tonnochy Road Wanchai Hong Kong

Independent Non-Executive Directors:

Mr. Kee Wah Sze Mr. Choi Wai Yin Mr. Chan Pat Lam

23 August 2005

To the Shareholders

Dear Sir or Madam,

MAJOR TRANSACTION

ACQUISITION OF 13% INTEREST IN SHANXI YAO ZIN COAL AND COKING COMPANY LIMITED

INTRODUCTION

On 1 August 2005, the Company announced that on 29 June 2005, New Honest, a wholly-owned subsidiary of the Company, entered into the Acquisition Agreement with Party A and Party C pursuant to which New Honest agreed to acquire from Party A 13% of the equity interest in the JV Company at a cash consideration of RMB5.2 million (approximately HK$5.0 million) and Party C confirmed that it will give up its pre-emptive rights to acquire the JV Interest.

The Acquisition constitutes a major transaction of the Company under the Listing Rules and must be made conditional on approval by the Shareholders. Pursuant to Rule 14.44 of the Listing Rules, the approval by the Shareholders may be obtained by means of the written approval of the transaction by a shareholder who holds more than 50% of the voting rights of the Company. Given that (i) no Shareholder is required to abstain from voting if the Company were to convene a general meeting for the approval of the Acquisition; and (ii) a written approval of the Acquisition on the terms and conditions of the Acquisition Agreement and the transaction contemplated thereunder has been given by the Major Shareholder who holds approximately 59.59% of the existing issued share capital of the Company as at the Latest Practicable Date, an extraordinary general meeting of the Shareholders will therefore not be convened for the purpose of approving the Acquisition.

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LETTER FROM THE BOARD

The purpose of this circular is to give you further information on the Acquisition Agreement and the accountants’ report on the JV Company.

THE ACQUISITION AGREEMENT DATED 29 JUNE 2005

Parties

• Party A: 孝義市曜鑫煤焦有限責任公司 (Ziao Yi Shi Yao Zin Coal and Coking Company Limited), a company established in the PRC with limited liability and is primarily engaged in production and sales of coking coal products

• Party B: New Honest Limited 新誠有限公司 , a company incorporated in the British Virgin Islands with limited liability and wholly owned by the Company

• Party C: 山西焦煤集團國際發展有限公司 (Shanxi Coal and Coking Group International Development Company Limited), a company established in the PRC with limited liability and is primarily engaged in acting as agency for import and export and sales of coal products and machineries.

To the best of the Directors’ knowledge, information and belief having made all reasonable enquiry, Party A, Party C and their respective directors and ultimate shareholders are not connected persons of the Company (as defined in the Listing Rules).

Assets to be acquired

• 13% of the equity interest of Party A in the JV Company.

The JV Company is currently owned as to 38% by New Honest. Upon Completion, the JV Company will be owned as to 51% by New Honest, as to 29% by Party A and as to 20% by Party C.

Consideration

The Consideration is RMB5.2 million (approximately HK$5.0 million) and is to be satisfied in cash in an equivalent amount of US Dollar (based on the median exchange rate between RMB and US Dollar as quoted by the People’s Bank of China on the date of Completion) by New Honest within seven days after Completion.

The Consideration was determined by the parties to the Acquisition Agreement after arm’s length negotiations and is equal to 13% of the registered capital of the JV Company of RMB40 million (approximately HK$38.5 million) (before the increase in registered capital to RMB80 million). The Consideration will be funded by the internal resources of the Group.

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LETTER FROM THE BOARD

Conditions

Completion is conditional, amongst other things, on the following conditions:

• (1) the requirement as stipulated in the Listing Rules having been complied with by the Company relating to the entering into and the implementation of the Acquisition Agreement;

• (2) Party C having confirmed that it will give up its pre-emptive rights to acquire the JV Interest and consent to the Acquisition;

• (3) all necessary consents, permits and approval from the relevant PRC authorities, including the approval from 山西省商務廳 (Department of Commerce of Shanxi Province) and the registration in 山西省工商行政管理部門 (The Administration for Industry and Commerce of Shanxi Province) for the change of the shareholding in the JV Company, (whether governmental, regulatory or otherwise) as may be required in respect of the Acquisition having been obtained by the parties to the Acquisition Agreement;

• (4) Party A and the JV Company having passed their respective directors’ resolution approving the Acquisition and the transactions contemplated thereunder;

• (5) Party A, New Honest and Party C having signed the supplemental sino-foreign equity joint venture agreement and the supplemental articles of association of the JV Company as approved by the relevant PRC authorities; and

• (6) all declarations, undertakings and warranties given by Party A, New Honest and Party C pursuant to the Acquisition Agreement remain true and accurate upon fulfillment of all the conditions precedent mentioned above.

If the conditions set out above are not fulfilled within four calendar months after the date of signing of the Acquisition Agreement, any party to the Acquisition Agreement will have the right to terminate the Acquisition Agreement. Except condition (1), all the above conditions have been fulfilled as at the Latest Practicable Date.

Completion

After all the conditions precedents in the Acquisition Agreement as set out above have been satisfied, Completion will take place on the day on which the necessary filing has been made with the relevant registration authority.

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LETTER FROM THE BOARD

THE SUPPLEMENTAL SINO-FOREIGN EQUITY JOINT VENTURE AGREEMENTS AND THE SUPPLEMENTAL ARTICLES OF ASSOCIATION

On 29 June 2005, Party A, New Honest and Party C also entered into the supplemental sino-foreign equity joint venture agreement and the supplemental articles of association to regulate the responsibilities of the shareholders of the JV Company towards the management of the business and corporate affairs of the JV Company. Upon Completion, the board of directors of the JV Company will comprise five directors, of which three directors are to be appointed by New Honest, one director is to be appointed by Party A and one director is to be appointed by Party C and the chairman will be appointed by New Honest.

On 20 July 2005, Party A, New Honest and Party C also entered into the second supplemental sino-foreign equity joint venture agreement and the second supplemental articles of association to increase the registered capital from RMB40 million (approximately HK$38.5 million) to RMB80 million (approximately HK$76.9 million) and to increase the total investment amount from RMB49.8 million (approximately HK$47.9 million) to RMB200 million (approximately HK$192.3 million). The latest time for capital contribution was also changed from six months from the issue of business license to one year after the issue of the new business license. The increase in the registered capital of RMB40 million (approximately HK$38.5 million) shall be contributed by the shareholders of the JV Company in proportion to their respective equity interest in the JV Company after the Acquisition. The proportionate capital contribution of RMB20.4 million (approximately HK$19.6 million) to be made by New Honest will be financed by the internal resources of the Company.

The JV Company has already obtained the approval of the increase in registered capital and the change in shareholding of the JV Company under the Acquisition pursuant to a written approval dated 27 July 2005 issued by the Department of Commerce of Shanxi Province and a certificate of approval dated 28 July 2005 issue by the People’s Government of Shanxi Province.

INFORMATION OF THE JV COMPANY

The JV Company is a sino-foreign equity joint venture incorporated in the PRC on 15 December 2004 upon obtaining its business license on the same day. The operating period of the JV Company is 20 years from 15 December 2004 to 15 December 2024. The JV Company was established for the production and sales of coking coal products. According to the joint venture agreement dated 10 December 2004 entered into amongst Party A, New Honest and Party C, the registered capital and the total investment amount of the JV Company were initially RMB40 million (approximately HK$38.5 million) and RMB49.8 million (approximately HK$47.9 million) respectively. The initial registered capital of the JV Company of RMB40 million has been fully paid by Party A, New Honest and Party C respectively in January 2005. As mentioned above, the registered capital of the JV Company has been increased to RMB80 million (approximately HK$76.9 million). The increase in registered capital of RMB40 million (approximately HK$38.5 million) has not been

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LETTER FROM THE BOARD

contributed by the shareholders of the JV Company. It is expected that the outstanding amount of registered capital will be contributed on a proportionate basis by the shareholders of the JV Company before the end of 2005. Other than the contribution of registered capital by New Honest, the Group has no future capital commitment on the JV Company.

The JV Company is currently owned as to 38% by New Honest. Upon Completion, the JV Company will be owned as to 51% by New Honest, as to 29% by Party A and as to 20% by Party C and accordingly the JV Company will become a subsidiary of the Company. Currently, both Party A and Party C have no intention to dispose their respective remaining equity interests to the Company. Pursuant to opinion issued by the PRC lawyers, New Honest as a foreign party can legally own the controlling interest of the JV Company which will principally engage in the production and sales of coking coal products without any restriction.

In early 2004 and prior to the establishment of the JV Company, Party A had initiated the construction of a privately owned coking coal plant with water cleaning, chemical and coking workshops (the “Coking Coal Plant”) and such construction was primarily financed by the loans advanced by Party A, Party C and certain independent third parties. On 1 February 2005, the JV Company has entered into a transfer agreement (the “Transfer Agreement”) with Party A, pursuant to which Party A agreed to transfer all assets of the Coking Coal Plant of approximately RMB103,599,000 (approximately HK$99,614,000) as at 31 December 2004 per management accounts to the JV Company at cost and the JV Company shall bear all the liabilities of the Coking Coal Plant of approximately RMB103,599,000 (approximately HK$99,614,000) as at 31 December 2004 per management accounts as consideration.

The unaudited total liabilities of the Coking Coal Plant as at 31 January 2005 mainly comprised a loan of approximately RMB6.2 million (approximately HK$6.0 million) advanced by Party A, a loan of RMB25 million (approximately HK$24.0 million) advanced by Party C and an aggregate of other loans amounting to approximately RMB53.6 million (approximately HK$51.5 million) advanced by certain independent third parties. As the total construction costs were estimated to be approximately RMB200 million (approximately HK$192.3 million) and based on the unaudited total assets of the Coking Coal Plant of approximately RMB103.6 million (approximately HK$99.6 million) as at 31 December 2004, the total outstanding construction costs was expected to be approximately RMB96.4 million (approximately HK$92.7 million) as at the date of the Transfer Agreement. There was no outstanding condition under the Transfer Agreement and completion of the Transfer Agreement is not subject to any governmental approval as the assets transferred under the Transfer Agreement are privately owned assets. The transfer of the assets from Party A to the JV Company had been completed and the JV Company has been continuing the construction of the Coking Coal Plant. The construction of the Coking Coal Plant is scheduled to be completed in the fourth quarter of 2005 and trial production is expected to begin thereafter. It is expected that the Coking Coal Plant will have an annual production capacity of 400,000 tonnes of coking coal.

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LETTER FROM THE BOARD

The outstanding construction costs (being the difference between the unaudited total assets of the JV Company as at 31 May 2005 and the estimated total construction costs) of approximately RMB56.5 million (approximately HK$54.3 million) is expected to be financed by the banking facility and it is expected that the banking facility will be secured by certain plant and machineries of the Coking Coal Plant and will not be guaranteed by the parties to the JV Company.

Based on the audited balance sheet of the JV Company as at 31 May 2005 as set out in Appendix I to this circular, the audited total assets and the audited total liabilities of the JV Company were approximately RMB138,076,000 (approximately HK$132,765,000) and RMB100,722,000 (approximately HK$96,848,000) respectively. The total liabilities of the JV Company comprised primarily the administrative accruals and construction payable of approximately RMB2,667,000 (approximately HK$2,564,000), an interest payable of approximately RMB1,382,000 (approximately HK$1,329,000), an aggregate of loans amounting to approximately RMB31,173,000 (approximately HK$29,974,000) advanced by Party A and Party C and an aggregate of loans amounting to approximately RMB65,500,000 (approximately HK$62,981,000) advanced by certain independent third parties. Pursuant to the loan agreements between the JV Company and each of the lenders, the loans advanced by Party A, Party C and the independent third parties are unsecured and bear interest at the rate ranging from 5.49% to 6.138% per annum. Maturity dates of the loans include 9 November 2005 which has been extended to 9 November 2006, 22 April 2006, 31 December 2006 and the date falling on the first anniversary after the commencement of production of the Coking Coal Plant.

Based on the income statement of the JV Company for the period from 15 December 2004 (date of incorporation) to 31 May 2005 as set out in Appendix I to this Circular, both the audited loss before and after taxation for the period were RMB2,645,000 (approximately HK$2,543,000).

REASONS FOR THE ACQUISITION

The Company is an investment holding company and the Group is principally engaged in the production and sales of coking coal products and side products, acting as an agent in the coal business and sales of jewellery products.

As mentioned in the 2004 annual report of the Company, the buoyant demand of coal is expected to stay intact and the Company will position itself to respond to these opportunities by strengthening the productivities and expanding the capacities to keep up the pace with the economic momentum. The Company will monitor the financial position in a favorable level and utilize its capital strength for the appropriate investments to support the business development in the energy sector.

According to the statistics published by National Bureau of Statistics of the PRC, the growth in gross domestic product in 2004 was approximately 9.5% whilst the growth in fixed asset investment in 2004 was approximately 25.8%. As recently announced by National Bureau of Statistics of the PRC, fixed asset investment of the PRC grew 26.4% on an year-on-year basis during the first five months of 2005. The relatively fast growth of fixed asset investment was partly due to the small base in the previous year and partly due to

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LETTER FROM THE BOARD

the increase in investment in sectors such as coal mining, electricity and transportation. According to the statistics published by National Bureau of Statistics of the PRC, the production of coal in 2004 increased by 17.3% while the accumulated amount of electricity generated and production of steel in 2004 rose by approximately 14.5% and approximately 23.3% when compared with 2003. Although the PRC government has not been relaxing its economic austerity measures and recently implemented eight measures including the introduction of specific tax policies to increase control over the real estate sector, it is expected that more investments in coal mining, electricity and transportation will take place for the PRC’s future economic development.

Given the growth potential of the coking industry in the PRC and the future earnings potential of the JV Company upon the commencement of the operations of the production plant by the end of this year, the Board is of the view that the Acquisition is in line with the business strategy of the Group and will enable the Group to further increase its exposure in the energy sector. As such, the Board considers that the increase in the investment in the JV Company will be in the interest of the Company and the Shareholders as a whole.

Upon Completion, the JV Company will become a subsidiary of the Company. By acquiring a controlling interest in the JV Company, the Company will be able to control the management of the JV Company and enhance its development in the coal business. As the consideration was determined on the basis of the registered capital of the JV Company, the Board considers that the terms of the Acquisition Agreement are fair and reasonable so far as the interest of the Company and the Shareholders are concerned.

FINANCIAL AND TRADING PROSPECTS OF THE GROUP

According to the 2004 annual report of the Company, the audited consolidated turnover of the Group for the year ended 31 December 2004 was approximately HK$7.56 million representing an increase of approximately 414% when compared with that of the preceding financial year. A net loss of approximately HK$14.71 million was recorded for the year ended 31 December 2004. The increase in net loss by approximately HK$11.9 million as compared with that of the preceding financial year was mainly due to the pre-operating expense of a subsidiary which is engaged in production and sales of coking coal products.

As mentioned in the 2004 annual report of the Company, due to the increase of global demand, political unrest in certain districts of Middle East and the weak dollar policy, crude oil prices rose to a record high level. Despite the implementing of control measures to certain overheated industries, the overall economic progress of the PRC was remarkable. Establishment of a rational energy policy and mechanism became crucial to support the continued economic growth in the PRC eventually. In view of such marvelous development environment in the PRC, the Company made further investment into another associated company in the middle of December 2004 to emphasis itself in the coal industry for further earnings growth opportunity.

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LETTER FROM THE BOARD

In the light of the investments in the coal industry, it is clear that the principal activities of the Group will be focusing on the production and sale of coking coal products and side products besides the coal trades and jewellery sales and this segment is becoming an important milestone for the Group in terms of revenue and profit growth.

FINANCIAL POSITION

Segment Information

As at 31 December 2004, the Group’s turnover comprised sales of coal products of approximately HK$6,126,000; commission from coal business of approximately HK$1,241,000 and sales of jewellery products of approximately HK$193,000. Turnover of the Group of approximately HK$7,367,000 were derived from the PRC and of approximately HK$193,000 were derived from Hong Kong.

Charges on Assets

At 31 December 2004, except for bank deposit of HK$4,703,000 and certain construction in progress with a carrying value of approximately HK$26,882,000 pledged for certain banking facilities of HK$4,703,000 and a bank loan of HK$37,622,000 respectively, none of the Group’s assets was charged or subject to any encumbrance.

Contingent Liabilities

At 31 December 2004, the Group was not liable to any borrowings or guarantees given to any banks or financial institutions.

Gearing Ratio

At 31 December 2004, the gearing ratio of the Group, which is computed from the Group’s interest bearing liabilities divided by shareholders’ funds, was approximately 44%. The borrowing was mainly for the financing certain construction and installation of plant and machinery of a subsidiary in the PRC for the production of coking coal products.

Exposure To Fluctuations In Exchange Rates

At 31 December 2004, the Group had no material exposure to foreign exchange fluctuations other than assets denominated in Renminbi.

Capital Structure, Liquidity and Financial Resources

As at 31 December 2004, the current ratio (current assets divided by current, liabilities) was approximately 0.58. Excluded pledged bank deposit of HK$4,703,000, the Group’s cash and bank deposits at 31 December 2004 amounted to HK$31,628,000. As at 31 December 2004, the bank borrowings of the Group amounted to approximately HK$42,325,000.

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LETTER FROM THE BOARD

Staff

The Group had 8 Hong Kong employees and 144 PRC employees at 31 December 2004 with remuneration package to be reviewed annually. The Group provides a mandatory provident fund scheme for Hong Kong employees and the state-sponsored retirement plan for PRC employees. The Group has also adopted share option scheme since 20 June 2003. No share option was granted under the share option scheme during the year and no share option was outstanding as at 31 December 2004.

FINANCIAL EFFECTS OF THE TRANSACTIONS ON THE GROUP

Upon Completion, the JV Company will become a 51% owned indirect subsidiary of the Company and the accounts of which will be consolidated into those of the Company.

As at 31 December 2004, the audited consolidated net assets of the Group amounted to approximately HK$85,074,000. Based on the unaudited pro forma statement of adjusted assets and liabilities statement of the Group as at 31 December 2004 as enlarged after the Acquisition as set out in Appendix III to this circular, the unaudited pro forma adjusted consolidated net assets of the enlarged Group is approximately HK$83,301,000.

ADDITIONAL INFORMATION

Your attention is drawn to the additional information contained in the appendices to this circular.

By Order of the Board SO KWOK HOO Executive Director

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APPENDIX I

ACCOUNTANTS’ REPORT ON THE JV COMPANY

The following is the full text of the accountants’ report received from Grant Thornton for the purpose of incorporation in this circular.

Certified Public Accountants Member of Grant Thornton International

==> picture [115 x 34] intentionally omitted <==

23 August 2005

The Directors

Fushan International Energy Group Limited 12/F, Kwan Chart Tower 6 Tonnochy Road Wan Chai Hong Kong

Dear Sirs,

We set out below our report on the financial information (the “Financial Information”) relating to Shanxi Yao Zin Coal and Coking Company Limited (the “JV Company”) for the period from 15 December 2004 (the date of its incorporation) to 31 May 2005 (the “Relevant Period”) for inclusion in the circular of Fushan International Energy Group Limited (the “Company”) dated 23 August 2005 (the “Circular”).

On 29 June 2005, New Honest Limited (“New Honest”), a company incorporated in the British Virgin Islands with limited liability and wholly owned by the Company, entered into a conditional agreement (the “Acquisition Agreement”) with Ziao Yi Shi Yao Zin Coal and Coking Company Limited (“Yao Zin”), a company established under the laws of the People’s Republic of China (“PRC”) and Shanxi Coal and Coking Group International Development Company Limited (“Shanxi Coal”), another company established under the laws of the PRC. Pursuant to the Acquisition Agreement, New Honest agreed to acquire from Yao Zin 13% equity interest (the “JV Interest”) in the JV Company at a consideration of RMB5.2 million and Shanxi Coal confirmed that it will give up its pre-emptive right to acquire the JV Interest. The JV Company was established for the production and sale of coking coal products and side products and is currently owned as to 38% by New Honest. Upon completion of the Acquisition Agreement, the JV Company will be 51% owned by New Honest. Further details of the Acquisition Agreement are described more fully in the section headed “Letter from the Board” in the Circular.

No audited financial statements have been prepared for the JV Company since its incorporation as it was newly incorporated and was not required to prepare audited financial statements for the period from its date of incorporation to 31 May 2005.

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APPENDIX I ACCOUNTANTS’ REPORT ON THE JV COMPANY

For the purpose of this report, we have, however, carried out independent audit procedures in accordance with Statements of Auditing Standards issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) as we considered necessary on the management accounts (the “Accounts”) of the JV Company for the Relevant Period, prepared in accordance with accounting principles generally accepted in Hong Kong. The directors of the JV Company are responsible for preparing the Accounts which give a true and fair view. In preparing the Accounts, it is fundamental that appropriate accounting policies are selected and applied consistently.

The summaries of the income statement, statement of changes in equity and cash flow statement of the JV Company for the Relevant Period and of the balance sheet of the JV Company as at 31 May 2005 together with the notes thereto (the “Summaries”) set out in this report have been prepared by the directors of the Company based on the Accounts. We have examined the Summaries and carried out such additional procedures as are necessary in accordance with the Auditing Guideline “Prospectuses and the reporting accountant” issued by the HKICPA.

The directors of the Company are responsible for the Summaries. It is our responsibility to form an independent opinion, based on our examination, on the Summaries and to report our opinion to you.

In our opinion, the Summaries give, for the purpose of this report, a true and fair view of the state of affairs of the JV Company as at 31 May 2005 and of the results and cash flows of the JV Company for the Relevant Period.

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APPENDIX I

ACCOUNTANTS’ REPORT ON THE JV COMPANY

Income statement

For the period from 15 December 2004 to 31 May 2005

Notes Turnover 2 Other income 3 Administrative expenses Loss from operations 4 Finance costs 5 Loss before taxation Taxation 6 Loss for the period	RMB – 18,181 (2,654,801) (2,636,620) (8,313) (2,644,933) – (2,644,933)

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APPENDIX I ACCOUNTANTS’ REPORT ON THE JV COMPANY

Balance sheet

As at 31 May 2005

Notes ASSETS AND LIABILITIES Non-current assets Property, plant and equipment 8 Lease prepayments 9 Prepayments and deposits 10 Current assets Prepayments and other receivables Amount due from an equityholder 11 Cash at banks and in hand Current liabilities Other loans 12 Accruals and other payables Net current assets Total assets less current liabilities Non-current liabilities Other loans 12 Equityholders’ loans 13 Interest payables 14 Net assets CAPITAL AND RESERVES Capital 15 Accumulated loss

RMB 98,188,540 7,670,400 28,036,439 133,895,379 595,550 141,165 3,444,395 4,181,110 500,000 2,666,632 3,166,632 1,014,478 134,909,857 65,000,000 31,173,109 1,381,681 97,554,790 37,355,067 40,000,000 (2,644,933) 37,355,067

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APPENDIX I ACCOUNTANTS’ REPORT ON THE JV COMPANY

Cash flow statement

For the period from 15 December 2004 to 31 May 2005

Note Cash flows from operating activities Loss before taxation Adjustments for: Interest income Finance costs Depreciation and amortisation on property, plant and equipment Amortisation of lease prepayments Operating loss before working capital changes Increase in prepayments and other receivables Increase in amount due from an equityholder Decrease in accruals and other payables Net cash used in operating activities Cash flows from investing activities Interest received Acquisition of a coking coal plant, net of cash acquired 18 Payments to acquire property, plant and equipment Increase in prepayments and deposits Net cash used in investing activities Cash flows from financing activities Interest paid Repayment of equityholders’ loans Increase in other loans Capital contributions Net cash generated from financing activities Cash at banks and in hand at 31 May 2005

RMB (2,644,933) (13,917) 8,313 38,746 70,500 (2,541,291) (264,794) (141,165) (540,883) (3,488,133) 13,917 8,691,372 (28,678,269) (6,535,179) (26,508,159) (8,313) (16,551,000) 10,000,000 40,000,000 33,440,687 3,444,395

– 16 –

APPENDIX I ACCOUNTANTS’ REPORT ON THE JV COMPANY

Statement of changes in equity

For the period from 15 December 2004 to 31 May 2005

Capital contributions Loss for the period Balance at 31 May 2005	Capital RMB 40,000,000 – 40,000,000	Accumulated loss RMB – (2,644,933) (2,644,933)	Total RMB 40,000,000 (2,644,933
			37,355,067

Notes to the financial information

For the period from 15 December 2004 to 31 May 2005

1. PRINCIPAL ACCOUNTING POLICIES

(a) Basis of preparation

The Summaries have been prepared under the historical cost convention and in accordance with accounting principles generally accepted in Hong Kong and comply with all applicable Hong Kong Financial Reporting Standards issued by the HKICPA.

The HKICPA has recently issued a number of new and revised Hong Kong Financial Reporting Standards and Hong Kong Accounting Standards (“new HKFRSs”) which are effective for accounting periods beginning on or after 1 January 2005. The JV Company has not early adopted these new HKFRSs in the Accounts. Accordingly, these new HKFRSs have also not been adopted in these Summaries. The JV Company has already commenced an assessment of the impact of these new HKFRSs but is not yet in a position to state whether these new HKFRSs would have a significant impact on its results of operations and financial position.

(b) Property, plant and equipment

(i) Depreciation

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

Plant and machinery	10%
Office equipment	20%
Motor vehicles	25%

(ii) Measurement bases

Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. The cost of an asset comprises its purchase price and any directly attributable cost of bringing the asset to the working condition and location for its intended use. Subsequent expenditure relating to property, plant and equipment is added to the carrying amount of the assets if it can be demonstrated that such expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the assets.

When assets are sold or retired, any gain or loss resulting from their disposal, being the difference between the net disposal proceeds and the carrying amount of the assets, is included in the income statement.

– 17 –

APPENDIX I

ACCOUNTANTS’ REPORT ON THE JV COMPANY

(c) Construction in progress

Construction in progress represents assets under construction and is stated at cost. Cost includes costs for acquisition of assets, construction costs plus interest charges arising from borrowings used to finance these assets during the construction period. Capitalisation of these costs ceases and the asset concerned is transferred to property, plant and equipment when substantially all the activities necessary to prepare the assets for their intended use are completed.

No depreciation is provided on construction in progress until the relevant assets are ready for use.

(d) Impairment

The carrying amounts of the JV Company’s non-current assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. All impairment losses are recognised in the income statement.

(i) Calculation of recoverable amount

The recoverable amount of an asset is the greater of its net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

(ii) Reversals of impairment

In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount.

An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

(e) Foreign currencies

Transactions in foreign currencies are translated at the rates of exchange ruling at the dates of transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the rates of exchange ruling at that date. Exchange differences arising are dealt with in the income statement.

(f) Recognition of revenue

Interest income is recognised on a time proportion basis.

(g) Operating leases

Leases where substantially all the risks and rewards of ownership of assets remain with the lessor are accounted for as operating leases. Annual rentals applicable to such operating leases are charged to the income statement on a straight line basis over the lease terms except where an alternative basis is more representative of the pattern of benefits to be derived from the leased assets. Contingent rentals are charged to the income statement in the accounting period in which they are incurred.

Lease prepayments represent up-front payments to acquire long term interests in the usage of land. They are stated at cost less impairment losses and are charged to the income statement on a straight-line basis over the lease terms.

– 18 –

APPENDIX I

ACCOUNTANTS’ REPORT ON THE JV COMPANY

(h) Employee benefits

According to the relevant rules and regulations in the PRC, the JV Company is required to participate in the state-sponsored retirement plan (the “PRC RB Plan”) operated by the local municipal government in the PRC and to contribute a certain percentage of the basic salaries of their employees, at 8% to 20%, to the PRC RB Plan. The PRC RB Plan is responsible for the entire pension obligations payable to the retired employees and the JV Company has no further obligations for the actual pension payments or other post-retirement benefits beyond the annual contributions. Contributions under the PRC RB Plan are charged to the income statement as they become payable in accordance with the rules of the PRC RB Plan.

(i) 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.

2. TURNOVER

The JV Company has not commenced business operations and did not derive any turnover during the Relevant Period.

3. OTHER INCOME

Interest income Exchange gain	RMB 13,917 4,264
	18,181

4. LOSS FROM OPERATIONS

Loss from operations is arrived at after charging: Staff costs Salaries, allowances and benefits in kind _Less:_Amounts capitalised to construction in progress Depreciation and amortisation on property, plant and equipment Amortisation of lease prepayments Operating lease charges in respect of – office premises – land	RMB 748,950 (346,000
	402,950 38,746 70,500 24,000 267,500

No auditors’ remuneration was incurred by the JV Company as no audited financial statements have been prepared for the JV Company since its incorporation.

5. FINANCE COSTS

Interest charges on other loans and shareholders’ loans _Less:_Interest capitalised included in construction in progress	RMB 2,359,041 (2,350,728
	8,313

– 19 –

APPENDIX I

ACCOUNTANTS’ REPORT ON THE JV COMPANY

The borrowing costs have been capitalised at interest rates ranging from 6.00% to 6.14% per annum.

6. TAXATION

No provision for PRC corporate income tax has been made in the Summaries as the JV Company did not derive any assessable profit for the Relevant Period.

There was no material unprovided deferred tax as at the balance sheet date.

Reconciliation between tax expense and accounting loss:

Loss before taxation Tax on loss before taxation, calculated at the statutory rate of 33% Tax effect of non-deductible expenses Tax effect of tax loss not recognised Actual tax expense	RMB (2,644,933
	(872,828 52,982 819,846
	–

7. DIRECTORS’ AND EMPLOYEES’ EMOLUMENTS

(a) Directors’ emoluments

	RMB
Fees	–
Other emoluments	–

During the Relevant Period, no emoluments were paid by the JV Company to its directors as a discretionary bonus or an inducement to join or upon joining the JV Company or as compensation for loss of office.

There was no arrangement under which a director of the JV Company waived or agreed to waive any remuneration during the Relevant Period.

(b) Employees’ emoluments

The five highest paid individuals for the Relevant Period did not include any directors of the JV Company. The total emoluments of the five highest paid individuals were as follows:

	RMB
Salaries and other benefits	37,500

The emoluments paid to each of the five highest paid individuals were below RMB1,000,000.

During the Relevant Period, no emoluments were paid by the JV Company to any of the five highest paid individuals as a discretionary bonus or an inducement to join or upon joining the JV Company or as compensation for loss of office.

– 20 –

APPENDIX I

ACCOUNTANTS’ REPORT ON THE JV COMPANY

8. PROPERTY, PLANT AND EQUIPMENT

Cost Additions At 31 May 2005 Accumulated depreciation and amortisation Charge for the period At 31 May 2005 Net book value At 31 May 2005	Plant and machinery RMB 491,000 491,000 18,383 18,383 472,617	Office equipment RMB 72,157 72,157 4,446 4,446 67,711	Motor vehicles RMB 554,639 554,639 15,917 15,917 538,722	Construction in progress RMB 97,109,490 97,109,490 – – 97,109,490	Total RMB 98,227,286
					98,227,286
					38,746
					38,746
					98,188,540

9. LEASE PREPAYMENTS

The balance represents prepayment of rental in respect of the land where the construction in progress is located for a term of 50 years.

10. PREPAYMENTS AND DEPOSITS

Included in prepayments and deposits were amounts paid for the construction and installation of certain property, plant and equipment.

11. AMOUNT DUE FROM AN EQUITYHOLDER

The amount due from an equityholder is unsecured, interest free and repayable on demand.

12. OTHER LOANS

The other loans are unsecured and bear interest at rates ranging from 5.49% to 6.14% per annum during the Relevant Period. The other loans are not expected to be settled within one year from the balance sheet date, except for an amount of RMB500,000 which is repayable on 22 April 2006.

13. EQUITYHOLDERS’ LOANS

The equityholders’ loans are unsecured, interest bearing at 6.00% per annum and are repayable after 31 May 2006.

14. INTEREST PAYABLES

The balance represents accrued interest expenses for other loans (note 12) and equityholders’ loans (note 13), which are repayable after 31 May 2006 together with the repayment of the loans.

15. CAPITAL

RMB

Fully paid registered capital

40,000,000

– 21 –

APPENDIX I

ACCOUNTANTS’ REPORT ON THE JV COMPANY

16. DISTRIBUTABLE RESERVE

At 31 May 2005, the JV Company did not have any reserves available for distribution.

17. CONTINGENT LIABILITIES

At 31 May 2005, the JV Company had no contingent liabilities.

18. ACQUISITION OF ASSETS AND LIABILITIES

During the Relevant Period, the JV Company acquired certain assets and liabilities in relation to the construction in progress for a coking coal plant from Yao Zin at nil consideration. Details of the assets and liabilities acquired are as follows:

Net assets acquired Property, plant and equipment Lease prepayments Prepayments and deposits Other receivables Cash at bank and on hand Accruals and other payables Other loans Equityholders’ loans Cash at bank and on hand acquired and net cash inflow in respect of the acquisition	RMB 67,198,289 7,740,900 22,470,307 330,756 8,691,372 (3,207,515 (55,500,000 (47,724,109
	–
	8,691,372

19. COMMITMENTS

Capital commitments outstanding at 31 May 2005 not provided for in the Summaries were as

follows:

	RMB
Contracted for construction in progress	31,917,815

20. OPERATING LEASE COMMITMENTS

As at 31 May 2005, the total future minimum lease payments under non-cancellable operating leases in respect of leasehold land for a term of 50 years are payable as follows:

Within one year In the second to fifth years After five years	RMB 496,000 1,984,000 20,005,333
	22,485,333

– 22 –

APPENDIX I

ACCOUNTANTS’ REPORT ON THE JV COMPANY

21. RELATED PARTY TRANSACTIONS

• (a) During the Relevant Period, two equityholders granted advances to the JV Company to finance the construction in progress. The amounts are unsecured, interest bearing at 6.00% per annum and not expected to be settled within one year from the balance sheet date.

• (b) During the Relevant Period, the JV Company entered into an agreement with one of its equityholders in relation to the acquisition of certain assets and liabilities as detailed in note 18 above.

22. POST BALANCE SHEET EVENT

Subsequent to the balance sheet date, the equityholders of the JV Company entered into another supplemental sino-foreign equity joint venture agreement and another supplemental articles of association to increase the registered capital of the JV Company from RMB40,000,000 to RMB80,000,000 and to increase the total investment amount of the JV Company from RMB49,800,000 to RMB200,000,000.

23. SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements have been prepared by the JV Company in respect of any period subsequent to 31 May 2005.

Yours faithfully,

Grant Thornton

Certified Public Accountants Hong Kong

– 23 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

1. SUMMARY OF AUDITED FINANCIAL STATEMENTS

Set out below is a summary of the audited consolidated results and assets and liabilities of the Group for each of the three years ended 31 December 2004 as extracted from the respective published audited financial statements:

	For the year ended 31 December	For the year ended 31 December	For the year ended 31 December	For the year ended 31 December	For the year ended 31 December
	2004		2003		2002
	HK$’000		HK$’000		HK$’000
Turnover	7,560		1,470		3,732
Operating loss	(15,901)		(1,504)		(5,344)
Finance costs	(109)		–		–
Share of losses of associates	(2,743)		(1,301)		–
Loss before taxation	(18,753)		(2,805)		(5,344)
Income tax	–		–		–
Loss before minority interests	(18,753)		(2,805)		(5,344)
Minority interests	4,045		–		–
Loss attributable to shareholders	(14,708)		(2,805)		(5,344)
Loss per share
– Basic	(0.71 cents)		(0.13 cents)		(0.27 cents)
ASSETS AND LIABILITIES
		As	at 31 December
	2004		2003		2002
	HK$’000		HK$’000		HK$’000
Non-current assets
Property, plant and equipment	75,299		8,412		6,153
Goodwill	–		–		–
Interest in associates	–		41,079		–
Prepayments and deposits	91,408		–		–
Current assets	42,468		54,752		99,928
Current liabilities	(72,615)		(4,461)		(3,376)
Non-current liability
Amount due to a related company	(9,406)		–		–
Minority interests	42,080		–		–
Shareholders’ funds	85,074		99,782		102,705

– 24 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

2. AUDITED FINANCIAL STATEMENTS

Set out below are the audited financial statements together with the relevant notes to the financial statements as extracted from the annual reports of the Company for the year ended 31 December 2004:

Consolidated Income Statement

For the year ended 31 December 2004

Notes Turnover 3 Cost of sales 4 Gross profit Other revenue 3 Administrative expenses Other operating expenses Operating loss 4 Finance costs 5 Share of losses of associates Loss before taxation Income tax 6 Loss before minority interests Minority interests Loss attributable to shareholders 7, 24 Loss per share 8 – Basic – Diluted	2004 HK$’000 7,560 (5,548) 2,012 1,350 (13,457) (5,806) (15,901) (109) (2,743) (18,753) – (18,753) 4,045 (14,708) (0.71 cents) N/A	2003 HK$’000 1,470 – 1,470 3,931 (6,905) – (1,504) – (1,301) (2,805) – (2,805) – (2,805) (0.13 cents) N/A

– 25 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

Consolidated Balance Sheet

As at 31 December 2004

Notes ASSETS AND LIABILITIES Non-current assets Property, plant and equipment 10 Goodwill 11 Interest in associates 13 Prepayments and deposits 14 Current assets Inventories 15 Trade receivables 16 Prepayments, deposits and other receivables Pledged bank deposit 17 Cash and cash equivalents 17 Current liabilities Bills payable 17 Trade payables 18 Other payables Bank loan 20 Net current (liabilities)/assets Total assets less current liabilities Non-current liability Amount due to a related company 21 Minority interests NET ASSETS CAPITAL AND RESERVES Share capital 22 Reserves 24 Shareholders’ funds	2004 HK$’000 75,299 – – 91,408 166,707 – 502 5,635 4,703 31,628 42,468 4,703 1,152 29,138 37,622 72,615 (30,147) 136,560 9,406 42,080 85,074 208,080 (123,006) 85,074	2003 HK$’000 8,412 – 41,079 – 49,491 – 826 93 – 53,833 54,752 – – 4,461 – 4,461 50,291 99,782 – – 99,782 208,080 (108,298) 99,782

– 26 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

Balance Sheet

As at 31 December 2004

Notes ASSETS AND LIABILITIES Non-current assets Property, plant and equipment 10 Interest in subsidiaries 12 Interest in associates 13 Current assets Inventories 15 Trade receivables 16 Prepayments, deposits and other receivables Cash and cash equivalents 17 Current liabilities Other payables Net current assets Total assets less current liabilities Net assets CAPITAL AND RESERVES Share capital 22 Reserves 24 Shareholders’ funds	2004 HK$’000 155 62,438 – 62,593 – 502 591 23,908 25,001 795 24,206 86,799 86,799 208,080 (121,281) 86,799	2003 HK$’000 411 52,549 – 52,960 – 596 34 43,727 44,357 4,457 39,900 92,860 92,860 208,080 (115,220) 92,860

– 27 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

Consolidated Cash Flow Statement

For the year ended 31 December 2004

Notes Cash flows from operating activities Loss before taxation Adjustments for: Depreciation and amortisation of property, plant and equipment Reversal of impairment loss on land and buildings Amortisation and impairment of goodwill Finance costs Share of losses of associates Interest income Gain on disposal of partial interest in a subsidiary Gain on disposal of property, plant and equipment Operating loss before changes in working capital Decrease/(Increase) in trade receivables Decrease in prepayments, deposits and other receivables Increase in trade payables Increase in other payables Net cash generated from operating activities Cash flows from investing activities Payments for purchase of property, plant and equipment Increase in prepayment for purchase of property, plant and equipment and deposit for a potential mining project Capital investment in an associate Payment for purchase of subsidiaries, net of cash acquired 26 Proceeds from disposal of partial interest in a subsidiary Proceeds form disposal of property, plant and equipment Interest received Net cash used in investing activities Cash flows from financing activities Increase in pledged bank deposit New bank loan borrowed Increase in amount due to a related company Interest paid Net cash generated from financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December 17	2004 HK$’000 (18,753) 1,794 – 1,837 109 2,743 (248) (1,083) (10) (13,611) 324 17,159 1,152 8,650 13,674 (29,277) (41,709) – (13,630) 7,054 74 248 (77,240) (4,703) 37,622 9,406 (964) 41,361 (22,205) 53,833 31,628	2003 HK$’000 (2,805) 471 (2,691) – – 1,301 (1,240) – – (4,964) (826) 20,300 – 1,085 15,595 (39) – (42,498) – – – 1,240 (41,297) – – – – – (25,702) 79,535 53,833

– 28 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

Consolidated Statement of Changes in Equity

For the year ended 31 December 2004

At 1 January 2003 Exchange difference on translation of the financial statements of foreign entities Loss for the year At 31 December 2003 and at 1 January 2004 Loss for the year At 31 December 2004	Share capital HK$’000 208,080 – – 208,080 – 208,080	Share Accumulated premium losses HK$’000 HK$’000 399,169 (504,544) – – – (2,805) 399,169 (507,349) – (14,708) 399,169 (522,057)	Other reserves HK$’000 – (118) – (118) – (118)	Total HK$’000 102,705 (118) (2,805) 99,782 (14,708) 85,074

– 29 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

Notes to the Financial Statements

For the year ended 31 December 2004

1. GENERAL INFORMATION

The Company is an investment holding company and is also engaged in acting as an agent in the coal business, sales and marketing of coal products and sales of jewellery products. The Group is principally engaged in production and sales of coking coal products and side products, acting as an agent in the coal business and sales of jewellery products.

2. BASIS OF PRESENTATION AND PRINCIPAL ACCOUNTING POLICIES

(a) Basis of presentation

The financial statements have been prepared on a going concern basis, notwithstanding that the Group had net current liabilities as at 31 December 2004. In the opinion of the directors, the Group will have sufficient cash resources to satisfy its future working capital and other financing requirements, after taking into consideration an undertaking made by China Merit Limited, the ultimate holding company of the Company, to provide continuing financial support to the Group so as to enable the Group to continue in business as a going concern and to meet its liabilities and obligations as and when they fall due for the period at least up to 31 December 2005. Accordingly, the financial statements have been prepared on a going concern basis.

(b) Basis of preparation

These financial statements have been prepared in accordance with all applicable Hong Kong Financial Reporting Standards (which include all applicable Statements of Standard Accounting Practice and Interpretations) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”), accounting principles generally accepted in Hong Kong and the requirements of the Hong Kong Companies Ordinance. These financial statements also comply with the applicable disclosure provisions of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited.

The financial statements are prepared under the historical cost convention.

(c) Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries made up to 31 December each year. All material inter-company transactions and balances within the Group are eliminated on consolidation.

The consolidated financial statements also include the Group’s share of post-acquisition results and reserves of its associates.

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

The gain or loss on disposal of a subsidiary represents the difference between the proceeds from the sale and the Group’s share of its net assets together with any unamortised goodwill and any related accumulated foreign currency translation reserve.

Minority interests represent the interests of outside shareholders in the operating results and net assets of subsidiaries.

– 30 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

(d) Subsidiaries

Subsidiaries are those enterprises in which the Company controls more than half of the voting power, or holds more than half of the issued share capital, or controls the composition of the board of directors.

In the Company’s balance sheet, investments in subsidiaries are carried at cost less impairment losses. The results of the subsidiaries are accounted for by the Company on the basis of dividend received and receivable.

(e) Associates

An associate is an enterprise in which the Group has significant influence and which is neither a subsidiary nor a joint venture of the Group.

The Group uses the equity method of accounting to account for the results of the associates. The Group’s investments in associates are stated at its share of net assets of the associates. The Company’s investments in associates are stated at cost less impairment losses. The results of associates are accounted for by the Company on the basis of dividends received and receivable.

An assessment of investments in associates is performed when there is an indication that the asset has been impaired or the impairment losses recognised in prior years no longer exist.

When the Group transacts with its associates, unrealised profits and losses are eliminated to the extent of the Group’s interest in the relevant associates except where unrealised losses provide evidence of an impairment of the asset transferred.

(f) Goodwill

Goodwill arising on acquisition represents the excess of the cost of acquisition over the Group’s share of the fair value of the identifiable assets and liabilities acquired as at the date of acquisition.

In respect of subsidiaries, goodwill is amortised to the consolidated income statement on a straight-line basis over its estimated useful life. Goodwill is stated in the consolidated balance sheet at cost less accumulated amortisation and impairment losses.

In respect of acquisition of associates, goodwill is amortised to the consolidated income statement on a straight-line basis over its estimated useful life. The cost of goodwill less accumulated amortisation and impairment losses is included in the carrying amount of the interests in associates.

(g) Revenue recognition

Provided it is probable that the economic benefits will flow to the Group and the revenue and costs, if applicable, can be measured reliably, revenue is recognised in the consolidated income statement as follows:

• (i) Commission from coal business

Commission from coal business is recognised when the agreed services are rendered.

• (ii) Sale of goods

Revenue is recognised on the transfer of risks and rewards of ownership, which generally coincides with the time when the goods are delivered to customers and title has passed.

– 31 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

• (iii) Interest income

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

(h) Construction in progress

Construction in progress represented assets under construction and is stated at cost. Cost includes construction costs plus interest charges arising from borrowings used to finance these assets during the construction period. Capitalisation of these costs ceases and the asset concerned is transferred to property, plant and equipment when substantially all the activities necessary to prepare the assets for their intended use are completed.

No depreciation is provided on construction in progress until the relevant assets are ready for use.

(i) Property, plant and equipment

• (i) Depreciation and amortisation

Depreciation is provided to write off the depreciable amount of property, plant and equipment over their estimated useful lives, using the straight line method, at the following rates per annum:

	Leasehold land	2%
	Buildings	5%
	Plant and machinery	10%
	Leasehold improvements	331/3%
	Office equipment	20%
	Furniture and fixtures	20%
	Motor vehicles	25%
(ii)	Measurement bases

Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to the working condition and location for its intended use. Subsequent expenditure relating to property, plant and equipment is added to the carrying amount of the assets if it can be demonstrated that such expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the assets.

When assets are sold or retired, any gain or loss resulting from their disposal, being the difference between the net disposal proceeds and the carrying amount of the assets, is included in the consolidated income statement.

(j) Land use rights

Land use rights are stated at cost less accumulated amortisation and impairment losses and are amortised over the lease terms, taking into account the estimated residual value, using the straight line method.

(k) Inventories

Inventories are stated at the lower of cost and net realisable value. Cost, calculated on the first-in, first-out basis, comprises materials, direct labour and those overheads that have been incurred in bringing the inventories to their present location and condition. Net realisable value is calculated as the actual or estimated selling price less all further costs of completion and the estimated costs necessary to make the sale.

– 32 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

(l) Cash and cash equivalents

Cash and cash equivalents comprise cash at banks and on hand, demand deposits with banks and other financial institutions, and short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, having been within three months of maturity at acquisition. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are also included as a component of cash and cash equivalents for the purpose of the consolidated cash flow statement.

(m) Income tax

• (i) Income tax for the year comprises current and deferred tax. Income tax is recognised in the consolidated income statement except to the extent that it relates to items recognised directly to equity, in which case it is recognised in equity.

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

• (iii) Deferred tax assets and liabilities arise from deductible and taxable temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the tax bases. Deferred tax assets also arise from unused tax losses and unused tax credits.

Apart from certain limited exceptions, all deferred tax liabilities, and all deferred tax assets to the extent that it is probable that future taxable profits will be available against which the asset can be utilised, are recognised.

The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of the assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. Deferred tax assets and liabilities are not discounted.

The carrying amount of a deferred tax asset is reviewed at each balance sheet date and is reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow the related tax benefit to be utilised. Any such reduction is reversed to the extent that it becomes probable that sufficient taxable profit will be available.

Current tax balances and deferred tax balances, and movements therein, are presented separately form each other and are not offset.

(n) Operating leases

Leases where substantially all the risks and rewards of ownership of assets remain with the lessor are accounted for as operating leases. Annual rentals applicable to such operating leases are charged to the consolidated income statement on a straight line basis over the lease terms except where an alternative basis is more representative of the pattern of benefits to be derived from the leased assets. Contingent rentals are charged to the consolidated income statement in the accounting period in which they are incurred.

(o) Foreign currencies

Transactions in foreign currencies are translated into Hong Kong dollars at the rates of exchange ruling at the dates of transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated into Hong Kong dollars at the rates of exchange ruling at the balance sheet date. Gains and losses arising on exchange are dealt with in the consolidated income statement.

– 33 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

The balance sheets of subsidiaries and associates expressed in foreign currencies are translated at the rates of exchange ruling at the balance sheet date and their income statements are translated at the average rates for the year. Gains and losses arising on exchange are dealt with as movements in reserves.

(p) Employee benefits

(i) Employee leave entitlements

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

Non-accumulating compensated absences are not recognised until the time of leave.

(ii) Retirement benefits costs

In Hong Kong, the Group contributes to a Mandatory Provident Fund Scheme as required under the Hong Kong Mandatory Provident Fund Schemes Ordinance, for all employees in Hong Kong. The assets of the scheme are held separately from those of the Group in an independently administered fund. The contributions are calculated as 5% of employees’ salaries and are recognised as an expense in the consolidated income statement as incurred.

In the Peoples’ Republic of China (the “PRC”), according to the relevant rules and regulations in the PRC, the subsidiaries of the Company operating in the PRC are required to participate in the state-sponsored retirement plan (the “PRC RB Plan”) operated by the respective local municipal government in the PRC. These PRC subsidiaries are required to contribute a certain percentage of the basic salaries of their employees, at 8% to 20%, to the PRC RB Plan. The PRC RB Plan is responsible for the entire pension obligations payable to the retired employees and the Group has no further obligations for the actual pension payments or other post-retirement benefits beyond the annual contribution. Contributions under the PRC RB Plan are charged to the consolidated income statement as they become payable in accordance with the rules of the PRC RB Plan.

(q) Segment reporting

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

(r) Impairment

The carrying amounts of the Group’s assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the consolidated income statement.

(i) Calculation of recoverable amount

The recoverable amount of an asset is the greater of its net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

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APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

(ii) Reversals of impairment

An impairment loss in respect of goodwill is not reversed unless the loss was caused by a specific external event of an exceptional nature that is not expected to recur, and the increase in recoverable amount relates clearly to the reversal of the effect of that specific event.

In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount.

An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

(s) Borrowing costs

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

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

(t) 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 decision. Parties are also considered to be related if they are subject to common control or common significant influence.

(u) Recently issued accounting standards

The HKICPA has issued a number of new and revised Hong Kong Financial Reporting Standards and Hong Kong Accounting Standards (“new HKFRSs”) which are effective for accounting periods beginning on or after 1 January 2005. The Group has not early adopted these new HKFRSs for the year ended 31 December 2004. The Group has already commenced an assessment of the impact of these new HKFRSs but is not yet in a position to state whether these new HKFRSs would have a significant impact on its results of operations and financial position.

– 35 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

3. REVENUE, TURNOVER AND SEGMENT INFORMATION

The Group is principally engaged in production and sales of coking coal products and side products, acting as an agent in the coal business and sales of jewellery products.

Turnover and other revenue recognised during the year are as follows:

Sales of coal products Commission from coal business Sales of jewellery products Turnover Bank Interest income Other Interest income Reversal of impairment loss on land and buildings Gain on disposal of partial interest in a subsidiary_(Note)_ Gain on disposal of property, plant and equipment Other income Other revenue Total revenue	2004 HK$’000 6,126 1,241 193 7,560 248 – – 1,083 10 9 1,350 8,910	2003 HK$’000 – 853 617
		1,470
		614 626 2,691 – – –
		3,931
		5,401

Note: During the year, Jinshan Energy Group Limited, a subsidiary of the Company, disposed of 25% equity interests in its subsidiary, Liulin Luenshan Coking Company Limited, to a minority shareholder for a consideration of approximately HK$7,054,000, resulting in a gain on disposal of approximately HK$1,083,000.

(a) Primary reporting format - business segment

An analysis of the Group’s turnover and loss attributable to shareholders for the year by principal activities is as follows:

Principal activities: Sales of coal products Commission from coal business Sales of jewellery products Others Finance costs Share of losses of associates Minority interests	Turnover 2004 2003 HK$’000 HK$’000 6,126 – 1,241 853 193 617 – – 7,560 1,470	Loss attributable to shareholders 2004 2003 HK$’000 HK$’000 (9,290) – 1,241 853 193 613 (8,045) (2,970 (15,901) (1,504 (109) – (2,743) (1,301 (18,753) (2,805 4,045 – (14,708) (2,805	Loss attributable to shareholders 2004 2003 HK$’000 HK$’000 (9,290) – 1,241 853 193 613 (8,045) (2,970 (15,901) (1,504 (109) – (2,743) (1,301 (18,753) (2,805 4,045 – (14,708) (2,805
			(1,504 – (1,301
			(2,805 –
			(2,805

– 36 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

An analysis of the Group’s assets, liabilities as at 31 December 2004 and capital expenditure, depreciation and amortisation and impairment incurred for the year by principal activities is as follows:

Total assets 2004 2003 HK$’000 HK$’000 Principal activities: Sales of coal products 175,167 – Commission from coal business 502 596 Sales of jewellery products – 230 Unallocated 33,506 62,338 209,175 63,164 Interests in associates – 41,079 209,175 104,243	Total liabilities 2004 2003 HK$’000 HK$’000 81,222 – – – – – 799 4,461 82,021 4,461	Capital expenditure 2004 2003 HK$’000 HK$’000 50,701 – – – – – – 39 50,701 39	Depreciation and amortisation 2004 2003 HK$’000 HK$’000 1,523 – – – – – 577 471 2,100 471	Impairment of goodwill 2004 2003 HK$’000 HK$’000 1,531 – – – – – – – 1,531 –	Impairment of goodwill 2004 2003 HK$’000 HK$’000 1,531 – – – – – – – 1,531 –
					–

(b) Secondary reporting format – geographical segment

An analysis of the Group’s turnover, segment results for the year, the Group’s assets as at 31 December 2004 and capital expenditure incurred for the year by principal markets is as follows:

Turnover 2004 2003 HK$’000 HK$’000 Principal markets: The PRC 7,367 595 Hong Kong 193 617 Korea – 258 7,560 1,470 Interests in associates	Segment 2004 HK$’000 (8,049) (7,852) – (15,901)	results 2003 HK$’000 595 (2,357) 258 (1,504)	Total assets 2004 2003 HK$’000 HK$’000 175,167 – 34,008 63,164 – – 209,175 63,164 – 41,079 209,175 104,243	Capital expenditure 2004 2003 HK$’000 HK$’000 50,701 – – 39 – – 50,701 39	Capital expenditure 2004 2003 HK$’000 HK$’000 50,701 – – 39 – – 50,701 39
					39

– 37 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

4. OPERATING LOSS

Operating loss is arrived at after charging:

5.

2004 HK$’000 Cost of inventories sold 7,263 Less:_Provision for inventories written back upon disposal (1,715) Cost of sales 5,548 Staff costs(including directors’ remuneration_ and retirement benefits scheme contributions) 6,317 Retirement benefits scheme contributions 174 Depreciation and amortisation of property, plant and equipment 1,794 Auditors’ remuneration – audit services 260 – other services 96 Operating leases charges in respect of land and buildings 75 Other operating expenses – amortisation of goodwill 306 – impairment of goodwill 1,531 – exploration costs incurred for a potential mining project 2,851 FINANCE COSTS 2004 HK$’000 Interest on bank loans wholly repayable within five years 1,057 _Less:_Borrowing costs capitalised included in construction in progress* (948) 109

2003 HK$’000 5,990 (5,990) – 4,418 75 471 188 – – – – – 2003 HK$’000 – – –

* The borrowing costs have been capitalised at a rate of 8% per annum (2003: NIL).

6. INCOME TAX

• (a) No provision for Hong Kong profits tax and the PRC income tax has been made in the financial statements in respect of the Company and its subsidiaries for the year (2003: NIL), as the Company and its subsidiaries either have substantial accumulated tax losses brought forward which are available for setting off against current year’s assessable profits or have tax losses for the year.

– 38 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

(b) Reconciliation between tax expense and accounting loss at applicable tax rates:

Loss before taxation Notional tax on loss before taxation, calculated at the rates applicable to loss in the countries concerned Tax effect of non-deductible expenses Tax effect of non-taxable revenue Tax effect of unused tax losses not recognised Actual tax expense	2004 HK$’000 % (18,753) (4,309) 23.0 2,334 (12.5) (20) 0.1 1,995 (10.6) – –	HK$’000 (2,805) (267) 44 (572) 795 –	2003 % 9.5 (1.6) 20.4 (28.3) –

Hong Kong profits tax is calculated at 17.5% (2003: 17.5 %) on the estimated assessable profit/adjusted loss for the year. Taxation for overseas subsidiaries and associates is charged at the appropriate current rates of taxation ruling in the relevant countries.

7. LOSS ATTRIBUTABLE TO SHAREHOLDERS

The loss attributable to shareholders for the year is dealt with in the financial statements of the Company to the extent of HK$6,061,000 (2003: HK$4,044,000).

8. LOSS PER SHARE

(a) Basic

The calculation of basic loss per share is based on the Group’s loss attributable to shareholders for the year of HK$14,708,000 (2003: HK$2,805,000) and 2,080,800,000 (2003: 2,080,800,000) ordinary shares in issue during the year.

(b) Diluted

No diluted loss per share has been presented as the Company did not have any share options outstanding for both 2003 and 2004.

– 39 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

9. DIRECTORS’ AND SENIOR MANAGEMENT’S EMOLUMENTS

(a) Directors’ emoluments

The aggregate amounts of emoluments payable to the directors of the Company during the year are as follows:

Fees Executive directors Non-executive directors Other emoluments: Basic salaries, housing allowances, other allowances and benefits in kind Retirement benefits scheme contributions	2004 HK$’000 – 150 150 2,466 24 2,640	2003 HK$’000 – 120
		120 2,418 24
		2,562

The emoluments of the directors fell within the following bands:

Emolument bands HK$Nil – HK$1,000,000 HK$1,000,001 – HK$1,500,000	Number of directors 2004 2003 5 3 2 2 7 5	Number of directors 2004 2003 5 3 2 2 7 5
		5

No directors waived any emoluments in respect of the year ended 31 December 2004 (2003: NIL).

During the year, no emoluments were paid by the Group to the directors as an inducement to join or upon joining the Group, or as compensation for loss of office (2003: NIL).

(b) Five highest paid individuals

The aggregate amounts of the emoluments paid to the five highest paid individuals of the Group whose emoluments have not been disclosed in the directors’ emoluments noted above are as follows:

Basis salaries, housing allowances, other allowances and benefits in kind Retirement benefits scheme contributions	2004 HK$’000 1,560 36 1,596	2003 HK$’000 1,246 30
		1,276

– 40 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

The number of the highest paid individuals whose emoluments have not been disclosed in the directors’ emoluments noted above and fell within the following band is as follows:

Emolument bands	Number of	individuals
	2004	2003
HK$Nil – HK$1,000,000	3	3

10. PROPERTY, PLANT AND EQUIPMENT

Group

Cost At 1 January 2004 Additions – through acquisition of subsidiaries – Others Disposals At 31 December 2004 Accumulated depreciation/ amortisation and impairment losses At 1 January 2004 Charge for the year Written back on disposals At 31 December 2004 Net book value At 31 December 2004 At 31 December 2003	Construction in progress HK$’000 – 3,309 50,453 – 53,762 – – – – 53,762 –	Leasehold land and buildings HK$’000 9,970 6,481 – – 16,451 1,970 461 – 2,431 14,020 8,000	Plant and Leasehold machinery improvements HK$’000 HK$’000 – 696 3,021 – 88 – – – 3,109 696 – 367 180 232 – – 180 599 2,929 97 – 329	Office equipment HK$’000 275 45 48 – 368 207 28 – 235 133 68	Furniture and fixtures HK$’000 91 4 – – 95 76 5 – 81 14 15	Motor vehicles HK$’000 601 5,184 112 (83 ) 5,814 601 888 (19 ) 1,470 4,344 –	Total HK$’000 11,633 18,044 50,701 (83
							80,295
							3,221 1,794 (19
							4,996
							75,299
							8,412

The leasehold land and buildings of the Group are situated in Hong Kong and the PRC and held under medium term leases. The net book values of leasehold land and buildings of the Group situated in Hong Kong and the PRC are approximately HK$7,680,000 and HK$6,340,000 respectively.

At 31 December 2004, the cost of land and buildings of the Group includes an amount of HK$246,000 (2003: NIL) which represents the costs of the land use rights of the Group and the related accumulated amortisation amounts to HK$33,000 (2003: NIL).

At 31 December 2004, the Group’s bank loan of HK$37,622,000 (2003: NIL) is secured by the Group’s construction in progress with a carrying value of HK$26,882,000 (2003: NIL) (Note 20).

– 41 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

Company

Leasehold improvements HK$’000 Cost At 1 January 2004 696 Additions – At 31 December 2004 696 Accumulated depreciation/ amortisation At 1 January 2004 368 Charge for the year 231 At 31 December 2004 599 Net book value At 31 December 2004 97 At 31 December 2003 328	Office equipment HK$’000 266 – 266 198 20 218 48 68	Furniture and fixtures HK$’000 91 – 91 76 5 81 10 15	Motor vehicles HK$’000 601 – 601 601 – 601 – –	Total HK$’000 1,654 –
				1,654
				1,243 256
				1,499
				155
				411

11. GOODWILL

Arising on acquisition of subsidiaries and at 31 December Accumulated amortisation and impairment losses – amortisation charge for the year – impairment loss – at 31 December Net book value at 31 December	Group 2004 2003 HK$’000 HK$’000 1,837 – (306) – (1,531) – (1,837) – – –	Group 2004 2003 HK$’000 HK$’000 1,837 – (306) – (1,531) – (1,837) – – –
		– –
		–
		–

The estimated useful life of the goodwill is three years. At the balance sheet date, the management assessed the carrying amount of goodwill and impairment loss of HK$1,531,000 has been charged to the consolidated income statement during the year.

12. INTEREST IN SUBSIDIARIES

Unlisted shares, at cost _Less:_Provision for impairment losses Amounts due from subsidiaries _Less:_Provision for doubtful amounts	Company 2004 2003 HK$’000 HK$’000 22,256 22,256 (22,256) (22,256 213,355 203,873 (150,917) (151,324 62,438 52,549	Company 2004 2003 HK$’000 HK$’000 22,256 22,256 (22,256) (22,256 213,355 203,873 (150,917) (151,324 62,438 52,549
		203,873 (151,324
		52,549

– 42 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

The amounts due from subsidiaries are unsecured, interest-free and not repayable within 12 months from the balance sheet date.

Particulars of the subsidiaries at 31 December 2004 are as follows:

			Particulars of
			issued	Group’s
	Place of	Principal activities	share capital/	effective
Name	incorporation	and place of operations	registered capital	interest	held
				2004	2003
Jinshan Energy Group	PRC	Investment holding,	Registered capital	65%	–
Limited (“Jinshan”)*		production and sales of	of RMB100,000,000
		of coal products in the PRC
Taiyuan Xishan Risheng	PRC	Production and sales	Registered capital	45.5% #	–
Coal and Coking Company		of coal products in the PRC	of RMB30,000,000
Limited (“Risheng”)*
Liulin Luenshan	PRC	Production and sales	Registered capital	42.25% #	–
Coking Company Limited		of coal products in the PRC	of RMB30,000,000
(“Luenshan”)*
Fushan Energy Group	British Virgin	Investment holding	1 ordinary share	100%	100%
Limited	Islands	in the PRC	of US$1 each
Fu Hui Jewellery &	Hong Kong	Jewellery retailing and	2,000,000	100%	100%
Goldsmith Company		wholesaling in Hong Kong	ordinary shares
Limited			of HK$1 each
Fu Hui Investments Limited	Hong Kong	Provision of financing	100 ordinary shares	100%	100%
		arrangements in Hong Kong	of HK$1 each
Jumbo Hall International	Hong Kong	Property holding in Hong Kong	2 ordinary shares	100%	100%
Limited			of HK$1 each
New Honest Limited	British Virgin	Investment holding in the PRC	1 ordinary share	100%	100%
	Islands		of US$1 each
Maxease Limited	British Virgin	Dormant	1 ordinary share	100%	100%
	Islands		of US$1 each
Full Bright International	New York,	Dormant	US$183,750	100%	100%
Limited	U.S.A.

* These companies were indirectly held by the Company and were joint ventures incorporated in the PRC with limited liability.

# These companies are subsidiaries of Jinshan and accordingly, are accounted for as subsidiaries of the Company.

During the year, Fushan Energy Group Limited, a wholly-owned subsidiary of the Company, increased its equity interests in Jinshan from 45% to 65% by acquiring an additional 20% equity interest in Jinshan. Accordingly, Jinshan, an associate of the Group as at 31 December 2003, and its two subsidiaries, Risheng and Luenshan became subsidiaries of the Company since then.

– 43 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

13. INTEREST IN ASSOCIATES

Unlisted shares, at cost Share of net assets Amount due from an associate _Less:_Provision for doubtful amount	Group 2004 2003 HK$’000 HK$’000 – – – 41,079 3,739 3,739 3,739 44,818 (3,739) (3,739) – 41,079	Company 2004 2003 HK$’000 HK$’000 4 4 – – 3,739 3,739 3,743 3,743 (3,743) (3,743 – –	Company 2004 2003 HK$’000 HK$’000 4 4 – – 3,739 3,739 3,743 3,743 (3,743) (3,743 – –
			3,743 (3,743
			–

The amount due from an associate is unsecured, interest-free and not repayable within 12 months from the balance sheet date.

Particulars of the associates at 31 December 2004 are as follows:

			Particulars
			of issued	Group’s
	Place of	Principal activities	share capital/	effective
Name	incorporation	and place of operations	registered capital	interest	held
				2004	2003
Real Wide Limited	Hong Kong	Dormant	10,000	*45%	*45%
			ordinary shares
			of HK$1 each
Jinshan Energy Group	PRC	Investment holding,	Registered capital	**–	45%
Limited		production and sales	of RMB100,000,000
		of coal products in the PRC
Shanxi Yao Zin Coal and	PRC	Production and sales	Registered capital	***38%	–
Coking Company Limited		of coal products in	of RMB40,000,000
		the PRC

• Held by the Company directly.

• ** During the year, Jinshan and its subsidiaries became subsidiaries of the Group (Note 12).

• *** A sino-foreign equity joint-venture established on 15 December 2004. No capital contribution has been injected to the joint-venture by the Group as at 31 December 2004 (Note 28 a).

14. PREPAYMENTS AND DEPOSITS

Included in prepayments and deposits of the Group were (a) a deposit of HK$23,514,000 paid by a subsidiary for a potential mining project; and (b) prepayments of HK$67,894,000 paid by another subsidiary for construction and installation of certain property, plant and machinery.

– 44 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

15. INVENTORIES

Raw materials Finished goods _Less:_Provision for inventories	Group 2004 2003 HK$’000 HK$’000 100,284 101,967 68,371 68,403 168,655 170,370 (168,655) (170,370) – –	Company 2004 2003 HK$’000 HK$’000 93,801 93,801 64,468 64,500 158,269 158,301 (158,269) (158,301 – –	Company 2004 2003 HK$’000 HK$’000 93,801 93,801 64,468 64,500 158,269 158,301 (158,269) (158,301 – –
			158,301 (158,301
			–

16. TRADE RECEIVABLES

General credit terms of the Group range from 60 to 90 days. At 31 December 2004, the ageing analysis of the trade receivables (net of specific provision for bad and doubtful debts) was as follows:

Current – 3 months CASH AND CASH EQUIVALENTS Deposits with banks Cash at bank and on hand Pledged bank deposit* Cash and cash equivalents	Group 2004 2003 HK$’000 HK$’000 502 826 Group 2004 2003 HK$’000 HK$’000 27,275 51,161 9,056 2,672 36,331 53,833 (4,703) – 31,628 53,833	Company 2004 2003 HK$’000 HK$’000 502 596 Company 2004 2003 HK$’000 HK$’000 22,572 41,127 1,336 2,600 23,908 43,727	Company 2004 2003 HK$’000 HK$’000 502 596 Company 2004 2003 HK$’000 HK$’000 22,572 41,127 1,336 2,600 23,908 43,727
			43,727

17. CASH AND CASH EQUIVALENTS

* At 31 December 2004, the Group’s bills payable of HK$4,703,000 were secured by a bank deposit of HK$4,703,000.

Included in cash and cash equivalents of the Group are cash and bank balances of HK$11,308,000 (2003: NIL) denominated in Renminbi.

18. TRADE PAYABLES

At 31 December 2004, the ageing analysis of the trade payables was as follows:

			Group		Company
			2004	2003	2004	2003
			HK$’000	HK$’000	HK$’000	HK$’000
Current –	3	months	1,152	–	–	–

– 45 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

19. EMPLOYEE RETIREMENT BENEFITS

The Group operates a Mandatory Provident Fund Scheme (“the MPF scheme”) under the Hong Kong Mandatory Provident Fund Schemes Ordinance for employees employed under the jurisdiction of the Hong Kong Employment Ordinance. The MPF scheme is a defined contribution retirement scheme administered by independent trustees. Under the MPF scheme, the Group and its employees are each required to make contributions to the scheme at 5% of the employees’ relevant income, subject to a cap of monthly relevant income of HK$20,000.

According to the relevant rules and regulations in the PRC, the subsidiaries of the Company operating in the PRC are required to participate in the state-sponsored retirement plan (the “PRC RB Plan”) operated by the respective local municipal government in the PRC. These PRC subsidiaries are required to contribute a certain percentage of the basic salaries of their employees, at 8% to 20%, to the PRC RB Plan. The PRC RB Plan is responsible for the entire pension obligations payable to the retired employees and the Group has no further obligations for the actual pension payments or other postretirement benefits beyond the annual contribution.

20. BANK LOAN

At 31 December 2004, the bank loan was repayable as follows:

			Group	Group	Company	Company
			2004	2003	2004	2003
			HK$’000	HK$’000	HK$’000	HK$’000
Within	1	year	37,622	–	–	–

At 31 December 2004, the bank loan of HK$37,622,000 was secured by certain construction in progress of a subsidiary with a carrying value of HK$26,882,000 (Note 10) and was guaranteed by the ultimate holding company, China Merit Limited and Jinshan. The loan was interest bearing at 8% per annum.

21. AMOUNT DUE TO A RELATED COMPANY

The amount due to a related company, in which a substantial shareholder of the Company who is also a director of the Company has beneficial interest, is unsecured, interest-free and is not expected to be settled within one year.

22. SHARE CAPITAL

Authorised: Ordinary shares of HK$0.10 each At 31 December Issued and fully paid: Ordinary shares of HK$0.10 each At 1 January and 31 December	Number of shares 2004 2003 5,000,000,000 5,000,000,000 2,080,800,000 2,080,800,000	Company 2004 2003 HK$’000 HK$’000 500,000 500,000 208,080 208,080	Company 2004 2003 HK$’000 HK$’000 500,000 500,000 208,080 208,080
			208,080

– 46 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

23. SHARE OPTION SCHEME

At the annual general meeting of the Company held on 20 June 2003, the shareholders of the Company approved the adoption of a new option scheme (the “Scheme”) and to give the Directors the power to implement and administer the Scheme with effect from the date of passing of the resolution. The Scheme is designed to reward and provide incentive to, and strengthen the Group’s business relationship with, the prescribed classes of participants, including eligible employees and directors of any member of the Group, who may contribute to the growth and development of the Group.

The exercise price of options is to be determined by the Directors and is the highest of the closing price of the shares of the Company as stated in the Stock Exchange’s daily quotations sheet on the date of grant, the average closing price of the shares as stated in the Stock Exchange’s daily quotations sheets for the five business days immediately preceding the date of grant and the nominal value of the share on the date of grant.

No share options were granted under the Scheme during the year ended 31 December 2004 (2003: NIL) and no share option was outstanding as at 31 December 2004 (2003: NIL).

24. RESERVES

Group

At 1 January 2003 Exchange difference on translation of the financial statements of foreign entities Loss for the year At 31 December 2003 and 1 January 2004 Loss for the year At 31 December 2004	Share Accumulated premium losses HK$’000 HK$’000 399,169 (504,544) – – – (2,805) 399,169 (507,349) – (14,708) 399,169 (522,057)	Other reserves HK$’000 – (118) – (118) – (118)	Total HK$’000 (105,375) (118) (2,805) (108,298) (14,708) (123,006)

At 31 December 2003, accumulated losses and other reserves included accumulated losses of HK$1,301,000 and other reserves of HK$118,000 attributable to associates respectively.

Company

At 1 January 2003 Loss for the year At 31 December 2003 and 1 January 2004 Loss for the year At 31 December 2004	Share Accumulated premium losses HK$’000 HK$’000 399,169 (510,345) – (4,044) 399,169 (514,389) – (6,061) 399,169 (520,450)	Total HK$’000 (111,176) (4,044) (115,220) (6,061) (121,281)

– 47 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

25. DEFERRED TAXATION

As at 31 December 2004, no deferred tax liabilities have been provided (2003: NIL) as the amount involved was immaterial and no deferred tax assets have been recognised (2003: NIL) in relation to the deductible temporary differences and unused tax losses as it is uncertain whether future taxable profit will be available against which the deductible temporary differences and tax losses can be utilised. Deferred tax assets have not been recognised in respect of the following items:

Deductible temporary differences Tax losses	Group 2004 2003 HK$’000 HK$’000 23,516 7,332 175,078 167,744 198,594 175,076	Company 2004 2003 HK$’000 HK$’000 435 244 139,439 133,450 139,874 133,694	Company 2004 2003 HK$’000 HK$’000 435 244 139,439 133,450 139,874 133,694
			133,694

The tax losses of the Group of approximately HK$1,432,000 (2003: NIL) and HK$173,646,000 (2003: HK$167,744,000) will expire in five years and do not expire respectively. The tax losses of the Company do not expire under current tax legislation.

26. ACQUISITION OF SUBSIDIARIES

On 8 June 2004, Fushan Energy Group Limited, a wholly-owned subsidiary of the Company, acquired a further 20% equity interest in Jinshan, increasing its equity interests from 45% to 65%, at a consideration of approximately HK$18,875,000 which was satisfied by cash. Accordingly, Jinshan and its two subsidiaries, namely Risheng and Luenshan, became subsidiaries of the Company on 8 June 2004.

Net assets acquired Property, plant and equipment Prepayments for construction and installation of property, plant and equipment and deposit for a potential mining project Prepayments, deposits and other receivables Cash at bank and on hand Other payables Minority interests Share of net assets of associates before acquisition Goodwill arising on acquisition Total consideration paid, satisfied by cash _Less:_Cash at bank and on hand of the subsidiaries acquired Net cash outflow in respect of the purchase of subsidiaries	2004 HK$’000 18,044 49,699 22,701 5,245 (161) (40,154) 55,374 (38,336) 17,038 1,837 18,875 (5,245) 13,630	2003 HK$’000 – – – – – –
		– –
		– –
		– –
		–

Since the acquisition, the subsidiaries contributed HK$6,126,000 to the Group’s turnover and HK$7,553,000 to the consolidated loss before minority interests for the year ended 31 December 2004.

– 48 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

27. MAJOR NON-CASH TRANSACTIONS

Consideration for purchase of property, plant and equipment outstanding and unpaid included in – other payables – bills payable	2004 HK$’000 15,773 4,703 20,476	2003 HK$’000 – –
		–

28. COMMITMENTS

(a) Capital commitments outstanding at 31 December 2004 not provided for in the financial statements were as follows:

Contracted but not provided for: – capital expenditure in respect of acquisition of property, plant and equipment – capital expenditure in respect of exploration for a potential mining project – shareholder’s loan to an associate – capital investment in an associate	Group 2004 2003 HK$’000 HK$’000 56,753 – 1,270 – – 5,960 17,799 – 75,822 5,960	Company 2004 2003 HK$’000 HK$’000 – – – – – – – – – –	Company 2004 2003 HK$’000 HK$’000 – – – – – – – – – –
			–

(b) At 31 December 2004, the total future minimum lease payments under non-cancellable operating leases in respect of leasehold land and buildings are payable as follows:

Within one year In the second to fifth years After five years	Group 2004 2003 HK$’000 HK$’000 279 – 615 – 6,728 – 7,622 –	Company 2004 2003 HK$’000 HK$’000 – – – – – – –	Company 2004 2003 HK$’000 HK$’000 – – – – – – –
			–

The Group leases certain leasehold land and buildings under operating lease arrangements for terms ranging from 2 to 50 years.

– 49 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

29. RELATED PARTY TRANSACTIONS

• (a) On 24 June 2004, Jinshan entered into an agreement with Shanxi Luensheng Energy Company Limited (“Luensheng”), a company owned by a minority shareholder of Luenshan and his family, in relation to the disposal by Jinshan of 25% equity interests in Luenshan to Luensheng for a cash consideration of approximately HK$7,054,000. The transaction was completed on 29 June 2004. Further details of this transaction are included in the announcement issued by the Company dated 24 June 2004.

• (b) During the year, a company, which is indirectly owned by the substantial shareholder of the Company, Mr. Wong Lik Ping who is also a director of the Company, granted an advance of HK$9,406,000 to one of the subsidiaries of the Company to finance certain construction and installation of coking coal plant and machinery. The amount is unsecured, interest-free and is not expected to be settled within one year (Note 21).

• (c) During the year, China Merit Limited, the ultimate holding company of the Company, provided a corporate guarantee in respect of a bank loan of HK$37,622,000 (Note 20) in favour of one of the subsidiaries of the Company at nil consideration.

30. ULTIMATE HOLDING COMPANY

The Directors consider the ultimate holding company as at 31 December 2004 to be China Merit Limited, which is incorporated in the British Virgin Islands.

3. INDEBTEDNESS

As at 30 June 2005, being the latest practicable date for the purpose of this indebtedness statement prior to the printing of this circular, the Group as enlarged after the Acquisition had outstanding indebtedness of approximately HK$188.2 million. The indebtedness comprised secured bank loans of approximately HK$37.7 million, other loans of HK$104.2 million, due to related companies of HK$14.1 million and loans from minority equityholders of approximately HK$32.2 million.

The bank loans were secured by certain construction in progress of a subsidiary of the Company and corporate guarantees executed by China Merit Limited, the ultimate holding company of the Company and one of the subsidiaries of the Company.

Included in other loans of HK$104.2 million, an amount of HK$0.5 million is unsecured, bears interest of a rate of 5.49% per annum and is repayable on 22 April 2006 and the remaining amount of HK$103.7 million is unsecured, bears interest of rates ranging from 6.00% to 7.00% per annum and is not expected to be settled within one year from 30 June 2005.

The amounts due to related companies of HK$14.1 million are unsecured, bear interest of a rate of 7.00% per annum and are not expected to be settled within one year from 30 June 2005.

The loans from minority equityholders of HK$32.2 million are unsecured, bear interest of a rate of 6.00% per annum and are not expected to be settled within one year from 30 June 2005.

– 50 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

Save as aforesaid and apart from intra-group liabilities, the Group as enlarged after the Acquisition did not have, at the close of business on 30 June 2005, any outstanding mortgages, charges, debentures or other loan capital, bank overdrafts, loans or other similar indebtedness, liabilities under acceptances (other than normal trade bills), acceptance credits, hire purchase or other finance lease commitments, guarantees or other significant contingent liabilities.

As at the Latest Practicable Date, the Directors were not aware of any material change in respect of the indebtedness or other contingent liabilities of the Group as enlarged after the Acquisition since 30 June 2005.

For the purpose of the indebtedness statement, the indebtedness of the Group has been translated from Renminbi to Hong Kong dollars at the exchange rate ruling at 30 June 2005.

4. MATERIAL CHANGE

The Directors are not aware of any material adverse changes in the financial or trading position or prospects of the Group since 31 December 2004, being the date to which the latest audited consolidated financial statements of the Group were made up.

5. WORKING CAPITAL

After taking into account the internally generated funds, available banking facilities of the Group as enlarged after the Acquisition and the continuous financial support from China Merit Limited, the ultimate holding company of the Company, the Directors are of the opinion that the Group as enlarged after the Acquisition will have sufficient working capital to satisfy its present requirements.

– 51 –

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

1. UNAUDITED PRO FORMA STATEMENT OF ADJUSTED ASSETS AND LIABILITIES OF THE GROUP AS AT 31 DECEMBER 2004 AS ENLARGED AFTER THE ACQUISITION

The following statement has been prepared for the purpose of providing information about the impact of the Acquisition by illustrating how the Acquisition might have affected the financial information presented in this circular, had the Acquisition been undertaken at the date reported. As it is prepared for illustrative purposes only, and because of its nature, it may not give a true picture of the assets and liabilities of the enlarged Group on the completion of the Acquisition.

Set out below is a summary of the unaudited pro forma statement of adjusted assets and liabilities of the Group as enlarged after the Acquisition, based on the audited consolidated accounts of the Group as at 31 December 2004 and the audited balance sheet of the JV Company as at 31 May 2005 as extracted from the accountants’ report on the JV Company set out in Appendix I to this circular, adjusted as detailed below. For the purpose of the unaudited pro forma statement, the balance sheet of the JV Company as at 31 May 2005 has been translated from Renminbi to Hong Kong dollars at the exchange rate ruling at 31 December 2004:

ASSETS AND LIABILITIES Non-current assets Property, plant and equipment Lease prepayments Prepayments and deposits Current assets Trade receivables Prepayments, deposits and other receivables Amount due from a minority equityholder Pledged bank deposit Cash and cash equivalents Current liabilities Bills payable Trade payables Accruals and other payables Bank and other loans Net current (liabilities)/assets Total assets less current liabilities Non-current liabilities Amount due to a related company Other loans Minority equityholders’ loans Interest payables Minority interests NET ASSETS	The Group HK$’000 75,299 – 91,408 166,707 502 5,635 – 4,703 31,628 42,468 4,703 1,152 29,138 37,622 72,615 (30,147) 136,560 9,406 – – – 9,406 42,080 85,074	The JV Company Adjustments HK$’000 HK$’000 92,631 7,236 26,450 126,317 – 562 1334 – 3,249 (19,246)1 3,944 – – 2,515 5002 472 2,987 957 127,274 – 61,321 29,4085 1,304 92,033 – 17,2683 35,241	Unaudited pro forma adjusted balances of the enlarged Group HK$’000 167,930 7,236 117,858 293,024 502 6,197 133 4,703 15,631 27,166 4,703 1,152 32,153 38,094 76,102 (48,936) 244,088 9,406 61,321 29,408 1,304 101,439 59,348 83,301

– 52 –

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

Note:

1. The JV Company is a sino-foreign equity joint-venture established on 15 December 2004 and its registered capital is RMB40 million. No capital contribution has been injected into the JV Company by the Group as at 31 December 2004.

The adjustment represented the capital injection for 38% equity interest in the JV Company amounting to RMB15.2 million (approximately HK$14,340,000), being 38% of RMB40 million, and the consideration of RMB5.2 million (approximately HK$4,906,000) to be paid by the Group for the Acquisition.

1. It represented the estimated expenses, mainly including professional fees to financial advisor and expert, to be incurred for the Acquisition.

2. It represented 49% minority interests of the JV Company, being 49% of the net asset value of the JV Company.

3. The balance represented amount due from Party A as at 31 May 2005.

4. The balance represented loans from Party A and Party C as at 31 May 2005.

– 53 –

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

2. LETTER FROM THE AUDITORS ON THE UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

The following is the full text of a letter from Grant Thornton for the purpose of incorporation in this circular:

Certified Public Accountants Member of Grant Thornton International

==> picture [115 x 34] intentionally omitted <==

23 August 2005

The Directors

Fushan International Energy Group Limited 12/F, Kwan Chart Tower 6 Tonnochy Road Wan Chai Hong Kong

Dear Sirs,

Re: Fushan International Energy Group Limited (the “Company”) and its subsidiaries (collectively referred to as the “Group”)

We report on the unaudited pro forma statement of assets and liabilities (“Pro Forma Statement”) of the Group as enlarged, set out in section 1 of Appendix III to the circular dated 23 August 2005 (the “Circular”), in connection with the proposed acquisition by New Honest Limited (“New Honest”), a wholly-owned subsidiary of the Company, of 13% of the equity interest in Shanxi Yao Zin Coal and Coking Company Limited, which has been prepared by the directors of the Company, for illustrative purposes only, to provide information about how the proposed acquisition might have affected the relevant financial information presented. The basis of preparation of the Pro Forma Statement is set out on page 52 of the Circular.

RESPONSIBILITIES

It is the responsibility solely of the directors of the Company to prepare the Pro Forma Statement in accordance with Rule 4.29 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”).

It is our responsibility to form an opinion, as required by the Listing Rules, on the Pro Forma Statement and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the Pro Forma Statement beyond that owed to those to whom those reports were addressed by us at the dates of their issue.

– 54 –

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

BASIS OF OPINION

We conducted our work with reference to the Statements of Investment Circular Reporting Standards and Bulletin 1998/8 “Reporting on pro forma financial information pursuant to the Listing Rules” issued by the Auditing Practice Board in the United Kingdom, where applicable. Our work, which involved no independent examination of any of the underlying financial information, consisted primarily of comparing the unadjusted financial information with the source documents, considering the evidence supporting the adjustments and discussing the Pro Forma Statement with the directors of the Company.

Our work did not constitute an audit or review made in accordance with Statements of Auditing Standards issued by the Hong Kong Institute of Certified Public Accountants, and accordingly, we do not express any such assurance on the Pro Forma Statement.

The Pro Forma Statement is for illustrative purposes only, based on the judgements and assumptions made by the directors of the Company, and, because of its nature, it may not give any assurance or indication that any event will take place in the future and may not be indicative of the assets and liabilities of the Group as enlarged had the transaction actually occurred on 31 December 2004 or of the Group at any future date.

OPINION

In our opinion:

• (a) the Pro Forma Statement has been properly compiled by the directors of the Company on the basis stated;

• (b) such basis is consistent with the accounting policies of the Group; and

• (c) the adjustments are appropriate for the purposes of the Pro Forma Statement as disclosed pursuant to Rule 4.29 of the Listing Rules.

Yours faithfully, Grant Thornton

Certified Public Accountants Hong Kong

– 55 –

APPENDIX IV

GENERAL INFORMATION

1. RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Group. The Directors jointly and severally accept responsibility for the accuracy of the information contained in this circular and confirm, having made all reasonable inquiries and that to the best of their knowledge and belief there are no other facts the omission of which would made any statement therein misleading.

2. DISCLOSURE OF INTERESTS

Interests of Directors

As at the Latest Practicable Date, the interests of the Directors in the share capital of the Company which were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests which they were taken or deemed to have under such provisions of the SFO), or were required, pursuant to section 352 of the SFO, to be entered in the register referred to therein, or were required, pursuant to the Model Code for Securities Transactions by Directors of Listed Companies in the Listing Rules, to be notified to the Company and the Stock Exchange were as follows:

Long positions in the Shares

	Number of Shares	Number of Shares	held	Percentage of
	Personal	Corporate		shareholding
Name	interests	interests	Total	Total
The Major Shareholder	90,750,000	1,149,200,000	1,239,950,000	59.59

Note: The Major Shareholder is the beneficial owner of the entire issued share capital of China Merit Limited which owned 1,149,200,000 Shares as at the Latest Practicable Date.

Save as disclosed above, as at the Latest Practicable Date, none of the Directors or any chief executive of the Company had an interest or short position in any shares, underlying shares or debentures of the Company or any associated corporation (within the meaning of Part XV of the SFO) which would have to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which he was taken or deemed to have under such provisions of the SFO) or which was required, pursuant to section 352 of the SFO, to be entered in the register referred to therein, or pursuant to the Model Code for Securities Transactions by Directors of Listed Companies in the Listing Rules to be notified to the Company and the Stock Exchange.

Save as disclosed herein, as at the Latest Practicable date, none of the Directors was a director or employee of a company which had an interest or short position in the Shares and underlying shares of the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO.

– 56 –

APPENDIX IV

GENERAL INFORMATION

Substantial Shareholder

As at the Latest Practicable Date, so far as is known to the Directors, the following person (other than a Director or chief executive of the Company) who have, directly or indirectly, interested in 5% or more of the nominal value of the share capital carrying rights to vote in all circumstances at general meetings of any subsidiary of the Company:

	Number of	Percentage of
Name	Shares	shareholding
China Merit Limited	1,149,200,000	55.23

Note: The Major Shareholder is the beneficial owner of the entire issued share capital of China Merit Limited which owned 1,149,200,000 as at the Latest Practicable Date.

Save as disclosed herein, as at the Latest Practicable Date, so far as is known to the Directors, there was no person known to the Directors or chief executive of the Company who was, had an interest or short position in the Shares and underlying shares of the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO, or who was directly or indirectly, interested in 5% or more of the nominal value of any class of shares of the Company or any other members of the Group.

Interests in contract or arrangement

As at the Latest Practicable Date, none of the Directors is materially interested in contract or arrangement subsisting which is significant in relation to the business of the Group.

Interests in assets

As at the Latest Practicable Date, none of the Directors has any direct or indirect interest in any assets acquired or disposed of by or leased to any member of the Group or is proposed to be acquired or disposed of by or leased to any member of the Group since 31 December 2004, being the date to which the latest published audited accounts of the Company were made up.

Service contracts

There is no service contract between any member of the Group and any Director (excluding contracts expiring or determinable by the Group within one year without payment of compensation (other than statutory compensations)).

– 57 –

APPENDIX IV

GENERAL INFORMATION

3. LITIGATION

Neither the Company nor any of its subsidiaries is engaged in any litigation or arbitration of material importance and no litigation or claim of material importance is known to the Directors to be pending or threatened against the Company or any of its subsidiaries.

4. EXPERT AND CONSENT

The qualification of the expert who has given opinion in this circular is as follows:

Name Qualification

Grant Thornton Certified Public Accountants

As at the Latest Practicable Date, Grant Thornton has no shareholding in any company in the Group or the right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any company in the Group and has no direct or indirect interest in any assets acquired or disposed of by or leased to any member of the Group or is proposed to be acquired or disposed of by or leased to any member of the Group since 31 December 2004, being the date to which the latest published audited accounts of the Company were made up.

Grant Thornton has given and has not withdrawn its written consent to the issue of this circular with copy of its accountants’ report on the JV Company, letter in connection with the unaudited pro forma financial information of the enlarged Group and the reference to its name included herein in the form and context in which it is included.

5. MATERIAL CONTRACTS

The following contracts (not being contracts in the ordinary course of business) have been entered into by members of the Group within the two years preceding the date of this circular and are or may be material:

1. a conditional agreement dated 27 May 2004 entered into between 山西金業煤 焦化集團有限公司(Shanxi Jin Ye Coal and Coking Group Co., Limited) (“Shanxi Jin Ye”) as vendor and Fushan Energy Group Limited (“Fushan Energy”), a wholly-owned subsidiary of the Company, as purchaser in respect of the acquisition of 20% of the equity interest in 山西金山能源有限責任公司 (Jinshan Energy Group Limited) (“Jinshan Energy”) for a cash consideration of RMB20 million;

2. a supplemental sino-foreign equity joint venture agreement and the supplemental articles of association dated 27 May 2004 entered into between Fushan Energy, Shanxi Jin Ye and Golden Oak Development Limited;

– 58 –

APPENDIX IV

GENERAL INFORMATION

1. a conditional agreement dated 24 June 2004 entered into between Jinshan Energy and 山西聯盛能源有限公司 (Shanxi Luensheng Energy Co., Ltd.) (“Luensheng”) in relation to the disposal of 25% equity interest in 柳林縣聯山 煤化有限公司 (Liulin Luenshan Coking Co., Ltd) by Jinshan Energy to Luensheng for a cash consideration of RMB7.5 million;

2. a joint venture agreement dated 10 December 2004 entered into amongst the Party A, New Honest and Party C for the formation of the JV Company;

3. the Acquisition Agreement;

4. the supplemental sino-foreign equity joint venture agreement and the supplemental articles of association dated 29 June 2005 entered into amongst Party A, New Honest and Party C to regulate the responsibilities of the shareholders of the JV Company towards the management of the business and corporate affairs of the JV Company; and

5. the second supplemental sino-foreign equity joint venture agreement and the second supplemental articles of association dated 20 July 2005 entered into amongst Party A, New Honest and Party C to increase the registered capital of the JV Company from RMB40 million (approximately HK$38.5 million) to RMB80 million (approximately HK$76.9 million) and to increase the total investment of the JV Company amount from RMB49.8 million (approximately HK$47.9 million) to RMB200 million (approximately HK$192.3 million).

6. GENERAL

• (a) The secretary and qualified accountant of the Company is Lam Lin Chu, a member of HKICPA.

• (b) The registered office of the Company is situated at 12th Floor, Kwan Chart Tower, No. 6 Tonnochy Road, Wanchai, Hong Kong.

• (c) The Hong Kong share registrar of the Company is Tengis Limited, Ground Floor, Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong.

7. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection at the registered office of the Company at 12th Floor, Kwan Chart Tower, No. 6 Tonnochy Road, Wanchai, Hong Kong during normal business hours up to and including 6 September 2005:

• (a) the memorandum and articles of association of the Company;

• (b) the annual reports of the Company for the two years ended 31 December 2004;

– 59 –

APPENDIX IV

GENERAL INFORMATION

• (c) the letter issued by Grant Thornton in connection with the unaudited pro forma financial information of the enlarged Group, the text of which is set out in Appendix III to this circular;

• (d) the accountants’ report on the JV Company, the text of which is set out in Appendix I to this circular;

• (e) the material contracts referred to in the paragraph headed “Material contracts” in this appendix; and

• (f) the written consent referred to in the paragraph headed “Expert and Consent” in this appendix.

– 60 –